Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and nine months ended September 30, 2011, filed November 14, 2011. The filing names the registrant as Information Systems Associates, Inc., although the request metadata identifies DUOS Technologies Group, Inc.; this discrepancy should be verified.
The company provides mobile data center management systems and turnkey data center solutions, including asset management, software, data collection, consulting, implementation, training, maintenance, and support. Its principal product is the OSPI software platform.
Financial Results and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $160,003, versus $305,933 in 2010 | $361,878, versus $797,573 in 2010 |
| Gross profit | $142,441, versus $295,235 | $317,402, versus $772,435 |
| Gross margin | Approximately 89.0%, versus 96.5% | Approximately 87.7%, versus 96.9% |
| Operating loss | $(217,903), versus $(112,021) | $(738,962), versus $(532,753) |
| Net loss | $(231,746), versus $(143,215) | $(756,873), versus $(580,070) |
| Net loss per share | $(0.01), versus $(0.01) | $(0.03), versus $(0.03) |
Revenue declined approximately 48% for the quarter and 55% for the nine-month period. Nine-month operating expenses decreased to $1.056 million from $1.305 million, but the reduction was insufficient to offset the revenue decline. The nine-month net loss margin was approximately negative 209%, compared with approximately negative 73% in 2010.
Cash used in operating activities was $490,750 for the nine months, compared with $177,607 in 2010. Investing cash use was $52,152, including $36,022 for software development and $16,130 for property and equipment. Financing activities provided $557,743, primarily from $280,000 of stock issuance and $250,000 of convertible-note proceeds. Ending cash was $85,167, compared with $70,326 at December 31, 2010.
Balance Sheet, Debt, and Liquidity
- Total assets were $244,588 at September 30, 2011, down from $299,712 at December 31, 2010.
- Current liabilities increased to $422,759 from $113,510, producing stockholders’ deficit of $(178,171), compared with equity of $186,202 at year-end 2010.
- Debt included $34,507 under a bank line of credit, $25,000 owed to a related party, $253,267 in convertible notes, and $7,582 in insurance financing.
- The convertible notes were issued for $250,000 of cash, have an aggregate face amount of $275,000, bear 10% interest, mature after one year, convert at $0.10 per share, and include five-year warrants for 2.5 million shares at $0.10 per share.
- The company states that its current operations require additional capital to sustain operations through 2011 and that it is seeking up to $160,000 for software enhancements and market rollout.
- After the reporting period, management advanced the company $95,000 under a three-month promissory note bearing $5,000 of interest.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue fell $435,695, primarily because consulting revenue declined $277,000, related travel-revenue declined $149,000, and OSPI software revenue declined $72,000 following expiration of a multiyear license.
- Operating expenses decreased $248,824, reflecting lower software amortization, travel, professional fees, and certain administrative costs. These savings were partly offset by approximately $251,000 of higher salaries and benefits related to new personnel.
- The nine-month operating loss increased $206,209 and the net loss increased $176,803 despite lower operating expenses.
- Operating cash burn increased $313,143 year over year.
- Common shares outstanding increased to 28,166,084 at September 30, 2011 from 22,266,084 at December 31, 2010. Weighted-average shares for the nine months increased to 26.9 million from 19.2 million.
- The company began development of an enhanced OSPI version and started building a sales network during 2011.
Outlook, Risks, Contingencies, and Unusual Items
Management states that continuing operations depend on implementing its business plan and raising additional capital. The filing includes an explicit going-concern uncertainty, citing the $756,873 nine-month operating loss, accumulated deficit of $3.374 million, limited cash, and dependence on additional financing. There is no assurance that planned debt or equity financing will be obtained.
Management identifies software enhancement, marketing, and sales-network expansion as priorities. The filing does not provide formal revenue or earnings guidance.
The company is defending a lawsuit brought by Phuture World, Inc. involving an alleged software-development contract breach and seeks damages against the plaintiff. Management believes the matter will not materially affect financial condition, cash flows, or results of operations.
Unusual items include stock issued for services, related-party financing, convertible debt with beneficial conversion features and warrants, and $131,687 of amortization of prepaid consulting costs. Management reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Investor Verification Checklist
- Confirm the registrant’s legal name and corporate identity, given the difference between the request metadata and the filing.
- Assess the company’s ability to continue as a going concern and obtain the additional financing required for operations and software development.
- Review the terms, maturity, conversion provisions, warrants, and potential dilution associated with the $275,000 convertible notes.
- Validate the sustainability and timing of recurring revenue after the expiration of the multiyear OSPI license and the decline in consulting activity.
- Reconcile the sharp increase in current liabilities and the resulting stockholders’ deficit.
- Evaluate the effects of stock-based compensation, related-party transactions, and subsequent-period financing on liquidity and dilution.
- Review the status and potential exposure of the Phuture World litigation.