DUOS TECHNOLOGIES GROUP, INC. quarterly report, Q1 FY2011

Business Context and Reporting Period

Company: Information Systems Associates, Inc. (ISA)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2011
Business Overview: ISA provides Mobile Data Center Management systems and turnkey solutions, including asset/inventory management software (OSPI) and consulting services. The company operates as a smaller reporting company.

Key Financial Metrics

Metric Q1 2011 Q1 2010
Revenue $127,254 $256,654
Gross Profit $110,224 $256,654
Gross Margin 86.6% 100.0%
Operating Expenses $386,788 $464,564
Net Loss $(278,157) $(209,621)
Loss Per Share (Basic/Diluted) $(0.01) $(0.01)
Cash and Equivalents (End of Period) $29,280 $5,790
Working Capital $66,513 N/A
Total Debt (Current) $33,530 N/A

Note: Total Debt includes Line of Credit ($24,727) and Insurance Notes ($8,803).

Material Changes vs. Prior Period

  • Revenue Decline: Revenue decreased by approximately 50% ($129,400) compared to Q1 2010. Management attributes this to a $111,000 decrease in consulting service revenue and a $29,000 decrease in OSPI software revenue.
  • Expense Reduction: Total operating expenses decreased by $77,776. This was driven by an $83,000 drop in administrative/general expenses and a $70,000 drop in professional fees (lower travel and consulting costs).
  • Increased Salaries: Salaries and employee benefits increased by $74,094, primarily due to the hiring of a new Chief Operating Officer (COO), a software engineer, and a product salesman.
  • Widened Loss: Net loss increased by $68,536 due to the significant revenue decline, despite lower operating expenses.
  • Capital Raise: The company raised $155,000 in cash through private placements of common stock in January 2011, significantly improving cash balances from the prior year's low of $5,790.

Outlook, Risks, and Management Commentary

  • Liquidity Needs: Management states that current operations require additional capital to sustain through 2011. They have identified a need for up to $1 million to fund software enhancements and market rollout.
  • Financing Strategy: The company is exploring various equity and debt financing alternatives. There is no assurance these efforts will be successful.
  • Strategic Shift: A new COO was hired in January 2011 to oversee OSPI software improvements and build the sales force. The company is transitioning focus from consulting services to its proprietary software product.
  • Customer Concentration: Two major customers accounted for 86.3% of revenue (68.8% and 17.5%) and 97.9% of accounts receivable (67.7% and 30.2%) for the quarter.
  • Legal Proceedings: The company is defending a lawsuit filed by Phuture World, Inc. regarding a software development contract. Management believes the outcome will not have a material adverse effect.

Investor Verification Checklist

  • Capital Sufficiency: Verify if the company has secured the additional $1 million financing required to fund operations through 2011.
  • Revenue Concentration: Assess the risk associated with two customers representing over 86% of revenue and nearly 98% of receivables.
  • Product Viability: Confirm the progress of the new OSPI software version and the effectiveness of the new sales force in generating recurring software revenue.
  • Debt Obligations: Review the repayment schedule for the line of credit (Prime + 3%) and insurance notes to ensure cash flow can service these debts.
  • Stock Dilution: Note the issuance of 3.55 million shares in Q1 2011 for cash and services, and the existence of 15 million outstanding options (anti-dilutive).