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).