Business Context and Reporting Period
Company: Duos Technologies Group, Inc. (DUOT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2019
Business Overview: The Company operates through two primary subsidiaries: duos tech, which designs intelligent technologies for security, inspection, and operations in critical infrastructure (primarily rail), and true vue 360, a subsidiary launched in January 2019 focused on Artificial Intelligence (AI) and deep machine learning applications. The Company also provides IT asset management services.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total Revenue | $13,641,315 | $12,048,619 |
| Gross Profit | $6,481,438 | $5,204,223 |
| Gross Margin | 47.5% | 43.2% |
| Operating Loss | $(2,406,522) | $(1,569,904) |
| Net Loss | $(2,470,882) | $(1,580,887) |
| Net Loss Per Share (Basic/Diluted) | $(1.39) | $(1.06) |
| Cash and Cash Equivalents (Year End) | $56,249 | $1,209,301 |
| Working Capital | $(607,372) | $(469,082) |
| Accumulated Deficit | $(32,740,715) | $(30,269,833) |
Debt and Liquidity: As of December 31, 2019, the Company held approximately $1.0 million in notes payable to related parties (net of discounts) and $42,299 in financing agreements. The Company reported a negative working capital position of $607,372.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 13% year-over-year, driven by an 11% increase in project revenues and a 141% surge in IT asset management services revenue.
- Expense Increase: Operating expenses rose 31% to $8.89 million. This was primarily due to a 30% increase in salaries and wages (driven by the expansion of the true vue 360 AI team) and a 52% increase in general and administrative expenses.
- Widening Loss: Net loss increased by approximately $890,000 compared to 2018, attributed to higher operating costs associated with the new AI subsidiary and slightly lower revenue than originally forecasted due to contract delays.
- Cash Position: Cash on hand decreased significantly from $1.21 million in 2018 to $56,249 in 2019. This was due to high operating cash burn ($4.02 million used) and project execution costs prior to receiving customer payments.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Capitalization: Management stated that substantial doubt regarding the Company's ability to continue as a going concern has been alleviated following a 2020 equity raise (subsequent to year-end) of over $8.2 million and the exercise of warrants in 2019. The Company expects to achieve profitability without further capital raises for existing operations, contingent on revenue growth.
Key Risks:
- Customer Concentration: Three customers accounted for approximately 71% of total revenues in 2019. Two customers accounted for 78% of accounts receivable.
- Going Concern History: The Company has a history of losses and negative operating cash flows. While management believes recent capital raises mitigate this, the business remains dependent on continued revenue generation.
- Regulatory and Technology Risks: Success depends on regulatory changes to allow automated rail inspections to replace manual ones. The Company also faces risks related to the rapid evolution of AI technology and potential intellectual property disputes.
- COVID-19: The filing notes potential adverse impacts from the Novel Coronavirus on operations, supply chains, and economic conditions.
- Post-Period Liquidity: Verify the status of the $8.2 million equity raise closed in February 2020 and the current cash balance as of the most recent filing.
- Revenue Concentration: Assess the stability of the top three customers who generated 71% of 2019 revenue and the risk of contract delays or cancellations.
- Regulatory Milestones: Monitor progress on federal rule changes required to fully automate rail inspections, a key driver for the Company's growth strategy.
- Debt Obligations: Confirm repayment status of the $1.0 million related-party notes due in June 2020 and any new debt incurred.
- AI Integration: Evaluate the commercial traction of the true vue 360 AI platform and whether it is generating the projected recurring revenue to offset high R&D costs.
Unusual Items: The Company had a delinquent payroll tax liability of $115,111 (including $37,210 in penalties) as of year-end, which was paid in full on January 22, 2020.