DUOS TECHNOLOGIES GROUP, INC. This quarterly report on Form 10-Q and other reports filed by
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance, or achievements. Except as required by
applicable law, including the securities laws of
Our financial statements are prepared in accordance with accounting principles
generally accepted in
Overview
The Company has developed the Railcar Inspection Portal (RIP) that provides both freight and transit railroad customers and select government agencies the ability to conduct fully remote railcar inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies, illumination and other sensors, scans each passing railcar to create an extremely high-resolution image set from a variety of angles including the undercarriage. These images are then processed through various methods of artificial intelligence algorithms to identify specific defects and/or areas of interest on each railcar. This is all accomplished within seconds of a railcar passing through our portal. This solution has the potential to transform the railroad industry immediately increasing safety, improving efficiency and reducing costs. The Company has successfully deployed this system with several Class 1 railroad customers and anticipates an increased demand in the future. Government agencies can conduct digital inspections combined with the incorporated artificial intelligence (AI) to improve rail traffic flow across borders which also directly benefits the Class 1 railroads through increasing their velocity.
24
The Company has also developed the Automated Logistics Information System (ALIS) which automates and reduces/removes personnel from gatehouses where trucks enter and exit large logistics and intermodal facilities. This solution also incorporates sensors and data points as necessary for each operation and directly interconnects with backend logistics databases and processes to streamline operations, and significantly improve operations and security and importantly dramatically improves the vehicle throughput on each lane on which the technology is deployed.
The Company has built a portfolio of IP and patented solutions that creates "actionable intelligence" using two core native platforms called Centraco® and Praesidium™. All solutions provided include a variant of both applications. Centraco is designed primarily as the user interface to all our systems as well as the backend connection to third-party applications and databases through both Application Programming Interfaces (APIs) and Software Development Kits (SDKs). This interface is browser based and hosted within each one of our systems and solutions. It is typically also customized for each unique customer and application. Praesidium typically resides as middleware in our systems and manages the various image capture devices and some sensors for input into the Centraco software.
The Company also developed a proprietary Artificial Intelligence (AI) software platform, Truevue360™ with the objective of focusing the Company's advanced intelligent technologies in the areas of AI, deep machine learning and advanced multi-layered algorithms to further support our solutions.
Through
The Company's strategy is to deliver operational and technical excellence to our
customers; expand our RIP and ALIS solutions into current and new customers
focused in the Rail, Logistics and
Prospects and Outlook
The Company has made significant changes in the senior management team to
include a new Chief Executive Officer with a wealth of experience successfully
leading start-up and turn-around companies. In addition, the former divisional
COO who has 20 years of experience with the Company delivering technology into
rail, logistics, intermodal, and other industries, has been promoted to Chief
Commercial Officer (CCO) of our wholly owned, operating subsidiary, Duos. Duos
has also hired a divisional Chief Operating Officer (COO) with a strong
background in operations in multiple former assignments. The Company's CFO will
continue in the same role providing continuity and multiple years of public
company experience. More recently, the Company's Board of Directors was
strengthened with the addition of two very experienced leaders. The first is a
retired Chief Operating Officer for a Class 1 railroad with more than 50 years
of experience in the rail industry. The second is a retired Army General Officer
and former CEO of a large, global security and training company contracting with
multiple
The new leadership team's focus is to improve operational and technical execution which will in turn enable the commercial side of the business to expand RIP and ALIS delivery into existing customers and to expand and diversify our current customer base. Even though COVID-19 is expected to still be an issue during the remainder of 2021 and potentially into 2022, the Company's primary customers have indicated readiness to order more equipment and services should the Company execute as expected on key deliverables over the next few months.
Additionally, the new CEO has directed that the Company make engineering and
software upgrades to the RIP to meet anticipated
The Company is expanding its focus in the rail industry to encompass passenger transportation and is currently in the last stages of a bid for a large, multi-year contract with a national rail carrier. If successful, the Company is expected to deliver at least two RIP solutions along with a long-term services agreement in late 2021 or early 2022.
Although the Company's prospects and outlook are anticipated to be favorable for the remainder of 2021 and 2022, investing in our securities involves risk and careful consideration should be made before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control and unexpected macro events can have a severe impact on the business.
25 Results of Operation
The following discussion should be read in conjunction with the unaudited financial statements included in this report.
Comparison for the Three Months Ended
The following table sets forth a modified version of our unaudited Consolidated Statements of Operations that is used in the following discussions of our results of operations:
For the Three Months Ended
September 30,
2021 2020
Revenues $ 1,740,457 $ 1,281,949
Cost of revenues 2,804,773 1,529,052
Gross margin (1,064,316 ) (247,103)
Operating expenses 1,382,177 2,459,740Loss from operations (2,446,493 ) (2,706,843 ) Other income (expense)
(3,944 ) (1,736 )
Net loss $ (2,450,437 ) $ (2,708,579 )
Revenues
For the Three Months Ended
September 30,
2021 2020 % Change
Revenues:
Technology systems $ 1,153,150 $ 729,231 58%
Services and consulting 587,307 552,718 6%
Total revenues $ 1,740,457 $ 1,281,949 36%
The significant increase in overall revenues for the quarter is from the progress in new installations in the technology systems portion of our business. Previously, the Company noted a comparable decrease in revenues for the equivalent quarter. The greater than expected decrease during the previous quarter of 2021 was the result of a delay in receiving anticipated "notices to proceed" for new contracts expected earlier in the year. During this quarter the anticipated "notice to proceed" on a significant upgrade to two key installations was received and some of that revenue was recognized during this quarter resulting in a 58% increase in revenues in comparison to the equivalent quarter a year ago. While anticipated orders continued to be delayed, we remain encouraged by the breadth and scope of recent bids which we have participated in indicating an expected surge in orders in late this year and in early 2022. However, management cautions that because of the delays in anticipated start dates, certain installations may produce revenues towards the end of the year, some of which may ultimately be recorded in 2022. Additionally, although the industries where we operate are showing early signs of recovery from the delays as a result of the Covid-19 pandemic, other macro-economic effects are anticipated to impact us, including the current supply chain disruptions which continue to extend deadlines for shipment of key components used in our technology systems. The effect of this will be to push revenue recognition later in the year or into 2022 as previously mentioned.
The Company's stable capital structure has thus far allowed us to weather the unexpected delays without significant operational impact and enabled us to pursue large projects requiring the ability to deploy major resources. In order to respond to the much longer lead times to procure equipment, management is anticipating additional demands on our working capital as the requirement to procure ahead of a formal award is becoming more critical. An additional effect of this is the ongoing investment by the Company in streamlining our project build and delivery process and quality control processes. The Company undertook a major review of operations in the final quarter of 2020 and made significant changes in staffing including additional engineering staff. A further review was conducted in the second quarter of 2021 with additional, material changes in staffing being implemented, particularly in our software engineering and AI teams. The Company previously implemented a "rapid development" initiative to be able to respond to market driven demand more quickly and although this has been successful, the impact has not been as anticipated due to the supply chain shortages as previously discussed. Although not fully visible in this quarter's financials, this effort has shortened delivery times on major projects and is expected to result in significant revenue growth in the last three months of this year and beyond once the materials are procured.
We continue to build a solid base of recurring revenue contracts as demonstrated by the continuing growth in services revenue. New maintenance contracts are being established as well as renewals of existing contracts and a shift to the next generation of technology systems which are currently being installed is anticipated to generate further growth in this area in 2022 and beyond. The services portion of revenues is driven by successful completion on projects and represents services and support for those installations. The Company expects to continue the growth with new, long term recurring revenue from existing customers which will be coming on-line in the next several months.
26
Cost of Revenues
For the Three Months Ended
September 30,
2021 2020 % Change
Cost of revenues:
Technology systems $ 1,869,812 $ 976,121 92%
Services and consulting 277,054 319,334 -13%
Overhead 657,907 233,597 182%
Total cost of revenues $ 2,804,773 $ 1,529,052 83%
Cost of revenues largely comprises equipment, labor and overhead necessary to support the implementation of new systems and support and maintenance of existing systems. Cost of revenues on technology systems increased during the period compared to the equivalent period in 2020 by a greater amount than the increase in revenues. The main reason for the continuing high level of cost is the result of additional work being necessary on certain of the Company's installations to resolve newly identified quality issues which are now mostly resolved as well as higher costs of materials due to supply chain disruptions. There was also a significant increase in cost related to the new deployment of an undercarriage technology. Many of these costs were not envisioned by the original scope of work. However, the costs are expected to be much lower going forward as a percentage of the overall system price. As previously noted, the Company's organization and related cost structure was realigned to give the capability to manufacture, install and support multiple production systems simultaneously. Prior to this realignment, the Company's organization was focused on primarily research and development with implementation resources being allocated as necessary. In accordance with this shift in structure, certain staff were re-assigned or replaced, and new staff added in key areas, particularly software engineering, IT and AI.
In conjunction with this change, increased costs are now being recognized against project and support revenues with a similar reduction in costs previously recognized for research and development, engineering development and internal support. In concert with this, there is a continued focus on construction costs and savings through efficiency, but the Company has elected to expand its key employees in anticipation of expected sales growth in technology systems and services through the end of this year and in 2022. As previously discussed in the first quarter of 2021, certain expenses related to installed equipment upgrades were greater than anticipated for a variety of reasons including cost overruns on the first installation of new technologies and certain implementation inefficiencies related to Covid-19 restrictions such as extended quarantines and additional contract staff necessary to complete projects on time. These changes had a negative impact on the gross margin (see below), but this is expected to be a short-term impact, offset by increases in revenue later in the year. It is also expected to have positive long-term impact as the Company is prepared to deliver a higher number of systems in a given period, with a shorter time of implementation and with better quality and reliability as the operations become standardized in anticipation of expected higher demand for systems, particularly in the rail industry.
Cost of revenues decreased on services and consulting versus the increase in revenues. This is a positive trend and is expected to continue as more of the Company's business is from recurring revenue. This decrease in cost of revenues in the quarter is the result of lower costs in servicing clients as well as the elimination of certain costs related to our ITAM business that were recorded in the equivalent period. Costs of service are expected to increase in future quarters at a slower rate than revenue growth as some of the streamlining of support took place earlier in the year and despite the additional resources allocated to these activities in anticipation of higher recurring revenue in 2022 and beyond.
Gross Margin
For the Three Months Ended
September 30,
2021 2020 % Change
Revenues $ 1,740,457 $ 1,281,949 36%
Cost of revenues 2,804,773 1,529,052 83%
Gross margin $ (1,064,316 ) $ (247,103 ) 331%
As previously discussed, the Company has revamped its operations to support an
anticipated increase in the number of new systems going forward. The resultant
additional cost of revenues, while somewhat offset by decreases in G&A expenses,
is not yet covered by a comparable increase in revenues as of the third quarter
2021. The overall negative gross margin was
27
Operating Expenses
For the Three Months Ended
September 30,
2021 2020 % Change
Operating expenses:
Sales and marketing $ 361,820 $ 173,197 109%
Research and development 57,000 21,583 164%
Administration 963,357 2,264,960 -57%
Total operating expenses $ 1,382,177 $ 2,459,740 -44%
Overall operating expenses were lower by 44% than the equivalent period in 2020. A significant increase in sales and marketing costs was more than offset by a substantial decrease in overall administration costs. This decrease was mostly due to the recording of the ex-CEO's separation agreement during the same period in 2020. Additionally, certain costs to support the organization as it operated at that time were eliminated as an offset to the increases in operations staff as described previously.
Loss from Operations
The loss from operations for the three months ended
Other Income/Expense
Interest expense for the three months ended
Net Loss
The net loss for the three months ended
Comparison for the Nine Months Ended
The following table sets forth a modified version of our unaudited Consolidated Statements of Operations that is used in the following discussions of our results of operations:
For the Nine Months Ended
September 30,
2021 2020
Revenues $ 4,543,879 $ 4,255,036
Cost of revenues 7,721,155 4,970,164
Gross margin (3,177,276 ) (715,128 )
Operating expenses 4,039,985 5,506,686
Loss from operations (7,217,261 ) (6,221,814 )
Other income (expense) 1,407,921 (99,703 )
Net loss $ (5,809,340 ) $ (6,321,517 )
28
Revenues
For the Nine Months Ended
September 30,
2021 2020 % Change
Revenues:
Technology systems $ 2,743,849 $ 2,840,538 -3%
Services and Consulting 1,800,030 1,414,498 27%
Total revenues $ 4,543,879 $ 4,255,036 7%
For the first three quarters of 2021, there was a 7% overall increase in revenues. The increase was driven by new revenues being recorded after delays in receiving "notices to proceed" for anticipated new contracts earlier in the year pushed delivery dates into the second half of this year. There was a slight decrease in revenue from systems which was more than offset by a 27% increase in services revenue, most of which is recurring in nature. The Company is focusing on increasing its business from services and the increase is the result of new contracts for existing and new systems. This trend is expected to continue into 2022. While anticipated orders continue to be delayed, we are encouraged by the breadth and scope of recent bids in which we have participated, indicating an expected increase in orders in the fourth quarter. As previously discussed, management cautions that because of the delays in anticipated start dates, certain installations may produce revenues towards the end of the year, some of which may ultimately be recorded in 2022. Additionally, although the industries in which we operate are showing early signs of recovery from the delays as a result of the Covid-19 pandemic, other macro-economic effects are anticipated to impact us, including the current supply chain issues which are extending deadlines for shipment of key components used in our technology systems. The effect of this will be to push revenue recognition later in the year or into 2022 as previously mentioned.
The Company's stable capital structure continues to allow us to weather the unexpected delays without significant operational impact and enables us to pursue large projects requiring the ability to deploy major resources. It should be noted that the Company may increase its working capital to account for an increase in pre-contract procurement activities to avoid a slowdown in revenues caused by delays in receiving certain components. The Company undertook a major review of operations in the final quarter of 2020 and made significant changes in staffing including additional engineering staff and revamping its software development and Artificial Intelligence staffing. Although in early 2021 the Company implemented a "rapid development" initiative which was intended to be able to respond to market driven demand more quickly, this effort has been somewhat negated by ongoing supply chain issues. Where this effort has shortened delivery times on major projects and was expected to result in significant revenue growth in the last six months of this year and beyond, the previously discussed supply chain issues have not allowed the anticipated benefits to be realized at this time. The Company is monitoring the situation and is intending to begin procuring materials ahead of contract award although this is likely to require an increase in working capital in the early part of 2022.
In 2020, the Company received a large ($2+ million) contract for AI related development from a large client which is expected to add revenues in the fourth quarter of 2021 or early 2022. Revenues from this initiative have been delayed due to another vendor of the client experiencing delays in producing certain deliverables. The Company is assisting the client with resolving this and is expecting revenues from this project to resume in the last quarter of the year. The Company also expects to continue the growth with new revenue from other existing customers which also will be coming on-line in the next several months. As previously noted, the slight decrease in technology systems revenues was offset by an increase in services revenue as the result of new maintenance contracts being established as well as renewals of existing contracts and a shift to the next generation of technology systems which are currently being installed. The services portion of revenues are driven by successful completion on projects and represent services and support for those installations. The Company expects to continue the growth with new, long term recurring revenue from existing customers which will be coming on-line in the next several months.
Cost of Revenues
For the Nine Months Ended
September 30,
2021 2020 % Change
Cost of revenues:
Technology systems $ 4,979,667 $ 3,390,211 47%
Services and consulting 986,757 827,532 19%
Overhead 1,754,731 752,421 133%
Total cost of revenues $ 7,721,155 $ 4,970,164 55%
Cost of revenues increased by 55% for the nine months in 2021 over the equivalent nine months in 2020. This is the result of increased costs of deployment related to certain installations where new technologies were being deployed for the first time. Costs for services and consulting increased at a proportionate, albeit slightly slower rate, than the increase in revenues and this trend is expected to continue as certain economies of scale become evident late in the year and continue into 2022. Overhead more than doubled for the period reflecting higher costs for staffing current and anticipated projects although this rate of increase is expected to flatten in the fourth quarter of 2021 and beyond.
29
Gross Margin
For the Nine Months Ended
September 30,
2021 2020 % Change
Revenues $ 4,543,879 $ 4,255,036 7%
Cost of revenues 7,721,155 4,970,164 55%
Gross margin $ (3,177,276 ) (715,128 ) 344%
As previously discussed, the Company has revamped its operations to support an
anticipated increase in the number of new systems going forward. The resultant
additional cost of revenues, while somewhat offset by decreases in SG&A
expenses, is not yet covered by a comparable increase in revenues during the
first nine months of 2021. The overall negative gross margin of
Operating Expenses
For the Nine Months Ended
September 30,
2021 2020 % Change
Operating expenses:
Sales and marketing $ 1,024,872 $ 435,522 135%
Research and development 197,164 77,179 155%
Administration 2,817,949 4,993,985 -44%
Total operating expense $ 4,039,985 $ 5,506,686 -27%
Operating expenses were lower by 27% than the equivalent period in 2020 reflecting the decrease in resources related to the Company's transition to production from the previous research and development focus. Sales and marketing expense increased due to additional resources focused on growing and supporting the Company's projected sales increase. Sales personnel are starting to travel with the gradual easing of restrictions due to the Covid-19 pandemic. Research and development expenses increased with a renewed focus on developing key technologies, notably in the areas of machine learning and artificial intelligence. Administration expenses decreased mostly due to staff re-alignment. These decreases are expected to substantially offset the increased costs allocated to technology systems implementations with potential gains coming with an anticipated increase in new contracts in 2022.
Loss From Operations
The loss from operations for the nine months ended
Interest Expense
Interest expense for the nine months ended
Other Income
Other income for the nine months ended
30 Net Loss
The net loss for the nine months ended
Liquidity and Capital Resources
As of
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
September 30 ,September 30, 2021 2020
Net cash used in operating activities
(310,776 ) (224,586 )
Net cash provided by financing activities 4,122,315 8,508,830
Net increase (decrease) in cash $ (1,711,129 ) $ 4,060,333 Net cash used in operating activities for the nine months ended
Net cash used in investing activities for the nine months ended
Net cash provided by financing activities for the nine months ended
Previously, we have funded our operations primarily through the sale of our
equity (or equity linked) and debt securities. During 2021, we have funded our
operations through a combination of a recent capital raise, revenues generated,
and cash received from ongoing project execution and associated maintenance
revenues. As of
On a long-term basis, our liquidity is dependent on continuation and expansion of operations and receipt of revenues. Our current capital and revenues are no longer enough to fund operations for at least the next 12 months. The Company cannot currently quantify the uncertainty related to the pandemic and its effects on the business in the coming quarters. Additional factors may emerge including delays in the availability of certain components which may further delay the completion of current and anticipated technology systems installations. This will be partially offset by the addition of new service contracts that started in 2021.
31
Demand for our products and services will be dependent on, among other things, continuing market acceptance of our products and services, the technology market in general, and general economic conditions, which are cyclical in nature and are currently impacted by the Covid-19 pandemic and emerging supply chain issues for key components. In as much as a major portion of our activities is the receipt of revenues from the sales of our products and services, our business operations may continue to be adversely affected by this situation as well as the potential for a prolonged recessionary period.
Going Concern and Liquidity
Under Accounting Standards Update, or ASU, 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) ("ASC 205-40"), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company's ability to continue as a going concern in accordance with the requirement of ASC 205-40.
As reflected in the accompanying unaudited consolidated financial statements,
the Company had a net loss of
Upon completion of the 2020 Offering, management raised sufficient working
capital to meet its needs for the next 12-months without the need to raise
further capital. Since the advent of the Covid-19 pandemic, the Company has
experienced a significant slowdown in closing new projects due to cautious
actions by current and potential clients. We continue to be successful in
identifying new business opportunities and are focused on re-establishing a
backlog of projects. Most importantly, the Company's success in increasing its
working capital surplus after receiving proceeds from the 2020 Offering of more
than
Management believes that, at this time, the conditions in our market space with
ongoing contract delays, the consequent need to procure certain materials in
advance of a binding contract and the additional time needed to execute on new
contracts have put a strain on our cash reserves and that because of these
factors, there is substantial doubt for the Company to continue as a going
concern for a period of twelve months from the issuance of this report. We were
executing the plan to grow our business and achieve profitability without the
requirement to raise additional capital for existing operations. Due to the
various delays encountered, Management evaluated our requirements in the past 90
days and has determined that the Company currently has sufficient cash to
operate for the next six months. As part of its evaluation, the Company has
determined that the previously sufficient levels of working capital must be
bolstered in order to allow the Company to execute its growth plans with
identified business expected to be executed in 2022. As previously noted, the
Company raised
Off Balance Sheet Arrangements
We have no-off balance sheet contractual arrangements, as that term is defined in Item 303(a)(4) of Regulation S-K.
32
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.
Share-Based Compensation
The Company accounts for employee stock-based compensation in accordance with ASC 718-10, "Share-Based Payment," which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company's determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding a number of highly subjective variables.
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for stock options using the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
Revenue Recognition
As of
Revenue is recognized by evaluating our revenue contracts with customers based on the five-step model under ASC 606:
1. Identify the contract with the customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to separate performance obligations; and 5. Recognize revenue when (or as) each performance obligation is satisfied.
For revenues related to technology systems, the Company recognizes revenue over time using a cost-based input methodology in which significant judgment is required to estimate costs to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding amount of revenue to recognize.
Accordingly, the Company now bases its revenue recognition on ASC 606-10-25-27, where control of a good or service transfers over time if the entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured and revenue is recognized accordingly.
33
In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company has adopted the implementation guidance as set out in ASC-606-10-55-187 through 192.
Under this method, contract revenues are recognized over the performance period
of the contract in direct proportion to the costs incurred. Costs include direct
material, direct labor, subcontract labor and other allocable indirect costs.
All
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in
© Edgar Online, source
