Duos Technologies Group, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. Duos develops artificial-intelligence-driven intelligent technology and security systems through duostech, including the praesidium and centraco platforms, with target markets in transportation, petrochemical, utilities, healthcare, and related sectors. The Company also operates an IT asset management services division.
Management states that the Company operates in one reportable segment. The filing reports substantial doubt about the Company’s ability to continue as a going concern.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $1,647,144 | $1,608,869 | $2,651,386 | $2,710,963 |
| Gross profit | $975,193 | $855,585 | $1,493,018 | $1,408,790 |
| Gross margin | 59.2% | 53.2% | 56.3% | 52.0% |
| Loss from operations | $(452,994) | $(1,877,209) | $(1,220,376) | $(2,241,740) |
| Net loss | $(663,103) | $(2,052,322) | $(1,501,484) | $(2,804,746) |
| Net loss per common share | $(0.01) | $(0.03) | $(0.02) | $(0.05) |
- Six-month revenue declined $59,577, or approximately 2.2%, primarily because project revenue fell $410,740. This was partly offset by $328,389 of new IT asset management revenue and a $22,774 increase in maintenance and technical support revenue.
- Six-month gross profit increased $84,228, and gross margin improved to approximately 56.3% from 52.0%.
- Operating expenses declined $937,136, principally because the prior-year period included a $1,578,816 impairment charge. Salaries, wages, and contract labor increased $602,881 for the six-month period as the Company expanded its employee base in anticipation of new projects.
- Six-month interest expense was $282,414, compared with $566,212 in the prior-year period. Second-quarter interest expense increased to $210,109 from $175,118, primarily because of debt-discount amortization.
Cash flow, liquidity, debt, and capital structure
| Balance sheet item | June 30, 2016 | December 31, 2015 |
|---|---|---|
| Cash | $250 | $140,129 |
| Total current assets | $852,772 | $1,178,575 |
| Total liabilities | $5,327,852 | $5,066,848 |
| Stockholders’ deficit | $(4,339,138) | $(3,758,723) |
| Working capital deficit | $3,400,441 | Not clearly provided |
- Six-month operating cash flow was $(1,375,845), compared with $(535,444) in the prior-year period.
- Investing cash flow was $(30,143), primarily for office equipment. Financing cash flow was $1,266,109.
- On April 1, 2016, the Company closed a $1.8 million senior secured, non-convertible debt financing. The note bears interest at 14% annually plus additional interest at 2% annually, matures in three years, is secured by substantially all Company assets, and includes restrictive covenants. The balance sheet carried the note at $1,074,639 net of discounts at June 30, 2016.
- Net proceeds from the financing were reported as $837,891 after transaction costs and direct payments to creditors. The financing funded the $550,000 CW Electric settlement and repaid a $125,000 secured shareholder note, among other obligations.
- The Company had $449,799 of notes payable to related parties and $36,286 of accounts payable to related parties at June 30, 2016.
- The Company disclosed approximately $409,500 of cash on hand as of August 15, 2016, but also approximately $131,000 of monthly lease and other mandatory payments, excluding payroll and ordinary expenses.
- Management estimated that at least $1 million of additional capital would be needed during 2016 and stated that current operations require at least $500,000 of additional capital.
Material changes, outlook, and unusual items
- Project revenue was adversely affected by delays in two projects expected to begin during the second quarter. Management reported an order backlog of $3.99 million and anticipated recognizing $3.57 million of that backlog during the second half of 2016.
- Management stated that additional new revenue of at least $3.5 million, beyond the reported backlog, would be needed during the second half of 2016 to support operations through year-end.
- The Company continues to invest in product development, sales resources, personnel, and market penetration, particularly in the rail industry. The filing provides no formal earnings or revenue guidance beyond backlog and capital needs.
- The CW Electric litigation was settled and paid in full on April 1, 2016 for $550,000 plus $8,032 of accrued interest; the matter was released and closed.
- The Company is involved in litigation with Greentree Financial Group concerning two convertible notes, disputed conversion notices, and alleged default. The Company owes principal and interest under the notes, and the matter remained unresolved as of the filing.
- The Company had delinquent payroll taxes of $144,470 included in total payroll taxes payable of $332,846. The IRS accepted a $25,000 monthly installment arrangement, and payments were current at June 30, 2016.
- Disclosure controls and procedures were assessed as ineffective because of insufficient segregation of duties and insufficient technical expertise for public-company financial reporting.
- On July 19, 2016, the CEO lent the Company $60,000 for short-term working capital at 7.99% annual interest pending other financing.
- At June 30, 2016, the Company had 65,956,115 shares outstanding, 3,600,840 outstanding warrants, and 1,332,074 shares issuable upon conversion of convertible debt and accrued interest, with potentially dilutive securities excluded from diluted loss per share.
Principal risks and contingencies
- Near-term liquidity is highly constrained: cash was only $250 at quarter-end, operating cash burn increased, and liabilities substantially exceeded assets.
- The senior secured debt exposes substantially all Company assets and subsidiary shares to foreclosure upon default, which could force a substantial curtailment or cessation of operations.
- Continuation as a going concern depends on additional financing, revenue growth, execution of the business plan, and achieving profitability; management provides no assurance these conditions will be met.
- Additional equity financing would likely dilute existing shareholders, while additional debt could increase repayment obligations and operating restrictions.
- Revenue concentration is significant. Several customers individually represented more than 10% of six-month revenue, and one customer represented 56% of accounts receivable at June 30, 2016.
- Project revenue depends on percentage-of-completion estimates, including estimated costs to complete contracts, creating potential for future adjustments.
Most important facts for investors to verify
- Whether the Company secured the additional capital required to fund operations and whether the July 2016 CEO loan was sufficient only as a temporary measure.
- Actual conversion of the reported $3.99 million backlog into revenue, including the timing of delayed projects and the need for at least $3.5 million of additional new revenue.
- Compliance with the senior secured note’s payment terms and covenants, including restrictions on additional debt and certain equity issuances.
- Status and potential financial impact of the Greentree litigation and the two convertible notes.
- Progress toward resolving the disclosed material weaknesses in internal control and disclosure controls.
- Cash burn, mandatory monthly payments, payroll-tax installment compliance, and related-party financing dependence.