Business Context and Reporting Period
The filing is a Form 10-Q for the quarter ended March 31, 2014. Although the request identifies DUOS TECHNOLOGIES GROUP, INC., the filing names the registrant as Information Systems Associates, Inc. The company provides mobile data center management software, hardware, asset-management systems, and related data collection and professional services, including its OSPI technology.
The financial statements are unaudited and prepared under U.S. GAAP for interim reporting. Management states that quarterly results are not necessarily indicative of full-year results.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $127,165 | $208,862 | Down $81,697, approximately 39% |
| Gross profit | $54,729 | $110,326 | Down $55,597 |
| Gross margin | Approximately 43.0% | Approximately 52.8% | Down approximately 9.8 percentage points |
| Operating expenses | $269,084 | $209,706 | Up $59,378, approximately 28% |
| Loss from operations | $(214,355) | $(99,380) | Loss increased $114,975 |
| Interest expense | $37,692 | $44,264 | Down $6,572 |
| Net loss | $(252,047) | $(149,399) | Loss increased $102,648 |
| Net loss margin | Approximately (198.2%) | Approximately (71.5%) | Significantly worsened |
| Cash used in operating activities | $(207,954) | $(67,702) | Use increased $140,252 |
Software and hardware sales were $66,724, compared with $72,085 in the prior-year quarter. Services revenue was $60,441, compared with $136,777. Cost of revenue declined to $72,436 from $98,536, reflecting lower professional services costs, partially offset by higher software and hardware costs.
At March 31, 2014, cash and cash equivalents were $653, accounts receivable were $54,590 net of a $5,490 allowance, and total assets were $83,013. Total current liabilities were $1,038,993, producing a reported working capital deficit of $968,832. Stockholders' deficit was $955,980 and accumulated deficit was $5,604,333.
Current obligations included $348,661 of related-party notes, $50,000 owed to a stockholder, $66,000 of related-party convertible notes, $145,783 of stockholder OID notes, $45,000 of third-party notes, $39,847 under a bank line of credit, and $37,890 of accrued interest. The company had no investing cash flows during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue decreased approximately 39%, primarily because services revenue declined by $76,336 and software and hardware sales declined by $5,361.
- Gross profit declined approximately 50%, and gross margin fell from approximately 52.8% to 43.0%.
- Administrative and general expense increased by $48,064, while salaries and employee benefits increased by $20,427. Professional fees declined by $9,113.
- Operating loss more than doubled, and net loss increased by approximately $102,000.
- Operating cash burn increased from $67,702 to $207,954, largely reflecting the higher net loss and a $27,894 increase in accounts receivable.
- Financing activities provided $208,441, including $190,000 from sales of common stock and warrants and $61,000 of related-party note proceeds, partially offset by $42,427 of related-party note repayments.
- The weighted-average common shares outstanding increased to 106,060,244 from 30,599,417. Shares issued during the quarter included approximately 17.5 million Class A shares for cash, 4.45 million shares from cashless warrant exercises, and additional shares issued in connection with prior subscriptions.
- The company granted 3.15 million stock options during the quarter and had 28.86 million warrants outstanding at March 31, 2014, creating potential future dilution.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects to release a new software product during 2014 and believes that recurring revenue from the product could narrow and ultimately eliminate ongoing losses. Management also plans to focus on expanding software and customer services and is seeking additional capital for software development, marketing, and general working capital.
The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Continuation depends on generating sufficient revenue, achieving profitability, obtaining additional financing, maintaining related-party working capital support, and extending or otherwise resolving outstanding obligations. Management had arranged access to up to $300,000 of related-party working capital, but the filing does not establish that this support is sufficient or committed for all future needs.
At May 14, 2014, cash on hand was only $1,031. Two customers accounted for 90% of first-quarter revenue, and one customer represented 100% of accounts receivable at March 31, 2014, creating significant concentration risk.
A $66,000 related-party convertible note was technically in default, although no written notice had been received. Management was discussing conversion or an extension. The $45,000 third-party note was subsequently extended for 90 days on May 7, 2014.
Subsequent events included a proposed $150,000 investment for 12.5 million restricted shares and a proposed reorganization and software subsidiary spin-out. As of the report, the $150,000 had not been received and the transactions remained subject to further decisions and execution.
Management concluded that disclosure controls and procedures were ineffective as of March 31, 2014. Material weaknesses remained in segregation of duties and communication of information required for reporting. The company also disclosed that executive-management and staffing changes materially affected, or were reasonably likely to materially affect, internal control over financial reporting.
The company reported no material pending legal proceedings and no off-balance-sheet arrangements. The office lease was scheduled to expire in 2014, with renewal terms under negotiation.
Important Facts for Investors to Verify
- Confirm the identity of the registrant: the supplied filing is for Information Systems Associates, Inc., not DUOS TECHNOLOGIES GROUP, INC.
- Verify the company’s ability to continue as a going concern given $653 of quarter-end cash, $207,954 of quarterly operating cash burn, and a $968,832 working capital deficit.
- Assess the collectability and concentration of the $54,590 accounts receivable balance, including the 100% concentration with one customer.
- Review the terms, maturity status, default provisions, and related-party relationships associated with the company’s substantial short-term debt.
- Determine whether the planned software release can generate recurring revenue and whether additional financing can be secured on acceptable terms.
- Evaluate dilution from the approximately 28.86 million outstanding warrants, 4.15 million outstanding options, and continued equity financing.
- Confirm the status and funding of the proposed $150,000 investment, planned reorganization, software subsidiary, and potential spin-out.
- Review the disclosed ineffective controls and material weaknesses, including the effect of staffing and executive-management changes on financial reporting reliability.