Duos Technologies Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The unaudited consolidated statements cover Duos Technologies Group, Inc. and its wholly owned subsidiaries. The company develops AI-driven intelligent technology, security, inspection and operations systems, with business units focused on intelligent technologies, AI/machine learning platforms and IT asset management.
Financial performance and liquidity
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $1.35 million | $3.24 million | $5.70 million | $4.39 million |
| Gross profit | $0.17 million | $1.26 million | $2.31 million | $1.73 million |
| Gross margin | 13% | 39% | 40% | 40% |
| Operating loss | $(1.95) million | $(0.63) million | $(1.90) million | $(1.37) million |
| Net loss | $(1.95) million | $(0.63) million | $(1.91) million | $(1.38) million |
| Net loss per share | $(0.08) | $(0.03) | $(0.08) | $(0.07) |
- Six-month revenue increased 30%, led by project revenue of $4.90 million, up 30%; maintenance and technical support revenue of $602,075, up 18%; and IT asset management revenue of $192,382, up 108%.
- Second-quarter revenue declined 58%, primarily because customer acceptance and project-start delays reduced project revenue by 67%. Maintenance revenue increased 11% and IT asset management revenue increased 72%.
- Operating expenses increased 36% year over year in the first half to $4.21 million, including higher salaries and contract labor, selling and marketing costs, and general and administrative expenses.
- Cash used in operating activities was $2.71 million in the first half of 2019, compared with cash provided of $195,745 in the prior-year period. Investing cash use was $226,549.
- Financing activities provided $2.01 million, primarily from warrant exercises. Cash declined from $1.21 million at December 31, 2018 to $280,684 at June 30, 2019; management reported approximately $255,000 on hand as of August 12, 2019.
- At June 30, 2019, current assets were $2.79 million and current liabilities were $3.34 million, producing a working-capital deficit of $543,920. Accumulated deficit was $32.18 million.
- Total liabilities were $3.69 million, including $125,029 of insurance-financing notes, a $28,704 closed line-of-credit balance, and $592,402 of operating lease obligations. The filing reports no senior-debt default.
Material changes versus the prior comparable period
- The first half showed stronger revenue and gross profit, but the net loss widened by $528,155 because operating expenses grew faster than gross profit.
- The second quarter reversed the first-half revenue trend because of customer acceptance and contract-term delays. Management stated that the delays could affect another quarter but were not expected to materially affect the full year.
- Second-quarter gross margin fell to 13% from 39%, reflecting staffing added in anticipation of higher project execution and delayed project revenue. Management expects full-year margins to approach historical norms.
- Common shares issued and outstanding increased substantially following warrant exercises. At June 30, 2019, 20.83 million warrants and 2.16 million employee options remained outstanding, in addition to 5.66 million shares issuable upon conversion of Series B preferred stock.
- The company adopted the new lease standard effective January 1, 2019, recognizing a $565,926 right-of-use asset at June 30 and related current and long-term lease obligations.
Outlook, commentary, risks and unusual items
- Management expects a substantial order from an existing client in the third quarter and anticipates continued growth in rail-related projects, maintenance contracts and recurring revenue.
- Management believes the company has alleviated substantial doubt about its ability to continue as a going concern, based on warrant proceeds, expected customer receipts, backlog and planned growth. The company nevertheless remains dependent on timely customer payments, additional revenue and achieving consistent profitability.
- Management indicated that additional warrant exercises or equity or debt financing may be pursued, but no assurance was provided. The filing also references potential additional shareholder investment of approximately $3.5 million.
- Revenue and cash flow are concentrated: two customers accounted for 69% and 12% of first-half revenue, approximately 72% of revenue was generated from two customers outside the United States, and four customers represented 25%, 17%, 13% and 10% of accounts receivable at June 30.
- Contract assets declined to $304,061 from $1.21 million at year-end, while contract liabilities declined to $1.08 million from $2.25 million. Revenue recognition depends on estimates of contract costs, progress and customer acceptance.
- The company had $120,964 of payroll taxes payable at June 30, including $63,572 of accrued late-payment penalties, and was making $15,000 monthly payments.
- Subsequent events included $151,250 of additional warrant exercises in July 2019, a $6,849 share repurchase, an increase in the equity-plan authorization from 2.5 million to 4.5 million shares, and the appointment of a new director.
- No material litigation or material changes to previously disclosed risk factors were reported. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Investor verification points
- Verify the timing, size and collectability of the expected third-quarter customer order and delayed project acceptances.
- Assess whether approximately $255,000 of cash, customer collections, warrant exercises and operating receipts are sufficient to cover approximately $135,000 of monthly lease and other mandatory payments plus payroll and ordinary expenses.
- Monitor operating cash burn, working-capital deficit and the company’s ability to achieve consistent profitability without additional financing.
- Review customer and geographic concentration, accounts-receivable aging, contract estimates and the conversion of contract assets and liabilities into billed and collected cash.
- Evaluate dilution from outstanding warrants, employee options, Series B preferred-stock conversion rights and any future equity financing.