Business Context and Reporting Period
Company: Duos Technologies Group, Inc. (DUOT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
Business Overview: The Company designs and deploys artificial intelligence-driven intelligent technology systems, converging traditional security with IT to create "actionable intelligence." Operations include project implementation, maintenance/technical support, and IT asset management services. The Company is a smaller reporting company and a shell company status is denied.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 |
|---|---|---|
| Total Revenues | $1,045,735 | $3,243,969 |
| Gross Profit | $387,344 | $1,368,689 |
| Gross Margin | 37.0% | 42.2% |
| Net Loss | $(124,868) | $(3,737,959) |
| Net Loss Applicable to Common Stock | $(130,788) | $(3,755,719) |
| Net Loss Per Share (Basic & Diluted) | $(0.07) | $(1.98) |
| Cash and Cash Equivalents (Sep 30, 2017) | $250 | |
| Total Current Assets | $1,064,714 | |
| Total Current Liabilities | $8,642,058 | |
| Working Capital Deficit | $(7,577,344) | |
| Total Debt (Notes Payable & Related) | ~$4.1M (Principal) |
Note: Interest expense for the nine months ended Sep 30, 2017, was $3,279,898, largely driven by non-cash amortization of debt discounts and warrant liabilities.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 24% in the quarter and 19% year-to-date compared to 2016. This was primarily due to a 48% drop in maintenance and technical support revenue (loss of a legacy customer) and a decline in project revenue as the company transitions to new AI offerings.
- IT Asset Management Growth: Conversely, IT asset management services revenue increased 27% in the quarter and 70% year-to-date.
- Net Loss Reduction (Quarterly): Net loss for the three months ended Sep 30, 2017, decreased to $(124,868) from $(591,074) in the prior year quarter. This improvement was driven by a non-cash warrant derivative gain of $2,188,546, which offset significant operating losses and interest expenses.
- Net Loss Increase (Year-to-Date): Net loss for the nine months increased to $(3,737,959) from $(2,092,558) in 2016, driven by higher interest expenses related to bridge financing and lower gross margins on specific projects.
- Liquidity Crisis: Cash on hand plummeted from $174,376 at year-end 2016 to $250 as of September 30, 2017. The company reported a working capital deficit of $7.6 million.
Guidance, Outlook, Risks, and Unusual Items
- Going Concern: Management has expressed substantial doubt about the Company's ability to continue as a going concern for one year from the filing date due to accumulated deficits, working capital deficits, and technical defaults on several promissory notes.
- Capital Raise Withdrawal: On August 16, 2017, the Company withdrew its registration statement for a planned Initial Offering (targeting $11M-$15M) intended to fund operations and list on a national exchange. Consequently, several letter agreements for debt-to-equity conversion contingent on this offering were terminated.
- Debt Defaults and Extensions: The Company is in technical default on multiple notes. However, lenders (including JMJ Financial and GPB Debt Holdings) have granted multiple extensions and forbearance agreements. The maturity date for the $2.5M JMJ note has been extended multiple times, most recently to November 22, 2017.
- Unusual Items:
- Warrant Derivative Gain: A significant non-cash gain of $1,901,219 (nine months) and $2,188,546 (quarter) was recorded due to the decrease in the Company's stock price, which reduced the fair value of warrant liabilities.
- Debt Settlement: The Company settled a lawsuit with Greentree Financial Group for $150,000 in March 2017, recording a gain on settlement of $64,647.
- Delinquent Payroll Taxes: The Company has a delinquent payroll tax liability of approximately $1.15 million, with an installment agreement in place with the IRS.
Investor Verification Checklist
- Cash Position: Verify the current cash balance (reported as $250 at period end) and confirm if any subsequent financing has occurred to cover the $131,000+ in monthly mandatory payments.
- Debt Maturity: Confirm the status of the $2.5M JMJ Financial note and other related party notes, specifically whether the November 2017 extensions were honored or if new defaults have occurred.
- Going Concern Status: Assess the likelihood of the Company securing the additional $3M in capital required for 2017 operations given the withdrawal of the S-1 registration.
- Payroll Tax Liability: Review the status of the $1.15M delinquent payroll tax obligation and the adherence to the IRS installment agreement.
- Revenue Transition: Evaluate the progress of the transition from legacy security products to AI-driven solutions and the timeline for replacing lost maintenance revenue.