DUOS Technologies Group, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Duos develops automated rail inspection, logistics, artificial intelligence, and related support solutions, including its Railcar Inspection Portal, Automated Logistics Information System, Centraco, Praesidium, and Truevue360 platforms. The company operates as one reportable segment.
The company reported 66 employees, including 58 full-time employees, and had 6,095,217 common shares outstanding as of May 10, 2022.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1.439 million | $2.155 million | -33% |
| Technology systems revenue | $783,269 | $1.490 million | -47% |
| Services and consulting revenue | $656,047 | $664,456 | -1% |
| Gross margin | $222,066 | $502,974 | -56% |
| Gross margin percentage | 15.4% | 23.3% | Down 7.9 points |
| Operating expenses | $2.864 million | $2.325 million | +23% |
| Loss from operations | $(2.642) million | $(1.822) million | Loss increased |
| Net loss | $(2.645) million | $(406,023) | Loss increased |
| Basic and diluted loss per share | $(0.49) | $(0.11) | Loss increased |
| Net cash used in operating activities | $(827,733) | $(1.296) million | Use decreased |
Q1 2022 net loss margin was approximately negative 183.7%, compared with approximately negative 18.8% in Q1 2021. The prior-year period included $1.422 million of other income from PPP loan forgiveness; Q1 2022 had only $182 of other income and $3,180 of interest expense.
Cash increased by $4.436 million during the quarter to $5.330 million at March 31, 2022. Investing activities used $102,078, while financing activities provided $5.366 million, principally from common stock issuance.
At March 31, 2022, total current assets were $7.089 million and total current liabilities were $4.548 million, producing reported working capital of $2.541 million. Total assets were $13.236 million, total liabilities were $9.290 million, and stockholders’ equity was $3.946 million. Accumulated deficit was $48.142 million.
Debt was described as primarily normal-course insurance and equipment financing. Current notes payable for financing agreements were $166,657, equipment financing totaled $79,227, and operating lease obligations totaled $5.125 million, including $395,468 current. The company stated that the PPP loan had been forgiven in Q1 2021.
Material changes versus the prior comparable period
- Revenue declined 33%, primarily because technology-system installations were delayed by delayed notices to proceed and supply-chain constraints.
- Technology systems revenue fell 47%, while services and consulting revenue was broadly stable.
- Gross margin percentage declined to 15.4% from 23.3%, reflecting higher material and labor costs, inflation, supply-chain disruptions, and additional work to address quality issues.
- Operating expenses increased 23%, including a 30% increase in general and administrative expense and a 22% increase in research and development expense. The increases reflected organizational expansion, engineering and product development, and the new office and warehouse lease.
- Net loss increased substantially, partly because Q1 2021 benefited from PPP loan forgiveness and Q1 2022 did not.
- The company raised approximately $5.5 million of net proceeds from common stock offerings in Q1 2022. It issued 1,523,750 common shares for gross proceeds of $6.095 million and recorded $576,650 of issuance costs.
- All 4,500 Series C preferred shares were converted into 454,546 common shares in January 2022. Series B preferred shares outstanding totaled 851 and remain convertible into common stock.
- Stock-based compensation increased to $250,577 from $76,301. The company granted 665,000 stock options in January 2022, contributing to total outstanding options of 1,096,266 at quarter-end.
Guidance, outlook, commentary, and risks
Management expected revenue growth later in 2022 as delayed installations, new orders, maintenance contracts, and anticipated project awards progress. It indicated that at least two Railcar Inspection Portal solutions and a long-term services agreement were expected to be delivered under a large, multi-year passenger rail contract, with completion anticipated in the first quarter of 2023.
Management expected full-year gross-margin improvement, particularly in the second half of 2022, but acknowledged that inflation and supply-chain pressures could delay profitability into 2023. The company is upgrading RIP and ALIS systems to address anticipated Federal Railroad Administration and Association of American Railroads standards.
Management stated that the company had sufficient liquidity to operate for at least twelve months from the report date and that it did not expect additional capital to be required for existing 2022 operations, although additional financing could be pursued for selective opportunities. Cash on hand was approximately $4.030 million as of May 10, 2022, with approximately $165,500 of monthly lease and other mandatory payments before payroll and ordinary expenses.
Key risks include continued project and contract delays, supply-chain disruption, inflation, higher labor and material costs that may not be recoverable from customers, customer concentration, reliance on equity financing, execution risk on large projects, COVID-19 effects, competition, technology changes, and the need to achieve sustained profitability. Four customers represented 83% of Q1 2022 revenue, and three customers represented 94% of accounts receivable. Approximately 54% of Q1 2022 revenue came from three customers outside the United States.
The company previously disclosed substantial doubt regarding going-concern status, but management concluded that the 2022 equity offering, recent orders, and available liquidity removed substantial doubt for at least twelve months from issuance of the report. Long-term viability remains dependent on revenue growth, additional project execution, and achieving consistent profitability.
The company reported no material litigation, no defaults on indebtedness, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures as of March 31, 2022.
Important facts for investors to verify
- Verify the timing, backlog, scope, margins, and customer acceptance of the anticipated RIP and passenger-rail projects.
- Monitor whether supply-chain delays, inflation, and quality remediation continue to pressure project margins.
- Reconcile cash balances and monthly cash requirements with the company’s stated twelve-month liquidity assessment.
- Assess customer concentration, advance-payment terms, contract liabilities of $2.364 million, and the collectability of accounts receivable.
- Review dilution from 6.095 million common shares outstanding, 1.096 million options, 1.376 million warrants, and convertible Series B preferred stock.
- Evaluate the company’s ability to reduce operating losses and achieve management’s expected improvement in gross margin and profitability.
- Consider the long-term commitment under the office and warehouse lease, including $8.166 million of undiscounted future minimum payments.