See accompanying condensed notes to the unaudited
consolidated financial statements.
See accompanying condensed notes to the unaudited
consolidated financial statements.
See accompanying condensed notes to the unaudited
consolidated financial statements.
See accompanying condensed notes to the unaudited
consolidated financial statements.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2021
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS, BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Duos Technologies Group, Inc. (the “Company”),
through its operating subsidiaries, Duos Technologies, Inc. and TrueVue360, Inc. (collectively the “Company”), develops and
deploys vision based analytical technology solutions that will help to transform precision railroading, logistics and inter-modal transportation
operations. Additionally, these unique patented solutions can be employed into many other industries.
The Company has developed the Railcar Inspection Portal
(RIP) that provides both freight and transit railroad customers and select government agencies the ability to conduct fully automated
inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies, illumination
and other sensors, scans each passing railcar to create an extremely high-resolution image set from a variety of angles including the
undercarriage. These images are then processed through various methods of artificial intelligence (“AI”) algorithms to identify
specific defects and/or areas of interest on each railcar. This is all accomplished within minutes of a railcar passing through our portal.
This solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The
Company has successfully deployed this system with several Class 1 railroad customers and anticipates an increased demand in the future.
Government agencies can conduct digital inspections combined with the incorporated AI to improve rail traffic flow across borders which
also directly benefits the Class 1 railroads through increasing their velocity.
The Company has also developed the Automated Logistics
Information System (ALIS) which automates and reduces/removes personnel from gatehouses where trucks enter and exit large logistics and
intermodal facilities. This solution also incorporates sensors and data points as necessary for each operation and directly interconnects
with backend logistics databases and processes to streamline operations and significantly improve operations and security and importantly
dramatically improves the vehicle throughput on each lane on which the technology is deployed.
The Company has built a portfolio of IP and patented
solutions that creates “actionable intelligence” using two core native platforms called Centraco® and Praesidium™.
All solutions provided include a variant of both applications. Centraco is designed primarily as the user interface to all our systems
as well as the backend connection to third-party applications and databases through both Application Programming Interfaces (APIs) and
Software Development Kits (SDKs). This interface is browser based and hosted within each one of our systems and solutions. It is typically
also customized for each unique customer and application. Praesidium typically resides as middleware in our systems and manages the various
image capture devices and some sensors for input into the Centraco software.
The Company also developed a proprietary Artificial
Intelligence (AI) software platform, Truevue360™ with the objective of focusing the Company’s advanced intelligent technologies
in the areas of AI, deep machine learning and advanced multi-layered algorithms to further support our solutions. The Company also offers
technical support services for the above products.
The Company also provided professional and consulting
services for large data centers and had developed a system for the automation of asset information marketed as DcVue™. The Company
had deployed its DcVue software at one beta site. This software was used by Duos’ consulting auditing teams. DcVue was based upon
the Company’s OSPI patent which was awarded in 2010. The Company offered DcVue available for license to our customers as a licensed
software product. The Company ceased offering this product in 2021.
The Company’s strategy is to deliver operational
and technical excellence to our customers, expand our RIP and ALIS solutions into current and new customers focused in the Rail, Logistics
and U.S. Government Sectors, offer both CAPEX and OPEX pricing models to customers that increases recurring revenue, grows backlog and
improves profitability, responsibly grow the business both organically and through selective acquisitions, and promote a performance-based
work force where employees enjoy their work and are incentivized to excel and remain with the Company.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 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 three months
ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any
other future period. These unaudited consolidated financial statements and the unaudited condensed notes thereto should be read in conjunction
with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022.
Reclassifications
The Company reclassified certain expenses for the
three months ended March 31, 2021 to conform to 2022 classification. There was no net effect on the total expenses of such reclassification.
The following tables reflect the reclassification
adjustment effect in the three months ended March 31, 2021:
Schedule of Reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
Before Reclassification |
|
|
|
|
After Reclassification |
|
|
|
For the |
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
|
March 31, |
|
|
|
2021 |
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
REVENUES: |
|
|
|
|
Technology systems |
|
$ |
1,490,298 |
|
|
Technology systems |
|
$ |
1,490,298 |
|
Services and consulting |
|
|
664,456 |
|
|
Services and consulting |
|
|
664,456 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
2,154,754 |
|
|
Total Revenue |
|
|
2,154,754 |
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
Technology systems |
|
|
1,895,485 |
|
|
Technology systems |
|
|
1,293,608 |
|
Services and consulting |
|
|
331,384 |
|
|
Services and consulting |
|
|
358,172 |
|
Overhead |
|
|
503,593 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
|
2,730,462 |
|
|
Total Cost of Revenues |
|
|
1,651,780 |
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN |
|
|
(575,708) |
|
|
GROSS MARGIN |
|
|
502,974 |
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
Sales and marketing |
|
|
311,801 |
|
|
Sales and marketing |
|
|
311,801 |
|
Research and development |
|
|
61,033 |
|
|
Research and development |
|
|
359,127 |
|
General and administration |
|
|
873,758 |
|
|
General and administration |
|
|
1,654,346 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
1,246,592 |
|
|
Total Operating Expenses |
|
|
2,325,274 |
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
$ |
(1,822,300 |
) |
|
LOSS FROM OPERATIONS |
|
$ |
(1,822,300 |
) |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
Principles of Consolidation
The unaudited consolidated financial statements include
Duos Technologies Group, Inc. and its wholly owned subsidiaries, Duos Technologies, Inc and TrueVue360. Inc. All inter-company transactions
and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these
estimates. The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts
receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues
and the total estimated costs to determine progress towards contract completion, estimates of the valuation of right of use assets and
corresponding lease liabilities, valuation of warrants issued with debt and valuation of stock-based awards. We base our estimates on
historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and at
times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of March 31, 2022,
the balance in one financial institution exceeded federally insured limits by approximately $4,827,300.
Significant Customers and Concentration of Credit Risk
The Company had certain customers
whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually
represented 10% or more of the Company’s total accounts receivable, as follows:
For the three months ended March 31, 2022, four customers
accounted for 24% (“Customer 2”), 35% (“Customer 1”), 13% (“Customer 3”) and 11% (“Customer
4”) of revenues. For the three months ended March 31, 2021, one customer accounted for 79% (“Customer 2”) of revenues.
In all cases, there is no minimum contract value stated. Each contract covers an agreement to deliver a rail inspection portal which,
once accepted, must be paid in full with 30% or more being due and payable prior to delivery. The balances of the contracts are for service
and maintenance which is paid annually in advance with revenues recorded ratably over the contract period. Each of the customers referenced
has the following termination provisions:
|
· |
Customer 1, termination can be made, prior to delivery of products or services, in the case where either party breaches any of its obligations under the agreement between the parties. The other party may terminate the agreement effective 15 Business Days following notice from the non-defaulting party, if the non-performance has not been cured within such period, and without prejudice to damages that could be claimed by the non-defaulting party. Either party may terminate the agreement if the other party becomes unable to pay its debts in the ordinary course of business; goes into liquidation (other than for the purpose of a genuine amalgamation or restructuring); has a receiver appointed over all or part of its assets; enters into a composition or voluntary arrangement with its creditors; or any similar event occurs in any jurisdiction, all to the extent permitted by law. |
|
· |
For Customer 2, prior to delivery of products or services, either party may terminate the agreement between the parties upon the other party’s material breach of a representation, warranty, term, covenant or undertaking in the agreement if, within 30 days following the delivery of a written notice to the defaulting party setting forth in reasonable detail the basis of such default, the defaulting party has not rectified such default to the reasonable satisfaction of the non-defaulting party. Failure to perform due to a force majeure condition shall not be considered a material default under the agreement. |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
|
· |
For Customer 3, prior to delivery of products or services if the customer terminates the statement of work for convenience, no refund of any advance payments will be due to Customer 3. ln the event of a material breach by the Company, which breach is not cured, or cure has not begun within 30 days of written notice to the Company by Customer 3, Customer 3 may terminate this statement of work for cause. In the event of termination by Customer 3 for cause, the Company shall reimburse Customer 3 any unused prepaid fees on a pro rata basis. |
|
· |
For Customer 4, if the customer terminates this Agreement for convenience, no refund, of
any advance payments, will be due to Customer 4. In the event of a material breach by Duos, which breach is not cured, or cure has not
begun within 30 days of written notice to Duos by Customer 4, Customer 4 may terminate this Agreement for cause. In the event of termination
by Customer 4 for cause, Duos shall reimburse Customer any unused advanced payments or pre-paid fees on a pro rata basis. |
At March 31, 2022, three customers accounted for
45%, 32% and 17% of accounts receivable. At December 31, 2021, two customers accounted for 81% and 10%, of accounts receivable. Much
of the credit risk is mitigated since all of the customers listed here are Class 1 railroads or large government funded national railroad.
The Class 1 railroads have a multi-year history of timely payments to us.
Geographic Concentration
For the three months ended March 31, 2022, approximately
54% of revenue was generated from three customers outside of the United States. For the three months ended March 31, 2021, approximately
86% of revenue was generated from three customers outside of the United States. These customers are Canadian and Mexican, and two of the
three are Class 1 railroads operating in the United States.
Significant Vendors and Concentration of Credit
Risk
At March 31, 2022, three vendors accounted for 13%,
14% and 18% of accounts payable. At December 31, 2021, one vendor accounted for 14% of accounts payable.
Fair Value of Financial Instruments and Fair Value Measurements
The Company follows Accounting Standards Codification
(“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured
at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted
accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure
about such fair value measurements.
ASC 820 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs.
These inputs are prioritized below:
Level 1: |
Observable inputs such as quoted market prices in active markets
for identical assets or liabilities.
|
Level 2: |
Observable market-based inputs or unobservable inputs that are
corroborated by market data.
|
Level 3: |
Unobservable inputs for which there is little or no
market data, which require the use of the reporting entity’s own assumptions that the market participants would use in the valuation
of the asset or liability based on the best available information.
|
The Company analyzes all financial instruments with
features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard
for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
The estimated fair value of certain financial instruments,
including accounts receivable, prepaid expense, accounts payable, accrued expenses and notes payable are carried at historical cost basis,
which approximates their fair values because of the short-term nature of these instruments.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
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.
Earnings (Loss) Per Share
Basic earnings per share (EPS) are computed by dividing
net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is
computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period
and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares
issuable upon the exercise or conversion of stock options, stock warrants, convertible debt instruments, convertible preferred stock or
other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. At
March 31, 2022, there was an aggregate of 1,376,466 outstanding warrants to purchase shares of common stock. At March 31, 2022, there
were employee stock options to purchase an aggregate of 1,096,266 shares of common stock. Also, at March 31, 2022, 121,571 common shares
were issuable upon conversion of Series B convertible preferred stock all of which were excluded from the computation of dilutive earnings
per share because their inclusion would have been anti-dilutive.
Accounts Receivable
Accounts receivable are stated at estimated net realizable
value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining
the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances.
The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required
allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based
on how recently payments have been received from customers.
Revenue Recognition
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. |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
The Company generates revenues from four sources:
|
3. |
Technical Support; and |
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.
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.
The Company’s consulting services business generates
revenues under contracts with customers from three sources: (1) Professional Services (consulting and auditing); (2) Software licensing
with optional hardware sales; and (3) Customer service training and (4) Maintenance support.
|
(1) |
Revenues for professional services, which are of short-term duration, are recognized when services are completed; |
|
(2) |
For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer; |
|
(3) |
Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and |
|
(4) |
Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term. |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
Multiple Performance Obligations and Allocation
of Transaction Price
Arrangements with customers may involve multiple performance
obligations including project revenue and maintenance services in our Intelligent Technology Systems business. Maintenance will occur
after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business,
multiple performance obligations may include any of the above four sources. Training and maintenance on software products may occur after
the software product sale while other services may occur before or after the software product sale and may not relate to the software
product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each performance obligation is accounted for separately
when each has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable.
For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting
based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated,
the revenue for each performance obligations is recognized using the applicable criteria under GAAP as discussed above for performance
obligations sold in single performance obligation arrangements. A delivered item or items that do not qualify as a separate unit of accounting
within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement
consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company
sells its various services and software and hardware products at established prices on a standalone basis which provides Company specific
objective evidence of selling price for purposes of performance obligations relative selling price allocation. The Company only sells
maintenance services or spare parts based on its established rates after it has completed a system integration project for a customer.
The customer is not required to purchase maintenance services. All elements in multiple performance obligations arrangements with Company
customers qualify as separate units of account for revenue recognition purposes.
Segment Information
The Company operates in one reportable segment.
Stock-Based Compensation
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.
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock options
granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing
model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.
The Company estimates volatility based upon the historical
stock price of the Company and estimates the expected term for stock options using the simplified method for employees and directors and
the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities
with similar maturities.
Leases
The Company follows ASC 842 “Leases”.
This guidance requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities for most operating leases. In
addition, this guidance requires that lessors separate lease and non-lease components in a contract in accordance with the revenue guidance
in ASC 606.
The Company made an accounting policy election to
not recognize short-term leases with terms of twelve months or less on the balance sheet and instead recognize the lease payments in expense
as incurred. The Company has also elected to account for real estate leases that contain both lease and non-lease components as a single
lease component.
At the inception of a contract the Company assesses
whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of
a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout
the period, and (3) whether it has the right to direct the use of the asset.
Operating ROU assets represent the right to use the
leased asset for the lease term and operating lease liabilities are recognized based on the present value of minimum lease payments over
the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based
on the information available at the lease commencement date to determine the present value of future payments. The lease term includes
all periods covered by renewal and termination options where the Company is reasonably certain to exercise the renewal options or not
to exercise the termination options. Operating lease expense is recognized on a straight-line basis over the lease term and is included
in general and administrative expenses in the consolidated statements of operations.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
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. 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.
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.
NOTE 2 – LIQUIDITY
As reflected in the accompanying unaudited consolidated
financial statements, the Company had a net loss of $2,644,616 for the three months ended March 31, 2022. During the same period, cash
used in operating activities was $827,733. The working capital surplus and accumulated deficit as of March 31, 2022 were $2,540,856 and
$48,141,667, respectively. In one previous financial report during 2021, 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 common stock offering which was completed
during the first quarter of 2022 (the “2022 Offering”).
During the previous 15 months, the Company has raised
more than $10 million after fees and expenses, both from existing shareholders through the issuance of Series C Convertible Preferred
Stock and in the first quarter of 2022, a follow-on common stock offering using its previously filed “shelf” registration.
Although, further additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to
support expanded operations based on an anticipated increase in business activity. In the long run, the continuation of the Company as
a going concern is dependent upon the ability of the Company to continue executing the plan described above, generate enough revenue,
and eventually attain consistently profitable operations. Although the current global pandemic related to the coronavirus (COVID-19) has
affected our operations, particularly in supply chain, we now believe that this is expected to be an ongoing issue and our working capital
assumptions reflect this new reality. The Company cannot currently quantify the uncertainty related to the pandemic and its effects on
our customers in the coming quarters. We have analyzed our cash flow under “stress test” conditions and have determined that
we have sufficient liquid assets on hand to maintain operations for at least twelve months from the date of this report. A notable recent
success is the “bonding” secured in the amount of approximately $8 million for a major project for which the Company recently
received full “notice to proceed”.
The Company was successful in securing a loan of
$1,410,270 during the second quarter of 2020
from the Small Business Administration via the PPP/CARES Act program which further bolstered the Company’s cash reserves. This
loan was forgiven in the first quarter of 2021 and leaves the Company essentially debt free other than the normal course of business
equipment and insurance financing. The Company has also been successful in increasing its working capital surplus after receiving
proceeds from the 2021 Offering of $4,500,000 and more recently, in the first quarter of 2022, receiving net proceeds of
approximately $5,500,000
from the successful sales of common stock under the Company’s “shelf registration” statement as previously
mentioned. 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 business strategy overall. 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. Upon completion of the 2022 Offering, management has raised sufficient working capital to meet its needs for the next
12-months without the need to raise further capital. 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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
Management believes that, at this time, the conditions
in our market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding contract and
the additional time needed to execute on new contracts previously reported have put a strain on our cash reserves. However, recent events
including an approximate $5.5 million injection of funds from a sale of common stock, significant recent orders and the overall stabilization
of the business indicate that there is no longer substantial doubt for the Company to continue as a going concern for a period of twelve
months from the issuance of this report. We will continue executing the plan to grow our business and eventually achieve profitability
without the requirement to raise additional capital for existing operations for 2022 although we may do so to fund selective opportunities
that may arise. Management has extensively evaluated our requirements for the next 12 months and has determined that the Company currently
has sufficient cash to operate for at least that period.
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 March 31, 2022 and December 31, 2021:
Notes Payable - Financing Agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
December 31, 2021 |
|
Notes Payable |
|
Principal |
|
|
|
Interest |
|
Principal |
|
|
|
Interest |
|
Third Party - Insurance Note 1 |
|
$ |
16,349 |
|
|
|
7.75 |
% |
|
$ |
22,266 |
|
|
|
7.75 |
% |
|
Third Party - Insurance Note 2 |
|
|
— |
|
|
|
— |
|
|
|
12,667 |
|
|
|
6.24 |
% |
|
Third Party - Insurance Note 3 |
|
|
9,792 |
|
|
|
— |
|
|
|
17,570 |
|
|
|
— |
|
|
Third Party - Insurance Note 4 |
|
|
140,516 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
166,657 |
|
|
|
|
|
|
$ |
52,503 |
|
|
|
|
|
|
The Company entered into an agreement on December
23, 2021 with its insurance provider by issuing a $22,266 note payable (Insurance Note 1) for the purchase of an insurance policy, secured
by that policy with an annual interest rate of 7.75% payable in monthly installments of principal and interest totaling $2,104 through
November 23, 2022. The balance of Insurance Note 1 as of March 31, 2022 and December 31, 2021 was $16,349 and $22,266, respectively.
The Company entered into an agreement on April 15,
2021 with its insurance provider by issuing a note payable in the amount of $62,041, secured with an annual interest rate of 6.24% and
payable in 10 monthly installments of principal and interest totaling $6,383. At March 31, 2022 and December 31, 2021, the balance of
Insurance Note 2 was zero 0 and $12,667, respectively.
The Company entered into an agreement on September
15, 2021 with its insurance provider by issuing a note payable in the amount of $19,965 and payable in 10 monthly installments of $1,997.
At March 31, 2022 and December 31, 2021, the balance of Insurance Note 3 was $9,792 and $17,570, respectively.
The Company entered into an agreement on
February 3, 2021 with its insurance provider by issuing a note payable in the amount of $215,654
with a down payment paid in the amount of $37,000 on April 6, 2021 and ten monthly installments of $17,899.
The Company received a refund for the annual audit of the policy resulting in the refund being applied to the outstanding amount of
$35,787. The policy renewed on February 3, 2022 in the amount of $242,591 with a down payment paid in the amount of $41,854 and
payable in ten monthly installments of $20,074.
At March 31, 2022 and December 31, 2021, the balance of Insurance Note 4 was $140,516
and zero, 0 respectively.
Equipment Financing
The Company entered into an agreement on August 26,
2019 with an equipment financing company by issuing a $147,810 secured note, with an annual interest rate of 12.72% and payable in monthly
installments of principal and interest totaling $4,963 through August 1, 2022. The Company entered into an additional agreement on May
22, 2020 with the same equipment financing company by issuing a $121,637 secured note, with an annual interest rate of 9.90% and payable
in monthly installments of principal and interest totaling $3,919 through June 1, 2023. At March 31, 2022 and December 31, 2021, the balance
of these notes was $79,227 and $103,186, respectively.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
At March 31, 2022, future minimum lease payments due under the equipment
financing is as follows:
Schedule of Future Minimum Lease Payments Under Finance Lease |
|
|
|
|
As of March 31, |
Amount |
|
2022 |
|
|
60,187 |
|
2023 |
|
|
23,515 |
|
Total minimum equipment financing payments |
|
$ |
83,702 |
|
Less: interest |
|
|
(4,475 |
) |
Total equipment financing at March 31, 2022 |
|
$ |
79,227 |
|
Less: current portion of equipment financing |
|
|
(67,563 |
) |
Long term portion of equipment financing |
|
$ |
11,664 |
|
NOTE 4 – COMMITMENTS AND CONTINGENCIES
Operating Lease Obligations
On July 26, 2021, the Company entered a new operating
lease agreement of office and warehouse combination space of 40,000 square feet, with the lease commencing on November 1, 2021 and ending
April 30, 2032. This new space will combine the Company’s two separate work locations into one facility, which will allow for greater
collaboration and also accommodate a larger anticipated workforce and manufacturing facility. On November 24, 2021, the lease was amended
to commence on December 1, 2021 and end on May 31, 2032. The Company recognized a ROU asset and operating lease liability in the amount
of $4,980,104 at lease commencement. Rent for the first eleven months of the term will be calculated based on 30,000 rentable square feet.
The rent is subject to an annual escalation of 2.5%, beginning November 1, 2023. The Company made a security deposit payment in the amount
of $600,000 on July 26, 2021. The right of use asset balance at March 31, 2022, net of amortization, was $4,848,129.
As of March 31, 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
10.2 years and includes an option to extend for two renewal terms of five years each. The renewal options are not reasonably certain to
be exercised, and therefore, they are not included when determining the lease term used to establish the right-of use asset and lease
liability. The Company also has several short-term leases, primarily related to equipment. The Company made an accounting policy election
to not recognize short-term leases with terms of twelve months or less on the balance sheet and instead recognize the lease payments in
expense as incurred. The Company has also elected to account for real estate leases that contain both lease and non-lease components (such
as common area maintenance) as a single lease component.
The following table shows supplemental information
related to leases:
Schedule of supplemental information related to leases |
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Lease cost: |
|
|
|
|
|
|
|
|
Operating lease cost |
|
$ |
193,980 |
|
|
$ |
68,578 |
|
Short-term lease cost |
|
|
6,749 |
|
|
|
4,928 |
|
|
|
|
|
|
|
|
|
|
Other information: |
|
|
|
|
|
|
|
|
Operating cash outflow used for operating leases |
|
|
46,250 |
|
|
|
75,784 |
|
Weighted average discount rate |
|
|
9.0 |
% |
|
|
12.0 |
% |
Weighted average remaining lease term |
|
|
10.2 years |
|
|
|
0.6 years |
|
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
As of March 31, 2022, future minimum lease payments due under operating
leases are as follows:
Future minimum lease payments for non-cancelable operating leases |
|
|
|
Amount |
|
Fiscal year: |
|
|
|
|
2022 |
|
$ |
269,052 |
|
2023 |
|
|
696,869 |
|
2024 |
|
|
779,087 |
|
2025 |
|
|
798,556 |
|
2026 |
|
|
818,518 |
|
Thereafter |
|
|
4,803,472 |
|
Total undiscounted future minimum lease payments |
|
|
8,165,554 |
|
Less: Impact of discounting |
|
|
(3,040,376 |
) |
Total present value of operating lease obligations |
|
|
5,125,178 |
|
Current portion |
|
|
(395,468 |
) |
Operating lease obligations, less current portion |
|
$ |
4,729,710 |
|
Executive Severance Agreement
On July 10, 2020, the Company announced that Gianni
Arcaini would retire from the positions of Chief Executive Officer and Chairman of the Board effective as of September 1, 2020 (the “CEO
Transition”). In order to facilitate a transition of his duties, the Company and Mr. Arcaini entered into a separation agreement
which became effective as of July 10, 2020 (the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. Arcaini’s
employment with the Company ended on September 1, 2020 (“Separation Date”) and he will receive separation payments over a
36-month period equal to his base salary plus $75,000 as well as certain limited health and life insurance benefits. The Separation Agreement
also contains confidentiality, non-disparagement and non-solicitation covenants and a release of claims by Mr. Arcaini who continued to
serve as Chairman of the Board of Directors of the Company. The Corporate Governance and Nominating Committee did not submit Mr. Arcaini
for re-election as a director and on November 19, 2020 at the Annual Shareholders meeting a new non-Executive Chairman was appointed.
In accordance with the Separation Agreement, the Company
will pay to Mr. Arcaini the total sum of $747,788. Notwithstanding the foregoing, the status of Mr. Arcaini as a “Specified Employee”
as defined in Internal Revenue Code Section 409A has the effect of delaying any payments to Mr. Arcaini under the Separation Agreement
for six months after the Separation Date. On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months
of payments, or $124,631, owed to Mr. Arcaini and the Company will continue to pay him in semi-monthly installments for 30 months thereafter,
as contemplated in Mr. Arcaini’s Separation Agreement. The remaining balance of approximately $416,000 as of March 31, 2022 is included
in accrued expenses in the accompanying unaudited consolidated balance sheet. In addition, the Company will pay one-half of Mr. Arcaini’s
current life insurance premiums for 36 months of approximately $1,200 per month and provide and pay for his health insurance for 36 months
following the Separation Date of approximately $450 per month. Unvested options in the amount of 50,358 became exercisable and vested
in their entirety on the Separation Date valued at $95,127. The Company made payment of his attorneys’ fees for legal work associated
with the negotiation and drafting of the Separation Agreement of approximately $17,000.
NOTE 5 – STOCKHOLDERS’ EQUITY
Common stock issued
On January 11, 2022, a shareholder converted 710 and
1,790 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 $5.50 per common share resulting in the issuance of 129,091 and 325,455 shares of the Company’s
Common Stock.
On February 3, 2022, the Company closed an offering
of 1,325,000 shares of common stock in the amount of $5,300,000 or $4 per share before certain underwriting fees and offering expenses
with net proceeds of $4,779,000.
On February 21, 2022, the Company closed a “over-allotment”
offering of 198,750 shares of common stock in the amount of $795,000 or $4 per share before certain underwriting fees and offering expenses
with net proceeds of $739,350. Both this and the previous offering were “takedowns” from a previously filed “shelf”
registration statement for the offer of up to $50,000,000 in the aggregate of Common Stock, Preferred Stock, Debt Securities, Warrants,
Rights or Units from time to time in one or more offerings.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
Series B Convertible Preferred Stock
The following summary of certain terms and provisions
of our Series B Convertible Preferred Stock (the “Series B Convertible Preferred Stock”) is subject to, and qualified in its
entirety by reference to, the terms and provisions set forth in our certificate of designation of preferences, rights and limitations
of Series B Convertible Preferred Stock (the “Series B Convertible Preferred Certificate of Designation”) as previously filed.
Subject to the limitations prescribed by our articles of incorporation, our board of directors is authorized to establish the number of
shares constituting each series of preferred stock and to fix the designations, powers, preferences, and rights of the shares of each
of those series and the qualifications, limitations and restrictions of each of those series, all without any further vote or action by
our stockholders. Our board of directors has designated 15,000 of the 10,000,000 authorized shares of preferred stock as Series B Convertible
Preferred Stock with a stated value of $1,000 per share. The shares of Series B Convertible Preferred Stock are validly issued, fully
paid and non-assessable.
Each share of Series B Convertible Preferred
Stock is convertible at any time at the holder’s option into a number of shares of common stock equal to $1,000 divided by the conversion
price of $7.00 per share. Notwithstanding the foregoing, we shall not effect any conversion of Series B Convertible Preferred Stock, with
certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series B Convertible Preferred
Stock (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s
affiliates) would beneficially own a number of shares of our common stock in excess of 4.99% (or, at the election of the purchaser, 9.99%)
of the shares of our common stock then outstanding after giving effect to such exercise. Effective November 24, 2017 (the “Effective
Date”), the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) and a Registration
Rights Agreement (the “Registration Rights Agreement”) which included the issuance of 2,830 shares of Series B Convertible
Preferred Stock worth $2,830,000 (including the conversion of liabilities at a price of $1,000 per Class B Unit. As of March 31, 2022
and December 31, 2021, respectively, there are 851 and shares of Series B Convertible Preferred Stock issued and outstanding.
Series C Convertible Preferred Stock
On February 26, 2021, the Company entered into a Securities
Purchase Agreement (the “Purchase Agreement”) with certain existing investors in the Company (the “Purchasers”).
Pursuant to the Purchase Agreement, the Purchasers purchased 4,500 shares of a newly authorized Series C Convertible Preferred Stock (the
“Series C Convertible Preferred Stock”), and the Company received proceeds of $4,500,000. The Purchase Agreement contains
customary representations, warranties, agreements and indemnification rights and obligations of the parties. In January 2022, the 4,500
outstanding shares of Series C Convertible Preferred Stock were converted into 454,546 shares of common stock.
In connection with the Purchase Agreement, the Company
also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed
with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series
C Convertible Preferred Stock are convertible. The Registration Rights Agreement contains customary representations, warranties, agreements
and indemnification rights and obligations of the parties.
The Company’s Board of Directors has designated
5,000 shares as the Series C Convertible Preferred Stock. Each share of the Series C Convertible Preferred Stock has a stated value of
$1,000. The holders of the Series C Convertible Preferred Stock, the holders of the common stock and the holders of any other class or
series of shares entitled to vote with the common stock shall vote together as one class on all matters submitted to a vote of shareholders
of the Company. Each share of Series C Convertible Preferred Stock has 172 votes (subject to adjustment); provided that in no event may
a holder of Series C Convertible Preferred Stock be entitled to vote a number of shares in excess of such holder’s Beneficial Ownership
Limitation (as defined in the Certificate of Designation and as described below). Each share of Series C Convertible Preferred Stock is
convertible, at any time and from time to time, at the option of the holder, into that number of shares of common stock (subject to the
Beneficial Ownership Limitation) determined by dividing the stated value of such share ($1,000) by the conversion price, which is $5.50
(subject to adjustment).
The Company shall not effect any conversion of the
Series C Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Series C Convertible Preferred
Stock, to the extent that after giving effect to the conversion sought by the holder such holder (together with such holder’s Attribution
Parties (as defined in the Certificate of Designation)) would beneficially own more than 4.99% (or upon election by a holder, 19.99%)
of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable
upon such conversion (the “Beneficial Ownership Limitation”).
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
Stock-Based Compensation
Stock-based compensation expense recognized under
ASC 718-10 for the three months ended March 31, 2022 and 2021, was $250,577 and $76,301 respectively, for stock options granted to employees
and directors. This expense is included in selling, general and administrative expenses in the unaudited consolidated statements of operations.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that
are ultimately expected to vest during the period. At March 31, 2022, the total compensation cost for stock options not yet recognized
was $1,421,156. This cost will be recognized over the remaining vesting term of the options ranging from six months to two- and one-half
years.
Employee Stock
Options
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 1,000,000 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 665,000
options were awarded by the Company’s Compensation Committee and approved by the Board, with a strike price of $6.41
per share, a five- 5 year term and vesting equally over a three-year period. The Options serve as a retention tool and contain
key provisions that the holder must remain in good standing with the Company. The options were valued on the grant date at 1,563,708
using a Black-Scholes model with the following assumptions: (1) expected term of 3.5
years using the simplified method, (2) expected volatility rate of 72%
based on historical volatility, (3) dividend yield of zero , and (4) a discount rate of 0.97%.
As of March 31, 2022, and December 31, 2021, options
to purchase a total of 1,096,266 shares of common stock and 431,266 shares of common stock were outstanding, respectively. Of the total
of 1,096,266 options issued, 271,266 and 271,266 options were issued under the 2016 Plan, 665,000 and zero were issued under the 2021
Plan and a further 160,000 and 160,000 non-plan options to purchase common stock were outstanding as of March 31, 2022 and December 31,
2021, respectively. The non-plan options were granted to four executives as hiring incentives, including the Company’s CEO.
For the three months ended March 31, 2022, the Company
has recorded an option expense for all options outstanding in the amount of $250,577.
Warrants
No new warrants were issued during the first quarter
of 2022. At March 31, 2022 and December 31, 2021, warrants outstanding were 1,376,466 and 1,376,466, respectively.
NOTE 6 - REVENUE
Revenue Recognition and Contract Accounting
The Company generates revenue from four sources: (1)
Technology Systems; (2) AI Technology which is included in the consolidated statements of operations line-item Technology systems; (3)
Technical Support; and (4) Consulting Services which is included in the unaudited consolidated statements of operations line-item Services
and consulting.
Technology Systems
The Company constructs intelligent technology systems
consisting of materials and labor under customer contracts. Revenues and related costs on technology systems revenue are recognized based
on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create an asset
with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a
profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured
and revenue is recognized accordingly.
In addition, the Company has adopted ASC 606-10-55-21
such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method
to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the
cost of the goods to satisfy the performance obligation.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
Under this method, contract revenues are recognized
over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct labor,
subcontract labor and other allocable 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.
A contract is considered complete when all costs except
insignificant items have been incurred and the installation is operating according to specifications or has been accepted by the customer.
The Company has contracts in various stages of completion.
Such contracts require estimates to determine the appropriate cost and revenue recognition. Cost estimates are reviewed periodically on
a contract-by-contract basis throughout the life of the contract such that adjustments to the profit resulting from revisions are made
cumulative to the date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects,
must be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional
information becomes available.
Artificial Intelligence
The Company has
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 revenue is recognized ratably
over the contracted maintenance term.
Technical Support
Maintenance and technical
support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance
and technical support provided outside of a maintenance contract are on an as-requested basis, and revenue is recognized 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.
For sales arrangements that do not involve multiple
performance obligations such as professional services, which are of short-term duration, revenues are recognized when services are completed.
Consulting Services
The Company’s consulting services business generates
revenues under contracts with customers from three sources: (1) Professional Services (consulting and auditing); (2) Software licensing
with optional hardware sales; and (3) Customer Service (training and 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 at a point in time 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 at a point in time 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 time ratably over the contract term. |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
Contract assets and contract liabilities on
uncompleted contracts for revenues recognized over time are as follow:
Contract Assets
Contract assets on uncompleted contracts represent
revenues recognized in excess of billings and/or cash received on uncompleted contracts accounted for under the cost-to-cost input method,
which recognizes revenue based on the ratio of cost incurred to total estimated costs.
At March 31, 2022 and December 31, 2021, contract
assets on uncompleted contracts consisted of the following:
Schedule Of Contract Assets On Uncompleted Contracts | |
| | |
| |
| |
March 31, 2022 | | |
December 31, 2021 | |
Cumulative revenues recognized | |
$ | 348,826 | | |
$ | 5,266,930 | |
Less: Billings or cash received | |
| (81,154 | ) | |
| (5,263,481 | ) |
Contract assets | |
$ | 267,672 | | |
$ | 3,449 | |
Contract Liabilities
Contract liabilities, on uncompleted contracts represent
billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under the cost-to-cost
input method, which recognizes revenues based on the ratio of the cost incurred to total estimated costs.
Contract liabilities, services and consulting revenues
represent billings or cash received in excess of revenue recognizable on service agreements that are not accounted for under the cost
to cost method.
At March 31, 2022 and December 31, 2021, contract
liabilities on uncompleted contracts and contract liabilities on services and consulting consisted of the following:
Schedule of Contract Liabilities on Uncompleted Contracts | |
| | |
| |
| |
March 31, 2022 | | |
December 31, 2021 | |
Billings and/or cash receipts on uncompleted contracts | |
$ | 2,243,607 | | |
$ | 4,273,726 | |
Less: Cumulative revenues recognized | |
| (1,387,734 | ) | |
| (3,041,088 | ) |
Contract liabilities, technologies systems | |
| 855,873 | | |
| 1,232,638 | |
Contract liabilities, services and consulting | |
| 1,508,145 | | |
| 596,673 | |
Total contract liabilities | |
$ | 2,364,018 | | |
$ | 1,829,311 | |
The Company expects to recognize all contract liabilities
within 12 months from the consolidated balance sheet date.
Disaggregation of Revenue
The Company is following the guidance of ASC 606-10-55-296
and 297 for disaggregation of revenue. Accordingly, revenue has been disaggregated according to the nature, amount, timing and uncertainty
of revenue and cash flows. We are providing qualitative and quantitative disclosures.
Qualitative:
|
1. |
We have four distinct revenue sources: |
|
a. |
Turnkey, engineered projects; |
|
b. |
Associated maintenance and support services; |
|
c. |
Licensing and professional services related to auditing of data center assets; and |
|
d. |
Predetermined algorithms to provide important operating information to the users of our systems. |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
|
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 March 31, 2022
Disaggregation of Revenue | |
| | |
| | |
| | |
| | |
| |
Segments | |
Rail | | |
Commercial | | |
Government | | |
Artificial Intelligence | | |
Total | |
Primary Geographical Markets | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| |
North America | |
$ | 1,007,273 | | |
$ | 17,300 | | |
$ | 152,142 | | |
$ | 262,601 | | |
$ | 1,439,316 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Major Goods and Service Lines | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Turnkey Projects | |
$ | 520,657 | | |
$ | (498 | ) | |
$ | 131,921 | | |
$ | — | | |
$ | 652,080 | |
Maintenance and Support | |
| 486,616 | | |
| 17,798 | | |
| 20,221 | | |
| 131,412 | | |
| 656,047 | |
Software License | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Algorithms | |
| — | | |
| — | | |
| — | | |
| 131,189 | | |
| 131,189 | |
| |
$ | 1,007,273 | | |
$ | 17,300 | | |
$ | 152,142 | | |
$ | 262,601 | | |
$ | 1,439,316 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Timing of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Goods transferred over time | |
$ | 520,657 | | |
$ | (498 | ) | |
$ | 131,921 | | |
$ | — | | |
$ | 652,080 | |
Goods delivered at point in time | |
| — | | |
| — | | |
| — | | |
| 131,189 | | |
| 131,189 | |
Services transferred over time | |
| 486,616 | | |
| 17,798 | | |
| 20,221 | | |
| 131,412 | | |
| 656,047 | |
| |
$ | 1,007,273 | | |
$ | 17,300 | | |
$ | 152,142 | | |
$ | 262,601 | | |
$ | 1,439,316 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
For the Three Months Ended March 31, 2021
Segments | |
Rail | | |
Commercial | | |
Government | | |
Banking | | |
IT Suppliers | | |
Artificial Intelligence | | |
Total | |
Primary Geographical Markets | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
North America | |
$ | 1,757,446 | | |
$ | 55,842 | | |
$ | 28,560 | | |
$ | 22,829 | | |
$ | 132,977 | | |
$ | 157,100 | | |
$ | 2,154,754 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Major Goods and Service Lines | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Turnkey Projects | |
$ | 1,323,322 | | |
$ | — | | |
$ | 8,339 | | |
$ | 1,537 | | |
$ | — | | |
$ | — | | |
$ | 1,333,198 | |
Maintenance and Support | |
| 434,124 | | |
| 55,842 | | |
| 20,221 | | |
| 21,292 | | |
| — | | |
| — | | |
| 531,479 | |
Data Center Auditing Services | |
| — | | |
| — | | |
| — | | |
| — | | |
| 130,592 | | |
| — | | |
| 130,592 | |
Software License | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2,385 | | |
| — | | |
| 2,385 | |
Algorithms | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 157,100 | | |
| 157,100 | |
| |
$ | 1,757,446 | | |
$ | 55,842 | | |
$ | 28,560 | | |
$ | 22,829 | | |
$ | 132,977 | | |
$ | 157,100 | | |
$ | 2,154,754 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Timing of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Goods transferred over time | |
$ | 1,323,322 | | |
$ | — | | |
$ | 8,339 | | |
$ | 1,537 | | |
$ | 132,977 | | |
$ | — | | |
$ | 1,466,175 | |
Goods delivered point in time | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 157,100 | | |
| 157,100 | |
Services transferred over time | |
| 434,124 | | |
| 55,842 | | |
| 20,221 | | |
| 21,292 | | |
| — | | |
| — | | |
| 531,479 | |
| |
$ | 1,757,446 | | |
$ | 55,842 | | |
$ | 28,560 | | |
$ | 22,829 | | |
$ | 132,977 | | |
$ | 157,100 | | |
$ | 2,154,754 | |
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
three months ended March 31, 2022, the Company matched 100% of the first 4% of eligible employee compensation that was contributed to
the 401(k) Plan. For the three months ended March 31, 2022, the Company recognized expense for matching cash contributions to the 401(k)
Plan totaling $29,064.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (Unaudited) |
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 7 additional full-time contractors located in Slovakia at a cost of $16,250
for January initially, rising to $25,583
after fully staffed, per month starting February 2019. This was in addition to the existing contract of $7,480
per month for duos for 4 full-time contractors which increased to $8,231 per month in June of 2019. During 2020 efforts in reducing
cost, Luceon reduced its staff for the TrueVue360 software development team from a staff of 7 to 3 full-time employees at a cost of
$11,666 per month starting June 1, 2020. As of January 1, 2021, the Company no longer records activities in TrueVue360 and has
combined billings for a total of $20,986
per month. For the three months ended March 31, 2022 and 2021, the total amount expensed is zero 0 and $62,958, respectively. The
Company had no open accounts payable with Luceon at March 31, 2022. On May 14, 2021, the Company formally ended its relationship
with Luceon in concert with the resignation of our Chief Technology Officer and as such there is no longer a related party
relationship.
NOTE 9 – SUBSEQUENT EVENTS
On April 22, 2022, an employee tendered their resignation
with an effective date of May 13, 2022. The employee had previously been awarded 30,000 non-qualified plan options which were unvested
which have been forfeited as a result of the resignation.
On April 28, 2022, a previously identified key employee
tendered their resignation with an immediate effective date. The employee had previously been awarded 60,000 non-qualified plan options
which were unvested which have been forfeited as a result of the resignation.