Business Context and Reporting Period
Filing identity: The supplied filing is a Form 10-Q for the quarter ended June 30, 2014, filed August 19, 2014, by Information Systems Associates, Inc. and subsidiary, not DUOS Technologies Group, Inc. The filing text does not explain the discrepancy with the requested company metadata.
The company provided data-center asset-management software, hardware, consulting, auditing, training, and support services. In late June 2014, it formed wholly owned subsidiary TrueVue 360, Inc. to develop and market an IT asset-management software-as-a-service offering. ISA planned to focus on independent consulting and professional services.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $135,419 | $223,018 | $262,584 | $430,077 |
| Gross profit | $92,636 | $122,776 | $147,365 | $231,299 |
| Gross margin | 68.4% | 55.1% | 56.1% | 53.8% |
| Loss from operations | $(84,719) | $(122,043) | $(299,074) | $(223,226) |
| Net loss | $(120,149) | $(161,746) | $(372,196) | $(311,145) |
| Net margin | (88.7%) | (72.5%) | (141.7%) | (72.3%) |
Six-month operating cash flow was negative $225,030, compared with negative $112,305 in the prior-year period. Investing activities provided $225. Financing activities provided $225,424, including $210,000 from common-stock and warrant sales and net related-party note proceeds.
Cash and cash equivalents were $785 at June 30, 2014, versus $166 at December 31, 2013. At August 6, 2014, management reported cash on hand of $97. Current liabilities were $1.041 million, producing a reported working-capital deficit of $1.040 million. Stockholders’ deficit was $1.028 million and accumulated deficit was $5.724 million.
Current debt and debt-like obligations included $365,160 of related-party notes, $50,000 owed to a stockholder, $66,000 of a related-party convertible OID note, $149,173 of a stockholder OID note, $45,000 of third-party notes, $40,329 under a Wells Fargo line of credit, and $37,819 of accrued interest. Total current liabilities also included $229,987 of accounts payable and $44,458 of accrued expenses.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue declined 39.3% year over year, primarily because professional and customer-service revenue fell by approximately $101,206; software and hardware sales contributed $13,607.
- Six-month revenue declined 38.9%, principally because professional-services revenue decreased by approximately $175,739. Software and hardware sales increased by approximately $8,246.
- Second-quarter gross profit decreased $30,140, but gross margin improved to 68.4% from 55.1% because costs declined faster than revenue.
- Six-month gross profit fell $83,934, driving the operating loss to $299,074 from $223,226 and the net loss to $372,196 from $311,145.
- Second-quarter net loss improved by approximately $41,600 because operating expenses decreased $67,464 and factoring fees were zero, partly offset by lower gross profit.
- Operating expenses declined modestly for the six-month period to $446,439 from $454,525, while administrative and general expense increased $10,836.
- Weighted-average shares outstanding increased to 110.0 million from 68.8 million for the six-month period. At August 19, 2014, 113,891,856 Class A and Class B shares were outstanding.
- The company raised $210,000 from common-stock and warrant sales during the first six months and issued or had outstanding substantial additional warrants and options.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that a new software product was expected to be released in 2014 and was intended to generate recurring revenue and eventually reduce or eliminate operating losses. No quantitative revenue or earnings guidance was provided.
The financial statements contain a going-concern warning. Management identified substantial doubt about the company’s ability to continue as a going concern because of recurring losses, negative operating cash flow, the working-capital deficit, and stockholders’ deficit. Management expected to rely on additional capital, short-term loans from friends and family, deferred or forgiven officer compensation, supplier payment extensions, and future revenue generation.
A related-party convertible note with a $66,000 carrying value was technically in default, although no written notice had been received. The company was discussing conversion or an extension. A $165,000 stockholder note matured July 16, 2014; the company lacked funds to repay it and had obtained a one-year extension, with final terms still being negotiated.
On August 11, 2014, TrueVue 360 received a $50,000 advance against future receivables, repayable as $62,400 over 12 months. $40,000 was transferred to ISA as partial payment for $60,000 of software-development costs incurred for the SaaS offering.
Revenue was highly concentrated: Customer A represented 75% and Customer B 22% of six-month revenue. The filing reported no material pending legal proceedings and no off-balance-sheet arrangements. The company’s disclosure controls were deemed ineffective, with continuing material weaknesses involving segregation of duties and communication of required disclosure information.
Important Facts for Investors to Verify
- Confirm the registrant’s identity, because the filing names Information Systems Associates, Inc. rather than DUOS Technologies Group, Inc.
- Verify the ability to continue as a going concern, including available cash, financing access, and repayment or extension terms for maturing and defaulted debt.
- Assess whether TrueVue 360’s SaaS product was completed, commercialized, and capable of generating recurring revenue.
- Review related-party financing, high monthly interest rates, personal guarantees, collateral, and potential equity conversions.
- Evaluate customer concentration and the sustainability of the two customers representing 97% of six-month revenue.
- Reconcile share issuance, warrants, options, cashless exercises, and potential dilution, including 28,859,063 outstanding warrants and 4,150,000 outstanding options at June 30, 2014.
- Determine whether the identified material weaknesses in disclosure controls and financial reporting were remediated.