Business Context and Reporting Period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2013. The filing identifies the registrant as Information Systems Associates, Inc., not DUOS Technologies Group, Inc.; investors should verify the company and filing association.
The company provides mobile data-center management systems, software, asset and inventory management, data collection, auditing, training, and support services using its OSPI technology.
Financial Results and Position
| Metric | Three months ended September 30, 2013 | Three months ended September 30, 2012 | Nine months ended September 30, 2013 | Nine months ended September 30, 2012 |
|---|---|---|---|---|
| Revenue | $157,441 | $271,445 | $587,518 | $505,149 |
| Gross profit | $100,587 | $134,939 | $331,886 | $245,732 |
| Gross margin | 63.9% | 49.7% | 56.5% | 48.7% |
| Operating loss | $(115,011) | $(83,269) | $(338,237) | $(400,546) |
| Net loss | $(184,041) | $(124,301) | $(495,185) | $(633,761) |
| Net loss per share | Not clearly stated beyond nil | Not clearly stated beyond nil | $(0.01) | $(0.01) |
For the nine months, operating cash flow was $(138,695), compared with $(421,161) in the prior-year period. Financing activities provided $139,468, resulting in a $773 increase in cash. Cash and cash equivalents were $773 at September 30, 2013, and management reported $852 of cash on hand as of October 31, 2013.
At September 30, 2013, total assets were $162,122, current assets were $146,412, and total liabilities were $1,201,220. Stockholders’ deficit was $(1,039,098), accumulated deficit was $(5,198,904), and the working-capital deficit was $1,054,808. Accounts receivable totaled $100,972, including $98,839 of factored receivables.
Current liabilities included accounts payable of $250,648, accrued payroll of $222,076, related-party notes of $288,595, shareholder notes of $50,000, original-issue-discount and other notes, factor borrowings of $79,071, and a line of credit of $39,949. The filing does not provide a single separately labeled total for interest-bearing debt.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue declined 42.0%, primarily because software licensing revenue fell by $83,660 and professional-services and customer-service revenue also decreased.
- Nine-month revenue increased 16.3%, driven by a $101,377 increase in professional-services revenue, partially offset by a $23,188 decline in software licensing revenue.
- Gross margin improved in both comparison periods because software and hardware costs declined and service delivery became more efficient.
- The third-quarter operating loss increased by approximately $31,742 and net loss increased by $59,740, despite lower operating expenses, because of lower revenue, higher interest expense, and higher factoring fees.
- The nine-month operating loss improved by approximately $62,309 and net loss improved by approximately $138,576, largely because of higher revenue and lower amortization of debt discounts and related financing costs.
- Operating expenses increased 3.7% for the nine months, including higher marketing and investor-relations costs, professional fees, salaries, and general and administrative expenses.
- Accounts receivable increased substantially from $35,708 at December 31, 2012 to $100,972, while cash remained minimal and liabilities increased from $818,868 to $1,201,220.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal revenue or earnings guidance. Management stated that it is pursuing additional capital for expansion, software development, marketing, and working capital. A related party had arranged up to $200,000 of working capital, with a verbal agreement to increase that amount to $300,000 subject to negotiations.
Management expressly states that substantial doubt exists about the company’s ability to continue as a going concern. Continued operations depend on implementing the business plan, generating sufficient revenue, raising capital, and obtaining additional debt or equity financing. The financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
- A $66,000 related-party convertible note was technically in default after its August 15, 2013 maturity date. Discussions regarding conversion or extension were ongoing, and no written default notice had been received.
- The company relies materially on factoring; $479,248 of receivables were factored during the nine months. Because the arrangements are recourse obligations, factor advances are recorded as secured loans.
- Two customers represented 74% and 17% of nine-month revenue, and 68% and 22% of accounts receivable, respectively, creating significant customer-concentration risk.
- A shareholder convertible note, including interest and a 30% default penalty totaling $24,063, was converted into approximately 5.57 million Class A shares. Approximately 1.86 million shares remained recorded as common stock to be issued pending an attorney opinion letter.
- The company completed a recapitalization creating non-voting Class A and voting Class B common stock and effected a three-for-one equivalent stock dividend for Class A holders. Authorized shares increased to 450 million Class A shares and 50 million Class B shares.
- Outstanding warrants covered 19.86 million Class A shares, and options covered 1.0 million shares. These securities were excluded from diluted loss-per-share calculations because they were antidilutive.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements, and no material changes in internal control over financial reporting. Management concluded disclosure controls were effective.
Investor Verification Items
- Verify that this filing belongs to the requested issuer, since the filing names Information Systems Associates, Inc. rather than DUOS Technologies Group, Inc.
- Confirm the company’s ability to fund operations given $773 of reported cash, a $1.05 million working-capital deficit, negative equity, and substantial reliance on related-party financing, factoring, and future capital raises.
- Review the status, maturity, default terms, and potential equity consequences of the related-party convertible note and other shareholder and related-party debt.
- Assess collectability and concentration of the $100,972 receivable balance, including the $98,839 subject to factoring and recourse obligations.
- Evaluate dilution from the recapitalization, stock issuances for debt and services, 19.86 million warrants, and 1.0 million options.
- Reconcile the reported share counts, stock dividend treatment, common stock to be issued, and conversion shares in subsequent filings.