DUOS TECHNOLOGIES GROUP, INC. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015; financial statements are unaudited. Duos Technologies Group, formerly Information Systems Associates, completed a reverse triangular merger with duostech effective April 1, 2015. The company develops artificial-intelligence-driven security and intelligent technology systems and also operates an IT asset-management services division.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2.242 million | $0.965 million | $4.953 million | $3.174 million |
| Gross profit | $1.238 million | $0.461 million | $2.647 million | $1.509 million |
| Gross margin | 55.23% | 47.78% | 53.44% | 47.54% |
| Operating income (loss) | $0.064 million | $(0.425) million | $(2.177) million | $(0.887) million |
| Net loss | $(0.209) million | $(0.464) million | $(3.014) million | $(0.985) million |
| Net loss applicable to common stock per share | $(0.00) | $(0.01) | $(0.05) | $(0.01) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(2.003) million | $(0.702) million |
Q3 revenue increased approximately 132% year over year, driven primarily by higher project activity, increased maintenance and technical support, and $0.210 million of data-center professional-services revenue from the merged operations. Nine-month revenue increased approximately 56%.
Project revenue was $2.891 million for the first nine months, maintenance and technical support was $1.852 million, and IT asset-management services were $0.210 million. The company reported a Q3 operating profit, but remained unprofitable for the nine-month period.
The nine-month net loss included a $1.579 million non-cash impairment charge related to goodwill and intangible assets acquired in the merger. Interest expense rose to $0.840 million from $0.097 million, substantially reflecting debt discounts, debt-settlement losses, and other financing costs.
At September 30, 2015, cash was $14,488, accounts receivable were $1.170 million, and total assets were $1.849 million. Current and total liabilities were $6.867 million, compared with $5.862 million at December 31, 2014. Stockholders’ deficit was $5.018 million, and accumulated deficit was $21.639 million.
Material changes and financing
- The April 2015 reverse merger added the duostech operating business and resulted in the issuance of substantial common stock. Shares issued and issuable increased to 63.3 million at September 30, 2015 from 57.7 million at December 31, 2014; 64.4 million shares were outstanding as of November 10, 2015.
- Convertible and other debt was partly converted or settled through equity. During the nine months, the company issued $2.216 million of common stock to settle notes payable and accrued interest, plus additional shares for accounts payable and accrued salary.
- Current liabilities included $598,051 of related-party notes, $557,214 of convertible notes, $68,646 of other notes, $40,214 drawn on a line of credit, $1.596 million of accounts payable, and a $1.412 million contingent lawsuit payable.
- The company raised approximately $2.050 million through financing activities during the first nine months, including proceeds from related-party notes, convertible notes, other debt, and a bank line of credit. Financing exceeded investing needs but did not offset operating cash usage sufficiently to increase cash.
- Customer concentration was significant: four customers each represented more than 10% of nine-month 2015 revenue, and three customers represented more than 10% of accounts receivable.
Liquidity, outlook, risks, and unusual items
Management disclosed substantial doubt about the company’s ability to continue as a going concern. The company had a $5.143 million working-capital deficit, used $2.003 million in operating cash during the first nine months, and depended on additional capital, revenue growth, and improved profitability. Management stated that approximately $2 million of additional fourth-quarter revenue and deferral of outstanding loans were needed to support operations through December 31, 2015. As of November 4, 2015, management reported approximately $60,000 of cash, approximately $283,000 owed to the IRS, and approximately $85,000 in monthly lease and other mandatory payments, excluding payroll and ordinary expenses.
Management reported an order backlog of approximately $7 million, with about 50% expected to be recognized during 2015, but provided no formal revenue or earnings guidance. The company continued efforts to raise capital through equity-linked securities and placement agents; no firm financing commitment had been obtained as of the report.
Key risks include limited liquidity, dependence on financing and collections, dilution from equity financing and convertible debt, customer concentration, project-estimate risk under percentage-of-completion accounting, competition and pricing pressure, manufacturing and delivery risks, and the ability to integrate the merged operations.
Subsequent to quarter-end, the company agreed to settle the Corky Wells Electric litigation for $550,000 payable by February 15, 2016, subject to financing security requirements. If the settlement is not funded, an agreed judgment and 12% interest could apply. Management anticipated an approximate non-cash gain of $861,650 because $1.412 million had previously been accrued.
The company disclosed ineffective disclosure controls due to insufficient segregation of duties and limited technical expertise in public-company financial reporting. Management planned to add internal or external accounting personnel when resources permitted.
Important facts for investors to verify
- Whether the company obtained financing or generated the approximately $2 million of additional revenue management identified as necessary for near-term liquidity.
- Cash collections, accounts-receivable aging, contract-billing balances, and the recoverability of the $1.170 million accounts receivable balance.
- The status and repayment or conversion terms of related-party notes, convertible notes, the Wells Fargo line of credit, and other current obligations.
- Funding and final accounting treatment of the $550,000 Corky Wells Electric settlement and any resulting gain.
- Whether the reported $7 million backlog converted into revenue on the expected schedule and at the disclosed margins.
- Progress in remediating the material weakness in disclosure controls and internal control over financial reporting.
- The extent of future dilution from outstanding warrants, convertible debt, and additional capital raises.