Duos Technologies Group, Inc. — 2018 Form 10-K Summary
Business context and reporting period
The filing is the annual report for the fiscal year ended December 31, 2018, filed April 12, 2019. It does not provide separate fourth-quarter financial statements; the filing reports full-year results with comparison to 2017.
Duos develops and deploys intelligent technology systems, including rail inspection and security portals, artificial-intelligence and machine-learning applications, command-and-control software, and IT asset-management services. Its principal platforms are praesidium and centraco. Operations serve transportation, retail, industrial, government, banking, utilities and data-center customers, primarily in North America.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $12.05 million | $3.88 million | +210% |
| Gross profit | $5.20 million | $1.59 million | +227% |
| Gross margin | 43% | 41% | +2 percentage points |
| Operating loss | $1.57 million | $3.44 million | 54% improvement |
| Net loss | $1.58 million | $5.15 million | 69% improvement |
| Net loss per common share | $0.08 | $1.43 | Improved |
| Cash used in operating activities | $345,287 | $3.56 million | Improved |
| Cash used in investing activities | $285,678 | $41,709 | Higher investment |
| Cash from/(used in) financing activities | $(101,552) | $5.37 million | Lower financing inflow |
| Cash at year-end | $1.21 million | $1.94 million | Down $732,517 |
| Working capital | $(469,082) | $550,332 | Declined |
| Total liabilities | $4.66 million | $2.24 million | Higher |
| Stockholders’ equity/(deficit) | $(170,985) | $622,535 | Declined |
Revenue consisted of $10.75 million from projects, $1.17 million from maintenance and technical support, and $124,478 from IT asset-management services. Project revenue increased 471%, while IT asset-management revenue declined 86% because a major project ended in 2017 and a replacement project was delayed.
Operating expenses increased 35% to $6.77 million, primarily from higher salaries, contract labor, research and development, sales and marketing, and general and administrative costs. Interest expense fell sharply to $17,180 from $4.52 million, largely because non-cash debt and warrant-related charges recorded in 2017 did not recur.
Year-end current assets were $4.19 million versus current liabilities of $4.66 million. Current liabilities included $2.25 million of contract liabilities, $1.42 million of accounts payable, and $317,573 of payroll taxes payable. Debt consisted primarily of $48,330 of insurance-financing notes and a $31,201 closed line of credit; the filing reports no long-term debt at December 31, 2018.
Material changes versus the prior comparable period
- Revenue grew substantially because of increased project activity, including rail, retail distribution-center, banking and other intelligent-technology deployments.
- Gross margin improved modestly despite ASC 606 adoption and lower-margin construction-related pass-through work requested by two customers.
- The operating loss and net loss narrowed materially, but the company remained unprofitable.
- Operating cash burn improved primarily because contract liabilities increased by more than $2 million; this benefit may not recur at the same level.
- Accounts receivable increased to $1.54 million from $298,304, and contract assets increased to $1.21 million from $423,793, increasing dependence on customer collections and contract execution.
- The company capitalized $60,000 of software development costs and invested $212,393 in fixed assets during 2018.
- The company granted 2.242 million stock options and ended the year with 25.41 million exercisable warrants, creating significant potential dilution.
- Revenue concentration increased: two customers represented 83% of 2018 revenue and 92% of year-end accounts receivable.
Guidance, outlook, commentary, risks and unusual items
Management expects continued growth from rail inspection portals, new detection algorithms, retail gatehouse automation, bank security deployments, TrueVue360 AI initiatives, and the dcVue IT asset-management software platform. Management expected additional rail portal deployments, commercial thermal inspection deployment, and increased maintenance revenue during 2019. The filing does not provide formal numerical revenue or earnings guidance.
Management stated that existing backlog, expected orders, potential warrant exercises and anticipated profitable operations could support the business for at least twelve months. However, the independent auditor expressed substantial doubt about the company’s ability to continue as a going concern. The company reported an accumulated deficit of $30.27 million, negative working capital of approximately $469,000, negative stockholders’ equity of $171,000, continuing losses and negative operating cash flow.
Material contingencies include repayment of IRS penalties related to delinquent payroll taxes; the $317,573 payroll-tax balance included $123,572 of accrued late fees, with monthly payments of $15,000. The company also has approximately $681,148 of future minimum office-lease payments through 2021 and an annual software support and maintenance commitment of approximately $300,000.
The company’s principal risks include dependence on a small number of customers, uncertain market acceptance, project execution and revenue-recognition estimates under ASC 606, rapid technological change, cybersecurity and data-security threats, intellectual-property risks, competition from better-capitalized companies, dependence on key personnel, financing needs and potential dilution. The common stock trades on the OTCQB, has limited liquidity, is subject to penny-stock rules, and the company does not expect to pay dividends.
Subsequent events included $2.03 million of proceeds from warrant exercises in March and April 2019 after exercise prices were reduced to $0.55, a new 120,000-option grant to an independent director, and cancellation of 200,000 options following an employee resignation.
Most important facts for an investor to verify
- Whether project backlog converts into recognized revenue and cash collections without material cost overruns, delays or customer acceptance issues.
- Whether management’s plan achieves profitability and resolves the auditor’s going-concern uncertainty without requiring unfavorable financing.
- The composition, collectability and aging of the $1.54 million accounts receivable and $1.21 million contract-asset balances.
- The concentration and renewal status of the two customers representing 83% of revenue and 92% of accounts receivable.
- The company’s total fully diluted share count, including 25.41 million warrants, 2.24 million options and 5.66 million shares issuable upon conversion of Series B preferred stock.
- The amount and timing of IRS penalty payments, lease obligations and the approximately $300,000 annual software-support commitment.
- Whether TrueVue360, thermal inspection, additional rail deployments and dcVue achieve the stated 2019 commercial milestones.