Business Context and Reporting Period
This Form 10-K was filed by Information Systems Associates, Inc. (ISA), the predecessor name of the company identified in the request as Duos Technologies Group, Inc. It covers the fiscal year ended December 31, 2014. ISA operated primarily in IT asset-management software, professional services, software licensing, and related hardware.
After year-end, ISA completed a reverse triangular merger with Duos Technologies, Inc., effective April 1, 2015. Duos shareholders received approximately 96% of the combined company, and Duos became a wholly owned subsidiary. The company planned to emphasize Duos's intelligent technology, rail inspection, security, analytics, command-and-control, and turnkey engineered-system businesses while continuing ISA's legacy operations through TrueVue360, Inc.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $401,311 | $607,596 | Down 34.0% |
| Gross profit | $233,018 | $331,351 | Down 29.7% |
| Gross margin | 58.1% | 54.5% | Up 3.6 percentage points |
| Operating loss | $(429,790) | $(454,435) | Improved 5.4% |
| Net loss | $(735,223) | $(648,567) | Worsened 13.4% |
| Net loss per share | $(1.25) | $(1.67) | Improved, partly reflecting higher share count |
| Cash used in operating activities | $(297,920) | $(160,834) | Use increased 85.2% |
| Cash at year-end | $3,478 | $166 | Increase of $3,312 |
| Current assets | $42,767 | $56,654 | Down 24.5% |
| Current liabilities | $1,092,722 | $1,003,486 | Up 8.9% |
| Stockholders' deficit | $(1,048,337) | $(932,551) | Deficit increased |
| Accumulated deficit | $(6,087,509) | $(5,352,286) | Deficit increased |
Revenue consisted of $102,720 of software and hardware sales and $298,591 of services. Operating expenses were $662,808, including $369,093 of salaries and employee benefits, $236,132 of administrative and general expenses, and $57,583 of professional fees. The approximate operating margin was (107.1%) and the net margin was (183.2%).
Financing activities provided $299,507 in cash, primarily from related-party notes, third-party financing, line-of-credit activity, and $210,000 of stock sales. Investing activities provided $1,725 from fixed-asset sales. The filing does not provide a clear total-debt figure labeled as such; however, current liabilities included approximately $677,727 of notes payable, line-of-credit borrowings, and accrued interest, excluding accounts payable, accrued payroll, and deferred revenue.
Material Changes Versus the Prior Period
- Revenue fell by $206,285, driven primarily by lower professional-services revenue and the absence of software revenue during the last two quarters while the TrueVue IT product remained under development and testing.
- Cost of revenue declined to $168,293 from $276,245, but the decline was smaller in software and hardware costs, which increased from $12,361 to $68,429.
- Operating expenses declined by $122,978 as ISA scaled back operations in anticipation of lower revenue, a software-focused transition, and a potential merger.
- Interest expense declined to $141,205 from $191,677, while a $150,274 non-cash loss on note conversions materially increased the 2014 net loss.
- Operating cash use increased substantially despite lower operating expenses, reflecting continued losses and the delayed delivery of new software products.
- The company reduced reliance on factoring; receivables factored decreased to $5,978 from $479,248, and factoring fees decreased to $1,386 from $25,667.
- Common shares outstanding increased to 690,779 at December 31, 2014 from 454,710 at December 31, 2013, before the subsequent 1-for-200 reverse split and merger-related share issuances.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management projected a need for approximately $2 million of additional capital during 2015 to fund operations. The filing also states that at least $500,000 would be needed to sustain the then-current level of operations for an additional year, while the post-merger business plan required at least $2 million and the planned UDC acquisition would require approximately $14 million in total funding. No financing commitments were in place.
The financial statements and auditor's report raise substantial doubt about the company's ability to continue as a going concern. At December 31, 2014, the company had a $1,049,955 working-capital deficiency, $1,048,337 of stockholders' deficit, $6,087,509 of accumulated deficit, and negative operating cash flow. Management expected continued losses and negative operating cash flow until licensing and other revenues increased.
- The planned acquisition of Uni-Data Communications, Inc. required significant financing and had not closed. The agreed purchase consideration was $7 million, subject to the transaction's conditions.
- Duos had outstanding payroll taxes of approximately $626,713 plus estimated penalties and interest of approximately $70,000. The balance had been reduced to below $500,000 by April 10, 2015, and the company was seeking an installment agreement.
- Duos was involved in litigation concerning a promissory note. The complaint sought approximately $1.4 million, while the filing reported principal of $524,434 and accrued interest of $104,683 through December 31, 2014. Duos disputed the claim.
- FacilityTeam filed a breach-of-contract claim after ISA canceled a software-development arrangement. Management stated that it believed the claim lacked merit.
- The company relied heavily on related-party financing, deferred executive compensation, equity issuance, and short-term debt. Several notes were in default, extended, or subject to high interest rates and penalties.
- Customer concentration was significant: one customer represented 66% of 2014 revenue and 100% of year-end accounts receivable; a second customer represented 17% of revenue.
- Principal risks include failure to integrate the merger, inability to raise capital, continued losses, software-development delays, customer concentration, intellectual-property challenges, dependence on key personnel, dilution, and limited liquidity in the OTC market.
The company had no formal financial guidance beyond its capital requirements and strategic objectives. Management's outlook emphasized organic growth, expansion of Duos's intelligent-technology and rail businesses, cloud and SaaS offerings, strategic acquisitions, cross-selling, and development of proprietary intellectual property.
Most Important Facts to Verify
- Confirm the post-merger accounting presentation, including the reverse-merger treatment and the conversion from ISA's historical results to the combined Duos business.
- Verify the actual financing raised after December 31, 2014 and whether it was sufficient to address the going-concern deficiency and fund operations.
- Verify whether the planned UDC acquisition closed, its final purchase price, funding sources, and resulting debt or equity dilution.
- Reconcile post-split and post-merger share counts, including shares issued to Duos shareholders, note holders, consultants, executives, and other investors.
- Review the status and ultimate resolution of the CW Electric litigation, FacilityTeam claim, Duos payroll-tax liabilities, and any related accrued amounts.
- Assess whether the company reduced customer concentration and generated recurring revenue from support contracts, software licenses, cloud services, and rail deployments.
- Confirm year-end and subsequent-period cash balances, operating cash burn, debt maturities, defaults, related-party obligations, and available credit facilities.
- Evaluate the commercial progress, technical readiness, and revenue contribution of the TrueVue, praesidium, centraco, vue, and cloud/SaaS platforms.