Filing summary
Important entity and period discrepancy: The filing provided is Information Analysis Incorporated’s Form 10-K for the fiscal year ended December 31, 2011, not a filing for Firefly Neuroscience, Inc. or a standalone 2011 fourth quarter. The summary below describes the filing as provided.
Business context and reporting period
Information Analysis Incorporated (IAI) provides information technology services and software, focusing on legacy-system modernization, electronic forms and web applications, and related software sales and maintenance. The company serves government and commercial clients, with substantial federal government exposure. Results cover the year ended December 31, 2011, compared with 2010.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $7.821 million | $6.860 million |
| Gross profit / margin | $2.442 million / 31.2% | $2.386 million / 34.8% |
| Operating income | $148,809 | $136,927 |
| Net income | $153,401 | $146,462 |
| Basic and diluted EPS | $0.01 | $0.01 |
| Cash from operations | $(669,390) | $529,145 |
- Revenue increased 14.0%. Software sales rose 55.7% to $3.120 million, while professional-services revenue declined 3.2% to $4.701 million.
- Gross margin fell to 31.2% from 34.8%, reflecting a larger share of lower-margin software sales. Software gross margin was 14.6%; professional-services gross margin was 42.3%.
- Cash and cash equivalents declined $687,151 to $1.281 million. The company attributed the decline primarily to a large product-related receivable and having paid $1 million toward the supplier’s total cost.
- At year-end, accounts receivable, net, was $2.890 million, versus $771,814 in 2010; accounts payable was $998,160, versus $76,509. The filing attributes the increases primarily to product-related invoices outstanding at year-end.
- Stockholders’ equity was $2.040 million. There were no non-current liabilities and no borrowings under the $1 million revolving credit line. The line was due to expire December 1, 2012.
- Management reported no material capital-expenditure commitments or material off-balance-sheet arrangements. Operating-lease payments totaled $135,443, largely due in 2012 and 2013.
Material changes versus 2010
- Software sales increased by approximately $1.116 million, more than offsetting a $155,000 decline in professional-services revenue.
- Gross profit increased only 2.4% despite revenue growth, as the sales mix shifted toward software resale.
- Selling, general and administrative expense increased 1.5% to $1.564 million but declined as a percentage of revenue, from 22.5% to 20.0%. Commission expense was $729,075, up from $707,959.
- Operating cash flow moved from positive $529,145 to negative $669,390, principally due to working-capital movements, including the rise in receivables.
- Federal government prime contracts and subcontracts represented 89% of revenue, compared with 90% in 2010. One federal agency accounted for 48% of 2011 revenue, up from 31%.
Outlook, risks and unusual items
- Management expected its cash position and operating plan to cover requirements beyond the next 12 months. It planned to focus on federal customers and expand into cybersecurity, business intelligence, mobile applications and SharePoint, through partnerships and potentially acquisitions. No quantified revenue or earnings guidance was provided.
- Estimated backlog was approximately $14.3 million over the next three years, of which $3.7 million was funded. Backlog includes general client commitments and is not equivalent to guaranteed revenue.
- Key risks include federal budget and procurement changes, contract termination or non-renewal, customer and agency concentration, competition, technology changes, cost-estimation and project-delivery risks, subcontractor and software-supplier dependence, and retention of key personnel.
- The allowance for doubtful accounts increased to $141,721 from $22,152; bad-debt expense was $52,376. Net operating loss carryforwards were approximately $14.6 million, with expirations from 2012 through 2028, but deferred tax assets were fully offset by a valuation allowance. Possible Section 382 limitations had not been studied.
- No pending legal proceedings or material subsequent events were reported. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness. Management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Confirm the intended issuer: this filing identifies Information Analysis Incorporated, not Firefly Neuroscience, Inc.
- Investigate the collectability and timing of the large federal receivable, the related supplier payment, and the substantial year-end increases in receivables and payables.
- Assess the funding, duration, cancellation and renewal terms behind the reported backlog, especially the unfunded portion.
- Review the concentration in one federal agency and exposure to federal budget and contract-award decisions.
- Check the status and terms of the revolving credit facility, which was scheduled to expire in December 2012, and the potential use of tax-loss carryforwards.