Duos Technologies Group, Inc. — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2018; unaudited consolidated results. The company develops artificial-intelligence-driven security, inspection and operational technology systems, primarily through its proprietary praesidium and centraco platforms, and provides maintenance, technical support and IT asset-management services.
Financial Results and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $3.24 million vs. $1.16 million | $4.39 million vs. $2.20 million |
| Gross profit | $1.26 million vs. $0.58 million | $1.73 million vs. $0.98 million |
| Gross margin | 38.8% vs. 49.6% | 39.5% vs. 44.6% |
| Operating loss | $0.63 million vs. $0.78 million | $1.37 million vs. $1.64 million |
| Net loss | $0.63 million vs. $1.32 million | $1.38 million vs. $3.61 million |
| Loss per common share | $0.03 vs. $0.70 | $0.07 vs. $1.91 |
- Revenue mix: Six-month project revenue was $3.79 million, maintenance and technical support revenue was $0.51 million, and IT asset-management revenue was $0.09 million.
- Cash flow: Six-month operating cash flow was $195,745, compared with $848,263 used in the prior-year period. Investing cash outflow was $195,814, including $60,000 of software development costs and $134,814 of fixed-asset purchases. Financing cash outflow was $188,153.
- Cash and liquidity: Cash was $1.75 million at June 30, 2018, while the company reported approximately $420,000 of cash on hand as of August 10, 2018. Working capital was negative $541,594, and current liabilities were $3.83 million versus current assets of $3.29 million.
- Debt and obligations: Total liabilities were $3.83 million, including $109,572 of insurance-financing notes, $32,833 under a closed line of credit, $178,390 of payroll taxes payable and $1.77 million of contract liabilities. Related-party notes were fully repaid during the first quarter.
- Equity: Stockholders’ equity was negative $278,154 at June 30, 2018, compared with positive $622,535 at December 31, 2017. Accumulated deficit was $30.07 million.
Material Changes Versus the Prior Comparable Period
- Six-month revenue doubled, driven by a 298% increase in project revenue. Management attributed the increase partly to funds from the November 2017 capital raise enabling pursuit and execution of larger projects.
- Maintenance and technical-support revenue declined 19% for the six months as the company moved away from legacy systems toward next-generation installations. IT asset-management revenue declined 85% following completion of a large project in late 2017.
- Gross margin declined because ASC 606 revenue recognition resulted in certain project costs being recognized ahead of related revenue. Management stated that the effect was temporary and expected full-year margins to approach historical norms.
- Operating expenses increased 19% for the six months, including $403,070 of noncash stock-based compensation associated with employee and director option grants. Excluding that charge, management stated that expense growth was approximately 10%.
- Net loss improved substantially because the prior-year period included significant noncash debt-discount, interest and warrant-derivative charges. Six-month interest expense declined to $10,166 from $1.75 million.
- Contract liabilities increased to $1.77 million from $200,410 at December 31, 2017, contributing materially to positive operating cash flow.
Outlook, Risks and Unusual Items
- Management outlook: Management expects maintenance revenue to remain approximately flat for the rest of 2018 and then grow as 2018 installations produce support opportunities. It expects the new dcVue ITAM software platform to be available for licensing later in 2018 and anticipates improved ITAM demand later in the year.
- Management expects improved operating margins as projects are completed and deferred revenue is recognized, and believes anticipated profitable operations from the existing backlog in the second half of 2018 can support continued operations.
- Going concern: The filing states that negative working capital, the accumulated deficit and continuing operating losses raise substantial doubt about the company’s ability to continue as a going concern for twelve months after issuance. Continued operations depend on executing the business plan, collecting project-related receivables, generating additional revenue and achieving profitability; additional financing may be required if plans are insufficient.
- Customer concentration: Two customers represented 56% and 14% of six-month revenue. Four customers represented 44%, 20%, 15% and 12% of accounts receivable at June 30, 2018. Approximately 17.22% of revenue was generated from three customers outside the United States.
- Payroll tax contingency: Payroll taxes had been paid, but $178,390 remained payable for penalties and related amounts, including $123,572 of accrued late fees. The company began $15,000 monthly payments in July 2018.
- Cash concentration: Approximately $1.64 million of cash at one financial institution exceeded federally insured limits at June 30, 2018.
- Dilution: At June 30, 2018, the company had 25.22 million outstanding warrants, 2.24 million employee stock options outstanding and 5.66 million common shares issuable upon conversion of Series B preferred stock. During the quarter, 2.242 million options were issued at a $1.00 exercise price.
- Legal matter: On July 12, 2018, the company sued a vendor over allegedly nonconforming components and refusal to provide a refund. Management stated that the matter was not expected to materially affect operations or finances.
- The company adopted ASC 606 effective January 1, 2018. Revenue and project-margin trends remain sensitive to estimates of contract costs, completion progress and the timing of billings and cash receipts.
Important Facts for Investors to Verify
- Reconcile the reported $1.75 million June 30 cash balance with approximately $420,000 of cash reported on August 10, 2018, and assess near-term cash burn and mandatory monthly payments of approximately $135,000.
- Evaluate whether project backlog converts into recognized revenue and cash collections in the second half of 2018 as management expects.
- Assess the sustainability of the approximately 39% first-half gross margin after ASC 606 timing effects and project completion.
- Monitor the negative working capital position, payroll-tax penalty payments and the company’s ability to avoid additional capital raising.
- Assess customer concentration, contract-liability obligations and the collectability of accounts receivable.
- Quantify potential dilution from warrants, options and Series B preferred-stock conversion rights.