Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2013. The filing identifies the registrant as Information Systems Associates, Inc., not DUOS Technologies Group, Inc.; this entity discrepancy should be verified. The company provides mobile data center management software, asset and inventory management systems, data collection, and related professional and customer services.
The financial statements are unaudited and prepared under U.S. GAAP for interim reporting. The company was a smaller reporting company and reported 75,873,250 shares outstanding as of August 14, 2013, including Class A and Class B shares after a subsequent recapitalization.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Revenue | $223,018 | $430,077 |
| Gross profit | $122,776 | $231,299 |
| Gross margin | 55.1% | 53.8% |
| Operating loss | $(122,043) | $(223,226) |
| Operating margin | (54.7%) | (51.9%) |
| Net loss | $(161,746) | $(311,145) |
| Net margin | (72.5%) | (72.3%) |
| Cash used in operating activities | Not separately provided for the quarter | $(112,305) |
- At June 30, 2013, cash and cash equivalents were $1,630, accounts receivable were $184,893, and total assets were $203,661.
- Total liabilities were $1,214,282, including $1,072,324 of current liabilities. The filing does not provide a single total-debt figure, but reported notes payable, convertible notes, factoring debt, a third-party note, and a bank line of credit.
- Working capital deficit was $885,801, stockholders’ deficit was $1,010,621, and accumulated deficit was $5,014,864.
- Accounts receivable included $76,312 of factored receivables. Factoring advances are treated as secured loans because the company retains recourse for customer defaults.
Material Changes Versus the Prior Comparable Period
- Three-month revenue increased 41.0% from $158,109 to $223,018, primarily from higher professional and customer service revenue.
- Six-month revenue increased 84.0% from $233,704 to $430,077, reflecting increases in professional services, software licensing, and customer service revenue.
- Six-month gross profit increased to $231,299 from $110,792, and gross margin improved to approximately 53.8% from 47.4%.
- Six-month operating loss improved to $223,226 from $317,278, while net loss improved to $311,145 from $509,461. Management attributed much of the net-loss reduction to lower amortization of discounts and features associated with convertible debt, as well as higher revenue.
- Six-month operating cash use improved to $112,305 from $272,857, but the company remained dependent on financing to fund operations.
- Accounts receivable increased from $35,708 at December 31, 2012 to $184,893 at June 30, 2013, contributing $149,185 of operating cash usage.
- Current liabilities increased from $675,003 to $1,072,324, while cash remained only $1,630 at quarter-end.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that the financial condition raises substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on implementing the business plan, generating sufficient revenue, and raising additional capital.
- Management arranged up to $200,000 of related-party working capital for ongoing projects and was pursuing additional debt or equity financing for expansion, software development, marketing, and operations.
- As of August 14, 2013, management reported cash on hand of $6,453. The filing states that capital raising had been delayed by uncertainty surrounding the planned dividend and recapitalization.
- A shareholder convertible note with a net carrying value of $68,750 became due February 24, 2013. The company stated it was technically in default, although it had received no written notice, and was discussing conversion or extension with the shareholder.
- The company entered into a $45,000 third-party note in May 2013 at 1.5% monthly interest for six months. It also had a $34,291 bank line of credit, due on demand, with a maximum borrowing capacity of $40,000 and interest at prime plus 3%.
- Debt included significant related-party and shareholder obligations, including $288,507 of related-party notes payable, $50,000 owed to a shareholder, and $141,958 of long-term shareholder notes net of discounts.
- On August 1, 2013, the company filed amendments creating Class A and Class B common stock, increasing authorized shares to 501 million, and declaring a two-for-one dividend for Class A holders. On August 7, FINRA raised an issue concerning the reclassification, and the company stated that implementation was stayed pending resolution.
- On July 17, 2013, the company entered into a one-year consulting agreement with Abacus Securities in exchange for 6,000,000 Class A shares, giving effect to the planned dividend.
- Revenue was concentrated: one customer represented 41% of second-quarter revenue and 91% of accounts receivable at June 30, 2013. Additional customers represented 31%, 14%, and 10% of quarterly revenue.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. Management stated that disclosure controls were effective and that no material changes occurred in internal controls over financial reporting.
Investor Verification Points
- Verify that the filing belongs to DUOS Technologies Group, Inc.; the submitted document names Information Systems Associates, Inc. as registrant.
- Confirm the status and ultimate resolution of the FINRA issue, the Class A/Class B recapitalization, and the planned Class A stock dividend.
- Assess the company’s ability to obtain financing and meet obligations given the going-concern qualification, $1.63 million? No: $1,630 of quarter-end cash, $885,801 working capital deficit, and $1,010,621 stockholders’ deficit.
- Review the maturity, default, conversion, and extension terms of shareholder, related-party, convertible, factoring, and third-party debt.
- Evaluate collectability and concentration risk in the $184,893 accounts receivable balance, particularly the customer representing 91% of receivables.
- Account for potential dilution from 19,860,000 outstanding Class A warrants, 1,000,000 Class B options, the 825,000 shares recorded as common stock to be issued, and the 6,000,000-share Abacus agreement.