Business Context and Reporting Period
Duos Technologies Group, Inc. develops AI-enabled vision and automation solutions for rail inspection, logistics, intermodal transportation and government applications, including Railcar Inspection Portals, ALIS, Centraco, Praesidium and TrueVue360. This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparative results for the three months ended March 31, 2022.
The company reported 76 employees, including 69 full-time employees, and had 7,169,339 common shares outstanding as of May 10, 2023.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $2.644 million | $1.439 million | 84% |
| Technology systems revenue | $1.828 million | $0.783 million | 133% |
| Services and consulting revenue | $0.817 million | $0.656 million | 24% |
| Gross profit | $0.537 million | $0.222 million | 142% |
| Gross margin | 20.3% | 15.4% | Improved |
| Operating expenses | $2.684 million | $2.864 million | Down 6% |
| Loss from operations | $(2.147) million | $(2.642) million | Improved |
| Net loss | $(2.144) million | $(2.645) million | Improved 19% |
| Basic and diluted loss per share | $(0.30) | $(0.49) | Improved |
| Net cash used in operating activities | $(0.007) million | $(0.828) million | Improved |
| Cash at period end | $4.341 million | $5.330 million | Compared with prior-year quarter-end |
Technology systems revenue and cost primarily reflected the manufacture of two higher-cost, high-speed transit Rail Inspection Portals. Management attributed the approximately 20% quarterly gross margin to revenue and profit recognition on this project.
Operating expenses included sales and marketing of $307,577, research and development of $404,885, and general and administrative expenses of $1.972 million. Interest expense was $1,180 and other income was $4,295.
At March 31, 2023, total assets were $14.868 million, total liabilities were $9.153 million, stockholders’ equity was $5.715 million, and working capital surplus was $3.860 million. Cash increased by $3.220 million during the quarter, primarily because of $4.000 million of Series E preferred-stock proceeds.
Debt, Liquidity and Capital Structure
- Current notes payable under insurance financing agreements totaled $193,094, and equipment financing totaled $11,566. The company reported no long-term equipment financing balance.
- Operating lease obligations totaled $5.232 million, including $764,820 current and $4.467 million long term. Remaining undiscounted operating lease payments were $7.849 million.
- The company issued 4,000 shares of Series E convertible preferred stock for gross proceeds of $4.000 million on March 27, 2023. The shares have a $1,000 stated value and a $3.00 conversion price, subject to stockholder approval and beneficial ownership limitations.
- Series D convertible preferred stock outstanding totaled 1,299 shares and is also convertible at $3.00 per common share subject to stockholder approval. The company had 924,658 outstanding stock options and 80,091 outstanding warrants at March 31, 2023.
- Management stated that available liquid assets and access to capital markets are expected to support operations for at least twelve months. Continued viability depends on executing the business plan, generating sufficient revenue and achieving profitability; no assurance is provided.
Material Changes Versus the Prior Comparable Period
- Revenue increased 84%, led by a 133% increase in technology systems revenue as the company progressed from early procurement and manufacturing in Q1 2022 to substantial portal production in Q1 2023.
- Gross profit more than doubled and gross margin increased to approximately 20.3% from 15.4%. Management cautioned that margins may vary with project completion stages and revenue recognition timing.
- Operating expenses decreased 6%, partly because of lower non-cash compensation and reduced general and administrative and research and development costs.
- Net loss narrowed by $500,933, or 19%, and operating cash usage declined substantially to $7,086.
- Investing cash outflows increased to $261,144 from $102,078, including $212,067 of software development expenditures.
- Financing cash inflows fell to $3.488 million from $5.366 million because Q1 2023 financing consisted primarily of preferred-stock proceeds, compared with $6.095 million of common-stock proceeds in Q1 2022.
- Contract assets increased to $1.426 million from $425,722, while contract liabilities increased to $2.067 million from $957,997. The company expects to recognize all contract liabilities within twelve months.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal quantitative revenue or earnings guidance. It expects revenue growth from new and upgraded Rail Inspection Portals, ALIS improvements, artificial-intelligence detections, maintenance contracts and a shift toward next-generation systems. Management expects to manufacture and deliver a two-portal solution under a large, multi-year national rail carrier contract, together with a long-term services agreement, during 2023, with completion anticipated in the second quarter.
The company is pursuing a subscription model under which it would build, own and operate Railcar Inspection Portals and sell customer access to the resulting data. This could expand the addressable market but would require additional upfront capital and could increase working-capital needs.
- Supply-chain delays, inflation, component availability and longer commercial cycles may delay shipments and push revenue recognition into 2024.
- The company relies heavily on a small number of customers: two customers represented 70% and 20% of Q1 2023 revenue, while three customers represented 59%, 15% and 11% of accounts receivable.
- Approximately 25% of Q1 2023 revenue came from customers outside the United States.
- Cash held at one financial institution exceeded federally insured limits by approximately $3.907 million.
- The company continues to incur substantial losses and has an accumulated deficit of $54.506 million. Future financing may be required, and additional investment is not assured.
- The company disclosed that its disclosure controls and procedures were not effective at March 31, 2023 because of a material weakness in internal control over financial reporting related to the prior-year control deficiency. Planned remediation includes improving revenue-recognition systems, documentation, training, change-management controls, staffing and segregation of duties.
- There were no material pending legal proceedings, no defaults upon senior securities and no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify customer concentration, contract terms, backlog conversion and collection of the company’s accounts receivable and contract assets.
- Assess whether supply-chain constraints, inflation and project timing could materially change revenue recognition and gross margins.
- Review the national rail carrier contract, expected Q2 delivery milestones and associated services agreement.
- Evaluate the funding runway, potential use of the S-3 shelf registration and the likelihood of additional equity or preferred-stock financing.
- Quantify potential dilution from Series D and Series E preferred stock, stock options and warrants, including the required stockholder approvals.
- Monitor remediation of the material weakness and whether subsequent filings report effective internal controls.
- Assess the cash requirements and economics of the proposed company-owned subscription model for Railcar Inspection Portals.