SEC Filing Summary
Filing and reporting period: The submitted Form 10-K identifies the registrant as Information Systems Associates, Inc., not DUOS Technologies Group, Inc. It covers the fiscal year ended December 31, 2012, with comparative information for 2011. The company provides data-center asset-management software, professional services, data collection and auditing, training, maintenance and support through its OSPI platform.
Financial Performance and Liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $617,188 | $666,152 | Down 7.3% |
| Gross profit | $228,043 | $229,278 | Down 0.5% |
| Gross margin | 36.9% | 34.4% | Up approximately 2.5 percentage points |
| Operating loss | $(576,727) | $(1,074,235) | Improved $497,508 |
| Net loss | $(864,995) | $(1,221,446) | Improved $356,451 |
| Net loss per share | $(0.03) | $(0.04) | Improved |
| Cash used in operations | $(169,750) | $(637,768) | Improved $468,018 |
| Cash flow from financing | $168,762 | $620,101 | Down $451,339 |
Software and hardware sales were $112,535, while services revenue was $504,653. Cost of revenue was $389,145, producing a 36.9% gross margin. Operating expenses were $804,770, or approximately 130.4% of revenue, resulting in a substantial operating loss. Interest expense increased to $273,847 from $142,498, primarily because of amortization of original-issue discounts, beneficial conversion features and warrant discounts associated with convertible notes. Factoring fees were $14,421.
At December 31, 2012, cash was effectively zero, total current assets were $41,147, and total current liabilities were $675,003, producing a working-capital deficit of $633,856. Total liabilities were $818,869, compared with total assets of $64,143. Stockholders’ deficit was $754,726 and accumulated deficit was $4,703,719. The company reported cash on hand of only $879 as of March 31, 2013.
Material Changes Versus 2011
- Revenue declined modestly, reflecting lower professional-services revenue of $19,639, lower software-license revenue of $28,609 and lower customer-service revenue of $717.
- Cost of revenue declined by approximately $47,729, and gross margin improved despite lower revenue. Software and hardware costs increased by $45,892, partially offset by lower services costs.
- Operating expenses declined approximately 38%, including reductions in administrative and general expenses, salaries and employee benefits, and professional fees.
- The company closed its Las Vegas sales office, dismissed the remaining sales force and shifted sales efforts toward senior management, partners and resellers.
- The company terminated its Rubicon Software arrangement and began building an in-house software-development capability. Product enhancements were ongoing and expected to be released later in 2013.
- Accounts receivable declined to $35,708 from $184,232. Factoring remained a source of liquidity, but the arrangements were accounted for as secured debt because the company retained recourse for uncollected receivables.
- Shares outstanding increased to 30,599,417 from 28,666,084, including 1,833,333 shares issued upon conversion of a note.
Outlook, Risks and Unusual Items
Management’s strategy is to expand enterprise software licensing, professional services and customer support, targeting a data-center infrastructure-management market it expected to exceed $1.7 billion by 2016. The filing does not provide formal revenue or earnings guidance. Management expected product enhancements and continued development of the in-house software platform, but the filing states that the company would require additional financing unless revenue and operating cash flow improved.
The auditors and management concluded that substantial doubt exists about the company’s ability to continue as a going concern. The company stated that available working capital would permit operations only through approximately June 30, 2013 without improved cash flow or new financing. Management arranged potential related-party working capital of up to $100,000 and planned to seek additional debt or equity financing.
- On February 24, 2013, a convertible note with a face value of $68,750 became due and payable. The company stated it was technically in default, although no written notice had been received, and discussions regarding conversion or extension were continuing.
- A $165,000 original-issue-discount note was secured by the company’s intellectual property, including the OSPI patent. A February 2013 inter-creditor agreement provided the noteholder 5% of factor advances until repayment and addressed competing security interests.
- The company depended substantially on related-party loans, shareholder financing, factoring and a nearly fully utilized $40,000 bank line of credit.
- Customer concentration was significant: one customer represented 48% of 2012 revenue and 90% of year-end accounts receivable; the filing also identifies additional customers representing 17% and 14% of revenue.
- Outstanding warrants to purchase 5,020,000 shares and options to purchase 350,000 shares were excluded from diluted loss per share because they were anti-dilutive and could dilute future shareholders.
- The filing cites risks from limited liquidity, recurring losses, customer concentration, long sales and collection cycles, competition, product-development delays, software defects, intellectual-property disputes, technology changes and potential shareholder dilution.
Important Facts to Verify
- Verify that the filing belongs to the requested issuer: the source document names Information Systems Associates, Inc., while the request metadata names DUOS Technologies Group, Inc.
- Verify the company’s ability to obtain financing or generate positive operating cash flow, given the going-concern qualification, zero year-end cash and substantial working-capital deficit.
- Verify the status and repayment, conversion or extension of the $68,750 convertible note that was technically in default after February 24, 2013.
- Verify the terms and collateral implications of the $165,000 intellectual-property-secured note and the February 2013 inter-creditor agreement.
- Assess customer concentration and the collectability of receivables, including the company’s continuing recourse obligations under its factoring arrangements.
- Evaluate dilution from convertible notes, warrants, options and any future debt or equity financing.
- Confirm whether the planned software enhancements were completed and generated the expected revenue or margin improvement after 2012.