UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Commission file number 333-14229
34990
Registrant’s telephone number, including area code: (772) 403-2992
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No £
TABLE OF CONTENTS
PART 1. FINANCIAL STATEMENTS
INFORMATION SYSTEMS ASSOCIATES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2011
NOTE 1 – NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Information Systems Associates, Inc. (Company) was incorporated under the laws of the State of Florida on May 31, 1994. The Company provides Mobile Data Center Management™ systems and turnkey data center management solutions to customers. Our products and services include data center asset/inventory management, data center management software and data center data collection. Utilizing a proprietary and patented technology, OSPI® (On Site Physical Inventory®), customers are able to manage data centers on a mobile basis, bringing data center management out of the office and into the data center.
In
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the U.S Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and Plan of Operation contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Recent Accounting Pronouncements
In February the FASB issued an amendment to Accounting Standards Codification 855, “Subsequent Events”. An entity is required to disclose the date through which subsequent events have been evaluated and the basis for that date. This created potential conflicts with issuers who also filed with the Securities and Exchange Commission. An entity that is defined as an “SEC filer” is not required to disclose the date through which subsequent events have been evaluated. This amendment is effective for interim periods ending after March 31, 2011.
The Company does not believe the amendment to Topic 855 will have a significant impact on the Company’s financial statements.
C
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior period financial statements presented to conform to 2010. Such reclassifications have no effect on reported income.
NOTE 2 – CASH AND CASH EQUIVALENTS
As of
March 31. 2011
December 31, 2010
NOTE 3 – PROPERTY AND EQUIPMENT
Depreciation and amortization expense for property and equipment was $2,116 and $ 3,728 for the three months ended March 31, 2011 and 2010, respectively.
NOTE 4 – INVESTMENT
On April 17, 2009, the Company entered into a strategic alliance agreement with Rubicon Software Group, lpc (a company registered under the laws of England and Wales). The Company will be Rubicon’s exclusive agent in the United States for reselling Rubicon’s software and services. In return, Rubicon will be a software development partner and provide consulting services to the Company.
The Company agreed to purchase 2,500,000 ordinary shares for a subscription price of £.02 (two pence) a share. The total cost of the subscription was $73,958. Within ninety days of the subscription date, the Company could purchase an additional 2,500,000 shares at the same subscription price in British pounds. The ninety day period has lapsed with the Company not purchasing any additional shares.
Also, the Company has the ability, over the next three years, of subscribing to a maximum 5,000,000 warrant shares. Each warranted share will be at a subscription price of £.05 (five pence) per share and will be issued in offerings of 100,000 shares. The number of subscripted shares will be based on gross revenue received by Rubicon Software Group, Plc.
On April 30, 2010 the Company entered into an agreement whereby 2,500,000 shares of stock held in Rubicon Software Group, lpc were sold to Rubicon. In remuneration for this stock the Company received $10,000 and was relieved from paying $16,611 worth of outstanding invoices. In connection with this transaction, the Company recorded a loss on sale of security of $47,347.
NOTE 5 – NET (LOSS) PER SHARE
Basic earnings per share (EPS) is computed by dividing net (loss) by the weighted average number of common shares outstanding. The dilutive EPS adds the dilutive effect of stock options and other stock equivalents. During the three months ended March 31, 2011, outstanding options to purchase an aggregate of 15,000,000 shares of stock were excluded from the computation of dilutive earnings per share because the inclusion would have been anti-dilutive.
NOTE 6 – INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2007. None of the tax years subject to examination are currently under examination by a tax authority and the Company has not received notice of the intent by any tax authority to commence an examination.
The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, the Company did not recognize any liability for unrecognized tax benefits, since the Company has concluded that all of its tax positions are highly certain of being upheld upon examination by federal or state tax authorities.
NOTE 7 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the periods ended March 31, 2011 and 2010 is summarized as follows:
NOTE 8 – OPERATING LEASE
The Company leases its Palm City, Florida facility. On March 2, 2009 the lease was renewed for $1,200 per month. The Company held an additional option to renew the lease “at the market price.” This renewed lease went into effect June 1, 2009. The rent expense as of March 31, 2011 and 2010 was $3,834 and $3,834, respectively.
NOTE 9 – NOTE PAYABLE – LINE OF CREDIT
The Company has a line of credit with Wachovia Bank N.A. The line of credit provides for borrowings up to $40,000. The balance as of March 31, 2011 and December 31, 2010 was $24,727 and $36,141, respectively. The interest rate is the Prime Rate plus 3%. The President of the Company is a personal guarantor on the line of credit.
NOTE 10 – NOTE PAYABLE - INSURANCE
During the three months ended March 31, 2011, the Company incurred short term financings of $10,242 for the purchase of insurance. The interest rate on the financings were 6.96% and will be repaid November 2011. The balance as of March 31, 2011 was $ 7,514.
On August 31, 2010, the Company incurred short term financing for the purchase of insurance. The note was for $5,720. The interest rate on the debt is 4.96% and will be repaid May 31, 2011. The balance as of March 31, 2011 was $ 1,289.
NOTE 11 – NOTE PAYABLE – SHAREHOLDER
In February, 2010, the Company obtained financing from a shareholder for working capital purposes. The amount of $32,500 will be repaid in eighteen months. Interest accrues at a rate of 6% per annum. There is no penalty for early payment. On August 12, 2010 the shareholder was repaid $7,500. The remainder was repaid in December 2010.
NOTE 12 – COMMON STOCK
In January 2011, the Company issued 50,000 shares of common stock in exchange for $5,000 in a private placement with an accredited investor.
In January 2011, the Company issued 3,000,000 shares of common stock in exchange for $150,000 in a private placement with its new director and Chief Operating Officer. In addition, the Chief Operating Officer was granted 500,000 shares of common stock in lieu of salary for the three months ended March 31, 2011.
NOTE 13 – SHARE BASED PAYMENTS FOR SERVICES
In May 2010, the Company issued 200,000 shares of restricted common stock to two directors. The stock will vest in May 2011. Shares were valued at the current market price of $.20 per share.
On May 1, 2010 the Company entered into an agreement to receive website design and development, internet marketing and search engine optimization for one year. The consultants received 100,000 shares of company common stock. Shares were valued at a current market price of $.20 per share.
On April 29, 2010 the Company entered into an agreement to receive assistance in the development of new data center management technologies. The consultants will also investigate a variety of associated topics regarding data center management. This agreement will run for one year. The consultants received 1,000,000 shares of company common stock. Shares were valued at a current market price of $.20 per share.
On April 15, 2010 the Company entered into an agreement to receive marketing strategies, digital media and social media strategies to expand the Company’s investor base and improve shareholder communication. The consultants received 400,000 shares of company common stock. Shares were valued at the then current market price of $.15 per share.
On May 25, 2010 a notice of non renewal, was sent to the one consulting company that continued to provide services from August 1, 2009 to July 31, 2010 at an agreed to rate of $262,500. The Company issued 656,200 shares of common stock for the service provided.
The following is a summary of the status of options outstanding as of March 31, 2011 and 2010 respectively:
NOTE 14 – CONCENTRATIONS
Two major customers accounted for 68.8% and 17.5% of revenue for the three months ended March 31, 2011.
As of March 31, 2011, the two major customers accounted for 67.7% and 30.2 % of accounts receivable.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein the terms “we”, “us”, “our”, the “Registrant,” “ISA” and the “Company” means, Information Systems Associates, Inc., a Florida corporation.
GENERAL DESCRIPTION OF BUSINESS
BUSINESS OVERVIEW
Information Systems Associates, Inc. (Company) was incorporated under the laws of the State of Florida on May 31, 1994. The Company is a leading provider of Mobile Data Center Management™ systems and turnkey data center management solutions. The suite of products and services include data center asset/inventory management, data center management software and data center data collection. Utilizing a proprietary and patented technology, OSPI® (On Site Physical Inventory®), customers manage data centers on a mobile basis, bringing data center management out of the office and into the data. Our solutions can reduce sourcing, procurement and tracking costs, improve tracking and monitoring of asset performance and reduce operational downtime.
In 1995, we became a subcontractor of Avocent Huntsville Corp. (formally Aperture Technologies Inc At that time, Avocent’s Network Management tools (“System”), was one of the leading solutions in it field. For more than five years, Avocent Huntsville Corp. (formerly Aperture Technologies Inc.) has provided enterprise asset management solutions to customers in the United States, Europe and Asia and Pacific Rim. During this same timeframe, we have offered Advocent’s enterprise asset management solutions to customers and prospects in North America.
The typical Value Added Reseller Agreement allows the vendor’s partner/subcontractor (in this case ISA) the ability to offer to its client’s and prospects a Commercial Off the Shelf software solution to address a particular business problem. ISA’s customers are primarily working data centers, network management departments and corporate real estate departments. We help these customers to identify and then implement a software solution which addresses their needs based. Once the client chooses a software solution, ISA assists the client in implementing the software.
In 2007, ISA developed and began marketing its own software product, ONSITE PHYSICAL INVENTORY™ (OSPI).
RELATED SERVICES
In connection with our software offerings, we provide the following services to our customers:
Consulting
A significant number of our customers request our advice regarding their business and technical processes, often in conjunction with a scoping exercise conducted both before and after the execution of a contract. This advice can relate to development or streamline assorted business processes, such as sourcing or procurement activities, assisting in the development of technical specifications, and recommendations regarding internal workflow activities.
Customization and Implementation
Based generally upon the up-front scoping activities, we are able to customize our solutions as required to meet the customer’s particular needs. This process can vary in length depending on the degree of customization, the resources applied by the customer and the customer’s business requirements. We work closely with our customers to ensure that features and functionality meet their expectations. We also provide the professional services work required for the implementation of our customer solutions, including loading of data, identification of business processes, and integration to other systems applications.
Training
Upon completion of implementation (and often during implementation), we train customer personnel to utilize our Solutions through our administrative tools. Training can be conducted in one-on-one or group situations. We also conduct “train the trainer” sessions.
Maintenance and Support
We provide regular software upgrades and ongoing support to our customers.
We have been providing consulting, customization and implementation, training, maintenance and support services to our customers since 1994.
CURRENT DEVELOPMENTS
In January, 2011, the Company hired a new Chief Operating Officer who has been charged with identifying, and overseeing improvements and enhancements to our OSPI software. This person will also direct the development and implementation of the Company’s marketing plan and is responsible for building and managing the Company’s sales force. During the three months ended March 31, 2011, the Company has prepared a software requirements analysis for the new and enhanced version of OSPI, and has begun building the Company’s sales network.
FORWARD LOOKING STATEMENTS
Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by “Management’s Discussion and Analysis” and the Notes to Financial Statements, are “forward-looking statements”, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “”Exchange Act”), that are subject to certain events, risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”, “Optimistic”, “intend”’ “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements.
These forward-looking statements include statements include statements of management’s plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements.
Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements.
CRITICAL ACCOUNTING POLICIES
Revenue recognition
We recognize revenue in accordance with ASC 605-10 “Revenue Recognition” and ASC 605-25 “Revenue Arrangements with Multiple Deliverables”.
Consulting services and training revenues are accounted for separately from subscription and support revenues when these services have value to the customer on a standalone basis and there is objective and reliable evidence of fair value of each deliverable. When accounted for separately, revenues are achieved and accepted by the customer for fixed price contracts. The majority of our consulting service contracts are on a time and material basis. Training revenues are recognized after the services are performed. For revenue arrangements with multiple deliverables, we allocate the total customer arrangement to the separate units of accounting based on their relative fair values, as determined by the price of the undelivered items when sold separately.
In determining whether the consulting services can be accounted for separately from subscription and support revenues, we consider the following factors for each consulting agreement: availability of the consulting services from other vendors, whether objective and reliable evidence for fair value exists for the undelivered elements, the nature of the consulting services, the timing of when the consulting contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customer’s satisfaction with the consulting work. If a consulting arrangement does not qualify for separate accounting, we recognize the consulting revenue ratably over the remaining term of the subscription contract. Additionally, in these situations we defer the direct costs of the consulting arrangement and amortize these costs over the same time period as the consulting revenue is recognized. We did not have any revenue arrangements with multiple deliverables for the period ending September 30, 2010.
Property, Plant, and Equipment
Property and equipment is stated at cost. Depreciation is provided by the straight-line method over the estimated economic life of the property and equipment (three to ten years). When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the statement of operations.
We recognize an impairment loss on property and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges), indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation, and when the carrying amount of the asset cannot be realized through sale. Measurement of the impairment loss is based on the fair value of the assets.
Software Development Costs
The Company accounts for costs incurred to develop computer software for internal use in accordance with FASB Accounting Standards Codification 350-40 “Internal-Use Software”. As required by ASC 350-40, we capitalize the costs incurred during the application development state, which include costs to design the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software are expensed as incurred. Capitalized development costs are amortized over the estimated useful life. Costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life.
After the development of the internal-use “ON SITE PHYSICAL INVENTORY®” software (OSPI®) was complete, we decided to market the software. Proceeds from the licenses of the computer software, net of direct incremental costs of marketing, such as commissions, software reproduction cost, warranty and service obligations, and installation cost, are applied against the carrying cost of that software. No profit will be recognized until aggregate net proceeds from licenses and amortization have reduced the carrying amount of the software to zero. Subsequent proceeds will be recognized in revenue as earned.
On December 1, 2009, the Company released Version 2 of the “ON SITE PHYSICAL INVENTORY®” software (OSPI®) for sale in the marketplace. The Company accounts for internally produced software with FASB Accounting Standard Codification 985-20 “Cost of Software To Be Sold, Leased, or Otherwise Marketed”. Costs were capitalized when the second version was established as technically feasible and will be written off on a straight line method over the estimated useful life.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
The following discussion should be read in conjunction with the financial statements include in this report and is qualified in its entirety by the foregoing.
Revenues
Gross revenues were $127,254 and $256,154 for the three months ended March 31, 2011 and 2010, respectively. The increase in 2011 revenue is due primarily to a decrease in consulting service revenue and the related travel expense revenue of $111,000 and a decrease of $29,000 in OSPI software revenue. We recognize professional services revenue, which includes installation, training, consulting and engineering services, upon delivery of the services.
Operating Expenses
Operating expenses for the three months ended March 31, 2011 were $386,788 as compared to $466,305 for the three months ended March 31, 2010. The decrease resulted from declines in general and administrative expenses of $83,000 and professional fees of $70,000 which were primarily related to lower travel expenses and consulting expenses due to the decline in consulting service revenue. These decreases were partially offset by an increase in salaries and employee benefits which resulted for the addition of the new COO, software engineer and product salesman.
Loss from Operations
We had a loss from operations of $276,564 for the three months ended March 31, 2011 as compared to a loss of $207,910 for the three months ended March 31, 2010. The increase in the loss resulted from the sales decline which was partially offset by a decrease in operating expenses as described above.
Interest Expense
Interest expense was $1,593 for the three months ended March 31, 2011 as compared to interest of $1,741 for the three months ended March 31, 2010.
Net Loss
Net loss for the three months ended March 31, 2011 was $278,157 as compared with a net loss of $209,621 for the three months ended March 31, 2010. Net loss per common share was $0.01 for the three months ended March 31, 2011 and 2010. Weighted average common shares outstanding as of March 31, 2011 and 2010 were 25,539,973 and 18,266,084, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operations were $176,025 and $64,262, respectively, during the three months ended March 31, 2011 and 2010. Cash flows used in operations during the three months ended March 31, 2011 were primarily attributable to a net loss of $278,157 which was partially offset amortization of prepaid consulting of $83,875, the issuance of common stock for services of $25,000 and the decrease in accounts receivable of of $18,893 less the reduction of accounts payable of of $28,756.
Cash flows used by investing activities were $3,964 and $666 for the three months ended March 31, 2011and 2010, respectively, and resulted from investments for the purchase of equipment and furniture.
Cash flows provided by financing activities were $138,943 and $49,671, respectively, for the three months ended March 31, 2011 and 2010. Cash flows provided by financing activities for the three months ended March 31, 2011 were attributable to the proceeds of $155,000 from the sale of common stock in private placements. These proceeds were used to repay insurance financings of $4,643 and to make payments on the line of credit of $11,414. Cash flows provided by financing activities for the three months ended March 31, 2010 resulted from additional draws against the Company’s line of credit of $19,136, plus the proceeds from a shareholder loan of $32,500.
The Company had cash on hand of $29,280 and net working capital of $66,513 as of March 31, 2011. If the Company is unable to generate revenues sufficient to support the operations of the Company, the Company the will require additional debt or equity financing to meet the working capital needs of the Company.
Our current level of operations would require additional capital to sustain operations through 2011. Modifications to our business plans may require additional capital for us to operate. Management has identified the need for additional financing of up to $1million in order to fund the programming of the software enhancements and the market rollout of the new software product and is currently exploring various equity and debt financing alternatives. There can no assurance that these efforts will be successful. No significant amount of our trade payables has been unpaid within the stated trade term. We are not subject to any unsatisfied judgments, liens or settlement obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information to be reported under this item is not required of smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Changes in Internal Control Over Financial Reporting
Our Principal Executive Officer and Principal Financial Officer have determined that, during the period covered by this quarterly report, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. They have also concluded that there were no significant changes in our internal controls after the date of the evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings arising in the ordinary course of our business. On April 24, 2009, Phuture World, Inc. filed a complaint in the case captioned Phuture World, Inc. v. Information Systems Associates, Inc. and Joseph Coschera, Case No. 562009 CA 3086, 19th Judicial Circuit in and for St. Lucie County Florida. Phuture World originally alleged that the Company and its President breached the terms of a certain software development contract, and it sought damages in excess of $15,000. The plaintiff dropped all claims against the President and eliminated some of its other claims against the Company. The Company terminated the software contract at issue in the case prior to the filing of the case, and it no longer uses the services of Phuture World. The Company is contesting this lawsuit and believes that it has defenses to the claims made by Phuture World. The Company is vigorously defending itself and has filed and is pursuing damage claims of its own against Phuture World for Phuture World's failure to provide the software required under the contract between Phuture World and the Company. The Company believes that the outcome of this lawsuit will not have a material adverse effect on our financial condition, cash flows or results of operations.
ITEM 1A. RISK FACTORS
Information regarding risk factors appears in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the captions “General Description of Business” and “Cautionary Note Regarding Forward-Looking Statements” contained in this Quarterly Report on Form 10-Q and in “Item 1A. RISK FACTORS” of our 2009 Annual Report on Form 10-K. There have been no material changes from the risk factors previously disclosed in our 2009 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Description
31.1
Certification of Chief Executive Officer
31.2
Certification of Chief Financial Officer
32.1
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Information Systems Associates, Inc.
Joseph P. Coschera
Chief Executive Officer
Michael R. Hull
Chief Financial Officer