Duos Technologies Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Duos Technologies Group, Inc. designs and deploys artificial-intelligence-driven security, inspection and operations systems for critical infrastructure, with primary exposure to rail, commercial, government, banking, petrochemical and IT-supplier markets. Its offerings include turnkey technology systems, technical support, consulting services and AI technologies. The filing covers the unaudited three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
The company employed approximately 51 people and operated through Duos Technologies, Inc. and TrueVue360, Inc. It completed an underwritten public offering and Nasdaq Capital Market listing in February 2020.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $1,982,142 | $1,345,805 | $2,973,087 | $5,697,886 |
| Gross profit | $739,375 | $174,400 | $842,240 | $2,305,244 |
| Gross margin | 37% | 13% | 28% | 40% |
| Operating loss | $(1,427,056) | $(1,949,165) | $(3,514,971) | $(1,902,716) |
| Net loss | $(1,465,889) | $(1,949,791) | $(3,612,938) | $(1,905,622) |
| Basic and diluted loss per share | $(0.42) | $(1.09) | $(1.16) | $(1.14) |
- Second-quarter revenue increased 47%, driven by a large technology-systems project, higher technical-support revenue and the initial $178,224 of AI-technology revenue.
- Six-month revenue declined 48%, primarily because of delayed contract awards and COVID-19-related delays in project execution. Technology-systems revenue declined 61% to $1,933,083.
- Second-quarter gross profit increased 324% and gross margin expanded to 37%, reflecting improved project build costs and execution efficiencies. Six-month gross margin decreased to 28% from 40% because of lower project volume and timing of costs and revenue recognition.
- Six-month operating expenses increased 4% to $4,357,211. AI-technology expense increased 117% to $834,024, while administration expense increased 13% to $2,039,498.
- Interest expense increased to $127,175 for the six months, including $94,627 of debt-discount amortization. Stock-based compensation expense was $199,070.
Cash Flow, Liquidity and Debt
- Cash was $5,374,786 at June 30, 2020, compared with $56,249 at December 31, 2019. Working capital was $4,991,582, and accumulated deficit was $36,353,653.
- Six-month cash flow from operations was $(3,152,753), compared with $(2,711,334) in the prior-year period. Investing cash flow was $(179,202).
- Financing activities provided $8,650,492, including $9,253,128 from common-stock issuance and $1,410,270 from a Paycheck Protection Program loan, partially offset by $1,000,000 of related-party note repayments and $1,001,885 of offering costs.
- Total liabilities were $3,430,810 at June 30, 2020. Debt and financing obligations included a $1,410,270 SBA loan at 1% interest, $233,949 of finance-lease obligations, $175,796 of insurance-financing notes and $327,620 of operating-lease obligations. Related-party notes totaling $1,000,000 were repaid in June 2020, and the line of credit was paid in full.
- Management stated that available capital and projected revenues were sufficient to fund operations for at least 12 months from the report date. As of August 11, 2020, cash on hand was approximately $4.6 million, with approximately $135,000 of monthly lease and other mandatory payments excluding payroll and ordinary expenses.
Material Changes, Outlook and Risks
- The February 2020 public offering issued 1,542,188 common shares at $6.00 per share, including a partial over-allotment exercise, and generated approximately $9.25 million of gross proceeds. Shares outstanding increased to 3,526,146 at June 30, 2020 from 1,980,715 at December 31, 2019.
- The company also issued 310,290 employee and director stock options during the quarter, cancelled or modified 161,402 prior options, and had 1,588,750 warrants outstanding at June 30, 2020. These instruments may create future dilution.
- COVID-19 reduced the pace of new project closings, delayed awards and restricted travel and execution, particularly in consulting and technology-systems activities. Management indicated that expected business growth could be delayed by at least six months and that the full-year impact remained uncertain.
- Management expects improved gross margins, continued growth in technical-support revenue, additional AI revenue from existing customers and development of recurring revenue from new customers. The filing does not provide quantitative revenue or earnings guidance.
- Management reported that the prior substantial doubt regarding going concern had been alleviated following the 2020 offering, but continued viability depends on executing its growth plan, generating sufficient revenue and achieving consistent profitability.
- Revenue and receivables are concentrated. Three customers represented 45%, 15% and 12% of six-month 2020 revenue; four customers represented 41%, 32%, 10% and 10% of accounts receivable at June 30, 2020. Approximately 29% of revenue was generated from three customers outside the United States.
- Cash held at one financial institution exceeded federally insured limits by approximately $4,952,107. Revenue recognition relies on estimates of contract costs, project progress and expected profitability, which may be revised as projects develop.
- The company reported no material litigation, no material changes to previously disclosed risk factors, effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether delayed project awards and COVID-19 restrictions materially affect second-half revenue, backlog and cash burn.
- Whether the company converts its improved second-quarter gross margin into sustained profitability despite six-month operating losses and negative operating cash flow.
- The terms, repayment schedule and potential forgiveness of the $1.41 million PPP/SBA loan.
- Customer concentration, collectability of accounts receivable and the recoverability of contract assets totaling $845,810.
- Potential dilution from 1,588,750 warrants, 311,898 employee stock options and 243,571 shares issuable upon conversion of Series B preferred stock.
- Cash usage following the offering, including approximately $4.6 million of cash reported on August 11, 2020 and the company’s ability to operate without additional capital.