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
June 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 “duostech
Group”), through its operating subsidiaries, Duos Technologies, Inc. (“duostech”) and TrueVue360, Inc. (“TrueVue360”)
(collectively the “Company”), develops and deploys cutting-edge technologies 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 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 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 seconds of a railcar passing through
our portal. This solution has the potential to transform the railroad industry immediately 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 provides professional and consulting
services for large data centers and has been developing a system for the automation of asset information marketed as dcVue™. The
Company is now deploying its dcVue software. This software is used by Duos’ consulting auditing teams. dcVue is based upon the Company’s
OSPI patent which was awarded in 2010. The Company offers dcVue available for license to our customers as a licensed software product.
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
June 30, 2021
(Unaudited)
Basis of Presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are
of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the six months ended
June 30, 2021 are not indicative of the results that may be expected for the year ending December 31, 2021 or for any other future period.
These unaudited consolidated financial statements and the unaudited condensed notes thereto should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021.
Reclassifications
The Company reclassified certain revenues and
expenses for the three and six months ended June 30, 2020 to conform to 2021 classification. There was no net effect on the total expenses
of such reclassification.
The following table reflects the reclassification
adjustment effect in the three and six months ended June 30, 2020:
Schedule of Reclassifications
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Reclassification
|
|
|
|
|
After Reclassification
|
|
|
|
For the Three Months Ended
|
|
|
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
Technology systems
|
|
$
|
1,419,409
|
|
|
Technology systems
|
|
$
|
1,597,633
|
|
Technical support
|
|
|
382,124
|
|
|
Services and consulting
|
|
|
384,509
|
|
Consulting services
|
|
|
2,385
|
|
|
—
|
|
|
—
|
|
AI technologies
|
|
|
178,224
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
1,982,142
|
|
|
Total Revenue
|
|
|
1,982,142
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES:
|
|
|
|
|
|
COST OF REVENUES:
|
|
|
|
|
Technology systems
|
|
|
897,514
|
|
|
Technology systems
|
|
|
1,322,032
|
|
Technical support
|
|
|
234,754
|
|
|
Services and consulting
|
|
|
214,244
|
|
Consulting services
|
|
|
—
|
|
|
Overhead
|
|
|
258,403
|
|
AI technologies
|
|
|
110,499
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
|
1,242,767
|
|
|
Total Cost of Revenues
|
|
|
1,794,679
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
739,375
|
|
|
GROSS MARGIN
|
|
|
187,463
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
Sales and marketing
|
|
|
122,473
|
|
|
Sales and marketing
|
|
|
122,473
|
|
Engineering
|
|
|
352,970
|
|
|
Research and development
|
|
|
149,566
|
|
Research and development
|
|
|
149,566
|
|
|
Administration
|
|
|
1,342,480
|
|
Administration
|
|
|
1,023,947
|
|
|
—
|
|
|
—
|
|
AI technologies
|
|
|
517,475
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
2,166,431
|
|
|
Total Operating Expenses
|
|
|
1,614,519
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
$
|
(1,427,056
|
)
|
|
LOSS FROM OPERATIONS
|
|
$
|
(1,427,056
|
)
|
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
|
|
Before Reclassification
|
|
|
|
|
After Reclassification
|
|
|
|
For the Six Months Ended
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
Technology systems
|
$
|
|
1,933,083
|
|
|
Technology systems
|
|
$
|
2,111,307
|
|
Technical support
|
|
|
727,311
|
|
|
Services and consulting
|
|
|
861,780
|
|
Consulting services
|
|
|
134,469
|
|
|
—
|
|
|
—
|
|
AI technologies
|
|
|
178,224
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
2,973,087
|
|
|
Total Revenue
|
|
|
2,973,087
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES:
|
|
|
|
|
|
COST OF REVENUES:
|
|
|
|
|
Technology systems
|
|
|
1,479,058
|
|
|
Technology systems
|
|
|
2,414,090
|
|
Technical support
|
|
|
469,030
|
|
|
Services and consulting
|
|
|
508,198
|
|
Consulting services
|
|
|
72,260
|
|
|
Overhead
|
|
|
518,824
|
|
AI technologies
|
|
|
110,499
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
|
2,130,847
|
|
|
Total Cost of Revenues
|
|
|
3,441,112
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
842,240
|
|
|
GROSS MARGIN
|
|
|
(468,025)
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
Sales and marketing
|
|
|
262,325
|
|
|
Sales and marketing
|
|
|
262,325
|
|
Engineering
|
|
|
665,406
|
|
|
Research and development
|
|
|
555,958
|
|
Research and development
|
|
|
555,958
|
|
|
Administration
|
|
|
2,228,663
|
|
Administration
|
|
|
2,039,498
|
|
|
—
|
|
|
—
|
|
AI technologies
|
|
|
834,024
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
4,357,211
|
|
|
Total Operating Expenses
|
|
|
3,046,946
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
$
|
(3,514,971
|
)
|
|
LOSS FROM OPERATIONS
|
|
$
|
(3,514,971
|
)
|
Principles of Consolidation
The unaudited consolidated financial statements
include duostech Group and its wholly owned subsidiaries, Duos Technologies, Inc. and TrueVue360, Inc. All inter-company transactions
and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts receivable,
valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total
estimated costs to determine progress towards contract completion, valuation of derivatives, valuation of warrants issued with debt, valuation
of beneficial conversion features in convertible debt, estimates of the valuation of right of use assets and corresponding lease liabilities
and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and
at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of June 30, 2021,
the balance in one financial institution exceeded federally insured limits by approximately $4,376,000.
Significant Customers and Concentration of Credit Risk
The Company had certain
customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances
individually represented 10% or more of the Company’s total accounts receivable, as follows:
For the six months ended June 30, 2021, one customer
accounted for 69% (“Customer 2”) of revenues. For the six months ended June 30, 2020, three customers accounted for 45% (“Customer
1”), 12% (“Customer 2”) and 15% (“Customer 3”) 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 with the Company. 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 with
the Company upon the other partys 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. Either party may terminate
the agreement upon the other partys material breach of a representation, warranty, term, covenant or undertaking in the agreement
if, within 30 days following the delivery of a written notice to the defaulting party setting forth in reasonable detail the basis of
such default, the defaulting party has not rectified such default to the reasonable satisfaction of the non-defaulting party. Failure
to perform due to a force majeure condition shall not be considered a material default under the agreement.
|
|
·
|
For Customer 3, prior to delivery of products or services if the customer terminates the statement of
work for convenience, no refund of any advance payments will be due to Customer 3. ln the event of a material breach by the Company, which
breach is not cured, or cure has not begun within 30 days of written notice to the Company by Customer 3, Customer 3 may terminate this
statement of work for cause. In the event of termination by Customer 3 for cause, the Company shall reimburse Customer 3 any unused prepaid
fees on a pro rata basis.
|
At June 30, 2021, two customers accounted for
65% and 20% of accounts receivable. At December 31, 2020, two customers accounted for 56% and 30% of accounts receivable. Much of the
credit risk is mitigated since all of the customers listed here are Class 1 railroads with a history of timely payments to us.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Geographic Concentration
For the six months ended June 30, 2021, approximately
75% of revenue was generated from three customers outside of the United States. For the six months ended June 30, 2020, approximately
29% 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.
Fair Value of Financial Instruments and Fair Value Measurements
The Company follows Accounting Standards Codification
(“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured
at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted
accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure
about such fair value measurements.
ASC 820 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs.
These inputs are prioritized below:
Level 1:
|
Observable inputs such as quoted market prices in active
markets for identical assets or liabilities.
|
Level 2:
|
Observable market-based inputs or unobservable inputs that
are corroborated by market data.
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which
require the use of the
reporting entity’s own assumptions that the market participants
would use in the valuation of the asset or liability based on the best available information.
|
The Company analyzes all financial instruments
with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard
for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
The estimated fair value of certain financial
instruments, including accounts receivable, prepaid expense, accounts payable, accrued expenses and notes payable are carried at historical
cost basis, which approximates their fair values because of the short-term nature of these instruments.
Software Development Costs
Software development costs incurred prior to establishing
technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a
software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary
to establish that the product meets its design specifications, including functionality, features, and technical performance requirements.
Software development costs incurred after establishing technological feasibility for software sold as a perpetual license, as defined
within ASC 985-20 (Software – Costs of Software to be Sold, Leased, or Marketed) are capitalized and amortized on a product-by-product
basis when the product is available for general release to customers.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Earnings (Loss) Per Share
Basic earnings per share (EPS) are computed by
dividing net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common
share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for
the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental
common shares issuable upon the exercise or conversion of stock options, stock warrants, convertible debt instruments, convertible preferred
stock or other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
At June 30, 2021, there was an aggregate of 1,376,466 outstanding warrants to purchase shares of common stock. At June 30, 2021, there
were employee stock options to purchase an aggregate of 455,347 shares of common stock. Also, at June 30, 2021, 243,571 common shares
were issuable upon conversion of Series B convertible preferred stock and 818,182 common shares were issuable upon conversion of Series
C convertible preferred stock all of which were excluded from the computation of dilutive earnings per share because their inclusion would
have been anti-dilutive.
Accounts Receivable
Accounts receivable are stated at estimated net
realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts.
In determining the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at
appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required
payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs.
Past due status is based on how recently payments have been received from customers.
Revenue Recognition
As of January 1, 2018, the Company adopted Accounting
Standards Update (“ASU”) 2014-89, Revenue from Contracts with Customers (“ASC 606”), that affects the timing of
when certain types of revenues will be recognized. The basic principles in ASC 606 include the following: a contract with a customer creates
distinct unrecognized contract assets and performance obligations, satisfaction of a performance obligation creates revenue, and a performance
obligation is satisfied upon transfer of control to a good or service to a customer.
Revenue is recognized by evaluating our revenue
contracts with customers based on the five-step model under ASC 606:
|
1.
|
Identify the contract with the customer;
|
|
2.
|
Identify the performance obligations in the contract;
|
|
3.
|
Determine the transaction price;
|
|
4.
|
Allocate the transaction price to separate performance obligations; and
|
|
5.
|
Recognize revenue when (or as) each performance obligation is satisfied.
|
For revenues related to technology systems, the
Company recognizes revenue over time using a cost-based input methodology in which significant judgment is required to estimate costs
to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding
amount of revenue to recognize.
Accordingly, the Company now bases its revenue
recognition on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create
an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including
a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured
and revenue is recognized accordingly.
In addition, the Company has adopted ASC 606-10-55-21
such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method
to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the
cost of the goods to satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company
has adopted the implementation guidance as set out in ASC-606-10-55-187 through 192.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Under this method, contract revenues are recognized
over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct labor, subcontract
labor and other allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are also charged
to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract
assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”.
However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.
Segment Information
The Company operates in one reportable segment.
Stock Based Compensation
The Company accounts for employee stock-based
compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock
units, and employee stock purchases based on estimated fair values.
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock
options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing
model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.
The Company estimates volatility based upon the
historical stock price of the Company and estimates the expected term for stock options using the simplified method for employees and
directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States
Treasury securities with similar maturities.
Recent Accounting Pronouncements
From time to time, the FASB or other standards
setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards
Update (“ASU”).
In August
2020, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2020-06) related to the measurement
and disclosure requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds
disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an
entity's own equity. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after
December 15, 2021. We plan to adopt this pronouncement for our fiscal year beginning January 1, 2022, and we do not expect it to have
a material effect on our consolidated financial statements.
Management does not believe that any other recently
issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
NOTE 2 – LIQUIDITY
As reflected in the accompanying unaudited consolidated
financial statements, the Company had a net loss of $2,952,880 for the three months ended June 30, 2021 and $3,358,903 for the six months
ended June 30, 2021. During the six months ended June 30, 2021, net cash used in operating activities was $3,218,903. The working capital
surplus and accumulated deficit as of June 30, 2021 were $2,715,833 and $42,847,053, 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 which was completed during the first quarter of 2020 (the “2020 Offering”).
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Upon completion of the 2020 Offering, management
raised sufficient working capital to meet its needs for the next 12 months without the need to raise further capital. Since the advent
of the Covid-19 pandemic, the Company has experienced a significant slowdown in closing new projects due to cautious actions by current
and potential clients. We continue to be successful in identifying new business opportunities and are focused on re-establishing a backlog
of projects. Most importantly, the Company’s success in increasing its working capital surplus after receiving proceeds from the
2020 Offering of more than $8,200,000 and more recently, in the first quarter of 2021, receiving net proceeds of $4,500,000 from the issuance
of Series C Preferred Stock to two large shareholders, continues to give us the capital required to fund the fundamental business changes
that we undertook in the last quarter of 2020 and maintain our business strategy overall. In addition, 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 the Company is essentially debt free.
Management has been taking and continues to take actions including, but not limited to, elimination of certain costs that did 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
the second quarter, management continued to take significant actions including reorganizing our software engineering team and outsourcing
certain functions that could be more efficiently accomplished without increasing the long-term overhead of dedicated staffing. Pending
contracts indicate a much stronger second half of 2021 and 2022.
Management believes that, at this time, we have
alleviated the substantial doubt for the Company to continue as a going concern. We are executing the plan to grow our business and achieve
profitability without the requirement to raise additional capital for existing operations. As previously
noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock. Although
additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded
operations based on this increase in business activity. In the long run, the continuation of the Company as a going concern is dependent
upon the ability of the Company to continue executing the plan described above, generate enough revenue, and attain consistently profitable
operations. Although the current global pandemic related to the coronavirus (Covid-19) continues to affect our operations, and we do believe
this is expected to be a long-term issue, the Company cannot currently quantify the uncertainty related to the recent pandemic and its
effects on our customers in the coming quarters.
NOTE 3 – DEBT
Notes Payable - Financing Agreements
The Company’s notes payable relating to financing agreements
classified as current liabilities consist of the following as of:
Schedule of Notes Payable - Financing Agreements
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June 30, 2021
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December 31, 2020
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Notes Payable
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Principal
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Interest
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Principal
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Interest
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Third Party - Insurance Note 1
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$
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9,511
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7.75
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%
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$
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23,327
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7.75
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%
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Third Party - Insurance Note 2
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49,889
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6.24
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%
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10,457
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5.26
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%
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Third Party - Insurance Note 3
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1,126
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—
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9,158
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—
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Third Party - Insurance Note 4
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89,493
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—
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—
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—
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Third Party - Insurance Note 5
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4,612
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7.75
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%
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—
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—
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Total
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$
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154,631
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$
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42,942
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The Company entered into an agreement on December
23, 2020 with its insurance provider by issuing a $23,327 note payable (Insurance Note 1) for the purchase of an insurance policy, secured
by that policy with an annual interest rate of 7.75% payable in monthly installments of principal and interest totaling $2,416 through
October 23, 2021. The balance of Insurance Note 1 as of June 30, 2021 and December 31, 2020 was $9,511 and $23,327, respectively.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
The Company entered into an agreement on April
15, 2020, with its insurance provider by issuing a $51,379 note payable (Insurance Note 2) for the purchase of an insurance policy, secured
by that policy with an annual interest rate of 5.26% payable in monthly installments of principal and interest totaling $5,263 through
February 15, 2021. The note payable renewed on April 15, 2021 in the amount of $62,041, secured with an annual interest rate of 6.24%
and payable in 10 monthly installments of principal and interest totaling $6,383. At June 30, 2021 and December 31, 2020, the balance
of Insurance Note 2 was 49,889 and $10,457, respectively.
The Company entered into an agreement on September
15, 2020 with its insurance provider by issuing a $13,796 note payable (Insurance Note 3) for the purchase of an insurance policy, secured
by 12 monthly installments. At June 30, 2021 and December 31, 2020, the balance of Insurance Note 3 was $1,126 and $9,158, respectively.
The Company entered into an agreement on
February 3, 2020 with its insurance provider by issuing a $165,375
note payable (Insurance Note 4) with a down payment of $55,563 for the purchase of an insurance policy secured by eight monthly
installments of $13,726
through December 3, 2020. The policy renewed on February 3, 2021 in the amount of $215,654
with a down payment paid in the amount of $37,000 on April 6, 2021 and ten monthly installments of $17,899.
At June 30, 2021 and December 31, 2020, the balance of Insurance Note 4 was $89,493
and 0 zero, respectively.
The Company entered into an agreement on May
23, 2021 with its insurance provider by issuing a $6,874
note payable (Insurance Note 5) for the purchase of an insurance policy, secured with an annual interest rate of 7.75%
and payable in 6 monthly installments of principal and interest totaling $1,172.
At June 30, 2021 and December 31, 2020, the balance of Insurance Note 5 was $4,612 and
0 zero, respectively.
Equipment Financing
The Company entered into an agreement on August
26, 2019 with an equipment financing company by issuing a $147,810 secured note, with an annual interest rate of 12.72% and payable in
monthly installments of principal and interest totaling $4,963 through August 1, 2022. The Company entered into an additional agreement
on May 22, 2020 with the same equipment financing company by issuing a $121,637 secured note, with an annual interest rate of 9.90% and
payable in monthly installments of principal and interest totaling $3,919 through June 1, 2023. At June 30, 2021 and December 31, 2020,
the balance of these notes was $149,277 and $192,804, respectively.
At June 30, 2021, future minimum lease payments due under the equipment
financing is as follows:
Schedule of Notes Payable - Finance Lease
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As of December 31,
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Amount
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2021
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$
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53,294
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2022
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86,735
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2023
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23,515
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Total minimum equipment financing payments
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$
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163,544
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Less: interest
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(14,267
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)
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Total equipment financing at June 30, 2021
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$
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149,277
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Less: current portion of equipment financing
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(94,904
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)
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Long term portion of equipment financing
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$
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54,373
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DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Notes Payable – PPP Loan
Schedule of Notes Payable - SBA Loan
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June 30, 2021
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December 31, 2020
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Payable To
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Principal
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Interest
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Principal
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Interest
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PPP loan
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$
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—
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$
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1,410,270
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1%
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Total
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—
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1,410,270
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Less current portion
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—
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(863,845
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)
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Long term portion
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$
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—
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$
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546,425
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On April 23, 2020, the Company entered into a
promissory note (the “Note”) with BBVA USA, which provided for a loan in the amount of $1,410,270 (the “Loan”)
pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”). The Loan had a two-year term and accrued interest at a rate of 1.00% per annum (APR 1.014%). Monthly principal
and interest payments were deferred for nine months after the date of disbursement. The Loan could be prepaid at any time prior to maturity
with no prepayment penalties. The Company applied for the PPP loan forgiveness and was granted forgiveness on February 1, 2021. At June
30, 2021 and December 31, 2020, the loan balance was zero 0 and $1,410,270, respectively.
NOTE 4 – LINE OF CREDIT
The Company assumed a line of credit with
Wells Fargo Bank upon merger with ISA on April 1, 2015. The line of credit provided for borrowings up to $40,000
but is now closed. The balance as of June 30, 2021 and December 31, 2020, 0 was zero and zero, respectively, including accrued
interest. This line of credit has been paid in full as of May 5, 2020.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Delinquent Payroll Taxes Payable
The Company has paid
its delinquent IRS payroll taxes, late fees and outstanding state of California payroll taxes in full. At June 30, 2021 and December 31,
2020, the state payroll taxes payable balance was zero 0 and $3,146, respectively.
Operating Lease Obligations
The Company has an operating lease agreement for
office space of 8,308 square feet that was amended on May 1, 2016 and again on April 1, 2019, increasing the office space to 10,203 square
feet, with the lease ending on October 31, 2021. The rent is subject to an annual escalation of 3%, beginning
May 1, 2017.
The Company entered a new lease agreement of office
and warehouse combination space of 4,400 square feet on June 1, 2018 and ending May 31, 2021. The Company has extended this lease to coincide
with the main office space lease that will be ending on October 31, 2021. This additional space allows for resource growth and engineering
efforts for operations before deploying to the field. The rent is subject to an annual escalation of 3%.
The Company now has a total of office and warehouse
space of approximately 14,603 square feet.
At June 30, 2021, future minimum lease payments
due under operating leases are as follows:
Schedule of Future Minimum Lease Payments Due Operating Leases
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As of June 30, 2021
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Amount
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Total minimum financial lease payments
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94,264
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Less: interest
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(2,310
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)
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Total lease liability at June 30, 2021
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$
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91,954
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DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
In February 2016, the FASB issued ASU No. 2016-02
Leases (Topic 842) (“ASU 2016-02”), which requires all leases with a term greater than 12 months to be recognized on
the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current
accounting guidance. We adopted ASU 2016-02 effective January 1, 2019, on a modified retrospective basis, without adjusting comparative
periods presented. Effective January 1, 2019, the Company established a right-of-use model (ROU) asset and operating lease liability in
the amount of $644,245. The Company extended the lease agreement of office and warehouse combination space to coincide with the main office
space and recorded a right-of-use model (ROU) to the asset and operating lease liability in the amount of $21,022. The right of use asset
balance at June 30, 2021 was $91,954. These are the Company’s only leases with terms greater than 12 months. The adoption of ASU
2016-02 did not materially affect our unaudited consolidated statement of operations or our unaudited consolidated statements of cash
flows. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and to recognize
all lease payments for leases with a term greater than 12 months on a straight-line basis over the lease term in our unaudited consolidated
statements of operations.
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 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 $603,000 as of June 30, 2021 is included in
accrued expenses in the accompanying consolidated balance sheet. In addition, the Company will pay one-half of Mr. Arcaini’s
current life insurance premiums for 36 months of approximately $1,200
per month and provide and pay for his health insurance for 36 months following the Separation Date of approximately $450 per month.
Unvested options in the amount of 50,358
became exercisable and vested in their entirety on the Separation Date valued at $95,127.
The Company made payment of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation
Agreement of approximately $17,000.
NOTE 6 – STOCKHOLDERS’ EQUITY
Common stock issued
On February 12, 2020,
the Company entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity, a division of Fordham
Financial Management, Inc. (“ThinkEquity”), as representative of the underwriters listed therein (the “Underwriters”),
pursuant to which the Company agreed to sell to the Underwriters in a firm commitment underwritten public offering (the “Offering”)
an aggregate of 1,350,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at
a public offering price of $6.00 per share. In addition, the Underwriters were granted an over-allotment option (the “Over-allotment
Option”) for a period of 45 days to purchase up to an additional 202,500 shares of Common Stock. The Offering closed on February
18, 2020. The Common Stock began trading on the Nasdaq Capital Market under the symbol DUOT on February 13, 2020.
On February 20, 2020,
pursuant to and in compliance with the terms and conditions of the aforementioned Underwriting Agreement and the Offering, the Underwriters
partially exercised the Over-allotment Option to purchase 192,188 shares of Common Stock at $6.00 per share (the “Over-Allotment
Exercise”). The sale of the Over-Allotment Exercise to purchase 192,188 shares of Common Stock closed on February 21, 2020.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
In total, the Company issued 1,542,188 shares
of Common Stock in connection with the underwritten public offering and up listing to the Nasdaq Capital Market national exchange. The
securities were issued pursuant to a Registration Statement on Form S-1 (File No. 333- 235455), as amended, which was declared effective
by the Securities and Exchange Commission on February 12, 2020. The Company received gross proceeds of approximately $9.25 million for
the Offering, including the exercise of the Over-Allotment Exercise, prior to deducting underwriting discounts and commissions and offering
expenses payable by the Company.
Series C Convertible Preferred Stock
On February 26,
2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing investors
in the Company (the “Purchasers”). Pursuant to the Purchase Agreement, the Purchasers purchased 4,500 shares of a newly authorized
Series C Convertible Preferred Stock (the “Series C Convertible Preferred Stock”), and the Company received proceeds of $4,500,000.
The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
Under the Purchase
Agreement, the Company was required to hold a meeting of shareholders at the earliest practical date, which ultimately occurred on July
15, 2021. Nasdaq Marketplace Rule 5635(d) limits the number of shares of common stock (or securities that are convertible into common
stock) without shareholder approval. As previously disclosed, at its Annual Meeting of Shareholders, the Company obtained shareholder
approval (the “Stockholder Approval”) in order to issue shares of common stock underlying the Series C Convertible Preferred
Stock at a price less than the lower of the price immediately preceding the signing of the Purchase Agreement or the average of the prices
for the five trading days immediately preceding such signing which equal 20% or more of the number of shares of common stock outstanding
before the issuance. As described below, the terms of the Series C Convertible Preferred Stock limited its convertibility to a number
of shares less than the 20% limit, until the Stockholder Approval was obtained.
In connection with
the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration
Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common
stock into which the shares of Series C Convertible Preferred Stock are convertible. The Registration Rights Agreement contains customary
representations, warranties, agreements and indemnification rights and obligations of the parties.
The
Company’s Board of Directors has designated 5,000 shares as the Series C Convertible Preferred Stock. Each share of the Series C
Convertible Preferred Stock has a stated value of $1,000. The holders of the Series C Convertible Preferred Stock, the holders of the
common stock and the holders of any other class or series of shares entitled to vote with the common stock shall vote together as one
class on all matters submitted to a vote of shareholders of the Company. Each share of Series C Convertible Preferred Stock has 172 votes
(subject to adjustment); provided that in no event may a holder of Series C Convertible Preferred Stock be entitled to vote a number of
shares in excess of such holder’s Beneficial Ownership Limitation (as defined in the Certificate of Designation and as described
below). Each share of Series C Convertible Preferred Stock is convertible, at any time and from time to time, at the option of the holder,
into that number of shares of common stock (subject to the Beneficial Ownership Limitation) determined by dividing the stated value of
such share ($1,000) by the conversion price, which is $5.50 (subject to adjustment).
The
Company shall not effect any conversion of the Series C Convertible Preferred Stock, and a holder shall not have the right to convert
any portion of the Series C Convertible Preferred Stock, to the extent that after giving effect to the conversion sought by the holder
such holder (together with such holder’s Attribution Parties (as defined in the Certificate of Designation)) would beneficially
own more than 4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock outstanding immediately after giving
effect to the issuance of shares of common stock issuable upon such conversion (the “Beneficial Ownership Limitation”).
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Stock-Based Compensation
Stock-based compensation expense recognized under
ASC 718-10 for the six months ended June 30, 2021 and 2020, was $153,163 and $96,270, 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 June 30, 2021, the total compensation cost for stock options not yet recognized
was $201,958. This cost will be recognized over the remaining vesting term of the options ranging from six months to two- and one-half
years.
Employee Stock Options
A maximum of 178,572 shares were originally available
for grant under the 2016 Equity Incentive Plan, as amended (the “2016 Plan”), and all outstanding options under the 2016 Plan
provide a cashless exercise feature. The maximum number of shares was increased by shareholder approval to 321,429. The identification
of individuals entitled to receive awards, the terms of the awards, and the number of shares subject to individual awards, were determined
by our Board of Directors or the Compensation Committee, at their sole discretion. The aggregate number of shares with respect to which
options or stock awards may be granted under the 2016 Plan and the purchase price per share, if applicable, shall be adjusted for any
increase or decrease in the number of issued shares resulting from a stock dividend, stock split, reverse stock split, recapitalization,
or similar event. As of June 30, 2021, and December 31, 2020, options to purchase 295,347 shares of common stock and 311,898 shares of
common stock were outstanding under the 2016 Plan, respectively and a further 160,000 and 140,000 non-plan options to purchase common
stock were outstanding as of June 30, 2021, and December 31, 2020, respectively. The non-plan options were granted to four executives
as hiring incentives, including the Company’s CEO.
On April 1, 2020, the Board of Directors cancelled
161,402 options previously granted to existing employees and granted 310,290 options, of which 160,866 were replaced with new options
carrying a $6.00 exercise price and a further 149,424 options were issued to existing employees, officers and directors carrying a $4.74
strike price with a vesting period ranging from 9 months to 21 months. On April 1, 2020, the new stock options issued had a fair value
of $370,312. The options that were cancelled and replaced were accounted for by valuing the original options on the day before they were
cancelled and valuing the new options on the day of issuance. The inputs used were a stock price of $4.74 on the day of cancellation and
$4.70 on the day of issuance, expected term of 2.5 years, expected volatility of 81%, no anticipated dividend and an interest rate of
0.255%. The difference between the valuations were recorded as one-time option expense given that options cancelled were already vested
and the replacement options were immediately vested. The one-time expense for this cancellation and issuance was $102,800. The strike
price of the cancelled options was $14.00. The 2016 Plan terminated pursuant to its terms on December 31,
2020. No further awards will be made under the 2016 Plan although all awards outstanding on that date will remain in effect according
to their terms.
During the first quarter of 2021, the Company’s
Board of Directors granted 20,000 new stock options with a strike price of $4.32 per share to its new VP of Product Innovation. These
options were awarded as a one-time award as a hiring incentive and have a fair value of $52,758 as of January
4, 2021. The issuance of these options generated stock option compensation expense in that quarter in the amount of $7,685 and a balance
of unamortized stock option compensation expense of $45,073, that will be expensed in the following 2.75 years.
During the second
quarter of 2021, three former staff members and one contractor forfeited 16,551 options that resulted in a charge recorded in the amount
of $2,441.
Warrants
During the second quarter of 2021, warrants representing
205,574 shares were exercised by seven holders. All of the exercises were cashless exercises with exercise prices of $7.70 and stock prices
ranging from $9.25 to $11.14 resulting in a total of 50,588 common shares. No new warrants were issued during the second quarter of 2021.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
NOTE 7 - REVENUE
Revenue Recognition and Contract Accounting
The Company generates revenue from four sources:
(1) Technology Systems; (2) AI Technology; (3) Technical Support; and (4) Consulting Services.
The Company constructs
intelligent technology systems consisting of materials and labor under customer contracts. Revenues and related costs on technology systems
revenue are recognized based on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance
does not create an asset with an alternative use to the entity and the entity has an enforceable right 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.
Contract Assets
Contract assets on uncompleted contracts represent
costs and estimated earnings in excess of billings and/or cash received on uncompleted contracts accounted for under the input method,
which recognizes revenue only to the extent of the cost incurred.
At June 30, 2021 and December 31, 2020, contract
assets on uncompleted contracts consisted of the following:
Schedule of Contract Assets on Uncompleted Contracts
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Costs and estimated earnings recognized
|
|
$
|
1,915,472
|
|
|
$
|
4,152,850
|
|
Less: Billings or cash received
|
|
|
(1,762,683
|
)
|
|
|
(4,050,392
|
)
|
Contract assets
|
|
$
|
152,789
|
|
|
$
|
102,458
|
|
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 input
method, which recognizes revenue only to the extent of the cost incurred.
At June 30, 2021 and December 31, 2020, contract
liabilities on uncompleted contracts consisted of the following:
Schedule of Contract Liabilities on Uncompleted Contracts
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Billings and/or cash receipts on uncompleted contracts
|
|
$
|
2,559,222
|
|
|
$
|
2,978,007
|
|
Less: Costs and estimated earnings recognized
|
|
|
(2,387,941
|
)
|
|
|
(2,268,454
|
)
|
Contract liabilities
|
|
$
|
171,281
|
|
|
$
|
709,553
|
|
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
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 begun to derive revenue from applications
that incorporate artificial intelligence (AI) in the form of predetermined algorithms to provide important operating information to the
users of our systems. The revenue generated from these applications of AI consists of an annual application maintenance fee which will
be recognized ratably over the year, plus fees for the design, development, testing and incorporation of new algorithms into the system
which will be recognized upon completion of each deliverable.
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 as the services are provided. Revenue
for maintenance and technical support provided on an extended-term basis is recognized ratably over the term of the contract.
For sales arrangements that do not involve multiple
elements 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 contract 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).
For sales arrangements that do not involve performance
obligations:
(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 Elements
Arrangements with customers may involve multiple
elements 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 elements
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
multiple element arrangements is as follows:
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Each element is accounted for separately when
each element 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 element is recognized using the applicable criteria under GAAP as discussed above for elements
sold in non-multiple element 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 multiple element 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 element arrangements with Company customers qualify as separate units of account for revenue
recognition purposes.
Deferred Revenue
Deferred revenues represent billings or cash received
in excess of revenue recognizable on service agreements that are not accounted for under the percentage of completion method.
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;
|
|
d.
|
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, petrochemical, 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.
|
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
Quantitative:
For the Three
Months Ended June 30, 2021
Schedule of Disaggregation of Revenue Quantitative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
Rail
|
|
|
Commercial
|
|
|
Government
|
|
|
Banking/Other
|
|
|
IT Suppliers
|
|
|
Artificial Intelligence
|
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
466,628
|
|
|
$
|
57,600
|
|
|
$
|
116,727
|
|
|
$
|
2,932
|
|
|
$
|
795
|
|
|
$
|
3,986
|
|
|
$
|
648,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods and Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey Projects
|
|
$
|
3,895
|
|
|
$
|
—
|
|
|
$
|
96,506
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100,401
|
|
Maintenance & Support
|
|
|
462,733
|
|
|
|
57,600
|
|
|
|
20,221
|
|
|
|
2,932
|
|
|
|
—
|
|
|
|
3,986
|
|
|
|
547,472
|
|
Data Center Auditing Services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Software License
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
795
|
|
|
|
—
|
|
|
|
795
|
|
Algorithms
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
466,628
|
|
|
$
|
57,600
|
|
|
$
|
116,727
|
|
|
$
|
2,932
|
|
|
$
|
795
|
|
|
$
|
3,986
|
|
|
$
|
648,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred over time
|
|
$
|
3,895
|
|
|
$
|
—
|
|
|
$
|
96,506
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100,401
|
|
Services transferred over time
|
|
|
462,733
|
|
|
|
57,600
|
|
|
|
20,221
|
|
|
|
2,932
|
|
|
|
795
|
|
|
|
3,986
|
|
|
|
548,267
|
|
|
|
$
|
466,628
|
|
|
$
|
57,600
|
|
|
$
|
116,727
|
|
|
$
|
2,932
|
|
|
$
|
795
|
|
|
$
|
3,986
|
|
|
$
|
648,668
|
|
For the Three Months Ended June 30, 2020
Segments
|
|
Rail
|
|
|
Commercial
|
|
|
Government
|
|
|
Banking
|
|
|
IT Suppliers
|
|
|
Artificial Intelligence
|
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,631,891
|
|
|
$
|
52,552
|
|
|
$
|
20,221
|
|
|
$
|
96,869
|
|
|
$
|
2,385
|
|
|
$
|
178,224
|
|
|
$
|
1,982,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods and Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey Projects
|
|
$
|
1,332,577
|
|
|
$
|
(2,421)
|
|
|
$
|
—
|
|
|
$
|
89,253
|
|
|
$
|
—
|
|
|
$
|
178,224
|
|
|
$
|
1,597,633
|
|
Maintenance & Support
|
|
|
299,314
|
|
|
|
54,973
|
|
|
|
20,221
|
|
|
|
7,616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
382,124
|
|
Data Center Auditing Services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Software License
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,385
|
|
|
|
—
|
|
|
|
2,385
|
|
|
|
$
|
1,631,891
|
|
|
$
|
52,552
|
|
|
$
|
20,221
|
|
|
$
|
96,869
|
|
|
$
|
2,385
|
|
|
$
|
178,224
|
|
|
$
|
1,982,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred over time
|
|
$
|
1,332,577
|
|
|
$
|
(2,421)
|
|
|
$
|
—
|
|
|
$
|
89,253
|
|
|
$
|
2,385
|
|
|
$
|
178,224
|
|
|
$
|
1,600,018
|
|
Services transferred over time
|
|
|
299,314
|
|
|
|
54,973
|
|
|
|
20,221
|
|
|
|
7,616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
382,124
|
|
|
|
$
|
1,631,891
|
|
|
$
|
52,552
|
|
|
$
|
20,221
|
|
|
$
|
96,869
|
|
|
$
|
2,385
|
|
|
$
|
178,224
|
|
|
$
|
1,982,142
|
|
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(Unaudited)
For the Six Months Ended June 30, 2021
Segments
|
|
Rail
|
|
|
Commercial
|
|
|
Government
|
|
|
Banking/Other
|
|
|
IT Suppliers
|
|
|
Artificial Intelligence
|
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,224,074
|
|
|
$
|
113,442
|
|
|
$
|
145,287
|
|
|
$
|
25,761
|
|
|
$
|
133,772
|
|
|
$
|
161,086
|
|
|
$
|
2,803,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods and Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey Projects
|
|
$
|
1,327,217
|
|
|
$
|
—
|
|
|
$
|
104,845
|
|
|
$
|
1,537
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,433,599
|
|
Maintenance & Support
|
|
|
896,857
|
|
|
|
113,442
|
|
|
|
40,442
|
|
|
|
24,224
|
|
|
|
—
|
|
|
|
3,986
|
|
|
|
1,078,951
|
|
Data Center Auditing Services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
130,592
|
|
|
|
—
|
|
|
|
130,592
|
|
Software License
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,180
|
|
|
|
—
|
|
|
|
3,180
|
|
Algorithms
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,100
|
|
|
|
157,100
|
|
|
|
$
|
2,224,074
|
|
|
$
|
113,442
|
|
|
$
|
145,287
|
|
|
$
|
25,761
|
|
|
$
|
133,772
|
|
|
$
|
161,086
|
|
|
$
|
2,803,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred over time
|
|
$
|
1,327,217
|
|
|
$
|
—
|
|
|
$
|
104,845
|
|
|
$
|
1,537
|
|
|
$
|
130,592
|
|
|
$
|
157,100
|
|
|
$
|
1,721,291
|
|
Services transferred over time
|
|
|
896,857
|
|
|
|
113,442
|
|
|
|
40,442
|
|
|
|
24,224
|
|
|
|
3,180
|
|
|
|
3,986
|
|
|
|
1,082,131
|
|
|
|
$
|
2,224,074
|
|
|
$
|
113,442
|
|
|
$
|
145,287
|
|
|
$
|
25,761
|
|
|
$
|
133,772
|
|
|
$
|
161,086
|
|
|
$
|
2,803,422
|
|
For the Six Months Ended June 30, 2020
Segments
|
|
Rail
|
|
|
Commercial
|
|
|
Government
|
|
|
Banking
|
|
|
IT Suppliers
|
|
|
Artificial Intelligence
|
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,345,149
|
|
|
$
|
126,887
|
|
|
$
|
47,370
|
|
|
$
|
140,988
|
|
|
$
|
134,469
|
|
|
$
|
178,224
|
|
|
$
|
2,973,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods and Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey Projects
|
|
$
|
1,813,687
|
|
|
$
|
6,202
|
|
|
$
|
—
|
|
|
$
|
113,194
|
|
|
$
|
—
|
|
|
$
|
178,224
|
|
|
$
|
2,111,307
|
|
Maintenance & Support
|
|
|
531,462
|
|
|
|
120,685
|
|
|
|
47,370
|
|
|
|
27,794
|
|
|
|
—
|
|
|
|
—
|
|
|
|
727,311
|
|
Data Center Auditing Services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
129,699
|
|
|
|
—
|
|
|
|
129,699
|
|
Software License
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,770
|
|
|
|
—
|
|
|
|
4,770
|
|
|
|
$
|
2,345,149
|
|
|
$
|
126,887
|
|
|
$
|
47,370
|
|
|
$
|
140,988
|
|
|
$
|
134,469
|
|
|
$
|
178,224
|
|
|
$
|
2,973,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred over time
|
|
$
|
1,813,687
|
|
|
$
|
6,202
|
|
|
$
|
—
|
|
|
$
|
113,194
|
|
|
$
|
134,469
|
|
|
$
|
178,224
|
|
|
$
|
2,245,776
|
|
Services transferred over time
|
|
|
531,462
|
|
|
|
120,685
|
|
|
|
47,370
|
|
|
|
27,794
|
|
|
|
—
|
|
|
|
—
|
|
|
|
727,311
|
|
|
|
$
|
2,345,149
|
|
|
$
|
126,887
|
|
|
$
|
47,370
|
|
|
$
|
140,988
|
|
|
$
|
134,469
|
|
|
$
|
178,224
|
|
|
$
|
2,973,087
|
|
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2021
(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 duostech. 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 duostech 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 six months ended June 30,
2021 and 2020, the total amount expensed is $93,422 and $209,418, respectively. The Company had no open accounts payable with Luceon at
June 30, 2021. 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 July 15, 2021, as previously disclosed, the
Company held its annual meeting of shareholders at which all five nominees for director were elected. In
addition to other matters, the shareholders adopted the Stockholder Approval relating to the Series C Preferred
Stock (see Note 6) and the 2021 Equity Incentive Plan.
On July 27, 2021 the Company entered into a 127
month lease for a new facility which will house all operations from the two current locations. The Company will formally relocate to the
new location on November 1, 2021.