Duos Technologies (DUOT) - 2023 Q4 - Annual Report

PART I Overview of Duos Technologies Group, Inc.'s business, products, markets, risks, legal, and property information Business Overview Duos Technologies specializes in AI-driven inspection solutions for moving vehicles, focusing on railcar and logistics automation with a shift to subscription models - Duos Technologies Group, Inc. designs, develops, deploys, and operates intelligent technology solutions focusing on AI for inspecting moving vehicles[11][12] - Primary offerings include the Railcar Inspection Portal (RIP) for high-speed railcar inspections and the Automated Logistics Information System (ALIS) for gatehouse automation[13][14] - Duos is shifting towards a subscription-based offering for RIPs to broaden its target market and increase recurring revenue[21][26] Our Corporate History Details the company's incorporation as ISA in 1994 and its merger with Duos Technologies in 2015 - Information Systems Associates, Inc. (ISA) was incorporated in Florida on May 31, 1994, initially providing consulting and IT asset management software services[11] - In 2015, ISA merged with Duos Technologies, Inc., becoming a wholly-owned subsidiary and subsequently changing its name to Duos Technologies Group, Inc.[11] Overview of Business and Products Describes Duos' core products, the Railcar Inspection Portal (RIP) and Automated Logistics Information System (ALIS), leveraging machine vision and AI - Duos operates in the Vision Technology market, specifically Machine Vision, providing imaging-based automatic inspection and analysis[12] - Key products include the Railcar Inspection Portal (RIP) for remote, full-speed railcar inspections using optical, laser, and speed sensors with AI algorithms[13] - The Automated Logistics Information System (ALIS) automates gatehouse operations for transport trucks at large logistics and intermodal facilities[14] - Proprietary software solutions include 'centra' for Enterprise Information Management and 'truevue360' for AI algorithm development and deployment[16] Target Markets and Expansion Focuses on expanding RIP and ALIS in North America, pursuing subscription models, and planning global expansion - The Railcar Inspection Portal (RIP) business is top priority, with 13 systems deployed across North America and engagement with three Class 1 railroad operators[25] - The company is pursuing a subscription platform for RIPs to expand the addressable market to other railroads, railcar owners, and lessors[26] - The Automated Logistics and Information Systems (ALIS) is the second priority, with 20 production systems in use and opportunities in over 900 traffic lanes within nearly 300 facilities[27] - Current focus is on the North American market, with future plans for global expansion into Europe, Asia, and the Middle East[28] Intellectual Property The company protects its technology solutions through patents, trademarks, and contractual restrictions - The Company holds a number of patents and trademarks for its technology solutions, protecting intellectual property through federal, state, common law rights, and contractual restrictions[29] Competitive Landscape Analyzes competitors in railcar inspection and logistics automation, highlighting Duos' competitive advantages - Competitors in visual and optical railcar inspection systems include Wabtec (Beena Vision), KLD Labs, WID, IEM, and Camlin Rail; some Class 1 railroads develop in-house solutions[32] - Duos believes it has a significant competitive advantage due to multiple years of deployment experience, access to millions of images for AI analysis, and in-house industry expertise[32] - The Automated Logistics Information System (ALIS) targets a mature market with a significant technology gap, as most facilities lack advanced gatehouse automation[33] Growth Strategy and Objectives Outlines the company's vision to expand intelligent technology solutions in rail and intermodal markets through various strategies - The company's vision is to design, develop, deploy, and operate intelligent technology solutions for inspecting and evaluating moving objects, focusing on rail and intermodal markets[34] - Key objectives include improving operational and technical execution, expanding RIP and ALIS, offering CAPEX and subscription pricing models, forming strategic partnerships, and executing thoughtful M&A[36] Organic Growth Initiatives Details organic growth efforts in rail and logistics, supported by new management and continuous product upgrades - Organic growth strategy focuses on the rail, logistics, and intermodal market, supported by significant changes in the senior management team, including a new CEO, key account executive, CCO, and CTO[37] - New leadership aims to improve operational and technical execution to expand RIP and ALIS delivery, with primary customers indicating readiness for more orders[38] - The CEO has directed continuous engineering and software upgrades to the RIP to meet anticipated FRA and AAR standards[39] Manufacturing and Supply Chain Describes the company's approach to design, development, and manufacturing, noting anticipated supply chain challenges - The company designs and develops technology solutions using in-house fabrication, commercial off-the-shelf technology, and outsourced manufacturing[40] - Internal manufacturing includes materials procurement, assembly, testing, and quality control, with third-party partners producing hardware components[40] - The company anticipates significant challenges in 2024 and beyond due to macro-economic impacts like inflation and supply chain disruptions, potentially delaying revenue and impacting profitability[41] Research and Development Efforts Highlights significant R&D investment to maintain and improve product offerings and adapt to technological advancements - R&D and software development teams, comprising in-house engineers and contractors, design and develop all systems and software applications[42] - Significant resources are dedicated to R&D to maintain and improve current product and service offerings, adapting to rapid technological advances and evolving industry standards[42] Government Regulations and Compliance Addresses compliance with federal regulations and anticipates positive impacts from future regulatory changes in transportation - The company has worked with federal government agencies for over 10 years, ensuring solutions meet specific certification, safety, and security requirements[44] - Primary customers are governed by regulations related to safe and effective transportation, and the company believes any regulatory changes will be positive and complementary to its offerings[45] Employee Information Provides details on the company's 71 employees, primarily in Jacksonville, Florida, and their labor relations - The company has 71 employees, with 66 full-time, primarily in Jacksonville, Florida, maintaining good relationships without collective bargaining agreements or work stoppages[46] Risk Factors Outlines various risks including technology complexity, macroeconomic impacts, market changes, financial challenges, and cybersecurity threats - Complex and highly integrated technology platforms may lead to software errors, data corruption, or performance issues, harming revenues and reputation[47][48] - Lingering effects of the COVID-19 pandemic, inflation, and supply chain disruptions continue to adversely affect operations, sales, and financial results, potentially delaying revenue and impacting profitability[50][51][52] - The company has a history of losses, with an accumulated deficit of $64 million as of December 31, 2023, and growth plans may lead to additional losses and negative operating cash flows[59] - Dependence on a limited number of customers (three customers accounted for 48%, 30%, and 11% of 2023 revenues) creates a concentration of credit risk[74][75] Risks Related to Our Company and Business Covers risks associated with technology management, inflation, market competition, subscription model transition, intellectual property, and key personnel - Failure to manage technology releases or integrate new solutions successfully could harm revenues, operating income, and reputation due to complexity and condensed development cycles[47][48] - Inflation and supply chain disruptions are increasing costs for employees, contractors, and materials, potentially reducing profitability and delaying revenue recognition[51][52] - The company's products and services may fail to keep pace with rapidly changing technology and evolving industry standards, affecting market position and operating results[53] - A shift to a subscription format for RIPs may require significant upfront investments without immediate customer milestone payments, impacting working capital and capitalization strategy[57] - Inability to protect intellectual property (patents, trademarks, trade secrets) could impair competitive advantage, reduce revenue, and increase costs[60][61] - Dependence on key personnel, especially engineers, makes the business vulnerable to loss of services or inability to hire qualified staff, delaying product development and disrupting business plans[72] Risks Related to Our Common Stock Addresses risks concerning limited stock trading, potential dilution from future issuances, preferred stock issuance, lack of dividends, and fluctuating operating results - There is currently a limited active trading market for the company's common stock, leading to potential price fluctuations[76] - Future issuances of securities (common stock, preferred shares, convertible debt) may dilute existing ownership interests[78] - The Board of Directors can issue preferred stock without stockholder approval, potentially affecting voting power or preventing a change in control[79] - The company does not anticipate paying dividends in the foreseeable future, meaning investors will only realize economic gain through stock price appreciation[80] - Operating results are likely to fluctuate due to factors including manufacturing issues, product liability claims, competitor innovations, and regulatory changes[81][82] Unresolved Staff Comments Reports no unresolved staff comments for the fiscal year ended December 31, 2023 - No unresolved staff comments were reported for the year ended December 31, 2023[86] Cybersecurity Details the company's cybersecurity risk management framework, policies, and Board oversight through the Audit Committee - The company has infrastructure, systems, policies, and procedures to proactively and reactively address cybersecurity incidents, including processes for assessing, identifying, and managing material risks[87] - Cybersecurity and data privacy policies are designed to respond to new global privacy laws and to prevent, detect, respond to, mitigate, and recover from identified threats[87] - As of Q1 2024, information security matters, including cybersecurity risk management, are overseen by the Audit Committee of the Board, receiving regular updates from the CTO (designated as CISO)[88] Properties Describes the company's 40,000 square foot office and warehouse lease in Jacksonville, Florida, and associated rental expenses - The company entered a new operating lease agreement on July 26, 2021, for 40,000 square feet of office and warehouse space in Jacksonville, Florida[89] - The lease commenced on November 1, 2021, ends on May 31, 2032, with rent subject to an annual escalation of 2.5% starting December 1, 2022[89] Rental Expense | Year | Rental Expense | | :--- | :--- | | 2023 | $781,638 | | 2022 | $782,591 | Legal Proceedings States that the company is not involved in any material litigation that would adversely affect its financial condition - The company is not currently involved in any litigation believed to have a material adverse effect on its financial condition or results of operations[92] Mine Safety Disclosures Confirms that Mine Safety Disclosures are not applicable to the company's operations - Mine Safety Disclosures are not applicable to the company[93] PART II Covers market for common equity, management's discussion and analysis of financial condition, and controls and procedures Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Details common stock trading, authorized capital, outstanding preferred stock, and the company's dividend policy - The company's common stock is quoted on the Nasdaq Capital Markets under the symbol "DUOT," but currently experiences limited active trading[96][76] - Authorized capital includes 500,000,000 shares of common stock and 10,000,000 shares of blank check preferred stock[97] Outstanding Preferred Stock (as of December 31, 2023) | Series | Shares Designated | Shares Issued & Outstanding | | :----- | :---------------- | :-------------------------- | | Series A | 500,000 | 0 | | Series B | 15,000 | 0 | | Series C | 5,000 | 0 | | Series D | 4,000 | 1,299 | | Series E | 30,000 | 11,500 | | Series F | 5,000 | 0 | - The company does not anticipate declaring or paying any dividends in the foreseeable future, expecting to use all available funds to finance future development and business expansion[127] Reserved This item is reserved and contains no information - Item 6 is reserved and contains no information[130] Management's Discussion and Analysis of Financial Condition and Results of Operation Analyzes financial performance, strategic direction, and operational challenges for 2023, focusing on revenue, net loss, and liquidity - Overall revenues decreased by 50% in 2023 compared to 2022, primarily due to substantial completion of two freight RIP projects in 2022 and customer-driven delays in transit-focused RIPs in 2023[143] - Net loss increased to $11,241,718 in 2023 from $6,864,783 in 2022, driven by declining system revenues and higher operating expenses[157] - The company is investing in resources to focus on execution within its target markets (rail, trucking, aviation) and is expanding its artificial intelligence offering and subscription platform to drive recurring revenues[135][137] - Liquidity has been strengthened by successful equity raises in 2023 and Q1 2024, providing sufficient cash and access to capital to maintain operations for at least twelve months[169][170][172] Overview Aims to clarify financial statements, key changes, and accounting principles for readers - The discussion aims to help readers understand the company's financial statements, changes in key items, primary factors for those changes, and how accounting principles affect financial statements[134] Plan of Operation Outlines the company's growth strategy through technology expansion, organic development, partnerships, and resource investment - The company's growth strategy involves expanding its technology base through organic development, strategic partnerships, and acquisitions, focusing on Vision Technology and Machine Vision sectors[135] - Current efforts include investing in resources to improve execution in target markets (rail, trucking, aviation) and adding development resources to compete for additional projects and revenue growth[136] Prospects and Outlook Details plans for improving execution, expanding RIP and ALIS, shifting to subscriptions, and entering passenger rail - The company aims to improve operational and technical execution to expand RIP and ALIS delivery, with a shift towards a subscription platform and expanded AI offerings to drive recurring revenues[137] - Engineering and software upgrades to the RIP are ongoing to meet FRA and AAR standards, expected to drive revenue growth in 2024 and beyond[138] - Expansion into passenger transportation in the rail industry is underway, with a large multi-year contract awarded for a two-RIP solution installation in 2024[139] Results of Operations Presents a detailed analysis of revenues, costs, gross margin, operating expenses, and net loss for 2023 versus 2022 Consolidated Statements of Operations Summary | Metric | 2023 ($) | 2022 ($) | | :-------------------- | :--------- | :--------- | | Revenues | 7,471,198 | 15,012,366 | | Cost of revenues | 6,162,317 | 10,264,263 | | Gross margin | 1,308,881 | 4,748,103 | | Operating expenses | 12,755,447 | 11,613,252 | | Loss from operations | (11,446,566) | (6,865,149) | | Other income | 204,848 | 366 | | Net loss | (11,241,718) | (6,864,783) | Revenue Breakdown (YoY Change) | Revenue Type | 2023 ($) | 2022 ($) | % Change | | :------------- | :--------- | :--------- | :------- | | Technology systems | 3,618,022 | 11,190,292 | -68% | | Services and consulting | 3,853,176 | 3,822,074 | 1% | | Total revenues | 7,471,198 | 15,012,366 | -50% | - Overall revenues decreased by 50% in 2023 due to substantial completion of freight RIP projects in 2022 and customer-driven delays in transit-focused RIPs in 2023[143] - Underlying recurring revenues from services and consulting climbed by approximately 23% year-over-year, driven by expanded service contracts and AI service deployments[143] Cost of Revenues Breakdown (YoY Change) | Cost Type | 2023 ($) | 2022 ($) | % Change | | :---------- | :--------- | :--------- | :------- | | Technology systems | 4,352,247 | 8,376,649 | -48% | | Services and consulting | 1,810,070 | 1,887,614 | -4% | | Total cost of revenues | 6,162,317 | 10,264,263 | -40% | - Gross margin decreased by 72% to 18% in 2023 from 32% in 2022, primarily due to lower business activity and project delays, coupled with fixed departmental costs[151] Operating Expenses Breakdown (YoY Change) | Expense Type | 2023 ($) | 2022 ($) | % Change | | :------------- | :--------- | :--------- | :------- | | Sales and marketing | 1,493,309 | 1,337,186 | 12% | | Research and development | 1,812,951 | 1,651,064 | 10% | | General and Administration | 9,449,187 | 8,625,002 | 10% | | Total operating expense | 12,755,447 | 11,613,252 | 10% | - Loss from operations increased to $11,446,566 in 2023 from $6,865,149 in 2022, mainly due to declining system revenues and project delays[154] - Other income significantly increased to $212,007 in 2023 (from $9,557 in 2022), mainly due to the sale of iCAS assets for $165,000 via a convertible note[156] Net Loss and EPS | Metric | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Net Loss | $(11,241,718) | $(6,864,783) | | Basic and Diluted Net Loss Per Share | $(1.56) | $(1.11) | Liquidity and Capital Resources Assesses the company's cash position, accounts receivable, cash flows, and capital raising efforts to support operations and growth Cash Balance and Accounts Receivable (as of December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------- | :--------- | :--------- | | Cash | 2,441,842 | 1,121,092 | | Accounts Receivable | 1,462,463 | 3,418,263 | Cash Flows Summary | Cash Flow Activity | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Net cash used in operating activities | (8,746,564) | (7,873,307) | | Net cash used in investing activities | (1,093,909) | (644,888) | | Net cash provided in financing activities | 11,161,223 | 8,745,567 | | Net increase (decrease) in cash | 1,320,750 | 227,372 | - Net cash used in operating activities increased in 2023 due to current and anticipated 2024 project expenditures and changes in assets/liabilities[160] - Net cash provided by financing activities increased in 2023, primarily from $11,500,000 in gross proceeds from preferred stock issuance[162] - As of March 27, 2024, the company had approximately $3,329,753 cash on hand after a March 2024 equity capital raise of $2,745,000[163] - Management believes it has sufficient liquid assets and access to capital markets (including an S-3 shelf registration in Q2 2024) to maintain operations for at least twelve months and support expanded operations[170][172] Critical Accounting Estimates Explains key accounting judgments for revenue recognition, stock-based compensation, and other financial statement items - Revenue recognition for technology systems uses a cost-based input methodology, requiring significant judgment to estimate costs and determine progress towards contract completion[175] - The company generates revenue from four sources: Technology Systems, AI Technologies, Technical Support, and Consulting Services[179] - Stock-based compensation expense is measured and recognized based on estimated fair values of awards using the Black-Scholes option-pricing formula and graded vesting method[176][177] Quantitative and Qualitative Disclosures About Market Risk States that this item is not applicable to the company's operations - Quantitative and Qualitative Disclosures About Market Risk are not applicable[180] Financial Statements and Supplementary Data Refers to the consolidated financial statements and supplementary data presented in pages F-1 through F-35 - The consolidated financial statements and supplementary data are contained in pages F-1 through F-35 of this Annual Report on Form 10-K[181] Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Reports no reportable events concerning changes in or disagreements with accountants for the year ended December 31, 2023 - No reportable events regarding changes in or disagreements with accountants on accounting and financial disclosure for the year ended December 31, 2023[182] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The CEO, CFO, and Controller concluded that disclosure controls and procedures were effective as of December 31, 2023[183][186] - Management concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[184] - No material changes in internal control over financial reporting occurred during the year ended December 31, 2023[187][188] Other Information Reports no Rule 10b5-1 or non-Rule 10b5-1 trading arrangements adopted or terminated by directors or officers in Q4 2023 - No director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q4 2023[189] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections States that this disclosure item is not applicable to the company - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[190] PART III Details directors, executive officers, corporate governance, executive compensation, and security ownership Directors, Executive Officers and Corporate Governance Outlines executive officers, directors, their experience, Board committee structure, and corporate governance policies Executive Officers and Directors | Name | Age | Position | | :---------------- | :-- | :----------------------------------- | | Charles P. Ferry | 57 | Chief Executive Officer, Director | | Andrew W. Murphy | 40 | Chief Financial Officer | | Kenneth Ehrman | 52 | Chairman | | Frank Lonegro | 55 | Director | | Ned Mavrommatis | 52 | Director | | James Craig Nixon | 63 | Director | - The Board of Directors consists of five members, with Mr. Ehrman, Mr. Mavrommatis, Mr. Nixon, and Mr. Lonegro qualified as independent directors[218][219] - The company has established an Audit Committee, a Compensation Committee, and a Corporate Governance and Nominating Committee[221][222] - A Code of Ethics has been adopted for the CEO and CFO to ensure honest and ethical conduct and proper financial disclosure[217] Directors and Executive Officers Lists and describes the company's executive officers and directors, highlighting their professional backgrounds and expertise - Charles P. Ferry, CEO and Director, brings over 3 years in energy and 7 years in defense contracting, following 26 years in the U.S. Army[195][196] - Andrew W. Murphy, CFO, has over 16 years of accounting and finance experience, including nearly five years in public companies, with expertise in pricing, risk management, FP&A, and M&A[198][199] - Kenneth Ehrman, Chairman, is an innovator in intelligent MtoM wireless technology and IoT, co-authored over 40 patents, and founded I.D. Systems, Inc.[200][201][202] - Frank A. Lonegro, Director, is the CEO of Landstar Systems, Inc., and previously served as EVP and CFO of Beacon Roofing Supply, Inc. and CSX Corporation[203] - Ned Mavrommatis, Director, is the CFO of Halo Collar and previously served as CFO of PowerFleet, Inc. and I.D Systems, Inc.[205][206] - James Craig Nixon, Director, is a combat-decorated, retired Brigadier General with 29 years in the Army, and built Constellis Group to over $1 billion annually[207][208][209][210] - Jeff Necciai, CTO, has over 25 years of experience in designing and delivering value-driven technology solutions, including advanced OCR and imaging solutions[212] - Chris King, CCO, brings over 20 years of operational and commercial leadership from energy and supply chain sectors, including leading power plant operations and closing over $1 billion in new revenue[213] Board Committees Describes the Audit, Compensation, and Corporate Governance and Nominating Committees, each with independent chairmen - The Board of Directors has established an Audit Committee, a Compensation Committee, and a Corporate Governance and Nominating Committee, each with independent directors as chairmen[221][222] Audit Committee Oversees accounting, financial reporting, internal controls, and cybersecurity risk management, with an audit committee financial expert - The Audit Committee oversees accounting and financial reporting processes, the audit of financial statements, and the effectiveness of internal control over financial reporting[223] - Key functions include appointing and overseeing the independent registered public accounting firm, reviewing financial statements, monitoring internal controls, discussing risk management, and overseeing cybersecurity risk management[224] - Mr. Mavrommatis is qualified as an "audit committee financial expert" and serves as the Chairman of the Audit Committee[223] Compensation Committee Reviews and approves executive compensation, employment agreements, and incentive plans, chaired by Mr. Nixon - The Compensation Committee reviews and approves corporate goals and objectives for CEO compensation, and evaluates and recommends compensation structures for other executive officers[225] - Responsibilities include determining the need for employment and change-in-control agreements, overseeing management's compensation decisions, and reviewing incentive compensation and equity-based plans[226] - Mr. Nixon serves as the Chairman of the Compensation Committee[225] Corporate Governance and Nominating Committee Recommends director nominees, oversees the Code of Ethics, and reviews board composition, chaired by Mr. Ehrman - The Corporate Governance and Nominating Committee recommends director nominees, considers stockholder-proposed candidates, oversees the Code of Ethics, and reviews board composition and effectiveness[227] - Mr. Ehrman serves as the Chairman of the Corporate Governance and Nominating Committee[227] Executive Compensation Details compensation for named executive officers and non-employee directors, including salaries, bonuses, and equity awards Named Executive Officer Compensation | Name and Principal Position | Year | Salary ($) | Bonus ($) | Options ($) | Other Comp. ($) | Total ($) | | :-------------------------- | :--- | :--------- | :-------- | :---------- | :-------------- | :-------- | | Charles P. Ferry, CEO | 2023 | 260,625 | 125,000 | 73,365 | — | 458,990 | | | 2022 | 250,000 | 150,000 | 235,144 | — | 635,144 | | Andrew W. Murphy, CFO | 2023 | 221,010 | 57,240 | 58,692 | — | 336,942 | | | 2022 | 206,500 | 60,000 | 188,115 | — | 454,615 | | Adrian G. Goldfarb, Former CFO | 2023 | 224,675 | 31,000 | 55,024 | — | 310,699 | | | 2022 | 214,385 | 50,000 | 176,358 | — | 440,743 | | Connie L. Weeks, Former CAO | 2023 | — | — | — | — | — | | | 2022 | 167,030 | 20,000 | 94,058 | — | 281,088 | - Executive officers' compensation includes base salary, performance-based bonuses, and non-qualified stock options with three-year vesting periods[232][233][234][235][236][241][244] - Employment agreements for CEO and CFO include provisions for early termination severance payments, typically up to six months of base salary[242][245] Non-Employee Director Compensation (2023) | Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Total ($) | | :---------------- | :------------------------------ | :--------------- | :---------------- | :-------- | | Kenneth Ehrman | 5,000 | 45,000 | 0 | 50,000 | | Frank A. Lonegro | 0 | 18,065 | 0 | 18,065 | | Ned Mavrommatis | 20,000 | 30,000 | 0 | 50,000 | | James Craig Nixon | 0 | 50,000 | 0 | 50,000 | - Non-employee directors receive $40,000 for committee membership and an additional $10,000 for Chairman service, paid 40% in cash and 60% in restricted common stock or options[251] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Reports beneficial ownership by major shareholders, directors, and officers, and details equity compensation plans Beneficial Ownership of Common Stock (as of March 28, 2024) | Name and Address of Beneficial Owner | Number of Shares of Common Stock Beneficially Owned | Percentage of Shares of Common Stock Beneficially Owned | | :----------------------------------- | :-------------------------------------------------- | :------------------------------------------------------ | | Bleichroeder LP | 1,504,934 | 19.99% | | Pessin Family Holdings | 1,459,945 | 20.00% | | Bard Associates, Inc. | 418,283 | 5.72% | | Laurence W. Lytton | 482,976 | 6.60% | | Charles P. Ferry | 140,409 | 1.89% | | Andrew W. Murphy | 49,866 | * | | Kenneth Ehrman | 74,528 | * | | Ned Mavrommatis | 43,519 | * | | James C. Nixon | 37,759 | * | | Frank A. Lonegro | 4,835 | * | | Executive Officers and Directors as a Group (6 persons) | 350,916 | 4.67% | - As of March 28, 2024, 7,306,663 shares of common stock were issued and outstanding, with each share entitling its holder to one vote[259] Equity Compensation Plan Information Provides details on the 2021 Equity Incentive Plan, including shares available for issuance and exercise prices - The 2021 Equity Incentive Plan, approved by shareholders, provides for the issuance of up to 1,000,000 shares of Common Stock to attract and retain key personnel[262][266] Equity Compensation Plan Information (as of December 31, 2023) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :------------------------------------------ | :------------------------------------------------------------------------ | :------------------------------------------------------------------------ | :------------------------------------------------------------------------ | | Equity compensation plans approved by security holders | 1,321,429 | $5.67 | 105,133 | | Equity compensation plans not approved by security holders | 330,000 | $4.22 | N/A | Employee Stock Purchase Plan (ESPP) Describes the ESPP, allowing employees to purchase common stock at a discount through payroll deductions - The ESPP, effective January 1, 2023, allows eligible employees to purchase common stock at a discounted price (85% of fair market value) through payroll deductions, with a maximum of 1,000,000 shares available[276] - In 2023, the company issued 111,538 shares of common stock under the ESPP across two tranches, with employee contributions totaling $117,048 (Q2) and $113,352 (Q4)[278] Certain Relationships and Related Transactions, and Director Independence States no related party transactions occurred and outlines the policy for future approvals by independent directors - No related party transactions for the periods reflected in this report[279] - The company's policy requires any future related party transactions to be approved by a majority of its independent directors[279] Principal Accountant Fees and Services Presents aggregate audit and non-audit fees billed by Salberg & Company, P.A. for fiscal years 2023 and 2022 Principal Accountant Fees and Services | Fee Type | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Audit Fees | 116,400 | 111,200 | | Audit-Related Fees | 31,100 | 18,900 | | Tax Fees | — | — | | All Other Fees | — | — | | Total Accounting fees and Services | 147,500 | 130,100 | - Audit fees increased from $111,200 in 2022 to $116,400 in 2023, and audit-related fees increased from $18,900 to $31,100[281] PART IV Lists exhibits and financial statement schedules included in the Annual Report on Form 10-K Exhibit and Financial Statement Schedules Details documents filed as part of the 10-K, including financial statements and a comprehensive list of exhibits - The section includes financial statements, with financial statement schedules omitted as not applicable or already presented[284] - A detailed list of exhibits is provided, covering corporate governance documents, preferred stock designations, securities purchase agreements, registration rights agreements, and employment contracts[285][286][287][288] Form 10-K Summary States that this item is not applicable to the company - Form 10-K Summary is not applicable[288] SIGNATURES Confirms the report is duly signed by the CEO, CFO, Chairman, and other Directors of Duos Technologies Group, Inc Signatures Lists the individuals who signed the report on behalf of Duos Technologies Group, Inc. on April 1, 2024 - The report is signed by Charles P. Ferry (CEO and Director), Andrew W. Murphy (CFO), Kenneth Ehrman (Chairman), Ned Mavrommatis (Director), James Craig Nixon (Director), and Frank A. Lonegro (Director)[292][293] - All signatures are dated April 1, 2024[292][293] INDEX TO FINANCIAL STATEMENTS Provides an index to the consolidated financial statements and related notes included in the Annual Report on Form 10-K Report of Independent Registered Public Accounting Firm Salberg & Company, P.A. issued an unqualified opinion on the financial statements, addressing critical audit matters like revenue recognition and liquidity - Salberg & Company, P.A. issued an unqualified opinion on the consolidated financial statements for 2023 and 2022, affirming fair presentation in accordance with GAAP[298] - Two critical audit matters were identified: Percentage of Completion Revenue Recognition & Related Contract Assets and Contract Liabilities, and Analysis of Liquidity and Going Concern[304][307] - The auditors agreed with management's conclusions regarding both critical audit matters, including the assessment of the company's ability to continue as a going concern[306][310] Consolidated Balance Sheets Presents the company's financial position as of December 31, 2023 and 2022, detailing assets, liabilities, and equity changes Consolidated Balance Sheet Summary (as of December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Total Current Assets | 6,256,895 | 6,834,757 | | Total Assets | 12,842,285 | 13,089,119 | | Total Current Liabilities | 3,247,053 | 4,495,705 | | Total Liabilities | 7,475,771 | 9,038,648 | | Total Stockholders' Equity | 5,366,514 | 4,050,471 | - Cash balance increased from $1,121,092 in 2022 to $2,441,842 in 2023[313] - Accounts receivable, net, decreased significantly from $3,418,263 in 2022 to $1,462,463 in 2023[313] - Additional paid-in-capital increased from $56,562,600 in 2022 to $69,120,199 in 2023, reflecting capital raises[316] Consolidated Statements of Operations Reports the net loss, revenues, costs, and operating expenses for 2023 and 2022, highlighting a significant revenue decrease Consolidated Statements of Operations (Years Ended December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------- | :--------- | :--------- | | Technology systems revenue | 3,618,022 | 11,190,292 | | Services and consulting revenue | 3,853,176 | 3,822,074 | | Total Revenues | 7,471,198 | 15,012,366 | | Total Cost of Revenues | 6,162,317 | 10,264,263 | | GROSS MARGIN | 1,308,881 | 4,748,103 | | Total Operating Expenses | 12,755,447 | 11,613,252 | | LOSS FROM OPERATIONS | (11,446,566) | (6,865,149) | | NET LOSS | (11,241,718) | (6,864,783) | | Basic and Diluted Net Loss Per Share | (1.56) | (1.11) | - Technology systems revenue decreased by 68% from $11,190,292 in 2022 to $3,618,022 in 2023[319] - Services and consulting revenue remained relatively stable, increasing slightly from $3,822,074 in 2022 to $3,853,176 in 2023[319] - Operating expenses increased by 10% from $11,613,252 in 2022 to $12,755,447 in 2023[319] Consolidated Statements of Changes in Stockholders' Equity Illustrates movements in equity components for 2023 and 2022, driven by preferred stock issuances and net loss - Total stockholders' equity increased from $4,050,471 at December 31, 2022, to $5,366,514 at December 31, 2023[322][323] - Additional paid-in capital increased significantly due to proceeds from Series E preferred stock ($6,500,000) and Series F preferred stock ($5,000,000), as well as stock options compensation and ESPP issuances[323] - The accumulated deficit increased from $(52,361,834) in 2022 to $(63,603,552) in 2023 due to the net loss for the year[323] Consolidated Statements of Cash Flows Details cash flow activities for 2023 and 2022, showing increased cash from financing offsetting operating and investing uses Consolidated Statements of Cash Flows (Years Ended December 31) | Cash Flow Activity | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Net cash used in operating activities | (8,746,564) | (7,873,307) | | Net cash used in investing activities | (1,093,909) | (644,888) | | Net cash provided in financing activities | 11,161,223 | 8,745,567 | | Net increase in cash | 1,320,750 | 227,372 | | Cash, end of year | 2,441,842 | 1,121,092 | - Net cash used in operating activities increased by 11.1% in 2023, primarily due to expenditures related to current and future projects[160][325] - Net cash used in investing activities increased by 69.6% in 2023, reflecting continued investment in computing, lab equipment, internal use software, and AI detections development[161][325] - Net cash provided by financing activities increased by 27.6% in 2023, mainly from $11,500,000 in gross proceeds from preferred stock issuances[162][325] Notes to Consolidated Financial Statements Provides detailed disclosures on accounting policies, liquidity, assets, liabilities, equity, and recent accounting pronouncements - The company specializes in machine vision and artificial intelligence to analyze fast-moving objects, primarily trains, trucks, automobiles, and aircraft, to improve safety, maintenance, and operating metrics[327] - Significant estimates in financial statements include allowances on receivables, valuation of deferred tax assets, intangible assets, contract revenues, inventory, lease assets/liabilities, and stock-based awards[334] - The company has a history of net losses and cash used in operating activities, but management believes recent equity raises and future plans provide sufficient liquidity to continue as a going concern for at least twelve months[402][403][405] - Revenue is generated from Technology Systems, AI Technologies, Technical Support, and Consulting Services, recognized based on a five-step model under ASC 606[363] NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Describes Duos' core business in machine vision and AI, its strategic expansion, and key accounting policies like revenue recognition - Duos Technologies Group, Inc. specializes in machine vision and AI for inspecting fast-moving objects like trains and trucks, with core products including the Railcar Inspection Portal (RIP) and Automated Logistics Information System (ALIS)[327][328][329] - The company's strategy is to expand its customer base in North America, grow its subscription offerings, and meet international demand, focusing on operational and technical excellence[330] - Cash balances at financial institutions exceeded federally insured limits by approximately $1,948,794 as of December 31, 2023[335] - Revenue recognition follows ASC 606, with revenue generated from Technology Systems, AI Technologies, Technical Support, and Consulting Services[360][363] - Technology Systems revenue is recognized over time using a cost-based input methodology, while AI Technologies revenue includes fixed fees and annual maintenance fees[364][368] NOTE 2 – LIQUIDITY Addresses the company's net loss and operating cash use, highlighting equity raises and management's plan for future liquidity - The company had a net loss of $11,241,718 and used $8,746,564 in operating activities for 2023, with an accumulated deficit of $63,603,552[402] - Successful equity raises in 2023 (over $11,500,000 from preferred stock) and Q1 2024 ($2,745,000 from preferred stock) have bolstered working capital[403] - Management believes it has sufficient liquid assets and access to capital markets (including an S-3 shelf registration in Q2 2024) to maintain operations for at least twelve months[403][405] - The company aims to generate sufficient revenue and attain profitable operations with minimal cash use in the next 12-18 months[406] NOTE 3 – ACCOUNTS RECEIVABLE Details the decrease in accounts receivable and the absence of bad debt expense for 2023 and 2022 Accounts Receivable, Net (as of December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Accounts receivable | 1,462,463 | 3,418,263 | | Allowance for doubtful accounts | — | — | | Accounts Receivable, Net | 1,462,463 | 3,418,263 | - Accounts receivable decreased by 57.2% from $3,418,263 in 2022 to $1,462,463 in 2023[409] - No bad debt expense was recognized during 2023 and 2022[409] NOTE 4 – PROPERTY AND EQUIPMENT Presents the net increase in property, equipment, and software, along with depreciation expense for 2023 and 2022 Property, Equipment and Software, Net (as of December 31) | Category | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Furniture & Fixtures | 132,018 | 115,238 | | Tools and Equipment | 1,291,673 | 1,162,568 | | Leasehold Improvements | 298,004 | 228,404 | | Internal Use Software | 381,441 | 100,241 | | Property, Plant and Equipment, Gross | 2,103,136 | 1,606,451 | | Accumulated Depreciation | (1,376,629) | (976,961) | | Property, Equipment and Software, net | 726,507 | 629,490 | - Property, equipment, and software, net, increased by 15.4% from $629,490 in 2022 to $726,507 in 2023[410] Depreciation Expense | Year | Depreciation Expense ($) | | :--- | :----------------------- | | 2023 | 315,686 | | 2022 | 267,959 | NOTE 5 – PATENTS AND TRADEMARKS Details the increase in net patents and associated amortization expense for 2023 and 2022 Patents, Net (as of December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Patents | 395,472 | 326,145 | | Accumulated Amortization | (266,332) | (256,412) | | Patent, net | 129,140 | 69,733 | - Patents, net, increased by 85.2% from $69,733 in 2022 to $129,140 in 2023[412] Amortization Expense | Year | Amortization Expense ($) | | :--- | :----------------------- | | 2023 | 9,920 | | 2022 | 13,688 | NOTE 6 – SOFTWARE DEVELOPMENT COSTS Reports the significant increase in net software development costs and amortization expense for 2023 and 2022 Software Development, Net (as of December 31) | Category | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Software Development | 721,309 | 341,784 | | Construction in Progress | 148,371 | — | | Accumulated amortization | (216,842) | (76,576) | | Software Development, net | 652,838 | 265,208 | - Software development, net, increased by 146.2% from $265,208 in 2022 to $652,838 in 2023[414] Amortization of Software Development Costs | Year | Amortization Expense ($) | | :--- | :----------------------- | | 2023 | 140,267 | | 2022 | 16,576 | NOTE 7 – DEBT Outlines the decrease in notes payable for insurance premium financing and the maturity of equipment financing Notes Payable - Insurance Premium Financing Agreements (as of December 31) | Note | Principal 2023 ($) | Interest Rate 2023 | Principal 2022 ($) | Interest Rate 2022 | | :-------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Third Party - Insurance Note 1 | — | — | — | — | | Third Party - Insurance Note 2 | 39,968 | 8.00% | 17,753 | 6.24% | | Third Party - Insurance Note 3 | 2,008 | — | 16,094 | — | | Third Party - Insurance Note 4 | — | — | 40,728 | — | | Total | 41,976 | | 74,575 | | - Total notes payable for insurance premium financing decreased by 43.7% from $74,575 in 2022 to $41,976 in 2023[417] - Equipment financing payable decreased from $22,851 in 2022 to zero in 2023, with the note maturing in June 2023[421] NOTE 8 – REVENUES AND CONTRACT ACCOUNTING Explains revenue sources, contract assets, contract liabilities, and disaggregation of revenue by segment and service line - The company generates revenue from Technology Systems, AI Technology, Technical Support, and Consulting Services[423] Contract Assets (as of December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Cumulative revenues recognized | 8,820,256 | 5,934,205 | | Less: Billings or cash received | (8,178,309) | (5,508,483) | | Contract Assets | 641,947 | 425,722 | Contract Liabilities (as of December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Billings and/or cash receipts on uncompleted contracts | 1,264,658 | 4,355,470 | | Less: Cumulative revenues | (199,976) | (4,144,018) | | Contract liabilities, technology systems | 1,064,682 | 211,452 | | Contract Liabilities, services and consulting | 601,561 | 746,545 | | Total Contract Liabilities | 1,666,243 | 957,997 | - The company expects to recognize all contract liabilities within 12 months[427] Disaggregation of Revenue by Segment and Geographical Market (2023) | Segments | Rail ($) | Commercial ($) | Government ($) | Artificial Intelligence ($) | Total ($) | | :-------------------------- | :--------- | :------------- | :------------- | :-------------------------- | :-------- | | North America | 6,261,748 | 78,575 | 11,353 | 1,119,522 | 7,471,198 | Disaggregation of Revenue by Major Goods and Service Lines (2023) | Major Goods and Service Lines | Rail ($) | Commercial ($) | Government ($) | Artificial Intelligence ($) | Total ($) | | :-------------------------- | :--------- | :------------- | :------------- | :-------------------------- | :-------- | | Turnkey Projects | 3,616,334 | 1,694 | — | — | 3,618,028 | | Maintenance & Support | 2,645,414 | 76,881 | 11,353 | — | 2,733,648 | | Algorithms | — | — | — | 1,119,522 | 1,119,522 | NOTE 9 – DEFERRED COMPENSATION Reports the decrease in accrued deferred compensation to zero as of December 31, 2023 - As of December 31, 2023, the company had accrued zero deferred compensation, down from $297,620 in 2022[440] NOTE 10 – COMMITMENTS AND CONTINGENCIES Details the primary operating lease commitment for office and warehouse space, including future minimum lease payments - The company's primary commitment is an operating lease for 40,000 square feet of office and warehouse space, commencing December 1, 2021, and ending May 31, 2032[440] Operating Lease Information (Years Ended December 31) | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Operating lease cost ($) | 781,638 | 782,591 | | Short-term lease cost ($) | 63,770 | 33,751 | | Operating cash outflow for operating leases ($) | 696,869 | 416,250 | | Weighted average remaining lease term (years) | 8.5 | 9.5 | | Weighted average discount rate | 9.0% | 9.0% | Future Minimum Lease Payments (as of December 31, 2023) | Calendar year | Amount ($) | | :------------ | :--------- | | 2024 | 779,087 | | 2025 | 798,556 | | 2026 | 818,518 | | 2027 | 838,984 | | 2028 | 859,856 | | Thereafter | 3,183,571 | | Total undiscounted future minimum lease payments | 7,278,572 | | Less: Impact of discounting | (2,270,767) | | Total present value of operating lease obligation | 5,007,805 | | Current portion | (779,087) | | Operating lease obligation, less current portion | 4,228,718 | NOTE 11 – INCOME TAXES Reconciles income tax benefit, details net deferred tax assets, and explains the full valuation allowance against them Income Tax Benefit Reconciliation (Years Ended December 31) | Item | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Income tax benefit at U.S. statutory rate of 21% | (2,360,761) | (1,441,624) | | State income taxes | (404,702) | (247,135) | | Non-deductible expenses | 271,648 | 201,521 | | Change in valuation allowance | 2,493,815 | 1,487,238 | | Total provision for income tax | — | — | Net Deferred Tax Assets (as of December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------------- | :--------- | :--------- | | Net operating loss carryforward | 12,318,836 | 9,772,854 | | Intangible assets | (84,823) | (32,656) | | Total Deferred Tax Asset (Liability) | 12,234,013 | 9,740,198 | | Valuation allowance | (12,234,013) | (9,740,198) | | Net deferred tax assets | — | — | - The gross operating loss carryforward was approximately $50,076,569 in 2023 and $39,727,050 in 2022[448] - A full valuation allowance is provided against net deferred income tax assets due to uncertainty of future taxable income to utilize loss carryforwards[448] NOTE 12 – STOCKHOLDERS' EQUITY Covers the 2021 Equity Incentive Plan, preferred stock designations, common stock issuances, and stock-based compensation - The 2021 Equity Incentive Plan, approved by shareholders, allows for the issuance of up to 1,000,000 shares of Common Stock for compensation to employees, directors, and consultants[455][458] - The company has designated various series of preferred stock (Series B, C, D, E, F) with specific conversion rights and beneficial ownership limitations, primarily used for capital raising[469][471][476][482][492] - In 2023, the company issued 38,249 shares of common stock for board fees and 111,538 shares under the Employee Stock Purchase Plan[498][499][501][503][504] - Stock-based compensation expense recognized was $573,441 in 2023 and $819,191 in 2022[517] - As of December 31, 2023, the company held 1,324 shares of Common Stock as treasury stock at an aggregate value of $157,452[518] NOTE 13 – COMMON STOCK OPTIONS AND WARRANTS Details stock option and warrant activity, including grants, forfeitures, and weighted-average assumptions for valuation - In 2023, the Board granted 463,117 new stock options with a strike price of $4.22 per share to 19 key employees and one contractor as retention incentives, carrying a three-year vesting period[519] Stock Option Activity (Years Ended December 31) | Metric | 2023 Shares | 2023 Avg. Exercise Price ($) | 2022 Shares | 2022 Avg. Exercise Price ($) | | :-------------------------- | :---------- | :--------------------------- | :---------- | :--------------------------- | | Outstanding at beginning of year | 926,266 | 5.74 | 431,266 | 4.98 | | Granted | 463,117 | 4.22 | 685,000 | 6.41 | | Forfeited | (1,608) | 14.00 | (190,000) | 6.41 | | Outstanding at end of year | 1,387,775 | 5.23 | 926,266 | 5.74 | | Exercisable at end of year | 581,324 | 5.38 | 404,599 | 5.02 | Weighted-Average Assumptions for Stock Options | Assumption | 2023 | 2022 | | :-------------------------- | :----- | :---------- | | Risk free interest rate | 3.73% | 0.97% – 3.15% | | Expected term in years | 3.50 | 3.25 – 3.50 | | Dividend yield | — | — | | Volatility of common stock | 54% –118% | 72% – 80% | | Weighted average grant date fair value per option ($) | 1.57 | 2.33 | Warrant Activity (Years Ended December 31) | Metric | 2023 Number of Warrants | 2023 Avg. Exercise Price ($) | 2022 Number of Warrants | 2022 Avg. Exercise Price ($) | | :-------------------------- | :---------------------- | :--------------------------- | :---------------------- | :--------------------------- | | Outstanding at beginning of year | 80,091 | 8.63 | 1,376,466 | 8.18 | | Expired, forfeited, cancelled or exercised | (102,947) | — | (1,228,875) | — | | Outstanding at end of year | 44,644 | 7.70 | 80,091 | 8.63 | | Exercisable at end of year | 44,644 | 7.70 | 80,091 | 8.63 | NOTE 14 – DEFINED CONTRIBUTION PLAN Describes the 401(k) retirement savings plan and the company's matching contributions for 2023 - The company has a 401(k) retirement savings plan for eligible employees, matching **100% of the first 4%