Duos Technologies Group, Inc. — Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
Duos Technologies Group, Inc. develops artificial-intelligence-driven security and intelligent technology systems through its subsidiary, Duos Technologies, Inc. Its platforms serve transportation, petrochemical, utilities, healthcare, and other markets. The company also operates an IT asset-management services division. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparison to the three months ended March 31, 2016.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1.036 million | $1.004 million | 3% increase |
| Gross profit | $404,342 | $517,826 | 22% decrease |
| Gross margin | 39.0% | 51.6% | Down 12.6 percentage points |
| Operating loss | $855,765 | $767,382 | 12% larger loss |
| Net loss | $2.295 million | $838,381 | Loss increased $1.456 million |
| Net loss applicable to common stock | $2.301 million | $838,381 | Includes $5,920 preferred dividend |
| Basic and diluted loss per share | $1.21 loss | $0.45 loss | Per-share loss increased |
| Cash used in operating activities | $675,526 | $91,245 | Higher cash burn |
Revenue consisted of project revenue of $360,487, maintenance and technical support revenue of $315,327, and IT asset-management services revenue of $359,916. Project revenue and IT asset-management revenue increased, while maintenance and technical-support revenue declined 48% following the cancellation of a legacy customer contract.
Q1 2017 operating expenses were $1.260 million, broadly comparable to $1.285 million in the prior-year quarter. The operating loss reflected lower project margins and higher professional, general and administrative, and research and development costs. Interest expense rose to $921,314 from $72,305, primarily from amortization of debt discounts and warrant-related financing costs. The company also recorded a $582,388 loss from the change in fair value of warrant derivative liabilities and a $64,647 gain on debt settlement.
At March 31, 2017, cash was $53,185, compared with $174,376 at December 31, 2016. Total assets were $1.049 million. Current liabilities were $7.232 million versus current assets of $927,315, producing a working-capital deficit of $6.305 million. Stockholders’ deficit was $7.809 million, accumulated deficit was $25.819 million, and total liabilities were $8.550 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but gross profit declined because of aggressive pricing and unanticipated travel and implementation costs on an international project.
- Maintenance and technical-support revenue decreased substantially after one legacy customer cancelled its contract.
- Net loss increased sharply, principally because of approximately $1.504 million of non-cash debt-discount and warrant-related expenses.
- Operating cash use increased to $675,526 from $91,245.
- Debt financing increased materially. Notes payable, net of discounts, totaled $2.071 million at March 31, 2017, compared with $1.294 million at December 31, 2016. The company also carried a $2.203 million warrant derivative liability, up from $793,099.
- The company issued approximately 194,887 warrants during the quarter in connection with JMJ Financial debt financing and placement-agent compensation. Total outstanding warrants were 413,276 at quarter-end.
Liquidity, Debt, Outlook, and Risks
Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern. The company reported recurring losses, negative working capital, a substantial stockholders’ deficit, operating cash burn, and a default on a promissory note. Management stated that continued operations depend on raising capital, implementing its business plan, increasing revenue, and achieving profitability.
Cash on hand was approximately $63,000 as of May 16, 2017, while monthly lease and other mandatory payments were approximately $131,000 before payroll and ordinary operating expenses. Management estimated that an additional $3 million would be needed during 2017 and expected to seek funding through equity-related instruments and a planned registered offering targeted at approximately $13.3 million. The filing does not establish that this offering will be completed.
The JMJ bridge financing permitted borrowings of up to $2.5 million and was originally due May 15, 2017. On May 22, 2017, the maturity date and related origination-share deadline were extended to June 15, 2017, subject to conditional waiver provisions. Failure to satisfy the amended terms could trigger default remedies, including potential conversion rights for the lender.
Management expects Q1 project cost overruns and margin pressure to be one-time items, with margins expected to improve toward historical levels. It also expects growth from rail-industry consulting and recurring maintenance on new projects. These expectations are not guaranteed. Market acceptance, customer concentration, project-estimate revisions, financing availability, debt defaults, dilution from warrants or equity issuance, and competitive and economic conditions remain significant risks.
Five customers represented 31%, 24%, 19%, 12%, and 12% of accounts receivable at March 31, 2017. Three customers represented 35%, 22%, and 12% of Q1 revenue. Approximately 9.33% of revenue was generated outside the United States.
The company settled the Greentree convertible-note litigation and the FacilityTeam dispute during the quarter. It also had delinquent payroll taxes of $655,755 within total payroll taxes payable of $703,532; the IRS had accepted a $25,000 monthly installment agreement.
After quarter-end, the company effected a 1-for-35 reverse stock split, intended partly to support its application to list on Nasdaq. The filing states that Nasdaq approval was not assured.
Important Facts for Investors to Verify
- Whether the company raised the planned capital and obtained sufficient liquidity to meet the amended JMJ maturity date and other obligations.
- The status and terms of the proposed approximately $13.3 million registered offering and any resulting dilution.
- Whether project margins recovered after the reported implementation cost overruns.
- Current balances and repayment or restructuring terms for delinquent payroll taxes, related-party notes, bridge debt, and other current liabilities.
- The impact of the 1-for-35 reverse split, outstanding warrants, origination shares, and potential lender conversion rights on the common-share count.
- Whether the company achieved Nasdaq listing and whether it generated positive operating cash flow or profitability.