FIREFLY NEUROSCIENCE, INC. 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our Common Stock started trading on the OTCQB market on January 15, 2021,under the symbol IAIC. Prior thereto, our shares traded on the OTC Pink Market and the OTC Bulletin Board. The following table sets forth, for the fiscal periods indicated, the high and low bid prices of the Common Stock: 2020 Quarter Ended: 2019 Quarter Ended: 03/31/20 06/30/20 09/30/20 12/31/20 03/31/19 06/30/19 09/30/19 12/31/19 High $ 0.25 $ 0.24 $ 0.87 $ 1.63 $ 0.26 $ 0.23 $ 0.20 $ 0.17 Low $ 0.09 $ 0.10 $ 0.13 $ 0.59 $ 0.20 $ 0.18 $ 0.17 $ 0.08 The quotations on which the above data are based reflect inter-dealer prices without adjustment for retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Because our stock trades on OTCQB rather than on a national securities exchange, a shareholder may find it difficult to either dispose of or obtain quotations as to the price of our common stock. There has historically been a low trading volume of our shares which may have an adverse impact on a shareholder’s ability to execute transactions of our shares. Holders As of December 31, 2020, we had 105 holders of record of our Common Stock. Dividends We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends within the foreseeable future. Our management anticipates that all earnings, if any, will be retained for development of our business. Any future dividends will be subject to the discretion of the board of directors and will depend on, among other things, future earnings, our operating and financial condition, our capital requirements and general business conditions. Recent Sales of Unregistered Securities We had no sales of unregistered securities during 2020. Purchases of Equity Securities by the Issuer and Affiliated Purchasers We did not repurchase any of our equity securities during 2020. Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached financial statements and notes thereto. Reference is made to “Cautionary Statement Regarding Forward-Looking Statements” on page 1 hereof, which describes important factors that could cause actual results to differ from expectations and non-historical information contained herein. Overview In 2020, the key factor to our return to profitability was the 70% increase in our revenue from professional fees, almost all of which was related to our modernization services. When our largest subcontract award emerged from protest proceedings and commenced in June 2020, a year after the contract was originally awarded, it immediately eased our cash flow burdens, took some of the concern over COVID-19 uncertainty away, and allowed us to shift our focus from short-term cash management to strategic planning and growth. 11 Information Analysis Incorporated 2020 Annual Report on Form 10-K 2020 was not without its challenges. In the first half of the year, we had been carrying several employees that are key to our modernization services at least partially on overhead in anticipation of the commencement of projects delayed by protest, causing strain on cash flows. And of course, like every other business, large and small, we had to adapt to the new environment surrounding COVID-19. Fortunately, we had most of the infrastructure in place for employees to work remotely, but the ways in which we interact with customers, potential customers, peers, as a management team, as a sales team, internal and external technical support, and recruiting and human resources management were affected. As 2020 came to a close, we had fully reversed the losses incurred early in the year, cash balances were building back up to over $1.8 million, we invested in internal technological infrastructure improvements, including more robust, higher capacity, better protected server systems with improved firewall protections, we mapped out a plan to expand our services and software offerings into cybersecurity, Cloud services, and artificial intelligence, we began the process to upgrade our stock listing from the pink sheets to OTCQB to make it easier for our shareholders to trade, and we began to rebuild our sales teams. Cash and cash equivalents increased $819,000 in 2020, due mostly to a combination of profitable operations and borrowings of $450,000 under the Paycheck Protection Program (“PPP”), guaranteed by the U.S. Small Business Administration (“SBA”). The nature of our business is a mixture of fees earned for specialized professional information technology services, including modernization services and electronic forms services, and sales of third-party software. Our profit margins on our professional fees materially exceed our profit margins on software sales. We continue to devote attention to software sales despite the low margins because certain software manufacturers require minimum software sales levels for us to be a certified as a partner to perform the professional services supporting or using the software. We require a certain level of professional fee revenue to generate enough profit margin to cover our general and administrative expenses. Our management will continue to explore ways to expand our current market spaces and develop new ones that may offer more opportunity. This may take the shape of organic growth or through acquisitions of other companies. In 2020, IAI evaluated certain merger and acquisition opportunities that would expand our company offerings. Although these particular opportunities did not result in any transactions in 2020, IAI is more aggressively pursuing its search to find potential acquisition opportunities. 12 Information Analysis Incorporated 2020 Annual Report on Form 10-K Results of Operations The following table sets forth, for the periods indicated, selected information from our Statements of Operations, expressed as a percentage of revenue: Years ended December 31, 2020 2019 Revenues Professional fees 39.8 % 31.9 % Software sales 60.2 % 68.1 % Total revenues 100.0 % 100.0 % Cost of revenues Cost of professional fees 25.6 % 19.5 % Cost of software sales 58.5 % 66.7 % Total cost of revenues 84.1 % 86.2 % Gross profit 15.9 % 13.8 % Operating expenses Selling, general and administrative expenses 10.8 % 18.5 % Commissions expense 2.1 % 2.5 % Income (loss) from operations 3.0 % (7.2% ) Other income 0.0 % 0.1 % Income (loss) before provision for income taxes 3.0 % (7.1% ) Provision for income taxes 0.0 % 0.0 % Net income (loss) 3.0 % (7.1% ) 2020 Compared to 2019 Revenue. Total revenue for 2020 increased $3.7 million, or 36.8%, to $13.9 million from $10.2 million in 2019. Revenue from professional services fees increased $2.3 million, or 70.4%, to $5.5 million in 2020 from $3.2 million in 2019. Revenue from professional fees increased primarily from the addition of professional fee modernization services subcontracts, some of which had been awarded but delayed due to protest of the prime contract awards in 2019. Revenue from software sales increased $1.5 million, or 21.0%, to $8.4 million in 2020 from $6.9 million in 2019. The increase in our software sales revenue in 2020 versus 2019 is from the non-recurring nature of many of our software sales transactions, as well as the timing of recurring orders. In addition, sales of robotics process automation (RPA) software have increased as a percentage of total software sales. Software product and maintenance sales and commissions on registered sales are subject to considerable fluctuation from period to period, based on the product mix sold and customer demand. Revenue from software sales comprised 60.2% of total sales in 2020, compared to 68.1% of total sales in 2019. Gross Profit . Gross profit increased $809,000, or 57.8%, in 2020 versus 2019. Gross profit on professional fees revenue is substantially higher than gross profit on software sales, as gross profit on software sales is more dependent on the costs from third-party suppliers, and revenue is generally based on increasingly-competitive bidding in which identical products are offered by all bidders at very low profit margins. Overall gross profit as a percentage of revenue increased to 15.9% of revenue in 2020 from 13.8% of revenue in 2019 due to the increase in professional fees as a percentage of total revenues. Gross profit from professional fees for 2020 was $2.0 million, or 35.5% of professional fees revenue, while gross profit for 2019 from professional fees was $1.3 million, or 38.9% of professional fees revenue. Gross profit from professional fees increased primarily due to the material increase in professional fees revenue. For software sales, gross profit percentage increased to 3.0% in 2020 from 2.0% in 2019. The primary reason for the increase in gross profit percentage on software sales is an increase in incentive payments earned, Software product sales and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold and incentive payments earned. Increases and decreases in our software sales, excluding incentive payments, generally do not have a material effect on our gross profit, as the gross profit percentage on software sales averages less than 3.0%. 13 Information Analysis Incorporated 2020 Annual Report on Form 10-K Selling, General and Administrative. Selling, general and administrative expense decreased in 2020 by $371,000 to $1.5 million, or 10.8% of revenue, from $1.9 million, or 18.5% of revenue, in 2019. These decreases are primarily due to decreases in the cost of non-billable labor and the associated cost of fringe benefits, as we had hired and carried employees in 2019 who were not fully billable in anticipation of the commencement of services on a subcontract award under prime contract that had been protested. Additionally, the decrease is due to costs incurred in 2019 associated with a potential merger that did not proceed to settlement. These decreases offset increases in stock compensation expenses and executive bonuses. Commission Expense. Commission expense in 2020 was $293,000, or 2.1% of revenue, versus $253,000, or 2.5%, in 2019. Commissions are driven by varying factors and are earned at varying rates for each salesperson. The increase in commission expense is primarily related to increases in incentive payments received to $132,000 in 2020 versus $27,000 in 2019. Net income (loss). Net income for 2020 was $413,000, or 3.0% of revenues, versus net loss of $717,000, or (7.1%) of revenue, for 2019, a positive change of $1.1 million. The largest contributing factors to the change are the commencement (following prolonged delays due to protest) of professional fee modernization subcontracts and increases in incentive payments received. We had previously reported losses in each of the last eight first calendar quarters. In 2021, we believe we have reversed that trend. We had also previously reported that we require a certain level of professional fee revenue to generate enough profit margin to cover our general and administrative expenses. With the commencement of previously delayed subcontracts, and the addition of additional contracts, we have surpassed that minimum requirement and are in a period of sustainable profitability. We are working to expand both the services and the products we offer into the areas of cybersecurity, cloud services, and artificial intelligence, and have made investments in sales and business development, as well as in our IT infrastructure. Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”), or other standard setting bodies that the Company adopts as of the specified effective date. If there had been accounting standards recently adopted or pending adoption and such accounting changes were expected to affect our results of operations, financial position or liquidity, the notes to the financial statements would have included a discussion of those accounting standards. Liquidity and Capital Resources Our beginning cash and cash equivalents balance, when combined with our cash flow from operations and a forgivable term loan under the Paycheck Protection Program of $450,000, were sufficient to provide financing for our operations. We expect to apply for forgiveness as soon as our lender again begins accepting forgiveness applications following its implementation of the most recent legislative changes that impact the program. For 2020, net cash provided by operating activities was $423,000. When combined with the proceeds of our PPP loan and employee option exercises, and reduced by investments in fixed assets, we increased cash balances by $819,000 to bring our cash and cash equivalents balance to $1.9 million at December 31, 2020. We have a revolving line of credit with a bank providing for demand or short-term borrowings of up to $1 million. The line became effective December 20, 2005, and expires on July 31, 2021. The credit agreement includes an interest rate indexed to 3.50% above the Intercontinental Exchange Benchmark Administration Ltd. London Interbank Offered Rate with a floor of 4.0%. The total amount allowed to be drawn against the line is limited by varying percentages of our eligible accounts receivable. At December 31, 2020, the limit was $1 million. The bank is granted a security interest in all of the Company’s assets if there are borrowings under the line of credit. Interest on outstanding balances is payable monthly. The effective rate at December 31, 2020 was 4.0%. Under the line of credit agreement, the Company is bound by certain covenants, including maintaining a minimum tangible net worth and producing a number of periodic financial reports for the benefit of the bank. At December 31, 2020, the Company was in compliance with its covenants with its lender. As of December 31, 2020 and 2019, no amounts were outstanding under this line of credit. We did not borrow against this line of credit in 2020. 14 Information Analysis Incorporated 2020 Annual Report on Form 10-K Based on our current cash position and operating plan, we anticipate that we will be able to meet our cash requirements for at least one year from the filing of this Annual Report on Form 10-K. We presently lease our corporate offices on a contractual basis with certain timeframe commitments and obligations. We believe that our existing offices will be sufficient to meet our foreseeable facility requirement. Should we need additional space to accommodate increased activities, management believes we can secure such additional space on reasonable terms. We have no material commitments for capital expenditures. Off-Balance Sheet Arrangements We do not have any off-balance-sheet arrangements that have or are likely to have a material current or future effect on our financial condition, or changes in financial condition, liquidity or capital resources or expenditures. Critical Accounting Policies and Estimates Our significant accounting policies are described in Note 1 to our accompanying financial statements. We consider the accounting policies related to revenue recognition to be critical to the understanding of our results of operations. Our critical accounting policies also include the areas where we have made what we consider to be particularly difficult, subjective or complex judgments in making estimates, and where these estimates can significantly impact our financial results under different assumptions and conditions. We prepare our financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates. Revenue Recognition We generate revenue from the sales of information technology professional services, sales of third-party software licenses and implementation and training services, sales of third-party support and maintenance contracts based on those software products, and incentive payments received from third-party software suppliers for facilitating sales directly between that supplier and a customer introduced by us. We sell through our direct relationships with end customers and under subcontractor arrangements. Revenue is recognized when all of the following steps have been taken and criteria met for each contract: • Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and the parties are committed to perform and, (iii) we determine that collection of substantially all consideration to which we will be entitled in exchange for goods or services that will be transferred is probable based on the customer’s intent and ability to pay the promised consideration. • Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation. 15 Information Analysis Incorporated 2020 Annual Report on Form 10-K • Determination of the transaction price - The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any. We typically estimate the transaction price impact of discounts offered to the customers for early payments on receivables or rebates based on sales target achievements. Constraints are applied when estimating variable considerations based on historical experience where applicable. • Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. We determine standalone selling price by taking into account available information such as historical selling prices of the performance obligation, geographic location, overall strategic pricing objective, market conditions and internally approved pricing guidelines related to the performance obligations. • Recognition of revenue when, or as, we satisfy performance obligations - We satisfy performance obligations either over time or at a point in time. Revenue is recognized at or over the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Effects of Inflation In the opinion of management, inflation has not had a material effect on our operations.