Business Context and Reporting Period
Duos Technologies Group, Inc. develops AI-enabled vision and automation systems, including Rail Inspection Portals, Automated Logistics Information Systems, and related software, maintenance, technical support, and consulting services for rail, logistics, government, and other customers. The unaudited Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to the same 2021 periods.
Financial Performance and Liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $4.02 million | $1.74 million | $9.08 million | $4.54 million |
| Gross margin | $1.10 million; 27.3% | $0.07 million; 4.1% | $2.60 million; 28.7% | $0.30 million; 6.7% |
| Operating loss | $(1.87) million | $(2.45) million | $(5.91) million | $(7.22) million |
| Net loss | $(1.93) million | $(2.45) million | $(5.91) million | $(5.81) million |
| Net loss per share | $(0.30) | $(0.68) | $(1.01) | $(1.63) |
| Cash used in operations | Not separately provided | Not separately provided | $(3.85) million | $(5.52) million |
| Cash from financing | Not separately provided | Not separately provided | $8.34 million | $4.12 million |
Technology systems revenue increased 135% in the third quarter and 129% for the nine-month period. Services and consulting revenue increased 123% and 56%, respectively. The company attributed the growth primarily to production and installation of Rail Inspection Portals, project completion, change orders, and related support activity.
At September 30, 2022, cash was $4.97 million versus $0.89 million at December 31, 2021. Working capital was a surplus of $2.72 million, compared with a deficit of $0.65 million at year-end 2021. Total assets were $15.56 million and total liabilities were $11.26 million.
Debt was relatively limited apart from lease obligations. Current notes payable for insurance financing totaled $0.10 million, equipment financing totaled $0.03 million, and operating lease obligations totaled $5.12 million, including current and long-term portions. The company had an accumulated deficit of $51.41 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue more than doubled, while gross margin improved to approximately 27% from approximately 4%.
- The third-quarter operating loss narrowed by $0.58 million and net loss narrowed by $0.53 million.
- Nine-month revenue doubled, and the operating loss decreased by $1.31 million; however, nine-month net loss increased slightly because the 2021 period included approximately $1.42 million of PPP loan-forgiveness income.
- Operating cash outflow improved by approximately $1.67 million year over year, but operations remained cash consumptive.
- Cash increased primarily from equity financing. During the first nine months, the company received $8.55 million from common stock and $0.999 million from Series D preferred stock, before issuance costs.
- Common shares outstanding increased to approximately 7.06 million at September 30, 2022 from approximately 4.11 million at December 31, 2021. The company also had 1.38 million warrants, 0.93 million options, and potential Series D conversion shares outstanding or issuable, creating material potential dilution.
- Contract liabilities increased to $3.88 million from $1.83 million, while contract assets increased to $0.82 million from $0.003 million. The company expects to recognize all contract liabilities within 12 months.
Guidance, Outlook, Risks, and Unusual Items
Management expected revenue growth to continue through the remainder of 2022 and into 2023, supported by RIP and ALIS deployments, maintenance contracts, AI-related services, and a large multi-year passenger-rail contract. The company expected to manufacture a two-RIP solution and complete delivery, together with a long-term services agreement, during the second quarter of 2023.
Management also expected gross-margin improvement to continue, but did not provide formal revenue or earnings guidance. Revenue timing remains dependent on project completion and component availability. Supply-chain disruptions, inflation in materials and labor, contract delays, and customer payment timing may defer revenue into late 2022 or 2023 and pressure margins.
The company stated that it had sufficient liquid assets to operate for at least 12 months from the report date and that substantial doubt about going concern had been alleviated by equity financings, recent orders, and improved activity. Nonetheless, it continues to report substantial accumulated losses, negative operating cash flow, and dependence on customer receipts and potential future capital raising.
Customer concentration is significant: four customers represented 25%, 21%, 19%, and 19% of nine-month revenue, and two customers represented 42% and 36% of accounts receivable. Approximately 54% of nine-month revenue came from customers outside the United States. Approximately $4.51 million of cash held at one financial institution exceeded federally insured limits.
On October 29, 2022, the company raised gross proceeds of $0.55 million through the sale of common stock and Series D preferred stock. On November 14, 2022, the company announced a CFO transition: Adrian Goldfarb retired as CFO effective November 15, 2022, and Andrew W. Murphy was appointed CFO.
The filing reports no material pending litigation, no material changes to previously disclosed risk factors, and no defaults on indebtedness. Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether RIP and passenger-rail project deliveries occur on schedule and generate the anticipated margins and cash collections.
- The composition, enforceability, and timing of the $3.88 million contract-liability balance and $0.82 million contract-asset balance.
- Whether operating cash flow improves sufficiently to reduce reliance on equity financing.
- The dilution implications of outstanding warrants, options, and Series D preferred stock conversion rights, including the need for shareholder approval for certain conversions.
- The effect of supply-chain delays, inflation, and unrecoverable cost increases on project profitability.
- Customer concentration, receivable collections, and the financial impact of any project termination or delay.
- Whether the company can achieve sustained profitability before available liquidity is exhausted.