Duos Technologies Group, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Duos Technologies Group designs and deploys artificial-intelligence-enabled security, inspection and operational technology systems, primarily for rail transportation, commercial, petrochemical, government, banking and IT customers. Its offerings include turnkey technology systems, maintenance and technical support, consulting services and AI-related applications. The filing covers the unaudited three months ended March 31, 2020. The company operated as a smaller reporting company and listed its common stock on the Nasdaq Capital Market in February 2020.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $990,945 | $4,352,081 | Down 77% |
| Gross profit | $102,865 | $2,130,844 | Down 95% |
| Gross margin | 10% | 49% | Down 39 percentage points |
| Operating income (loss) | $(2,087,915) | $46,450 | Declined $2,134,365 |
| Net income (loss) | $(2,147,049) | $44,169 | Declined $2,191,218 |
| Basic loss per share | $(0.80) | $0.03 profit | Unfavorable change |
| Cash flow from operations | $(1,657,013) | $(1,500,159) | Higher cash use |
Technology systems revenue fell 87% to $513,674, while technical support revenue increased 7% to $345,187 and consulting services revenue increased 18% to $132,084. Operating expenses rose 5% to $2,190,780, including higher administration and AI technology costs. Interest expense increased to $68,932, principally because of amortization of debt discounts.
Cash was $6,552,888 at March 31, 2020, compared with $56,249 at December 31, 2019. Financing activities provided $8,189,897, primarily from the February public offering, while investing activities used $36,245. Total assets were $9,172,823 and total liabilities were $3,180,299. Stockholders’ equity increased to $5,992,524 from a deficit of $127,270 at year-end, largely because of the equity offering.
The company reported working capital of $5,703,723 in MD&A, while Note 2 reports $5,503,723; the filing does not explain the $200,000 difference.
Material changes versus the prior comparable period
- Revenue declined sharply because anticipated contract awards were delayed, customer acceptance and execution were slower, and COVID-19 restrictions affected awards and project delivery.
- Gross margin contracted to 10% from 49% because project-related equipment and personnel costs were incurred before delayed customer implementations generated corresponding revenue.
- The company moved from a modest operating profit and net profit in Q1 2019 to substantial operating and net losses in Q1 2020.
- The February 2020 underwritten offering issued 1,542,188 common shares at $6.00 per share, generating approximately $9.25 million of gross proceeds and more than $8.1 million after banking fees and offering expenses.
- Common shares outstanding increased to 3,524,514 at March 31, 2020 from 1,980,715 at December 31, 2019, before giving effect to subsequent option issuances.
- Customer concentration remained significant: three customers represented 44%, 13% and 13% of Q1 revenue, and three customers represented 28%, 21% and 18% of accounts receivable at March 31, 2020.
Guidance, outlook, risks and unusual items
Management stated that the offering provided sufficient liquidity for at least 12 months and believes it eliminated substantial doubt about going-concern status. The company expects to pursue growth through new contracts, recurring support revenue, AI development and market expansion, and stated that full-year gross margins could approach historical norms. However, management also indicated that COVID-19-related delays could postpone expected growth by at least six months and that the full-year impact could not be quantified.
- Management identified delayed customer awards, customer acceptance delays, execution timing, staffing levels and COVID-19 restrictions as key operating risks.
- Long-term viability remains dependent on generating sufficient revenue and achieving consistently profitable operations.
- Debt included $1.0 million of related-party notes, net of discounts of $954,299, repayable June 25, 2020, plus finance lease and insurance-financing obligations. The filing states there were no material debt defaults.
- At March 31, 2020, cash held at one financial institution exceeded applicable federal insurance limits by approximately $6.36 million.
- Subsequent to quarter-end, the company issued 149,424 new options and 160,866 replacement options. On April 23, 2020, it borrowed $1,410,270 under the Paycheck Protection Program at 1% interest with a two-year term.
- Revenue recognition depends on estimates of contract costs, progress and completion, creating potential for future revisions to reported revenue and margins.
- The company reported no material litigation and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether delayed technology-system awards and customer acceptance issues convert into revenue and cash collections during subsequent quarters.
- Whether gross margins recover from the reported 10% level and whether project staffing and equipment costs remain elevated.
- Actual cash burn, including the effect of the $1.0 million related-party notes, lease obligations and the PPP loan.
- The reason for the inconsistent working-capital figures of $5.503 million and $5.704 million in different sections of the filing.
- Customer concentration, accounts-receivable collectability and the effect of the company’s international customer exposure.
- Potential dilution from 1,588,750 outstanding warrants, 163,010 employee options at March 31, 2020, convertible preferred stock and the substantial April 2020 option grants.
- Whether the company achieves profitability without additional capital, as management’s liquidity assessment remains dependent on future revenue growth and operating improvements.