Business context and reporting period
The supplied filing is Information Analysis Incorporated’s Form 10-K for the fiscal year ended December 31, 2018, filed April 1, 2019. It is not identified in the filing as a Firefly Neuroscience, Inc. filing; the company identity in the request and source therefore does not match. This is an annual report, not a standalone fourth-quarter report.
Information Analysis provides IT professional services and resells third-party software, primarily to U.S. government customers. Its work includes digital forms and web applications, software sales and support, and legacy-system modernization.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $8.93 million | $10.64 million |
| Professional services revenue | $4.39 million | $5.00 million |
| Software sales revenue | $4.54 million | $5.64 million |
| Gross profit and margin | $2.14 million; 24.0% | $2.42 million; 22.7% |
| Operating income (loss) | $(62,345) | $237,774 |
| Net income (loss) | $(51,034) | $246,462 |
| Cash from operations | $(763,502) | $836,067 |
| Cash and cash equivalents at year-end | $1.96 million | $2.73 million |
| Total assets | $3.02 million | $3.73 million |
| Total liabilities | $1.15 million | $1.84 million |
| Stockholders’ equity | $1.87 million | $1.89 million |
Revenue fell 16.0%. Management attributed the decline mainly to lower software sales and professional-services work as contracts expired or shifted from development to maintenance. Gross margin improved, but higher selling, general and administrative costs as a share of revenue contributed to an operating loss. The company reported no income-tax provision in either year.
Cash declined by $767,554 during 2018, primarily as operating cash use reflected lower revenue and reductions in accrued expenses and commissions payable. The company had no borrowings under its revolving credit line at year-end; the facility provides up to $1 million, subject to borrowing-base limits and covenants. Management said its cash position and operating plan should meet requirements beyond twelve months from the filing date. No material capital-expenditure commitments were reported.
Material changes versus the prior year
- Total revenue decreased $1.71 million; professional-services revenue declined $612,000 and software sales declined $1.10 million.
- Gross profit decreased $273,000, although gross margin rose from 22.7% to 24.0%.
- Results shifted from $246,462 net income in 2017 to a $51,034 net loss in 2018.
- Operating cash flow changed from $836,067 provided in 2017 to $763,502 used in 2018; year-end cash fell by approximately $768,000.
- Contract liabilities (deferred revenue) decreased to $318,552 from $387,002. Adoption of ASC 606 in 2018 had no material impact, according to the filing.
Outlook, risks and unusual items
Management expected the modernization contract that contributed about $2 million of revenue in each of 2017 and 2018 to generate more than $1.4 million in 2019 in maintenance mode. It also planned to pursue other government professional-services opportunities. The filing cautioned that the 2018–January 2019 federal shutdown halted work on several contracts and delayed solicitations. Management expected losses to continue through the first and second calendar quarters of 2019.
Estimated backlog at December 31, 2018 was $13.2 million over three years, of which $2.9 million was funded. Backlog includes outstanding contracts and anticipated work under general client commitments, so it is not wholly funded or assured revenue.
- Customer and supplier concentration: federal prime contracts generated 68.8% of 2018 revenue and federal subcontracts 26.5%; one software supplier accounted for 50.0% of revenue. Three individual federal contract relationships contributed 20.5%, 12.4% and 22.1% of revenue.
- Key risks include federal budget changes and shutdowns, contract termination or nonrenewal, concentrated revenue, competition, changing technology, cost or timing estimation errors, subcontractor performance, and retention of technical staff. The company also said modernization opportunities among existing forms customers were nearing maturity.
- Approximately $7.4 million of net operating loss carryforwards were disclosed, with expirations from 2019 through 2036; deferred tax assets were fully offset by a valuation allowance. Potential ownership-change limitations under Section 382 had not been assessed in a study.
- No pending legal proceedings were reported. The independent auditor gave an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness.
- Outstanding options totaled 1,376,500 shares, with a weighted-average exercise price of $0.23; the filing identifies potential dilution. The stock traded over the counter, with historically low trading volume.
Important facts for investors to verify
- Confirm the issuer: this source is Information Analysis Incorporated, not Firefly Neuroscience, Inc.
- Check the status, funding and conversion of the $13.2 million backlog, including the $2.9 million funded portion and the expected 2019 maintenance revenue.
- Monitor federal shutdown effects, contract renewals, agency funding and the concentration of revenue in a small number of contracts and one software supplier.
- Assess cash burn and liquidity against management’s stated ability to fund operations beyond twelve months, particularly given management’s forecast of continued quarterly losses.
- Review net operating loss expiry dates and any Section 382 limitations, as well as potential dilution from outstanding options.