Business context and reporting period
Registrant discrepancy: The supplied filing is Information Analysis Incorporated (IAI), not Firefly Neuroscience, Inc. It is a Form 10-K for the fiscal year ended December 31, 2017, filed April 2, 2018; it does not appear to be a Firefly filing.
IAI provides IT development and modernization services and resells third-party software, primarily serving U.S. government customers. Its strategy emphasizes digital forms and web applications, legacy-system modernization, and federal contract opportunities.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $10.64 million | $6.73 million |
| Gross profit / margin | $2.42 million / 22.7% | $1.82 million / 27.1% |
| Operating income (loss) | $237,774 | ($563,454) |
| Net income (loss) | $246,462 | ($553,681) |
| Cash from operating activities | $836,067 | ($256,509) |
| Cash and equivalents at year-end | $2.73 million | $1.90 million |
| Stockholders’ equity | $1.89 million | $1.63 million |
- Revenue increased 58.1%. Professional-services revenue rose 47.5% to $5.00 million; software sales rose 68.9% to $5.64 million.
- Gross profit increased 32.5%, but gross margin fell to 22.7%. Professional-services gross margin improved to 45.6%; software-sales gross margin dropped to 2.4% from 9.7%, reflecting lower margins on large transactions and reduced commissions.
- SG&A declined 10.9% to $1.67 million. Commission expense was $504,000, approximately unchanged year over year.
- Working capital was approximately $1.88 million, with current assets of $3.72 million and current liabilities of $1.84 million. There were no non-current liabilities and no year-end borrowings.
- IAI reported no income-tax provision. Deferred tax assets were fully offset by a valuation allowance; the Tax Act reduced deferred tax assets by approximately $1.87 million, offset by a valuation-allowance change.
Material changes versus prior period
IAI swung from a 2016 net loss to 2017 net income, while revenue and operating cash flow improved substantially. Revenue growth came from new professional-services contracts and large software transactions. Despite higher gross profit, total gross margin declined because software margins contracted. Cash rose by $836,138, aided by lower receivables and prepaid expenses.
Outlook, risks and unusual items
- Management expected the contract begun in January 2017 to generate more than $1.4 million of revenue in 2018. A new GSA IT-services schedule was awarded in March 2018, with a five-year base period and options; it replaces a schedule expiring in November 2018.
- Backlog at year-end was estimated at $17.7 million over three years, of which $3.0 million was funded. Backlog includes general client commitments and is not equivalent to funded revenue.
- Management said existing cash and the operating plan should meet requirements beyond 12 months. The $1 million revolving credit facility had no outstanding balance, but the borrowing base limited availability to $489,627 at year-end; the facility was due to expire May 31, 2018.
- Customer and supplier concentration is significant: U.S. government prime contracts generated 70.9% of 2017 revenue and federal subcontracts another 23.2%; one software supplier accounted for 52.7% of total revenue. Several individual contracts were also material.
- Key risks include federal budget and contracting changes, government termination and funding rights, competition, contract cost/timing estimates, subcontractor performance, recruiting and retaining personnel, technology changes, and the limited trading market for the OTC-listed shares.
- IAI expected adoption of Topic 606 in 2018 not to materially affect financial statements, though some software transactions could be reported net rather than gross without changing operating results. The independent auditor issued an unqualified opinion on the financial statements; it did not attest to internal-control effectiveness.
- No pending legal proceedings were reported. No material off-balance-sheet arrangements or material capital-expenditure commitments were reported. The filing states no cash dividends are anticipated in the foreseeable future.
Important facts for investors to verify
- Confirm the issuer identity: this source is IAI, not Firefly Neuroscience.
- Check whether the $17.7 million backlog converted into funded work and revenue, particularly the $3.0 million funded portion.
- Assess whether the very low 2017 software gross margin and supplier/customer concentrations persisted.
- Verify renewal or replacement of the revolving credit facility after its May 31, 2018 expiration date.
- Review the subsequent results of the 2018 revenue outlook, GSA award, and Topic 606 adoption.
- Consider dilution: 1.288 million options were outstanding at year-end, including 1.056 million exercisable.