Duos Technologies Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 30, 2019, compared with the same 2018 periods. Duos provides artificial-intelligence-driven security, inspection, operations and IT asset-management technologies, primarily for critical infrastructure and rail transportation. Its business units are intelligent technologies, AI/machine-learning platforms and IT asset management.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $2.20 million, down 57% | $7.90 million, down 17% |
| Gross profit | $1.03 million; 47% margin | $3.33 million; 42% margin |
| Operating income (loss) | $(1.13) million | $(3.03) million |
| Net income (loss) | $(1.14) million; $(0.04) per share | $(3.05) million; $(0.13) per share |
| Net cash used in operating activities | Not separately presented | $(3.62) million |
- Nine-month revenue consisted of $6.95 million from projects, $701,552 from maintenance and technical support, and $240,673 from IT asset-management services.
- Cash was $767,339 at September 30, 2019, compared with $1.21 million at December 31, 2018. Working-capital deficit was $1.30 million, and accumulated deficit was $33.32 million.
- Total liabilities were $5.67 million versus $4.66 million at year-end 2018. September 30 liabilities included $856,372 of related-party notes, $256,250 of a shareholder note, $58,947 of financing notes, $28,512 on a closed line of credit, and $534,415 of operating lease obligations.
- Financing activities provided $3.33 million, primarily from $2.32 million of warrant exercises and $1.33 million of short-term borrowings, partly offset by debt and lease repayments.
- Common shares outstanding increased to 26.95 million at September 30, 2019 from 21.08 million at December 31, 2018. There were also 21.30 million outstanding warrants, 2.28 million employee options and 4.16 million shares issuable upon conversion of Series B preferred stock.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue fell 57%, principally because contract awards and customer acceptance for two major projects were delayed. Nine-month revenue declined 17%.
- Project revenue declined 59% in the quarter and 18% year to date; maintenance revenue declined 38% and 20%, respectively. IT asset-management revenue increased 161% year to date, supported by a new software version.
- Gross margin was relatively stable at 47% in the quarter versus 46% in the prior-year quarter, but nine-month margin decreased modestly to 42% from 43%.
- Operating expenses increased 27% in the quarter and 33% year to date, reflecting higher staffing, selling and marketing, general and administrative costs, and investment in TrueVue360.
- The company moved from a $632,625 third-quarter 2018 profit to a $1.14 million loss and from a $744,842 nine-month 2018 loss to a $3.05 million loss.
- The company issued 1.35 million common shares from warrant exercises during the quarter and converted 750 shares of Series B preferred stock into 1.5 million common shares.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that delayed orders had been received and expected the delays to have no material full-year effect, although customer acceptance and execution delays continued. Management expected a substantial fourth-quarter order from an existing client and anticipated improving recurring maintenance revenue.
- Management expects project efficiencies, tighter production controls and the Engineering and Operations Center to support future margins. The filing does not provide quantitative revenue or earnings guidance.
- Management stated that prior substantial doubt regarding going-concern status had been alleviated through warrant proceeds, short-term loans, backlog and expected contract receipts. However, continued operations depend on timely customer payments, additional revenue, consistent profitability and possible future warrant exercises or capital raises.
- The company used $3.62 million in operating cash during the first nine months while reporting a $1.30 million working-capital deficit. As of November 11, 2019, management reported approximately $859,000 of cash and approximately $135,000 in monthly lease and other mandatory payments, excluding payroll and ordinary expenses.
- Revenue and credit exposure are concentrated: two customers represented 66% and 14% of nine-month revenue, four customers represented 32%, 23%, 17% and 13% of accounts receivable, and approximately 69% of revenue was generated from two customers outside the United States.
- A $262,500 shareholder note due November 11, 2019 was repaid on November 12, 2019. Related-party notes totaling $1.0 million principal were due June 25, 2020 and carried 3% interest.
- The company had an accrued payroll-tax penalty component of $33,572 within $122,453 of payroll taxes payable. It also had annual software support and maintenance commitments of approximately $300,000.
- Management reported no material litigation, no defaults on indebtedness and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Most Important Facts for Investors to Verify
- Whether delayed project awards, customer acceptance and the anticipated fourth-quarter order converted into cash and revenue.
- Whether operating cash burn and the working-capital deficit can be reduced without additional equity or debt financing.
- The repayment schedule and liquidity impact of related-party and shareholder notes, lease obligations and other mandatory payments.
- The collectability of concentrated accounts receivable and contract assets, and the effect of contract-estimate revisions under ASC 606.
- Potential dilution from 21.30 million warrants, 2.28 million employee options and 4.16 million preferred-stock conversion shares.
- Whether TrueVue360 and the IT asset-management initiatives generate the revenue and margin growth anticipated by management.