Business Context and Reporting Period
The filing is a Form 10-K for Information Systems Associates, Inc. (ISA), not DUOS Technologies Group, Inc. as indicated in the request metadata. It covers the fiscal year ended December 31, 2011, with comparative fiscal-year information for 2010; the source does not present a standalone fourth-quarter filing.
ISA provides data-center and facilities asset-management software, implementation, consulting, training, maintenance and physical-inventory services. Its offerings include OSPI, Vista, VisionFM and Rackwise DCM. The company had seven employees and operated primarily from Florida, with a Las Vegas sales and administrative sublease beginning in October 2011.
Financial Performance and Position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $666,152 | $1,070,704 |
| Gross profit | $603,555 | $1,039,307 |
| Gross margin | 90.6% | 97.07% |
| Operating expenses | $1,457,108 | $1,790,546 |
| Net loss | $893,923 | $808,773 |
| Basic and diluted loss per share | $0.03 | $0.04 |
| Cash used in operations | $637,499 | $135,030 |
| Cash at year-end | $988 | $70,326 |
| Current assets | $224,157 | $280,028 |
| Current liabilities | $594,378 | $113,510 |
| Working capital | Negative $370,221 | Positive $166,518 |
| Total stockholders’ equity | Negative $317,721 | $186,202 |
Revenue was concentrated: Avocent Huntsville represented 31.77% of 2011 revenue and Chevron represented 27.19%. A separate customer represented 6.98%. In 2010, one customer represented approximately 87% of revenue.
Investing cash outflows were $51,940 in 2011, primarily for OSPI Version 3 development and equipment. Financing activities provided $620,101, including $115,126 from accounts-receivable financing, $250,000 of convertible-note proceeds, $25,000 of related-party debt and $230,000 from stock issuance.
At December 31, 2011, current debt and financing obligations included $115,126 of factoring-related borrowings, $35,146 under a line of credit, $25,000 owed to the CEO, $274,427 of convertible notes and $4,174 of insurance-related notes. The accounts-receivable factoring arrangement generally funded 80% of receivables, charged a 3% initial fee and was recorded as debt because ISA retained default risk.
Material Changes Versus 2010
- Revenue declined 37.8%, primarily because OSPI Version 2 was no longer offered while Version 3 was under development and because a multiyear service agreement expired.
- Gross profit declined 41.9%, and gross margin fell from 97.07% to 90.6% as maintenance and support became the primary 2011 cost of sales.
- Operating expenses declined 18.6%, but salaries and employee benefits increased 119.4%, or $337,118, following the hiring of five employees and expansion of sales and maintenance personnel.
- The net loss increased from $808,773 to $893,923 despite lower operating expenses because of the revenue decline and higher interest expense.
- Cash used in operations increased substantially, and cash fell to $988. Current liabilities rose by $480,868, producing negative working capital and negative stockholders’ equity.
- ISA issued 3.8 million shares for $230,000 of cash and issued 2.6 million shares for employee, director and consultant services. Shares outstanding increased from 22,266,084 to 28,666,084 at year-end.
- OSPI Version 3 was released for sale on October 1, 2011. DataCenterEasy was announced on March 19, 2012, after the reporting period.
Guidance, Outlook, Risks and Unusual Items
Management stated that additional capital and increased sales were required to sustain operations. It estimated that approximately $600,000 of additional capital would be needed to fund operations through 2012 if revenue did not increase. No formal revenue or earnings guidance was provided.
The independent auditor issued an unqualified opinion but emphasized substantial doubt about ISA’s ability to continue as a going concern. The company reported an accumulated deficit of $3,511,200 and stated that continued operations depend on additional financing and successful execution of its business plan.
- ISA depends on external debt and equity financing, with limited cash and no sufficient committed capital source beyond its line of credit.
- Convertible notes issued in 2011 had a stated conversion price of $0.10 per share, 10% interest and warrants to purchase 2.5 million shares at $0.10 per share, creating potential dilution.
- Customer concentration, long sales and collection cycles, implementation delays and economic weakness could materially affect revenue and liquidity.
- The company competes with substantially larger and better-capitalized providers and must continue investing in product development and technology.
- Management disclosed risks from software defects, product-development delays, intellectual-property claims and dependence on third-party vendors and partners.
- The common stock was quoted on the OTC Bulletin Board, had limited trading activity and was subject to penny-stock rules. No regular trading market was assured.
- A pending lawsuit by Phuture World sought damages originally exceeding $15,000. ISA disputed the claims, asserted defenses and counterclaims, and believed the matter would not materially affect its financial condition or results.
- The filing states that the company’s disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to express an opinion on internal control effectiveness.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied filing is for Information Systems Associates, Inc., while the request identifies DUOS Technologies Group, Inc.
- Reconcile the filing’s inconsistent references to convertible-note proceeds of $250,000 versus a year-end convertible-note balance of $274,427.
- Verify the exact amount and terms of the receivables factoring obligation, including the filing’s references to $115,126 and $115,526.
- Assess the going-concern qualification, the approximately $600,000 projected 2012 funding requirement and the availability and terms of additional financing.
- Review customer concentration, particularly the 2011 dependence on Avocent Huntsville and Chevron, and the effect of the expired service agreement.
- Evaluate dilution from convertible notes, warrants and further equity issuance, as well as the company’s negative equity position.
- Confirm the status and potential exposure of the Phuture World litigation and the marketability of the OTC Bulletin Board shares.