Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-22405 Information Analysis Incorporated (Exact name of registrant as specified in its charter) Virginia 54-116 ...

Information Analysis Incorporated Form 10-Q First Quarter 2019 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-22405 Information Analysis Incorporated (Exact name of registrant as specifie ...

PART I [Business](index=5&type=section&id=Item%201.%20Business) Information Analysis Incorporated (IAI) specializes in IT systems development, modernization, and professional services for U.S. federal government agencies - IAI's primary business involves IT systems development, modernization, and professional services for government and commercial organizations, focusing on web/mobile solutions, data analytics, and legacy software migration[14](index=14&type=chunk) - The company distinguishes itself through expertise in complex web applications connected to legacy back-end systems, leveraging a strategic partnership with Adobe Systems for electronic forms solutions[15](index=15&type=chunk)[17](index=17&type=chunk)[25](index=25&type=chunk) - IAI's strategy includes capitalizing on its digital technology expertise, focusing on federal government clients, and forming alliances with larger IT consulting firms to pursue opportunities[24](index=24&type=chunk)[26](index=26&type=chunk)[35](index=35&type=chunk) Backlog as of December 31, 2018 | Category | Amount (USD) | | :--- | :--- | | Total Estimated Backlog | **$13.2 million** | | Funded Backlog | **$2.9 million** | - The company faces intense competition from hundreds of firms, many of which are larger, more established, and have greater financial resources[42](index=42&type=chunk)[43](index=43&type=chunk) - As of December 31, 2018, the company employed **21 full-time** and **3 part-time** individuals, supplemented by **8 individuals** through subcontractor relationships[47](index=47&type=chunk) [Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from its heavy reliance on the U.S. federal government and intense market competition - A significant risk is the company's dependence on the U.S. federal government, making it vulnerable to changes in funding priorities, budget shutdowns, and unfavorable contract terms that allow termination for convenience[52](index=52&type=chunk)[53](index=53&type=chunk)[54](index=54&type=chunk) - Over half of the company's revenue is concentrated among a small number of contracts, making the loss of any key contract a material risk to revenue and operations[56](index=56&type=chunk) - The business is exposed to market risks such as the failure to adapt to a rapidly changing technological environment and intense competition from companies with greater resources[57](index=57&type=chunk)[58](index=58&type=chunk) - Operational risks include the potential for inaccurate cost and timeline estimates on contracts, which could adversely affect profitability, and non-performance by subcontractors[59](index=59&type=chunk)[60](index=60&type=chunk) - The company's future success is significantly dependent on the continued services of its key managerial and technical personnel[62](index=62&type=chunk) [Properties](index=14&type=section&id=Item%202.%20Properties) The company's principal office is located in Fairfax, Virginia, under a lease expiring on June 30, 2021 - The company leases **4,434 square feet** of office space at 11240 Waples Mill Road, Fairfax, VA 22030, with the lease expiring on June 30, 2021[70](index=70&type=chunk) [Legal Proceedings](index=14&type=section&id=Item%203.%20Legal%20Proceedings) Information Analysis Incorporated is not a party to any pending or threatened legal proceedings - There are no pending or, to the company's knowledge, threatened legal proceedings[71](index=71&type=chunk) [Mine Safety Disclosures](index=14&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - Not applicable[72](index=72&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=15&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the OTC Bulletin Board with low volume and no plans for future dividends - The company's common stock trades on the Over-the-Counter Bulletin Board under the symbol **IAIC**. The market is limited with historically low trading volume[74](index=74&type=chunk)[75](index=75&type=chunk) Quarterly Common Stock Price Range (2017-2018) | Quarter Ended | 2018 High | 2018 Low | 2017 High | 2017 Low | | :--- | :--- | :--- | :--- | :--- | | March 31 | **$0.50** | **$0.36** | **$0.26** | **$0.14** | | June 30 | **$0.47** | **$0.27** | **$0.35** | **$0.17** | | September 30 | **$0.36** | **$0.21** | **$0.30** | **$0.19** | | December 31 | **$0.27** | **$0.14** | **$0.42** | **$0.19** | - As of December 31, 2018, there were **104 holders of record** of the company's common stock[76](index=76&type=chunk) - The company has never paid cash dividends and anticipates retaining all future earnings to develop the business[77](index=77&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2018, the company incurred a net loss of **$51,000** due to decreased revenue and increased expenses [Results of Operations](index=17&type=section&id=Results%20of%20Operations) Total revenue decreased by **16.0%** to **$8.93 million** in 2018, resulting in a net loss of **$51,000** Financial Performance Comparison (2018 vs. 2017) | Metric | 2018 | 2017 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | **$8.93M** | **$10.64M** | **($1.71M)** | **(16.0%)** | | Gross Profit | **$2.14M** | **$2.42M** | **($0.27M)** | **(11.3%)** | | (Loss) Income from Operations | **($62K)** | **$238K** | **($300K)** | **(126.2%)** | | Net (Loss) Income | **($51K)** | **$246K** | **($297K)** | **(120.7%)** | - The **$1.71 million** revenue decrease was driven by a **$612,000** drop in professional services fees and a **$1.10 million** decline in software sales[88](index=88&type=chunk) - Overall gross profit as a percentage of revenue increased to **24.0%** in 2018 from **22.7%** in 2017, primarily due to a better gross profit percentage on software sales (**2.9%** in 2018 vs **2.4%** in 2017)[89](index=89&type=chunk) - Selling, general and administrative expenses increased by **$72,000**, mainly due to higher non-billable labor costs, stock compensation costs, and costs related to bids and proposals[90](index=90&type=chunk) [Liquidity and Capital Resources](index=18&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and cash equivalents decreased by **$768,000** in 2018, ending at **$1.96 million** - Net cash used in operating and investing activities was **$768,000** in 2018, leading to a year-end cash and cash equivalents balance of **$1.96 million**, down from **$2.73 million** at the start of the year[97](index=97&type=chunk) - The company has a **$1,000,000** revolving line of credit that expires on May 31, 2020, with no amounts outstanding as of December 31, 2018[98](index=98&type=chunk) - Management anticipates that the current cash position and operating plan will be sufficient to meet cash requirements for more than twelve months from the filing date[99](index=99&type=chunk) [Critical Accounting Policies and Estimates](index=19&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Revenue recognition is a critical accounting policy, with ASC 606 adoption having no material impact - Revenue recognition is considered a critical accounting policy, requiring subjective judgments and estimates that can significantly impact financial results[104](index=104&type=chunk) - The company adopted **ASC 606** (Revenue from Contracts with Customers) on January 1, 2018, with no material impact on its revenue recognition policies or financial statements[105](index=105&type=chunk)[127](index=127&type=chunk) [Financial Statements and Supplementary Data](index=20&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited financial statements for 2018 and 2017, along with explanatory notes [Financial Statements](index=21&type=section&id=Financial%20Statements) Total assets decreased to **$3.02 million** in 2018, with a net loss of **$51,034** and negative operating cash flow Balance Sheet Summary (as of Dec 31) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Total Current Assets | **$3,010,328** | **$3,717,569** | | Total Assets | **$3,023,756** | **$3,734,983** | | Total Liabilities | **$1,151,165** | **$1,840,958** | | Total Stockholders' Equity | **$1,872,591** | **$1,894,025** | Statement of Operations Summary (for year ended Dec 31) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Total Revenues | **$8,933,775** | **$10,640,603** | | Gross Profit | **$2,142,838** | **$2,415,429** | | (Loss) Income from Operations | **($62,345)** | **$237,774** | | Net (Loss) Income | **($51,034)** | **$246,462** | | Diluted (Loss) Earnings Per Share | **$0.00** | **$0.02** | [Notes to Financial Statements](index=26&type=section&id=Notes%20to%20Financial%20Statements) Notes detail significant customer concentration, net operating loss carryforwards, and stock incentive plans - In 2018, prime contracts with U.S. government agencies represented **68.8%** of revenue, and subcontracts under federal procurements represented **26.5%**[140](index=140&type=chunk) - Sales of third-party software and maintenance from one major supplier accounted for **50.0%** of total revenue in 2018 and **52.7%** in 2017[142](index=142&type=chunk) - The company has net operating loss carryforwards of approximately **$7.4 million**, which expire between 2019 and 2036, with a full valuation allowance recorded against related deferred tax assets[178](index=178&type=chunk) Stock Option Status (as of Dec 31, 2018) | Category | Shares | Weighted Avg. Exercise Price | | :--- | :--- | :--- | | Outstanding | **1,376,500** | **$0.23** | | Exercisable | **1,228,000** | **$0.21** | [Changes in and Disagreements With Accountants on Accounting and Financial Disclosures](index=39&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) No changes or disagreements with independent registered accountants have occurred in the last two fiscal years - There have been no changes in or disagreements with the company's independent registered accountants during the last two years[194](index=194&type=chunk) [Controls and Procedures](index=39&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that as of the end of the period, the company's disclosure controls and procedures were effective[195](index=195&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[198](index=198&type=chunk) - No changes in internal control over financial reporting occurred during the fourth quarter of 2018 that have materially affected, or are reasonably likely to affect, these controls[196](index=196&type=chunk) [Other Information](index=39&type=section&id=Item%209B.%20Other%20Information) There is no other information to be reported in this section - None[201](index=201&type=chunk) PART III [Directors, Executive Officers, Corporate Governance, Compensation, and Related Matters](index=40&type=section&id=Item%2010-14) Information for these items is incorporated by reference from the company's 2019 Annual Meeting Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders[203](index=203&type=chunk)[204](index=204&type=chunk)[205](index=205&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=41&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements and provides an index of all exhibits filed with the Form 10-K - This section provides a list of the financial statements included in the report and an index of all exhibits filed concurrently[206](index=206&type=chunk)[214](index=214&type=chunk)