Duos Technologies Group, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. Duos develops automated railcar inspection, logistics, artificial intelligence, and related technology systems, primarily for rail, logistics, intermodal, and government customers. The company operates as one reportable segment and had 3,610,801 common shares outstanding as of November 11, 2021.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.74 million | $1.28 million | $4.54 million | $4.26 million |
| Gross margin | $(1.06) million | $(0.25) million | $(3.18) million | $(0.72) million |
| Gross margin percentage | (61.2%) | (19.3%) | (69.9%) | (16.8%) |
| Operating loss | $(2.45) million | $(2.71) million | $(7.22) million | $(6.22) million |
| Net loss | $(2.45) million | $(2.71) million | $(5.81) million | $(6.32) million |
| Net loss per share | $(0.68) | $(0.77) | $(1.63) | $(1.95) |
| Net cash used in operating activities | — | — | $(5.52) million | $(4.22) million |
- Q3 revenue increased 36%, led by a 58% increase in technology systems revenue to $1.15 million; services and consulting revenue increased 6% to $0.59 million.
- Nine-month revenue increased 7%. Technology systems revenue declined 3% to $2.74 million, while services and consulting revenue increased 27% to $1.80 million.
- Gross losses worsened because project costs, quality remediation, new undercarriage technology deployment costs, staffing, and supply-chain costs increased faster than revenue.
- Operating expenses declined 44% in Q3 and 27% for the nine-month period, primarily because of lower administration costs, including the absence of the prior-year CEO separation charge. Sales and marketing and research and development spending increased.
- Nine-month other income included approximately $1.42 million of PPP loan forgiveness and related interest. The PPP loan was fully forgiven during the first quarter of 2021.
- Cash was $2.26 million at September 30, 2021, down from $3.97 million at December 31, 2020. Current assets were $3.54 million versus current liabilities of $3.70 million, resulting in a working-capital deficit of approximately $160,000.
- Debt was substantially reduced. At September 30, 2021, remaining financing consisted primarily of $54,953 of insurance notes and $126,560 of equipment financing; the $1.41 million PPP loan had been forgiven.
- Financing activities provided $4.12 million during the first nine months, principally from the $4.50 million issuance of Series C convertible preferred stock. Investing activities used $0.31 million.
Material changes versus the prior comparable period
- Revenue improved in Q3, but cost of revenue rose 83%, producing a larger negative gross margin. For the nine-month period, revenue rose 7% while cost of revenue increased 55%.
- The company shifted toward production and deployment, adding engineering, software, artificial intelligence, and operating resources. Costs previously classified in research and development or internal support were increasingly allocated to projects and support revenue.
- Services and recurring maintenance revenue became a larger contributor, while technology systems revenue remained affected by delayed contract starts.
- Series C preferred stock increased total preferred equity by $4.50 million. Each share has a $1,000 stated value and is convertible at $5.50 per common share, subject to beneficial ownership limitations; the outstanding Series C shares were convertible into approximately 818,182 common shares at September 30, 2021.
- Customer concentration increased: one customer represented 79% of nine-month revenue, and two customers represented 65% and 18% of accounts receivable.
Guidance, outlook, risks, and unusual items
- Management expects increased demand for Railcar Inspection Portal and Automated Logistics Information System deployments, additional recurring maintenance revenue, and potential contract activity in late 2021 and 2022.
- Management previously expected fourth-quarter profitability, but stated that supply-chain disruptions could delay profitability into 2022. Management continued to anticipate profitability in 2022 if delayed contracts begin and deployment efficiencies improve.
- Contract awards and notices to proceed have been delayed. Component shortages, including semiconductor shortages and lead times of up to 30 weeks, may defer installations and revenue recognition.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern for twelve months after issuance of the report. It stated that available liquidity was sufficient for at least six months under stress-test conditions, but that additional capital would likely be required to execute the 2022 growth plan. As of November 11, 2021, cash was approximately $797,000, including $253,000 of uncollected cash, with approximately $135,000 of monthly lease and other mandatory payments before payroll and ordinary expenses.
- The company entered into a new 40,000-square-foot facility lease beginning November 1, 2021, through May 31, 2032, and paid a $600,000 security deposit. The company expected to move during November and December 2021.
- On October 1, 2021, the company divested its IT asset-management business, including DcVue, the OSPI patent, and data-center auditing operations, for a nominal amount. It retained the TrueVue360 brand and AI software platform.
- There were no material pending legal proceedings reported, no defaults on indebtedness, and management stated that disclosure controls were effective.
Most important facts for investors to verify
- Whether the company obtained sufficient additional financing to address the disclosed going-concern risk and fund operations beyond the stated six-month liquidity horizon.
- Whether delayed notices to proceed, customer orders, and the expected large AI-related project converted into executable contracts and revenue.
- Whether supply-chain constraints and project quality issues were resolved sufficiently to produce positive gross margins and the anticipated 2022 profitability.
- The sustainability and collectability of revenue given that one customer represented 79% of nine-month revenue and two customers represented 83% of accounts receivable.
- The financial and operational impact of the new long-term facility lease and the divestiture of the IT asset-management business.
- Potential dilution from 1,376,466 warrants, 431,266 employee and other stock options, and convertible Series B and Series C preferred stock.