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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 September 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 of 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 November 11, 2021, the registrant has one class of common equity, and the number of shares outstanding of such common equity is 3,610,801

 

 

 
 

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

 

 

           
   September 30,   December 31, 
   2021   2020 
   (Unaudited)     
ASSETS          
CURRENT ASSETS:          
Cash  $2,257,971   $3,969,100 
Accounts receivable, net   384,654    1,244,876 
Contract assets   249,870    102,458 
Prepaid expenses and other current assets   644,878    486,626 
           
Total Current Assets   3,537,373    5,803,060 
           
Property and equipment, net   368,327    342,180 
Operating lease right of use asset, net   22,930    196,144 
Security deposit   600,000     
           
OTHER ASSETS:          
Patents and trademarks, net   67,824    64,415 
Total Other Assets   67,824    64,415 
           
TOTAL ASSETS  $4,596,454   $6,405,799 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $978,170   $599,317 
Accounts payable - related parties       7,700 
Notes payable - financing agreements   54,953    42,942 
Payroll taxes payable       3,146 
Accrued expenses   1,191,567    1,038,092 
Current portion - equipment financing agreements   92,700    89,620 
Current portion - operating lease obligations   23,333    202,797 
Current portion - PPP loan       627,465 
Contract liabilities   449,496    709,553 
Deferred revenue   907,154    315,370 
           
Total Current Liabilities   3,697,373    3,636,002 
           
Equipment financing payable, less current portion   33,860    103,184 
PPP loan, less current portion       782,805 
           
Total Liabilities   3,731,233    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 September 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 September 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 September 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, 3,612,125 and 3,535,339 shares issued, 3,610,801 and 3,534,015 shares outstanding at September 30, 2021 and December 31, 2020, respectively   3,612    3,536 
Additional paid-in-capital   40,111,551    39,820,874 
Total stock & paid-in-capital   46,320,163    41,529,410 
Accumulated deficit   (45,297,490)   (39,488,150)
Sub-total   1,022,673    2,041,260 
Less:  Treasury stock (1,324 shares of common stock at September 30, 2021 and December 31, 2020)   (157,452)   (157,452)
Total Stockholders' Equity   865,221    1,883,808 
           
Total Liabilities and Stockholders' Equity  $4,596,454   $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 Nine Months Ended 
   September 30,   September 30, 
   2021   2020   2021   2020 
                 
REVENUES:                    
Technology systems  $1,153,150   $729,231   $2,743,849   $2,840,538 
Services and consulting   587,307    552,718    1,800,030    1,414,498 
                     
Total Revenues   1,740,457    1,281,949    4,543,879    4,255,036 
                     
COST OF REVENUES:                    
Technology systems   1,869,812    976,121    4,979,667    3,390,211 
Services and consulting   277,054    319,334    986,757    827,532 
Overhead   657,907    233,597    1,754,731    752,421 
                     
Total Cost of Revenues   2,804,773    1,529,052    7,721,155    4,970,164 
                     
GROSS MARGIN   (1,064,316)   (247,103)   (3,177,276)   (715,128)
                     
OPERATING EXPENSES:                    
Sales & marketing   361,820    173,197    1,024,872    435,522 
Research & development   57,000    21,583    197,164    77,179 
Administration   963,357    2,264,960    2,817,949    4,993,985 
                     
Total Operating Expenses   1,382,177    2,459,740    4,039,985    5,506,686 
                     
LOSS FROM OPERATIONS   (2,446,493)   (2,706,843)   (7,217,261)   (6,221,814)
                     
OTHER INCOME (EXPENSES):                    
Interest expense   (4,819)   (6,260)   (16,580)   (133,435)
Other income, net   875    4,524    1,424,501    33,732 
                     
Total Other Income (Expenses)   (3,944)   (1,736)   1,407,921    (99,703)
                     
NET LOSS  $(2,450,437)  $(2,708,579)  $(5,809,340)  $(6,321,517)
                     
                     
Basic & Diluted Net Loss Per Share  $(0.68)  $(0.77)  $(1.63)  $(1.95)
                     
                     
Weighted Average Shares-Basic & Diluted   3,588,381    3,528,128    3,559,340    3,247,954 

 

   

See accompanying condensed notes to the unaudited consolidated financial statements.

 

 

2 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three and Nine Months Ended September 30, 2021 and 2020

(Unaudited)

 

                                                   
   Preferred Stock B   Preferred Stock C   Common Stock   Additional   Accumulated   Treasury     
   # of Shares   Amount   # of Shares   Amount   # of Shares   Amount   Paid-in-Capital   Deficit   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 
                                                   
Common stock issued for cashless 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 
                                                   
Stock options granted to employees                           62,590            62,590 
                                                   
Common stock issued for services                   11,255    11    74,989            75,000 
                                                   
Common stock issued for cashless employee stock options exercised                   14,576    15    (15)            
                                                   
Rounding-split in 2020 (367 shares)                   367    0    (0)            
                                                   
Net loss for the three months ended September 30, 2021                               (2,450,437)       (2,450,437)
                                                   
Balance September 30, 2021   1,705   $1,705,000    4,500   $4,500,000    3,612,125   $3,612   $40,111,551   $(45,297,490)  $(157,452)  $865,221 
                                                   
                                                   
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 
                                                   
Stock options granted to employees                           165,491            165,491 
                                                   
Common stock issued for services                   7,869    8    37,492            37,500 
                                                   
Net loss for the three months ended September 30, 2020                               (2,708,579)       (2,708,579)
                                                   
Balance September 30, 2020   1,705   $1,705,000       $   $3,535,339   $3,536   $39,730,665   $(39,062,232)  $(157,452)  $2,219,517 

 

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 Nine Months Ended 
   September 30, 
   2021   2020 
         
Cash from operating activities:          
Net loss  $(5,809,340)  $(6,321,517)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   281,220    159,121 
Stock based compensation   215,753    261,761 
Stock issued for services   75,000     
Modification of employee stock options       102,800 
PPP loan forgiveness including accrued interest   (1,421,577)    
Interest expense related to debt discounts       94,627 
Bad debt expense   76,046     
Changes in assets and liabilities:          
Accounts receivable   631,948    1,271,822 
Contract assets   (147,412)   1,191,685 
Prepaid expenses and other current assets   264,878    331,456 
Operating lease right of use asset   173,214    172,778 
Security deposit   (600,000)    
Accounts payable   378,853    (1,938,824)
Accounts payable-related party   (7,700)   (4,841)
Payroll taxes payable   (3,146)   (111,965)
Accrued expenses   164,782    648,625 
Operating lease obligation   (179,464)   (176,345)
Contract liabilities   (207,507)   324,090 
Deferred revenue   591,784    (229,184)
           
Net cash used in operating activities   (5,522,668)   (4,223,911)
           
Cash flows from investing activities:          
Purchase of patents/trademarks   (7,435)   (8,185)
Purchase of fixed assets   (303,341)   (216,401)
           
Net cash used in investing activities   (310,776)   (224,586)
           
Cash flows from financing activities:          
Repayments of line of credit       (27,615)
Repayments of insurance and equipment financing   (311,442)   (204,659)
Repayment of finance lease   (66,243)   (42,046)
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   4,122,315    8,508,830 
           
Net (decrease) increase in cash   (1,711,129)   4,060,333 
Cash, beginning of period   3,969,100    56,249 
Cash, end of period  $2,257,971   $4,116,582 
           
Supplemental Disclosure of Cash Flow Information:          
Interest paid  $25,678   $32,768 
           
Supplemental Non-Cash Investing and Financing Activities:          
Common stock issued for accrued BOD fees  $   $52,500 
Lease right of use asset and liability  $   $644,245 
Notes issued for financing of insurance premiums  $323,452   $233,350 

 

 

See accompanying condensed notes to the unaudited consolidated financial statements.

 

 

4 
 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 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 “Company”), through its operating subsidiaries, Duos Technologies, Inc. (“Duos”) and TrueVue360, Inc. (“TrueVue360”) (collectively the “Company”), develops and deploys vision based analytical technology solutions 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 automated 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 minutes of a railcar passing through our portal. This solution has the potential to transform the railroad industry by 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.

 

Through September 30, 2021, the Company also provided professional and consulting services for large data centers and had developed a system for the automation of asset information marketed as DcVue™. The Company had deployed its DcVue software at one beta site. This software was used by Duos’ consulting auditing teams. DcVue was based upon the Company’s OSPI patent which was awarded in 2010. The Company offered DcVue available for license to our customers as a licensed software product. (see Note 10)

 

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

September 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 nine months ended September 30, 2021 are not necessarily 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 nine months ended September 30, 2020 to conform to 2021 classification. There was no net effect on the total expenses of such reclassification.

 

The following tables reflect the reclassification adjustment effect in the three and nine months ended September 30, 2020:

 

                   
    Before Reclassification         After Reclassification  
    For the         For the  
    Three Months Ended         Three Months Ended  
    September 30,         September 30,  
    2020         2020  
                 
REVENUES:           REVENUES:        
Technology systems   $ 672,951     Technology systems   $ 729,231  
Technical support     502,502     Services and consulting     552,718  
Consulting services     50,216          
AI technologies     56,280          
                     
Total Revenue     1,281,949     Total Revenue     1,281,949  
                     
COST OF REVENUES:           COST OF REVENUES:        
Technology systems     601,814     Technology systems     976,121  
Technical support     333,721     Services and consulting     319,334  
Consulting services     12,301     Overhead     233,597  
AI technologies     39,182          
                     
Total Cost of Revenues     987,018     Total Cost of Revenues     1,529,052  
                     
GROSS MARGIN     294,931     GROSS MARGIN     (247,103
                     
OPERATING EXPENSES:           OPERATING EXPENSES:        
Sales and marketing     173,197     Sales and marketing     173,197  
Engineering     280,897     Research and development     21,583  
Research and development     215,831     Administration     2,264,960  
Administration     1,991,408          
AI technologies     340,441          
                     
Total Operating Expenses     3,001,774      Total Operating Expenses     2,459,740  
                     
LOSS FROM OPERATIONS   $ (2,706,843 )   LOSS FROM OPERATIONS   $ (2,706,843 )

 

 

6 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

    Before Reclassification         After Reclassification  
    For the         For the  
    Nine Months Ended         Nine Months Ended  
    September 30,         September 30,  
    2020         2020  
                 
REVENUES:           REVENUES:        
Technology systems $   2,606,034     Technology systems   $ 2,840,538  
Technical support     1,229,813     Services and consulting     1,414,498  
Consulting services     184,685          
AI technologies     234,504          
                     
Total Revenue     4,255,036     Total Revenue     4,255,036  
                     
COST OF REVENUES:           COST OF REVENUES:        
Technology systems     2,080,872     Technology systems     3,390,211  
Technical support     802,751     Services and consulting     827,532  
Consulting services     84,561     Overhead     752,421  
AI technologies     149,681          
                     
Total Cost of Revenues     3,117,865     Total Cost of Revenues     4,970,164  
                     
GROSS MARGIN     1,137,171     GROSS MARGIN     (715,128)  
                     
OPERATING EXPENSES:           OPERATING EXPENSES:        
Sales and marketing     435,522     Sales and marketing     435,522  
Engineering     946,303     Research and development     77,179  
Research and development     771,789     Administration     4,993,985  
Administration     4,030,906          
AI technologies     1,174,465          
                     
Total Operating Expenses     7,358,985      Total Operating Expenses     5,506,686  
                     
LOSS FROM OPERATIONS   $ (6,221,814 )   LOSS FROM OPERATIONS   $ (6,221,814 )

 

 

 Principles of Consolidation

 

The unaudited consolidated financial statements include Duos Technologies Group, Inc. 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

September 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 September 30, 2021, the balance in one financial institution exceeded federally insured limits by approximately $1,603,300.

 

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 nine months ended September 30, 2021, one customer accounted for 79% (“Customer 2”) of revenues. For the nine months ended September 30, 2020, three customers accounted for 42% (“Customer 1”), 20% (“Customer 2”) and 11% (“Customer 3”) of revenues. The Company’s strategy going forward is to add additional customers and to diversify offerings to reduce the current concentration risk. 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 between the parties. 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 between the parties 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 September 30, 2021, two customers accounted for 65% and 18% 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

September 30, 2021

(Unaudited)

 

Geographic Concentration

 

For the nine months ended September 30, 2021, approximately 84% of revenue was generated from three customers outside of the United States. For the nine months ended September 30, 2020, approximately 30% of revenue was generated from two 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

September 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 September 30, 2021, there was an aggregate of 1,376,466 outstanding warrants to purchase shares of common stock. At September 30, 2021, there were employee stock options to purchase an aggregate of 431,266 shares of common stock. Also, at September 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”) 2014-09, 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

September 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 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 – GOING CONCERN

 

As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $2,450,437 for the three months ended September 30, 2021 and $5,809,340 for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, net cash used in operating activities was $5,522,668. The working capital deficit and accumulated deficit as of September 30, 2021 were $160,000 and $45,297,490, respectively. Management believes that, at this time, the conditions in our market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding contract and the additional time needed to execute on new contracts have put a strain on our cash reserves and that because of these factors, there is substantial doubt for the Company to continue as a going concern for a period of twelve months from the issuance date of this report.

 

11 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

We were executing the plan to grow our business and achieve profitability without the requirement to raise additional capital for existing operations. Due to the various delays encountered, Management evaluated our requirements in the past 90 days and has determined that the Company currently has sufficient cash to operate for the next six months. As part of its evaluation, the Company has determined that the previously sufficient levels of working capital must be bolstered in order to allow the Company to execute its growth plans with identified business expected to be executed in 2022. As previously noted, the Company raised $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 an anticipated 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) has affected our operations, we now believe that this is expected to be an ongoing issue and that our working capital assumptions must now reflect this new reality. The Company cannot currently quantify the uncertainty related to the pandemic and its effects on our customers in the coming quarters. We have analyzed our cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand to maintain operations for at least six months from the date of this report.

 

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:

 

                                 
    September 30, 2021   December 31, 2020  
Notes Payable   Principal       Interest   Principal       Interest  
Third Party - Insurance Note 1   $ 2,401       7.75 %   $ 23,327       7.75 %  
Third Party - Insurance Note 2     31,423       6.24 %     10,457       5.26 %  
Third Party - Insurance Note 3     19,965             9,158          
Third Party - Insurance Note 4                          
Third Party - Insurance Note 5     1,164       7.75 %              
Total   $ 54,953             $ 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 September 30, 2021 and December 31, 2020 was $2,401 and $23,327, respectively.

 

12 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021 and December 31, 2020, the balance of Insurance Note 2 was $31,423 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. The note payable renewed on September 15, 2021 in the amount of $19,965 and payable in 10 monthly installments of $1,997. At September 30, 2021 and December 31, 2020, the balance of Insurance Note 3 was $19,965 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. The Company received a refund for the annual audit of the policy resulting in the refund being applied to the outstanding amount of $35,787. At September 30, 2021 and December 31, 2020, the balance of Insurance Note 4 was zero 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 September 30, 2021 and December 31, 2020, the balance of Insurance Note 5 was $1,164 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 September 30, 2021 and December 31, 2020, the balance of these notes was $126,560 and $192,804, respectively.

 

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

 

       
As of September 30, Amount  
2021   $ 26,648  
2022     86,735  
2023     23,515  
Total minimum equipment financing payments   $ 136,898  
Less: interest     (10,338 )
Total equipment financing at September 30, 2021   $ 126,560  
Less: current portion of equipment financing     (92,700 )
Long term portion of equipment financing   $ 33,860  

 

 

 

13 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Notes Payable – PPP Loan

 

                                               
                September 30, 2021     December 31, 2020  
Payable To               Principal     Interest     Principal     Interest  
                                                 
PPP loan                   $             $ 1,410,270       1%  
Total                                   1,410,270          
Less current portion                                   (627,465 )        
Long term portion                   $             $ 782,805          

 

 

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 Note 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 Note 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 September 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 the 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 September 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 September 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 that was amended on May 1, 2016 and again on April 1, 2019, increasing the office space from 8,308 square feet 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. (see Note 10)

 

The Company entered a new lease agreement of office and warehouse combination space of 4,400 square feet on June 1, 2018, with the lease originally ending May 31, 2021. The Company has extended this lease to coincide with the main office space lease which ends 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%. (see Note 10)

 

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

 

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

 

   
As of September 30, 2021 Amount  
Total minimum financial lease payments     23,566  
Less: interest     (233 )
Total lease liability at September 30, 2021   $ 23,333  

 

 

 

14 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021 was $23,333. As of September 30, 2021, 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.

 

On July 26, 2021, the Company entered a new operating lease agreement of office and warehouse combination space of 40,000 square feet with the lease commencing on November 1, 2021 and ending May 31, 2032 This additional space allows for resource growth and engineering efforts for operations before deploying to the field. The rent for the first twelve months of the term will be calculated as rentable base space on 30,000 square feet. The rent is subject to an annual escalation of 2.5%, beginning December 1, 2022. The Company made a security deposit in the amount of $600,000 on July 26, 2021. The Company will apply the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”) in the fourth quarter of 2021. (see Note 10)

 

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 (“Separation Date”) 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 $541,000 as of September 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

September 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) issuable, in certain circumstances, 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”). All holders of the Series C Preferred Stock have elected the 19.99% Beneficial Ownership Limitation.

 

16 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Stock-Based Compensation

 

Stock-based compensation expense recognized under ASC 718-10 for the nine months ended September 30, 2021 and 2020, was $215,753 and $261,761 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 September 30, 2021, the total compensation cost for stock options not yet recognized was $137,391. 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 September 30, 2021, and December 31, 2020, options to purchase 271,266 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 September 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 was recorded as a 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 is being expensed over the following 2.75 years.

 

During the second quarter of 2021, five former staff members and one contractor exercised 31,710 and forfeited 8,922 non-qualified stock options. These transactions were ultimately consummated in the third quarter. Accordingly, in the third quarter the Company recorded a charge of $63,860 for the remaining unvested option which was offset by a credit of $1,270 for an over accrual recorded in the second quarter related to the forfeited options.

 

During the third quarter of 2021, the shareholders approved the issuance of up to one million shares or share equivalents in the form of stock options for the purposes of share issuance for compensation to Board Members and grants to certain staff members for recruiting and retention. On July 14, 2021, the Company filed an S-8 registration statement in concert with the 2021 Equity Incentive Plan which was deemed effective on August 5, 2021. The plan covers a period of ten years.

 

Warrants

 

During the second quarter of 2021, warrants representing 205,574 shares were exercised by seven holders. All 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 third quarter of 2021.

 

17 
 

 

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 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