Duos Technologies Group, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016; filed November 14, 2016. The unaudited consolidated statements cover Duos Technologies Group, Inc., duostech and TrueVue 360, Inc. The company develops artificial-intelligence-driven security and analytics systems, including the praesidium and centraco platforms, and provides maintenance, technical support and IT asset-management services.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.367 million | $2.242 million | $4.019 million | $4.953 million |
| Gross profit | $0.722 million | $1.238 million | $2.215 million | $2.647 million |
| Gross margin | 52.8% | 55.2% | 55.1% | 53.4% |
| Operating income (loss) | $(0.430) million | $0.064 million | $(1.650) million | $(2.177) million |
| Net loss | $(0.591) million | $(0.209) million | $(2.093) million | $(3.014) million |
| Net loss per share | $(0.01) | $(0.00) | $(0.03) | $(0.05) |
- Revenue mix: Nine-month project revenue was $1.707 million, maintenance and technical support revenue was $1.830 million, and IT asset-management revenue was $0.482 million.
- Cash flow: Nine-month cash used in operating activities was $1.518 million, cash used in investing activities was $32,481, and cash provided by financing activities was $1.480 million. Cash declined from $140,129 at December 31, 2015 to $69,567 at September 30, 2016.
- Balance sheet: Total assets were $1.405 million and total liabilities were $6.320 million at September 30, 2016. Stockholders’ deficit was $4.915 million, compared with $3.759 million at December 31, 2015.
- Debt and obligations: Liabilities included $1.141 million of net senior notes payable, $611,352 of related-party notes, $193,950 of convertible notes including premiums, $1.254 million of accrued expenses and $408,186 of payroll taxes payable.
- Senior financing: On April 1, 2016, the company closed a $1.8 million senior secured, non-convertible debt financing. The note bears 14% annual interest plus an additional 2% compounded annual rate, matures in three years, is secured by substantially all company assets and subsidiary shares, and was issued with warrants for 2.5 million common shares.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue decreased $875,031, or approximately 39%, primarily because of delayed customer project implementations. Project revenue declined $772,469; maintenance and technical support declined $46,988; and IT asset-management revenue declined $55,574.
- Nine-month revenue decreased $934,609, or approximately 19%. Project revenue fell $1.184 million and maintenance revenue fell $22,406, partially offset by a $271,818 increase in IT asset-management revenue.
- Third-quarter operating expenses were broadly stable at $1.152 million versus $1.174 million, but salaries, wages and contract labor increased $72,604 as the company expanded its employee base in anticipation of new projects.
- Nine-month salaries, wages and contract labor increased $675,485, while research and development costs increased $44,340. The prior-year period included a $1.579 million impairment loss that did not recur in 2016.
- Nine-month operating loss improved by $527,347 and net loss improved by $921,511, primarily because of the absence of the 2015 impairment charge and lower interest expense. The third-quarter net loss nevertheless increased by $381,750 because of lower revenue and higher staffing costs.
- Common shares outstanding increased to 66,070,698 at September 30, 2016 from 64,777,621 at December 31, 2015. The company had 3,600,840 outstanding warrants and 1,819,418 shares issuable upon conversion of convertible debt, all excluded from diluted EPS because they were anti-dilutive.
Outlook, Risks and Unusual Items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. The company reported a $2.093 million nine-month net loss, $1.518 million of operating cash use, a $3.901 million working-capital deficit and a $23.044 million accumulated deficit. Continued operations depend on additional capital, execution of the business plan and achievement of profitability.
- Liquidity needs: Management stated that cash on hand was approximately $47,000 as of November 11, 2016, with approximately $131,000 of monthly lease and other mandatory payments, excluding payroll and ordinary expenses. Management estimated a need for at least $500,000 of additional capital and anticipated needing approximately $1 million during 2016.
- Backlog: Reported backlog was $3.346 million, of which management anticipated recording $2.3 million of revenue during the fourth quarter of 2016. This expectation depends on timely project execution and customer implementation.
- Financing constraints: The senior debt agreement contains covenants restricting additional debt and certain preferred-stock issuances without required lender consent. Interest and repayment obligations increase pressure on cash flow.
- Preferred stock financing: The company authorized Series A convertible preferred stock with a $10 stated value, an 8% cumulative dividend when declared, conversion at $0.18 per common share and holder redemption rights after three years. The company received $140,000 of related prepayments through September 30 and an additional $8,000 on October 11, 2016.
- Litigation: The CW Electric settlement was fully paid and released on April 1, 2016. Litigation involving the holder of two convertible notes remained unresolved. Subsequent to quarter-end, the company reported that motions were granted against it without prejudice and that it intended to amend its defenses and counterclaim.
- Tax obligations: Delinquent payroll taxes included $94,470 at September 30, 2016. The IRS installment agreement requires $25,000 monthly payments; management stated the company was current as of October 28, 2016.
- Internal controls: Management concluded that disclosure controls and procedures were not effective because of insufficient segregation of duties and limited technical expertise in public-company financial reporting.
- Customer concentration: Five customers each represented more than 10% of nine-month 2016 revenue, and approximately 18% of revenue was generated outside the United States.
Investor Verification Checklist
- Verify whether the company converted its reported backlog into fourth-quarter revenue and whether customer implementation delays persisted.
- Review available cash, operating cash burn, mandatory payments and the timing and terms of any subsequent equity or debt financing.
- Examine compliance with the senior secured note’s interest, repayment and restrictive covenants.
- Track the Greentree convertible-note litigation, potential acceleration or conversion claims and any resulting dilution or cash liability.
- Confirm the final terms, issuance and classification of the Series A preferred stock and related shareholder prepayments.
- Assess whether the company remedied the disclosed internal-control weaknesses and whether additional material weaknesses were identified.
- Evaluate customer concentration, project accounting estimates under the percentage-of-completion method and collectability of the $726,289 accounts receivable balance.