Duos Technologies Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; unaudited consolidated results. The company develops artificial-intelligence-driven security and intelligent technology systems, principally for transportation, rail, petrochemical, utilities and healthcare markets, and also provides IT asset-management services.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.16 million | $1.65 million | $2.20 million | $2.65 million |
| Gross profit | $577,002 | $975,193 | $981,345 | $1.49 million |
| Gross margin | 49.6% | 59.2% | 44.6% | 56.3% |
| Loss from operations | $(780,646) | $(452,994) | $(1.64 million) | $(1.22 million) |
| Net loss | $(1.32 million) | $(663,103) | $(3.61 million) | $(1.50 million) |
| Net loss per common share | $(0.70) | $(0.35) | $(1.91) | $(0.80) |
| Cash flow from operations | Not separately presented for the quarter | $(848,263) | $(1.38 million) |
Six-month revenue declined 17% year over year, while Q2 revenue declined 29%. Six-month revenue included project revenue of $951,606, maintenance and technical support revenue of $626,301, and IT asset-management revenue of $620,327. IT asset-management revenue increased 98% year over year, but maintenance revenue declined 48% after a legacy customer did not renew and project revenue also decreased.
At June 30, 2017, cash was $41,103, total current assets were $796,115, and total current liabilities were $8.35 million, resulting in a reported working-capital deficit of $7.55 million. Total liabilities were $9.73 million, including $2.82 million of notes payable, net of discounts, $2.16 million of warrant derivative liability, $971,337 of payroll taxes payable, and $1.32 million of accrued expenses. Stockholders’ deficit was $9.13 million and accumulated deficit was $27.14 million.
Six-month financing activities provided $736,999, primarily from debt proceeds, while investing activities used $22,009. Cash decreased by $133,273 during the period. Management reported approximately $55,000 of cash on hand as of August 11, 2017 and approximately $131,000 of monthly lease and other mandatory payments, excluding payroll and ordinary expenses.
Material changes versus the prior comparable period
- Q2 gross profit fell 41% and six-month gross profit fell 34%, with gross-margin compression attributed primarily to lower project margins and unanticipated travel and implementation costs on an international project.
- Operating expenses decreased modestly, but operating losses increased because of lower gross profit and higher public-company, financing and planned up-listing costs.
- Interest expense increased to $1.75 million for the six months from $282,414, primarily from non-cash amortization of debt discounts and warrant-related costs associated with bridge financing.
- The company recorded a $287,327 warrant-derivative loss for the six months and a $295,061 gain in Q2; the liability reached $2.16 million at June 30, 2017.
- Warrants outstanding increased to 472,825 from 218,764 at the beginning of 2017, with a weighted-average exercise price of $6.77.
- The company completed a 1-for-35 reverse stock split effective May 22, 2017 in connection with its application to list on the Nasdaq Capital Market. Nasdaq approval was not assured.
Outlook, risks and unusual items
Management expects growth from intelligent security solutions, rail-related consulting and recurring maintenance on new projects, while continuing to expand IT asset-management services. It stated that additional capital of approximately $3 million would be needed during 2017 and planned an approximately $11 million registered offering to fund working capital, growth and a potential national exchange listing. No assurance was provided that the offering, listing or anticipated market acceptance would occur.
The company disclosed substantial doubt about its ability to continue as a going concern because of recurring losses, negative working capital and stockholders’ deficit, defaults on several promissory notes, limited cash and the need for additional financing and profitability. Management stated that failure to obtain financing or generate sufficient revenue could result in seeking bankruptcy protection.
The JMJ bridge financing had an original maturity date of May 15, 2017 and an outstanding principal obligation of $1.63 million at that date. Subsequent amendments extended the maturity to June 15, July 31 and then August 31, 2017, with conditional waivers of certain defaults. The financing included substantial discounts, warrants and potential equity-related obligations.
Six note holders, the CEO and the CFO agreed to convert specified obligations into restricted common stock, contingent on completion of the planned offering. The company also entered into an agreement in August 2017 for GPB Debt Holdings II, LLC to convert approximately $212,077 of senior secured debt upon completion of the offering, subject to additional terms including a potential cash put right.
Delinquent payroll taxes totaled $931,683 at June 30, 2017. The IRS accepted a $25,000 monthly installment agreement, and the company reported $250,000 of payments made as of that date. Previously disclosed litigation with Greentree and FacilityTeam was settled and paid in March 2017. Management reported no other pending litigation expected to have a material adverse effect.
Investor verification checklist
- Verify the company’s ability to raise the planned capital and satisfy the maturity, default and equity-delivery obligations under the JMJ financing.
- Assess cash runway against approximately $131,000 of monthly mandatory payments, payroll, ordinary expenses and delinquent payroll-tax obligations.
- Review the substantial going-concern uncertainty, negative working capital and stockholders’ deficit.
- Evaluate dilution from 472,825 outstanding warrants, potential note conversions, preferred-stock conversions and the planned registered offering.
- Determine whether project cost overruns were nonrecurring and whether gross margins recover as management projected.
- Assess customer concentration: three customers generated 65% of six-month 2017 revenue, and four customers represented 95% of accounts receivable.
- Confirm the status of the Nasdaq up-listing application and the terms and completion status of the planned offering.