FIREFLY NEUROSCIENCE, INC. annual report, FY2012

Filing identity and reporting period

Important identity discrepancy: The supplied filing is Information Analysis Incorporated’s Form 10-K, not a filing for Firefly Neuroscience, Inc. It reports the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter filing.

Information Analysis Incorporated (IAI) provided IT modernization, software and professional services, with substantial exposure to U.S. federal government customers.

Financial results and liquidity

• Revenue fell 9.8%. Professional services revenue rose 6.9% to $5.03 million; software sales declined 34.9% to $2.03 million.
• Gross margin percentage improved as professional services made up a greater share of revenue, but gross profit dollars declined by $31,272. Net income decreased about 34.5%.
• Operating cash flow benefited substantially from a $2.15 million reduction in accounts receivable, including collection of a large product-related receivable outstanding at 2011 year-end. Cash also reflected a $719,359 reduction in deferred revenue and lower payables.
• Year-end current assets were $3.55 million and current liabilities $1.46 million. There were no non-current liabilities and no borrowings on the $1 million revolving credit line; the line was due to expire December 1, 2013.
• Stockholders’ equity was $2.15 million. No material capital-expenditure commitments or material off-balance-sheet arrangements were reported.

Material changes, outlook, and risks

• Management attributed lower software sales to contract expirations and reduced maintenance renewals amid competition and customer license consolidations. SG&A rose 7.7%, driven primarily by non-revenue-producing labor, federal budget uncertainty, and a business-development project that did not produce expected results.
• Management said existing cash and its operating plan were expected to meet cash requirements beyond the next twelve months. It planned to pursue federal web applications, legacy modernization, mobile, cybersecurity and business-intelligence opportunities, and to consider expansion and acquisitions. These are plans, not quantified financial guidance.
• Estimated backlog was $11.9 million over three years, of which $2.7 million was funded. Backlog included general client commitments, not solely funded contractual amounts.
• Federal government contracts and subcontracts accounted for 87% of revenue in 2012. One agency represented 28% of revenue; software sales and maintenance from two major suppliers represented 27%.
• Key disclosed risks include federal budget and contracting changes, contract termination or non-renewal, intense competition, technology changes, inaccurate contract cost or schedule estimates, subcontractor performance, dependence on key personnel and third-party software suppliers, and limited trading liquidity in OTC-traded shares.
• The company reported no pending legal proceedings. The auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal control over financial reporting. Management concluded its controls were effective.

Important facts for investors to verify

1. Confirm the issuer: this document names Information Analysis Incorporated (ticker IAIC), not Firefly Neuroscience, Inc.
2. Review whether the strong 2012 operating cash flow is repeatable, given its dependence on receivables collection and accompanying working-capital changes.
3. Assess the amount, funding status, timing and renewability of backlog and federal contracts, and the effect of customer and supplier concentration.
4. Check the status and terms of the revolving credit line after its stated December 2013 expiration, and the company’s ability to maintain profitability and liquidity.
5. Consider the company’s low-margin results, reduced software revenue, elevated SG&A as a share of sales, stock-option dilution, and thinly traded OTC shares.