Duos Technologies Group, Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Unaudited quarterly and nine-month results ended September 30, 2020, compared with the prior-year periods. The company develops AI-enabled rail inspection, logistics automation, software and related consulting solutions, including the Railcar Inspection Portal, ALIS, centraco, praesidium and truevue360.
Financial Highlights
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $1.282 million | $2.198 million | $4.255 million | $7.896 million |
| Gross profit | $295 thousand | $1.025 million | $1.137 million | $3.331 million |
| Gross margin | 23% | 47% | 27% | 42% |
| Operating loss | $2.707 million | $1.132 million | $6.222 million | $3.035 million |
| Net loss | $2.709 million | $1.144 million | $6.322 million | $3.050 million |
| Net loss per share | $0.77 | $0.63 | $1.95 | $1.78 |
| Operating cash flow | Not separately provided | Not separately provided | $(4.224) million | $(3.624) million |
- Q3 revenue mix: Technology systems revenue was $673 thousand, technical support $503 thousand, consulting services $50 thousand and AI technologies $56 thousand.
- Nine-month revenue mix: Technology systems revenue declined to $2.606 million from $6.954 million, while technical support increased to $1.230 million from $702 thousand and AI technologies contributed $235 thousand versus none in the prior-year period.
- Operating expenses: $3.002 million in Q3 and $7.359 million for the nine months. Q3 administration expense increased substantially, primarily because of former CEO severance and related legal and hiring costs.
- Balance sheet: Cash was $4.117 million at September 30, 2020, versus $56 thousand at December 31, 2019. Working capital was $2.247 million, total assets were $6.924 million and stockholders’ equity was $2.220 million, compared with a deficit of $127 thousand at year-end 2019.
- Debt and obligations: Total liabilities were $4.704 million. The principal debt increase was a $1.410 million SBA/PPP loan bearing 1% interest, with $864 thousand classified as current and $546 thousand long term. Related-party notes totaling $1.0 million at year-end were repaid in June 2020.
- Financing: The company raised approximately $9.25 million gross through a February 2020 underwritten offering and partial over-allotment exercise, issuing 1.542 million shares at $6.00 per share. Net cash provided by financing activities was $8.509 million for the nine months.
Material Changes Versus Prior Comparable Period
- Q3 revenue fell 42%, and nine-month revenue fell 46%, primarily because large technology-system projects were delayed and COVID-19 slowed customer awards and project execution.
- Q3 gross margin declined to 23% from 47%; nine-month gross margin declined to 27% from 42%. The company maintained implementation and engineering personnel ahead of expected orders, leaving fixed costs underutilized.
- Q3 operating expenses increased 39% and the nine-month total increased 16%. The increases included an approximately $885 thousand former CEO separation charge, equity offering and Nasdaq listing costs, and new CEO hiring expenses.
- Technical support revenue grew 119% in Q3 and 75% for the nine months, reflecting new and renewed service agreements and the company’s shift toward recurring revenue.
- Shares outstanding increased to 3.534 million at September 30, 2020 from 1.981 million at December 31, 2019. Outstanding warrants totaled 1.588 million and employee stock options totaled 412 thousand at quarter-end.
- The company completed a reverse stock split at a ratio of 1-for-14 in January 2020; share and per-share data are presented retrospectively.
Cash Flow, Liquidity and Outlook
Cash used in operations was $4.224 million for the first nine months, while investing activities used $225 thousand. Management stated that the February equity offering and the $1.410 million PPP loan provided sufficient liquidity for at least 12 months from the report date and that substantial doubt regarding going-concern status had been eliminated. Management also stated that additional capital could be needed if 2021 growth exceeds current forecasts, and that continued viability depends on generating sufficient revenue and achieving consistent profitability.
- Management reported approximately $3.816 million of cash on hand as of November 9, 2020 and approximately $135 thousand of monthly lease and other mandatory payments, excluding payroll and ordinary operating expenses.
- Management expected delayed projects to be substantially completed in Q4 2020 and anticipated renewed order flow in late 2020 and 2021.
- Planned product upgrades to RIP and ALIS were expected in the first and second quarters of 2021 to address anticipated FRA and AAR standards and support additional sales.
- The company was competing for a large, multi-year national rail carrier contract that, if awarded, would involve at least two RIP systems and a long-term services agreement in 2021. No award was assured.
- COVID-19 continued to delay customer decisions, awards, travel and consulting work, and management stated that its future effects could not be quantified.
Risks, Contingencies and Unusual Items
- Revenue recognition for technology systems uses cost-based input methods and requires estimates of contract revenue, costs to complete and progress toward completion. Revisions could materially affect reported results.
- Customer concentration was significant: three customers represented 42%, 20% and 11% of nine-month 2020 revenue, and 58%, 13% and 11% of accounts receivable at September 30, 2020.
- Approximately 30% of revenue was generated from two Canadian and Mexican Class 1 railroad customers operating in the United States.
- Approximately $3.661 million of cash at one financial institution exceeded federally insured limits at September 30, 2020.
- The former CEO’s separation arrangement requires approximately $885 thousand in payments over 36 months, plus specified insurance benefits; 50,358 unvested options became fully vested.
- Subsequent to quarter-end, the company hired a chief operating officer and granted 20,000 five-year stock options with a $4.18 exercise price.
- The company reported no material litigation, no defaults on indebtedness and no material changes to previously disclosed risk factors.
Facts Investors Should Verify
- Whether delayed technology-system projects were completed in Q4 2020 and converted into recognized revenue and cash collections.
- Whether technical-support and AI revenue growth is recurring and sufficient to offset weaker system revenue.
- Actual cash burn, PPP loan forgiveness status and remaining liquidity after November 9, 2020.
- Customer concentration, contract termination provisions and collectability of concentrated receivables.
- Progress toward profitability, FRA/AAR product upgrades and the outcome of the potential national rail carrier contract.
- Potential dilution from 1.588 million warrants, 412 thousand employee options and 243,571 shares issuable upon conversion of Series B preferred stock.