Business Context and Reporting Period
Duos Technologies Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2022. The company develops machine-vision, artificial-intelligence and sensor-based systems for rail, logistics, intermodal and government applications. Its primary products are the Railcar Inspection Portal (RIP) and Automated Logistics Information System (ALIS).
The company operated approximately 75 employees, including 67 full-time employees, and reported one operating segment. It had deployed 13 RIP systems across North America and reported 20 ALIS production systems in use.
Financial Performance and Position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $15.0 million | $8.3 million | +82% |
| Technology systems revenue | $11.2 million | $5.9 million | +91% |
| Services and consulting revenue | $3.8 million | $2.4 million | +60% |
| Gross profit | $4.7 million | $2.0 million | +133% |
| Gross margin | 31.6% | 24.7% | +6.9 percentage points |
| Operating loss | $(6.9) million | $(7.5) million | Improved by $0.6 million |
| Net loss | $(6.9) million | $(6.0) million | Higher loss |
| Net loss per share | $(1.11) | $(1.63) | Improved |
| Cash used in operating activities | $(7.9) million | $(6.6) million | Higher use |
| Cash from financing activities | $8.7 million | $4.1 million | Higher funding |
| Cash at year-end | $1.1 million | $0.9 million | +$0.2 million |
Revenue growth reflected delivery of two RIP projects, progress on a high-value RIP project, and increased AI, maintenance and consulting activity. Management stated that the company was near operating breakeven in the fourth quarter, but the filing does not provide a separate fourth-quarter income statement.
Operating expenses increased 22% to $11.6 million. General and administrative expense rose 50% to $8.6 million, partly due to employee retention programs, increased headcount and higher stock-based compensation. Research and development expense declined 34% to $1.7 million as certain technical resources were allocated to customer projects.
The company had a working-capital surplus of $2.3 million and an accumulated deficit of $52.4 million at December 31, 2022. Total liabilities were $9.0 million, including $5.2 million of operating lease liabilities, $74,575 of insurance financing notes and $22,851 of equipment financing. The PPP loan had been forgiven in 2021 and no balance remained.
Material Changes Versus the Prior Comparable Period
- Revenue increased 82%, driven primarily by higher technology-systems revenue and RIP deployments.
- Gross profit more than doubled, and gross margin increased to approximately 32% from approximately 25%.
- Operating loss narrowed, but net loss increased because 2021 included approximately $1.4 million of PPP loan-forgiveness-related other income.
- Operating cash use increased to $7.9 million, reflecting higher accounts receivable, inventory and contract-related expenditures.
- Accounts receivable increased to $3.4 million from $1.7 million, inventory increased to $1.4 million from $0.3 million, and contract assets increased to $0.4 million from $3,449.
- The company raised approximately $10.1 million of gross proceeds in 2022 from common-stock and Series D preferred-stock issuances, resulting in substantial equity dilution potential.
- All outstanding Series B and Series C preferred stock converted into common stock during 2022. The company ended the year with 1,299 shares of Series D preferred stock outstanding.
- The company elected not to renew one iCAS support contract in the fourth quarter and is evaluating the sale of related assets; management does not expect a material impact.
Guidance, Outlook, Risks and Unusual Items
Management expected to deliver at least two RIP solutions and begin a long-term services agreement during 2023. It also planned continued expansion of recurring maintenance, AI and subscription revenue, including a model under which Duos would build, own and operate RIP assets and sell data access to multiple subscribers.
The subscription strategy may broaden the customer base and increase recurring revenue, but it requires greater upfront investment and could materially increase working-capital needs. Management estimated a 12-to-18-month cash break-even period for each company-owned RIP site.
Management stated that it had sufficient liquidity and access to capital to fund operations for at least twelve months from the filing date, while acknowledging that continued operations depend on executing its business plan, generating sufficient revenue and obtaining additional funding if necessary. Cash was approximately $4.5 million as of March 28, 2023, and the company raised $4.0 million through a Series E preferred-stock issuance on March 27, 2023.
- Supply-chain disruption, inflation, labor costs and component shortages may delay installations, defer revenue recognition and reduce project margins.
- Customer concentration remains significant. Four customers represented 42%, 18%, 14% and 14% of 2022 revenue; the largest customer represented approximately 42%.
- Accounts receivable were concentrated among four customers representing 34%, 31%, 19% and 10% of year-end receivables.
- The company has a history of losses and negative operating cash flow, with no assurance that profitability will be achieved.
- Revenue recognition depends on estimates of costs to complete projects under a percentage-of-completion methodology. This was identified as a critical audit matter.
- Management reported material weaknesses in internal control over financial reporting relating to review of revenue-recognition policies, project scopes of work and reliance on ineffective reporting software and multiple data sources.
- The company faces competition from established technology providers and potential internally developed systems at Class 1 railroads.
- Future equity or convertible-preferred issuances, including Series D and Series E securities, may dilute common shareholders. Series D conversion requires shareholder approval and could result in up to approximately 433,000 common shares based on year-end disclosures.
- The company has a long-term office and warehouse lease with undiscounted future minimum payments of approximately $8.0 million through 2032.
The independent auditor issued an unqualified opinion on the consolidated financial statements, but was not engaged to provide an opinion on the effectiveness of internal control over financial reporting.
Most Important Facts an Investor Should Verify
- Whether 2023 RIP deliveries, the high-value portal project and the expected long-term services agreement were completed on schedule and at anticipated margins.
- Whether recurring services, AI and subscription revenue are growing sufficiently to offset project timing and customer concentration risks.
- Current cash balances, operating cash burn, working-capital requirements and the company’s need for additional equity financing.
- The actual dilution exposure from Series D and Series E preferred stock, stock options, warrants and the employee stock purchase plan.
- Progress in remediating the material weaknesses in revenue-recognition controls and financial reporting systems.
- Collection of concentrated accounts receivable and the status of contract assets, contract liabilities and inventory purchased ahead of firm customer orders.
- Impact of inflation, supply-chain delays and customer termination provisions on revenue recognition and project profitability.