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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2021
 
OR
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________ 

 

Commission file number 000-55497

 

Duos Technologies Group, Inc.
(Exact name of registrant as specified in its charter)

 

Florida 65-0493217

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification No.)
   

6622 Southpoint Drive South, Suite 310,

Jacksonville, Florida, 32216

 
(Address of principal executive offices)  

 

(904) 652-1616

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001   DUOT   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    Accelerated filer 
Non-accelerated Filer    Smaller reporting company 
Emerging growth company      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes    No 

  

As of August 11, 2021, the registrant has one class of common equity, and the number of shares outstanding of such common equity is 3,584,603

 

 

 
 

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 3. Qualitative and Quantitative Disclosures about Market Risk 34
     
Item 4. Controls and Procedures 34
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 35
     
Item 1A. Risk Factors 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3. Defaults Upon Senior Securities 35
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 36

 

SIGNATURES 37

 

 

 
 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

           
   June 30,   December 31, 
   2021   2020 
   (Unaudited)     
 ASSETS          
CURRENT ASSETS:          
Cash  $4,822,945   $3,969,100 
Accounts receivable, net   239,616    1,244,876 
Contract assets   152,789    102,458 
Prepaid expenses and other current assets   741,897    486,626 
           
Total Current Assets   5,957,247    5,803,060 
           
Property and equipment, net   357,974    342,180 
Operating lease right of use asset   89,468    196,144 
           
OTHER ASSETS:          
Patents and trademarks, net   69,166    64,415 
Total Other Assets   69,166    64,415 
           
TOTAL ASSETS  $6,473,855   $6,405,799 
           
 LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $529,679   $599,317 
Accounts payable - related parties   7,700    7,700 
Notes payable - financing agreements   154,631    42,942 
Payroll taxes payable       3,146 
Accrued expenses   1,093,123    1,038,092 
Current portion - equipment financing agreements   94,904    89,620 
Current portion-operating lease obligations   91,954    202,797 
Current portion-PPP loan       627,465 
Contract liabilities   171,281    709,553 
Deferred revenue   1,098,142    315,370 
           
Total Current Liabilities   3,241,414    3,636,002 
           
Equipment financing payable, less current portion   54,373    103,184 
PPP loan, less current portion       782,805 
           
Total Liabilities   3,295,787    4,521,991 
           
Commitments and Contingencies (Note 5)          
           
STOCKHOLDERS' EQUITY:          
Preferred stock:  $0.001 par value, 10,000,000 authorized, 9,480,000 shares available to be designated          
Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at June 30, 2021 and December 31, 2020, convertible into common stock at $6.30 per share        
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 1,705 and 1,705 issued and outstanding at June 30, 2021 and December 31, 2020, convertible into common stock at $7 per share   1,705,000    1,705,000 
Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 4,500 issued and outstanding at June 30, 2021 and 0 issued and outstanding at December 31, 2020, convertible into common stock at $5.50 per share   4,500,000     
Common stock:  $0.001 par value; 500,000,000 shares authorized, 3,585,927 and 3,535,339 shares issued, 3,584,603 and 3,534,015 shares outstanding at June 30, 2021 and December 31, 2020, respectively   3,586    3,536 
Additional paid-in capital   39,973,987    39,820,874 
Total stock & paid-in-capital   46,182,573    41,529,410 
Accumulated deficit   (42,847,053)   (39,488,150)
Sub-total   3,335,520    2,041,260 
Less:  Treasury stock (1,324 shares of common stock at June 30, 2021 and December 31, 2020)   (157,452)   (157,452)
Total Stockholders' Equity   3,178,068    1,883,808 
           
Total Liabilities and Stockholders' Equity  $6,473,855   $6,405,799 

 

  

See accompanying condensed notes to the unaudited consolidated financial statements.

 

 

1 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

                 
   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
                 
REVENUES:                    
Technology systems  $100,401   $1,597,633   $1,590,699   $2,111,307 
Services and consulting   548,267    384,509    1,212,723    861,780 
                     
Total Revenues   648,668    1,982,142    2,803,422    2,973,087 
                     
COST OF REVENUES:                    
Technology systems   1,214,370    1,322,032    3,109,855    2,414,090 
Services and consulting   378,319    214,244    709,703    508,198 
Overhead   593,231    258,403    1,096,824    518,824 
                     
Total Cost of Revenues   2,185,920    1,794,679    4,916,382    3,441,112 
                     
GROSS MARGIN   (1,537,252)   187,463    (2,112,960)   (468,025)
                     
OPERATING EXPENSES:                    
Sales & marketing   351,251    122,473    663,052    262,325 
Research & development   79,131    149,566    140,164    555,958 
Administration   980,834    1,342,480    1,854,592    2,228,663 
                     
Total Operating Expenses   1,411,216    1,614,519    2,657,808    3,046,946 
                     
LOSS FROM OPERATIONS   (2,948,468)   (1,427,056)   (4,770,768)   (3,514,971)
                     
OTHER INCOME (EXPENSES):                    
Interest expense   (5,541)   (58,243)   (11,761)   (127,175)
Other income, net   1,129    19,410    1,423,626    29,208 
                     
Total Other Income (Expense)   (4,412)   (38,833)   1,411,865    (97,967)
                     
NET LOSS  $(2,952,880)  $(1,465,889)   $(3,358,903)   $(3,612,938)
                     
                     
Basic & Diluted Net Loss Per Share  $(0.83)  $(0.42)  $(0.95)  $(1.16)
                     
                     
Weighted Average Shares-Basic & Diluted   3,553,718    3,526,382    3,544,579    3,106,660 

 

   

See accompanying condensed notes to the unaudited consolidated financial statements.

 

 

2 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 

                                                   
   Preferred Stock B   Preferred Stock C   Common Stock   Additional             
   # of
Shares
   Amount   # of
Shares
   Amount   # of
Shares
   Amount   Paid-in-
Capital
   Accumulated
Deficit
   Treasury
Stock
   Total 
                                         
Balance December 31, 2020   1,705   $1,705,000       $    3,535,339   $3,536   $39,820,874   $(39,488,150)  $(157,452)  $1,883,808 
                                                   
Stock options granted to employees                           76,301            76,301 
                                                   
Series C preferred stock issued           4,500    4,500,000                        4,500,000 
                                                   
Net loss for the three months ended March 31, 2021                               (406,023)       (406,023)
                                                   
Balance March 31, 2021   1,705    $1,705,000    4,500    $4,500,000    3,535,339    $3,536    $39,897,175    $(39,894,173)   $(157,452)   $6,054,086 
                                                   
Stock options granted to employees                           76,862            76,862 
                                                   
Commons stock issued for cash less warrants exercised                   50,588    50    (50)            
                                                   
Net loss for the three months ended June 30, 2021                               (2,952,880)       (2,952,880)
                                                   
Balance June 30, 2021   1,705    $1,705,000    4,500    $4,500,000    3,585,927    $3,586    $39,973,987    $(42,847,053)   $(157,452)   $3,178,068 
                                                   
                                                   
Balance December 31, 2019   1,705    $1,705,000        $    1,982,039    $1,982    $31,063,915    $(32,740,715)   $(157,452)   $(127,270)
                                                   
Common stock issued                   1,542,188    1,542    9,251,586            9,253,128 
                                                   
Stock options granted to employees                           8,100            8,100 
                                                   
Stock issuance cost                           (1,001,885)           (1,001,885)
                                                   
Common stock issued for services                   1,611    2    7,498            7,500 
                                                   
Net Loss for the three months ended March 31, 2020                               (2,147,049)       (2,147,049)
                                                   
Balance March 31, 2020   1,705   $1,705,000            3,525,838   $3,526   $39,329,214   $(34,887,764)  $(157,452)  $5,992,524 
                                                   
Modification of employee stock options                           102,800            102,800 
                                                   
Stock options granted to employees                           88,170            88,170 
                                                   
Common stock issued for services                   1,632    2    7,498            7,500 
                                                   
Net Loss for the three months ended June 30, 2020                               (1,465,889)       (1,465,889)
                                                   
Balance June 30, 2020   1,705   $1,705,000            3,527,470   $3,528   $39,527,682   $(36,353,653)  $(157,452)  $4,725,105 

 

 

See accompanying condensed notes to the unaudited consolidated financial statements.

 

 

3 
 

 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

         
   For the Six Months Ended 
   June 30, 
   2021   2020 
         
Cash from operating activities:          
Net loss  $(3,358,903)  $(3,612,938)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   171,382    97,353 
Stock based compensation   153,163    96,270 
Modification of employee stock options       102,800 
PPP loan forgiveness including accrued interest   (1,421,577)    
Interest expense related to debt discounts       94,627 
Amortization of operating lease right of use asset   106,676    113,419 
Changes in assets and liabilities:          
Accounts receivable   902,871    2,114,802 
Contract assets   (50,331)   530,110 
Prepaid expenses and other current assets   98,055    235,194 
Accounts payable   (69,638)   (2,009,394)
Accounts payable-related party       (300)
Payroll taxes payable   (3,146)   (104,381)
Accrued expenses   66,338    (247,474)
Lease obligation   (110,843)   (114,865)
Contract liabilities   (485,722)   (5,378)
Deferred revenue   782,772    (442,598)
           
Net cash used in operating activities   (3,218,903)   (3,152,753)
           
Cash flows from investing activities:          
Purchase of patents/trademarks   (7,435)   (7,735)
Purchase of fixed assets   (184,492)   (171,467)
           
Net cash used in investing activities   (191,927)   (179,202)
           
Cash flows from financing activities:          
Repayments of line of credit       (27,615)
Repayments of insurance and equipment financing   (191,798)   (83,257)
Repayment of finance lease   (43,527)   (21,786)
Repayment of notes payable       (1,000,000)
Proceeds from PPP loan       1,410,270 
Proceeds from equipment financing       121,637 
Proceeds from common stock issued       9,253,128 
Issuance cost       (1,001,885)
Proceeds from preferred stock issued   4,500,000     
           
Net cash provided by financing activities   4,264,675    8,650,492 
           
Net increase in cash   853,845    5,318,537 
Cash, beginning of period   3,969,100    56,249 
Cash, end of period  $4,822,945   $5,374,786 
           
Supplemental Disclosure of Cash Flow Information:          
Interest paid  $22,339   $29,830 
           
Supplemental Non-Cash Investing and Financing Activities:          
Common stock issued for accrued BOD fees  $   $15,000 
Lease right of use asset and liability  $   $644,245 
Note issued for financing of insurance premiums  $303,487   $216,754 

 

 

See accompanying condensed notes to the unaudited consolidated financial statements.

 

 

4 
 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

NOTE 1 – NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

Duos Technologies Group, Inc. (the “duostech Group”), through its operating subsidiaries, Duos Technologies, Inc. (“duostech”) and TrueVue360, Inc. (“TrueVue360”) (collectively the “Company”), develops and deploys cutting-edge technologies that will help to transform precision railroading, logistics and inter-modal transportation operations. Additionally, these unique patented solutions can be employed into many other industries.

 

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 (“AI”) 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 AI to improve rail traffic flow across borders which also directly benefits the Class 1 railroads through increasing their velocity.

 

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.

 

The Company also provides professional and consulting services for large data centers and has been developing a system for the automation of asset information marketed as dcVue™. The Company is now deploying its dcVue software. This software is used by Duos’ consulting auditing teams. dcVue is based upon the Company’s OSPI patent which was awarded in 2010. The Company offers dcVue available for license to our customers as a licensed software product.

 

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 U.S. Government Sectors, offer both CAPEX and OPEX pricing models to customers that increases recurring revenue, grows backlog and improves profitability, responsibly grow the business both organically and through selective acquisitions, and promote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with the Company.

 

5 
 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2021 are not indicative of the results that may be expected for the year ending December 31, 2021 or for any other future period. These unaudited consolidated financial statements and the unaudited condensed notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021.

 

Reclassifications

 

The Company reclassified certain revenues and expenses for the three and six months ended June 30, 2020 to conform to 2021 classification. There was no net effect on the total expenses of such reclassification.

 

The following table reflects the reclassification adjustment effect in the three and six months ended June 30, 2020:

 

                   
    Before Reclassification         After Reclassification  
    For the Three Months Ended         For the Three Months Ended  
    June 30,         June 30,  
    2020         2020  
                 
REVENUES:           REVENUES:        
Technology systems   $ 1,419,409     Technology systems   $ 1,597,633  
Technical support     382,124     Services and consulting     384,509  
Consulting services     2,385          
AI technologies     178,224          
                     
Total Revenue     1,982,142     Total Revenue     1,982,142  
                     
COST OF REVENUES:           COST OF REVENUES:        
Technology systems     897,514     Technology systems     1,322,032  
Technical support     234,754     Services and consulting     214,244  
Consulting services         Overhead     258,403  
AI technologies     110,499            
                     
Total Cost of Revenues     1,242,767     Total Cost of Revenues     1,794,679  
                     
GROSS MARGIN     739,375     GROSS MARGIN     187,463  
                     
OPERATING EXPENSES:           OPERATING EXPENSES:        
Sales and marketing     122,473     Sales and marketing     122,473  
Engineering     352,970     Research and development     149,566  
Research and development     149,566     Administration     1,342,480  
Administration     1,023,947          
AI technologies     517,475          
                     
Total Operating Expenses     2,166,431      Total Operating Expenses     1,614,519  
                     
LOSS FROM OPERATIONS   $ (1,427,056 )   LOSS FROM OPERATIONS   $ (1,427,056 )

 

6 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

    Before Reclassification         After Reclassification  
    For the Six Months Ended         For the Six Months Ended  
    June 30,         June 30,  
    2020         2020  
                 
REVENUES:           REVENUES:        
Technology systems $   1,933,083     Technology systems   $ 2,111,307  
Technical support     727,311     Services and consulting     861,780  
Consulting services     134,469          
AI technologies     178,224          
                     
Total Revenue     2,973,087     Total Revenue     2,973,087  
                     
COST OF REVENUES:           COST OF REVENUES:        
Technology systems     1,479,058     Technology systems     2,414,090  
Technical support     469,030     Services and consulting     508,198  
Consulting services     72,260     Overhead     518,824  
AI technologies     110,499          
                     
Total Cost of Revenues     2,130,847     Total Cost of Revenues     3,441,112  
                     
GROSS MARGIN     842,240     GROSS MARGIN     (468,025)  
                     
OPERATING EXPENSES:           OPERATING EXPENSES:        
Sales and marketing     262,325     Sales and marketing     262,325  
Engineering     665,406     Research and development     555,958  
Research and development     555,958     Administration     2,228,663  
Administration     2,039,498          
AI technologies     834,024          
                     
Total Operating Expenses     4,357,211      Total Operating Expenses     3,046,946  
                     
LOSS FROM OPERATIONS   $ (3,514,971 )   LOSS FROM OPERATIONS   $ (3,514,971 )

 

Principles of Consolidation

 

The unaudited consolidated financial statements include duostech Group and its wholly owned subsidiaries, Duos Technologies, Inc. and TrueVue360, Inc. All inter-company transactions and balances are eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of derivatives, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible debt, estimates of the valuation of right of use assets and corresponding lease liabilities and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

7 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

Concentrations

 

Cash Concentrations

 

Cash is maintained at financial institutions and at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of June 30, 2021, the balance in one financial institution exceeded federally insured limits by approximately $4,376,000.

 

Significant Customers and Concentration of Credit Risk

 

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:

 

For the six months ended June 30, 2021, one customer accounted for 69% (“Customer 2”) of revenues. For the six months ended June 30, 2020, three customers accounted for 45% (“Customer 1”), 12% (“Customer 2”) and 15% (“Customer 3”) of revenues. In all cases, there is no minimum contract value stated. Each contract covers an agreement to deliver a rail inspection portal which, once accepted, must be paid in full with 30% or more being due and payable prior to delivery. The balances of the contracts are for service and maintenance which is paid annually in advance with revenues recorded ratably over the contract period. Each of the customers referenced has the following termination provisions:

 

·Customer 1, termination can be made, prior to delivery of products or services, in the case where either party breaches any of its obligations under the agreement with the Company. The other party may terminate the agreement effective 15 Business Days following notice from the non-defaulting party, if the non-performance has not been cured within such period, and without prejudice to damages that could be claimed by the non-defaulting party. Either party may terminate the agreement if the other party becomes unable to pay its debts in the ordinary course of business; goes into liquidation (other than for the purpose of a genuine amalgamation or restructuring); has a receiver appointed over all or part of its assets; enters into a composition or voluntary arrangement with its creditors; or any similar event occurs in any jurisdiction, all to the extent permitted by law.

 

·For Customer 2, prior to delivery of products or services, either party may terminate the agreement with the Company upon the other party’s material breach of a representation, warranty, term, covenant or undertaking in the agreement if, within 30 days following the delivery of a written notice to the defaulting party setting forth in reasonable detail the basis of such default, the defaulting party has not rectified such default to the reasonable satisfaction of the non-defaulting party. Failure to perform due to a force majeure condition shall not be considered a material default under the agreement. Either party may terminate the agreement upon the other party’s material breach of a representation, warranty, term, covenant or undertaking in the agreement if, within 30 days following the delivery of a written notice to the defaulting party setting forth in reasonable detail the basis of such default, the defaulting party has not rectified such default to the reasonable satisfaction of the non-defaulting party. Failure to perform due to a force majeure condition shall not be considered a material default under the agreement.

 

·For Customer 3, prior to delivery of products or services if the customer terminates the statement of work for convenience, no refund of any advance payments will be due to Customer 3. ln the event of a material breach by the Company, which breach is not cured, or cure has not begun within 30 days of written notice to the Company by Customer 3, Customer 3 may terminate this statement of work for cause. In the event of termination by Customer 3 for cause, the Company shall reimburse Customer 3 any unused prepaid fees on a pro rata basis.

 

At June 30, 2021, two customers accounted for 65% and 20% of accounts receivable. At December 31, 2020, two customers accounted for 56% and 30% of accounts receivable. Much of the credit risk is mitigated since all of the customers listed here are Class 1 railroads with a history of timely payments to us.

 

8 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

Geographic Concentration

 

For the six months ended June 30, 2021, approximately 75% of revenue was generated from three customers outside of the United States. For the six months ended June 30, 2020, approximately 29% of revenue was generated from three customers outside of the United States. These customers are Canadian and Mexican, and two of the three are Class 1 railroads operating in the United States.

 

Fair Value of Financial Instruments and Fair Value Measurements

 

The Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

 

These inputs are prioritized below: 

 

Level 1:

Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

 

Level 2:

Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3:

Unobservable inputs for which there is little or no market data, which require the use of the

reporting entity’s own assumptions that the market participants would use in the valuation of the asset or liability based on the best available information.

 

The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The estimated fair value of certain financial instruments, including accounts receivable, prepaid expense, accounts payable, accrued expenses and notes payable are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

 

Software Development Costs

 

Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features, and technical performance requirements. Software development costs incurred after establishing technological feasibility for software sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be Sold, Leased, or Marketed) are capitalized and amortized on a product-by-product basis when the product is available for general release to customers.

 

9 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

Earnings (Loss) Per Share

 

Basic earnings per share (EPS) are computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise or conversion of stock options, stock warrants, convertible debt instruments, convertible preferred stock or other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. At June 30, 2021, there was an aggregate of 1,376,466 outstanding warrants to purchase shares of common stock. At June 30, 2021, there were employee stock options to purchase an aggregate of 455,347 shares of common stock. Also, at June 30, 2021, 243,571 common shares were issuable upon conversion of Series B convertible preferred stock and 818,182 common shares were issuable upon conversion of Series C convertible preferred stock all of which were excluded from the computation of dilutive earnings per share because their inclusion would have been anti-dilutive.

 

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.

 

Revenue Recognition

 

As of January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-89, Revenue from Contracts with Customers (“ASC 606”), that affects the timing of when certain types of revenues will be recognized. The basic principles in ASC 606 include the following: a contract with a customer creates distinct unrecognized contract assets and performance obligations, satisfaction of a performance obligation creates revenue, and a performance obligation is satisfied upon transfer of control to a good or service to a customer.

 

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.

 

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.

 

10 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

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 un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.

 

Segment Information

 

The Company operates in one reportable segment.

 

Stock 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 the 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.

 

Recent Accounting Pronouncements

 

From time to time, the FASB or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards Update (“ASU”).

 

In August 2020, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. We plan to adopt this pronouncement for our fiscal year beginning January 1, 2022, and we do not expect it to have a material effect on our consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

NOTE 2 – LIQUIDITY

 

As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $2,952,880 for the three months ended June 30, 2021 and $3,358,903 for the six months ended June 30, 2021. During the six months ended June 30, 2021, net cash used in operating activities was $3,218,903. The working capital surplus and accumulated deficit as of June 30, 2021 were $2,715,833 and $42,847,053, respectively. In previous financial reports, the Company had raised substantial doubt about continuing as a going concern. This was principally due to a lack of working capital prior to an underwritten offering which was completed during the first quarter of 2020 (the “2020 Offering”).

 

11 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

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 $8,200,000 and more recently, in the first quarter of 2021, receiving net proceeds of $4,500,000 from the issuance of Series C Preferred Stock to two large shareholders, continues to give us the capital required to fund the fundamental business changes that we undertook in the last quarter of 2020 and maintain our business strategy overall. In addition, the Company was successful in securing a loan of $1,410,270 during the second quarter of 2020 from the Small Business Administration via the PPP/CARES Act program which further bolstered the Company’s cash reserves. This loan was forgiven in the first quarter of 2021 and the Company is essentially debt free. Management has been taking and continues to take actions including, but not limited to, elimination of certain costs that did not contribute to short term revenue, and re-aligning both management and staffing with a focus on improving certain skill sets necessary to build growth and profitability and focusing product strategy on opportunities that are likely to bear results in the relatively short term. During the second quarter, management continued to take significant actions including reorganizing our software engineering team and outsourcing certain functions that could be more efficiently accomplished without increasing the long-term overhead of dedicated staffing. Pending contracts indicate a much stronger second half of 2021 and 2022.

 

Management believes that, at this time, we have alleviated the substantial doubt for the Company to continue as a going concern. We are executing the plan to grow our business and achieve profitability without the requirement to raise additional capital for existing operations. As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock. Although additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded operations based on this increase in business activity. In the long run, the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing the plan described above, generate enough revenue, and attain consistently profitable operations. Although the current global pandemic related to the coronavirus (Covid-19) continues to affect our operations, and we do believe this is expected to be a long-term issue, the Company cannot currently quantify the uncertainty related to the recent pandemic and its effects on our customers in the coming quarters.

 

NOTE 3 – DEBT

 

Notes Payable - Financing Agreements

 

 

The Company’s notes payable relating to financing agreements classified as current liabilities consist of the following as of:

 

                                 
    June 30, 2021   December 31, 2020  
Notes Payable   Principal       Interest   Principal       Interest  
Third Party - Insurance Note 1   $ 9,511       7.75 %   $ 23,327       7.75 %  
Third Party - Insurance Note 2     49,889       6.24 %     10,457       5.26 %  
Third Party - Insurance Note 3     1,126             9,158          
Third Party - Insurance Note 4     89,493                      
Third Party - Insurance Note 5     4,612       7.75 %              
Total   $ 154,631             $ 42,942            

 

The Company entered into an agreement on December 23, 2020 with its insurance provider by issuing a $23,327 note payable (Insurance Note 1) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 7.75% payable in monthly installments of principal and interest totaling $2,416 through October 23, 2021. The balance of Insurance Note 1 as of June 30, 2021 and December 31, 2020 was $9,511 and $23,327, respectively.

 

12 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

The Company entered into an agreement on April 15, 2020, with its insurance provider by issuing a $51,379 note payable (Insurance Note 2) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 5.26% payable in monthly installments of principal and interest totaling $5,263 through February 15, 2021. The note payable renewed on April 15, 2021 in the amount of $62,041, secured with an annual interest rate of 6.24% and payable in 10 monthly installments of principal and interest totaling $6,383. At June 30, 2021 and December 31, 2020, the balance of Insurance Note 2 was 49,889 and $10,457, respectively.

 

The Company entered into an agreement on September 15, 2020 with its insurance provider by issuing a $13,796 note payable (Insurance Note 3) for the purchase of an insurance policy, secured by 12 monthly installments. At June 30, 2021 and December 31, 2020, the balance of Insurance Note 3 was $1,126 and $9,158, respectively.

 

The Company entered into an agreement on February 3, 2020 with its insurance provider by issuing a $165,375 note payable (Insurance Note 4) with a down payment of $55,563 for the purchase of an insurance policy secured by eight monthly installments of $13,726 through December 3, 2020. The policy renewed on February 3, 2021 in the amount of $215,654 with a down payment paid in the amount of $37,000 on April 6, 2021 and ten monthly installments of $17,899. At June 30, 2021 and December 31, 2020, the balance of Insurance Note 4 was $89,493 and zero, respectively.

 

The Company entered into an agreement on May 23, 2021 with its insurance provider by issuing a $6,874 note payable (Insurance Note 5) for the purchase of an insurance policy, secured with an annual interest rate of 7.75% and payable in 6 monthly installments of principal and interest totaling $1,172. At June 30, 2021 and December 31, 2020, the balance of Insurance Note 5 was $4,612 and zero, respectively.

 

Equipment Financing

 

The Company entered into an agreement on August 26, 2019 with an equipment financing company by issuing a $147,810 secured note, with an annual interest rate of 12.72% and payable in monthly installments of principal and interest totaling $4,963 through August 1, 2022. The Company entered into an additional agreement on May 22, 2020 with the same equipment financing company by issuing a $121,637 secured note, with an annual interest rate of 9.90% and payable in monthly installments of principal and interest totaling $3,919 through June 1, 2023. At June 30, 2021 and December 31, 2020, the balance of these notes was $149,277 and $192,804, respectively.

 

At June 30, 2021, future minimum lease payments due under the equipment financing is as follows:

 

       
As of December 31, Amount  
2021   $ 53,294  
2022     86,735  
2023     23,515  
Total minimum equipment financing payments   $ 163,544  
Less: interest     (14,267 )
Total equipment financing at June 30, 2021   $ 149,277  
Less: current portion of equipment financing     (94,904 )
Long term portion of equipment financing   $ 54,373  

 

13 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

Notes Payable – PPP Loan

 

                                               
                June 30, 2021     December 31, 2020  
Payable To               Principal     Interest     Principal     Interest  
                                                 
PPP loan                   $             $ 1,410,270       1%  
Total                                   1,410,270          
Less current portion                                   (863,845 )        
Long term portion                   $             $ 546,425          

 

On April 23, 2020, the Company entered into a promissory note (the “Note”) with BBVA USA, which provided for a loan in the amount of $1,410,270 (the “Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Loan had a two-year term and accrued interest at a rate of 1.00% per annum (APR 1.014%). Monthly principal and interest payments were deferred for nine months after the date of disbursement. The Loan could be prepaid at any time prior to maturity with no prepayment penalties. The Company applied for the PPP loan forgiveness and was granted forgiveness on February 1, 2021. At June 30, 2021 and December 31, 2020, the loan balance was zero and $1,410,270, respectively.

 

NOTE 4 – LINE OF CREDIT

 

The Company assumed a line of credit with Wells Fargo Bank upon merger with ISA on April 1, 2015. The line of credit provided for borrowings up to $40,000 but is now closed. The balance as of June 30, 2021 and December 31, 2020, was zero and zero, respectively, including accrued interest. This line of credit has been paid in full as of May 5, 2020.

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES

 

Delinquent Payroll Taxes Payable

 

The Company has paid its delinquent IRS payroll taxes, late fees and outstanding state of California payroll taxes in full. At June 30, 2021 and December 31, 2020, the state payroll taxes payable balance was zero and $3,146, respectively.

 

Operating Lease Obligations

 

The Company has an operating lease agreement for office space of 8,308 square feet that was amended on May 1, 2016 and again on April 1, 2019, increasing the office space to 10,203 square feet, with the lease ending on October 31, 2021. The rent is subject to an annual escalation of 3%, beginning May 1, 2017.

 

The Company entered a new lease agreement of office and warehouse combination space of 4,400 square feet on June 1, 2018 and ending May 31, 2021. The Company has extended this lease to coincide with the main office space lease that will be ending on October 31, 2021. This additional space allows for resource growth and engineering efforts for operations before deploying to the field. The rent is subject to an annual escalation of 3%.

 

The Company now has a total of office and warehouse space of approximately 14,603 square feet.

 

At June 30, 2021, future minimum lease payments due under operating leases are as follows:

 

   
As of June 30, 2021 Amount  
Total minimum financial lease payments     94,264  
Less: interest     (2,310 )
Total lease liability at June 30, 2021   $ 91,954  

 

14 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”), which requires all leases with a term greater than 12 months to be recognized on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance. We adopted ASU 2016-02 effective January 1, 2019, on a modified retrospective basis, without adjusting comparative periods presented. Effective January 1, 2019, the Company established a right-of-use model (ROU) asset and operating lease liability in the amount of $644,245. The Company extended the lease agreement of office and warehouse combination space to coincide with the main office space and recorded a right-of-use model (ROU) to the asset and operating lease liability in the amount of $21,022. The right of use asset balance at June 30, 2021 was $91,954. These are the Company’s only leases with terms greater than 12 months. The adoption of ASU 2016-02 did not materially affect our unaudited consolidated statement of operations or our unaudited consolidated statements of cash flows. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and to recognize all lease payments for leases with a term greater than 12 months on a straight-line basis over the lease term in our unaudited consolidated statements of operations.

 

Executive Severance Agreement

 

On July 10, 2020, the Company announced that Gianni Arcaini would retire from the positions of Chief Executive Officer and Chairman of the Board effective as of September 1, 2020 (the “CEO Transition”). In order to facilitate a transition of his duties, the Company and Mr. Arcaini entered into a separation agreement which became effective as of July 10, 2020 (the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. Arcaini’s employment with the Company ended on September 1, 2020 and he will receive separation payments over a 36-month period equal to his base salary plus $75,000 as well as certain limited health and life insurance benefits. The Separation Agreement also contains confidentiality, non-disparagement and non-solicitation covenants and a release of claims by Mr. Arcaini who continued to serve as Chairman of the Board of Directors of the Company. The Corporate Governance and Nominating Committee did not submit Mr. Arcaini for re-election as a director and on November 19, 2020 at the Annual Shareholders meeting a new non-Executive Chairman was appointed.

 

In accordance with the Separation Agreement, the Company will pay to Mr. Arcaini the total sum of $747,788. Notwithstanding the foregoing, the status of Mr. Arcaini as a “Specified Employee” as defined in Internal Revenue Code Section 409A has the effect of delaying any payments to Mr. Arcaini under the Separation Agreement for six months after the Separation Date. On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631, owed to Mr. Arcaini and the Company will continue to pay him in semi-monthly installments for 30 months thereafter, as contemplated in Mr. Arcaini’s Separation Agreement. The remaining balance of approximately $603,000 as of June 30, 2021 is included in accrued expenses in the accompanying consolidated balance sheet. In addition, the Company will pay one-half of Mr. Arcaini’s current life insurance premiums for 36 months of approximately $1,200 per month and provide and pay for his health insurance for 36 months following the Separation Date of approximately $450 per month. Unvested options in the amount of 50,358 became exercisable and vested in their entirety on the Separation Date valued at $95,127. The Company made payment of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation Agreement of approximately $17,000.

 

NOTE 6 – STOCKHOLDERS’ EQUITY 

 

Common stock issued

 

On February 12, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity, a division of Fordham Financial Management, Inc. (“ThinkEquity”), as representative of the underwriters listed therein (the “Underwriters”), pursuant to which the Company agreed to sell to the Underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 1,350,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a public offering price of $6.00 per share. In addition, the Underwriters were granted an over-allotment option (the “Over-allotment Option”) for a period of 45 days to purchase up to an additional 202,500 shares of Common Stock. The Offering closed on February 18, 2020. The Common Stock began trading on the Nasdaq Capital Market under the symbol DUOT on February 13, 2020.

 

On February 20, 2020, pursuant to and in compliance with the terms and conditions of the aforementioned Underwriting Agreement and the Offering, the Underwriters partially exercised the Over-allotment Option to purchase 192,188 shares of Common Stock at $6.00 per share (the “Over-Allotment Exercise”). The sale of the Over-Allotment Exercise to purchase 192,188 shares of Common Stock closed on February 21, 2020.

 

15 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

In total, the Company issued 1,542,188 shares of Common Stock in connection with the underwritten public offering and up listing to the Nasdaq Capital Market national exchange. The securities were issued pursuant to a Registration Statement on Form S-1 (File No. 333- 235455), as amended, which was declared effective by the Securities and Exchange Commission on February 12, 2020. The Company received gross proceeds of approximately $9.25 million for the Offering, including the exercise of the Over-Allotment Exercise, prior to deducting underwriting discounts and commissions and offering expenses payable by the Company.

 

Series C Convertible Preferred Stock

 

On February 26, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing investors in the Company (the “Purchasers”). Pursuant to the Purchase Agreement, the Purchasers purchased 4,500 shares of a newly authorized Series C Convertible Preferred Stock (the “Series C Convertible Preferred Stock”), and the Company received proceeds of $4,500,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.

 

Under the Purchase Agreement, the Company was required to hold a meeting of shareholders at the earliest practical date, which ultimately occurred on July 15, 2021. Nasdaq Marketplace Rule 5635(d) limits the number of shares of common stock (or securities that are convertible into common stock) without shareholder approval. As previously disclosed, at its Annual Meeting of Shareholders, the Company obtained shareholder approval (the “Stockholder Approval”) in order to issue shares of common stock underlying the Series C Convertible Preferred Stock at a price less than the lower of the price immediately preceding the signing of the Purchase Agreement or the average of the prices for the five trading days immediately preceding such signing which equal 20% or more of the number of shares of common stock outstanding before the issuance. As described below, the terms of the Series C Convertible Preferred Stock limited its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval was obtained.

 

In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series C Convertible Preferred Stock are convertible. The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.

 

The Company’s Board of Directors has designated 5,000 shares as the Series C Convertible Preferred Stock. Each share of the Series C Convertible Preferred Stock has a stated value of $1,000. The holders of the Series C Convertible Preferred Stock, the holders of the common stock and the holders of any other class or series of shares entitled to vote with the common stock shall vote together as one class on all matters submitted to a vote of shareholders of the Company. Each share of Series C Convertible Preferred Stock has 172 votes (subject to adjustment); provided that in no event may a holder of Series C Convertible Preferred Stock be entitled to vote a number of shares in excess of such holder’s Beneficial Ownership Limitation (as defined in the Certificate of Designation and as described below). Each share of Series C Convertible Preferred Stock is convertible, at any time and from time to time, at the option of the holder, into that number of shares of common stock (subject to the Beneficial Ownership Limitation) determined by dividing the stated value of such share ($1,000) by the conversion price, which is $5.50 (subject to adjustment).

 

The Company shall not effect any conversion of the Series C Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Series C Convertible Preferred Stock, to the extent that after giving effect to the conversion sought by the holder such holder (together with such holder’s Attribution Parties (as defined in the Certificate of Designation)) would beneficially own more than 4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon such conversion (the “Beneficial Ownership Limitation”).

 

16 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

Stock-Based Compensation

 

Stock-based compensation expense recognized under ASC 718-10 for the six months ended June 30, 2021 and 2020, was $153,163 and $96,270, respectively, for stock options granted to employees and directors. This expense is included in selling, general and administrative expenses in the unaudited consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that are ultimately expected to vest during the period. At June 30, 2021, the total compensation cost for stock options not yet recognized was $201,958. This cost will be recognized over the remaining vesting term of the options ranging from six months to two- and one-half years.

 

Employee Stock Options

 

A maximum of 178,572 shares were originally available for grant under the 2016 Equity Incentive Plan, as amended (the “2016 Plan”), and all outstanding options under the 2016 Plan provide a cashless exercise feature. The maximum number of shares was increased by shareholder approval to 321,429. The identification of individuals entitled to receive awards, the terms of the awards, and the number of shares subject to individual awards, were determined by our Board of Directors or the Compensation Committee, at their sole discretion. The aggregate number of shares with respect to which options or stock awards may be granted under the 2016 Plan and the purchase price per share, if applicable, shall be adjusted for any increase or decrease in the number of issued shares resulting from a stock dividend, stock split, reverse stock split, recapitalization, or similar event. As of June 30, 2021, and December 31, 2020, options to purchase 295,347 shares of common stock and 311,898 shares of common stock were outstanding under the 2016 Plan, respectively and a further 160,000 and 140,000 non-plan options to purchase common stock were outstanding as of June 30, 2021, and December 31, 2020, respectively. The non-plan options were granted to four executives as hiring incentives, including the Company’s CEO.

 

On April 1, 2020, the Board of Directors cancelled 161,402 options previously granted to existing employees and granted 310,290 options, of which 160,866 were replaced with new options carrying a $6.00 exercise price and a further 149,424 options were issued to existing employees, officers and directors carrying a $4.74 strike price with a vesting period ranging from 9 months to 21 months. On April 1, 2020, the new stock options issued had a fair value of $370,312. The options that were cancelled and replaced were accounted for by valuing the original options on the day before they were cancelled and valuing the new options on the day of issuance. The inputs used were a stock price of $4.74 on the day of cancellation and $4.70 on the day of issuance, expected term of 2.5 years, expected volatility of 81%, no anticipated dividend and an interest rate of 0.255%. The difference between the valuations were recorded as one-time option expense given that options cancelled were already vested and the replacement options were immediately vested. The one-time expense for this cancellation and issuance was $102,800. The strike price of the cancelled options was $14.00. The 2016 Plan terminated pursuant to its terms on December 31, 2020. No further awards will be made under the 2016 Plan although all awards outstanding on that date will remain in effect according to their terms.

 

During the first quarter of 2021, the Company’s Board of Directors granted 20,000 new stock options with a strike price of $4.32 per share to its new VP of Product Innovation. These options were awarded as a one-time award as a hiring incentive and have a fair value of $52,758 as of January 4, 2021. The issuance of these options generated stock option compensation expense in that quarter in the amount of $7,685 and a balance of unamortized stock option compensation expense of $45,073, that will be expensed in the following 2.75 years. 

 

During the second quarter of 2021, three former staff members and one contractor forfeited 16,551 options that resulted in a charge recorded in the amount of $2,441.

 

Warrants

 

During the second quarter of 2021, warrants representing 205,574 shares were exercised by seven holders. All of the exercises were cashless exercises with exercise prices of $7.70 and stock prices ranging from $9.25 to $11.14 resulting in a total of 50,588 common shares. No new warrants were issued during the second quarter of 2021.

 

17 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

NOTE 7 - REVENUE

 

Revenue Recognition and Contract Accounting

 

The Company generates revenue from four sources: (1) Technology Systems; (2) AI Technology; (3) Technical Support; and (4) Consulting Services.

 

The Company constructs intelligent technology systems consisting of materials and labor under customer contracts. Revenues and related costs on technology systems revenue are recognized based 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.

 

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 un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.

 

Contract Assets

 

Contract assets on uncompleted contracts represent costs and estimated earnings in excess of billings and/or cash received on uncompleted contracts accounted for under the input method, which recognizes revenue only to the extent of the cost incurred.

 

At June 30, 2021 and December 31, 2020, contract assets on uncompleted contracts consisted of the following:

 

               
   

June 30,

2021

   

December 31,

2020

 
Costs and estimated earnings recognized   $ 1,915,472     $ 4,152,850  
Less: Billings or cash received     (1,762,683 )     (4,050,392 )
Contract assets   $ 152,789     $ 102,458  

 

Contract Liabilities

 

Contract liabilities on uncompleted contracts represent billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under the input method, which recognizes revenue only to the extent of the cost incurred.

 

At June 30, 2021 and December 31, 2020, contract liabilities on uncompleted contracts consisted of the following:

 

               
   

June 30,

2021

   

December 31,

2020

 
Billings and/or cash receipts on uncompleted contracts   $ 2,559,222     $ 2,978,007  
Less: Costs and estimated earnings recognized     (2,387,941 )     (2,268,454 )
Contract liabilities   $ 171,281     $ 709,553  

 

18 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

A contract is considered complete when all costs except insignificant items have been incurred and the installation is operating according to specifications or has been accepted by the customer.

 

The Company has contracts in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. Cost estimates are reviewed periodically on a contract-by-contract basis throughout the life of the contract such that adjustments to the profit resulting from revisions are made cumulative to the date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects, must be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional information becomes available.

 

Artificial Intelligence

 

The Company has begun to derive revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms to provide important operating information to the users of our systems. The revenue generated from these applications of AI consists of an annual application maintenance fee which will be recognized ratably over the year, plus fees for the design, development, testing and incorporation of new algorithms into the system which will be recognized upon completion of each deliverable.

 

Technical Support

 

Maintenance and technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and technical support provided outside of a maintenance contract are on an as-requested basis, and revenue is recognized as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized ratably over the term of the contract.

 

For sales arrangements that do not involve multiple elements such as professional services, which are of short-term duration, revenues are recognized when services are completed.

 

Consulting Services

 

The Company’s consulting services business generates revenues under contract with customers from three sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; and (3) Customer Service (training and maintenance support).

 

For sales arrangements that do not involve performance obligations: 

 

(1) Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2) For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer;
(3) Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
(4) Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term.

 

Multiple Elements

 

Arrangements with customers may involve multiple elements including project revenue and maintenance services in our Technology Systems business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business, multiple elements may include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for multiple element arrangements is as follows:

 

19 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

Each element is accounted for separately when each element has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each element is recognized using the applicable criteria under GAAP as discussed above for elements sold in non-multiple element arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company sells its various services and software and hardware products at established prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of multiple element relative selling price allocation. The Company only sells maintenance services or spare parts based on its established rates after it has completed a system integration project for a customer. The customer is not required to purchase maintenance services. All elements in multiple element arrangements with Company customers qualify as separate units of account for revenue recognition purposes. 

 

Deferred Revenue

 

Deferred revenues represent billings or cash received in excess of revenue recognizable on service agreements that are not accounted for under the percentage of completion method.

 

Disaggregation of Revenue

 

The Company is following the guidance of ASC 606-10-55-296 and 297 for disaggregation of revenue. Accordingly, revenue has been disaggregated according to the nature, amount, timing and uncertainty of revenue and cash flows. We are providing qualitative and quantitative disclosures.

 

Qualitative:

 

1.We have four distinct revenue sources:
a.Turnkey, engineered projects;
b.Associated maintenance and support services;
c.Licensing and professional services related to auditing of data center assets;
d.Predetermined algorithms to provide important operating information to the users of our systems.
2.We currently operate in North America including the USA, Mexico and Canada.
3.Our customers include rail transportation, commercial, petrochemical, government, banking and IT suppliers.
4.Our contracts are fixed price and fall into two duration types:
a.Turnkey engineered projects and professional service contracts that are less than one year in duration and are typically two to three months in length; and
b.Maintenance and support contracts ranging from one to five years in length.
5.Transfer of goods and services are over time.

 

 

20 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

 

Quantitative:

 

For the Three Months Ended June 30, 2021

 

                                         
Segments   Rail     Commercial     Government     Banking/Other     IT Suppliers     Artificial Intelligence     Total  
Primary Geographical Markets                                          
                                           
North America   $ 466,628     $ 57,600     $ 116,727     $ 2,932     $ 795     $ 3,986     $ 648,668  
                                                         
Major Goods and Service Lines                                                        
                                                         
Turnkey Projects   $ 3,895     $     $ 96,506     $     $     $     $ 100,401  
Maintenance & Support     462,733       57,600       20,221       2,932             3,986       547,472  
Data Center Auditing Services                                          
Software License                             795             795  
Algorithms                                          
    $ 466,628     $ 57,600     $ 116,727     $ 2,932     $ 795     $ 3,986     $ 648,668  
                                                         
Timing of Revenue Recognition                                                        
                                                         
Goods transferred over time   $ 3,895     $     $ 96,506     $     $     $     $ 100,401  
Services transferred over time     462,733       57,600       20,221       2,932       795       3,986       548,267  
    $ 466,628     $ 57,600     $ 116,727     $ 2,932     $ 795     $ 3,986     $ 648,668  

 

 

For the Three Months Ended June 30, 2020

 

Segments   Rail     Commercial     Government     Banking     IT Suppliers     Artificial Intelligence     Total  
Primary Geographical Markets                                          
                                           
North America   $ 1,631,891     $ 52,552     $ 20,221     $ 96,869     $ 2,385     $ 178,224     $ 1,982,142  
                                                         
Major Goods and Service Lines                                                        
                                                         
Turnkey Projects   $ 1,332,577     $ (2,421)     $     $ 89,253     $     $ 178,224     $ 1,597,633  
Maintenance & Support     299,314       54,973       20,221       7,616                   382,124  
Data Center Auditing Services                                          
Software License                             2,385             2,385  
    $ 1,631,891     $ 52,552     $ 20,221     $ 96,869     $ 2,385     $ 178,224     $ 1,982,142  
                                                         
Timing of Revenue Recognition                                                        
                                                         
Goods transferred over time   $ 1,332,577     $ (2,421)     $     $ 89,253     $ 2,385     $ 178,224     $ 1,600,018  
Services transferred over time     299,314       54,973       20,221       7,616                   382,124  
    $ 1,631,891     $ 52,552     $ 20,221     $ 96,869     $