Duos Technologies Group, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Duos develops intelligent technology systems for rail, logistics, intermodal transportation and government customers, including its Railcar Inspection Portal, Automated Logistics Information System and related AI, software, maintenance and consulting offerings.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $2.155 million | $0.991 million | 117% increase |
| Technology systems revenue | $1.490 million | $0.514 million | 190% increase |
| Services and consulting revenue | $0.664 million | $0.477 million | 39% increase |
| Gross margin | $(0.576) million | $(0.655) million | Improved by $0.080 million |
| Gross margin percentage | (26.7%) | (66.2%) | Improved |
| Operating loss | $(1.822) million | $(2.088) million | Improved by $0.266 million |
| Net loss | $(0.406) million | $(2.147) million | 81% improvement |
| Net loss per share | $(0.11) | $(0.80) | Improved |
| Net cash used in operations | $(1.296) million | $(1.657) million | Lower use of cash |
Gross margin remained negative because expanded project delivery costs, cost overruns and COVID-19-related implementation inefficiencies exceeded the benefit of higher revenue. Operating expenses declined 13% to $1.247 million, primarily because lower administration costs more than offset increased sales and marketing and research and development spending.
Cash was $7.072 million at March 31, 2021, compared with $3.969 million at December 31, 2020. Working capital was $5.588 million. Financing activities provided $4.457 million, primarily from the issuance of Series C convertible preferred stock. Investing activities used $58,105. Total liabilities were $3.686 million and stockholders’ equity was $6.054 million.
The $1.410 million PPP loan was forgiven in February 2021, producing approximately $1.422 million of other income and leaving the Company with no SBA loan balance. Remaining debt consisted primarily of $171,352 of equipment financing, $237,390 of insurance-related notes and operating lease obligations. Management described the Company as essentially debt free, although these obligations remain.
Material changes versus the prior comparable period
- Revenue more than doubled, driven primarily by technology systems projects and increased maintenance and support activity.
- The operating loss narrowed despite negative gross margin, reflecting higher revenue and a 30% reduction in administration expense.
- Net loss improved substantially, mainly because of PPP loan forgiveness rather than operating profitability.
- Cash increased by $3.103 million during the quarter, supported by the $4.5 million Series C preferred stock financing.
- Series C preferred stock issued increased by $4.5 million. The securities are convertible at $5.50 per common share, subject to ownership and shareholder-approval limitations.
- Revenue concentration increased: one customer represented 79% of revenue and 79% of accounts receivable in Q1 2021. Approximately 86% of revenue was generated from three customers outside the United States.
Guidance, outlook, risks and unusual items
Management expects revenue growth and improved gross margins in 2021, with much of the improvement expected in the second half of the year. Management also expects profitability in the latter half of 2021, based on delayed contracts resuming, greater deployment efficiency and increased recurring maintenance revenue. The filing does not provide formal quantitative revenue or earnings guidance.
Management reported a more than $2 million AI-related development contract expected to contribute revenue in subsequent 2021 quarters and described a potential multi-year passenger rail contract that could involve at least two Railcar Inspection Portal systems and long-term services beginning in late 2021 or early 2022. These opportunities are subject to execution, customer decisions and contract completion.
COVID-19 continued to delay customer purchasing and project execution, while quarantines and additional contract labor contributed to cost overruns. The Company reorganized engineering and technical teams, increased selected operating resources and is upgrading its RIP and ALIS products to address anticipated FRA and AAR standards.
Management stated that substantial doubt regarding going-concern status had been alleviated and that available liquidity should fund operations for at least 12 months from the filing date. Continued viability nevertheless depends on rebuilding backlog, increasing revenue and achieving consistent profitability. The Company had an accumulated deficit of $39.894 million and used $1.296 million in operating cash during the quarter.
Other matters include a $747,788 executive separation obligation, with a $124,631 lump-sum payment made in March 2021; $76,301 of stock-based compensation expense; significant customer and geographic concentration; and approximately $6.647 million of cash held above federally insured limits at one financial institution. The filing reports no material litigation, no material changes to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether anticipated delayed projects, the AI contract and potential passenger rail contract convert into recognized revenue and cash collections.
- Whether the Company achieves the stated second-half 2021 gross-margin improvement and profitability targets.
- The sustainability of liquidity given ongoing operating cash outflows, the accumulated deficit and reliance on project execution.
- Exposure to the customer representing 79% of revenue and accounts receivable and to international customers.
- The terms, dilution potential and required shareholder approval relating to the Series C convertible preferred stock, warrants and stock options.
- The extent to which PPP forgiveness and other unusual items inflated Q1 2021 net income relative to underlying operations.