Duos Technologies Group, Inc. — 2020 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended December 31, 2020, with comparative results for 2019. Duos Technologies develops artificial-intelligence, machine-learning, imaging, sensor and data-processing solutions for rail transportation, logistics, intermodal operations and government customers. Its principal products include the Railcar Inspection Portal, Automated Logistics Information System, centraco and truevue360 platforms, and the dcVue IT asset-management solution.
The company experienced significant COVID-19-related delays in customer orders, installations and travel during 2020. It completed an up-listing to Nasdaq in the first quarter, appointed Charles Ferry as CEO effective September 1, 2020, reorganized senior management and added Edmond Harris, a former senior railroad executive, to the board.
Financial Performance and Liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $8.04 million | $13.64 million | Down 41% |
| Gross profit | $2.79 million | $6.48 million | Down 57% |
| Gross margin | 35% | 48% | Down 13 percentage points |
| Operating expenses | $9.42 million | $8.89 million | Up 6% |
| Loss from operations | $6.63 million | $2.41 million | Loss increased |
| Net loss | $6.75 million | $2.47 million | Loss increased $4.28 million |
| Basic and diluted loss per share | $2.03 | $1.39 | Loss per share increased |
| Net cash used in operating activities | $4.23 million | $4.02 million | Use increased modestly |
| Net cash used in investing activities | $0.29 million | $0.22 million | Use increased |
| Net cash provided by financing activities | $8.43 million | $3.09 million | Increase primarily from equity financing |
Technology systems revenue fell to $4.96 million from $11.96 million, while technical support revenue increased 31% to $1.80 million. AI technology revenue began in 2020 and totaled $1.01 million. Consulting services revenue declined 9% to $0.27 million.
Operating expenses included approximately $885,000 of one-time severance expense related to the former CEO. Excluding that charge, management stated that continuing operating expenses decreased approximately 4%. Interest expense increased to $150,137 from $69,322.
Cash was $3.97 million at December 31, 2020, compared with $56,249 at December 31, 2019. Working capital was positive at $2.17 million, compared with negative working capital of $0.61 million in 2019. The company reported an accumulated deficit of $39.49 million and total stockholders’ equity of $1.88 million.
Financing included approximately $9.25 million of common-stock proceeds, approximately $1.41 million from a Paycheck Protection Program loan and repayment of $1.0 million of related-party notes. The PPP loan, including accrued interest, was forgiven on February 1, 2021. As of March 26, 2021, management reported approximately $7.44 million of cash and approximately $140,500 in monthly lease and other mandatory payments, excluding payroll and ordinary expenses.
Material Changes Versus 2019
- Revenue declined 41%, primarily because COVID-19 delayed expected orders and project implementations; management reported no cancellations of current contracts or expected orders.
- Gross margin declined to 35% from 48%, reflecting lower project volume, staffing retained ahead of anticipated growth and costs recognized under ASC 606.
- Technical support revenue grew, providing a larger recurring component, while AI technologies generated their first material revenue.
- Operating losses increased substantially because of lower revenue, continued staffing and approximately $885,000 of CEO severance expense.
- Cash and working capital improved materially as a result of the 2020 equity offering and PPP funding, although operations continued to consume cash.
- Customer concentration remained significant: two customers represented approximately 68% of 2020 revenue and 86% of accounts receivable.
Guidance, Outlook, Risks and Unusual Items
Management expects customer order flow and project implementations to recover in 2021, with particular growth expected from Railcar Inspection Portal deployments, AI development, technical support and dcVue licensing. Management cited a contract exceeding $2 million for AI-related development and expected additional revenue from existing customers. It also expects margins to improve through larger projects, implementation efficiencies, material-cost controls and increased recurring support revenue.
Management stated that the company has sufficient liquidity to fund operations for at least 12 months from the filing date and believes substantial doubt regarding going concern has been alleviated. However, the company continues to have a history of losses and negative operating cash flow and may require additional working capital if growth exceeds current forecasts.
In February 2021, the company issued $4.5 million of Series C Convertible Preferred Stock to existing shareholders. The securities carry conversion and voting rights subject to beneficial ownership limitations and require shareholder approval for certain common-stock issuances. The transaction creates potential dilution and additional voting complexity.
- COVID-19 may continue to delay customer spending, installations, supply chains, travel and employee productivity.
- The company depends heavily on a limited number of railroad customers and has no minimum contract values stated for the significant customer contracts.
- Technology systems revenue is project-driven and may fluctuate materially between periods.
- The company faces rapid technological change, competition from larger companies and potential customer-developed solutions.
- Revenue recognition for technology systems uses percentage-of-completion estimates, including estimated costs to complete projects, creating judgment and potential margin volatility.
- The company relies on key technical and management personnel and faces cybersecurity, data-loss and system-integration risks.
- Outstanding warrants and stock options, convertible preferred stock and future financing could dilute common shareholders.
- The company had approximately $1.59 million of outstanding warrants and 451,898 employee stock options at December 31, 2020.
- Accrued deferred compensation increased to approximately $797,000, principally related to the former CEO and sales personnel.
Most Important Facts for Investors to Verify
- Whether delayed railroad orders and installations converted into recognized revenue and cash collections during 2021.
- Actual 2021 revenue growth, recurring support revenue, gross margin improvement and progress toward breakeven.
- The collectability of accounts receivable, given that two customers represented 86% of year-end receivables.
- The terms, conversion impact, voting rights and dilution potential of the $4.5 million Series C preferred-stock financing.
- Whether operating cash burn declines sufficiently to avoid additional equity or debt financing.
- The status of the company’s major Railcar Inspection Portal and AI contracts, backlog and customer concentration.
- Whether percentage-of-completion estimates, contract assets and contract liabilities result in future revenue or margin adjustments.
- Execution of the new management strategy, regulatory progress with FRA and AAR standards, and the company’s ability to scale deployments.