What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-04-12 compared with 2021-03-31 · 183 added, 124 removed, 25 unchanged (92% of the section changed)

Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Registrant ’

s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Common Stock started trading on the OTCQB market on January 15, 2021,under the symbol IAIC.

Prior thereto, our shares traded on the OTC Pink Market and the OTC Bulletin Board.

The following table sets forth, for the fiscal periods indicated, the high and low bid prices of the Common Stock:

2020 Quarter Ended:

2019 Quarter Ended:

The quotations on which the above data are based reflect inter-dealer prices without adjustment for retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

Because our stock trades on OTCQB rather than on a national securities exchange, a shareholder may find it difficult to either dispose of or obtain quotations as to the price of our common stock.

There has historically been a low trading volume of our shares which may have an adverse impact on a shareholder’s ability to execute transactions of our shares.

As of December 31, 2020, we had 105 holders of record of our Common Stock.

Our common stock began trading on the NASDAQ Capital Market (“NASDAQ”) under the symbol “WAVD”

on November 26, 2021.

Prior to trading on NASDAQ, our common stock started trading on the OTCQB market on January 15, 2021 under the symbol “IAIC.”

Prior thereto, our common stock traded on the OTC Pink Market and the OTC Bulletin Board.

December 31, 2021, we had 217 holders of record of our Common Stock.

We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends within the foreseeable future.

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Recent Sales of Unregistered Securities

We had no sales of unregistered securities during 2020.

There were no unregistered sales of equity securities during the twelve months ended December 31, 2021 that were not disclosed by the Company on a Current Report on Form 8-K.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not repurchase any of our equity securities during 2021.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached financial statements and notes thereto.

Reference is made to “Cautionary Statement Regarding Forward-Looking Statements” on page 1 hereof, which describes important factors that could cause actual results to differ from expectations and non-historical information contained herein.

In 2020, the key factor to our return to profitability was the 70% increase in our revenue from professional fees, almost all of which was related to our modernization services.

When our largest subcontract award emerged from protest proceedings and commenced in June 2020, a year after the contract was originally awarded, it immediately eased our cash flow burdens, took some of the concern over COVID-19 uncertainty away, and allowed us to shift our focus from short-term cash management to strategic planning and growth.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

2020 was not without its challenges.

In the first half of the year, we had been carrying several employees that are key to our modernization services at least partially on overhead in anticipation of the commencement of projects delayed by protest, causing strain on cash flows.

And of course, like every other business, large and small, we had to adapt to the new environment surrounding COVID-19.

Fortunately, we had most of the infrastructure in place for employees to work remotely, but the ways in which we interact with customers, potential customers, peers, as a management team, as a sales team, internal and external technical support, and recruiting and human resources management were affected.

As 2020 came to a close, we had fully reversed the losses incurred early in the year, cash balances were building back up to over $1.8 million, we invested in internal technological infrastructure improvements, including more robust, higher capacity, better protected server systems with improved firewall protections, we mapped out a plan to expand our services and software offerings into cybersecurity, Cloud services, and artificial intelligence, we began the process to upgrade our stock listing from the pink sheets to OTCQB to make it easier for our shareholders to trade, and we began to rebuild our sales teams.

Cash and cash equivalents increased $819,000 in 2020, due mostly to a combination of profitable operations and borrowings of $450,000 under the Paycheck Protection Program (“PPP”), guaranteed by the U.S.

Small Business Administration (“SBA”).

The nature of our business is a mixture of fees earned for specialized professional information technology services, including modernization services and electronic forms services, and sales of third-party software.

Our profit margins on our professional fees materially exceed our profit margins on software sales.

We continue to devote attention to software sales despite the low margins because certain software manufacturers require minimum software sales levels for us to be a certified as a partner to perform the professional services supporting or using the software.

We require a certain level of professional fee revenue to generate enough profit margin to cover our general and administrative expenses.

Our management will continue to explore ways to expand our current market spaces and develop new ones that may offer more opportunity.

This may take the shape of organic growth or through acquisitions of other companies.

In 2020, IAI evaluated certain merger and acquisition opportunities that would expand our company offerings.

Although these particular opportunities did not result in any transactions in 2020, IAI is more aggressively pursuing its search to find potential acquisition opportunities.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report.

This discussion, particularly information with respect to our outlook, key trends and uncertainties, our plans and strategy for our business, and our performance and future success, includes forward-looking statements that involve risks and uncertainties.

Our actual results could differ materially from those discussed below.

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A, “

Risk Factors.

” 

WaveDancer, formerly known as Information Analysis Incorporated (“IAI”), is engaged in providing professional services to U.S.

government agencies to modernize information technology services, in selling and supporting third-party software, primarily Adobe products, to U.S.

government agencies, and, with our December, 2021 acquisition of Gray Matters, Inc.

(“GMI”

or “Gray Matters”), in providing a blockchain enabled supply chain management software solution.

With the acquisition of GMI, we began implementing a strategy that will expand our offerings well beyond systems modernization services and sales of third-party software.

Recent Developments

2021 was a year of significant change for the Company.

We began the year with a new President and CEO, Stan Reese, who enacted a strategy designed to expand our offerings and grow our more profitable services business.

In April, we acquired Tellenger, Inc.

in order to become more competitive in the government contracting business.

The Tellenger acquisition has expanded our IT services capabilities, including in cybersecurity.

We refer to the products and services offered by Tellenger and WaveDancer prior to the acquisition of GMI as “Legacy IAI”.

In August 2021, our Board of Directors appointed Jamie Benoit as Chairman and CEO and Mr.

Reese resumed his duties as President of Legacy IAI.

Where the acquisition of Tellenger was a natural and important step forward, the appointment of Mr.

Benoit and subsequent adoption of a new strategy represented a sea change for our Company.

This new strategy has been developed to meet the needs of government and commercial customers in a rapidly evolving threat landscape relating to devices and data.

Three key elements of this changing landscape include:

the evolution of cybersecurity practices toward the zero trust approach;

the proliferation of Internet of Things (IoT) devices that are taking enterprise networks to the edge;

the promise of blockchain technology.

As of the date of this filing we are moving aggressively to combine our existing capabilities, along with others we intend to build through acquisitions or alliances.

Leveraging blockchain, we intend to deploy our software solutions to provide corporate and government organizations with a new, secure, and transparent way to conduct business to meet cybersecurity risks.

Our efforts are designed to reposition WaveDancer as a disruptive technology in government and private sectors.

Coinciding with the appointment of Mr.

Benoit in August 2021, the Company raised $2.8 million by issuing shares of common stock in an unregistered private offering to provide the initial funding for our strategy.

Investors in this offering comprised the entirety of the Board of Directors and members of senior management, demonstrating our confidence in the new direction.

During the period from August 2021 through the date of this filing, we focused on putting the building blocks of this transformative strategy in place.

In December 2021 we raised $10 million by issuing shares of common stock in an unregistered private offering, using the proceeds for the acquisition of GMI and to provide further liquidity to execute our strategy.

Below is a summary of the key objectives of this initial phase of our strategy and certain related actions and accomplishments:

Actions and Accomplishments

●         Enhance the Company’s profile

●         Improve the liquidity of our common stock

●         Listed on NASDAQ

●         Changed our name to WaveDancer

●         Reorganize management structure to leverage Tellenger and establish foundation for growth

●         Add capability to our Board of Directors and our management team to support and execute our strategy

●         Improve the predictability, and flexibility in the Company’s legal affairs

●         Appointed James C.

“Chip” DiPaula and Rear Admiral (Ret.) Paul Becker to our Board

●         Added new key executives including Chief Growth Officer, Chief Sales Officer and Chief Financial Officer.

●         Changed incorporation from Virginia to Delaware

●         Adoption of a new certificate of incorporation and bylaws

●         Increase our shareholder base and raise funds to support our strategy

●         Identify and pursue acquisition targets consistent with our strategy

●         Raised $10 million in an unregistered private offering of common shares to over 75 new investors

●         Acquired Gray Matters, Inc.

●         In March 2022, entered into a definitive agreement to acquire Knowmadics

Many of the actions above required spending in advance of generating revenue from new products and services and as discussed below have resulted in increases in Selling, general and administrative (“SG&A”) expenses without the increases in revenue and margin that we plan to generate as our strategy takes hold.

In 2022 we will hire salespeople, marketers, and software engineers, develop and implement sales and marketing programs, and expand our compliance, governance and administrative infrastructure to support our growing business.

These activities will result in continued growth in the SG&A expense line as we continue to move aggressively in implementing our strategy.

Key Factors Affecting Our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us, as discussed in Part I, Item 1, “Business,”

but also pose risks and challenges, as discussed in Part I, Item 1A, “Risk Factors.”

Results of Operations

The following table sets forth, for the periods indicated, selected information from our Statements of Operations, expressed as a percentage of revenue:

Years ended December 31,

The following table sets forth, for the periods indicated, selected information from our Consolidated Statements of Operations and the notes to the consolidated financial statements, expressed as a percentage of revenue:

Year Ended 12/31,

Professional fees

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Total cost of revenues

Operating expenses

Selling, general and administrative expenses

Commissions expense

Income (loss) from operations

Income (loss) before provision for income taxes

Provision for income taxes

Net income (loss)

2020 Compared to 2019

Total revenue for 2020 increased $3.7 million, or 36.8%, to $13.9 million from $10.2 million in 2019.

Revenue from professional services fees increased $2.3 million, or 70.4%, to $5.5 million in 2020 from $3.2 million in 2019.

Revenue from professional fees increased primarily from the addition of professional fee modernization services subcontracts, some of which had been awarded but delayed due to protest of the prime contract awards in 2019.

Revenue from software sales increased $1.5 million, or 21.0%, to $8.4 million in 2020 from $6.9 million in 2019.

The increase in our software sales revenue in 2020 versus 2019 is from the non-recurring nature of many of our software sales transactions, as well as the timing of recurring orders.

In addition, sales of robotics process automation (RPA) software have increased as a percentage of total software sales.

Software product and maintenance sales and commissions on registered sales are subject to considerable fluctuation from period to period, based on the product mix sold and customer demand.

Revenue from software sales comprised 60.2% of total sales in 2020, compared to 68.1% of total sales in 2019.

Gross Profit .

Gross profit increased $809,000, or 57.8%, in 2020 versus 2019.

Gross profit on professional fees revenue is substantially higher than gross profit on software sales, as gross profit on software sales is more dependent on the costs from third-party suppliers, and revenue is generally based on increasingly-competitive bidding in which identical products are offered by all bidders at very low profit margins.

Overall gross profit as a percentage of revenue increased to 15.9% of revenue in 2020 from 13.8% of revenue in 2019 due to the increase in professional fees as a percentage of total revenues.

Gross profit from professional fees for 2020 was $2.0 million, or 35.5% of professional fees revenue, while gross profit for 2019 from professional fees was $1.3 million, or 38.9% of professional fees revenue.

Gross profit from professional fees increased primarily due to the material increase in professional fees revenue.

For software sales, gross profit percentage increased to 3.0% in 2020 from 2.0% in 2019.

The primary reason for the increase in gross profit percentage on software sales is an increase in incentive payments earned, Software product sales and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold and incentive payments earned.

Increases and decreases in our software sales, excluding incentive payments, generally do not have a material effect on our gross profit, as the gross profit percentage on software sales averages less than 3.0%.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

Selling, General and Administrative.

Selling, general and administrative expense decreased in 2020 by $371,000 to $1.5 million, or 10.8% of revenue, from $1.9 million, or 18.5% of revenue, in 2019.

These decreases are primarily due to decreases in the cost of non-billable labor and the associated cost of fringe benefits, as we had hired and carried employees in 2019 who were not fully billable in anticipation of the commencement of services on a subcontract award under prime contract that had been protested.

Additionally, the decrease is due to costs incurred in 2019 associated with a potential merger that did not proceed to settlement.

These decreases offset increases in stock compensation expenses and executive bonuses.

Commission Expense.

Commission expense in 2020 was $293,000, or 2.1% of revenue, versus $253,000, or 2.5%, in 2019.

Commissions are driven by varying factors and are earned at varying rates for each salesperson.

The increase in commission expense is primarily related to increases in incentive payments received to $132,000 in 2020 versus $27,000 in 2019.

Net income (loss).

Net income for 2020 was $413,000, or 3.0% of revenues, versus net loss of $717,000, or (7.1%) of revenue, for 2019, a positive change of $1.1 million.

The largest contributing factors to the change are the commencement (following prolonged delays due to protest) of professional fee modernization subcontracts and increases in incentive payments received.

We had previously reported losses in each of the last eight first calendar quarters.

In 2021, we believe we have reversed that trend.

We had also previously reported that we require a certain level of professional fee revenue to generate enough profit margin to cover our general and administrative expenses.

With the commencement of previously delayed subcontracts, and the addition of additional contracts, we have surpassed that minimum requirement and are in a period of sustainable profitability.

We are working to expand both the services and the products we offer into the areas of cybersecurity, cloud services, and artificial intelligence, and have made investments in sales and business development, as well as in our IT infrastructure.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”), or other standard setting bodies that the Company adopts as of the specified effective date.

If there had been accounting standards recently adopted or pending adoption and such accounting changes were expected to affect our results of operations, financial position or liquidity, the notes to the financial statements would have included a discussion of those accounting standards.

Acquisition costs

(Loss) income from operations

Other income (expense):

Interest expense

Other income (expenses), net

Gain on forgiveness of note payable

(Loss) income before provision for income taxes

Income tax benefit

Net (loss) income

Revenue increased by 8.1%, or $1.1 million, from $13.9 million in 2020 to $15.0 million in 2021.

This net increase includes a significant shift of the mix of our primary types of revenue with professional fees revenue increasing by 91%, or $5.1 million, while sales of third-party software declined by 47%, or $3.9 million.

Almost half of the increase in professional fees revenue, or $2.4 million came from the Tellenger business we acquired in early April.

Excluding Tellenger, which does not sell software, our professional fees revenue grew by $2.6 million, or 47%.

The decline in third-party software sales reflects a shift in emphasis toward our higher margin professional services business and away from sales of third-party software which typically generate single digit gross profit rates.

Gross profit increased by $1.4 million, or 63.6%, from $2.2 million in 2020 to $3.6 million in 2021, with gross profit percentage increasing from 15.9% to 24.1%.

This 820 basis point increase in gross profit percentage corresponds to the significant shift in revenue mix highlighted above.

For 2021, professional fees revenue comprised 70.5% of our revenue versus 39.8% in 2020, and the gross profit percentage of professional fees revenue was 33.1% and 35.5% in 2021 and 2020, respectively, while the gross profit percentage for sales of third-party software was 2.4% and 3% in 2021 and 2020, respectively.

Selling, General and Administrative Expenses

SG&A expenses increased significantly in 2021 as we began to implement the transformative strategy outlined in Item 1 and in Recent Developments above.

SG&A expense for 2021 was $5.5 million versus $1.8 million in 2020, which is an approximate three-fold increase.

The following table shows the major elements of SG&A expenses and the changes from 2020 to 2021:

Stock-based compensation

Salaries and benefits

Legal and professional fees

Governance and investor relations

Intangibles amortization

As shown in the table above, nearly half of the increase in SG&A is a result of stock-based compensation expense.

We issue options to our employees and members of our board of directors to attract, retain and incentivize the individuals who will be critical to our success as we execute our strategy.

In 2021 we issued 2.0 million options as compared to 0.2 million options in 2020 and our stock price appreciated significantly year over year, with the average daily high and low share prices increasing from $0.40 in 2020 to $2.47 in 2021.

The increase in salaries and benefits is mainly driven by the addition of new positions as we build the team necessary to execute the strategy.

Starting in September 2021, we added executive positions to lead sales and marketing, while adding a new CEO and CFO and having the former executives stay on in other critical roles.

Our legal and professional fees spending increased in connection with our corporate reorganization, including revising our bylaws and reincorporating in Delaware, adopting a new Stock Incentive Plan, organizing a special meeting of shareholders, and other matters.

The increase in governance and investor relations costs include increases in director fees, costs associated with our listing on NASDAQ and increased usage of outside investor relations resources as our corporate activities grew in volume and complexity.

Intangible amortization expense of $0.2 million in 2021 increased from $0 in 2020 and is from the Tellenger and Gray Matters acquisitions.

Acquisition Costs

In 2021 we incurred $0.8 million of acquisition related expenses versus none in 2020.

These expenses are related to the completed acquisitions of Tellenger and Gray Matters as well as efforts in connection with signing a definitive agreement to acquire Knowmadics.

We incurred fees for legal advice, financial due diligence, valuation services, audit and tax services and other costs directly related to our acquisition activities.

Efforts related to our pending acquisition of Knowmadics have continued through the date of this filing.

Gain on Debt Forgiveness

On April 20, 2020 we were granted a Paycheck Protection Program ("PPP") loan in the amount of $450,000.

During 2021 we applied for forgiveness of the full amount of the loan including interest and on October 13, 2021 our application for forgiveness was approved.

For 2021 we have recorded a tax benefit $1.1 million.

As a result of our acquisitions of Tellenger and Gray Matters, we have recorded deferred tax liabilities that arise because we have intangible assets that will be amortized for book purposes but not for tax purposes.

The recording of these liabilities in 2021 has the effect of allowing us to recognize tax benefits that arose in prior years, primarily related to net operating loss carryforwards, that we were unable to recognize previously.

See the Note 10 in the notes to the consolidated financial statements for details.

For 2021 we had a net loss of $1.1 million as compared to net income of $0.4 million in 2020.

The loss is driven primarily by the SG&A increases associated with our broad strategic alignment as well as our acquisition related expenses, which together account for $4.4 million of additional costs, more than offsetting our $1.4 million increase in gross profit and $1.1 million income tax benefit.

Liquidity and Capital Resources

Our beginning cash and cash equivalents balance, when combined with our cash flow from operations and a forgivable term loan under the Paycheck Protection Program of $450,000, were sufficient to provide financing for our operations.

We expect to apply for forgiveness as soon as our lender again begins accepting forgiveness applications following its implementation of the most recent legislative changes that impact the program.

For 2020, net cash provided by operating activities was $423,000.

When combined with the proceeds of our PPP loan and employee option exercises, and reduced by investments in fixed assets, we increased cash balances by $819,000 to bring our cash and cash equivalents balance to $1.9 million at December 31, 2020.

We have a revolving line of credit with a bank providing for demand or short-term borrowings of up to $1 million.

The line became effective December 20, 2005, and expires on July 31, 2021.

The credit agreement includes an interest rate indexed to 3.50% above the Intercontinental Exchange Benchmark Administration Ltd.

London Interbank Offered Rate with a floor of 4.0%.

The total amount allowed to be drawn against the line is limited by varying percentages of our eligible accounts receivable.

At December 31, 2020, the limit was $1 million.

The bank is granted a security interest in all of the Company’s assets if there are borrowings under the line of credit.

Interest on outstanding balances is payable monthly.

The effective rate at December 31, 2020 was 4.0%.

Under the line of credit agreement, the Company is bound by certain covenants, including maintaining a minimum tangible net worth and producing a number of periodic financial reports for the benefit of the bank.

At December 31, 2020, the Company was in compliance with its covenants with its lender.

As of December 31, 2020 and 2019, no amounts were outstanding under this line of credit.

We did not borrow against this line of credit in 2020.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

Based on our current cash position and operating plan, we anticipate that we will be able to meet our cash requirements for at least one year from the filing of this Annual Report on Form 10-K.

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.

Off-Balance Sheet Arrangements

As of December 31, 2021, we had $4.9 million of cash and cash equivalents on hand consisting of bank deposits and money market funds, approximately $2.8 million of which was from the funds we raised in an unregistered private offering of common stock in connection with the Gray Matters acquisition.

In August of 2021 we raised $2.8 million, primarily from directors and officers of the Company, which was available to fund the increases in SG&A discussed above as well as to pay off $1.0 million of long-term debt and borrowings under our line of credit.

Our line of credit is for $1 million and is fully available.

It expires in April 2022 and the Company intends to renew it and no assurance can be provided of the renewal.

Our business is not fixed asset intensive, and we have no commitments for capital expenditures.

We have two office leases with lease commitments totaling $0.2 million in 2022 and $0.5 million during the remainder of their terms which end in 2024 and 2026.

In connection with the acquisition, we are required to pay the seller of Gray Matters (the "Seller") $1.5 million in December 2023.

Also, the Seller is entitled to additional consideration of up to $4 million contingent on the performance of Gray Matters for the year ending December 31, 2022.

Our balance sheet as of December 31, 2021 reflects an estimated $1 million for that contingent liability and the payment, if any, would be due after March 31, 2023.

To meet our liquidity commitments and continue to execute our strategy through the end of 2022 and beyond, assuming we consummate the acquisition of Knowmadics, which we believe is likely, we intend to use a combination of cash on hand, the ability of Legacy IAI, Gray Matters and Knowmadics to generate cash from operations, and approximately $7.0 million from the approximately $66.5 million we intend to raise in connection with the pending Knowmadics acquisition, of which no assurance can be provided.

See "- Impact of Acquisitions and Transformation of Our Business" below for more information on the pending Knowmadics acquisition and the funds we intend to raise in connection therewith.

To meet our liquidity commitments and continue to execute our strategy through the end of 2022 and beyond, if we do not consummate the acquisition of Knowmadics, we intend to use a combination of cash on hand, cash generated from the operations of Legacy IAI and Gray Matters, and we will reduce our operating expense cost structure to align with this scenario which will provide additional operating cash flow.

Based on our current cash position and operating plan, we anticipate that we will be able to meet our cash requirements through the end of the second quarter of 2023.

We do not have any off-balance-sheet arrangements that have or are likely to have a material current or future effect on our financial condition, or changes in financial condition, liquidity or capital resources or expenditures.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 to our accompanying financial statements.

Critical Accounting Estimates

Our significant accounting policies are described in Note 1 to our accompanying consolidated financial statements.

We consider the accounting policies related to revenue recognition to be critical to the understanding of our results of operations.

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Revenue Recognition

We generate revenue from the sales of information technology professional services, sales of third-party software licenses and implementation and training services, sales of third-party support and maintenance contracts based on those software products, and incentive payments received from third-party software suppliers for facilitating sales directly between that supplier and a customer introduced by us.

We sell through our direct relationships with end customers and under subcontractor arrangements.

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) we enter 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) we determine that collection of substantially all consideration to which we 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 us, 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, we apply judgment to determine whether promised goods or services are capable of being distinct and 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.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

Determination of the transaction price - The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any.

We typically estimate 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.

We determine 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, we satisfy performance obligations - We satisfy performance obligations either over time or at a point in time.

Revenue is recognized at or over the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

Effects of Inflation

In the opinion of management, inflation has not had a material effect on our operations.

We account for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.”

The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.

ASC 606 prescribes a five-step model for recognizing revenue that includes identifying the contract with the customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied.

Timing of the satisfaction of performance obligations varies based on whether we are selling a product or service and the contractual terms.

Significant judgment can be required in determining certain performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period. 

Our contracts may have a single performance obligation or multiple performance obligations.

When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on our best estimate of standalone selling price.

Stock-Based Compensation

The Company estimates the fair value of options granted using a Black-Scholes valuation model to establish the expense.

Determining the inputs for the valuation model requires significant judgment, particularly related to the estimation of stock price volatility.

Historically there has been a limited public market for the Company’s stock, and as a result the Company estimates its expected volatility by using the volatility of a pool of several public company issuers that operate within its market segment as a benchmark.

The Company adjusts the results of the benchmark analysis to reflect differences in the size of the benchmark companies and their capital structures as compared to ours.

The selection of comparable companies and the amount of the size adjustment require significant judgment and changes in those assumptions could have a material impact on our reported results of operation.

Business Combinations and Acquired Intangible Assets

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

The purchase price allocation process requires management to make significant estimates of projected financial information and assumptions with respect to valuation of intangible assets.

Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain.

Examples of highly subjective judgments used to estimate the fair value of intangibles assets include, but are not limited to, projections of future expected cash flows, expected customer attrition rates, estimated technology obsolescence rates, and discount rates.

These estimates were particularly subjective and uncertain as it relates to the acquired intangibles in the Gray Matters acquisition due to the relative novelty of blockchain supply chain software solutions, the fast pace of emerging competitive solutions and our limited experience managing and monetizing blockchain technology.

We intend to closely monitor our financial performance in our blockchain SCM business relative to our initial acquisition projections and look for indicators of impairment if we experience challenges executing our strategy and monetizing the acquired software technology and other intangibles.

Impact of Acquisitions and Transformation of Our Business

We expect our revenue, the nature of our revenue, our expenses, and our income in 2022 and thereafter to materially change, especially if we acquire Knowmadics.

We are phasing out our sales of third-party software products that, notwithstanding the revenue we earned from these sales, generated gross profit of less than 2% in both 2021 and 2020.

In 2021 and 2020, we generated $4,441,226 and $8,375,932 of revenue from such software sales.

We anticipate our professional service revenue, which had a gross profit in excess of 25% in 2021, will continue to increase because of our acquisition of Tellenger which resulted in an increase of such revenue in 2021.

With our acquisition of Gray Matters, the Company expects to generate revenue from licensing its blockchain SCM software with favorable margins in 2022.

Our intent is to adopt a Software as a Service ("SaaS") model and to materially grow the blockchain SCM business.

Under the SaaS model, in general, customers would pay a subscription fee for the right to access cloud-based software and the Company would recognize revenue ratably over the subscription period.

If we close the Knowmadics acquisition, then we expect our revenue and gross profits to materially increase in the second half of 2022.

In anticipation of our change in strategy and the transformation of our business, we began to hire additional personnel in the latter part of 2021.

Gray Matters and primarily Knowmadics, if we complete the acquisition, will require us to further increase our personnel resources in all facets of our business, such as in sales, marketing, engineering, and administration.

We do not anticipate generating a profit in 2022 as a result of the added personnel costs we will be incurring.

In connection with the anticipated closing of our acquisition of Knowmadics in the second quarter of 2022, we plan to raise approximately $66.5 million by issuing additional common shares.

The cash raised will be used for the cash consideration of approximately $56.5 million, to cover costs in connection with the fundraising and transaction expenses of approximately $3.0 million, and to provide approximately $7.0 million of additional liquidity for the Company to continue to implement its strategy.

Government Regulation

We are bound by various rules and regulations promulgated by the federal government and agencies thereunder.

We have not experienced undue expense beyond those expenses normally incurred in our ordinary course of business in adhering to such rules and regulations.

Since historically most of our business is derived from contracts either directly with the U.S.

federal government or as a subcontractor on behalf of U.S.

federal government customers, most of our contracts are subject to termination at the election of the government. 

Given our current strategy to reposition the business within the SCM sector, President Biden’s Executive Order on America’s Supply Chains, issued on February 24, 2021, may have a direct impact on our business going forward.

The executive order launches a comprehensive review of U.S.

supply chains and directs federal departments and agencies to identify ways to secure U.S.

supply chains against a wide range of risks and vulnerabilities.

Management believes the executive order could lead to potential legislative, policy or regulatory changes that could require companies to enhance their governance, risk management, and compliance efforts.

Such changes could increase demand for certain visibility and security services with respect to SCM that the Company intends to offer.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity