DUOS TECHNOLOGIES GROUP, INC. quarterly report, Q2 FY2022

Duos Technologies Group, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2022; filed August 12, 2022. The financial statements are unaudited and prepared under U.S. GAAP. Duos develops AI-enabled rail inspection, logistics automation and related technology systems, including Railcar Inspection Portals, ALIS, Centraco and Praesidium.

Financial performance and position

Metric	Three months ended June 30, 2022	Three months ended June 30, 2021	Six months ended June 30, 2022	Six months ended June 30, 2021
Revenue	$3.617 million	$0.649 million	$5.056 million	$2.803 million
Gross margin	$1.283 million	$(0.270) million	$1.505 million	$0.233 million
Gross margin percentage	35.5%	(41.6)%	29.8%	8.3%
Operating loss	$(1.394) million	$(2.948) million	$(4.036) million	$(4.771) million
Net loss	$(1.343) million	$(2.953) million	$(3.987) million	$(3.359) million
Net loss per share	$(0.22)	$(0.83)	$(0.70)	$(0.95)

Second-quarter revenue increased 458%, driven primarily by production and initial installation of Railcar Inspection Portals. Six-month revenue increased 80%; technology systems revenue rose 124% and services and consulting revenue rose 23%.
Six-month gross margin improved to $1.505 million from $0.233 million, although the company remained loss-making. Operating expenses increased 11% to $5.541 million, principally from higher research and development and general and administrative costs.
The six-month net loss increased year over year because the prior-year period included approximately $1.422 million of PPP loan forgiveness in other income.
Cash provided by operating activities was $0.288 million, compared with cash used of $3.219 million in the prior-year period. Investing cash outflow was $0.169 million.
Financing activities provided $5.256 million, primarily from approximately $5.5 million of net proceeds from common-stock offerings. Cash increased to $6.268 million at June 30, 2022 from $0.894 million at December 31, 2021.
Working capital surplus was $1.222 million at June 30, 2022, compared with negative working capital of $0.651 million at December 31, 2021. Total assets were $14.992 million and total liabilities were $12.161 million.
Debt was limited principally to $0.167 million of current insurance-financing notes and $0.054 million of current equipment financing. The company also reported $5.102 million of operating lease obligations, including $4.592 million classified as long term.

Material changes versus the prior comparable period

Revenue mix shifted materially toward turnkey technology systems and rail-related projects. Second-quarter technology systems revenue was $2.780 million versus $0.100 million in 2021.
Gross profitability improved substantially as revenue growth outpaced cost growth; however, supply-chain disruption and inflation increased materials, labor and project implementation costs.
Operating loss narrowed in both the quarter and first half, but the company continued to report substantial accumulated losses of $49.484 million at June 30, 2022.
Series C preferred stock with a stated value of $2.5 million was converted into 454,546 common shares in January 2022. The company issued 1,523,750 common shares in February offerings for $6.095 million gross proceeds and approximately $5.5 million net proceeds.
Contract liabilities increased to $5.015 million from $1.829 million at year-end 2021, while contract assets increased to $0.702 million from $0.003 million. The company expects to recognize all contract liabilities within 12 months.
Customer concentration changed: four customers represented 90% of six-month revenue in 2022, compared with one customer representing 69% in 2021. Four customers represented 93% of accounts receivable at June 30, 2022.

Outlook, commentary and risks

Management expects revenue growth to continue through the remainder of 2022 and into 2023, supported by RIP and ALIS installations, maintenance contracts and a multi-year national rail-carrier contract. The company anticipates manufacturing two RIP systems in 2022, with related services completing in the second quarter of 2023.
Management expects further gross-margin improvement during 2022, but stated that inflation, supply-chain delays and costs that cannot be passed to customers could delay profitability into 2023.
Supply-chain constraints may shift installations and revenue recognition from late 2022 into 2023. The company is procuring materials before formal contract awards in some cases, increasing cash requirements and execution risk.
Management stated that the company has sufficient liquidity to operate for at least 12 months and that there is no longer substantial doubt about going-concern status following the 2022 equity offering. This remains dependent on project execution, customer payments, revenue growth and eventual profitability.
As of August 9, 2022, cash on hand was approximately $3.6 million, with approximately $165,500 of monthly lease and other mandatory payments excluding payroll and ordinary expenses.
Approximately 51% of first-half 2022 revenue was generated from three customers outside the United States. Cash balances at one financial institution exceeded federal insurance limits by approximately $5.836 million.
Other disclosed risks include customer and vendor concentration, contract termination provisions, dependence on Class 1 railroads and government-funded customers, competition, technology changes, personnel retention, macroeconomic conditions and COVID-19 effects.
Management reported no material litigation, no material changes to previously disclosed risk factors, effective disclosure controls and no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether RIP and ALIS projects are delivered on schedule and whether supply-chain and inflation pressures affect contract margins.
The conversion of contract liabilities into revenue and cash, including the timing and profitability of the company’s large projects.
Customer concentration, payment timing and the enforceability of advance-payment and termination provisions.
The company’s ability to sustain operations from operating cash flow without additional equity financing.
Potential dilution from 1.376 million outstanding warrants, 0.986 million outstanding stock options and 121,571 common shares issuable upon conversion of Series B preferred stock.
Execution of the multi-year national rail-carrier contract, the approximately $8 million bonded project and expected 2022 RIP production.
Whether management’s expectation of improved gross margins and profitability by or after 2023 is achieved.