UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 7, 2021
INFORMATION ANALYSIS INCORPORATED
(Exact name of registrant as specified in its charter)
VA | 000-22405 | 54-1167364 | ||
(State or other jurisdiction | (Commission | (IRS Employer | ||
of incorporation) | File Number) | Identification No.) |
11240 Waples Mill Rd, Ste 201
Fairfax, VA 22030
(Address of principal executive offices, including zip code)
703-383-3000
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
None |
N/A |
N/A |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.01 Completion of Acquisition or Disposition of Assets
On April 13, 2021, Information Analysis Incorporated (the “Company”) filed a Form 8-K in connection with the execution and closing upon a Stock Purchase Agreement to which the Company, Tellenger, Inc. (“Tellenger”) and David and Heather Tortorelli were parties. Under this Stock Purchase Agreement, the Company purchased all of the issued and outstanding shares of Tellenger.
This Form 8-K/A amends the Form 8-K the Company filed to include (i) audited financial statements as of, and for the year ended December 31, 2020, of Tellenger, (ii) unaudited financial statements as of, and for the three months ended, March 31, 2021, of Tellenger, and (iii) unaudited pro forma condensed combined financial information of the Company giving effect to the Tellenger acquisition, required by Items 9.01(a) and 9.01(b) of Form 8-K.
Item 9.01 Financial Statement and Exhibits
(a) |
Financial Statements of Business Acquired |
(1) |
The unaudited statements of Tellenger and the notes thereto, for the three months ended March 31, 2021, are included in Exhibit 99.1 hereto and are incorporated herein by reference. |
(2) |
The audited statements of Tellenger and the notes thereto, for the year ended December 31, 2021, are included in Exhibit 99.1 hereto and are incorporated herein by reference. |
(b) |
Pro Forma Financial Information |
The following unaudited pro forma condensed combined financial information of the Company, giving effect to the acquisition of Tellenger, is included in Exhibit 99.2 hereto and is incorporated herein by reference.
(1) |
Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2021. |
(2) |
Unaudited Condensed Combined Statement of Operations for the three months ended March 31, 2021; and |
(3) |
Unaudited Condensed Combined Statement of Operations for the year ended December 31, 2020 |
(d) |
See the Exhibit Index below, which is incorporated by reference herein. |
EXHIBIT INDEX
Exhibit |
||||||||
Number |
Description |
|||||||
99.1 |
||||||||
99.2 |
Unaudited Pro Forma Condensed Combined Financial Information |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
INFORMATION ANALYSIS INCORPORATED |
||
Date: June 24, 2021 |
By: |
/s/ Matthew T. Sands |
Matthew T. Sands |
||
Chief Financial Officer |
Exhibit 99.1
TELLENGER, INC.
Unaudited Financial Statements for the three months ended March 31, 2021
and
Audited Financial Statements for the year ended December 31, 2020
TELLENGER, INC.
BALANCE SHEET
(Unaudited)
March 31, 2021 |
||||
ASSETS |
||||
Current assets |
||||
Cash and cash equivalents |
$ | 251,609 | ||
Accounts receivable |
563,853 | |||
Prepaid expenses and other current assets |
14,530 | |||
Total current assets |
829,992 | |||
Total assets |
$ | 829,992 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||
Current liabilities |
||||
Accounts payable |
$ | 284,667 | ||
Accrued payroll and related liabilities |
119,571 | |||
Total current liabilities |
404,238 | |||
Liability - joint venture |
28,642 | |||
Total liabilities |
432,880 | |||
Stockholders' equity |
||||
Common stock, $1.00 par value, 1,000 shares authorized, 200 shares issued and outstanding as of December 31, 2020 and 2019 |
200 | |||
Additional paid-in capital |
28,080 | |||
Retained earnings |
368,832 | |||
Total stockholders' equity |
397,112 | |||
Total liabilities and stockholders' equity |
$ | 829,992 |
The accompanying notes are an integral part of the financial statements
TELLENGER, INC.
STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME
(Unaudited)
For the three months ended: |
||||
March 31, 2021 |
||||
Revenues |
||||
Consulting/ contract revenue |
$ | 1,157,825 | ||
Total revenues |
1,157,825 | |||
Cost of revenues |
||||
Cost of consulting/ contract revenue |
952,863 | |||
Total cost of revenues |
952,863 | |||
Gross profit |
204,962 | |||
Selling, general and administrative expenses |
102,484 | |||
Income from operations |
102,478 | |||
Other income, net |
86 | |||
Income before provision for income taxes |
102,564 | |||
Provision for income taxes |
- | |||
Net income |
$ | 102,564 | ||
Comprehensive income |
$ | 102,564 | ||
Net income per common share - basic |
$ | 512.82 | ||
Net income per common share - diluted |
$ | 512.82 | ||
Weighted average common shares outstanding |
||||
Basic |
200 | |||
Diluted |
200 |
The accompanying notes are an integral part of the financial statements
TELLENGER, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Unaudited
Shares of |
||||||||||||||||||||
Common |
Additional |
|||||||||||||||||||
Stock |
Common |
Paid-In |
Retained |
|||||||||||||||||
Issued |
Stock |
Capital |
Earnings |
Total |
||||||||||||||||
Balances, December 31, 2019 |
200 | $ | 200 | $ | 28,079 | $ | 428,921 | $ | 457,200 | |||||||||||
Net income |
102,564 | 102,564 | ||||||||||||||||||
Distributions |
(162,653 | ) | (162,653 | ) | ||||||||||||||||
Balances, December 31, 2020 |
200 | $ | 200 | $ | 28,079 | $ | 368,832 | $ | 397,111 |
The accompanying notes are an integral part of the financial statements
TELLENGER, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the three months ended: |
||||
March 31, 2021 |
||||
Cash flows from operating activities |
||||
Net income |
$ | 102,564 | ||
Adjustments to reconcile net income to net cash provided by operating activities |
||||
Changes in operating assets and liabilities |
||||
Accounts receivable |
161,876 | |||
Prepaid expenses and other current assets |
1,676 | |||
Accounts payable |
(55,611 | ) | ||
Accrued payroll and related liabilities |
(1,050 | ) | ||
Net cash provided by operating activities |
209,455 | |||
Cash flows from investing activities |
||||
Disposition of property and equipment |
16,510 | |||
Net cash used in investing activities |
16,510 | |||
Cash flows from financing activities |
||||
Distributions |
(162,653 | ) | ||
Net cash used in financing activities |
(162,653 | ) | ||
Net increase in cash and cash equivalents |
63,312 | |||
Cash and cash equivalents, beginning of the year |
188,297 | |||
Cash and cash equivalents, end of the year |
$ | 251,609 |
The accompanying notes are an integral part of the financial statements
1. Summary of Significant Accounting Policies
Operations
Tellenger, Inc. (“the Company”), a subchapter S corporation, was incorporated under the corporate laws of the State of Maryland in 2007 to develop and market computer applications and provide computer programming, cyber security, and data analytics services. The Company provides services to customers throughout the United States, with a concentration in the Washington, D.C. metropolitan area.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can, and in many cases will, differ from those estimates.
Revenue Recognition
See Note 2 for a detailed description of revenue recognition under Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The Company adopted ASU 2014-09 and its related amendments (collectively known as “ASC 606”) effective January 1, 2020.
Segment Reporting
The Company has concluded that it operates in one business segment, providing information technology services and products.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of ninety days or less at the time of purchase to be cash equivalents. Deposits are maintained with a federally insured bank. Balances at times exceed federally insured limits, but management does not consider this to be a significant concentration of credit risk.
Accounts Receivable
Accounts receivable consist of trade accounts receivable and do not bear interest. The Company typically does not require collateral from its customers. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Accounts with receivable balances past due over 90 days are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. No allowance for doubtful accounts has been recorded at March 31, 2021.
Property and Equipment
With the exception of automobiles, property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated over the lesser of the useful life or five years, off-the-shelf software is depreciated over the lesser of three years or the term of the license, custom software is depreciated over the least of five years, the useful life, or the term of the license, and computer equipment is depreciated over three years. Automobiles are stated at cost and depreciated over 15 years using the double-declining-balance method. Maintenance and minor repairs are charged to operations as incurred. Gains and losses on dispositions are recorded in operations.
Income Taxes
As a Subchapter S corporation, income taxes pass through to the shareholders of the corporation and are not recorded as a liability nor an expense of the corporation.
Income Per Share
The Company’s net income per share calculations are based upon the weighted average number of shares of common stock outstanding. See Note 9 for more details.
Concentration of Credit Risk
During the three months ended March 31, 2021, the Company’s subcontracts under federal procurements represented 97.8% of revenue, and 2.2% of revenue came from commercial and not-for-profit 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 subcontract represented 42.9% and 34.4% of revenue, respectively. One prime contractor under which the Company has multiple subcontracts and a commercial contract represented 45.2% of revenue in aggregate.
At March 31, 2021, the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 46.1% and 33.3% of the Company’s outstanding accounts receivable, respectively.
Related Party Transactions
The Company’s two members of its board of directors at March 31, 2021, were husband and wife, and also functioned as the senior management of the company.
COVID-19
The COVID-19 (coronavirus) outbreak has had a notable impact on general economic conditions, including, but not limited to, the temporary closures of many businesses, “shelter in place” and other governmental regulations, and “work from home” directives. There are many unknowns, and many regional inconsistencies. Notable potential effects on the Company include U.S. government procurements may be delayed or cancelled, work on new or existing contracts that require personal interactions may be suspended, payment processing for customer invoices may be delayed, employees and customers or their families may become infected, and personal business development meetings may not be able to take place. The Company continues to monitor the impact of the COVID-19 outbreak closely.
To date, the COVID-19 impact on the Company’s existing business has been minimal. The Company had previously implemented the necessary infrastructure for its employees to work remotely, so it did not experience material issues supporting its customers. The Company rapidly adapted to the challenges presented to its administration, including challenges to management, accounting, and information technology infrastructure. The extent to which business development efforts have been hampered by the inability to meet with potential customers in person is indeterminable. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition, and cash flows over time is uncertain.
2. Revenue from Contracts with Customers
Revenue is recognized when all of the following steps have been taken and criteria met for each contract:
• |
Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and the parties are committed to perform and, (iii) it determines that collection of substantially all consideration to which the Company will be entitled in exchange for goods or services that will be transferred is probable based on the customer’s intent and ability to pay the promised consideration. |
• |
Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company applies judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. |
• |
Determination of the transaction price - The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any. The Company typically estimates the transaction price impact of discounts offered to the customers for early payments on receivables or rebates based on sales target achievements. Constraints are applied when estimating variable considerations based on historical experience where applicable. |
• |
Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price by taking into account available information such as historical selling prices of the performance obligation, geographic location, overall strategic pricing objective, market conditions and internally approved pricing guidelines related to the performance obligations. |
• |
Recognition of revenue when, or as, the Company satisfies performance obligations - The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at or over the time the related performance obligation is satisfied by transferring a promised good or service to a customer. |
Nature of Products and Services
The Company generates revenue from the sales of information technology professional services. The Company sells through its direct relationships with end customers and under subcontractor arrangements.
Professional services are offered through time and materials arrangements and firm fixed-price arrangements. Revenue under time and materials arrangements is recognized over time in the period the hours are worked or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed. Generally, revenue under fixed-price arrangements is recognized either over time or at a point in time based on the allocation of transaction pricing to each identified performance obligation as control of each is transferred to the customer.
Disaggregation of Revenue from Contracts with Customers
Contract |
Year ended 12/31/2020 |
|||||||
Type |
Amount |
Percentage |
||||||
Services Time & Materials |
$ | 707,393 | 61.1 | % | ||||
Services Firm Fixed Price |
450,432 | 38.9 | % | |||||
Total Revenue |
$ | 1,157,825 |
Contract Balances
Accounts Receivable
Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized at March 31, 2021.
Contract Assets
Contract assets consist of assets resulting when revenue recognized exceeds the amount billed or billable to the customer due to allocation of transaction price, and of amounts withheld from payment of invoices as a financing component of a contract. There were no balances of contract assets at March 31, 2021.
Contract Liabilities
Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. There were no balances of contract liabilities at March 31, 2021.
Costs to Obtain or Fulfill a Contract
When applicable, the Company recognizes an asset related to the costs incurred to obtain a contract only if it expects to recover those costs and it would not have incurred those costs if the contract had not been obtained. The Company recognizes an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. There were no such assets at March 31, 2021. When incurred, these costs are amortized ratably over the periods of the contracts to which those costs apply.
Financing Components
In instances where the timing of revenue recognition differs from the timing of invoicing, the Company assess whether the contract or subcontract includes a significant financing component. There were no contracts that included significant financing components at March 31, 2021.
Deferred Costs of Revenue
Deferred costs of revenue consist of the direct costs incurred by the company for which control of the associated asset or work product has not yet passed to the customer and thus the associated revenue has not been recognized. These costs are typically reported under the prepaid expenses or other current assets caption on the Company’s balance sheets. The Company recognizes these direct costs as the control or benefit is passed to the customer. There were no deferred costs of revenue at March 31, 2021.
3. Leases
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases: Topic 842,” that requires lessees to recognize assets and liabilities on the balance sheet for most leases including operating leases, and followed it up with ASUs No. 2018-10, No. 2018-11, No. 2018-20, and No. 2019-01 (collectively “Topic 842”), which clarified certain aspects of the new leases standard and provided an optional transition method.
We adopted Topic 842 on January 1, 2020, and elected the optional transition method to initially apply the standard at the January 1, 2020, adoption date. As a result, we applied the new lease standard prospectively to our leases commencing on or after January 1, 2020. Comparative periods presented were not restated upon adoption. Similarly, new disclosures under the standard were made for periods beginning January 1, 2020, and not for prior comparative periods. Prior periods will continue to be reported under guidance in effect prior to January 1, 2020. In addition, we elected the package of practical expedients permitted under the transition guidance within the standard, which among other things, allowed us to not reassess contracts to determine if they contain leases, lease classification and initial direct costs. The standard did not impact our statements of operations and had no impact on our cash flows.
The Company has an operating lease which is a real estate lease for its headquarters in Rockville, Maryland. This lease is on a month-to-month basis. The Company determines if an arrangement is a lease at inception. When applicable, operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company’s balance sheets. There were no such applicable assets or liabilities as of March 31, 2021. As of March 31, 2021, the Company does not have any sales-type or direct financing leases.
The Company’s operating lease asset represents its right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreement includes rental payments escalating annually for inflation at a fixed rate. These payments are included in the initial measurement of the operating lease liability and operating lease asset. The Company does not have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred.
The Company’s lease agreement does not contain any material residual value guarantees or material restrictions or covenants.
The Company does not sublease any real estate to third parties.
For the three months ended March 31, 2021, the Company incurred $2,700 of expense related to its operating lease.
4. Receivables
Accounts receivable at March 31, 2021, consist of the following:
March 31, 2021 |
||||
Billed federal government |
$ | 548,978 | ||
Billed commercial and not-for-profit |
- | |||
Subtotal |
$ | 548,978 | ||
Unbilled commercial and not-for-profit |
$ | 14,875 | ||
Accounts receivable |
563,853 |
Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer.
5. Fair Value Measurements
The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
• |
Level 1—Quoted prices in active markets for identical assets or liabilities; |
• |
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
• |
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table represents the fair value hierarchy for the Company’s financial assets (cash equivalents) measured at fair value on a recurring basis as of March 31, 2021:
Level 1 |
Level 2 |
Level 3 |
||||||||||
December 31, 2020 |
||||||||||||
Money market funds |
$ | 28 | $ | - | $ | - | ||||||
Total |
$ | 28 | $ | - | $ | - |
Money market funds are highly liquid investments. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
The carrying amount of financial instruments such as accounts receivable and accounts payable approximate the related fair value due to the short-term maturities of these instruments.
6. Property and Equipment
A summary of property and equipment at March 31, 2021, consist of the following:
2020 |
||||
Computer equipment and software |
$ | 13,768 | ||
Less: accumulated depreciation and amortization |
(13,768 | ) | ||
Total |
$ | - |
There was no depreciation or amortization expense recorded for the three months ended March 31, 2021.
7. Revolving Line of Credit
The Company entered into a revolving line of credit agreement with M&T Bank providing for demand or short-term borrowings up to $250,000. The bank was granted a security interest in all of the Company’s assets as well as a security interest in selected assets of the owners as guarantors. At March 31, 2021, the Company was in compliance with its covenants with its lender.
The Company did not borrow under the arrangement in 2021 and there was no outstanding balance on the line of credit at March 31, 2021.
8. Retirement Plans
The Company has a Cash or Deferred Arrangement Agreement, which satisfies the requirements of Section 401(k) of the Internal Revenue Code. This defined contribution retirement plan covers substantially all employees. Participants can elect to have up to the maximum percentage allowable of their salaries reduced and contributed to the plan. The Company may make matching contributions equal to a discretionary percentage of the participants’ elective deferrals. In the three months ended March 31, 2021, the Company matched 100% of the first 3% of the participants’ elective deferrals. The balance of funds forfeited by former employees from unvested employer matching contribution accounts may be used to offset current and future employer matching contributions. The Company may also make additional contributions to all eligible employees at its discretion. The Company did not make additional contributions during the period reported. Expenses for matching contributions for the three months ended March 31, 2021 was $8,188.
9. Income Per Share
Basic income 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 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. No shares were excluded from diluted shares for the three months ended March 31, 2021.
The following is a reconciliation of the amounts used in calculating basic and diluted net income per common share.
Per share |
||||||||||||
Net income (loss) |
Shares |
amount |
||||||||||
Basic net income per common share for the three months ended March 31, 2021: |
||||||||||||
Income available to common shareholders |
$ | 102,564 | 200 | $ | 512.82 | |||||||
Effect of dilutive securities |
- | - | - | |||||||||
Diluted net income per common share for the three months ended March 31, 2021: |
$ | 102,564 | 200 | $ | 512.82 |
10. Financial Statement Captions
The following table summarizes the Company’s prepaid expenses and other current assets as of March 31, 2021:
March 31, 2021 |
||||
Legal retainer |
$ | 7,810 | ||
Prepaid insurance |
4,020 | |||
Prepaid rent |
900 | |||
Security deposit |
1,800 | |||
Total |
$ | 14,530 |
11. Liability – Joint Venture
The Company is party to a joint venture that operates as a general partnership. As of December 31, 2019, the Company’s capital account in the joint venture had a negative balance of $28,642. The joint venture has published neither financial statements nor Schedule K-1 documents for the year ended December 31, 2020, nor for the three months ended March 31, 2021, but the company managing the joint venture have indicated that the joint venture had allocable net income in 2020 and expects to have net income in 2021, which will reduce the overall liabilities of its members. The managing company also indicated that the members do have a duty to make up any capital shortages, however member companies who have previously left the joint venture were not required to replenish negative capital accounts.
The contract vehicle for which the joint venture was formed has expired, but contracts under the joint venture are scheduled to continue into 2023, after which the joint venture will be dissolved. The sole contract under which the Company still participates within the joint venture will expire on June 30, 2021.
12. Subsequent Events
Sale of the Company
On April 7, 2021, the Company executed and closed a stock purchase agreement to sell all of the issued and outstanding shares of stock of Tellenger, Inc. to Information Analysis Incorporated (“IAI”).
IAI is a public company that is primarily engaged in the businesses of information technology modernization services. IAI has access to a range of federal government contract vehicles and subcontracts under federal government agencies which include the Department of Homeland Security, the U.S. Small Business Administration, the Department of Veterans Affairs, the Department of the Treasury, and the U.S. Marine Corps, among others. IAI is seeking to expand its offerings into the arenas of cyber security and data analytics.
Tellenger, Inc. will continue to operate as a wholly-owned subsidiary of IAI until it, with all of its contracts, qualifications, certifications, and clearances, is able to fully integrate into IAI.
Credit Facility
In conjunction with the transaction, on April 16, 2021, the Company and IAI jointly procured a $1 million term loan with Summit Community Bank (“Summit”) to assist with post-acquisition cash flow and integration costs. The loan will be repaid with monthly payments consisting of a fixed principal amount plus accrued interest over the course of two years at a fixed interest rate of 4.89%. The Company and IAI also replaced the Company’s prior revolving line of credit discussed in Note 7 with a $1 million revolving line of credit from Summit at a variable rate equal to the Prime Rate published in the Wall Street Journal, which is currently 3.25%, subject to a floor of 3.25%, with an expiration of April 16, 2022.
TELLENGER, INC.
Audited Financial Statements for the year ended December 31, 2020
Independent Auditors' Report
To the Board of Directors of
Tellenger, Inc.
Rockville, MD
We have audited the accompanying financial statements of Tellenger, Inc., which comprise the balance sheet as of December 31, 2020, and the related statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tellenger, Inc. as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Matthews, Carter, and Boyce
Fairfax, Virginia
June 24, 2021
TELLENGER, INC.
BALANCE SHEET
(Audited)
December 31, 2020 |
||||
ASSETS |
||||
Current assets |
||||
Cash and cash equivalents |
$ | 188,297 | ||
Accounts receivable |
725,729 | |||
Prepaid expenses and other current assets |
16,206 | |||
Right-of-use operating lease asset | 2,663 | |||
Total current assets |
932,895 |
|||
|
||||
Property and equipment, net of accumulated depreciation and amortization of $35,059 | 16,509 | |||
Total assets |
$ | 949,404 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||
Current liabilities |
||||
Accounts payable |
$ | 340,278 | ||
Accrued payroll and related liabilities |
120,621 | |||
Operating lease liability - current |
2,663 | |||
Total current liabilities |
463,562 | |||
Liability - joint venture |
28,642 | |||
Total liabilities |
492,204 | |||
Stockholders' equity |
||||
Common stock, $1.00 par value, 1,000 shares authorized, 200 shares issued and outstanding as of December 31, 2020 |
200 | |||
Additional paid-in capital |
28,079 | |||
Retained earnings |
428,921 | |||
Total stockholders' equity |
457,200 | |||
Total liabilities and stockholders' equity |
$ | 949,404 |
The accompanying notes are an integral part of the financial statements
TELLENGER, INC.
STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME
(Audited)
For the year ended: |
||||
December 31, 2020 |
||||
Revenues |
||||
Consulting/ contract revenue |
$ | 4,449,113 | ||
Total revenues |
4,449,113 | |||
Cost of revenues |
||||
Cost of consulting/ contract revenue |
3,608,613 | |||
Total cost of revenues |
3,608,613 | |||
Gross profit |
840,500 | |||
Selling, general and administrative expenses |
669,728 | |||
Income from operations |
170,772 | |||
Other income, net |
10,020 | |||
Income before provision for income taxes |
180,792 | |||
Provision for income taxes |
- | |||
Net income |
$ | 180,792 | ||
Comprehensive income |
$ | 180,792 | ||
Net income per common share - basic |
$ | 903.96 | ||
Net income per common share - diluted |
$ | 903.96 | ||
Weighted average common shares outstanding |
||||
Basic |
200 | |||
Diluted |
200 |
The accompanying notes are an integral part of the financial statements
TELLENGER, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Audited)
Shares of |
||||||||||||||||||||
Common |
Additional |
|||||||||||||||||||
Stock |
Common |
Paid-In |
Retained |
|||||||||||||||||
Issued |
Stock |
Capital |
Earnings |
Total |
||||||||||||||||
Balances, December 31, 2019 |
200 | $ | 200 | $ | 28,079 | $ | 276,599 | $ | 304,878 | |||||||||||
Net income |
180,792 | 180,792 | ||||||||||||||||||
Distributions |
(28,470 | ) | (28,470 | ) | ||||||||||||||||
Balances, December 31, 2020 |
200 | $ | 200 | $ | 28,079 | $ | 428,921 | $ | 457,200 |
The accompanying notes are an integral part of the financial statements
TELLENGER, INC.
STATEMENT OF CASH FLOWS
(Audited)
For the year ended: |
||||
December 31, 2020 |
||||
Cash flows from operating activities |
||||
Net income |
$ | 180,792 | ||
Adjustments to reconcile net income to net cash provided by operating activities |
||||
Gain on grant received |
(10,000 | ) | ||
Depreciation and amortization |
1,875 | |||
Changes in operating assets and liabilities |
||||
Accounts receivable |
208,077 | |||
Prepaid expenses and other current assets |
(7,682 | ) | ||
Accounts payable |
(263,849 | ) | ||
Accrued payroll and related liabilities |
37,356 | |||
Net cash provided by operating activities |
146,569 | |||
|
||||
Cash flows from financing activities |
||||
Proceeds from grant |
10,000 | |||
Distributions |
(28,470 | ) | ||
Net cash used in financing activities |
(18,470 | ) | ||
Net increase in cash and cash equivalents |
128,099 | |||
Cash and cash equivalents, beginning of the year |
60,198 | |||
Cash and cash equivalents, end of the year |
$ | 188,297 |
The accompanying notes are an integral part of the financial statements
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
1. Summary of Significant Accounting Policies
Operations
Tellenger, Inc. (“the Company”), a subchapter S corporation, was incorporated under the corporate laws of the State of Maryland in 2007 to develop and market computer applications and provide computer programming, cyber security, and data analytics services. The Company provides services to customers throughout the United States, with a concentration in the Washington, D.C. metropolitan area.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can, and in many cases will, differ from those estimates.
Revenue Recognition
See Note 2 for a detailed description of revenue recognition under Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The Company adopted ASU 2014-09 and its related amendments (collectively known as “ASC 606”) effective January 1, 2020.
Segment Reporting
The Company has concluded that it operates in one business segment, providing information technology services and products.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of ninety days or less at the time of purchase to be cash equivalents. Deposits are maintained with a federally insured bank. Balances at times exceed federally insured limits, but management does not consider this to be a significant concentration of credit risk.
Accounts Receivable
Accounts receivable consist of trade accounts receivable and do not bear interest. The Company typically does not require collateral from its customers. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Accounts with receivable balances past due over 90 days are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. No allowance for doubtful accounts has been recorded at December 31, 2020.
Property and Equipment
With the exception of automobiles, property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated over the lesser of the useful life or five years, off-the-shelf software is depreciated over the lesser of three years or the term of the license, custom software is depreciated over the least of five years, the useful life, or the term of the license, and computer equipment is depreciated over three years. Automobiles are stated at cost and depreciated over 15 years using the double-declining-balance method. Maintenance and minor repairs are charged to operations as incurred. Gains and losses on dispositions are recorded in operations.
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
Income Taxes
As a Subchapter S corporation, income taxes pass through to the shareholders of the corporation and are not recorded as a liability nor an expense of the corporation.
Income Per Share
The Company’s net income per share calculations are based upon the weighted average number of shares of common stock outstanding. See Note 9 for more details.
Concentration of Credit Risk
During the year ended December 31, 2020, the Company’s subcontracts under federal procurements represented 95.6% of revenue, and 4.4% of revenue came from commercial and not-for-profit 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 subcontract represented 37.1% and 37.0% of revenue, respectively. One prime contractor under which the Company has multiple subcontracts and a commercial contract represented 47.7% of revenue in aggregate, and another prime contractor under which the Company has multiple subcontracts represented 37.6% of revenue in aggregate.
At December 31, 2020, the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 41.6% and 37.9% of the Company’s outstanding accounts receivable, respectively. Receivables from one prime contractor under which the Company has multiple subcontracts and a commercial contract represented 45.4% of the Company’s outstanding accounts receivable in aggregate, and receivables from one prime contractor under which the Company has a subcontract represented 37.9% of the Company’s outstanding accounts receivable.
Related Party Transactions
The Company’s two members of its board of directors at December 31, 2020, were husband and wife, and also functioned as the senior management of the Company.
COVID-19
The COVID-19 (coronavirus) outbreak has had a notable impact on general economic conditions, including, but not limited to, the temporary closures of many businesses, “shelter in place” and other governmental regulations, and “work from home” directives. There are many unknowns, and many regional inconsistencies. Notable potential effects on the Company include U.S. government procurements may be delayed or cancelled, work on new or existing contracts that require personal interactions may be suspended, payment processing for customer invoices may be delayed, employees and customers or their families may become infected, and personal business development meetings may not be able to take place. The Company continues to monitor the impact of the COVID-19 outbreak closely.
To date, the COVID-19 impact on the Company’s existing business has been minimal. The Company had previously implemented the necessary infrastructure for its employees to work remotely, so it did not experience material issues supporting its customers. The Company rapidly adapted to the challenges presented to its administration, including challenges to management, accounting, and information technology infrastructure. The extent to which business development efforts have been hampered by the inability to meet with potential customers in person is indeterminable. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition, and cash flows over time is uncertain.
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
2. Revenue from Contracts with Customers
Revenue is recognized when all of the following steps have been taken and criteria met for each contract:
• |
Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and the parties are committed to perform and, (iii) it determines that collection of substantially all consideration to which the Company will be entitled in exchange for goods or services that will be transferred is probable based on the customer’s intent and ability to pay the promised consideration. |
• |
Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company applies judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. |
• |
Determination of the transaction price - The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any. The Company typically estimates the transaction price impact of discounts offered to the customers for early payments on receivables or rebates based on sales target achievements. Constraints are applied when estimating variable considerations based on historical experience where applicable. |
• |
Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price by taking into account available information such as historical selling prices of the performance obligation, geographic location, overall strategic pricing objective, market conditions and internally approved pricing guidelines related to the performance obligations. |
• |
Recognition of revenue when, or as, the Company satisfies performance obligations - The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at or over the time the related performance obligation is satisfied by transferring a promised good or service to a customer. |
Nature of Products and Services
The Company generates revenue from the sales of information technology professional services. The Company sells through its direct relationships with end customers and under subcontractor arrangements.
Professional services are offered through time and materials arrangements and firm fixed-price arrangements. Revenue under time and materials arrangements is recognized over time in the period the hours are worked or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed. Generally, revenue under fixed-price arrangements is recognized either over time or at a point in time based on the allocation of transaction pricing to each identified performance obligation as control of each is transferred to the customer.
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
Disaggregation of Revenue from Contracts with Customers
Contract |
Year ended 12/31/2020 |
|||||||
Type |
Amount |
Percentage |
||||||
Services Time & Materials |
$ | 2,559,947 | 57.6 | % | ||||
Services Firm Fixed Price |
1,886,665 | 42.4 | % | |||||
Total Revenue |
$ | 4,446,612 |
Contract Balances
Accounts Receivable
Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized at December 31, 2020.
Contract Assets
Contract assets consist of assets resulting when revenue recognized exceeds the amount billed or billable to the customer due to allocation of transaction price, and of amounts withheld from payment of invoices as a financing component of a contract. There were no balances of contract assets at December 31, 2020.
Contract Liabilities
Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. There were no balances of contract liabilities at December 31, 2020.
Costs to Obtain or Fulfill a Contract
When applicable, the Company recognizes an asset related to the costs incurred to obtain a contract only if it expects to recover those costs and it would not have incurred those costs if the contract had not been obtained. The Company recognizes an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. There were no such assets at December 31, 2020. When incurred, these costs are amortized ratably over the periods of the contracts to which those costs apply.
Financing Components
In instances where the timing of revenue recognition differs from the timing of invoicing, the Company assess whether the contract or subcontract includes a significant financing component. There were no contracts that included significant financing components at December 31, 2020.
Deferred Costs of Revenue
Deferred costs of revenue consist of the direct costs incurred by the company for which control of the associated asset or work product has not yet passed to the customer and thus the associated revenue has not been recognized. These costs are typically reported under the prepaid expenses or other current assets caption on the Company’s balance sheets. The Company recognizes these direct costs as the control or benefit is passed to the customer. There were no deferred costs of revenue at December 31, 2020.
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
3. Leases
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases: Topic 842,” that requires lessees to recognize assets and liabilities on the balance sheet for most leases including operating leases, and followed it up with ASUs No. 2018-10, No. 2018-11, No. 2018-20, and No. 2019-01 (collectively “Topic 842”), which clarified certain aspects of the new leases standard and provided an optional transition method.
The Company adopted Topic 842 on January 1, 2020, and elected the optional transition method to initially apply the standard at the January 1, 2020, adoption date. As a result, the Company applied the new lease standard prospectively to our leases commencing on or after January 1, 2020. Comparative periods presented were not restated upon adoption. Similarly, new disclosures under the standard were made for periods beginning January 1, 2020, and not for prior comparative periods. Prior periods will continue to be reported under guidance in effect prior to January 1, 2020. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the standard, which among other things, allowed the Company us to not reassess contracts to determine if they contain leases, lease classification and initial direct costs. The standard did not impact our statements of operations and had no impact on our cash flows.
The Company has an operating lease which is a real estate lease for its headquarters in Rockville, Maryland. This lease has a fixed lease term of 12 months. The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company’s balance sheets as of December 31, 2020. As of December 31, 2020, the Company does not have any sales-type or direct financing leases.
The Company’s operating lease asset represents its right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreement includes rental payments escalating annually for inflation at a fixed rate. These payments are included in the initial measurement of the operating lease liability and operating lease asset. The Company does not have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred.
The Company’s lease agreement does not contain any material residual value guarantees or material restrictions or covenants.
The Company does not sublease any real estate to third parties.
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table provides supplemental balance sheet information related to the Company’s operating lease:
Balance Sheet |
As of |
|||
Classification |
December 31, 2020 |
|||
Assets: |
||||
Right-to-use operating lease asset |
$ | 2,663 | ||
Liabilities: |
||||
Operating lease liability - current |
$ | 2,663 | ||
Total lease liabilities |
$ | 2,663 |
The following table reconciles the undiscounted cash flows to the operating lease liabilities recorded in the Company’s balance sheet at December 31, 2020.
December 31, 2020 |
||||
Payments in 2021 |
$ | 2,700 | ||
Total lease payments |
2,700 | |||
Less: discount |
(37 | ) | ||
Present value of lease liabilities |
$ | 2,663 |
As of December 31, 2020, the Company’s sole operating lease had a lease term of three months remaining. The discount rate of the lease is equal to Company’s estimated incremental borrowing rate at the measurement date of the lease agreement. The weighted average discount rate of the Company’s operating lease is approximately 5.5%. For the year ended December 31, 2020, the Company incurred $15,308 of expense related to its operating leases.
4. Receivables
Accounts receivable at December 31, 2020, consist of the following:
2020 |
||||
Billed federal government |
$ | 692,899 | ||
Billed commercial and not-for-profit |
32,830 | |||
Accounts receivable |
$ | 725,729 |
Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer.
5. Fair Value Measurements
The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
• |
Level 1—Quoted prices in active markets for identical assets or liabilities; |
• |
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
• |
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table represents the fair value hierarchy for the Company’s financial assets (cash equivalents) measured at fair value on a recurring basis as of December 31, 2020:
Level 1 |
Level 2 |
Level 3 |
||||||||||
December 31, 2020 |
||||||||||||
Money market funds |
$ | 100,174 | $ | - | $ | - | ||||||
Total |
$ | 100,174 | $ | - | $ | - |
Money market funds are highly liquid investments. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
The carrying amount of financial instruments such as accounts receivable and accounts payable approximate the related fair value due to the short-term maturities of these instruments.
6. Property and Equipment
A summary of property and equipment at December 31, 2020, consist of the following:
2020 |
||||
Computer equipment and software |
$ | 13,768 | ||
Automobile |
37,800 | |||
Subtotal |
51,568 | |||
Less: accumulated depreciation and amortization |
(35,059 | ) | ||
Total |
$ | 16,509 |
Depreciation and amortization expense was $1,875 for the year ended December 31, 2020.
7. Revolving Line of Credit
The Company entered into a revolving line of credit agreement with M&T Bank providing for demand or short-term borrowings up to $250,000. The bank was granted a security interest in all of the Company’s assets as well as a security interest in selected assets of the owners as guarantors. At December 31, 2020, the Company was in compliance with its covenants with its lender.
The Company did not borrow under the arrangement in 2020 and there was no outstanding balance on the line of credit at December 31, 2020.
8. Retirement Plans
The Company has a Cash or Deferred Arrangement Agreement, which satisfies the requirements of Section 401(k) of the Internal Revenue Code. This defined contribution retirement plan covers substantially all employees. Participants can elect to have up to the maximum percentage allowable of their salaries reduced and contributed to the plan. The Company may make matching contributions equal to a discretionary percentage of the participants’ elective deferrals. In 2020, the Company matched 100% of the first 3% of the participants’ elective deferrals. The balance of funds forfeited by former employees from unvested employer matching contribution accounts may be used to offset current and future employer matching contributions. The Company may also make additional contributions to all eligible employees at its discretion. The Company did not make additional contributions during 2020. Expenses for matching contributions for the years ended December 31, 2020 was $33,268.
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
9. Income Per Share
Basic income 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 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. No shares were excluded from diluted shares for the year ended December 31, 2020.
The following is a reconciliation of the amounts used in calculating basic and diluted net income per common share.
Per share |
||||||||||||
Net income (loss) |
Shares |
amount |
||||||||||
Basic net income per common share for the year ended December 31, 2020: |
||||||||||||
Income available to common shareholders |
$ | 180,792 | 200 | $ | 903.96 | |||||||
Effect of dilutive securities |
- | - | - | |||||||||
Diluted net income per common share for the year ended December 31, 2020: |
$ | 180,792 | 200 | $ | 903.96 |
10. Financial Statement Captions
The following table summarizes the Company’s prepaid expenses and other current assets as of December 31, 2020:
2020 |
||||
Legal retainer |
$ | 8,365 | ||
Prepaid insurance |
6,041 | |||
Security deposit |
1,800 | |||
Total |
$ | 16,206 |
11. Liability – Joint Venture
The Company is party to a joint venture that operates as a general partnership. Investment in the joint venture is accounted for under the equity method. As of December 31, 2019, the Company’s capital account in the joint venture had a negative balance of $28,642. The joint venture has published neither financial statements nor Schedule K-1 documents for the year ended December 31, 2020, but the company managing the joint venture has indicated that the joint venture had allocable net income in 2020, which will reduce the overall liabilities of its members. The managing company indicated that the partners do have a duty to make up any capital shortages.
The contract vehicle for which the joint venture was formed has expired, but contracts under the joint venture are scheduled to continue into 2023, after which the joint venture will be dissolved. The sole contract under which the Company still participates within the joint venture will expire on June 30, 2021.
TELLENGER, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2020
12. Subsequent Events
Sale of the Company
On April 7, 2021, the Company executed and closed a stock purchase agreement to sell all of the issued and outstanding shares of stock of Tellenger, Inc. to Information Analysis Incorporated (“IAI”).
IAI is a public company that is primarily engaged in the businesses of information technology modernization services. IAI has access to a range of federal government contract vehicles and subcontracts under federal government agencies which include the Department of Homeland Security, the U.S. Small Business Administration, the Department of Veterans Affairs, the Department of the Treasury, and the U.S. Marine Corps, among others. IAI is seeking to expand its offerings into the arenas of cyber security and data analytics.
Tellenger, Inc. will continue to operate as a wholly-owned subsidiary of IAI until it, with all of its contracts, qualifications, certifications, and clearances, is able to fully integrate into IAI.
Credit Facility
In conjunction with the transaction, on April 16, 2021, the Company and IAI jointly procured a $1 million term loan with Summit Community Bank (“Summit”) to assist with post-acquisition cash flow and integration costs. The loan will be repaid with monthly payments consisting of a fixed principal amount plus accrued interest over the course of two years at a fixed interest rate of 4.89%. The Company and IAI also replaced the Company’s prior revolving line of credit discussed in Note 7 with a $1 million revolving line of credit from Summit at a variable rate equal to the Prime Rate published in the Wall Street Journal, which is currently 3.25%, subject to a floor of 3.25%, with an expiration of April 16, 2022.
The Company has evaluated events and transactions for potential recognition or disclosure through the date of the independent auditors’ report, which is the date the financial statements were available to be issued. Except as described above, no other significant events or transactions were identified.
Exhibit 99.2
Information Analysis Incorporated
Unaudited Pro Forma Condensed Combined Financial Information
The unaudited pro forma condensed combined balance sheet as of March 31, 2021 and the unaudited pro forma condensed combined statements of operations for each of the three months ended March 31, 2021 and for the year ended December 31, 2020 combine the financial statements of Information Analysis Incorporated (“IAI”) and Tellenger, Inc. (“Tellenger”) giving effect to the transaction described in the Stock Purchase Agreement, as if they had occurred on January 1, 2020 in respect of the unaudited pro forma condensed combined statements of operations and on March 31, 2021 in respect of the unaudited pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined financial information should be read in conjunction with:
● |
IAI’s audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2020, as contained in the Form 10-K filed on March 31, 2020 with the United States Securities and Exchange Commission (the “SEC”). |
● |
IAI’s unaudited condensed consolidated financial statements and accompanying notes as of and for the three months ended March 31, 2020, as contained in its Quarterly Report on Form 10-Q filed on May 14, 2020 with the SEC. |
● |
Tellenger’s audited financial statements as of and for the year ended December 31, 2020, contained elsewhere herein. |
● |
Tellenger’s unaudited financial statements as of and for the three months ended March 31, 2021, contained elsewhere herein. |
● |
the other information contained in or incorporated by reference into this filing. |
The final purchase consideration and the allocation of the purchase consideration may materially differ from that reflected in the unaudited pro forma condensed combined financial information after final valuation procedures are performed and amounts are finalized.
The unaudited pro forma adjustments give effect to events that are directly attributable to the transaction and are based on available data and certain assumptions that management believes are factually supportable. In addition, with respect to the unaudited condensed combined statements of operations, the unaudited pro forma adjustments are expected to have a continuing impact on the combined results.
The unaudited pro forma condensed combined financial information is presented for informational purposes only and to aid you in your analysis of the financial aspects of the acquisition. The unaudited pro forma condensed combined financial information described above has been derived from the historical financial statements of IAI and Tellenger and the related notes included elsewhere in this Form 8-K. The unaudited pro forma condensed combined financial information is based on IAI’s accounting policies. Further review may identify additional differences between the accounting policies of IAI and Tellenger. The unaudited pro forma adjustments and the pro forma condensed combined financial information don’t reflect the impact of synergies or post-transaction management actions and are not necessarily indicative of the financial position or results of operations that may have actually occurred had the transaction taken place on the dates noted, or of IAI’s future financial position or operating results.
Information Analysis Incorporated |
Unaudited Pro Forma Combined Balance Sheet |
March 31, 2021 |
Information |
|||||||||||||||||
Analysis |
Pro Forma |
Pro Forma |
|||||||||||||||
Incorporated |
Tellenger, Inc. |
Adjustments |
Combined |
||||||||||||||
ASSETS |
|||||||||||||||||
Current Assets |
|||||||||||||||||
Cash and cash equivalents |
$ | 3,015,943 | $ | 251,609 | $ | (251,609 | ) |
A |
$ | 934,486 | |||||||
(2,312,930 | ) |
B |
|||||||||||||||
231,473 |
C |
||||||||||||||||
Accounts receivable |
1,185,963 | 563,853 | (563,853 | ) |
A |
1,739,296 | |||||||||||
553,333 |
C |
||||||||||||||||
Prepaid expenses and other current assets |
106,294 | 14,530 | (14,530 | ) |
A |
111,999 | |||||||||||
5,705 |
C |
||||||||||||||||
Total current assets |
4,308,200 | 829,992 | (2,352,411 | ) | 2,785,781 | ||||||||||||
Intangible assets and goodwill |
- | - | 2,305,143 |
C |
2,086,351 | ||||||||||||
(218,792 | ) |
D |
|||||||||||||||
Contract assets |
342,631 | - | - | 342,631 | |||||||||||||
Property & equipment, net |
61,395 | - | - | 61,395 | |||||||||||||
Right-of-use operating lease asset |
25,911 | - | - | 25,911 | |||||||||||||
Other assets |
- | - | - | - | |||||||||||||
Total Assets |
$ | 4,738,137 | $ | 829,992 | $ | (266,060 | ) | $ | 5,302,069 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||||||||||||
Current liabilities |
|||||||||||||||||
Accounts payable |
$ | 192,213 | $ | 284,667 | $ | (284,667 | ) |
A |
$ | 476,128 | |||||||
283,915 |
C |
||||||||||||||||
Revolving line of credit |
500,000 | - | - | 500,000 | |||||||||||||
Contract liabilities |
455,496 | - | - | 455,496 | |||||||||||||
Accrued payroll and related liabilities |
421,183 | 120,937 | (120,937 | ) |
A |
541,350 | |||||||||||
120,167 |
C |
||||||||||||||||
Commissions payable |
276,794 | - | - | 276,794 | |||||||||||||
Note payable - Tellenger purchase |
- | - | 150,000 |
C |
150,000 | ||||||||||||
Note payable - current portion |
149,001 | - | - | 149,001 | |||||||||||||
Liability - joint venture |
- | 28,642 | (28,642 | ) |
A |
28,642 | |||||||||||
28,642 |
C |
||||||||||||||||
Operating lease liability current |
18,363 | - | - | 18,363 | |||||||||||||
Other accrued liabilities |
8,047 | - | - | 8,047 | |||||||||||||
Interest payable |
4,583 | - | - | 4,583 | |||||||||||||
Total current liabilities |
2,025,680 | 434,246 | 148,478 | 2,608,404 | |||||||||||||
Note payable - non-current portion |
300,999 | 300,999 | |||||||||||||||
Total liabilities |
2,326,679 | 434,246 | 148,478 | 2,909,403 | |||||||||||||
Stockholders' equity |
|||||||||||||||||
Common stock |
132,599 | 200 | (200 | ) |
A |
133,282 | |||||||||||
683 |
E |
||||||||||||||||
Additional paid-in capital |
15,243,769 | 28,079 | (28,079 | ) |
A |
15,443,086 | |||||||||||
199,317 |
E |
||||||||||||||||
Retained Earnings (accumulated deficit) |
(12,034,699 | ) | 367,467 | (367,467 | ) |
A |
(12,253,491 | ) | |||||||||
(218,792 | ) |
D |
|||||||||||||||
Treasury stock |
(930,211 | ) | - | - | (930,211 | ) | |||||||||||
Total stockholders' equity |
2,411,458 | 395,746 | (414,538 | ) | 2,392,666 | ||||||||||||
Total liabilities and stockholders' equity |
$ | 4,738,137 | $ | 829,992 | $ | (266,060 | ) | $ | 5,302,069 |
See notes to the unaudited pro forma condensed combined financial information.
Information Analysis Incorporated |
Unaudited Pro Forma Combined Statement of Operations |
Three months ended March 31, 2021 |
Information |
|||||||||||||||||
Analysis |
Pro Forma |
Pro Forma |
|||||||||||||||
Incorporated |
Tellenger, Inc. |
Adjustments |
Combined |
||||||||||||||
Revenues |
|||||||||||||||||
Professional fees/ consulting revenue |
$ | 2,439,259 | $ | 1,157,825 | $ | - | $ | 3,597,084 | |||||||||
Software sales |
980,321 | - | 980,321 | ||||||||||||||
Total revenues |
3,419,580 | 1,157,825 | - | 4,577,405 | |||||||||||||
Cost of revenues |
|||||||||||||||||
Cost of professional fees/ consulting revenue |
1,467,699 | 952,863 | - | 2,420,562 | |||||||||||||
Cost of software sales |
932,231 | - | 932,231 | ||||||||||||||
Total cost of revenues |
2,399,930 | 952,863 | - | 3,352,793 | |||||||||||||
Gross profit |
1,019,650 | 204,962 | - | 1,224,612 | |||||||||||||
Selling, general and administrative expenses |
545,663 | 102,484 | 43,758 |
D |
691,905 | ||||||||||||
Commissions expense |
134,587 | - | 134,587 | ||||||||||||||
Acquisition costs |
70,530 | - | - | 70,530 | |||||||||||||
Income from operations |
268,870 | 102,478 | (43,758 | ) | 327,590 | ||||||||||||
Other income, net |
1,945 | 86 | 2,031 | ||||||||||||||
Income before provision for income taxes |
270,815 | 102,564 | (43,758 | ) | 329,621 | ||||||||||||
Provision for income taxes |
- | - | - | - | |||||||||||||
Net income |
$ | 270,815 | $ | 102,564 | $ | (43,758 | ) | $ | 329,621 | ||||||||
Comprehensive Income |
$ | 270,815 | $ | 102,564 | $ | (43,758 | ) | $ | 329,621 | ||||||||
Net income per share: |
|||||||||||||||||
Basic |
$ | 0.02 | $ | 0.03 | |||||||||||||
Diluted |
$ | 0.02 | $ | 0.03 | |||||||||||||
Weighted average number of shares outatanding: |
|||||||||||||||||
Basic |
11,282,671 | 68,264 | 11,350,935 | ||||||||||||||
Diluted |
12,286,216 | 68,264 | 12,354,480 |
See notes to the unaudited pro forma condensed combined financial information.
Information Analysis Incorporated |
Unaudited Pro Forma Combined Statement of Operations |
Year ended December 31, 2020 |
Information |
|||||||||||||||||
Analysis |
Pro Forma |
Pro Forma |
|||||||||||||||
Incorporated |
Tellenger, Inc. |
Adjustments |
Combined |
||||||||||||||
Revenues |
|||||||||||||||||
Professional fees/ consulting revenue |
$ | 5,527,139 | $ | 4,449,113 | $ | - | $ | 9,976,252 | |||||||||
Software sales |
8,375,932 | - | 8,375,932 | ||||||||||||||
Total revenues |
13,903,071 | 4,449,113 | - | 18,352,184 | |||||||||||||
Cost of revenues |
|||||||||||||||||
Cost of professional fees/ consulting revenue |
3,566,229 | 3,608,613 | - | 7,174,842 | |||||||||||||
Cost of software sales |
8,127,509 | - | 8,127,509 | ||||||||||||||
Total cost of revenues |
11,693,738 | 3,608,613 | - | 15,302,351 | |||||||||||||
Gross profit |
2,209,333 | 840,500 | - | 3,049,833 | |||||||||||||
Selling, general and administrative expenses |
1,504,077 | 669,728 | 173,159 |
D |
2,346,964 | ||||||||||||
Commissions expense |
293,408 | - | 293,408 | ||||||||||||||
Income from operations |
411,848 | 170,772 | (173,159 | ) | 409,461 | ||||||||||||
Other income, net |
1,531 | 10,020 | 11,551 | ||||||||||||||
Income before provision for income taxes |
413,379 | 180,792 | (173,159 | ) | 421,012 | ||||||||||||
Provision for income taxes |
- | - | - | - | |||||||||||||
Net income |
$ | 413,379 | $ | 180,792 | $ | (173,159 | ) | $ | 421,012 | ||||||||
Comprehensive income |
$ | 413,379 | $ | 180,792 | $ | (173,159 | ) | $ | 421,012 | ||||||||
Net income per share: |
|||||||||||||||||
Basic |
$ | 0.04 | $ | 0.04 | |||||||||||||
Diluted |
$ | 0.03 | $ | 0.03 | |||||||||||||
Weighted average number of shares outatanding |
|||||||||||||||||
Basic |
11,222,826 | 68,264 | 11,291,090 | ||||||||||||||
Diluted |
12,049,322 | 68,264 | 12,117,586 |
See notes to the unaudited pro forma condensed combined financial information.
Information Analysis Incorporated
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 1. Basis of Presentation
The unaudited pro forma condensed combined financial information set forth herein is based upon the consolidated financial statements of Information Analysis Incorporated (“IAI”) and Tellenger, Inc. (“Tellenger”). The unaudited pro forma condensed combined financial information is presented as if the transaction had been completed on January 1, 2020 with respect to the unaudited pro forma condensed combined statements of operations for each of the three months ended March 31, 2021 and for the year ended December 31, 2020 and on March 31, 2021 in respect of the unaudited pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined financial information is presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations had the transaction occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the combined company will experience after the completion of the transactions.
We have accounted for the acquisition in this unaudited pro forma condensed combined financial information using the acquisition method of accounting, in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations” (“ASC 805”). In accordance with ASC 805, we use our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired.
Pro forma adjustments reflected in the unaudited pro forma condensed combined balance sheet are based on items that are factually supportable and directly attributable to the transaction. Pro forma adjustments reflected in the pro forma condensed combined statements of operations are based on items that are factually supportable, directly attributable to the transaction and expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information does not reflect the cost of any integration activities or benefits from the transaction, including potential synergies that may be generated in future periods.
Note 2. Description of the Transaction
On April 7, 2021, Information Analysis Incorporated executed and closed upon a Stock Purchase Agreement to which the Company, Tellenger, Inc. and David and Heather Tortorelli are parties. Under this Stock Purchase Agreement, IAI purchased all of the issued and outstanding shares of Tellenger. The purchase price for the acquisition was $2,300,000 and 68,264 shares of the Company’s common stock, par value $0.01.
Note 3. Purchase Price Allocation
The fair value of the consideration transferred was valued as of the date of the acquisition as follows:
Tellenger, Inc. Purchase Price Allocation
Cash |
2,300,000 | |||
Common stock |
200,000 | |||
Working capital adjustment |
11,430 | |||
Other non-interest-bearing liabilities assumed |
432,724 | |||
Other consideration |
1,500 | |||
Total purchase consideration |
2,945,654 |
The preliminary allocation for the consideration recorded for the acquisition is as follows:
Current assets |
640,512 | |||
Intangible assets and goodwill |
2,305,143 | |||
Total purchase consideration |
2,945,654 |
The purchase price allocation is preliminary. The purchase price allocation will continue to be preliminary until a third-party valuation is finalized and the fair value and useful life of the assets acquired is determined. The amounts from the final valuation may significantly differ from the preliminary allocation.
Note 4. Pro Forma Adjustments
The following pro forma adjustments give effect to the transaction.
Unaudited Pro Forma Condensed Combined Balance Sheet – As of March 31, 2021
Note A |
To remove Tellenger, Inc. assets, liabilities, and equity. |
Note B |
To record cash consideration paid. |
Note C |
To record assets acquired and liabilities assumed from Tellenger, Inc. |
Note D |
To record depreciation/ amortization accumulation and effect on retained earnings (accumulated deficit). |
Note E |
To record common stock issued as consideration. |
Unaudited Pro Forma Condensed Combined Statement of Operations – For The Three Months Ended March 31, 2021
Note D |
To record depreciation/ amortization expense. |
Unaudited Pro Forma Condensed Combined Statement of Operations – For The Year Ended December 31, 2020
Note D |
To record depreciation /amortization expense. |