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Item 8. Financial Statements and Supplementary Data

2022-04-12 compared with 2021-03-31 · 2 added, 581 removed, 2 unchanged (100% of the section changed)

Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

Balance Sheets as of December 31, 2020 and 2019

Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2020 and 2019

Statements of Changes in Stockholders' Equity for the years ended December 31, 2020 and 2019

Statements of Cash Flows for the years ended December 31, 2020 and 2019

Notes to Financial Statements

Information Analysis Incorporated 2020 Annual Report on Form 10-K

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Information Analysis Incorporated

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Information Analysis Incorporated (the “Company”) as of December 31, 2020 and 2019, and the related statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgements.

The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

Revenue recognition – Gross Versus Net Recognition of Sales of Third-Party Software (Note 2 to the Financial Statements)

The Company is typically the principal in sales of third-party software.

Sales are recognized on a gross basis with the selling price to the customer recorded as sales and the acquisition cost of the product recognized as cost of sales.

The Company recognizes revenue from these sales at the point in time that control passes to the customer, which is typically after the software licenses have been implemented and the customer gains access to the software.

In instances where the Company is not required to provide implementation services, the Company is the agent and recognizes sales on a net basis at the point that their customer and vendor accept the terms and conditions of the arrangement.

The principal considerations for our determination that performing procedures relating to revenue recognition – gross versus net considerations is a critical audit matter are (1) that there was judgment applied by management in assessing the indicators that the Company controls the promised service before it was transferred to the customer, including assessing whether the Company was primarily responsible for fulfilling the promised service and whether the Company had full discretion in establishing the prices for the promised service, and (2) a high degree of auditor judgment, subjectivity and effort in performing audit procedures and evaluating the results of those procedures.

Our audit procedures related to management’s gross versus net revenue recognition included the following, among others:

Obtained documentation prepared by management to understand the Company’s process to evaluate gross versus net

Evaluated the reasonableness of management’s judgments on whether the Company is acting as a principal or agent, after considering whether the Company is the primary obligation provider, its exposures to inventory risks and the discretion in establishing the prices by reviewing agreements with software provider and understanding the business substance

Evaluated whether the Company’s conclusion is consistent with relevant accounting standards

For a selection of contracts, we performed the following procedures:

Inspected the customer contract to determine whether the sale represented a valid transaction

Evaluated whether management’s conclusion of gross versus net revenue recognition was reasonable in the circumstance

Agreed the amount of revenue recognized to source documents such as invoices, form of payments, and executed contract and related modifications, if any

We have served as the Company’s auditor since 2012.

/s/ CohnReznick LLP

Tysons, Virginia

March 31, 2021

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

BALANCE SHEETS

December 31, 2020

December 31, 2019

Current assets

Cash and cash equivalents

Accounts receivable

Prepaid expenses and other current assets

Total current assets

Contract assets

Property and equipment, net of accumulated depreciation and amortization of $312,320 and $300,258

Right-of-use operating lease asset

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

Contract liabilities

Accrued payroll and related liabilities

Commissions payable

Note payable - current portion

Other accrued liabilities

Operating lease liability current portion

Total current liabilities

Note payable - non-current portion

Operating lease liability non-current portion

Total liabilities

Stockholders' equity

Common stock, $0.01 par value, 30,000,000 shares authorized, 12,904,376 and 12,854,376 shares issued, 11,261,760 and 11,211,760 shares outstanding as of December 31, 2020 and 2019

Additional paid-in capital

Accumulated deficit

Treasury stock, 1,642,616 shares at cost at December 31, 2020 and 2019

Total stockholders' equity

Total liabilities and stockholders' equity

The accompanying notes are an integral part of the financial statements

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

For the years ended December 31,

Professional fees

Software sales

Total revenues

Cost of revenues

Cost of professional fees

Cost of software sales

Total cost of revenues

Selling, general and administrative expenses

Commission expense

Income (loss) from operations

Income (loss) before provision for income taxes

Provision for income taxes

Net income (loss)

Comprehensive income (loss)

Net income (loss) per commion share - basic

Net income (loss) per commion share - diluted

Weighted average common shares outstanding

The accompanying notes are an integral part of the financial statements

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY

Balances, December 31, 2018

Stock option compensation

Issuance of stock from exercise of options

Balances, December 31, 2019

Stock option compensation

Issuance of stock from exercise of options

Balances, December 31, 2020

The accompanying notes are an integral part of the financial statements

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

STATEMENTS OF CASH FLOWS

For the years ended December 31,

Cash flows from operating activities

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

Depreciation and amortization

Stock-based compensation

Bad debt expense

Changes in operating assets and liabilities

Accounts receivable

Contract assets

Prepaid expenses and other current assets

Accounts payable

Contract liabilties

Accrued payroll and related liabilities, and other accrued liabilities

Commissions payable

Net cash provided by (used in) operating activities

Cash flows from investing activities

Acquisition of property and equipment

Net cash used in investing activities

Cash flows from financing activities

Proceeds from note payable

Issuance of stock from exercise of options

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of the year

Cash and cash equivalents, end of the year

The accompanying notes are an integral part of the financial statements

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

Information Analysis Incorporated (“the Company”) was incorporated under the corporate laws of the Commonwealth of Virginia in 1979 to develop and market computer applications software systems, programming services, and related software products and automation systems.

The Company provides services to customers throughout the United States, with a concentration in the Washington, D.C.

metropolitan area.

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”).

Segment Reporting

The Company has concluded that it operates in one business segment, providing products and services to modernize client information systems.

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 and 2019.

Property and Equipment

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.

Leasehold improvements are amortized over the estimated term of the lease or the estimated life of the improvement, whichever is shorter.

Maintenance and minor repairs are charged to operations as incurred.

Gains and losses on dispositions are recorded in operations.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

Stock-Based Compensation

At December 31, 2020, the Company had the stock-based compensation plans described in Note 11 below.

Total compensation expense related to these plans was $27,628 and $6,031 for the years ended December 31, 2020 and 2019, respectively.

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

When stock-based compensation is awarded to employees, the expense is recognized ratably over the vesting period.

When stock-based compensation is awarded to non-employees, the expense is recognized over the period of performance.

Deferred tax assets and liabilities are computed based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse.

In addition, a valuation allowance is required to be recognized if it is believed more likely than not that a deferred tax asset will not be fully realized.

Authoritative guidance prescribes a recognition threshold of more likely than not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those positions to be recognized in the financial statements.

The Company continually reviews tax laws, regulations and related guidance in order to properly record any uncertain tax liabilities.

Income (Loss) Per Share

The Company’s income (loss) per share calculations are based upon the weighted average number of shares of common stock outstanding.

The dilutive effect of stock options, warrants and other equity instruments are included for purposes of calculating diluted income per share, except for periods when the Company reports a net loss, in which case the inclusion of such equity instruments would be antidilutive.

See Note 12 for more details.

Concentration of Credit Risk

During the year ended December 31, 2020, the Company’s prime contracts with U.S.

government agencies represented 58.3% of revenue, subcontracts under federal procurements represented 40.6% of revenue, and 1.1% of revenue came from commercial 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, one individual contract represented 13.9% of revenue.

Three subcontracts under federal procurements represented 17.9%, 10.3% and 8.7% of revenue, respectively.

One prime contractor under which the Company has multiple subcontracts represented 28.7% of revenue in aggregate.

During the year ended December 31, 2019, the Company’s prime contracts with U.S.

government agencies represented 76.8% of revenue, subcontracts under federal procurements represented 23.0% of revenue, and 0.2% of revenue came from commercial 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, one individual contract represented 19.0% of revenue.

One subcontract under a federal procurement represented 17.2% of revenue.

The Company sold third-party software and maintenance contracts under agreements with one major supplier in 2020 and 2019, accounting for 58.4% and 67.1% of total revenue, respectively.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

At December 31, 2020, the Company’s accounts receivable included receivables from prime contracts with one U.S.

government agency that represented 16.4% of the Company’s outstanding accounts receivable, and receivables from two subcontracts under federal procurements that represented 56.8% and 14.4% of the Company’s outstanding accounts receivable, respectively.

Receivables from one prime contractor under which the Company has multiple subcontracts represented 71.2% of the Company’s outstanding accounts receivable in aggregate.

At December 31, 2019, the Company’s accounts receivable included receivables from prime contracts with two U.S.

government agencies that represented 13.0% and 10.7% of the Company’s outstanding accounts receivable, respectively, and receivables from one subcontract under a federal procurement that represented 43.2% of the Company’s outstanding accounts receivable.

Related Party Transactions

The Company’s Director of Human Resources is the spouse of Stan Reese, who served as the Senior Vice President and Chief Operating Officer of the Company through December 31, 2020, and now serves as Chief Executive Officer and President.

During the years ended December 31, 2020 and 2019, the Director of Human Resources received wages and paid leave distributions totaling $140,400 and $131,552, respectively, as an employee of the Company.

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.

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.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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, 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 the Company.

The Company sells through its direct relationships with end customers and under subcontractor arrangements.

Professional services are offered through several arrangements – through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts.

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.

Revenue under fixed-price-per-unit arrangements is recognized at a point in time when delivery of units have occurred and units are accepted by the customer or are reasonably expected to be accepted.

Generally, revenue under fixed-price arrangements and mixed 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.

For fixed-price arrangements for which the Company is paid a fixed fee to make itself available to support a customer, with no predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over time.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the type of customer and whether the licenses are bulk licenses or individual licenses.

The Company’s obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers.

Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of the full benefit of the licenses, after the licenses are implemented.

If the transaction prices of the performance obligations related to implementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed.

Revenue for desktop software licenses for government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal.

If the transaction prices of the performance obligations related to implementing the government administrator’s use of the administrative portal and administrator support for the individual contract are material (rare), these obligations are recognized separately over time, as performed.

Revenue for bulk desktop software licenses for non-government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal.

For desktop software licenses sold on an individual license basis to non-government customers, where the Company has no obligation to the customer after the third-party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for the net of the selling price and its contract costs.

Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company’s reseller agreements for it to be the first line of support (direct support) and second line of support (intermediary between customer and manufacturer) to the customer.

Because of the support performance obligations, and because the amount of support is not estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support.

Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a customer, but the sale occurs directly between the customer and the supplier or between the customer and the manufacturer.

Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received.

Disaggregation of Revenue from Contracts with Customers

Year ended 12/31/2020

Year ended 12/31/2019

Services Time & Materials

Services Fixed Price

Services Combination

Services Fixed Price per Unit

Third-Party Software

Software Support & Maintenance

Incentive Payments

Total Revenue

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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, and December 31, 2019.

The accounts receivable balance does not include the amount invoiced but withheld from payment as a financing component under one contract with a customer.

The present value of the withheld amount is classified as a contract asset.

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.

Changes in contract assets balances in 2020 and 2019 are as follows:.

Contract Assets

Balance at December 31, 2019

Contract assets added

Balance at December 31, 2020

There was no balance of contract assets at December 31, 2018.

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.

Changes in contract liabilities balances in 2020 and 2019 are as follows:

Contract Liabilities

Balance at December 31, 2018

Contract liabilities added

Revenue recognized

Balance at December 31, 2019

Contract liabilities added

Revenue recognized

Balance at December 31, 2020

Revenue recognized during 2020 from the balance at December 31, 2019 was $464,223, and revenue recognized during 2019 from the balance at December 31, 2018, was $318,552.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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, and December 31, 2019.

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 has determined that one of its subcontracts to a prime contractor includes a significant financing component.

The subcontract is invoiced on a time and materials basis, under which 90% of each invoice amount is paid under regular terms, and the 10% payment balance of each invoice is deferred until the prime contractor meets a specific deliverable under its prime contract, which is expected to occur approximately June 2022.

The primary purpose of this arrangement is to assist the prime contractor in meeting all of its financial obligations until it can realize the financial benefit of meeting the deliverable.

The Company has estimated its interest rate of 4.5% based on a small premium over the rate of its revolving line of credit as of the measurement date.

The financing component cumulative balance is reflected in contract assets above.

Deferred Costs of Revenue

Deferred costs of revenue consist of the costs of third-party support and maintenance contracts for enterprise server-based software, as well direct costs associated with contract deliverables for which control of the work product has not passed to the customer and contract revenue has not been recognized.

These costs are reported under the prepaid expenses and other current assets caption on the Company’s balance sheets.

The Company recognizes these direct costs ratably over time as it makes itself available to provide its performance obligation for software support, commensurate with its recognition of revenue.

Changes in deferred costs of revenue balances in 2020 and 2019 are as follows:

Deferred Costs of Revenue

Balance at December 31, 2018

Deferred costs added - maintenance

Deferred costs expensed

Balance at December 31, 2019

Deferred costs added - maintenance

Deferred costs added - deliverables

Deferred costs expensed

Balance at December 31, 2020

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

The Company has an operating lease which is a real estate lease for its headquarters in Fairfax, Virginia.

This lease has a fixed lease term of 49 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 and 2019.

As of December 31, 2020 and 2019, 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.

The following table provides supplemental balance sheet information related to the Company’s operating lease:

Balance Sheet

Classification

December 31, 2020

December 31, 2019

Right-to-use operating lease asset

Operating lease liability - current

Operating lease liability - non-current

Total lease liabilities

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

Total lease payments

Present value of lease liabilities

As of December 31, 2020, the Company’s sole operating lease had a lease term of six months remaining.

The discount rate of the lease is equal to IAI’s 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 years ended December 31, 2020 and 2019, the Company incurred $104,487 of expense related to its operating leases.

Accounts receivable at December 31, 2020 and 2019, consist of the following:

Billed federal government

Unbilled receivables

Accounts receivable

Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer.

Unbilled receivables include short-term contract assets where billing cycles differ from calendar months or a monthly fixed billing amount does not reflect the revenue earned in a given month.

The accounts receivable balance as of December 31, 2018, was $652,839.

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;

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.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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 and 2019:

December 31, 2020

Money market funds

December 31, 2019

Money market funds

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.

Property and Equipment

A summary of property and equipment at December 31, 2020 and 2019, consist of the following:

Furniture and equipment

Computer equipment and software

Leasehold improvements

accumulated depreciation and amortization

Depreciation and amortization expense for the years ended December 31, 2020 and 2019, was $12,062 and $5,834, respectively.

Revolving Line of Credit

On December 20, 2005, the Company entered into a revolving line of credit agreement with TD Bank providing for demand or short-term borrowings up to $1 million.

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 line of credit expires on July 31, 2021.

The total amount allowed to be drawn against the line is limited by varying percentages of the Company’s 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.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

There was no outstanding balance on the line of credit at December 31, 2020 or 2019.

Due to the coronavirus uncertainty, and pending staffing and payroll cuts due to liquidity constraints, the Company applied for a Paycheck Protection Program loan, guaranteed by the SBA.

The Company was funded by its lender on April 20, 2020, in the amount of $450,000.

The loan accrues interest at a fixed rate of 1% and has a term of two years.

The first payment is deferred until the date the SBA remits the Company’s loan forgiveness amount to the lender, or, if the Company does not apply for forgiveness, for ten months after the end of the Company’s twenty-four week loan forgiveness covered period, though interest accrues during the deferral period.

The loan has been used exclusively to support maintaining employee payroll and benefits.

The amount of forgiveness for which IAI may be approved is uncertain.

The Company plans to apply for forgiveness of the full amount of the loan.

The lender has temporarily suspended accepting forgiveness applications for loans greater than $150,000 pending further guidance from the SBA.

The following table represents note payable balances at December 31, 2020:

Less current portion

Non-current portion

The tax effects of significant temporary differences representing deferred tax assets at December 31, 2020 and 2019 are as follows:

Deferred tax assets (liabilities)

Net operating loss carryforwards

Accrued commissions

Accrued vacation

Property and equipment

Valuation allowance

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

The provision for income taxes is at an effective rate different from the federal statutory rate due principally to the following:

Income (loss) before taxes

Income tax expense (benefit) on above amount at federal statutory rate

State income tax expense (benefit), net of federal benefit

Permanent differences

NOL Expirations

Change in valuation allowance

Provision for income taxes

Income tax expense for the years ended December 31, 2020 and 2019 consists of the following:

Current income taxes

Benefit from utilization of net operating losses

Deferred taxes

Provision for income taxes

The Company has recorded a valuation allowance to the full extent of its currently available net deferred tax assets which the Company determined to be not more-likely-than-not realizable.

The Company has net operating loss carryforwards of approximately $2.7 million, of which $1.3 million will expire, if unused, between the years 2021 and 2036.

The Company may have been deemed to have experienced changes in ownership which may impose limitations on its ability to utilize net operating loss carryforwards under Section 382 of the Internal Revenue Code.

However, as the deferred tax asset is fully offset by a valuation allowance, the Company has not yet conducted a Section 382 study to determine the extent of any such limitations.

The Company has analyzed its income tax positions using the criteria required by U.S.

GAAP and concluded that as of December 31, 2020 and 2019, it has no material uncertain tax positions and no interest or penalties have been accrued.

The Company has elected to recognize any estimated penalties and interest on its income tax liabilities as a component of its provision for income taxes.

The income tax returns of the Company are subject to examination by income taxing authorities in all jurisdictions for which the Company files tax returns, generally for three years after each was filed, but extending to years from which net operating loss carryforwards are utilized to reduce current year taxes.

The Company is not currently under audit in any jurisdiction.

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 and 2019, the Company matched 25% of the first 6% 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 or 2019.

Expenses for matching contributions for the years ended December 31, 2020 and 2019 were $40,741 and $32,162, respectively.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

Stock Options and Warrants

The Company has two stock-based compensation plans.

The 2006 Stock Incentive Plan was adopted in 2006 (“2006 Plan”) and had options granted under it through April 12, 2016.

On June 1, 2016, the shareholders ratified the IAI 2016 Stock Incentive Plan (“2016 Plan”), which was approved by the Board of Directors on April 4, 2016.

The Company recognizes compensation costs for those shares expected to vest on a straight-line basis over the requisite service period of the awards.

Generally such options vest over periods of six months to two years.

The fair values of option awards granted in 2020 and 2019 were estimated using the Black-Sholes option pricing model under the following assumptions:

Risk-free interest rate

Dividend yield

Expected term (in years)

Expected volatility

2016 Stock Incentive Plan

The 2016 Plan became effective June 1, 2016, and expires April 4, 2026.

The 2016 Plan provided for the granting of equity awards to key employees, including officers and directors.

The maximum number of shares for which equity awards may be granted under the 2016 Plan is 1,000,000.

Options under the 2016 Plan expire no later than ten years from the date of grant or when employment ceases, whichever comes first, and vest over periods determined by the Board of Directors.

The minimum exercise price of each option is the quoted market price of the Company’s stock on the date of grant.

At December 31, 2020 and 2019, there were 606,000 and 371,000 options, respectively, issued under the 2016 Plan, of which 371,000 and 347,500 were exercisable, respectively.

2006 Stock Incentive Plan

The 2006 Plan became effective May 18, 2006, and expired April 12, 2016.

The 2006 Plan provides for the granting of equity awards to key employees, including officers and directors.

The maximum number of shares for which equity awards could be granted under the 2006 Plan was 1,950,000.

Options under the 2006 Plan expire no later than ten years from the date of grant or when employment ceases, whichever comes first, and vested over periods determined by the Board of Directors.

There were 789,000 and 978,000 unexpired exercisable options remaining from the 2006 Plan at December 31, 2020 and 2019, respectively.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

The status of the options issued under the foregoing option plans as of December 31, 2020 and 2019, and changes during the years ended December 31, 2020 and 2019, were as follows:

Options outstanding

Weighted average

exercise price

Incentive options

contractual term

Outstanding at December 31, 2018

Options granted

Options exercised

Options expired

Options forfeited

Outstanding at December 31, 2019

3 years, 11 months

Options granted

Options exercised

Options expired

Options forfeited

Outstanding at December 31, 2020

4 years, 5 months

Exercisable at December 31, 2019

3 years, 10 months

Exercisable at December 31, 2020

3 years, 4 months

Nonvested stock option awards as of December 31, 2020 and 2019, and changes during the years ended December 31, 2020 and 2019, were as follows:

Weighted average

Nonvested at December 31, 2018

Nonvested at December 31, 2019

Nonvested at December 31, 2020

As of December 31, 2020, unrecognized compensation cost associated with non-vested share-based employee and non-employee compensation totaled $58,553, which is expected to be recognized over a weighted average period of 5 months.

Income (Loss) Per Share

Basic income (loss) 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 (loss) 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 antidilutive effect of 67,312 from stock options were excluded from diluted shares for the year ended December 31, 2019.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

Net income (loss)

Basic net income per common share for the year ended December 31, 2020:

Income available to common shareholders

Effect of dilutive stock options

Diluted net income per common share for the year ended December 31, 2020:

Basic net loss per common share for the year ended December 31, 2019:

Loss available to common shareholders

Effect of dilutive stock options

Diluted net loss per common share for the year ended December 31, 2019:

Financial Statement Captions

The following table summarizes the Company’s prepaid expenses and other current assets as of December 31, 2020 and 2019:

Deferred costs of software sales

Deferred direct cost of pending deliverables

Licenses and subscriptions

Prepaid insurance

The following table summarizes the Company’s other current liabilities as of December 31, 2020 and 2019:

Accrued costs of software sales

Accrued accounting and auditing expense

Interest payable

Subsequent Events

In order to raise additional funds for working capital and anticipated expansion efforts, on March 29, 2021, the Company raised $495,999 through a private placement of shares of ots common stock.

330,666 shares were issued in this placement.

Information Analysis Incorporated 2020 Annual Report on Form 10-K

Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

Our financial statements and notes thereto begin on page F-1 of this report and are incorporated herein by reference.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

During the last two years, for which financial statements are presented herein, there have been no changes in or disagreements with our independent registered accountants on accounting and financial disclosures.

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 8. Financial Statements and Supplementary Data