Duos Technologies Group, Inc. 2021 Form 10-K Summary
Business context and reporting period
The filing is the annual report for the fiscal year ended December 31, 2021, filed March 31, 2022. Duos develops machine-vision, artificial-intelligence, and sensor-based systems for automated inspection of railcars and logistics facilities. Its principal offerings are the Railcar Inspection Portal (RIP) and Automated Logistics Information System (ALIS), supported by recurring maintenance, software, and AI services.
The Company had approximately 68 employees, including 60 full-time employees, and had deployed RIP systems with three Class 1 railroads and ALIS systems at nine distribution centers. During 2021, it discontinued support for its legacy IT asset-management solution and focused primarily on rail, logistics, intermodal, and government opportunities.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $8.260 million | $8.039 million | +3% |
| Technology systems revenue | $5.872 million | $5.965 million | -2% |
| Services and consulting revenue | $2.388 million | $2.075 million | +15% |
| Cost of revenue | $10.819 million | $7.804 million | +39% |
| Gross profit (loss) | $(2.559) million | $0.236 million | Declined |
| Gross margin | (31.0%) | 2.9% | Down approximately 33.9 points |
| Operating expenses | $4.898 million | $6.870 million | -29% |
| Operating loss | $(7.457) million | $(6.634) million | Loss increased |
| Net loss | $(6.009) million | $(6.747) million | Loss decreased 11% |
| Net loss per share | $(1.63) | $(2.03) | Improved |
| Operating cash flow | $(6.579) million | $(4.231) million | Higher cash use |
| Cash flow from investing | $(0.553) million | $(0.287) million | Higher cash use |
| Cash flow from financing | $4.057 million | $8.432 million | Lower inflow |
Revenue was approximately 2.7% higher year over year, with recurring services revenue more than offsetting the modest decline in technology-systems revenue. More than half of annual revenue was recorded in the fourth quarter, according to management.
Profitability deteriorated because of project overruns, additional work to resolve quality issues, higher material costs, supply-chain disruptions, COVID-19-related implementation inefficiencies, and costs associated with deploying new undercarriage technology. Operating expenses declined primarily because 2020 included the former CEO’s separation costs and other restructuring-related expenses. Other income of $1.468 million in 2021 primarily reflected forgiveness of the Company’s PPP loan.
At December 31, 2021, cash was $893,720, accounts receivable were $1.739 million, current assets were $3.289 million, and current liabilities were $3.940 million, resulting in negative working capital of $651,381. Total assets were $9.484 million, total liabilities were $8.703 million, and stockholders’ equity was $781,485. The accumulated deficit was $45.497 million.
Debt was substantially reduced after forgiveness of the $1.410 million PPP loan in February 2021. Remaining financing obligations included $103,186 of equipment financing and $52,503 of insurance-premium notes. The Company also recorded approximately $5.055 million of operating lease liabilities related primarily to a new 40,000-square-foot facility through May 2032.
Material changes versus the prior comparable period
- Revenue increased 3%, but cost of revenue increased 39%, producing a negative gross margin compared with a positive gross margin in 2020.
- Technology systems revenue declined 2%, while services and consulting revenue increased 15%, reflecting growth in maintenance and recurring support activities.
- Sales and marketing expense increased 72% and research and development expense increased 146%, while administration expense decreased 44%; total operating expenses declined 29%.
- Operating cash use increased to $6.579 million from $4.231 million, partly because of project spending, advance procurement, increased inventory, and a $600,000 security deposit for the new facility.
- The Company issued $4.5 million of Series C Convertible Preferred Stock in February 2021. At year-end, 2,500 Series C shares remained outstanding and were convertible at $5.50 per common share, subject to ownership limitations.
- During the fourth quarter, holders converted 854 Series B preferred shares into 122,000 common shares and 2,000 Series C preferred shares into 363,636 common shares.
- The Company reorganized its engineering, software, information technology, and AI functions and appointed new senior management, including a chief technology officer and chief operating officer.
Guidance, outlook, commentary, risks, and unusual items
Management expected customer ordering activity to improve in early 2022 as COVID-19-related delays diminished. It expected gross-margin improvement during 2022, particularly in the second half, but stated that supply-chain and inflationary pressures could delay improvement until 2023. Management did not expect operating breakeven until 2023 or later.
The Company was pursuing a potential large, multi-year national rail-carrier contract that could involve at least two RIP systems and a long-term services agreement in late 2022 or early 2023. The filing states that no assurance can be given that this opportunity will be awarded or that anticipated orders will begin on schedule.
Management identified inflation, component shortages, labor and subcontractor cost increases, customer contract delays, and delayed revenue recognition as significant near-term challenges. Fixed-price or previously submitted bids may be less profitable because increased costs may not be fully passed through to customers.
The filing reports significant customer concentration: one customer represented 83% of 2021 revenue, and two customers represented 91% of accounts receivable. Approximately 86% of 2021 revenue was generated from customers outside the United States.
Although the Company had negative working capital, substantial historical losses, and negative operating cash flow, management concluded that the first-quarter 2022 equity offering provided sufficient liquidity for at least twelve months from the report date. Subsequent to year-end, the Company received net proceeds of approximately $5.5 million from common-stock offerings. Management stated that it did not expect to require additional capital for existing 2022 operations, although additional financing could be pursued for selective opportunities.
Other unusual items include PPP-loan forgiveness of approximately $1.422 million including accrued interest, a long-term facility lease, deferred compensation obligations of approximately $506,000 related to former executives and sales personnel, and significant reliance on percentage-of-completion revenue estimates. The independent auditor identified percentage-of-completion revenue recognition and liquidity/going-concern analysis as critical audit matters.
The Company reported no material pending litigation. Management stated that disclosure controls and internal control over financial reporting were effective as of December 31, 2021. The auditor expressed an unqualified opinion on the consolidated financial statements but did not express an opinion on internal control over financial reporting because the Company is not required to obtain an internal-control audit.
Most important facts for investors to verify
- Whether expected 2022 RIP and ALIS orders, including the potential multi-year rail contract, were awarded and converted into revenue and backlog.
- Whether gross margins improve as projected after resolving installation-quality issues and absorbing supply-chain and inflationary costs.
- The Company’s ongoing cash burn, working-capital position, and dependence on the approximately $5.5 million first-quarter 2022 financing.
- The sustainability of revenue given that one customer generated 83% of 2021 revenue and two customers represented 91% of year-end receivables.
- The dilution potential from Series B and Series C convertible preferred stock, 1.376 million outstanding warrants, 431,266 employee options, and 665,000 options granted on January 1, 2022.
- Whether percentage-of-completion estimates, contract liabilities, customer acceptance terms, and potential project losses could materially affect future revenue or margins.
- The financial impact of the new facility lease and other fixed commitments, including approximately $8.212 million of undiscounted future operating lease payments.