SEC Form 10-Q Summary
Registrant: Information Systems Associates, Inc. (the filing predates its post-merger identity as Duos Technologies Group, Inc.). Period: Three months ended March 31, 2015; unaudited. The company developed IT asset-management software and related professional services. On April 1, 2015, Duos Technologies, Inc. became a wholly owned subsidiary through a reverse triangular merger, treated as a reverse merger for accounting purposes.
Financial Results and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $5,071 | $127,165 | Down $122,094 |
| Gross profit | $5,071 | $54,729 | Down $49,658 |
| Operating expenses | $394,030 | $269,084 | Up $124,946 |
| Loss from operations | $(388,959) | $(214,355) | Higher loss |
| Interest expense | $145,641 | $37,692 | Up $107,949 |
| Net loss | $(534,100) | $(252,047) | Higher loss of $282,053 |
| Basic and diluted loss per share | $(1.31) | $(1.65) | Improved on a per-share basis |
| Cash used in operating activities | $(61,158) | $(207,954) | Improved by $146,796 |
Revenue consisted entirely of $5,071 of services in Q1 2015; software and hardware sales were zero. Cost of revenue was zero, resulting in a reported 100% gross margin, although the very low revenue base makes the margin not economically meaningful. Operating margin was approximately negative 7,671%.
Cash and cash equivalents declined from $3,478 at December 31, 2014 to $1,346 at March 31, 2015. Total current liabilities were $1.186 million, including accounts payable of $216,460, accrued payroll of $184,263, related-party notes of $310,130, convertible and other notes, a line of credit of $40,251, and accrued interest of $35,276. Stockholders’ deficit was $1.185 million, and accumulated deficit was $6.622 million. The balance sheet reported no accounts receivable or property and equipment at March 31, compared with $39,289 of receivables and $1,618 of property and equipment at year-end.
Material Changes Versus the Prior Period
- Revenue fell approximately 96% because the company wound down software operations before the Duos merger, terminated a third-party development effort, and did not receive certain professional-services work from its principal customer.
- Operating expenses increased approximately 46%, primarily from merger-related professional fees and higher administrative costs, partly offset by lower salaries and employee benefits.
- Interest expense increased substantially because of non-cash debt-discount and note-premium amortization and other financing costs.
- Operating cash usage improved, but primarily because of non-cash expenses and increases in accrued liabilities; the company remained dependent on financing.
- The company issued shares for services, debt settlements, and exchanges of warrants and options. It also converted portions of convertible debt into common stock.
- A 1-for-200 reverse stock split became effective April 9, 2015. Following the merger, the company reported 62.5 million common shares outstanding on a post-split basis.
Liquidity, Debt, Outlook, and Risks
Management disclosed substantial doubt about the company’s ability to continue as a going concern. The company stated that it needed additional capital and/or sufficient revenue to fund operations, integrate Duos, and address approximately $2.109 million of loans due as of May 20, 2015. Management reported $136,115 of cash on hand as of May 20 and expected to collect approximately $1 million of accounts receivable by June 30, but stated that delayed collections or insufficient revenue would require additional debt or equity financing.
Management indicated that existing resources and anticipated revenue could support operations through June 30, 2015 only if the company generated approximately $1 million of revenue by that date and deferred outstanding loans. No financing commitments were in place, and management cautioned that additional financing might be unavailable or dilutive. Potential responses included reducing cash expenditures, laying off personnel, or suspending or deferring activities. The filing provides no formal full-year revenue or earnings guidance.
Key unusual items included $50,000 of note-premium amortization, $47,225 of loss on debt extinguishment, and $236,000 of shares issued for services reflected in operating cash-flow adjustments. The company also had high-cost and past-due or extended obligations, including related-party debt, stockholder debt, a secured note tied to intellectual property, and a third-party financing arrangement.
Legal matters included a claim by CW Electric concerning a Duos promissory note, with the company reporting a claimed amount of approximately $1.412 million and a stated current principal and accrued interest amount of approximately $629,117 through December 31, 2014. FacilityTeam also asserted claims relating to cancelled software-development work and sought approximately $200,000; the company disputed the claims and filed a counterclaim. Management stated that it believed both matters lacked merit.
Investor Verification Checklist
- Verify the legal name, post-merger accounting presentation, reverse-merger treatment, and effect of the 1-for-200 reverse stock split.
- Confirm the company’s ability to collect the expected approximately $1 million of receivables and reconcile that expectation with the March 31 balance sheet showing no accounts receivable.
- Assess near-term maturities, defaults, extensions, related-party obligations, and the approximately $2.109 million of loans identified as due after quarter-end.
- Determine whether additional debt or equity financing was obtained and quantify the resulting dilution, conversion terms, and warrant or option issuances.
- Evaluate the going-concern uncertainty and whether the merged Duos operations generated sufficient revenue and cash flow to replace the discontinued ISA business.
- Review the CW Electric and FacilityTeam proceedings, including potential exposure, settlement status, and any required accruals or contingencies.