Duos Technologies Group, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Duos Technologies Group, Inc. develops machine-vision and artificial-intelligence systems for inspecting and evaluating moving vehicles, with a primary focus on rail applications. Its principal products include the Railcar Inspection Portal and related AI, maintenance, support, and consulting services. The company also evaluates logistics, trucking, aviation, and edge-data-center opportunities. This unaudited report covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Technology systems revenue | $269,855 | $1,827,764 | -85% |
| Services and consulting revenue | $800,825 | $816,524 | -2% |
| Total revenue | $1,070,680 | $2,644,288 | -60% |
| Gross profit | $94,632 | $537,172 | -82% |
| Gross margin | 8.8% | 20.3% | Down 11.5 percentage points |
| Operating expenses | $2,855,678 | $2,683,970 | +6% |
| Loss from operations | $(2,761,046) | $(2,146,798) | Loss increased |
| Net loss | $(2,752,309) | $(2,143,683) | Loss increased 28% |
| Basic and diluted loss per share | $(0.38) | $(0.30) | Lower earnings per share |
| Cash used in operating activities | $(2,032,719) | $(7,086) | Higher use of cash |
Sales and marketing expense increased 80% to $553,486 as the company expanded its commercial team. Research and development expense declined 6% to $382,142, while general and administrative expense declined 3% to $1,920,050. Other income, net, was $9,182, and interest expense was $445.
At March 31, 2024, cash was $2,977,592, compared with $2,441,842 at December 31, 2023. Current assets were $6,386,921 and current liabilities were $3,081,046, producing reported working capital of $3,305,875. Total assets were $12,742,440, total liabilities were $7,222,601, and stockholders’ equity was $5,519,839.
The company used $2,032,719 in operating activities and $9,810 in investing activities. Financing activities provided $2,578,279, primarily from approximately $2,745,002 of Series D and Series E preferred-stock proceeds, partly offset by financing repayments and stock issuance costs. The company had $183,763 of current notes payable related to insurance-financing agreements and $4,925,499 of operating lease obligations, including current and long-term portions.
Material changes versus the prior comparable period
- Total revenue declined 60%, primarily because customer site-preparation delays postponed installation and revenue recognition for two high-speed Railcar Inspection Portals.
- Technology systems revenue fell 85%, while services and consulting revenue was relatively stable, declining 2%.
- Gross margin fell to 8.8% from 20.3%, reflecting the absence of comparable project activity and margin contribution from the two delayed systems.
- Operating expenses increased 6%, despite lower research and development and general and administrative costs, mainly because of higher sales and marketing spending.
- Operating cash usage increased substantially, reflecting material purchases, operating expenses, lower accounts payable, and changes in contract assets.
- Series D preferred stock outstanding increased from 1,299 to 1,919 shares, and Series E preferred stock outstanding increased from 11,500 to 13,625 shares. The company received aggregate gross proceeds of approximately $2.745 million from these issuances.
- Contract assets increased to $912,046 from $641,947, while total contract liabilities increased to $1,692,940 from $1,666,243. The company expects to recognize all contract liabilities within 12 months.
Guidance, outlook, commentary, risks, and unusual items
Management expects customer site preparation and field installation for the two delayed high-speed RIP systems later in 2024. The company also expects new and renewed maintenance contracts, additional activity from existing customers, and completion of next-generation technology systems during 2024. Management is pursuing a subscription-based model and broader recurring-revenue opportunities while expanding into additional rail and potentially other vehicle-related markets. No quantitative revenue or earnings guidance was provided.
Management states that supply-chain delays have largely abated but continues to face contract delays, inflationary cost pressure, and the need to purchase materials before binding contract awards. The company may pass higher costs to customers, but this is not assured. Revenue recognition for technology systems uses a cost-to-cost input method and requires estimates of costs to complete, creating potential period-to-period volatility.
The company reported a cumulative deficit of $66,355,861 and operating cash use of $2,032,719 for the quarter. Management concluded that there is no substantial doubt about the company’s ability to continue as a going concern for at least 12 months from the report date, based on available cash, expected customer receipts, preferred-stock financing, possible use of its S-3 shelf registration, and cost-control measures. Additional financing is not assured, and long-term viability depends on revenue growth and achieving consistent profitability.
Customer concentration remains significant: three customers represented 31%, 30%, and 26% of Q1 2024 revenue, and three customers represented 49%, 38%, and 13% of accounts receivable. Approximately 61% of revenue was generated from three customers outside the United States. Approximately $2.485 million of cash held at one financial institution exceeded federally insured limits.
Potential dilution is material. At March 31, 2024, the company had 1,387,775 outstanding stock options, 44,644 warrants, and preferred-stock conversion rights for approximately 639,667 common shares from Series D and 4,541,667 common shares from Series E. Subsequent to quarter-end, the company issued $250,000 of Series D preferred stock and reported conversions of Series D preferred stock into an aggregate of 216,668 common shares.
The filing reports no material litigation, no defaults on indebtedness, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether the two delayed high-speed RIP installations occurred as planned and when related revenue and margins will be recognized.
- The company’s ability to reduce recurring cash burn and achieve positive operating cash flow without continued equity financing.
- The terms, conversion effects, registration requirements, and potential dilution associated with Series D and Series E preferred stock.
- Customer concentration, payment timing, contract backlog, and the collectability of accounts receivable and contract assets.
- The impact of revenue-recognition estimates and project cost-to-complete revisions on future results.
- Available capacity and terms under the S-3 shelf registration, and whether additional capital raises will be required.
- Progress toward subscription revenues, recurring maintenance contracts, next-generation RIP systems, and profitability.
- Remaining obligations under the approximately 8.3-year facility lease and the company’s ability to support those fixed payments.