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INFORMATION SYSTEMS ASSOCIATES, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) OUR COMPANY We were incorporated in Florida on May 31, 1994 to engage in the business of developing software for the financial and asset management industries. We are currently engaged and plan to continue in the sale of asset management software for corporate information technology data centers and networks. ISA is a "solution provider" positioned to develop and deliver comprehensive asset management systems large data center assets. In late June 2014, the Company announced the formation of a new wholly owned subsidiary, TrueVue 360, Inc. TrueVue 360's mission is to develop and market a new Software as a Service (SaaS) offering for IT asset management. TrueVue 360 will operate independently of the parent company, ISA, which will now focus exclusively on providing independent consulting and professional services through its partners to large data centers worldwide. ISA recently completed several engagements in this arena and received excellent ratings for quality and efficiency. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited financial statements included in this report. For the Three months ended June 30, 2014 compared to June 30, 2013 Revenues Revenues were $135,419 and $223,018 for the three months ended June 30, 2014 and 2013, respectively. The decrease in revenue for 2014 is primarily due to a decrease in professional services revenue and customer service revenue of $101,206. This amount was slightly offset by an increase in software and hardware sales of $13,607. Cost of Revenues Costs of revenues were $42,783 and $100,242 for the three months ended June 30, 2014 and 2013, respectively. The decrease in 2014 cost of sales is due to a decrease in professional services cost of $80,469. This amount was slightly offset by an increase in software and hardware costs of $23,010. Operating Expenses Operating expenses for the three months ended June 30, 2014 and 2013 were $177,355 and $244,819, respectfully. The decrease in operating expenses primarily resulted from decreases in both administrative and general expenses and salaries and employee benefits of $37,226 and $33,103, respectively. These amounts were slightly offset by an increase in professional fees of $2,865. Loss before other Income (Expense) The loss from operations for the three months ended, June 30, 2014 and 2013 was $84,719 and $122,043, respectfully. The decrease in loss from operations can be attributed to the decrease in overall revenue, costs of revenue and operating expenses of $87,598, $57,458 and $67,464, respectively. 14 -------------------------------------------------------------------------------- Other Income (Expense) Interest Expense Interest expense for the three months ended June 30, 2014 and 2013 was $40,325 and $40,236 respectfully. Factor Fees Factoring fees for the three months ending June 30, 2014 and 2013 were $0 and $6,895, respectfully. The decrease in factoring fees was due to the Company choosing not to factor any accounts receivables invoices for the three months ending June 30, 2014. Gain On June 11, 2014 the Company sold non-utilized office furniture to a private party and experienced a gain of $305 on the sale. Net Loss Net loss for the three month period ended June 30, 2014 and 2013 was $120,149 and $161,746, respectively. The approximate $41,000 decrease in net loss was primarily due to the decrease in gross profit of $30,140.The decrease in net loss was also attributed to a decrease in total operating expenses of $67,464. Net loss per common share was nil for the periods ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 compared to June 30, 2013 Revenues Revenues were $262,584 and $430,077 for the six months ended June 30, 2014 and 2013, respectively. The decrease in revenue for 2014 was attributed to a decrease in professional services revenue of $175,739. This was slightly offset by an increase in software and hardware sales of $8,246. Cost of Revenues Costs of revenues were $115,219 and $198,778 for the six months ended June 30, 2014 and 2013, respectively. The decrease in cost of sales for 2014 is primarily due to a decrease in professional services cost of $137,272. This was slightly offset by an increase in software and hardware costs of $53,713. Operating Expenses Operating expenses for the six months ended June 30, 2014 and 2013 were $446,439 and $454,525, respectfully. The decrease in operating expenses resulted primarily from decreases in salaries and employee benefits and professional fees of $12,676 and $6,248, respectively. These amounts were slightly offset by an increase in administrative and general expenses of $10,836. Loss before other Income (Expense) We had a loss from operations for the six months ended June 30, 2014 and 2013 of $299,074 and $223,226, respectfully. The increase in the loss resulted primarily from a $83,934 decrease in gross profit. Other Income (Expense) Interest Expense Interest expense for the six months ended June 30, 2014 and 2013 was $78,017 and $84,500 respectfully. The decrease in interest expense resulted from decrease of amortization of interest expense associated with original issue discount notes, the beneficial conversion feature and warrants issued associated with our convertible notes. 15 --------------------------------------------------------------------------------Factor Fees Factoring fees for the six months ending June 30, 2014 and 2013 were $0 and $12,648, respectfully. The decrease in factoring fees was due to the Company choosing not to factor any accounts receivables invoices for the six months ending June 30, 2014. Net Loss Net loss for the six month period ended June 30, 2014 and 2013 was $372,196 and $311,145 respectively. The approximate $60,000 increase in net loss was primarily due to the decrease in total revenue. Net loss per common share for the period ended June 30, 2014 and 2013 was nil and nil, respectively. Weighted average common shares outstanding for the six month period ended June 30, 2014 and 2013 were 110,010,281 shares and 68,798,501 shares, respectively. Liquidity and Capital Resources Cash flows used in operations were $225,030 for the six month period ending June 30, 2014 and cash flow used in operations was $112,305 for the six month period ending June 30, 2013. Cash flows used in operations during the period ended June 30, 2014 were attributable to a net loss of $372,196 and decreases in accounts receivable and deferred revenue of $26,696 and 17,714, respectively. This was offset by depreciation and amortization expense of $36,239 and an increase in accounts payable and accrued expenses $23,070. Cash flows provided by investing activities was $225 for the six months ending June 30, 2014 and cash flows provided by investing activities was $0 for the six months ending June 30, 2013. These cash flows were provided by net proceeds from the sale of property and equipment. Cash flows provided by financing activities was $225,424 for the six months ending June 30, 2014 and cash flows provided by financing was $113,935 for the six month period ending June 30, 2013. These cash flows were provided by net proceeds from related party and shareholder notes of $15,073 and the proceeds from the sale of Common Stock and Warrants of $210,000.This was offset by net payments to the line of credit of $350. As of August 6, 2014, we had cash on hand of $97. If we are unable to generate revenues sufficient to support our operations we will require additional debt or equity financing to meet the working capital needs of the Company. Management has arranged with a related party for working capital up to $300,000 to finance on-going projects. Our management will also be engaging in discussions with the capital markets to raise additional funds for expansion including software development and marketing. Cautionary Note Regarding Forward-Looking Statements This report on Form 10-Q contains forward-looking statements involving our future revenue, liquidity and the planned spin-out. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include the completion of our new software, the future acceptance of it by customers, and the condition of the capital markets for microcap companies. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors in our form 10-k for the year ended December 31, 2013. OFF BALANCE SHEET ARRANGEMENTS We have no-off balance sheet contractual arrangements, as that term is defined in Item 303(a)(4) of Regulation S-K. 16 --------------------------------------------------------------------------------Revenue Recognition The Company recognizes revenue in accordance with the Securities and Exchange Commission (the "SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition" and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605-25 which addresses Revenue Recognition for the software industry. The general criteria for revenue recognition under ASC 985-605 for our Company which sells software licenses which do not require any significant modification or customization is that revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. The Company generates revenue from three sources: (1) professional Services (consulting & auditing); (2) software licensing with optional hardware sales; and (3) customer service (training & maintenance/support). For sales arrangements that do not involve multiple elements: (1) Revenues for professional services, which are of short term duration, are recognized when services are completed. (2) Through the date of this report, software license sales have been one time sales of a perpetual license to use our software product and the customer also has the option to purchase third party manufactured handheld devices from us if they purchase our software license. Accordingly the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer. (3) Training sales are one time upfront short term training sessions and are recognized after the service has been performed. (4) Maintenance/support is an optional product sold to our software license customers under one year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term. Arrangements with customers may involve multiple elements of the above sources. Training and maintenance on software products will generally occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Each element is accounted for separately when each element has value to the customer on a stand-alone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price for the items when sold separately. Once the selling price is allocated, the revenue for each element is recognized using the general and specific criteria under GAAP as discussed above for elements sold in non-multiple element arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company sells it various services and software and hardware products at established prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of multiple element relative selling price allocation. All elements in multiple element arrangements with Company customers qualify as separate units of account for revenue recognition purposes. Accounts Receivable and Factoring Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on the account, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances. The Company accounts for the sale of our accounts receivable to a third party in accordance with ASC 860-10-40-5 "Transfers and Servicing". ASC 860-10 requires that several conditions be met in order to present the sale of accounts receivable net of related debt in the asset section of our balance sheet. Even though we have isolated the transferred (sold) assets and we have the legal right to transfer our assets (accounts receivable) we do not meet the third test of effective control since our accounts receivable sales agreement requires us to be liable in the event of default by one of our customers. Because we do not meet all three conditions, we do not qualify for sale treatment and our debt incurred with respect to the sale of our accounts receivable is presented as a liability on our balance sheet. 17 -------------------------------------------------------------------------------- Share-Based Compensation We follow the fair value recognition provisions of ASC 718, "Compensation - Stock Compensation". The fair values of share-based payments are estimated on the date of grant using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based on historical volatility of our common stock. We have elected to use the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of employee stock options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense is recognized on a straight-line basis over the requisite service period of the award. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in the accompanying financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible debt, valuation of stock-based awards, valuation of long-lived assets for impairment and the measurement and useful lives of property and equipment. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. |