SEC Form 10-K Summary
Filing identity: The source text identifies the registrant as Information Systems Associates, Inc. (ISA), not DUOS Technologies Group, Inc. Investors should verify that the filing corresponds to the intended issuer. The report covers the fiscal year ended December 31, 2013, with comparative 2012 results, and was filed April 15, 2014.
Business Context and Reporting Period
ISA develops and markets information-technology asset-management software and professional services for enterprise data centers. Its offerings include software licensing, hardware, consulting, implementation, data collection and auditing, training, maintenance and support. The company historically operated primarily as a professional-services business but planned to shift toward recurring software and software-as-a-service revenue.
- ISA was developing a new IT asset-management system targeted for release in the second quarter of 2014, with a cloud-based or SaaS offering anticipated beginning in the third quarter of 2014.
- The company entered into a multi-year software-development arrangement and term sheet with FacilityTeam, including a potential minority investment of up to 15%; the investment had not closed at year-end.
- As of March 2014, the company reported four full-time employees.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $607,596 | $617,188 | Down $9,592, or 1.6% |
| Software and hardware sales | $74,814 | $112,535 | Down 33.5% |
| Services revenue | $532,782 | $504,653 | Up 5.6% |
| Gross profit | $331,351 | $228,043 | Up 45.3% |
| Gross margin | 54.5% | 36.9% | Up 17.6 percentage points |
| Operating loss | $454,435 | $576,727 | Improved $122,292 |
| Operating margin | (74.8%) | (93.4%) | Improved |
| Net loss | $648,567 | $864,995 | Improved $216,428 |
| Net loss per share | $0.01 | $0.01 | Unchanged as reported |
| Cash used in operating activities | $160,834 | $169,750 | Improved $8,916 |
Interest expense declined to $191,677 from $273,847, while factoring fees increased to $25,667 from $14,421. Other income included $9,231 of finance fees and a $13,981 gain on settlement. The company reported no investing cash flows and $161,000 of financing cash inflows in 2013.
At December 31, 2013, cash was $166, accounts receivable net was $26,696, total assets were $70,935, total liabilities were $1,003,486, and stockholders’ deficit was $932,551. The working-capital deficit was $946,832 and accumulated deficit was $5,352,286. Current liabilities included $330,087 of related-party notes, $192,684 of shareholder notes, $66,000 of convertible related-party debt, $45,000 of third-party notes and $39,979 drawn under a line of credit.
As of March 31, 2014, cash on hand was only $653. Management stated that a related party had arranged working capital of up to $300,000 and that additional capital-market financing would be pursued.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly flat, but the mix shifted toward services: services revenue increased $28,129 while software and hardware revenue declined $37,721.
- Cost of revenue fell $112,900, driven by lower professional-services and software-licensing costs, producing a substantial gross-margin improvement.
- Operating expenses declined $18,984 to $785,786. Lower salaries, benefits, insurance, rent and depreciation were partly offset by higher marketing, general and administrative, research and development, and professional-fee expenses.
- Net loss narrowed by approximately 25% primarily because of higher gross profit and lower interest expense.
- Factoring activity increased, with $479,248 of receivables factored during 2013 versus $334,641 in 2012. Management intended to reduce or eliminate factoring because of its cost and recourse features.
- The company raised capital through equity and warrants, including $160,000 invested by two accredited investors for 13,332,500 shares and 9,999,375 warrants. The financing resulted in additional dilution risk.
- In August 2013, the company recapitalized into non-voting Class A and voting Class B common stock and declared a two-for-one stock dividend for specified Class A holders.
Outlook, Risks, Contingencies and Unusual Items
There is no formal quantitative revenue or earnings guidance. Management expected the new software product and SaaS strategy to increase recurring revenue, narrow losses and eventually support profitability, but these expectations are forward-looking and dependent on successful product development, market adoption and additional financing.
- The independent auditor included a going-concern emphasis, citing the 2013 net loss, operating cash deficit, working-capital deficit, stockholders’ deficit and accumulated deficit. Management stated that available working capital could sustain operations only through approximately June 30, 2014 without improved cash flow or new financing.
- A $66,000 related-party convertible note was due August 15, 2013 and was technically in default at the report date. The company was discussing conversion or an extension and had not received written notice of default.
- The company relied on related-party loans, shareholder financing, deferred or forgiven executive compensation, supplier payment extensions and equity issuance to fund operations.
- The company’s customer base and receivables were concentrated. One customer represented 49% of 2013 revenue and 68% of year-end accounts receivable; a second represented 18% of revenue and 22% of receivables.
- Competition, long sales and collection cycles, product-development delays, software defects, technology changes, intellectual-property challenges and reduced customer IT spending could materially affect results.
- Outstanding securities included 29,859,375 warrants and 1,000,000 options at year-end, in addition to convertible debt potentially convertible into approximately 3,959,921 shares, creating substantial potential dilution.
- The common stock traded over the counter at approximately $0.01 to $0.02 during 2013 and was subject to penny-stock liquidity risks. No dividends were expected.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2013, with no material changes during the year.
Investor Verification Checklist
- Confirm the issuer and ticker because the supplied metadata names DUOS Technologies Group, Inc., while the filing identifies Information Systems Associates, Inc., ticker IOSA.
- Verify the company’s post-filing financing, cash balance, debt maturities, related-party borrowings and ability to continue as a going concern.
- Determine whether the new IT asset-management product was released successfully and generated recurring SaaS revenue.
- Review customer concentration, contract backlog, collection history and the company’s progress in eliminating costly factoring.
- Reconcile the reported share count with the Class A/Class B recapitalization, stock dividend, warrants, options and convertible instruments.
- Monitor the status of the defaulted $66,000 convertible related-party note and the proposed FacilityTeam investment.