Duos Technologies Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2019. Duos provides artificial-intelligence-driven intelligent technology systems, software, inspection and security solutions, maintenance and technical support, and IT asset management services. Operations are organized around intelligent technologies, AI/machine-learning platforms, and IT asset management. The company launched the truevue360 AI platform in January 2019.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $4.352 million | $1.148 million | 279% |
| Gross profit | $2.131 million | $0.477 million | 347% |
| Gross margin | 49.0% | 41.5% | Up approximately 7.5 percentage points |
| Operating income (loss) | $46,450 | $(739,502) | Improved by $785,952 |
| Net income (loss) | $44,169 | $(743,104) | Improved by $787,273 |
| Basic EPS | $0.002 | $(0.04) | Improved |
| Cash flow from operations | $(1.500) million | $(1.628) million | Lower cash use |
- Project revenue was $3.918 million, maintenance and technical support revenue was $321,474, and IT asset management revenue was $112,169.
- Operating expenses increased 71% to $2.084 million, primarily due to higher salaries, contract labor, sales and marketing, professional fees, and general and administrative costs.
- Cash was $1.202 million at March 31, 2019, compared with $1.209 million at December 31, 2018. Management reported approximately $2.025 million of cash as of May 10, 2019.
- Working capital was $1.003 million. Accounts receivable increased to $3.624 million from $1.539 million at year-end, while contract assets declined to $287,000 from $1.209 million.
- Total liabilities were $4.783 million and stockholders’ equity was $1.545 million at March 31, 2019, compared with a stockholders’ deficit of $171,000 at December 31, 2018.
- Debt was primarily normal-course financing: $149,899 of insurance-financing notes and $30,280 outstanding under a closed line of credit. The company stated that it had no senior-debt default.
- Investing cash use was $91,511, including $88,511 for fixed assets. Financing cash inflow was $1.585 million, primarily from warrant exercises.
Material Changes Versus the Prior Comparable Period
- Revenue increased 279%, led by a 364% increase in project revenue. Management attributed the growth to stronger project activity, improved delivery processes, new maintenance contracts, and increased IT asset management licensing.
- Gross margin increased to 49% from 42%, which management attributed to tighter production cost controls, operating efficiencies, and a favorable project mix.
- The company moved from an operating loss and net loss in Q1 2018 to modest operating and net income in Q1 2019.
- Cash used in operations remained significant despite improved earnings, primarily because of the $2.085 million increase in accounts receivable and changes in contract-related balances.
- In March 2019, the company issued 3.0 million restricted common shares upon warrant exercises for $1.650 million. Outstanding common shares increased to 24.076 million at March 31, 2019 from 21.076 million at December 31, 2018.
- The company adopted the lease standard effective January 1, 2019, recording a $557,485 operating lease right-of-use asset and $571,245 of lease obligations at March 31, 2019.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued growth in project revenue, recurring maintenance revenue, and IT asset management revenue, and expects operating expenses to grow more slowly than revenue. No quantified financial guidance was provided.
- Management stated that prior substantial doubt regarding going-concern status had been alleviated following the 2017 capital raise, improved backlog, warrant proceeds, and progress toward profitability. However, continued viability remains dependent on timely customer payments, sufficient revenue, and consistently profitable operations.
- Management cited approximately $475,000 of additional warrant conversions secured after quarter-end and reported that certain shareholders had requested the opportunity to invest an additional $3.5 million. These potential proceeds were not presented as completed financing.
- Customer and geographic concentration is significant: two customers represented 78% and 11% of Q1 revenue, two customers represented 70% and 16% of accounts receivable, and approximately 80% of revenue was generated from two customers outside the United States.
- The company is required to repay IRS penalties related to delinquent payroll taxes. Payroll taxes payable totaled $160,730 at March 31, 2019, including $78,572 of accrued late fees; monthly payments of $15,000 had begun in July 2018.
- The company has approximately $300,000 of annual support and maintenance fees under a software licensing and configuration services arrangement.
- A vendor litigation matter was dismissed and closed in January 2019. Management reported no other material legal proceedings and no material changes to previously disclosed risk factors.
- After quarter-end, a shareholder exercised 684,581 warrants for $376,520 on April 1, 2019. An employee’s 200,000 stock options were canceled following resignation, also on April 1, 2019.
Facts Investors Should Verify
- Whether the substantial increase in accounts receivable converts to cash and reduces the continuing operating cash outflow.
- The sustainability of the 49% gross margin as project mix and contract estimates change.
- Customer concentration, international revenue exposure, and the effect of any delayed or lost major customer contract.
- Completion and terms of the additional warrant conversions and any proposed $3.5 million shareholder investment.
- The company’s ability to achieve consistent profitability without additional capital, given the accumulated deficit of $30.226 million and continuing cash use in operations.
- The timing and amount of IRS penalty repayments and other mandatory lease, financing, payroll, and operating payments.
- The potential dilution from 22.539 million outstanding warrants, 2.362 million employee options, and 5.660 million common shares issuable upon conversion of Series B preferred stock.