UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
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
(Exact name of registrant as specified in its charter) |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
|
|
(Address of principal executive offices) |
(
(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 | ||
The |
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.
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).
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 ☐ | |
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 ☐
As of November 11, 2021, the registrant has one class of common equity, and the number of shares outstanding of such common equity is
.
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 | $ | $ | ||||||
Accounts receivable, net | ||||||||
Contract assets | ||||||||
Prepaid expenses and other current assets | ||||||||
Total Current Assets | ||||||||
Property and equipment, net | ||||||||
Operating lease right of use asset, net | ||||||||
Security deposit | ||||||||
OTHER ASSETS: | ||||||||
Patents and trademarks, net | ||||||||
Total Other Assets | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | $ | ||||||
Accounts payable - related parties | ||||||||
Notes payable - financing agreements | ||||||||
Payroll taxes payable | ||||||||
Accrued expenses | ||||||||
Current portion - equipment financing agreements | ||||||||
Current portion - operating lease obligations | ||||||||
Current portion - PPP loan | ||||||||
Contract liabilities | ||||||||
Deferred revenue | ||||||||
Total Current Liabilities | ||||||||
Equipment financing payable, less current portion | ||||||||
PPP loan, less current portion | ||||||||
Total Liabilities | ||||||||
Commitments and Contingencies (Note 5) | ||||||||
STOCKHOLDERS' EQUITY: | ||||||||
Preferred stock: $ | par value, authorized, shares available to be designated||||||||
Series A redeemable convertible preferred stock, $ | stated value per share, shares designated; issued and outstanding at September 30, 2021 and December 31, 2020, convertible into common stock at $ per share||||||||
Series B convertible preferred stock, $ | stated value per share, shares designated; and issued and outstanding at September 30, 2021 and December 31, 2020, convertible into common stock at $ per share||||||||
Series C convertible preferred stock, $ | stated value per share, shares designated; issued and outstanding at September 30, 2021 and issued and outstanding at December 31, 2020, convertible into common stock at $ per share||||||||
Common stock: $ | par value; shares authorized, and shares issued, and shares outstanding at September 30, 2021 and December 31, 2020, respectively||||||||
Additional paid-in-capital | ||||||||
Total stock & paid-in-capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Sub-total | ||||||||
Less: Treasury stock ( | shares of common stock at September 30, 2021 and December 31, 2020)( | ) | ( | ) | ||||
Total Stockholders' Equity | ||||||||
Total Liabilities and Stockholders' Equity | $ | $ |
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 | $ | $ | $ | $ | ||||||||||||
Services and consulting | ||||||||||||||||
Total Revenues | ||||||||||||||||
COST OF REVENUES: | ||||||||||||||||
Technology systems | ||||||||||||||||
Services and consulting | ||||||||||||||||
Overhead | ||||||||||||||||
Total Cost of Revenues | ||||||||||||||||
GROSS MARGIN | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
OPERATING EXPENSES: | ||||||||||||||||
Sales & marketing | ||||||||||||||||
Research & development | ||||||||||||||||
Administration | ||||||||||||||||
Total Operating Expenses | ||||||||||||||||
LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
OTHER INCOME (EXPENSES): | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other income, net | ||||||||||||||||
Total Other Income (Expenses) | ( | ) | ( | ) | ( | ) | ||||||||||
NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Basic & Diluted Net Loss Per Share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Weighted Average Shares-Basic & Diluted |
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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
Stock options granted to employees | — | — | — | |||||||||||||||||||||||||||||||||||||
Series C preferred stock issued | — | — | ||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 2021 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Balance March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
Stock options granted to employees | — | — | — | |||||||||||||||||||||||||||||||||||||
Common stock issued for cashless warrants exercised | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
Net loss for the three months ended June 30, 2021 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Balance June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
Stock options granted to employees | — | — | — | |||||||||||||||||||||||||||||||||||||
Common stock issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
Common stock issued for cashless employee stock options exercised | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
Rounding-split in 2020 (367 shares) | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
Net loss for the three months ended September 30, 2021 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Balance September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
Balance December 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
Common stock issued | — | — | ||||||||||||||||||||||||||||||||||||||
Stock options granted to employees | — | — | — | |||||||||||||||||||||||||||||||||||||
Stock issuance cost | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Common stock issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 2020 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Balance March 31, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||
Modification of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||||||
Stock options granted to employees | — | — | — | |||||||||||||||||||||||||||||||||||||
Common stock issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended June 30, 2020 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Balance June 30, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||
Stock options granted to employees | — | — | — | |||||||||||||||||||||||||||||||||||||
Common stock issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended September 30, 2020 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
Balance September 30, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ |
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 | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | ||||||||
Stock based compensation | ||||||||
Stock issued for services | ||||||||
Modification of employee stock options | ||||||||
PPP loan forgiveness including accrued interest | ( | ) | ||||||
Interest expense related to debt discounts | ||||||||
Bad debt expense | ||||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | ||||||||
Contract assets | ( | ) | ||||||
Prepaid expenses and other current assets | ||||||||
Operating lease right of use asset | ||||||||
Security deposit | ( | ) | ||||||
Accounts payable | ( | ) | ||||||
Accounts payable-related party | ( | ) | ( | ) | ||||
Payroll taxes payable | ( | ) | ( | ) | ||||
Accrued expenses | ||||||||
Operating lease obligation | ( | ) | ( | ) | ||||
Contract liabilities | ( | ) | ||||||
Deferred revenue | ( | ) | ||||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of patents/trademarks | ( | ) | ( | ) | ||||
Purchase of fixed assets | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Repayments of line of credit | ( | ) | ||||||
Repayments of insurance and equipment financing | ( | ) | ( | ) | ||||
Repayment of finance lease | ( | ) | ( | ) | ||||
Repayment of notes payable | ( | ) | ||||||
Proceeds from PPP loan | ||||||||
Proceeds from equipment financing | ||||||||
Proceeds from common stock issued | ||||||||
Issuance cost | ( | ) | ||||||
Proceeds from preferred stock issued | ||||||||
Net cash provided by financing activities | ||||||||
Net (decrease) increase in cash | ( | ) | ||||||
Cash, beginning of period | ||||||||
Cash, end of period | $ | $ | ||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Interest paid | $ | $ | ||||||
Supplemental Non-Cash Investing and Financing Activities: | ||||||||
Common stock issued for accrued BOD fees | $ | $ | ||||||
Lease right of use asset and liability | $ | $ | ||||||
Notes issued for financing of insurance premiums | $ | $ |
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 | $ | Technology systems | $ | |||||||
Technical support | Services and consulting | |||||||||
Consulting services | — | — | ||||||||
AI technologies | — | — | ||||||||
Total Revenue | Total Revenue | |||||||||
COST OF REVENUES: | COST OF REVENUES: | |||||||||
Technology systems | Technology systems | |||||||||
Technical support | Services and consulting | |||||||||
Consulting services | Overhead | |||||||||
AI technologies | — | — | ||||||||
Total Cost of Revenues | Total Cost of Revenues | |||||||||
GROSS MARGIN | GROSS MARGIN | ( |
) | |||||||
OPERATING EXPENSES: | OPERATING EXPENSES: | |||||||||
Sales and marketing | Sales and marketing | |||||||||
Engineering | Research and development | |||||||||
Research and development | Administration | |||||||||
Administration | — | — | ||||||||
AI technologies | — | — | ||||||||
Total Operating Expenses | Total Operating Expenses | |||||||||
LOSS FROM OPERATIONS | $ | ( |
) | LOSS FROM OPERATIONS | $ | ( |
) |
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 | $ | Technology systems | $ | |||||||
Technical support | Services and consulting | |||||||||
Consulting services | — | — | ||||||||
AI technologies | — | — | ||||||||
Total Revenue | Total Revenue | |||||||||
COST OF REVENUES: | COST OF REVENUES: | |||||||||
Technology systems | Technology systems | |||||||||
Technical support | Services and consulting | |||||||||
Consulting services | Overhead | |||||||||
AI technologies | — | — | ||||||||
Total Cost of Revenues | Total Cost of Revenues | |||||||||
GROSS MARGIN | GROSS MARGIN | ( |
||||||||
OPERATING EXPENSES: | OPERATING EXPENSES: | |||||||||
Sales and marketing | Sales and marketing | |||||||||
Engineering | Research and development | |||||||||
Research and development | Administration | |||||||||
Administration | — | — | ||||||||
AI technologies | — | — | ||||||||
Total Operating Expenses | Total Operating Expenses | |||||||||
LOSS FROM OPERATIONS | $ | ( |
) | LOSS FROM OPERATIONS | $ | ( |
) |
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 $
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
· | 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
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
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)
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
outstanding warrants to purchase shares of common stock. At September 30, 2021, there were employee stock options to purchase an aggregate of shares of common stock. Also, at September 30, 2021, common shares were issuable upon conversion of Series B convertible preferred stock and 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.
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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.
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 $
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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 | $ | % | $ | % | |||||||||||||
Third Party - Insurance Note 2 | % | % | |||||||||||||||
Third Party - Insurance Note 3 | — | — | |||||||||||||||
Third Party - Insurance Note 4 | — | — | |||||||||||||||
Third Party - Insurance Note 5 | % | — | — | ||||||||||||||
Total | $ | $ |
The Company entered into an agreement on
December 23, 2020 with its insurance provider by issuing a $
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 $
The Company entered into an agreement on
September 15, 2020 with its insurance provider by issuing a $
The Company entered into an agreement on
February 3, 2020 with its insurance provider by issuing a $
The Company entered into an agreement on May
23, 2021 with its insurance provider by issuing a $
Equipment Financing
The Company entered into an agreement on August
26, 2019 with an equipment financing company by issuing a $
At September 30, 2021, future minimum lease payments due under the equipment financing is as follows:
As of September 30, | Amount | |||
2021 | $ | |||
2022 | ||||
2023 | ||||
Total minimum equipment financing payments | $ | |||
Less: interest | ( |
) | ||
Total equipment financing at September 30, 2021 | $ | |||
Less: current portion of equipment financing | ( |
) | ||
Long term portion of equipment financing | $ |
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 | $ | $ | ||||||||||||||||||||||
Total | ||||||||||||||||||||||||
Less current portion | ( |
) | ||||||||||||||||||||||
Long term portion | $ | $ |
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 $
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 $
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
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
The Company entered a new lease agreement of
office and warehouse combination space of
The Company now has a total of office and warehouse
space of approximately
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 | ||||
Less: interest | ( |
) | ||
Total lease liability at September 30, 2021 | $ |
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 $
On July 26,
2021, the Company entered a new operating lease agreement of office and warehouse combination space of
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 $
In accordance with the Separation Agreement,
the Company will pay to Mr. Arcaini the total sum of $
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
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
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 $
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 $
and $ 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 $ . 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
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 . 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 shares of common stock and shares of common stock were outstanding under the 2016 Plan, respectively, and a further and 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
During the first quarter of 2021, the
Company’s Board of Directors granted
During the second quarter of 2021, five
former staff members and one contractor exercised 31,710 and forfeited
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
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