Business Context and Reporting Period
Duos Technologies Group, Inc. filed its Form 10-K for the fiscal year ended December 31, 2015. The company designs and deploys artificial-intelligence-driven security, inspection, command-and-control, and IT infrastructure systems through its proprietary praesidium and centraco platforms. Its markets include transportation, government, healthcare, utilities, and oil, gas and chemical industries.
On April 1, 2015, the company completed a reverse triangular merger with Duos Technologies, Inc., rebranded as Duos Technologies Group, Inc., and implemented a 1-for-200 reverse stock split. The filing’s annual results primarily reflect Duos Technologies’ operations, with the legacy IT asset management business continuing as a division.
Financial Performance and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $6.768 million | $4.202 million | +61% |
| Gross profit | $3.572 million | $2.070 million | +72% |
| Gross margin | 52.8% | 49.3% | Improved |
| Operating loss | $(2.227) million | $(1.588) million | Worsened |
| Operating margin | (32.9%) | (37.8%) | Improved excluding merger impairment |
| Net loss | $(2.326) million | $(2.107) million | Loss increased $219 thousand |
| Net loss applicable to common stock | $(2.326) million | $(2.643) million | Improved due to 2014 preferred dividends |
| Basic and diluted loss per share | $(0.04) | $(0.05) | Improved |
| Cash flow from operations | $(2.116) million | $(986) thousand | Outflow increased |
| Cash flow from investing | $(75) thousand | $(30) thousand | Higher investment |
| Cash flow from financing | $2.246 million | $1.101 million | Higher financing |
Revenue growth was driven primarily by more than doubled project revenue and the addition and growth of IT asset management services. Revenue consisted of project revenue of $3.759 million, maintenance and technical support revenue of $2.481 million, and IT asset management revenue of $528 thousand.
Operating expenses were $5.799 million, including a $1.579 million non-cash impairment charge related to merger-acquired intangible assets and goodwill. Excluding this charge, management stated that operating expenses increased by approximately $562 thousand, while the loss from ongoing operations declined by more than 41%.
Other income included an $861,650 non-cash benefit from reducing a previously recorded contingent lawsuit liability from $1.412 million to a $550 thousand settlement obligation. Interest expense increased to $744 thousand from $516 thousand, and the company recorded $216 thousand of non-cash charges associated with debt conversions and warrant issuances.
Balance Sheet, Debt and Liquidity
- Cash was $140 thousand at December 31, 2015, compared with $85 thousand at December 31, 2014.
- Total assets were $1.308 million and total liabilities were $5.067 million.
- Working capital deficit was $3.888 million; stockholders’ deficit was $3.759 million; accumulated deficit was $20.951 million.
- Material current obligations included $487 thousand of related-party notes, $338 thousand of convertible notes, $53 thousand of other notes payable, $40 thousand under a line of credit, $44 thousand of insurance and equipment financing, $1.062 million of accounts payable, $956 thousand of accrued expenses, and $296 thousand of payroll taxes payable.
- Related-party debt and advances increased from $75 thousand at year-end 2014 to $487 thousand at year-end 2015, excluding related accrued interest and accounts payable.
- Cash used in operations substantially exceeded year-end cash, requiring continued external financing, debt conversions, related-party support, and equity issuance.
The independent auditor reported substantial doubt about the company’s ability to continue as a going concern. Management stated that approximately $1 million would be needed to maintain current operations and $1.5 million to $2 million to fully execute its growth plan.
Material Changes Versus the Prior Comparable Period
- The April 2015 reverse merger materially changed the corporate structure, ownership, reporting profile, capitalization, and consolidated liabilities.
- Revenue increased 61%, with project revenue more than doubling and IT asset management revenue contributing $528 thousand for the first reported year in the combined company.
- Gross margin improved to 52.8% from 49.3%, but operating and net losses continued.
- The company recognized a $1.579 million impairment of merger-related intangible assets and goodwill.
- Most convertible notes outstanding before the merger were converted into common stock during 2015, reducing convertible debt from $1.425 million at year-end 2014 to $338 thousand at year-end 2015, but increasing common shares outstanding to approximately 64.8 million.
- The company settled or converted substantial obligations through stock issuance, including approximately $2.258 million of convertible debt and $611 thousand of notes payable and accrued interest.
- A contingent lawsuit liability declined from $1.412 million to $550 thousand after settlement, creating a non-cash gain but leaving a material payment obligation.
- Customer concentration remained significant. Three customers represented 30%, 16%, and 16% of 2015 revenue, respectively, and the filing indicates that the company had limited geographic diversification, with approximately 1.73% of revenue generated outside the United States.
Guidance, Outlook, Risks and Unusual Items
Management planned to expand sales, research and development, marketing, channel partnerships, licensed software distribution, and potential strategic acquisitions. The company expected to require approximately $1 million of additional capital during 2016, potentially through equity financing. Management stated that operations were approaching breakeven excluding unusual charges, but profitability and continued operations remained dependent on revenue growth and additional funding.
Subsequent to year-end, the company entered into a March 31, 2016 securities purchase agreement for $1.8 million of senior secured, non-convertible debt. After the original issue discount, fees, legal expenses, and repayment of certain existing obligations, management expected approximately $500 thousand of additional working capital. The proposed debt carried 14% cash interest, an additional 2% compounded interest component, a three-year maturity, substantial security interests, covenants, and warrants for 2.5 million shares. The filing states that closing was expected on or about April 1, 2016, subject to customary conditions.
The company also expected to use financing proceeds to pay the $550 thousand settlement obligation to CW Electric. The settlement payment had been extended, with court-related deadlines extending to April 20, 2016. The company had an IRS installment agreement requiring $25 thousand monthly payments beginning March 28, 2016 for delinquent payroll taxes.
- Primary risks include insufficient capital, recurring losses and negative operating cash flow, substantial leverage, related-party financing dependence, customer concentration, project estimation risk, technology integration and cybersecurity risks, intense competition, intellectual property risks, and dependence on key personnel.
- The company’s common stock traded on the OTCQB with sporadic volume and no assurance of a liquid market. It was subject to penny-stock rules and potential dilution from convertible securities, warrants, future financings, and preferred stock authorization.
- Outstanding potential dilution at year-end included approximately 609 thousand warrants and 734 thousand shares issuable upon conversion of convertible debt, according to the financial statement notes.
- The company does not expect to pay dividends in the foreseeable future.
- The company reported no material pending lawsuits as of December 31, 2015 other than disclosed settlement obligations and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the $1.8 million senior secured financing actually closed on the expected date and the final net working capital received.
- Whether the company paid or otherwise resolved the $550 thousand CW Electric settlement and complied with the related court deadlines.
- The current status of the going-concern uncertainty, liquidity, working capital deficit, and additional capital needs.
- The final amount, terms, and repayment status of senior debt, related-party debt, payroll tax liabilities, and other current obligations.
- Revenue sustainability and customer concentration, particularly the dependence on three customers representing approximately 62% of 2015 revenue.
- Progress toward profitability and whether management’s expectation of near-breakeven operations excluding unusual items was achieved.
- The fully diluted share count after debt conversions, warrants, advisory issuances, and subsequent financings.
- Whether the merger-related impairment and other non-cash and settlement-related items accurately reflect ongoing operating economics.