Filing summary
Entity and period: The supplied filing is Information Analysis Incorporated’s Form 10-Q for the quarter ended September 30, 2017, filed November 13, 2017. It does not identify Firefly Neuroscience, Inc.; verify that this is the intended filing before relying on the information below.
Business context and results
Information Analysis Incorporated (IAI) provides IT modernization, software, and professional services to government and commercial customers, primarily in the Washington, D.C. area. The financial statements are unaudited, except the December 31, 2016 balance sheet.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.732 million | $2.032 million | $8.270 million | $5.323 million |
| Gross profit / margin | $636,000 / 23.3% | $556,000 / 27.4% | $1.773 million / 21.4% | $1.440 million / 27.0% |
| Operating income (loss) | $108,000 | $(60,000) | $161,000 | $(421,000) |
| Net income (loss) | $110,000 | $(57,000) | $167,000 | $(413,000) |
| Net margin | 4.0% | (2.8%) | 2.0% | (7.8%) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $655,000 | $645,000 |
Financial position and material changes
- Revenue rose 34.5% year over year in Q3 and 55.4% for the first nine months. Professional-fee revenue increased 56.4% in Q3 and 38.5% year to date; software revenue increased 17.5% and 72.2%, respectively.
- Despite higher revenue, gross margin declined. Software gross margin was 2.0% in Q3 and 1.9% year to date, versus 12.1% and 11.0% in the comparable 2016 periods. Management attributed the decline primarily to lower third-party referral fees; it also noted software sales and margins can fluctuate with product mix.
- SG&A, excluding commissions, fell 9.8% in Q3 and 15.1% year to date. Lower sales labor, training, bad-debt, legal, and promotional costs were among the cited factors; ISO certification costs and overhead labor partly offset savings.
- At September 30, 2017, cash was $2.551 million, current assets were $4.856 million, total liabilities were $3.069 million, and stockholders’ equity was $1.807 million. Cash increased $655,000 from year-end 2016. Accounts receivable rose $652,000, which management linked mainly to software sales shortly before the federal fiscal year-end.
- No debt was outstanding under the $1.0 million revolving credit facility, which expires May 31, 2018. The filing reports no material capital-expenditure commitments or off-balance-sheet arrangements.
Outlook, risks, and notable items
- Management said existing cash and operating plans should meet cash requirements for at least 12 months from the filing date; this is an expectation, not a guarantee.
- IAI expected to adopt ASC 606 on January 1, 2018, most likely using the retrospective transition method. Management anticipated that some software transactions would be reported net rather than gross, reducing reported revenue for comparable transaction volume but not affecting operating results. The company expected to estimate the adoption impact during Q4 2017.
- Revenue concentration is significant: in Q3, prime federal contracts represented 67.4% of revenue, federal subcontracts 27.7%, and commercial contracts 4.9%. One software sale, one other contract, and one subcontract generated 23.9%, 12.0%, and 22.0% of quarterly revenue, respectively. Two major software suppliers accounted for 49.3% of Q3 revenue.
- Management cited risks including changes in federal funding and procurement, customer and contract concentration, competition, technology changes, contract cost or timing estimation, subcontractor and supplier performance, and dependence on third-party software providers. The filing reports no material change to the prior annual report’s risk factors and no legal proceedings.
- Management reported effective disclosure controls as of September 30, 2017, and no material quarterly change in internal control over financial reporting. IAI also reported receiving ISO 9001:2015 certification during Q2 2017.
Important facts for investors to verify
- Confirm the issuer: the filing is for Information Analysis Incorporated, not Firefly Neuroscience, Inc.
- Review the size, timing, and repeatability of the large software sale and other concentrated contracts; assess whether Q3 receivables were subsequently collected.
- Assess the sustainability of profitability given lower software margins and the company’s reliance on federal contracts and two major software suppliers.
- Check the actual revenue and presentation effects of ASC 606 adoption against management’s expectation that net operating results would not change.
- Confirm subsequent cash generation, credit-facility availability and renewal, and whether the stated 12-month liquidity outlook remained valid.