Duos Technologies Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Duos Technologies Group, Inc. develops machine-vision and artificial-intelligence systems for rail, logistics, transportation, and related customers. Its principal products include the Railcar Inspection Portal, Automated Logistics Information System, and TrueVue360 AI platform. The company also provides technical support, maintenance, consulting, and software-related services.
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods. The company reported 7,247,131 common shares outstanding as of November 10, 2023.
Financial Results and Key Metrics
| Metric | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 |
|---|---|---|---|---|
| Technology systems revenue | $705,849 | $2,709,899 | $3,404,107 | $6,273,213 |
| Services and consulting revenue | $825,074 | $1,312,339 | $2,541,163 | $2,805,483 |
| Total revenue | $1,530,923 | $4,022,238 | $5,945,270 | $9,078,696 |
| Gross margin | $226,588 | $1,099,552 | $1,005,097 | $2,604,232 |
| Gross margin percentage | 14.8% | 27.3% | 16.9% | 28.7% |
| Operating expenses | $3,197,565 | $2,968,570 | $9,271,122 | $8,509,343 |
| Loss from operations | $(2,970,977) | $(1,869,018) | $(8,266,025) | $(5,905,111) |
| Net loss | $(2,947,736) | $(1,925,068) | $(8,080,819) | $(5,912,356) |
| Basic and diluted loss per share | $(0.41) | $(0.30) | $(1.12) | $(1.01) |
- Third-quarter revenue declined 62%, including a 74% decrease in technology systems revenue and a 37% decrease in services and consulting revenue.
- Nine-month revenue declined 35%; technology systems revenue fell 46% and services and consulting revenue fell 9%.
- Operating expenses increased 8% in the third quarter and 9% for the nine-month period. Nine-month general and administrative expense increased 11%, while research and development increased 7%.
- Cash used in operating activities was $5,637,072 for the nine months ended September 30, 2023, compared with $3,850,455 in the prior-year period.
- Cash used in investing activities was $898,435, primarily reflecting software development, patents and trademarks, and fixed-asset purchases.
- Cash provided by financing activities was $8,681,331, primarily from approximately $9.0 million of preferred-stock proceeds and $117,048 from the employee stock purchase plan.
- Cash increased from $1,121,092 at December 31, 2022 to $3,266,916 at September 30, 2023.
- Working capital surplus was $3,358,320, and accumulated deficit was $60,442,653, at September 30, 2023.
- Current liabilities were $3,396,092 versus current assets of $6,754,412. Current financing notes payable totaled $137,816. The company had no equipment-financing balance but had operating lease obligations totaling $5,085,159, including $774,306 current.
Material Changes Versus the Prior Comparable Period
- Management attributed the revenue decline principally to delays in the production and field deployment of two high-speed Railcar Inspection Portals for a passenger transit customer and to timing differences involving freight portals delivered during the third quarter of 2022.
- The prior-year third quarter included significant manufacturing, installation, and one-time site-improvement activity that did not recur at the same level in 2023.
- Gross margin declined disproportionately because revenue decreased faster than cost of revenues. Fixed departmental and servicing costs, supply-chain disruption, and higher costs reduced operating leverage.
- General and administrative expense increased due in part to the timing of personnel incentives and higher amortization associated with investments in AI algorithms.
- The company raised $4.0 million through Series E convertible preferred stock in March 2023 and $5.0 million through Series F convertible preferred stock in August 2023.
- On June 29, 2023, the company sold assets related to its legacy iCAS business for a convertible promissory note and warrants, recognizing a $150,000 gain. The note had a net carrying value of $151,875 at September 30, 2023.
- Contract assets increased to $1,346,731 from $425,722 at December 31, 2022. Contract liabilities increased to $1,588,928 from $957,997.
- Common shares outstanding increased from 7,155,552 at December 31, 2022 to 7,247,131 at September 30, 2023. Outstanding stock options increased to 1,217,775 from 926,266, while outstanding warrants decreased to 80,091 from 147,591.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects demand for rail safety, inspection, AI, maintenance, and subscription offerings to support future growth. It is developing upgrades to meet anticipated FRA and AAR standards and expects to expand RIP and ALIS applications.
- The company expects to manufacture a two-RIP solution for a national passenger rail carrier in 2023 or early 2024, with a long-term services agreement expected to begin upon delivery.
- Management cautioned that longer commercial cycles and continuing supply-chain delays may push revenue recognition into 2024. Inflation, component availability, customer delays, and the cost of procuring materials before contract awards remain significant risks.
- The company reported continuing operating losses and negative operating cash flow. Management stated that available cash, anticipated operating activity, customer payments, and access to capital markets should support operations for at least twelve months from the report date, but additional financing is not assured and long-term viability depends on achieving revenue growth and profitability.
- Cash held at one financial institution exceeded federally insured limits by approximately $2,768,466.
- Revenue and receivables are highly concentrated. Two customers represented 55% and 29% of nine-month revenue, while three customers represented 52%, 25%, and 14% of accounts receivable.
- The company relies on a limited group of vendors for key camera, server, and lighting components.
- The company has a 40,000-square-foot facility lease extending through May 2032, with undiscounted future minimum payments of $7,469,777 as of September 30, 2023.
- After quarter-end, the company raised $2.5 million through additional Series E preferred stock and exchanged all 5,000 outstanding Series F preferred shares for 5,000 Series E preferred shares. The Series E securities have a current conversion price of $3.00 per common share, subject to adjustment, and conversion above specified limits requires shareholder approval.
- Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2023.
Most Important Facts for Investors to Verify
- Whether delayed RIP projects enter the field and generate the expected revenue and margins during late 2023 and 2024.
- Cash burn, milestone collections, contract-asset recoverability, and the company’s ability to fund operations without additional equity financing.
- Progress toward consistent profitability and management’s expectation of reduced operating cash usage.
- Terms, conversion limits, shareholder-approval requirements, and potential dilution from Series D and Series E preferred stock, stock options, warrants, and the post-quarter-end securities transactions.
- Customer concentration, backlog quality, payment timing, and the absence of minimum contract values noted in the filing.
- Supply-chain availability, inflationary cost pressure, vendor concentration, and the effect of these factors on project completion and gross margins.
- The status of the passenger rail carrier contract, the two high-speed RIPs, the subscription model, and planned FRA/AAR-related product upgrades.