Duos Technologies Group, Inc. — 2023 Form 10-K Summary
Business context and reporting period
This Form 10-K covers the fiscal year ended December 31, 2023, with comparative information for 2022. Duos develops machine-vision and artificial-intelligence systems for inspecting moving vehicles, principally railcars. Its primary products are the Railcar Inspection Portal, or RIP, and the Automated Logistics Information System, or ALIS. The Company operates through wholly owned subsidiaries and had approximately 71 employees at year-end.
Revenue is concentrated in rail-related technology systems, maintenance and support, consulting, and AI applications. Duos operates in one reportable segment and generated approximately 44% of 2023 revenue from customers outside the United States.
Financial performance and key metrics
| ($, except per-share data) | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $7.47 million | $15.01 million | -50% |
| Technology systems revenue | $3.62 million | $11.19 million | -68% |
| Services and consulting revenue | $3.85 million | $3.82 million | +1% |
| Gross profit | $1.31 million | $4.75 million | -72% |
| Gross margin | Approximately 18% | Approximately 32% | Down approximately 14 percentage points |
| Operating expenses | $12.76 million | $11.61 million | +10% |
| Loss from operations | $(11.45) million | $(6.87) million | Loss increased |
| Net loss | $(11.24) million | $(6.86) million | Loss increased |
| Net loss per share | $(1.56) | $(1.11) | Loss per share increased |
| Cash used in operating activities | $(8.75) million | $(7.87) million | Use increased |
| Cash used in investing activities | $(1.09) million | $(0.64) million | Use increased |
| Cash provided by financing activities | $11.16 million | $8.75 million | Increase |
The decline in revenue was primarily attributable to customer-driven delays affecting two high-speed transit RIP projects. Technology-systems revenue fell substantially, while services and consulting revenue was broadly stable. Management stated that underlying recurring revenue increased approximately 23% year over year, supported by additional maintenance contracts and AI services.
Gross margin declined because 2022 benefited from substantial completion of two freight RIP projects, while 2023 included project delays, continued procurement and manufacturing activity, and fixed personnel and departmental costs that were not fully absorbed by revenue.
Operating expenses increased primarily due to higher sales and marketing investment, research and development personnel costs, stock-option compensation, employee retention programs, depreciation of capitalized AI development costs, and legal, consulting, and financing-related expenses. The filing reports approximately $710,000 of stock-based compensation and $550,000 of depreciation and amortization in 2023.
Liquidity, capital resources and debt
- Cash at December 31, 2023 was $2.44 million, compared with $1.12 million at December 31, 2022.
- Accounts receivable were $1.46 million, down from $3.42 million, with no allowance for doubtful accounts recorded.
- Total current assets were $6.26 million and total current liabilities were $3.25 million, producing a working-capital surplus of approximately $3.01 million.
- Accumulated deficit was $63.60 million at December 31, 2023.
- Debt consisted primarily of operating lease obligations. Current insurance-premium notes payable were $41,976; equipment financing was fully repaid during 2023. Operating lease obligations totaled approximately $5.01 million, including $779,000 classified as current.
- 2023 financing cash flow primarily reflected $11.50 million of gross proceeds from Series E and Series F preferred-stock issuances, partially offset by issuance costs. Series F was exchanged for Series E in November 2023, leaving 11,500 Series E shares outstanding at year-end.
- Management reported approximately $3.33 million of cash on hand as of March 27, 2024, after a March 2024 preferred-stock financing that generated $2.745 million of net proceeds as described in the filing.
The Company continues to report substantial operating losses and negative operating cash flow. Management concluded that available liquidity and access to capital markets should support operations for at least twelve months after issuance of the financial statements, while acknowledging that continued operations ultimately depend on additional revenue growth, financing access, and progress toward profitability. The auditors identified liquidity and going-concern analysis as a critical audit matter but agreed with management’s conclusions.
Material changes versus the prior comparable period
- Revenue decreased 50%, driven mainly by delayed delivery and acceptance of two transit-focused RIP systems.
- Technology-systems revenue declined 68%, while services and consulting revenue increased 1%.
- Gross margin fell to approximately 18% from 32%, and net loss increased to $11.24 million from $6.86 million.
- Operating cash usage increased to $8.75 million from $7.87 million, despite a $1.96 million reduction in accounts receivable.
- Cash increased because preferred-stock financing more than offset operating and investing cash needs.
- Series E preferred stock was issued for $6.5 million in March and November 2023, and $5.0 million of Series F preferred stock issued in August 2023 was exchanged for Series E in November.
- Common shares issued increased to 7,306,663 from 7,156,876, excluding the potential dilution from convertible preferred stock, options and warrants.
- The Company sold its iCAS assets in June 2023 for a convertible note with a principal amount of $165,000, recognizing a $150,000 gain included in other income.
Guidance, outlook, risks and unusual items
Management did not provide formal quantitative revenue or earnings guidance. It expects delayed transit RIP revenue to shift into 2024, although some installations may not generate revenue until late 2024. The Company stated that it expects to install a two-RIP solution under a newly awarded multi-year passenger-rail contract during 2024, with a long-term services agreement beginning upon delivery.
Strategic priorities include expanding RIP and ALIS deployments, increasing recurring maintenance and AI revenue, developing subscription-based offerings, and offering both capital-sale and subscription pricing models. The subscription model may broaden the customer base and recurring revenue opportunity but would require Duos to fund RIP construction before receiving customer cash flows.
- Customer concentration is significant: three customers represented 48%, 30% and 11% of 2023 revenue; two customers represented 83% and 11% of year-end accounts receivable.
- Supply-chain disruptions, inflation, component shortages and implementation delays may defer revenue recognition and reduce project profitability.
- The Company has a history of losses and negative operating cash flow, and future financing may dilute common-stock holders.
- Series E preferred stock is convertible into common stock only subject to shareholder approval and a 19.99% beneficial-ownership limitation. The conversion price was $3.00 per common share, subject to adjustment.
- Revenue recognition for technology systems uses a cost-to-cost percentage-of-completion method requiring estimates of total project costs. This was identified as a critical audit matter.
- The Company depends on rapidly evolving AI and machine-vision technology, a limited number of key customers and vendors, and the retention of specialized personnel.
- Cybersecurity incidents, intellectual-property disputes, regulatory changes and competition from larger companies or customer-developed systems could materially affect results.
- The Company has a long-term office and warehouse lease with undiscounted future minimum payments of approximately $7.28 million through the remaining lease term.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor was not required to, and did not, express an opinion on internal control effectiveness.
Most important facts for investors to verify
- Whether the delayed transit RIP projects are delivered and accepted in 2024 and whether the related revenue and gross profit are realized.
- Whether recurring services and AI revenue can offset the volatility and lower margins associated with large technology-system projects.
- Actual monthly cash burn, cash balances, operating cash flow and the timing or terms of any additional equity or preferred-stock financing.
- The potential dilution and voting effects of Series D and Series E preferred stock, outstanding options and warrants.
- Whether the Company can achieve its stated objective of reaching profitability with minimal cash use within the anticipated 12-to-18-month period.
- Customer concentration, accounts-receivable collectability and the absence of minimum contract values in significant customer agreements.
- Actual backlog conversion, subscription adoption and the capital required to build, own and operate RIP assets.
- Execution against supply-chain, pricing, regulatory and cybersecurity risks, as well as the Company’s ability to maintain adequate working capital.