Business Context and Reporting Period
This filing is a Form 10-Q for the quarter ended March 31, 2012. The filing identifies the registrant as Information Systems Associates, Inc., not DUOS Technologies Group, Inc.; investors should verify the company and filing identity. The company provides mobile data center management systems, software, asset and inventory management, implementation, consulting, training, maintenance, and support services, including its OSPI product.
Financial Highlights
| Metric | Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 |
|---|---|---|
| Revenue | $75,595 | $127,254 |
| Gross profit | $56,722 | $110,224 |
| Gross margin | 75.0% | 86.6% |
| Operating expenses | $260,433 | $386,788 |
| Loss from operations | $(203,711) | $(276,564) |
| Operating margin | (269.5%) | (217.4%) |
| Interest expense | $20,645 | $1,593 |
| Net loss | $(224,356) | $(278,157) |
| Loss per share | $(0.01) | $(0.01) |
| Cash used in operating activities | $(28,006) | $(176,025) |
Cash and cash equivalents were $5,652 at March 31, 2012, compared with $988 at December 31, 2011. Total assets were $140,894, while current liabilities were $531,055 and total stockholders’ equity was negative $390,161. The reported current ratio was approximately 0.19.
Debt and financing obligations included $211,320 of convertible notes, $78,628 of accounts receivable factoring, $36,619 under a line of credit, $25,000 owed to a related party, and $9,370 of insurance financing. The line of credit permits borrowings up to $40,000 and bears interest at prime plus 3%.
Material Changes Versus the Prior Comparable Period
- Revenue declined approximately 40.6%, primarily because consulting revenue decreased by approximately $34,000 and related travel expense revenue decreased by approximately $27,000.
- Gross profit declined approximately 48.5%, and gross margin decreased by approximately 11.6 percentage points.
- Operating expenses declined approximately 32.7%, reflecting lower salaries and benefits and lower professional fees after completion of the latest OSPI software version.
- Operating loss improved by approximately $72,853, but remained substantial relative to revenue.
- Net loss improved by approximately $53,801, despite a $19,052 increase in interest expense. The higher interest expense primarily reflected amortization of original issue discounts and beneficial conversion features on convertible notes.
- Operating cash outflow improved by approximately $148,019, partly due to a $120,516 reduction in accounts receivable and a $29,239 increase in accounts payable.
- The company received $62,500 from convertible note financing in February 2012. On March 6, 2012, a $146,361 convertible note was converted into 1,833,333 common shares.
- Shares outstanding increased to 30,599,417 at March 31, 2012, from 28,666,084 at December 31, 2011; weighted average shares increased to 29,288,795 from 25,593,973 in the prior-year quarter.
Outlook, Risks, Contingencies, and Unusual Items
- Management states that continuation as a going concern depends on implementing its business plan and raising additional capital. The company reported an accumulated deficit of $3,735,556 at March 31, 2012.
- Management expects that the current level of operations will require additional capital through 2012 and identified financing needs of up to $160,000 for software enhancements and market rollout. The company was seeking additional debt or equity financing, with no assurance that financing would be obtained.
- No specific revenue or earnings guidance was provided. Management released Version 3 of OSPI in December 2011 and planned further marketing and sales efforts.
- The company reported that its disclosure controls and procedures were not effective at March 31, 2012. Management identified material weaknesses related to insufficient financial and management resources to prepare and file the report timely; the filing was late. Adrian Goldfarb was retained to recommend remediation measures.
- The company is defending litigation brought by Phuture World, Inc., involving a software development contract and claims exceeding $15,000. Management believes the matter will not materially affect financial condition, cash flows, or results of operations.
- Outstanding warrants to purchase 1,487,500 shares were excluded from diluted loss per share because they were anti-dilutive. Convertible notes also contain conversion features and warrants that may create future dilution.
- The filing states that no material changes occurred in the risk factors previously disclosed in the 2011 Form 10-K. Interim results are not necessarily indicative of full-year results.
Important Facts for Investors to Verify
- Confirm that the filing belongs to the intended company, because the supplied filing names Information Systems Associates, Inc. rather than DUOS Technologies Group, Inc.
- Verify the company’s ability to obtain additional financing given minimal cash, negative working capital, recurring losses, and the stated going-concern uncertainty.
- Review the terms, maturity dates, conversion prices, interest, discounts, and warrants associated with the outstanding convertible and other debt.
- Assess whether the OSPI Version 3 product and planned market rollout can restore revenue growth and improve gross margins.
- Monitor dilution from convertible notes, warrants, stock issued for services, and other equity-based compensation.
- Follow remediation of the reported material weaknesses in disclosure controls and the company’s filing timeliness.
- Review the status and potential exposure of the Phuture World litigation and other contingencies.