Business Context and Reporting Period
Company: Information Systems Associates, Inc. (Note: Request metadata listed "DUOS TECHNOLOGIES GROUP, INC." but the filing text identifies the issuer as Information Systems Associates, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company provides asset management software solutions and consulting services, primarily acting as a Value Added Reseller (VAR) for third-party software (e.g., Aperture Technologies) and developing proprietary software ("On Site Physical Inventory" or OSPI). The Company also entered a strategic alliance with Rubicon Software Group, plc, in April 2009 to expand into the European market.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Revenue | $335,332 | $729,288 |
| Net Loss | $(510,896) | $18,030 (Income) |
| Gross Profit | $300,287 | $702,764 |
| Operating Expenses | $812,008 | $676,021 |
| Cash and Equivalents (End of Period) | $22,537 | $108,859 |
| Net Cash Used in Operating Activities | $(71,157) | $32,869 (Provided) |
| Net Cash Used in Investing Activities | $(211,074) | $40,170 (Provided) |
| Net Cash Provided by Financing Activities | $100,000 | $22,494 |
| Total Assets | $431,001 | $838,495 |
| Total Liabilities | $37,227 | $33,825 |
| Stockholders' Equity | $393,774 | $804,670 |
Debt: The Company has a line of credit with Wachovia Bank up to $40,000. The balance was $0 as of June 30, 2009.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased by approximately 54% year-over-year (from $729,288 to $335,332). Management attributes this to the economic environment, clients reducing business levels, and a 15% reduction in data discovery rates to attract new clients.
- Operating Loss: The Company shifted from a net income of $18,030 in the prior year period to a net loss of $510,896. This was driven by the revenue decline and a significant increase in operating expenses.
- Expense Increase: Operating expenses rose to $812,008 from $676,021. The primary driver was "Professional" expenses, which increased from $350,030 to $590,201, largely due to new consulting agreements and stock-based compensation for services ($403,688 non-cash expense).
- Cash Position: Cash and cash equivalents dropped significantly from $204,768 (Dec 31, 2008) to $22,537 (June 30, 2009), a decrease of $182,231.
- Investing Activity: The Company invested $128,389 in software development (OSPI v2) and $73,958 in purchasing shares of Rubicon Software Group, plc.
Guidance, Outlook, and Risks
- Outlook: Management expects the trend of reduced data discovery rates to continue through 2009. They anticipate long-term benefits from recent consulting expenditures and the strategic alliance with Rubicon, which aims to open the European market and provide cost-effective development.
- Liquidity: Management states they have enough cash to fund operations for the next year based on current financing and projected revenues. However, they warn that if projected revenues fall short, they may need to obtain additional capital through equity or debt financing. Failure to raise capital could result in lower revenues and market share.
- Risks:
- Customer Concentration: Two major customers accounted for 96% of revenue in the six months ended June 30, 2009 ($321,718).
- Legal Proceedings: Phuture World, Inc. filed a lawsuit on April 24, 2009, alleging breach of a software development contract and seeking damages in excess of $15,000. The Company is contesting the claim and believes it has counter-claims.
- Market Conditions: Demand is dependent on general economic conditions and the cyclical nature of the computer software market.
- Unusual Items: A significant portion of operating expenses ($403,688) was non-cash, representing common stock issued for consulting services.
Investor Verification Checklist
- Cash Runway: Verify the accuracy of management's claim that $22,537 in cash is sufficient to fund operations for the next year, given the high burn rate and revenue decline.
- Customer Concentration: Assess the risk associated with 96% of revenue coming from just two customers.
- Stock-Based Compensation: Review the valuation and terms of the consulting agreements paid in stock to ensure fair value accounting.
- Legal Exposure: Monitor the status of the Phuture World, Inc. lawsuit and potential counter-claims.
- Rubicon Investment: Evaluate the strategic value and financial risk of the $73,958 investment in Rubicon Software Group, plc, and the potential for future capital calls (warrants).
- Revenue Recognition: Confirm that revenue recognition policies for consulting and software licenses are being applied consistently, especially with the shift to lower rates.