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 August 9, 2022, 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 | 23 |
| Item 3. | Qualitative and Quantitative Disclosures about Market Risk | 34 |
| Item 4. | Controls and Procedures | 35 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 36 |
| Item 1A. | Risk Factors | 36 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36 |
| Item 3. | Defaults Upon Senior Securities | 36 |
| Item 4. | Mine Safety Disclosures | 36 |
| Item 5. | Other Information | 36 |
| Item 6. | Exhibits | 36 |
| SIGNATURES | 37 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contract assets | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right of use asset | ||||||||
| Security deposit | ||||||||
| OTHER ASSETS: | ||||||||
| Patents and trademarks, net | ||||||||
| Software development costs, net | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Notes payable - financing agreements | ||||||||
| Accrued expenses | ||||||||
| Equipment financing payable-current portion | ||||||||
| Operating lease obligations-current portion | ||||||||
| Contract liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Equipment financing payable, less current portion | ||||||||
| Operating lease obligations, less current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 4) | ||||||||
| 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 June 30, 2022 and December 31, 2021 convertible into common stock at $ per share | ||||||||
| Series B convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2022 and December 31, 2021, convertible into common stock at $ per share | ||||||||
| Series C convertible preferred stock, $ stated value per share, shares designated; issued and outstanding at June 30, 2022 and issued and outstanding at December 31, 2021, convertible into common stock at $ per share | ||||||||
| Common stock: $ par value; shares authorized, and shares issued, and shares outstanding at June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Total stock & paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Sub-total | ||||||||
| Less: Treasury stock ( shares of common stock at June 30, 2022 and December 31, 2021) | ( | ) | ( | ) | ||||
| 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 Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Technology systems | $ | $ | $ | $ | ||||||||||||
| Services and consulting | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| COST OF REVENUES: | ||||||||||||||||
| Technology systems | ||||||||||||||||
| Services and consulting | ||||||||||||||||
| Total Cost of Revenues | ||||||||||||||||
| GROSS MARGIN | ( | ) | ||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and Administration | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income, net | ||||||||||||||||
| Total Other Income (Expenses) | ( | ) | ||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic Net Loss Per Share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted Net Loss Per Share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Shares - Basic | ||||||||||||||||
| Weighted Average Shares - 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 Six Months Ended June 30, 2022 and 2021
(Unaudited)
| Preferred Stock B | Preferred Stock C | Common Stock | Additional | Accumulated | ||||||||||||||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | # of Shares | Amount | Paid-in-Capital | Deficit | Treasury Stock | Total | |||||||||||||||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Series C preferred stock converted to common stock | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Common stock issued for cash | — | — | ||||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2022 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Balance December 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Series C preferred stock issued | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2021 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Common stock issued for cash less warrants exercised | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2021 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| 3 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| 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 | ||||||||
| PPP loan forgiveness including accrued interest | ( | ) | ||||||
| Amortization of operating lease right of use asset | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Contract assets | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Payroll taxes payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Operating lease obligation | ( | ) | ||||||
| Contract liabilities | ||||||||
| Net cash provided (used) in operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of patents/trademarks | ( | ) | ( | ) | ||||
| Purchase of software development | ( | ) | ||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayments of insurance and equipment financing | ( | ) | ( | ) | ||||
| Repayment of finance lease | ( | ) | ( | ) | ||||
| Proceeds from common stock issued | ||||||||
| Issuance cost | ( | ) | ||||||
| Proceeds from preferred stock issued | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| Supplemental Non-Cash Investing and Financing Activities: | ||||||||
| 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
June 30, 2022
(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. and TrueVue360, Inc. (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. The Company also offers technical support services for the above products.
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. The Company ceased offering this product in 2021.
The Company’s strategy is to deliver operational and technical excellence to our customers, expand our RIP and ALIS solutions into current and new customers focused in the Rail, Logistics and U.S. Government Sectors, offer both CAPEX and OPEX pricing models to customers that increases recurring revenue, grows backlog and improves profitability, responsibly grow the business both organically and through selective acquisitions, and promote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with the Company.
| 5 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 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, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022.
Reclassifications
The Company reclassified certain expenses for the three months ended June 30, 2021 to conform to 2022 classification. There was no net effect on the total expenses of such reclassification.
The following tables reflect the reclassification adjustment effect in the three months ended June 30, 2021:
| Before Reclassification | After Reclassification | |||||||||
| For the | For the | |||||||||
| Three Months Ended | Three Months Ended | |||||||||
| June 30, | June 30, | |||||||||
| 2021 | 2021 | |||||||||
| REVENUES: | REVENUES: | |||||||||
| Technology systems | $ | Technology systems | $ | |||||||
| Services and consulting | Services and consulting | |||||||||
| Total Revenue | Total Revenue | |||||||||
| COST OF REVENUES: | COST OF REVENUES: | |||||||||
| Technology systems | Technology systems | |||||||||
| Services and consulting | Services and consulting | |||||||||
| Overhead | — | — | ||||||||
| Total Cost of Revenues | Total Cost of Revenues | |||||||||
| GROSS MARGIN | ( |
) | GROSS MARGIN | ( |
) | |||||
| OPERATING EXPENSES: | OPERATING EXPENSES: | |||||||||
| Sales and marketing | Sales and marketing | |||||||||
| Research and development | Research and development | |||||||||
| General and administration | General and administration | |||||||||
| 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 June 30, 2022 (Unaudited) |
The Company reclassified certain expenses for the six months ended June 30, 2021 to conform to 2022 classification. There was no net effect on the total expenses of such reclassification.
The following tables reflect the reclassification adjustment effect in the six months ended June 30, 2021:
| Before Reclassification | After Reclassification | |||||||||
| For the | For the | |||||||||
| Six Months Ended | Six Months Ended | |||||||||
| June 30, | June 30, | |||||||||
| 2021 | 2021 | |||||||||
| REVENUES: | REVENUES: | |||||||||
| Technology systems | $ | Technology systems | $ | |||||||
| Services and consulting | Services and consulting | |||||||||
| Total Revenue | Total Revenue | |||||||||
| COST OF REVENUES: | COST OF REVENUES: | |||||||||
| Technology systems | Technology systems | |||||||||
| Services and consulting | Services and consulting | |||||||||
| Overhead | — | — | ||||||||
| Total Cost of Revenues | Total Cost of Revenues | |||||||||
| GROSS MARGIN | ( |
) | GROSS MARGIN | |||||||
| OPERATING EXPENSES: | OPERATING EXPENSES: | |||||||||
| Sales and marketing | Sales and marketing | |||||||||
| Research and development | Research and development | |||||||||
| General and administration | General and administration | |||||||||
| Total Operating Expenses | Total Operating Expenses | |||||||||
| LOSS FROM OPERATIONS | $ | ( |
) | LOSS FROM OPERATIONS | $ | ( |
) | |||
| 7 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
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 consolidated 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, estimates of the valuation of right of use assets and corresponding lease liabilities, valuation of warrants issued with debt 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.
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and at
times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of June 30, 2022,
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 six months ended June 30, 2022, four customers
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. | |
| 8 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
| · | 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. |
| · | For Customer 4, if the customer terminates this Agreement for convenience, no refund, of any advance payments, will be due to Customer 4 and after taking appropriate mitigating actions, may submit to the Customer a claim for termination costs. Such costs will not exceed the unpaid balance of the contract. In the event of a material breach by Duos, which breach is not cured, or cure has not begun within 10 days of written notice to Duos by Customer 4, Customer 4 may terminate this Agreement for cause. In the event of termination by Customer 4 for cause, Duos shall reimburse Customer for any costs, losses and damages suffered or incurred arising from such event of default. Duos has secured a Performance and Payment Bond for specific project work be undertaken by the Company for Customer 4. |
At June 30, 2022, four customers accounted for
Geographic Concentration
For the six months ended June 30, 2022, approximately
Significant Vendors and Concentration of Credit Risk
At June 30, 2022, two vendors accounted for
One supplier accounted for 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. |
| 9 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
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.
Basic earnings per share (EPS) are computed by dividing
net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is
computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period
and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares
issuable upon the exercise or conversion of stock options, stock warrants, convertible debt instruments, convertible preferred stock or
other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. At
June 30, 2022, there was an aggregate of
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.
Inventory
Inventory consists primarily of spare parts and consumables to be used in the production of our technology systems or in connection with maintenance agreements with customers. Inventory is stated at the lower of cost or net realizable value. Inventory cost is primarily determined using the weighted average cost method.
Revenue Recognition
The Company follows Accounting Standards Codification 606, 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 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.
| 10 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
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. |
The Company generates revenues from four sources:
| 1. | Technology Systems; |
| 2. | AI Technology; |
| 3. | Technical Support; and |
| 4. | Consulting Services. |
Technology Systems
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 bases its technology systems 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.
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 direct 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.
AI Technologies
The Company has revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms which provide important operating information to the users of our systems. The revenue generated from these applications of AI consists of a fixed fee related to the design, development, testing and incorporation of new algorithms into the system, which is recognized as revenue at a point in time upon acceptance, as well as an annual application maintenance fee, which is recognized as revenue ratably over the contracted maintenance term.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
Technical Support
Technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and technical support provided outside of a maintenance contract are on an “as-requested” basis, and revenue is recognized over time as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized over time ratably over the term of the contract.
Consulting Services
The Company’s consulting services business generates revenues under contracts with customers from three sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; and (3) Customer service training and (4) Maintenance support.
| (1) | Revenues for professional services, which are of short-term duration, are recognized when services are completed; | |
| (2) | For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer; | |
| (3) | Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and | |
| (4) | Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term. |
Multiple Performance Obligations and Allocation of Transaction Price
Arrangements with customers may involve multiple performance obligations including project revenue and maintenance services in our Intelligent Technology Systems business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business, multiple performance obligations may include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each performance obligation is accounted for separately when each has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each performance obligations is recognized using the applicable criteria under GAAP as discussed above for performance obligations sold in single performance obligation arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company sells its various services and software and hardware products at established prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of performance obligations relative selling price allocation. The Company only sells maintenance services or spare parts based on its established rates after it has completed a system integration project for a customer. The customer is not required to purchase maintenance services. All elements in multiple performance obligations arrangements with Company customers qualify as separate units of account for revenue recognition purposes.
Segment Information
The Company operates in one reportable segment.
The Company accounts for employee and non-employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the grant date measurement and the recognition of compensation expense for all share-based payment awards made including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
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.
Leases
The Company follows ASC 842 “Leases”. This guidance requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities for most operating leases. In addition, this guidance requires that lessors separate lease and non-lease components in a contract in accordance with the revenue guidance in ASC 606.
The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on the balance sheet and instead recognize the lease payments in expense as incurred. The Company has also elected to account for real estate leases that contain both lease and non-lease components as a single lease component.
At the inception of a contract the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset.
Operating ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the lease commencement date to determine the present value of future payments. The lease term includes all periods covered by renewal and termination options where the Company is reasonably certain to exercise the renewal options or not to exercise the termination options. Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
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, 2023. The Company early adopted this pronouncement for our fiscal year beginning January 1, 2022, and it did not have a material effect on our unaudited consolidated financial statements.
In May 2021, the FASB issued an accounting pronouncement (ASU 2021-04) related to modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. The pronouncement states that an entity should treat the modification as an exchange of the original instrument for a new instrument, and the effect of the modification should be calculated as the difference between the fair value of the modified instrument and the fair value of that instrument immediately before modification. An entity should then recognize the effect of the modification on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. The pronouncement will be applied prospectively to all modifications that occur after the initial date of adoption. We adopted this pronouncement for our fiscal year beginning January 1, 2022, and it did not have a material effect on our unaudited 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.
| 13 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
NOTE 2 – LIQUIDITY
As reflected in the accompanying unaudited consolidated
financial statements, the Company had a net loss of $
During the previous 18 months, the Company has raised more than $10 million after fees and expenses, both from existing shareholders through the issuance of Series C Convertible Preferred Stock and in the first quarter of 2022, a follow-on common stock offering using its previously filed “shelf” registration. Although, further additional investment is not assured, the Company believes that it would be able to raise sufficient capital to support expanded operations based on an anticipated increase in business activity and the recent improvement in the capital markets. 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 eventually attain consistently profitable operations. Although the current global pandemic related to the coronavirus (COVID-19) has affected our operations, particularly in supply chain, we now believe that this is expected to be an ongoing issue and our working capital assumptions 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 twelve months from the date of this report. A notable recent success is the “bonding” secured in the amount of approximately $8 million for a major project for which the Company recently received full “notice to proceed”.
The Company was successful in securing a loan of $
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 previously reported have put a strain on our cash reserves. However, recent events including an approximate $5.5 million injection of funds from the 2022 Offering, significant recent orders and the overall stabilization of the business indicate that there is no longer substantial doubt for the Company to continue as a going concern for a period of twelve months from the issuance of this report. We will continue executing the plan to grow our business and eventually achieve profitability without the requirement to raise additional capital for existing operations for 2022 although we may do so to fund selective opportunities that may arise. Management has extensively evaluated our requirements for the next 12 months and has determined that the Company currently has sufficient cash to operate for at least that period.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
NOTE 3 – DEBT
Notes Payable - Financing Agreements
The Company’s notes payable relating to financing agreements classified as current liabilities consist of the following as of June 30, 2022 and December 31, 2021:
| June 30, 2022 | December 31, 2021 | ||||||||||||||||
| 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 | — | — | |||||||||||||||
| Total | $ | $ | |||||||||||||||
The Company entered into an agreement on December
23, 2021 with its insurance provider by issuing a $
The Company entered into an agreement on April
15, 2021 with its insurance provider by issuing a note payable (Insurance Note 2) in the amount of $
The Company entered into an agreement on September
15, 2021 with its insurance provider by issuing a note payable (Insurance 3) in the amount of $
The Company entered into an agreement on
February 3, 2021 with its insurance provider by issuing a note payable (Insurance 4) in the amount of $
Equipment Financing
The Company entered into an agreement on August 26,
2019 with an equipment financing company by issuing a $
At June 30, 2022, future minimum lease payments due under the equipment financing is as follows:
| Calendar year: | Amount | |||
| 2022 | ||||
| 2023 | ||||
| Total minimum equipment financing payments | $ | |||
| Less: interest | ( |
) | ||
| Total equipment financing at June 30, 2022 | $ | |||
| Less: current portion of equipment financing | ||||
| Long term portion of equipment financing | $ | |||
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
NOTE 4 – COMMITMENTS AND CONTINGENCIES
Operating Lease Obligations
On July 26, 2021, the Company entered a new operating
lease agreement for office and warehouse combination space of
As of June 30, 2022, the office and warehouse lease is the Company’s only lease with a term greater than twelve months. The office and warehouse lease has a remaining term of approximately 9.9 years and includes an option to extend for two renewal terms of five years each. The renewal options are not reasonably certain to be exercised, and therefore, they are not included when determining the lease term used to establish the right-of use asset and lease liability. The Company also has several short-term leases, primarily related to equipment. The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on the balance sheet and instead recognize the lease payments in expense as incurred. The Company has also elected to account for real estate leases that contain both lease and non-lease components (such as common area maintenance) as a single lease component.
The following table shows supplemental information related to leases:
|
Six Months Ended June 30, |
||||||||
| 2022 | 2021 | |||||||
| Lease cost: | ||||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Other information: | ||||||||
| Operating cash outflow used for operating leases | ||||||||
| Weighted average discount rate | % | % | ||||||
| Weighted average remaining lease term | ||||||||
As of June 30, 2022, future minimum lease payments due under operating leases are as follows:
| Amount | ||||
| Calendar year: | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted future minimum lease payments | ||||
| Less: Impact of discounting | ( |
) | ||
| Total present value of operating lease obligations | ||||
| Current portion | ( |
) | ||
| Operating lease obligations, less current portion | $ | |||
| 16 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
Executive Severance Agreement
Pursuant to a separation agreement with Gianni Arcaini,
our former Chief Executive Officer and Chairman of the Board (the “Separation Agreement”) , Mr. Arcaini’s employment
with the Company ended on September 1, 2020 (“Separation Date”). The Separation Agreement provides that 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 5 – STOCKHOLDERS’ EQUITY
Common stock issued
On January 11, 2022, shareholders converted and
shares of Series C Convertible Preferred stock collectively with a stated value of $2.5 million owned by two entities related to
each other with a conversion price of $
On February 3, 2022, the Company closed an offering
of shares of common stock in the amount of $
On February 21, 2022, the Company closed a “over-allotment”
offering of shares of common stock in the amount of $
On March 31, 2022, the Company issued shares
of common stock for payment of board fees to four directors in the amount of $
On June 30, 2022, the Company issued shares
of common stock for payment of board fees to four directors in the amount of $
Series B Convertible Preferred Stock
The following summary of certain terms and provisions of our Series B Convertible Preferred Stock (the “Series B Convertible Preferred Stock”) is subject to, and qualified in its entirety by reference to, the terms and provisions set forth in our certificate of designation of preferences, rights and limitations of Series B Convertible Preferred Stock (the “Series B Convertible Preferred Certificate of Designation”) as previously filed. Subject to the limitations prescribed by our articles of incorporation, our board of directors is authorized to establish the number of shares constituting each series of preferred stock and to fix the designations, powers, preferences, and rights of the shares of each of those series and the qualifications, limitations and restrictions of each of those series, all without any further vote or action by our stockholders. Our board of directors has designated of the authorized shares of preferred stock as Series B Convertible Preferred Stock with a stated value of $ per share. The shares of Series B Convertible Preferred Stock are validly issued, fully paid and non-assessable.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
Each share of Series B Convertible
Preferred Stock is convertible at any time at the holder’s option into a number of shares of common stock equal to $
Series C Convertible Preferred Stock
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.
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 $
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.
Stock-Based Compensation
Stock-based compensation expense recognized
under ASC 718-10 for the six months ended June 30, 2022 and 2021, 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 grant-date fair value of the
portion of share-based payment awards that are ultimately expected to vest during the period. At June 30, 2022, the total
compensation cost for stock options not yet recognized was $
On May 12, 2021, the Board adopted, with shareholder approval, the 2021 Equity Incentive Plan (the “2021 Plan”) providing for the issuance of up to shares of our common stock. The purpose of the 2021 Plan is to assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals to align their interests with those of our shareholders.
On January 1, 2022, the Company awarded certain
senior management and key employees non-qualified stock options under the 2021 Plan. Specifically, a total of
options were awarded by the Company’s Compensation Committee and approved by the Board, with a strike price of $
As of June 30, 2022, and December 31, 2021, options to purchase a total of (net of forfeitures discussed below) shares of common stock and shares of common stock were outstanding, respectively and at June 30, 2022, 344,599 options were exercisable. Of the total pre-forfeiture options issued, and options were outstanding under the 2016 Plan, and options were outstanding under the 2021 Plan and a further and non-plan options to purchase common stock were outstanding as of June 30, 2022 and December 31, 2021, respectively. The non-plan options were granted to four executives as hiring incentives, including the Company’s CEO in the fourth quarter of 2020.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
During the second quarter of 2022, options
were forfeited that had previously been awarded as a part of the 2021 Equity Incentive Plan. The forfeitures were the result of three
employees who had previously been awarded those options with a 3-year vesting requirement resigning from the Company without being vested
either in part or in whole. The forfeitures resulted in a credit to payroll expense of $
For the six months ended June 30, 2022, the Company has recorded an option expense for all options outstanding in the amount of $.
Warrants
NOTE 6 - REVENUE
Revenue Recognition and Contract Accounting
The Company generates revenue from four sources: (1) Technology Systems; (2) AI Technology which is included in the consolidated statements of operations line-item Technology systems; (3) Technical Support; and (4) Consulting Services which is included in the unaudited consolidated statements of operations line-item Services and consulting.
Contract assets and contract liabilities on uncompleted contracts for revenues recognized over time are as follow:
Contract Assets
Contract assets on uncompleted contracts represent revenues recognized in excess of billings and/or cash received on uncompleted contracts accounted for under the cost-to-cost input method, which recognizes revenue based on the ratio of cost incurred to total estimated costs.
At June 30, 2022 and December 31, 2021, contract assets on uncompleted contracts consisted of the following:
June 30, 2022 | December 31, 2021 | |||||||
| Cumulative revenues recognized | $ | $ | ||||||
| Less: Billings or cash received | ( | ) | ( | ) | ||||
| Contract assets | $ | $ | ||||||
Contract Liabilities
Contract liabilities, on uncompleted contracts represent billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under the cost-to-cost input method, which recognizes revenues based on the ratio of the cost incurred to total estimated costs.
Contract liabilities, services and consulting revenues represent billings or cash received in excess of revenue recognizable on service agreements that are not accounted for under the cost to cost method.
At June 30, 2022 and December 31, 2021, contract liabilities on uncompleted contracts and contract liabilities on services and consulting consisted of the following:
June 30, 2022 | December 31, 2021 | |||||||
| Billings and/or cash receipts on uncompleted contracts | $ | $ | ||||||
| Less: Cumulative revenues recognized | ( | ) | ( | ) | ||||
| Contract liabilities, technologies systems | ||||||||
| Contract liabilities, services and consulting | ||||||||
| Total contract liabilities | $ | $ | ||||||
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
The Company expects to recognize all contract liabilities within 12 months from the consolidated balance sheet date.
Disaggregation of Revenue
The Company is following the guidance of ASC 606-10-55-296 and 297 for disaggregation of revenue. Accordingly, revenue has been disaggregated according to the nature, amount, timing and uncertainty of revenue and cash flows. We are providing qualitative and quantitative disclosures.
Qualitative:
| 1. | We have four distinct revenue sources: |
| a. | Technology Systems (Turnkey, engineered projects); |
| b. | AI Technology (Associated maintenance and support services); |
| c. | Technical Support (Licensing and professional services related to auditing of data center assets); and |
| d. | Consulting Services (Predetermined algorithms to provide important operating information to the users of our systems). |
| 2. | We currently operate in North America including the USA, Mexico and Canada. |
| 3. | Our customers include rail transportation, commercial, government, banking and IT suppliers. |
| 4. | Our contracts are fixed price and fall into two duration types: |
| a. | Turnkey engineered projects and professional service contracts that are less than one year in duration and are typically two to three months in length; and |
| b. | Maintenance and support contracts ranging from one to five years in length. |
| 5. |
Transfer of goods and services are over time.
| |
| 6. | Goods delivered at point in time. |
Quantitative:
For the Three Months Ended June 30, 2022
| Segments | Rail | Commercial | Government | Artificial Intelligence | Total | |||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | |||||||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||
| Turnkey Projects | $ | $ | $ | $ | $ | |||||||||||||||
| Maintenance and Support | ||||||||||||||||||||
| Algorithms | ||||||||||||||||||||
| $ | 3,315,171 | $ | 26,697 | $ | 38,737 | $ | 236,537 | $ | 3,617,142 | |||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Goods transferred over time | $ | $ | $ | $ | $ | |||||||||||||||
| Goods delivered at point in time | ||||||||||||||||||||
| Services transferred over time | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| 20 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2022 (Unaudited) |
For the Three Months Ended June 30, 2021
| Segments | Rail | Commercial | Government | Banking | IT Suppliers | Artificial Intelligence | Total | |||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||||||||||
| Turnkey Projects | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Maintenance and Support | ||||||||||||||||||||||||||||
| Software License | ||||||||||||||||||||||||||||
| $ | 466,628 | $ | 57,600 | $ | 116,727 | $ | 2,932 | $ | 795 | $ | 3,986 | $ | 648,668 | |||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||
| Goods transferred over time | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Services transferred over time | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
For the Six Months Ended June 30, 2022
| Segments | Rail | Commercial | Government | Artificial Intelligence | Total | |||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | |||||||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||
| Turnkey Projects | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
| Maintenance and Support | ||||||||||||||||||||
| Algorithms | ||||||||||||||||||||
| $ | 4,322,444 | $ | 43,997 | $ | 190,879 | $ | 499,138 | $ | 5,056,458 | |||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Goods transferred over time | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
| Goods delivered at point in time | ||||||||||||||||||||
| Services transferred over time | ||||||||||||||||||||