SEC Form 10-Q Summary
Filing identity: The supplied filing identifies the registrant as Information Systems Associates, Inc., not DUOS Technologies Group, Inc. The report covers the quarter and six months ended June 30, 2012, and was filed August 13, 2012. Financial statements are unaudited.
Business Context and Reporting Period
The company provides mobile data center management systems and turnkey data center solutions, including asset and inventory management, software, data collection, consulting, implementation, training, maintenance and support. Its proprietary OSPI product, including Version 3, is marketed to data center customers.
At June 30, 2012, the company had 30,599,417 shares outstanding. Management identified a going-concern uncertainty because of recurring losses, an accumulated deficit and dependence on additional financing.
Financial Results and Liquidity
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $158,109, versus $74,621 | $233,704, versus $201,875 |
| Gross profit | $144,042, versus $64,737 | $200,764, versus $174,961 |
| Total operating expenses | $302,905, versus $309,232 | $563,338, versus $696,020 |
| Loss from operations | $(158,863), versus $(244,495) | $(362,574), versus $(521,059) |
| Interest expense | $25,757, versus $2,238 | $46,402, versus $3,831 |
| Net loss | $(184,877), versus $(246,970) | $(409,233), versus $(525,127) |
| Loss per share | $(0.01), versus $(0.01) | $(0.01), versus $(0.02) |
Six-month gross margin was approximately 85.9%, compared with approximately 86.7% in the prior-year period. Operating margin was approximately negative 155.1%, compared with negative 258.1%; net margin was approximately negative 175.1%, compared with negative 260.1%.
- Cash and cash equivalents were $50,052 at June 30, 2012, compared with $988 at December 31, 2011.
- Total assets were $241,040, including accounts receivable of $141,430 and net property and equipment of $29,336.
- Current liabilities were $816,078, compared with $594,378 at year-end. Stockholders’ deficit was $(575,038), compared with $(317,721).
- Listed debt and financing balances totaled approximately $585,721, excluding accounts payable and accrued liabilities. These included convertible notes of $244,062, related-party notes of $145,265, factoring debt of $91,364, shareholder notes of $50,000 and other short-term borrowings.
- Six-month cash used in operating activities was $(187,891), compared with $(318,133). Cash provided by financing activities was $237,212, compared with $285,250.
- Net cash increased by $49,064 during the six months, principally because financing proceeds exceeded operating and investing cash uses.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased approximately 15.8%, primarily from approximately $22,700 of additional consulting revenue and $8,000 of additional software sales. Second-quarter revenue increased approximately 111.9%, driven primarily by higher consulting, software and OSPI licensing revenue.
- Six-month operating expenses declined approximately 19.1%, reflecting lower administrative, salary and professional-fee expenses. The company operated for most of the period without a Chief Operating Officer.
- Despite improved operating performance, interest expense increased substantially because of original issue discount amortization and beneficial conversion features associated with convertible notes.
- One $146,361 convertible note was converted into 1,833,333 common shares on March 6, 2012. Weighted-average shares outstanding increased to 30,599,417 for the six-month period from 26,129,607.
- Debt and related-party financing increased materially, while the accumulated deficit expanded to $3,920,433.
Guidance, Outlook, Risks and Unusual Items
- Management stated that current operations require additional capital to sustain the business through 2012 and identified financing needs of up to $160,000 for software enhancements and market rollout. There is no assurance that financing will be obtained.
- The company established a private placement memorandum in March 2012 to raise up to $250,000 through original issue discount convertible notes and warrants.
- The going-concern assessment depends on implementing the business plan and raising additional capital. The financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
- In July 2012, the holder of a June 2012 note invested an additional $15,000 on the same terms. Adrian Goldfarb became President and Chief Financial Officer effective July 1, 2012; the former CFO remained Chief Executive Officer.
- Management disclosed material weaknesses during the first quarter related to insufficient financial and management resources for timely reporting. Management stated that remediation efforts restored disclosure controls to effective status as of June 30, 2012.
- The company closed its Las Vegas office and accrued $4,500 for unpaid rent. It also reported a pending lawsuit involving Phuture World, Inc.; management believes the matter will not materially affect financial condition, cash flows or results of operations.
- Outstanding warrants to purchase 2,175,000 shares were excluded from diluted loss per share because they were anti-dilutive.
Investor Verification Priorities
- Verify that the filing belongs to the intended issuer, because the supplied document names Information Systems Associates, Inc. rather than DUOS Technologies Group, Inc.
- Confirm the company’s ability to obtain the additional financing required to fund operations through 2012 and the terms and availability of the proposed private placement.
- Reconcile the $50,052 cash balance with operating cash burn, short-term maturities, demand obligations and approximately $585,721 of listed debt.
- Review the terms, conversion prices, warrants and dilution implications of the convertible notes and other equity-linked instruments.
- Assess whether the reported remediation of material weaknesses is sustainable and whether future filings will be timely and reliable.
- Monitor the Phuture World litigation, lease obligations and related-party advances, including the July 2012 subsequent financing and repayment disclosures.