SEC Filing Summary
Filing: Form 10-Q for the quarter ended September 30, 2014. The source filing identifies the registrant as Information Systems Associates, Inc. and Subsidiary, not DUOS Technologies Group, Inc.; this entity mismatch should be verified. The financial statements are unaudited and presented under U.S. GAAP.
Business Context and Reporting Period
The company develops and sells data-center asset-management software, related hardware, consulting, and professional services. During 2014, it formed wholly owned subsidiary TrueVue 360, Inc. to develop and market a SaaS IT-asset-management product, while the parent company shifted toward consulting and professional services.
The filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The company reported 138,155,740 Class A and Class B common shares outstanding as of November 17, 2014.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $20,810, down from $157,441 | $283,394, down from $587,518 |
| Gross profit | $9,341; approximately 44.9% margin | $156,706; approximately 55.3% margin |
| Operating loss | $(86,813); approximately (417.2%) margin | $(385,887); approximately (136.2%) margin |
| Net loss | $(203,670) | $(575,866) |
| Net loss per share | $0.00 as reported | $0.00 as reported |
| Cash used in operating activities | Not separately provided | $(272,578) |
Cash and cash equivalents were $3,094 at September 30, 2014, compared with $166 at December 31, 2013. Management reported cash on hand of $11,836 as of November 19, 2014. Current assets were $3,916, while current liabilities were $1,055,345, producing a working-capital deficit of $1,051,429. Stockholders’ deficit was $1,041,301 and accumulated deficit was $5,928,152.
Current debt and financing obligations included approximately $704,290 of related-party, stockholder, third-party, convertible, and line-of-credit balances, excluding accounts payable and accrued liabilities. The company also had $231,253 of accounts payable and $88,245 of accrued expenses.
Net cash provided by financing activities was $275,281, including $210,000 from common-stock and warrant sales, $50,000 from an advance against future receivables, and $20,324 of related-party note proceeds. Investing activities provided $225.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined approximately 87% year over year, primarily because professional-services revenue fell by $150,268; no software revenue was reported in the quarter.
- Nine-month revenue declined approximately 52%, driven primarily by a $286,061 decrease in professional-services revenue and an $18,063 decline in software sales.
- Gross profit declined from $100,587 to $9,341 in the third quarter and from $331,886 to $156,706 for the nine-month period.
- Operating expenses decreased to $96,154 from $215,598 in the third quarter and to $542,593 from $670,123 for the nine-month period.
- Despite lower operating expenses, the third-quarter net loss increased by $19,629 and the nine-month net loss increased by approximately $80,681, primarily because of higher interest and other non-cash financing charges.
- Interest expense increased to $104,081 from $57,488 in the third quarter and to $182,098 from $141,988 for the nine-month period. The third quarter included an approximately $78,000 non-cash loss associated with debt conversion.
- Weighted-average shares outstanding increased to 111,737,040 for the nine-month period from 72,316,560, reflecting equity issuance and debt conversions.
Outlook, Risks, Contingencies, and Unusual Items
Management did not provide formal numerical revenue or earnings guidance. It expected the new TrueVue IT product to be released in late 2014 and planned to pursue additional capital, software development, marketing, and markets outside its core business. The filing states that future results depend substantially on completing the software, customer acceptance, revenue generation, and access to capital markets.
Management concluded that substantial doubt existed about the company’s ability to continue as a going concern. The company depended on additional financing, short-term loans from friends and family, deferred or forgiven officer compensation, supplier payment extensions, and eventual revenue growth and profitability.
- Approximately 90% of nine-month revenue was concentrated in two customers: Customer A represented 74% and Customer B 16%. The filing does not provide customer names.
- A related-party convertible note with a $66,000 carrying value was technically in default; discussions regarding conversion or extension were continuing.
- A stockholder note had a carrying value of $144,293 and was extended to July 14, 2015. The agreement included a potential 25% penalty and required issuance of 1.5 million warrants.
- A third-party note and related financing arrangements included high interest, original-issue discounts, and advances against future receivables.
- The company terminated its prior office lease in July 2014 and entered into a settlement for approximately $6,091; it subsequently vacated its Stuart office and moved headquarters to Coral Springs.
- On October 30, 2014, the company agreed to assign approximately $80,000 of high-cost debt in exchange for 16.9 million shares, with closing expected concurrent with the report’s release.
- On November 12, 2014, the company announced a proposed 3% position in a startup and an option to acquire technology and intellectual property for $3.23 million in cash or stock. No definitive agreement for the larger engagement had been signed.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2014. Management identified material weaknesses involving segregation of duties and communication of required disclosures.
- The filing reports no material pending legal proceedings and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm that this filing belongs to the requested company, because the filing names Information Systems Associates, Inc., whereas the request identifies DUOS Technologies Group, Inc.
- Verify the company’s ability to obtain additional financing and address the disclosed going-concern uncertainty.
- Review maturities, defaults, interest rates, penalties, collateral, and related-party relationships associated with the approximately $704,290 of reported debt and financing obligations.
- Assess whether TrueVue 360’s SaaS product was completed, released, commercialized, and accepted by customers after the filing date.
- Evaluate customer concentration, especially the reported 74% and 16% revenue contributions from unnamed customers.
- Reconcile subsequent stock issuances, warrant activity, debt-for-equity transactions, and potential dilution, including the proposed 16.9 million-share debt assignment.
- Follow up on remediation of the material weaknesses in disclosure controls and internal control over financial reporting.