DUOS TECHNOLOGIES GROUP, INC. — 2017 Form 10-K Summary
Business context and reporting period
Filed April 2, 2018, for the fiscal year ended December 31, 2017. Duos Technologies develops artificial-intelligence-driven security, inspection and operational technology systems, primarily for transportation and critical infrastructure markets. Its principal platforms are praesidium, an analytics suite, and centraco, an enterprise command-and-control interface. The company also operates an IT asset management services division.
Key applications include intelligent rail inspection portals, undercarriage and pantograph inspection, security analytics, facility protection, retail logistics and transit-platform analytics. The company reported approximately 36 employees and operates as a smaller reporting company.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $3.885 million | $6.105 million | Down 36% |
| Gross profit | $1.590 million | $3.372 million | Down 53% |
| Gross margin | 40.9% | 55.2% | Down 14.3 percentage points |
| Operating loss | $(3.443) million | $(1.744) million | Loss increased |
| Net loss | $(5.152) million | $(2.562) million | Loss increased $2.591 million |
| Net loss applicable to common stock | $(5.170) million | $(2.568) million | Loss increased $2.603 million |
| Basic and diluted loss per share | $(1.43) | $(1.36) | More unfavorable |
| Cash flow from operations | $(3.562) million | $(1.840) million | Use increased |
| Cash flow from investing | $(41,709) | $(35,415) | Higher use |
| Cash flow from financing | $5.371 million | $1.910 million | Higher financing inflow |
| Cash at year-end | $1.942 million | $174,376 | Increased |
| Total assets | $2.866 million | $1.162 million | Increased |
| Total liabilities | $2.244 million | $6.383 million | Decreased |
| Stockholders’ equity | $622,535 | $(5.523) million | Improved |
Revenue consisted of project revenue of $1.884 million, maintenance and technical support revenue of $1.128 million, and IT asset management revenue of $873,000. Project and maintenance revenue declined materially, while IT asset management revenue increased approximately 29%.
Operating expenses were $5.034 million versus $5.117 million in 2016. Interest expense increased to $4.519 million from $561,174, primarily from non-cash debt discounts and derivative-related accounting associated with financing transactions. A $2.744 million warrant derivative gain partially offset these charges; the related warrant derivative liability was eliminated by year-end.
At December 31, 2017, current assets were $2.755 million and current liabilities were $2.205 million. Remaining obligations included $49,657 of insurance financing, $34,513 under a closed line of credit, $48,215 of related-party debt, $149,448 of payroll taxes payable and $438,907 of deferred revenue. The company stated that substantial debt and prior obligations were retired or converted in connection with the November 2017 financing. As of March 27, 2018, management reported approximately $441,000 of cash and approximately $131,000 in monthly lease and other mandatory payments, excluding payroll and ordinary expenses.
Material changes versus the prior comparable period
- Revenue declined 36%, primarily because an anticipated $11 million capital raise was delayed approximately six months, disrupting hiring, business development and project execution.
- Maintenance and technical support revenue declined more than 49% following expiration of several service contracts.
- Gross margin declined to 40.9% from 55.2%, reflecting lower-margin prototype and pilot projects and aggressive pricing on a major contract.
- Operating loss nearly doubled as lower gross profit was not offset by the relatively modest reduction in operating expenses.
- Operating cash use increased to $3.562 million, demonstrating continued dependence on external financing.
- The November 2017 private offering generated approximately $10 million of new equity proceeds, while also converting or retiring significant debt and preferred-stock obligations. The transaction included 16,402,742 common shares, 2,830 Series B convertible preferred shares and substantial warrant issuance.
- Common shares outstanding increased to 20,657,850 at year-end from 1,892,020 at December 31, 2016, reflecting substantial dilution. Warrants outstanding increased to 25,216,332.
- Series A preferred stock was redeemed in full for $319,680, including accrued dividends. Series B preferred stock outstanding at year-end was convertible into 5,660,000 common shares, subject to beneficial-ownership limitations.
Guidance, outlook, risks and unusual items
Management plans to invest available capital in sales, marketing, project execution and research and development to pursue revenue growth in rail, transit, retail, utilities, petrochemical, healthcare and government markets. Planned or anticipated product milestones included a vehicle undercarriage examiner upgrade by the third quarter of 2018, thermal undercarriage examiner completion by the second quarter of 2018, transit-platform analytics development by the second quarter of 2018, and a new IT asset management system expected in the second quarter of 2018. The filing does not provide formal revenue or earnings guidance.
The independent auditor stated that substantial doubt exists regarding the company’s ability to continue as a going concern because of the 2017 loss, operating cash outflow and accumulated deficit of $28.689 million. Management’s plan depends on executing its growth strategy, generating substantially higher revenue and achieving profitability; additional financing may be required if these objectives are not achieved.
- Customer concentration is significant: three customers represented approximately 60% of 2017 revenue, and four customers represented 83% of year-end accounts receivable.
- The company reported a delinquent payroll-tax history. Payroll taxes were stated to have been paid, but $108,262 of accrued late fees remained subject to an IRS penalty-reduction appeal.
- Technology integration failures, software defects, cybersecurity incidents, rapid technological change and stronger competitors could adversely affect results.
- The company depends on a limited number of key employees and has a limited operating history of sustained profitability.
- The company’s stock trades on the OTCQB, has no consistently active liquid market, is subject to penny-stock rules and may experience substantial dilution from preferred stock, warrants, options and future financing.
- The company does not expect to pay dividends in the foreseeable future.
- Previously disclosed lawsuits and vendor disputes were settled or dismissed. The filing states that no other pending litigation is expected to have a material adverse effect.
Most important facts for an investor to verify
- Whether post-year-end revenue growth and project execution were sufficient to reduce operating cash burn and resolve the going-concern uncertainty.
- Actual cash, monthly cash requirements and the company’s ability to fund operations without another dilutive financing.
- The terms, conversion limits and potential dilution from 25.2 million warrants, 2,830 Series B preferred shares convertible into 5.66 million common shares, and subsequent option grants.
- Customer concentration, renewal of maintenance contracts and collectability of the concentrated accounts receivable balance.
- Status of the IRS appeal concerning $108,262 of accrued late fees and any remaining payroll-tax obligations.
- Whether the rail, retail and transit pilot projects converted into recurring commercial contracts and higher-margin revenue.
- Completion and commercial adoption of the stated 2018 product milestones, including thermal inspection, platform analytics and the new IT asset management system.
- The company’s ability to maintain intellectual-property protection, cybersecurity and reliable integration of proprietary and third-party technologies.