Business Context and Reporting Period
Duos Technologies Group, Inc. develops machine-vision and artificial-intelligence systems for rail, logistics, transportation, and related markets. Its principal offerings include the Rail Inspection Portal, Automated Logistics Information System, Truck Inspection Portal, and AI detection applications. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $1.77 million | $3.62 million | $4.41 million | $5.06 million |
| Gross margin | $0.24 million; 13.6% | $1.28 million; 35.5% | $0.78 million; 17.6% | $1.50 million; 29.8% |
| Operating loss | $(3.15) million | $(1.39) million | $(5.30) million | $(4.04) million |
| Net loss | $(2.99) million | $(1.34) million | $(5.13) million | $(3.99) million |
| Net loss per share | $(0.42) | $(0.22) | $(0.72) | $(0.70) |
| Operating cash flow | Not separately provided | Not separately provided | $(1.92) million | $0.29 million |
- Second-quarter technology systems revenue declined 69% to $0.87 million, while services and consulting revenue increased 7% to $0.90 million. For the six-month period, technology systems revenue declined 24% and services and consulting revenue increased 15%.
- Operating expenses increased 27% in the second quarter and 10% for the six-month period. General and administrative expense increased primarily due to the timing of performance-based compensation.
- Cash was $2.45 million at June 30, 2023, compared with $1.12 million at December 31, 2022. Working capital surplus was $1.26 million, while accumulated deficit was $57.49 million.
- Total liabilities were $8.92 million, including $5.16 million of operating lease obligations and $0.26 million of current notes payable under insurance financing agreements. The company reported no defaults on indebtedness.
- Investing cash outflows were $0.55 million, including $0.36 million for software development, $0.16 million for fixed assets, and $0.03 million for patents and trademarks.
- Financing cash inflows were $3.80 million, primarily from the $4.00 million issuance of Series E Convertible Preferred Stock, partially offset by financing repayments and issuance costs.
- At June 30, 2023, two customers represented 61% and 25% of six-month revenue. Four customers represented 88% of accounts receivable in aggregate.
Material Changes Versus the Prior Comparable Period
- Revenue declined 51% in the second quarter and 13% for the first six months, primarily because production and manufacturing delays affected two high-speed Rail Inspection Portals for a passenger transit customer.
- Gross margin fell substantially as the timing and stage of completion of portal projects differed from the prior-year periods. Cost of revenues remained comparatively high while project revenue recognition was delayed.
- The six-month operating cash flow shifted from $0.29 million provided in 2022 to $1.92 million used in 2023, reflecting material purchases, operating expenses, and changes in contract-related balances.
- Contract assets increased to $1.01 million from $0.43 million at year-end 2022. Contract liabilities increased to $2.44 million from $0.96 million, with management expecting recognition within 12 months.
- Series E preferred stock issued during the first quarter provided $4.00 million of gross proceeds. Common shares outstanding increased to 7,239,221 at June 30, 2023 from 7,155,552 at December 31, 2022.
- The company sold assets associated with its iCAS business for a convertible note receivable, recognized a $0.15 million gain, and recorded the note at $0.15 million net of discount.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued demand for rail inspection and logistics systems, additional services and maintenance revenue from portals coming online, and expansion of subscription-based RIP offerings.
- Management anticipates manufacturing a two-RIP solution for a national rail carrier in 2023 or early 2024, followed by a long-term services agreement.
- Supply-chain delays, inflation, customer contract timing, longer commercial cycles, and possible revenue recognition deferrals into 2024 remain significant risks. The company stated that it cannot quantify the effects of supply-chain delays and inflation on future periods.
- Management believes available liquidity and access to capital are sufficient to fund operations for at least 12 months from the filing date, but continued operations and eventual profitability remain dependent on revenue growth, timely customer payments, and additional capital availability.
- Subsequent to quarter-end, the company received $5.00 million from the issuance of Series F Convertible Preferred Stock. The Series F shares are convertible at $6.20 per common share, subject to stated ownership limitations and other terms.
- Internal control over financial reporting and disclosure controls remained ineffective due to a material weakness previously reported in the 2022 Form 10-K. Remediation includes additional accounting personnel, outside technical accounting assistance, improved enterprise-system reporting, and enhanced contract-modification controls.
- The company has a 40,000-square-foot facility lease extending to May 2032. Undiscounted future minimum operating lease payments were $7.66 million at June 30, 2023.
- Revenue recognition for technology systems depends on estimates of project costs and progress toward completion, creating potential volatility in reported revenue and margins.
Most Important Facts for Investors to Verify
- Whether delayed passenger-transit RIP projects are completed on schedule and generate the expected revenue and margins.
- The company’s ability to convert its backlog and contract liabilities into revenue and cash within the expected time frame.
- Whether operating cash burn declines and profitability is achieved without recurring equity or preferred-stock financings.
- The terms, dilution potential, voting rights, and conversion effects of Series D, Series E, and subsequent Series F preferred stock, as well as outstanding options and warrants.
- The extent of customer concentration and the impact if major Class 1 railroad customers delay orders or payments.
- Progress in remediating the material weakness in internal controls and improving revenue-recognition processes.
- The carrying value and collectability of the $0.15 million convertible note receivable received in the iCAS asset sale.