Form 10-Q Summary
Filing identity and period: The submitted filing is a Form 10-Q for the quarter ended March 31, 2013. Although the request metadata identifies DUOS TECHNOLOGIES GROUP, INC., the filing names Information Systems Associates, Inc. as the registrant. The company provides data-center asset-management software, hardware, implementation, data-collection, training, and maintenance services using its OSPI technology.
Financial Results and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $208,862 | $75,595 | +$133,267 |
| Gross profit | $110,326 | $30,488 | +$79,838 |
| Gross margin | 52.8% | 40.3% | +12.5 percentage points |
| Operating expenses | $209,706 | $221,852 | -$12,146 |
| Operating loss | $(99,380) | $(191,364) | Improved by $91,984 |
| Interest and factoring expense | $(50,019) | $(131,623) | Improved by $81,604 |
| Net loss | $(149,399) | $(322,987) | Improved by $173,588 |
| Net margin | (71.5%) | (427.3%) | Improved |
| Cash used in operating activities | $(67,702) | $(23,216) | Higher cash use |
Software and hardware revenue was $72,085, while services revenue was $136,777. The filing does not provide a clear adjusted EBITDA measure. Revenue concentration was significant: two customers represented 50% and 40% of quarterly revenue, and one customer represented 88% of accounts receivable.
At March 31, 2013, cash and cash equivalents were $1,624, accounts receivable were $126,081, and total assets were $152,253. Current liabilities were $907,210, producing a working-capital deficit of $776,524. Total liabilities were $1,053,127, compared with a stockholders’ deficit of $900,874. Accumulated deficit was $4,853,118.
Debt and financing obligations included $290,841 of current related-party notes, $50,000 owed to a shareholder, $122,120 of current convertible notes net of discounts, $145,917 of long-term shareholder notes net of discounts, a $40,000 bank line of credit, $36,503 owed to a factor, and other short-term obligations. The company also had $70,476 of factored receivables outstanding; factoring was accounted for as secured borrowing because the company retained recourse risk.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 176%, driven by higher professional-services revenue, software licensing revenue, and customer-service revenue.
- Gross profit increased approximately 262%, and gross margin improved from 40.3% to 52.8%.
- Operating expenses declined approximately 5.5%, primarily because administrative and general expenses decreased by $18,895.
- Interest expense fell substantially because amortization of discounts, beneficial conversion features, and warrant-related debt discounts declined from the prior year.
- Despite the lower net loss, operating cash flow deteriorated to a $67,702 use, primarily because accounts receivable increased by $90,374.
- Accounts receivable increased from $35,708 at December 31, 2012 to $126,081 at March 31, 2013, while deferred revenue increased from $38,445 to $80,570.
- Related-party notes increased from $229,025 to $290,841 during the quarter, and total liabilities increased from $818,869 to $1,053,127.
- The company granted options to purchase 650,000 shares to independent directors. At quarter-end, 5,020,000 warrants and 1,000,000 options were outstanding, creating potential future dilution.
Liquidity, Outlook, Risks, and Unusual Items
Management stated that the financial statements raise substantial doubt about the company’s ability to continue as a going concern. The company reported a net loss, negative operating cash flow, a working-capital deficit, and a stockholders’ deficit. Management arranged with a related party for up to $200,000 of working capital and planned to seek additional debt or equity financing for expansion, software development, and marketing.
As of May 14, 2013, management reported cash on hand of $4,250 and approximately $27,000 remaining available under the related-party revolving loan. The filing states that existing working capital would support operations only through approximately June 30, 2013 without improved operating cash flow or new financing.
A shareholder convertible note with a net carrying value of $68,750 became due on February 24, 2013. The company disclosed that it was technically in default, although it had received no written notice, and was negotiating conversion or an extension. Another shareholder note was secured by the company’s intellectual property, including the OSPI patent, and an inter-creditor agreement required 5% of factor advances to be paid to that shareholder until repayment.
The company remains dependent on factoring, related-party financing, shareholder financing, and a demand line of credit. It expects continued losses and cash-flow deficits and may issue additional convertible notes or equity, potentially causing substantial dilution. The filing also identifies customer concentration, competition, technology and software-development risks, intellectual-property risks, limited trading liquidity, penny-stock restrictions, and exposure to changing information-technology spending.
The company reported no material pending legal proceedings, no material changes in internal controls, no off-balance-sheet arrangements, and no investing cash flows during either comparable quarter.
Important Facts for Investors to Verify
- Confirm the registrant’s identity: the filing names Information Systems Associates, Inc., not DUOS TECHNOLOGIES GROUP, INC.
- Verify whether the company obtained sufficient financing after May 14, 2013 to address the stated going-concern uncertainty and June 30 liquidity horizon.
- Review the status, maturity, and possible conversion of the shareholder note technically in default.
- Assess collectability and concentration of the $126,081 accounts receivable balance, including the 88% exposure to one customer.
- Reconcile related-party borrowings, interest rates, guarantees, and repayment terms, particularly the 2.5% and 1.5% monthly related-party arrangements.
- Evaluate the effect of factoring, recourse obligations, and the shareholder’s 5% claim on factor advances on future liquidity.
- Consider potential dilution from 5,020,000 warrants, 1,000,000 options, and anticipated future equity or convertible-debt financing.
- Verify whether reported revenue growth was recurring or driven by timing, customer concentration, or project-specific activity.