Business Context and Reporting Period
Company: Information Systems Associates, Inc. (ISA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: ISA provides asset management solutions, including software system design and consulting for Computer Aided Facilities Management (CAFM). The company operates as a Value Added Reseller (VAR) for third-party software (e.g., Aperture Technologies) and develops proprietary software, specifically "On Site Physical Inventory" (OSPI). The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Revenue | $491,640 | $335,332 |
| Gross Profit | $477,200 | $300,287 |
| Gross Margin | 97.1% | 89.5% |
| Net Loss | $(443,591) | $(510,896) |
| Operating Expenses | $904,667 | $812,008 |
| Cash and Cash Equivalents (End of Period) | $1,396 | $22,537 |
| Total Assets | $394,209 | $488,892 |
| Total Liabilities | $200,018 | $113,316 |
| Working Capital | $136,639 | $140,729 |
Note: Working Capital calculated as Total Current Assets ($304,157) minus Total Current Liabilities ($167,518).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased by 46.6% ($156,308) compared to the prior six-month period, driven primarily by increased sales of professional services, maintenance contracts, and time-and-materials arrangements to two new customers.
- Expense Increase: Operating expenses rose by $92,659 (11.4%). The increase was largely due to Administrative and General expenses, specifically a $72,996 increase in Travel and Entertainment and an $81,173 increase in Software Amortization.
- Loss Reduction: Net loss decreased by $67,305 (13.2%) compared to the prior period, despite higher operating expenses, due to significant revenue growth.
- Liquidity Decline: Cash and cash equivalents dropped significantly from $21,047 to $1,396. Net cash used in operating activities was $77,836.
- Debt Increase: Total liabilities increased by $86,702. This includes a new $32,500 long-term note payable from a shareholder and an increase in the line of credit balance from $20,055 to $39,682.
- Investment Sale: The company sold its investment in Rubicon Software Group, plc, resulting in a recorded loss of $16,154 and proceeds of $10,000.
Guidance, Outlook, and Risks
- Liquidity Risk: Management explicitly states that current cash levels ($1,396) are insufficient to sustain operations through the end of 2010 without additional capital. The company may need to raise capital to fund operations, marketing, or product expansion.
- Customer Concentration: One major customer accounted for 96% of revenue ($469,250) for the six months ended June 30, 2010. These customers also represented 83% of accounts receivable.
- Legal Proceedings: The company is defending a lawsuit filed by Phuture World, Inc., alleging breach of a software development contract with damages sought in excess of $15,000. Management believes the outcome will not have a material adverse effect.
- Forward-Looking Statements: The filing contains standard disclaimers that actual results may differ from expectations due to market acceptance, economic conditions, and the company's ability to secure additional funding.
- Non-Cash Transactions: A significant portion of expenses ($202,854) was offset by the issuance of common stock for services, reducing immediate cash outflow but increasing share count.
Investor Verification Checklist
- Cash Runway: Verify the company's immediate plan to secure working capital given the cash balance of only $1,396 and the explicit statement that current operations cannot be sustained through 2010.
- Customer Dependency: Assess the risk associated with 96% of revenue coming from a single customer and 83% of receivables being owed by that same customer.
- Stock Dilution: Review the impact of issuing over 1.5 million shares for services during the period (Note 14) on existing shareholder equity.
- Debt Covenants: Confirm the terms of the $32,500 shareholder note and the $39,682 line of credit, including interest rates and repayment schedules.
- Revenue Quality: Determine if the revenue growth is recurring or one-time project-based, given the heavy reliance on professional services.