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) |
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(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 8, 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 | 37 |
| SIGNATURES | 38 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 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 September 30, 2022 and December 31, 2021 convertible into common stock at $ per share | ||||||||
| Series B convertible preferred stock, $ par value per share, shares designated; and issued and outstanding at September 30, 2022 and December 31, 2021, convertible into common stock at $ per share | ||||||||
| Series C convertible preferred stock, $ par value per share, shares designated; issued and outstanding at September 30, 2022 and issued and outstanding at December 31, 2021, convertible into common stock at $ per share | ||||||||
| Series D convertible preferred stock, $ par value per share, shares designated; issued and outstanding at September 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 September 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 September 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 Nine Months Ended | |||||||||||||||
| September 30, | September 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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss Per Share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 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 Nine Months Ended September 30, 2022 and 2021
(Unaudited)
| Preferred Stock B | Preferred Stock C | Preferred Stock D | Common Stock | Additional | ||||||||||||||||||||||||||||||||||||||||||||
| # of | # of | # of | # of | Paid-in- | Accumulated | Treasury | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | 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 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock converted to common stock | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cash | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Series D preferred stock issued for cash | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2022 | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
3
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
| Preferred Stock B | Preferred Stock C | Preferred Stock D | Common Stock | Additional | ||||||||||||||||||||||||||||||||||||||||||||
| # of | # of | # of | # of | Paid-in- | Accumulated | Treasury | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
| Stock options granted to employees | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cashless employee stock options exercised | — | — | — | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Rounding-split in 2020 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2021 | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| 4 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 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 | ( | ) | ||||||
| Bad debt expense | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Security deposit | ( | ) | ||||||
| Operating lease right of use asset | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ||||||||
| Accounts payable-related party | ( | ) | ||||||
| Payroll taxes payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Operating lease obligation | ( | ) | ||||||
| Contract liabilities | ||||||||
| Net cash 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 (decrease) 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.
| 5 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 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 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 September 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 nine months ended September 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 $
The Company reclassified certain expenses for the three months ended September 30, 2021 to conform to the 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 September 30, 2021:
| Before Reclassification | After Reclassification | |||||||||
| For the | For the | |||||||||
| Three Months Ended | Three Months Ended | |||||||||
| September 30, | September 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 September 30, 2022 (Unaudited) |
The Company reclassified certain expenses for the nine months ended September 30, 2021 to conform to the 2022 classification. There was no net effect on the total expenses of such reclassification.
The following tables reflect the reclassification adjustment effect in the nine months ended September 30, 2021:
| Before Reclassification | After Reclassification | |||||||||
| For the | For the | |||||||||
| Nine Months Ended | Nine Months Ended | |||||||||
| September 30, | September 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 September 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, valuation of inventory, 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 September 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 nine months ended September 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 non-defaulting party may terminate the agreement effective 15 Business Days following notice to the 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 September 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 the agreement for convenience, no refund of any advance payments, will be due to Customer 4 and the Company 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 the 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 September 30, 2022, two customers accounted for
Geographic Concentration
For the nine months ended September 30, 2022, approximately
Significant Vendors and Concentration of Credit Risk
At September 30, 2022, two vendors accounted for
For the nine months ended September 30, 2022, the
Company had no suppliers exceeding
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. |
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 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 loss 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, 2022, there was an aggregate of
As of September 30, 2021, 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.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 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 customer 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 September 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 four sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; (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 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 obligation 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 September 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 we have 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.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 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 21 months, the Company has raised more than $13 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. The Company also raised more than $3 million by issuing a combination of Series D Convertible Preferred Stock and common stock late in the third quarter and early in the fourth quarter of 2022. 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 our 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 lingering 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
$
during the second quarter of 2020 from the Small Business Administration via the PPP/CARES Act program which further bolstered the
Company’s cash reserves. This loan was forgiven in the first quarter of 2021 and leaves the Company essentially debt free
other than the normal course of business equipment and insurance financing as reflected in Note 3 to these financial statements. The
Company has also been successful in increasing its working capital surplus after receiving proceeds in 2021 of $4.5 million from the
issuance of Series C Convertible Preferred Stock as well as in the first quarter of 2022, receiving net proceeds of approximately
$
This gives us the capital required to fund the fundamental business changes that we are executing including organization, product alignment and market focus and maintenance of our overall business strategy. In addition, management has been taking and continues to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning both management and staffing with a focus on improving certain skill sets necessary to build growth and profitability and focusing product strategy on opportunities that are likely to bear results in the relatively short term. During 2021, management took further significant actions including reorganizing our engineering and technical teams and selectively improving organizational efficiency to effectively grow the business in concert with the influx of business won in late 2021 and early 2022. The Company had experienced a significant slowdown in closing new projects due to cautious actions by current and potential clients as a result of COVID-19 but this appears to be abating as time passes. We continue to be successful in identifying new business opportunities and are focused on maintaining a backlog of projects.
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 $9 million injection of gross funds from the 2022 Offerings, 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 from the issuance date of this report 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 September 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 September 30, 2022 and December 31, 2021:
| September 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) for the purchase of an insurance policy 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) for the purchase of an insurance policy 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) for the purchase of an insurance policy 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 September 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 September 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 September 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 September 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 9.6 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 consolidated 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:
Nine Months Ended September 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 September 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 | $ | |||
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 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 on an “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 $
On August 25, 2022, common shares were issued upon conversion of shares of Series B preferred stock.
On September 30, 2022, the Company issued shares
of common stock for payment of board fees to four directors in the amount of $
On September 30, 2022, the Company closed an offering
of shares of common stock 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 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 were validly issued, fully paid and non-assessable.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (Unaudited) |
Each share of Series B Convertible
Preferred Stock was 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 designated 5,000 shares as the Series C Convertible Preferred Stock (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, 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 were convertible. The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (Unaudited) |
Series D Convertible Preferred Stock
On September 28, 2022 the Company amended its articles of incorporation to designate 4,000 shares as the Series D Convertible Preferred Stock (the “Series D Convertible Preferred Stock”). Each share of the Series D Convertible Preferred Stock has a stated value of $1,000. The holders of the Series D 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 D Convertible Preferred Stock has 333 votes (subject to standard anti-dilution adjustment); provided that in no event may a holder of Series D 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 D Convertible Preferred Stock is convertible, subject to shareholder approval (which has not yet been granted) for an increase in common stock; 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 $3.00 (subject to adjustment). The Company shall not effect any conversion of the Series D Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Series D 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 D Preferred Stock have elected the 19.99% Beneficial Ownership Limitation. The Company shall, subject to shareholder approval, reserve and keep available out of its authorized and unissued Common Stock, solely for the issuance upon the conversion of the Series D Convertible Preferred Stock, such a number of shares of Common Stock as shall from time to time be issuable upon the conversion of all of the shares of the Series D Convertible Preferred Stock then outstanding. Additionally, the Series D Convertible Preferred Stock does not have the right to dividends and in the event of an involuntary liquidation, the Series D shares shall be treated as a pro rata equivalent of common stock outstanding at the date of the liquidation event and have no liquidation preference.
On September 30, 2022, 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 999 shares of the newly authorized Series D Convertible Preferred Stock (the
“Series D 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 D 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 nine months ended September 30, 2022 and 2021, was $ and $ respectively, for stock options granted to
employees. 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 September 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 $
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (Unaudited) |
As of September 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. At September 30, 2022, 394,599 options were exercisable. Of the total options issued, and options were outstanding under the 2016 Equity Incentive Plan, 495,000 and no options were outstanding under the 2021 Plan and a further and non-plan options to purchase common stock were outstanding as of September 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.
During the third quarter of 2022, options were
forfeited that had previously been awarded as a part of the 2021 Plan. The forfeitures were the result of two 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 $
During the third quarter of 2022, options were awarded to an employee.
Warrants
No new warrants were issued during the first three
quarters of 2022. At September 30, 2022 and December 31, 2021, warrants outstanding were
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 consolidated statements of operations line-item Services and Consulting.
Contract assets and contract liabilities on uncompleted contracts for revenues recognized over time are as follows:
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 September 30, 2022 and December 31, 2021, contract assets on uncompleted contracts consisted of the following:
September 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 on services and consulting revenues represent billings and/or cash received in excess of revenue recognizable on service agreements that are not accounted for under the cost-to-cost method.
At September 30, 2022 and December 31, 2021, contract liabilities on uncompleted contracts and contract liabilities on services and consulting consisted of the following:
|
September 30, 2022 |
December 31, 2021 |
|||||||
| Billings and/or cash receipts on uncompleted contracts | $ | $ | ||||||
| Less: Cumulative revenues recognized | ( |
) | ( |
) | ||||
| Contract liabilities, technology systems | ||||||||
| Contract liabilities, services and consulting | ||||||||
| Total contract liabilities | $ | $ | ||||||
Contract Liabilities at December 31, 2021 were $
The Company expects to recognize all contract liabilities within 12 months from the consolidated balance sheet date.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (Unaudited) |
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 September 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 | ||||||||||||||||||||
| $ | 3,765,312 | $ | 32,821 | $ | 23,245 | $ | 200,860 | $ | 4,022,238 | |||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Goods transferred over time | $ | $ | $ | $ | $ | |||||||||||||||
| Goods delivered at point in time | ||||||||||||||||||||
| Services transferred over time | ||||||||||||||||||||
| Services delivered at point in time | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (Unaudited) |
For the Three Months Ended September 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 | ( | ) | ||||||||||||||||||||||||||
| $ | 1,303,662 | $ | 45,547 | $ | 52,866 | $ | (3,288 | ) | $ | 945 | $ | 340,725 | $ | 1,740,457 | ||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||
| Goods transferred over time | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Services transferred over time | ( | ) | ||||||||||||||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
For the Nine Months Ended September 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 | ||||||||||||||||||||
| $ | 8,087,759 | $ | 76,818 | $ | 214,124 | $ | 699,995 | $ | 9,078,696 | |||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Goods transferred over time | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
| Goods delivered at point in time | ||||||||||||||||||||
| Services transferred over time | ||||||||||||||||||||
| Services delivered at point in time | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (Unaudited) |
For the Nine Months Ended September 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 | ||||||||||||||||||||||||||||
| Data Center Auditing Services | ||||||||||||||||||||||||||||
| Software License | ||||||||||||||||||||||||||||
| Algorithms | ||||||||||||||||||||||||||||
| $ | 3,527,736 | $ | 158,989 | $ | 198,153 | $ | 22,473 | $ | 134,717 | $ | 501,811 | $ | 4,543,879 | |||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||
| Goods transferred over time | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Services transferred over time | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
NOTE 7 – DEFINED CONTRIBUTION PLAN
The Company has a 401(k)-retirement savings plan (the
“401(k) Plan”) covering all eligible employees. The 401(k) Plan allows employees to defer a portion of their annual compensation,
and the Company may match a portion of the employees’ contributions generally after the first six months of service. During the
nine months ended September 30, 2022, the Company matched 100% of the first 4% of eligible employee compensation that was contributed
to the 401(k) Plan. For the nine months ended September 30, 2022, the Company recognized expense for matching cash contributions to the
401(k) Plan totaling $
NOTE 8 – RELATED PARTY TRANSACTIONS
On August 1, 2012, the Company entered into an
independent contractor master services agreement (the “Services Agreement”) with Luceon, LLC, a Florida limited
liability company, owned by our former Chief Technology Officer, David Ponevac. The Services Agreement provided that Luceon
would provide support services including management, coordination or software development services and related services to duos. In
January 2019, additional services were contracted with Luceon for TrueVue360™ primarily for software development through the
provision of seven additional full-time contractors located in Slovakia at a cost of $
NOTE 9 – SUBSEQUENT EVENTS
On October 29, 2022, the Company sold to an existing
investor in the Company and two other accredited investors in a private placement a further
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This quarterly report on Form 10-Q and other reports filed by Duos Technologies Group, Inc. (the “Company”), and its operating subsidiaries, Duos Technologies, Inc. (“Duos”) and TrueVue360, Inc (“TrueVue360”, Duos Technologies Group, Inc. and Duos, collectively the “Company” “we”, “our”, and “us”) from time to time with the Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” “aim,” “project,” “target,” “will,” “may,” “should,” “forecast” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements typically address the Company’s expected future business and financial performance and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ materially from those anticipated, believed, estimated, expected, intended, or planned.
These factors include, but are not limited to, risks related to the Company’s ability to continue as a going concern, the Company’s ability to generate sufficient cash to continue and expand operations, the competitive environment generally and in the Company’s specific market areas, changes in technology, the availability of and the terms of financing, changes in costs and availability of goods and services, economic conditions in general and in the Company’s specific market areas, changes in federal, state and/or local government laws and regulations potentially affecting the use of the Company’s technology, changes in operating strategy or development plans and the ability to attract and retain qualified personnel. The Company cautions that the foregoing list of risks, uncertainties and factors is not exclusive. Additional information concerning these and other risk factors is contained in the Company’s most recently filed Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, and other filings filed by the Company with the SEC, which are available at the SEC’s website, http://www.sec.gov. The Company believes its plans, intentions and expectations reflected in or suggested by these forward-looking statements are based on reasonable assumptions. No assurance, however, can be given that the Company will achieve or realize these plans, intentions or expectations. Indeed, it is likely that some of the Company’s assumptions may prove to be incorrect. The Company’s actual results and financial position may vary from those projected or implied in the forward-looking statements and the variances may be material. Each forward-looking statement speaks only as of the date of the particular statement. We do not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any forward-looking statement is based, except as required by law. All subsequent written and oral forward-looking statements concerning the Company or other matters attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
Duos Technologies Group, Inc. (the “Company”) was incorporated in Florida on May 31, 1994 under the original name of Information Systems Associates, Inc. Initially, our business operations consisted of consulting services for asset management of large corporate data centers and the development and licensing of information technology (“IT”) asset management software. In late 2014, the Company entered negotiations with Duos Technologies, Inc. (“Duos”), for the purposes of executing a reverse triangular merger. This transaction was completed on April 1, 2015, whereby Duos became a wholly owned subsidiary of the Company. Duos was incorporated under the laws of Florida on November 30, 1990 for design, development and deployment of proprietary technology applications and turn-key engineered systems. The Company, based in Jacksonville, Florida, has a current staff of 75 people of which 69 are full time and is a technology and software applications company with a strong portfolio of intellectual property. The Company’s core competencies, including advanced intelligent technologies, are delivered through its proprietary integrated enterprise command and control platform, Centraco®.
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The Company has developed the Rail Inspection Portal (“RIP”) which provides both freight and transit railroad customers and select government agencies the ability to conduct fully remote railcar inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies, illumination and other sensors, scans each passing railcar to create a high-resolution image set from a variety of angles including the undercarriage. These images are then processed through various methods of artificial intelligence algorithms to identify specific defects and/or areas of interest on each railcar. This is all accomplished within seconds of a railcar passing through our portal. We believe this solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The Company has deployed this system with several Class 1 railroad customers and anticipates an increased demand from transit and other railroad customers along with selected government agencies that operate and/or manage rail traffic in the future. Government agencies can conduct digital inspections combined with the incorporated artificial intelligence (“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 gatehouse operations where transport 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 significantly 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 for 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 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 previously 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 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.
Prospects and Outlook
The Company’s focus is to improve operational and technical execution which, we believe, will in turn enable the commercial side of the business to expand RIP and ALIS delivery into existing customers and to expand and diversify our current customer base. Even though COVID-19 is expected to still be an issue during the remainder of 2022, the Company’s primary customers have indicated readiness to order more equipment and services should the Company execute as expected on key deliverables.
Additionally, the Company is making engineering and software upgrades to the RIP to meet anticipated Federal Railroad Association (FRA) and Association of American Railroad (AAR) standards. Similar upgrades are also being developed to improve the ALIS system. These upgrades will continue to be released throughout 2022 and are expected to drive revenue growth this year and beyond.
The Company is expanding its focus in the rail industry to encompass passenger transportation and was awarded a large, multi-year contract with a national rail carrier. The Company anticipates that it will manufacture a two-RIP solution for the carrier in 2022 and, along with a long-term services agreement complete delivery during the second quarter of 2023.
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Although the Company’s prospects and outlook are anticipated to be favorable for the remainder of 2022, investing in our securities involves risk and careful consideration should be made before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control and unexpected macro events can have a severe impact on the business. Please see the risk factors identified in “Item 1A – Risk Factors” of our Annual Report on Form 10-K filed with the SEC on March 31, 2022.
Results of Operations
The following discussion should be read in conjunction with the unaudited financial statements included in this report.
Comparison for the Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table sets forth a summary of our unaudited Consolidated Statements of Operations and is used in the following discussions of our results of operations:
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | 4,022,238 | $ | 1,740,457 | ||||
| Cost of revenues | 2,922,686 | 1,668,796 | ||||||
| Gross margin | 1,099,552 | 71,661 | ||||||
| Operating expenses | 2,968,570 | 2,518,154 | ||||||
| Loss from operations | (1,869,018 | ) | (2,446,493 | ) | ||||
| Other income (expense) | (56,050 | ) | (3,944 | ) | ||||
| Net loss | $ | (1,925,068 | ) | $ | (2,450,437 | ) | ||
Revenues
| For the Three Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenues: | ||||||||||||
| Technology systems | $ | 2,709,899 | $ | 1,153,150 | 135 | % | ||||||
| Services and consulting | 1,312,339 | 587,307 | 123 | % | ||||||||
| Total revenues | $ | 4,022,238 | $ | 1,740,457 | 131 | % | ||||||
The substantial increase in overall revenues for the quarter ended September 30, 2022 compared to the quarter ended September 30, 2021, is primarily related to the production and start of installation of new and upgraded RIPs which are recorded in the technology systems portion of our business. We expect this trend to continue for the rest of 2022 and into 2023, although supply chain issues continue to extend deadlines for shipment of key components used in our technology systems. While certain orders were delayed from 2021 into 2022, we remain encouraged by the breadth and scope of recent bids in which we have participated. Management cautions that because of the delays in anticipated start dates, certain installations may produce revenues towards the end of 2022, some of which may ultimately be recorded in 2023. Additionally, although the industries in which we operate are showing early signs of recovery from the delays as a result of the COVID-19 pandemic, other macro-economic effects are anticipated to impact us, including inflation and the aforementioned supply chain issues. The effect of this will be to push some revenue recognition later into the fourth quarter of 2022 or into 2023. The effects of inflation are not quantifiable at the current time but are now evident in increased costs for materials and labor. These effects may result in higher costs for project implementation that cannot be partially or in some cases, wholly passed on to our customers and thus resulting in delaying our progress towards profitability.
We believe the Company’s capital structure allows us to weather the unexpected delays without significant operational impact and enables us to pursue large projects requiring the ability to deploy major resources. It should be noted that the Company increased its liquidity in early 2022 to account for an increase in pre-contract procurement activities to avoid a slowdown in revenues caused by delays in receiving certain components. The Company continues to review operations during 2022 and adjust staffing in concert with the business demands with a particular focus on Artificial Intelligence research, development and production. Although the Company implemented a “rapid development” initiative in early 2021, which was intended to enable the Company to respond to market driven demand more quickly, this effort has been somewhat negated by ongoing supply chain issues. This effort was expected to shorten delivery times on major projects and result in significant revenue growth however, the previously discussed supply chain issues continue to slow the anticipated benefits at this time. The Company is monitoring the situation and continues to procure materials ahead of formal contract award.
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The growth of the services portion of revenues are driven by the successful completion of projects and represent services and support for those installations. The Company expects growth with new revenue from existing customers, including services revenue as the result of new maintenance contracts being established on installations coming on-line during 2022 and into 2023. The Company also anticipates renewals of existing and backlog contracts and a shift to the next generation of technology systems which are currently being installed.
Cost of Revenues
| For the Three Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Cost of revenues: | ||||||||||||
| Technology systems | $ | 2,176,761 | $ | 1,363,127 | 60 | % | ||||||
| Services and consulting | 745,925 | 305,669 | 144 | % | ||||||||
| Total cost of revenues | $ | 2,922,686 | $ | 1,668,796 | 75 | % | ||||||
Cost of revenues largely comprises equipment and labor necessary to support the implementation of new systems and support and maintenance of existing systems and software projects.
Cost of revenues on technology systems increased during the three months ended September 30, 2022 over the equivalent period in 2021, in a manner consistent with the increase in revenues and as a result of additional project works ongoing for the Company. In the third quarter of 2022, the Company was nearly complete in the manufacture and installation of two Rail Inspection Portals for its Class 1 customers and began to phase into the procurement and manufacture of two more expensive and more robust transit-oriented RIPs. By comparison, for the quarter ended September 2021, the Company had activity related to two site upgrades which had only begun to be manufactured thereby contributing to the increase in cost of revenues year-over-year. The Company also continues to face headwinds with supply disruption and cost. While we expect that macro-economic factors will continue to drive prices, the Company expects its structural realignment to eventually aid in lowering costs as a percentage of the overall system price going forward although inflation may impede this effort. As previously noted, the Company’s organization and related cost structure was realigned to provide the capability to manufacture, install and support multiple production systems simultaneously. In accordance with this shift in structure, certain staff were re-assigned or replaced, and new staff added in key areas, particularly engineering, software development and AI.
In conjunction with these organizational changes, increased costs are now being recognized against project and support revenues. While there is a continued focus on construction costs and savings through efficiency, the Company elected to expand its key employees in 2021 and early 2022 in anticipation of expected sales growth in technology systems and services which is now being realized. We also expect these changes to have a positive long-term impact as we believe they will enable the Company to deliver a higher number of systems in a given period, with a shorter period of implementation and with better quality and reliability, as operations become standardized in anticipation of expected higher demand for systems, particularly in the rail industry.
Cost of revenues on services and consulting increased in the three months ended September 30, 2022 compared to the prior year period with the change primarily driven by costs associated with one-time services completed in the third quarter of 2022 and follows a similar trend to the year-over-year change in services and consulting revenues for the third quarter. When comparing the third quarter of 2022 and the equivalent period in 2021, an overall positive trend on service and consulting revenue is expected to continue as the Company anticipates that an increasing amount of the revenue will be derived from recurring revenue and services and consulting follow a similar trend as the change in revenue. Costs of revenues on services and consulting are expected to increase in future years concurrent with the increase in revenues albeit at a slower rate. The Company focused on streamlining support operations in 2021, and despite the additional resources allocated to these activities in anticipation of higher recurring revenue in 2022 and beyond, we expect higher gross margins as the Company grows.
As discussed previously, the impact of inflation may negatively affect the costs of revenues such that we may experience higher costs for materials and labor, including higher employee and sub-contractor costs that cannot be passed along in all cases. Management is continuing to monitor this situation and expects to take actions as the full impact of these cost increases is understood. This may take the form of higher prices and continued evaluation of costs to attempt to reduce the overall costs to offset the additional expenses, although this is not assured.
Gross Margin
| For the Three Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenues | $ | 4,022,238 | $ | 1,740,457 | 131 | % | ||||||
| Cost of revenues | 2,922,686 | 1,668,796 | 75 | % | ||||||||
| Gross margin | $ | 1,099,552 | $ | 71,661 | 1,434 | % | ||||||
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Gross margin showed a significant improvement for the third quarter of 2022 as compared to the same period in 2021. As noted above, the improvement in margin was a direct result of increased business activity the Company, recognized in the third quarter of 2022 related to the manufacturing and near completion of installation in the delivery of two Rail Inspection Portals and one-time major site services for one customer. The Company began to recognize revenue and profit on those activities in conformity with its revenue recognition policy. The recognition of the revenue and subsequent profit from these major projects yielded the higher gross margins of approximately 25% for the period. By comparison to the third quarter of 2021, the Company had only initiated procurement and some manufacturing for site upgrades for a customer and as a result recognized no profit on the works of approximately $1 million resulting in a dilutive, low margin for the period ended September 30, 2021 bolstered by the services and consulting gross margin for the quarter. It should be noted that when comparing the results between two periods, the stage of completion for manufacturing and installation can factor into those comparisons and should be taken into account when analyzing those periods.
Operating Expenses
| For the Three Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | $ | 297,057 | $ | 361,820 | -18 | % | ||||||
| Research and development | 329,424 | 332,469 | -1 | % | ||||||||
| General and administration | 2,342,089 | 1,823,865 | 28 | % | ||||||||
| Total operating expenses | $ | 2,968,570 | $ | 2,518,154 | 18 | % | ||||||
Overall operating expenses during the three months ended September 30, 2022 were marginally higher compared to the equivalent period in 2021. The Company saw only slight decreases in cost for sales and marketing and research and development with a larger increase in general and administration costs during the same period for 2022 partially attributable to the Company’s new office space and non-cash compensation for staff. Overall, the Company continues to focus on stabilizing operating expenses while meeting the increased needs of our customers.
Loss from Operations
The loss from operations for the three months ended September 30, 2022 and 2021 was $1,869,018 and $2,446,493, respectively. The decrease in loss from operations was primarily the result of higher revenues recorded in the quarter resulting from increases in both our technology systems and services and consulting, slower growth in costs of those revenues and flat operating expenses.
Other Income/Expense
Other income for the three months ended September 30, 2022 was a negative $53,993 and $875 for the comparative period in 2021. Other expense for the three months ended September 30, 2022 was $2,057 and $4,819 for the comparative period in 2021.
Net Loss
The net loss for the three months ended September 30, 2022 and 2021 was $1,925,068 and $2,450,437, respectively. The 21% decrease in net loss was mostly attributed to the increase in revenues as described above along with slower growing expenses. Net loss per common share was $0.30 and $0.68 for the three months ended September 30, 2022 and 2021, respectively.
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Comparison for the Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The following table sets forth a summary of our unaudited Consolidated Statements of Operations and is used in the following discussions of our results of operations:
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | 9,078,696 | $ | 4,543,879 | ||||
| Cost of revenues | 6,474,464 | 4,239,006 | ||||||
| Gross margin | 2,604,232 | 304,873 | ||||||
| Operating expenses | 8,509,343 | 7,522,134 | ||||||
| Loss from operations | (5,905,111 | ) | (7,217,261 | ) | ||||
| Other income (expense) | (7,245 | ) | 1,407,921 | |||||
| Net loss | $ | (5,912,356 | ) | $ | (5,809,340 | ) | ||
Revenues
| For the Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenues: | ||||||||||||
| Technology systems | $ | 6,273,213 | $ | 2,743,849 | 129 | % | ||||||
| Services and consulting | 2,805,483 | 1,800,030 | 56 | % | ||||||||
| Total revenues | $ | 9,078,696 | $ | 4,543,879 | 100 | % | ||||||
The increase in overall revenues for the nine months ended September 30, 2022 is primarily related to the previously discussed start of production and new installations in the technology systems portion of our business and continuing increases in our services and consulting revenues. The Third quarter of 2022 marked the near completion of two RIP’s as well as work towards a larger $8 million project to be delivered across 2022 and into 2023. The Company also recognized in the first half of 2022 a number of change orders tied to transit projects which were not present when compared to the same period in 2021.
We believe the Company’s capital structure allows us to weather the unexpected delays without significant operational impact and enables us to pursue large projects requiring the ability to deploy major resources. As previously discussed, the Company increased its working capital in early 2022 to account for an increase in pre-contract procurement activities to avoid a slowdown in revenues caused by delays in receiving certain components.
The services portion of revenues is driven by the successful completion of projects and represents services and support for those installations. The Company expects growth with new revenue from existing customers, including services revenue as the result of new maintenance, artificial intelligence and subscription contracts being established on installations coming on-line during 2022. The Company also anticipates renewals of existing contracts and a shift to the next generation of technology systems which are currently being installed.
Cost of Revenues
| For the Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Cost of revenues: | ||||||||||||
| Technology systems | $ | 5,016,551 | $ | 3,162,866 | 59 | % | ||||||
| Services and consulting | 1,457,913 | 1,076,140 | 35 | % | ||||||||
| Total cost of revenues | $ | 6,474,464 | $ | 4,239,006 | 53 | % | ||||||
Cost of revenues largely comprises equipment, labor and overhead necessary to support the implementation of new systems and support and maintenance of existing systems.
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Cost of revenues on technology systems increased during the nine months ended September 30, 2022 compared to the equivalent period in 2021, which is consistent with the change in revenue over the same period albeit cost of revenues grew at a slower rate. The higher level of cost was mainly due to higher costs related to higher revenues from two RIP projects as well as the larger transit-focused RIPs noted above. By comparison, the Company had a reduced level of activity for the same period in 2021 with cost of revenues on technology systems primarily driven by two site upgrades as well as delayed costs from 2020 projects. Additionally, through September 30, 2021 the Company had not fully recognized project costs nor progressed through manufacturing to the same levels it has for the first nine months of 2022. Across the year, the Company has continued to see impacts from supply chain disruptions and inflation on cost of revenues and worked to mitigate this where feasible. Services and consulting costs rose for the nine months ended September 30, 2022 over the same period in 2021 in part due to one-time repairs and upgrade services to a number of customer systems and is offset by increased service and consulting revenue. While we expect that macro-economic factors will continue to drive prices, the Company expects its structural realignment to aid in lowering costs as a percentage of the overall system price going forward by leveraging internal skillsets rather than those of a third party some of which contribute to the increased services and consulting on a year-over-year comparison. As previously noted, the Company’s organization and related cost structure were realigned to provide the capability to manufacture, install and support multiple production systems simultaneously. In accordance with this shift in structure, certain staff were re-assigned or replaced, and new staff added in key areas, particularly engineering, software development and AI.
In conjunction with these organizational changes, increased costs are now being recognized against project and support revenues. While there is a continued focus on construction costs and savings through efficiency, the Company has elected to expand its key employees in 2021 and early 2022 in anticipation of expected sales growth in technology systems and services. We also expect these changes to have a positive long-term impact as we believe they will enable the Company to deliver a higher number of systems in a given period, with a shorter period of implementation and with better quality and reliability.
Cost of revenues on services and consulting increased in the nine months ended September 30, 2022 compared to the prior year period in-line with the increase in revenues from services and consulting for the current year period as compared to the prior year period. Cost of revenues on services and consulting grew at a lower rate than that of the service and consulting revenues with both changes largely driven by a one-time service event for one customer. This overall positive trend on service and consulting revenue is expected to continue as the Company continues to drive more recurring revenue. Costs of revenues on services and consulting are expected to increase in future periods but at a slower rate than revenue growth. The Company focused on streamlining support operations in 2021, and despite the additional resources allocated to these activities in anticipation of higher recurring revenue in 2022 and beyond, we expect higher gross margins as the Company grows.
As discussed previously, the impact of inflation may negatively affect the costs of revenues such that we may experience higher costs for materials and labor, including higher employee and sub-contractor costs that cannot be passed along in all cases. Management is continuing to monitor this situation and expects to take actions as the full impact of these cost increases is understood. This may take the form of higher prices and continued evaluation of costs to attempt to reduce the overall costs to offset the additional expenses, although this is not assured.
Gross Margin
| For the Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenues | $ | 9,078,696 | $ | 4,543,879 | 100 | % | ||||||
| Cost of revenues | 6,474,464 | 4,239,006 | 53 | % | ||||||||
| Gross margin | $ | 2,604,232 | $ | 304,873 | 754 | % | ||||||
As previously discussed, the Company has revamped its operations to support an anticipated increase in the number of new systems going forward. The resultant additional cost of revenues was covered by a greater increase in revenues during the first nine months of 2022. We continue to anticipate continued improvement in the overall gross margin for the full year of 2022, with much of the improvement beginning in the third quarter and carrying into the fourth quarter as a result of increased commercial and manufacturing activity. The improvement in gross margin for the nine months ended September 30, 2022 is a result of the Company’s efforts to deliver two Rail Inspection Portals to existing customers, which are now largely complete, and in accordance with the Company’s revenue recognition policy, have begun to recognize higher revenue and profit on these projects. Additionally, the Company has realized profits in the first half of 2022 related to change orders tied to a larger transit-oriented RIP project. By comparison to the nine months ended September 30, 2021, the Company had minimal project work with approximately $1 million of revenue recognized with no profit in-line with its revenue recognition policy as the Company was in the early stages of manufacturing and delivery of the projects and the profits were ultimately realized in the fourth quarter of 2021. This, in addition to some delayed costs for the completion of a 2020 project created a depressive effect on gross margins for the first nine months of 2021 especially when compared to the same period in 2022.
The Company continued to face challenges with inflation and supply chain disruption across the first nine months of 2022. Despite these challenges, the Company’s organizational changes noted above have helped to alleviate some of these challenges. However, management continues to monitor the impacts of inflation on the Company’s cost of revenues going forward and mitigate where possible in the form of higher system prices and evaluation of alternatives. As previously discussed, when comparing the results between two periods, the stage of completion for manufacturing and installation can factor int those comparisons and should be taken into account when analyzing the results for those periods.
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Operating Expenses
| For the Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | $ | 956,937 | $ | 1,024,872 | -7 | % | ||||||
| Research and development | 1,296,480 | 1,163,341 | 11 | % | ||||||||
| General and administration | 6,255,926 | 5,333,921 | 17 | % | ||||||||
| Total operating expenses | $ | 8,509,343 | $ | 7,522,134 | 13 | % | ||||||
Overall operating expenses during the nine months ended September 30, 2022 increased by 13% compared to the equivalent period in 2021. While sales and marketing were down slightly, research and development costs and general and administration costs increased by 11% and 17% respectively, although some of the increased administration costs were related to non-cash compensation for certain staff members and new office space. The overall increase in operating expense is primarily related to the growing business and the effects of inflation on salaries and general overhead. At the current time, we continue to expect overall costs to grow due to macro-economic factors in addition to organic growth costs increasing related to the business. Where possible, the Company continues to focus on stabilizing operating expenses while meeting the increase needs of our customers.
Loss from Operations
The loss from operations for the nine months ended September 30, 2022 and 2021 was $5,905,111 and $7,217,261, respectively. The decrease in losses from operations was primarily the result of higher revenues recorded in the period as a consequence of the start of new projects and receipt of materials for production and initiation of manufacturing and installation. A positive trend was the higher revenue recorded without a corresponding greater relative cost of sales even with higher costs of materials resulting from supply chain disruptions and inflation.
Other Income/Expense
Other expense for the nine months ended September 30, 2022 was $7,245 compared to other income of $1,407,921 in the comparative period of 2021. The change is primarily due to the one-time event of the PPP loan forgiveness recorded in the first quarter of 2021.
Net Loss
The net loss for the nine months ended September 30, 2022 and 2021 was $5,912,356 and $5,809,340, respectively. The increase in net loss was mostly attributed to the lower revenues and higher costs in 2021 being offset by the one-time PPP loan forgiveness recorded in the first quarter of 2021 as other income. Net loss per common share was $1.01 and $1.63 for the nine months ended September 30, 2022, and 2021, respectively.
Liquidity and Capital Resources
As of September 30, 2022, the Company has a working capital surplus of $2,723,497 as compared to a negative working capital of $651,381 and a net loss of $6,008,901 at December 31, 2021.
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (3,850,455 | ) | $ | (5,522,668 | ) | ||
| Net cash used in investing activities | (416,517 | ) | (310,776 | ) | ||||
| Net cash provided by financing activities | 8,338,718 | 4,122,315 | ||||||
| Net increase (decrease) in cash | $ | 4,071,746 | $ | (1,711,129 | ) | |||
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Net cash used in operating activities for the nine months ended September 30, 2022 and 2021 was $3,850,455 and $5,522,668, respectively. The decrease in net cash used in operations for the nine months ended September 30, 2022 was the result of cash inflows from new projects offset by cash outflows to procure necessary materials and overall sales, general and administrative expenses. In addition, there are several changes in assets and liabilities compared to the previous period that decreased the use of cash in operations, notably the change in contract liabilities due to the timing of project invoicing milestones and cash receipts.
Net cash used in investing activities for the nine months ended September 30, 2022 and 2021 was $416,517 and $310,776, respectively, representing an increase in the purchase of various fixed assets for computer equipment and product and software development.
Net cash provided by financing activities for the nine months ended September 30, 2022, and 2021 was $8,338,718 and $4,122,315, respectively. Cash flows provided by financing activities during the first nine months of 2022 were primarily attributable to net proceeds of approximately $8,500,000 from issuances of common stock and $999,000 from the issuance of Series D Convertible Preferred Stock. Cash flows from financing activities during the first nine months of 2021 were primarily attributable to the issuance of Series C Convertible Preferred Stock for $4,500,000.
During 2022, we funded our operations through the sale of our equity (or equity linked) securities, and through revenues generated and cash received from ongoing project execution, services, and associated maintenance revenues. As of November 8, 2022, we have cash on hand of approximately $4,500,000. We have approximately $165,500 in monthly lease and other mandatory payments, not including payroll and ordinary expenses which are due monthly.
On a long-term basis, our liquidity is dependent on continuation and expansion of operations and receipt of revenues. We believe our current capital and revenues are sufficient to fund such expansion and our operations over the next twelve months, although we are dependent on timely payments by our customers for projects and work in process. However, we expect such timely payments to continue. Material cash requirements will be satisfied within the normal course of business including substantial upfront payments from our customers prior to starting projects. In some limited cases, the Company may elect to purchase materials and supplies in advance of contract award but where there is a high probability of that award.
Demand for our products and services will be dependent on, among other things, market acceptance of our products and services, the technology market in general, and general economic conditions, which are cyclical in nature. Because a major portion of our activities is the receipt of revenues from the sales of our products and services, our business operations may continue to be challenged by our competitors and prolonged recession periods.
Liquidity
Under Accounting Standards Update, or ASU, 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.
As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $5,912,356 for the nine months ended September 30, 2022. During the same period, net cash used in operating activities was $3,850,455. The working capital surplus and accumulated deficit as of September 30, 2022 were $2,723,497 and $51,409,407, respectively. In previous financial reports, the Company had raised substantial doubt about continuing as a going concern. This was principally due to a lack of working capital prior to an underwritten offering receiving net proceeds of approximately $5,500,000 from the successful sales of common stock which was completed during the first quarter of 2022 (the “Q1 2022 Offering”) followed by approximately $3,200,000 in net proceeds for a combination offering of common stock and Preferred Series D Convertible Stock (the “Q3 2022 Offering”).
As previously noted, in 2021, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock.
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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 the current 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 eventually attain consistently profitable operations. Although the current global pandemic related to the coronavirus (COVID-19) has affected our operations, particularly in our supply chain, we now believe that this is expected to be an ongoing issue and our working capital assumptions reflect this new reality. In addition, inflationary pressures will cause some pressure on margins which the Company expects to offset by higher prices, although this is not assured. The Company also cannot currently quantify the uncertainty or impact related to the recession that has now been confirmed by broadly accepted economic standards and the 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.
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 a $8,750,000 injection of funds from sales of securities, significant recent orders, and the overall stabilization of the business, indicate that there is not a substantial doubt for the Company to continue as a going concern for a period of twelve months from the issuance of this report. We continue executing the plan to grow our business and 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 twelve months from the issuance date of this report and has determined that the Company currently has sufficient cash to operate for at least that period.
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
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.
Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding a 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.
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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.
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 revenue from four sources: (1) Technology Systems; (2) AI Technologies; (3) Technical Support and (4) Consulting Services.
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.
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.
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.
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.
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The Company’s consulting services business generates revenues under contracts with customers from four sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; (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 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.
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 inventory, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
With the participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Report. Based upon such evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or our Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Other Information.
On November 14, 2022, the Company announced the retirement of Adrian Goldfarb as Chief Financial Officer effective November 15, 2022. Mr. Goldfarb will remain as a strategic advisor to the Company reporting to Charles Ferry, our Chief Executive Officer.
The Company also announced the appointment of Andrew W. Murphy as the new Chief Financial Officer effective November 15, 2022. Mr. Murphy has served as Vice President, FP&A of the Company since November 2020, in which position he initially served on the commercial team to support new project bids while also further building out the Company’s corporate finance strategy.
Mr. Murphy, age 39, has over 16 years of progressive business experience in accounting and finance including nearly five years of public company experience for a London Stock Exchange-based company. He joined Duos Technologies, Inc. in 2020 where he served on the Commercial team to support new project bids while also building out the Finance function. Prior to joining Duos, from 2011 to 2020 Mr. Murphy held progressive senior Finance roles within APR Energy, a global fast-track power and asset management company formerly listed on the London Stock Exchange (LSE). In these roles Mr. Murphy oversaw the pricing & risk management efforts for more than $800 million in new business and asset transactions across the globe. Additionally, he was also responsible for managing the FP&A function as well as supporting M&A activity and the investor relations function during APR Energy’s time on the LSE. Prior to his time with APR, Mr. Murphy served in corporate accounting roles within a Fortune 500 company as well as time working in public accounting with a focus on tax and business services.
Mr. Murphy graduated from Jacksonville University “cum laude” with a business degree in Accounting and later received his Master’s degree in Business Administration with a focus in Finance.
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There are no family relationships between Mr. Murphy and any director or executive officer of the Company or its subsidiaries. Mr. Murphy's annual salary is $212,000. He is not a party to any employment agreement or other compensatory arrangement with the Company other than his eligibility for participation in such employee benefits as are provided by the Company to all employees. There also are no transactions to which the Company is or was a participant in which Mr. Murphy has a material interest subject to disclosure under Item 404(a) of Regulation S-K.
Item 6. Exhibits.
| Exhibit No. | Description | |
| 31.1* | Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). | |
| 31.2* | Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). | |
| 32.1** | Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2** | Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
DUOS TECHNOLOGIES GROUP, INC.
| ||
| Date: November 14, 2022 | By: | /s/ Charles P. Ferry |
|
Charles P. Ferry Chief Executive Officer | ||
| Date: November 14, 2022 | By: | /s/ Adrian G. Goldfarb |
|
Adrian G. Goldfarb Chief Financial Officer | ||
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