Duos Technologies Group, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2018. Duos develops artificial-intelligence-driven security, inspection and operations systems, including its praesidium and centraco software platforms, serving rail transportation, commercial, petrochemical, government, banking and data-center markets. The company operates as one reportable segment and employed approximately 35 people.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1.148 million | $1.036 million | 11% increase |
| Gross profit | $476,571 | $404,342 | 18% increase |
| Gross margin | 41.5% | 39.0% | Improved |
| Operating expenses | $1.216 million | $1.260 million | 3% decrease |
| Loss from operations | $(739,502) | $(855,765) | 14% narrower |
| Net loss | $(743,104) | $(2.295 million) | 68% narrower |
| Net loss per common share | $(0.04) | $(1.21) | Improved |
| Cash used in operating activities | $(1.628 million) | $(675,526) | Higher use |
Project revenue increased to $844,714 from $360,487. Maintenance and technical support revenue declined to $257,447 from $315,327, while IT asset management revenue declined to $45,769 from $359,916. Management attributed the project growth to increased adoption of intelligent analytics and machine-learning offerings and improved execution capacity following the 2017 capital raise.
Cash declined to $66,841 at March 31, 2018 from $1.942 million at December 31, 2017. Accounts receivable increased to $1.414 million from $298,304, and contract assets increased to $608,287 from $423,793. One customer represented 59% of accounts receivable at quarter-end. Contract liabilities increased to $722,582 from $200,410.
Total liabilities were $2.540 million, compared with $2.244 million at December 31, 2017. Current debt included $124,770 of insurance-financing notes and a $34,212 line-of-credit balance. Stockholders’ equity declined to a deficit of $46,861 from equity of $622,535, primarily reflecting the quarterly net loss.
Material changes versus the prior comparable period
- Revenue increased 11%, driven by a nearly 134% increase in project revenue.
- Gross profit increased 18%, with gross margin improving to approximately 41.5% from 39.0%.
- Operating expenses decreased 3%, although salaries, wages, contract labor and research and development expenses increased.
- Net loss improved substantially because Q1 2017 included approximately $921,314 of non-cash debt-discount amortization and a $582,388 warrant-derivative loss.
- Operating cash use increased by approximately $952,000, primarily because of higher accounts receivable and contract assets.
- The company adopted ASC 606 revenue recognition effective January 1, 2018. Management stated that the adoption temporarily affected overall gross margin because certain costs were recognized before related revenue.
Guidance, outlook, risks and unusual items
Management expects continued investment in sales, marketing and product development to expand penetration of target markets, particularly rail. The company stated that its near-term success depends on market acceptance and increased orders for its proprietary intelligent security and inspection technologies. No formal financial guidance was provided.
The financial statements disclose substantial doubt about the company’s ability to continue as a going concern. The company reported a $743,104 quarterly net loss, $1.628 million of operating cash outflow, a $263,243 working-capital deficit and a $29.432 million accumulated deficit. Management expects to rely on additional revenue, collections from customers, anticipated billings and funds from the November 2017 financing; however, it acknowledged that additional financing may be necessary and that bankruptcy protection could be sought if adequate revenue or financing is unavailable.
As of May 11, 2018, management reported approximately $385,000 of cash and approximately $131,000 in monthly lease and other mandatory payments, excluding payroll and ordinary expenses. The company also owed $158,056 in payroll taxes payable, including $108,262 of accrued IRS late fees, with monthly payments expected to begin in June 2018.
Subsequent events included the issuance of 2.122 million employee and director stock options on April 1, 2018 and the award on May 5, 2018 of a multi-million-dollar contract from CN for four rail inspection portals and a thermal undercarriage inspection system, with delivery required by September 7, 2018. The filing states that no material litigation was pending and no material risk-factor changes occurred from the prior Form 10-K.
Important facts for investors to verify
- Whether the CN contract was delivered on schedule and converted into recognized revenue and cash collections.
- The company’s ability to collect the concentrated accounts receivable balance and convert contract assets into cash.
- Available liquidity after considering approximately $131,000 of monthly mandatory payments and continuing operating losses.
- Progress in resolving the going-concern conditions, including whether additional equity or debt financing is required.
- The effect of ASC 606 estimates, contract-cost revisions and timing differences on future revenue and margins.
- Potential dilution from 25.216 million outstanding warrants, 5.660 million shares issuable upon conversion of Series B preferred stock, and the 2.122 million options issued after quarter-end.