NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 1 NATURE OF OPERATIONS 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 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, significantly improve operations, and security and importantly dramatically improves the vehicle throughput on each lane 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 Companys 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 Companys OSPI patent which was awarded in 2010. The Company offers dcVue available for license to our customers as a licensed software product.
The Companys 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, backlog and improves profitability, responsibly grow the business both organically and through selective acquisitions, and finally promote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with the Company.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
F-10
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Reverse Stock Split
All share and per share amounts have been presented to give retroactive effect to a 1-for-14 reverse-stock split that occurred in January 2020.
Reclassifications
The Company reclassified certain operating expenses for the year ended December 31, 2019 to conform to 2020 classification. There was no net effect on the total operating expenses of such reclassification.
The following table reflects the reclassification adjustment effect for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Reclassification
|
|
|
|
|
After Reclassification
|
|
|
|
For the Year Ended
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
|
|
2019
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
$
|
421,535
|
|
|
Sales and marketing
|
|
$
|
950,962
|
|
Salaries, wages and contract labor
|
|
|
5,570,140
|
|
|
Engineering
|
|
|
1,254,235
|
|
Research and development
|
|
|
431,425
|
|
|
Research and development
|
|
|
1,479,334
|
|
Professional fees
|
|
|
252,825
|
|
|
AI technologies
|
|
|
1,215,488
|
|
General and administrative expenses
|
|
|
2,212,035
|
|
|
Administration
|
|
|
3,987,941
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
8,887,960
|
|
|
|
|
$
|
8,887,960
|
|
Principles of Consolidation
The consolidated financial statements include the accounts of the Company 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 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 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 December 31, 2020, balance in one financial institution exceeded federally insured limits by approximately $3,490,000.
F-11
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Significant Customers and Concentration of Credit Risk
The Company had certain customers whose revenue individually represented 10% or more of the Companys total revenue, or whose accounts receivable balances individually represented 10% or more of the Companys total accounts receivable, as follows:
For the year ended December 31, 2020 two customers accounted for 45% and 23% of revenues. For the year ended December 31, 2019, three customers accounted for 48%, 13% and 10% of revenues. In all cases, there are no minimum contract values 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:
·
For Customer 1, termination can be made, prior to delivery of products or services, in the case where either party breach any of its obligations under the agreement with the Company. The other party may terminate the agreement effective fifteen (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 thirty (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.
At December 31, 2020, two customers accounted for 56% and 30% of accounts receivable. At December 31, 2019, two customers accounted for 68% and 10% 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.
Geographic Concentration
Approximately 51% and 59% of revenue in 2020 and 2019, respectively, is generated from customers outside of the United States.
Significant Vendors and Concentration of Credit Risk
At December 31, 2020, one vendor accounted for 36% of accounts payable. At December 31, 2019, three vendors accounted for 15%, 13% and 12% of accounts payable.
One supplier accounted for approximately 11% of total purchases for the year ended December 31, 2020. One supplier accounted for approximately 28% of total purchases for the year ended December 31, 2019.
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.
F-12
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
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 entitys own assumptions that the market participants would use in 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 Boards (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.
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 accounts, 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.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated economic life of the property and equipment (three to five years). When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the statement of operations. Leasehold improvements are expensed over the shorter of the term of our lease or their useful lives.
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.
Patents and Trademarks
Patents and trademarks which are stated at amortized cost, relate to the development of video surveillance security system technology and are being amortized over 17 years.
F-13
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Long-Lived Assets
The Company evaluates the recoverability of its property, equipment, and other long-lived assets in accordance with FASB ASC 360-10-35-15 Impairment or Disposal of Long-Lived Assets, which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceed the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate. This guidance requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Product Warranties
The Company has a 90 day warranty period for materials and labor after final acceptance of all projects. If any parts are defective they are replaced under our vendor warranty which is usually 12 to36 months. Final acceptance terms vary by customer. Some customers have a cure period for any material deviation and if the Company fails or is unable to correct any deviations, a full refund of all payments made by the customer will be arranged by the Company. As of December 31, 2020 and 2019, the warranty costs have been de-minimis, therefore no accrual of warranty liability has been made.
Loan Costs
Loan costs paid to lenders or third parties are recorded as debt discounts to the related loans and amortized to interest expense over the loan term.
Sales Returns
Our systems are sold as integrated systems and there are no sales returns allowed.
Revenue Recognition
Technology Systems
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 estimated 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.
F-14
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
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 entitys 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. (see Note 9)
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.
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 recognizes revenue from its IT asset management business in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605-25 which addresses revenue recognition for the software industry. The general criteria for revenue recognition under ASC 985-605 for our Company, which sells software licenses, which do not require any significant modification or customization, is that revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.
The Companys IT asset management business generates revenues 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 multiple elements:
(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
F-15
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
(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.
AI Technologies
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.
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. At December 31, 2020 and 2019, the balance of deferred revenue was $315,370 and $936,428, respectively. The amounts will be recorded to revenue over the next 12 months.
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 United States, 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.
Our goods and services are transferred over time.
F-16
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Quantitative:
For the Year Ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
Rail
|
|
|
Commercial
|
|
|
Petrochemical
|
|
|
Government
|
|
|
Banking
|
|
|
IT
Suppliers
|
|
|
Artificial
Intelligence
|
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
5,558,405
|
|
|
$
|
298,705
|
|
|
$
|
23,951
|
|
|
$
|
687,293
|
|
|
$
|
188,819
|
|
|
$
|
273,604
|
|
|
$
|
1,008,671
|
|
|
$
|
8,039,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods and Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey Projects
|
|
$
|
4,131,155
|
|
|
$
|
59,616
|
|
|
$
|
33,363
|
|
|
$
|
599,481
|
|
|
$
|
132,515
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,956,130
|
|
Technical Support
|
|
|
1,427,250
|
|
|
|
239,089
|
|
|
|
(9,412
|
)
|
|
|
87,812
|
|
|
|
56,304
|
|
|
|
|
|
|
|
|
|
|
|
1,801,043
|
|
Data Center Auditing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266,449
|
|
|
|
|
|
|
|
266,449
|
|
Software License
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,155
|
|
|
|
|
|
|
|
7,155
|
|
Algorithms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,008,671
|
|
|
|
1.008,671
|
|
|
|
$
|
5,558,405
|
|
|
$
|
298,705
|
|
|
$
|
23,951
|
|
|
$
|
687,293
|
|
|
$
|
188,819
|
|
|
$
|
273,604
|
|
|
$
|
1,008,671
|
|
|
$
|
8,039,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred over time
|
|
$
|
4,131,155
|
|
|
$
|
59,616
|
|
|
$
|
33,363
|
|
|
$
|
599,481
|
|
|
$
|
132,515
|
|
|
$
|
273,604
|
|
|
$
|
1,008,671
|
|
|
$
|
6,238,405
|
|
Services transferred over time
|
|
|
1,427,250
|
|
|
|
239,089
|
|
|
|
(9,412
|
)
|
|
|
87,812
|
|
|
|
56,304
|
|
|
|
|
|
|
|
|
|
|
|
1,801,043
|
|
|
|
$
|
5,558,405
|
|
|
$
|
298,705
|
|
|
$
|
23,951
|
|
|
$
|
687,293
|
|
|
$
|
188,819
|
|
|
$
|
273,604
|
|
|
$
|
1,008,671
|
|
|
$
|
8,039,448
|
|
F-17
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
For the Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
Rail
|
|
|
Commercial
|
|
|
Petrochemical
|
|
|
Government
|
|
|
Banking
|
|
|
IT Suppliers
|
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
11,201,794
|
|
|
$
|
465,782
|
|
|
$
|
99,841
|
|
|
$
|
201,659
|
|
|
$
|
1,371,821
|
|
|
$
|
300,418
|
|
|
$
|
13,641,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods and Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey Projects
|
|
$
|
10,020,318
|
|
|
$
|
422,230
|
|
|
$
|
70,545
|
|
|
$
|
88,723
|
|
|
$
|
1,361,622
|
|
|
$
|
|
|
|
$
|
11,963,438
|
|
Maintenance & Support
|
|
|
1,181,476
|
|
|
|
43,552
|
|
|
|
29,296
|
|
|
|
112,936
|
|
|
|
10,199
|
|
|
|
|
|
|
|
1,377,459
|
|
Data Center Auditing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,658
|
|
|
|
246,658
|
|
Software License
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,760
|
|
|
|
53,760
|
|
|
|
$
|
11,201,794
|
|
|
$
|
465,782
|
|
|
$
|
99,841
|
|
|
$
|
201,659
|
|
|
$
|
1,371,821
|
|
|
$
|
300,418
|
|
|
$
|
13,641,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred over time
|
|
$
|
10,020,318
|
|
|
$
|
422,230
|
|
|
$
|
70,545
|
|
|
$
|
88,723
|
|
|
$
|
1,361,622
|
|
|
$
|
300,418
|
|
|
$
|
12,263,856
|
|
Services transferred over time
|
|
|
1,181,476
|
|
|
|
43,552
|
|
|
|
29,296
|
|
|
|
112,936
|
|
|
|
10,199
|
|
|
|
|
|
|
|
1,377,459
|
|
|
|
$
|
11,201,794
|
|
|
$
|
465,782
|
|
|
$
|
99,841
|
|
|
$
|
201,659
|
|
|
$
|
1,371,821
|
|
|
$
|
300,418
|
|
|
$
|
13,641,315
|
|
Advertising
The Company expenses the cost of advertising. During the years ended December 31, 2020 and 2019, there were no advertising costs.
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 Companys 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 employee 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.
Income Taxes
The Company accounts for income taxes in accordance with the Financial Accounting Standards Board FASB Accounting Standards Codification (ASC) 740, Income Taxes, which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
F-18
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The Company evaluates all significant tax positions as required by ASC 740. As of December 31, 2020, the Company does not believe that it has taken any positions that would require the recording of any additional tax liability nor does it believe that there are any unrealized tax benefits that would either increase or decrease within the next year.
Any penalties and interest assessed by income taxing authorities are included in operating expenses.
The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed. Tax years 2017, 2018 and 2019 remain open for potential audit.
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 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 December 31, 2020, there was an aggregate of 1,587,553 outstanding warrants to purchase shares of common stock. At December 31, 2020, there was an aggregate of 451,898 employee stock options to purchase shares of common stock. Also, at December 31, 2020, 243,571 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.
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this guidance effective January 1, 2019.
On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases, and (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Companys 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. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.
Operating lease right of use assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of future 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 adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
Recent Accounting Pronouncements
From time to time, the FASB or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards Update (ASU).
F-19
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
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 entitys 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 entitys 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 consolidated financial statements, the Company had a net loss of $6,747,435 for the year ended December 31, 2020. During the same period, cash used in operating activities was $4,231,439. The working capital surplus and accumulated deficit as of December 31, 2020 were $2,167,058 and $39,488,150, 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).
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 Companys success in increasing its working capital surplus after receiving proceeds from the 2020 Offering of more than $8.1 million has given us the runway required to maintain our business strategy overall. In addition, the Company was successful in securing a loan of $1.4 million during the second quarter from the Small Business Administration via the PPP/CARES Act program which further bolstered the Companys cash reserves. Management has been and continues to take actions including, but not limited to, elimination of certain costs that did not contribute to short term revenue, re-aligning management 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 February 2021, management has taken further significant actions including reorganizing senior management and selectively improving organizational efficiency to effectively grow the business as the expected order flow resumes in 2021. (see Note 15)
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. However, if we experience a significant increase in business in 2021 beyond current forecasts, we may require an increase in working capital in that year. In the first quarter of 2021, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock (see Note 15). 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 to attain consistently profitable operations. Although the current global pandemic related to the coronavirus (Covid-19) has affected 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. 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 12 months from the date of this report.
F-20
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable were as follows at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts receivable
|
|
$
|
1,244,876
|
|
|
$
|
2,757,013
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
(145,405
|
)
|
|
|
$
|
1,244,876
|
|
|
$
|
2,611,608
|
|
There was bad debt (recovery) expense related to accounts receivable of (3,217) and $220,405 in 2020 and 2019, respectively.
NOTE 4 PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follow at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Furniture, fixtures and equipment
|
|
$
|
1,569,328
|
|
|
$
|
1,290,183
|
|
Less: Accumulated depreciation
|
|
|
(1,227,148
|
)
|
|
|
(1,030,002
|
)
|
|
|
$
|
342,180
|
|
|
$
|
260,181
|
|
Depreciation expense in 2020 and 2019 was $197,146 and $159,252, respectively.
NOTE 5 PATENTS AND TRADEMARKS
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Patents and trademarks
|
|
$
|
301,770
|
|
|
$
|
293,585
|
|
Less: Accumulated amortization
|
|
|
(237,355
|
)
|
|
|
(231,987
|
)
|
|
|
$
|
64,415
|
|
|
$
|
61,598
|
|
Amortization expense in 2020 and 2019 was $5,368 and $5,368, respectively.
NOTE 6 SOFTWARE DEVELOPMENT COSTS
In 2018, the Company capitalized $60,000, relating to the development of new software products. These software products were developed by a third party and had passed the preliminary project stage prior to capitalization.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Software development costs
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
Less: Accumulated amortization
|
|
|
(60,000
|
)
|
|
|
(40,000
|
)
|
|
|
$
|
|
|
|
$
|
20,000
|
|
Amortization of software development costs in 2020 and 2019 was $20,000 and $20,000, respectively.
F-21
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 7 DEBT
Notes Payable Insurance Premium Financing Agreements
The Companys notes payable relating to financing agreements classified as current liabilities consist of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Notes Payable
|
|
Principal
|
|
|
|
Interest
|
|
Principal
|
|
|
|
Interest
|
|
Third Party - Insurance Note 1
|
|
$
|
23,327
|
|
|
|
7.75
|
%
|
|
$
|
28,500
|
|
|
|
7.31
|
%
|
|
Third Party - Insurance Note 2
|
|
|
10,457
|
|
|
|
5.26
|
%
|
|
|
|
|
|
|
6.36
|
%
|
|
Third Party - Insurance Note 3
|
|
|
9,158
|
|
|
|
|
|
|
|
13,799
|
|
|
|
|
|
|
Third Party - Insurance Note 4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,942
|
|
|
|
|
|
|
$
|
42,299
|
|
|
|
|
|
|
The Company entered into an agreement on December 23, 2019 with its insurance provider by issuing a $28,500 note payable (Insurance Note 1) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 7.31% payable in monthly installments of principal and interest totaling $2,218 through October 23, 2020. The policy renewed on December 23, 2020 in the amount of $30,994 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 December 31, 2020 and December 31, 2019 was $23,327 and $28,500, respectively.
The Company entered into an agreement on April 15, 2019 in the amount of $51,940 with an annual interest rate of 6.36% payable (Insurance Note 2) with monthly installments of principal and interest totaling $5,326 through December 15, 2019 and the Company renewed the policy on April 15, 2020 in the amount of $51,379 with an annual interest rate of 5.26% payable in monthly installments of principal and interest totaling $5,263 through February 15, 2021. At December 31, 2020 and December 31, 2019, the balance of Insurance Note 2 was $10,457 and zero, respectively.
The Company entered into an agreement on September 15, 2019 in the amount of $13,799 with its insurance provider by issuing a note payable (Insurance Note 3) for the purchase of an insurance policy, secured by 5 installment payments. The Company renewed the policy on September 15, 2020, secured by 12 monthly installments. At December 31, 2020 and December 31, 2019, the balance of Insurance Note 3 was $9,158 and $13,799, respectively.
The Company entered into an agreement on February 3, 2019 in the amount of $141,058 with an annual interest rate of 6.36% payable in monthly installments of principal and interest totaling $14,520 (Insurance Note 4) through December 3, 2019. The policy renewed on February 3, 2020 in the amount of $109,812 with eight monthly installments of $13,726. At December 31, 2020 and December 31, 2019, the balance of Insurance Note 4 was zero and 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 December 31, 2020 and 2019, the balance of these notes was $192,804 and $134,098 respectively.
F-22
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
At December 31, 2020, future minimum note payments due under the equipment financing agreements are as follows:
|
|
|
|
|
As of December 31,
|
Amount
|
|
2021
|
|
$
|
106,588
|
|
2022
|
|
|
86,735
|
|
2023
|
|
|
23,515
|
|
Total minimum equipment financing payments
|
|
$
|
216,838
|
|
Less: interest
|
|
|
(24,034
|
)
|
Total equipment financing at December 31, 2020
|
|
$
|
192,804
|
|
Less: current portion of equipment financing
|
|
|
(89,620
|
)
|
Long-term portion of equipment financing
|
|
$
|
103,184
|
|
Notes Payable Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Payable To
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Principal
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
267,000
|
|
|
|
3%
|
|
Related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
733,000
|
|
|
|
3%
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
Less unamortized discounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,627
|
)
|
|
|
|
|
Total, net
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
905,373
|
|
|
|
|
|
The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the aggregate principal amount of $267,000, pursuant to a note, repayable on June 25, 2020. The note carried an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 11,920 shares of the Companys common stock at a price of $7.70 per share. On June 22, 2020, the Company repaid this short-term note in the amount of $267,000. The balance of this note as of December 31, 2020 and 2019 was zero and $267,000, respectively.
The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the aggregate principal amount of $733,000, pursuant to a note, repayable on June 25, 2020. The note carried an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 32,724 shares of the Companys common stock at a price of $7.70 per share. On June 22, 2020, the Company repaid this short-term note in the amount of $733,000. The balance of this note as of December 31, 2020 and 2019 was zero and $733,000, respectively.
The Company determined the relative fair value between the notes and the warrants on the issue date utilizing the Bi-nominal Lattice Pricing Model for the warrants. As a result, the Company allocated $146,779 to the warrants, which was recorded as a debt discount with an offset to additional paid in capital in the accompanying consolidated financial statements. The fair value pricing model used the following assumptions: stock price $7.00, warrant exercise price $7.70, expected term of 5 years, expected volatility of 86% and discount rate of 1.609%.
For the year ended December 31, 2020, the Company recorded $94,627 for amortization of the debt discount discussed above to interest expense in the accompanying consolidated financial statements.
Notes Payable
The Company entered into an agreement on August 12, 2019 with a shareholder by executing a short-term $262,500 note repayable on November 11, 2019. The note was issued with a 5% original issue discount and the Company received a net amount of $250,000. No other consideration was given. On November 12, 2019, the Company repaid the short-term note in the amount of $262,500. The original issue discount of $12,500 was fully amortized in 2019.
F-23
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Notes Payable SBA Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Payable To
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Principal
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loan
|
|
|
|
|
|
|
|
|
|
$
|
1,410,270
|
|
|
|
1%
|
|
|
$
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
1,410,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
(627,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
|
|
|
|
|
|
|
|
$
|
782,805
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
On April 23, 2020, the Company entered into a promissory note (the Note) with BBVA USA, which provides 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 has a two-year term and bears interest at a rate of 1.00% per annum (APR 1.014%). Monthly principal and interest payments are deferred for seven months after the date of disbursement and was extended additional six months from the date of disbursement. The Loan may 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. (see Note 15)
NOTE 8 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. This line of credit has been paid in full as of May 5, 2020.The balance as of December 31, 2020 and December 31, 2019, was zero and $27,615, respectively, including accrued interest.
NOTE 9 CONTRACT ACCOUNTING
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 percentage of completion contract method.
At December 31, 2020 and 2019, contract assets on uncompleted contracts consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Costs and estimated earnings recognized
|
|
$
|
4,152,850
|
|
|
$
|
3,700,124
|
|
Less: Billings or cash received
|
|
|
(4,050,392
|
)
|
|
|
(2,324,204
|
)
|
Contract Assets
|
|
$
|
102,458
|
|
|
$
|
1,375,920
|
|
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 percentage of completion contract method.
At December 31, 2020 and 2019, contract liabilities on uncompleted contracts consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Billings and/or cash receipts on uncompleted contracts
|
|
$
|
2,978,007
|
|
|
$
|
35,665
|
|
Less: Costs and estimated earnings recognized
|
|
|
(2,268,454
|
)
|
|
|
(27,004
|
)
|
Contract Liabilities
|
|
$
|
709,553
|
|
|
$
|
8,661
|
|
F-24
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 10 DEFERRED COMPENSATION
As of December 31, 2020, and 2019, the Company has accrued $797,042 and $277,850, respectively, of deferred compensation relating to individual agreements with former CEO and sales staff, which are included in the accompanying consolidated balance sheet in accrued expenses.
NOTE 11 COMMITMENTS AND CONTINGENCIES
Delinquent Payroll Taxes Payable
The Company has subsequently paid its delinquent IRS payroll taxes and late fees. At December 31, 2020 and December 31, 2019, the payroll taxes payable balance of $3,146 and $115,111 included accrued late fees in the amount of zero and $37,210, respectively. The remaining balance of $3,146 with the state of California will be remitted in 2021.
Licensing Agreement
In 2018, the Company had entered into a software license and configuration services agreement with a third-party vendor. The support and maintenance fees of approximately $300,000 included support and updates to the vendors Gateway software and customer access to their services (including web application, mobile application, and associated APIs) for gateway configuration, gateway monitoring and management, application configuration, application management, and automatic model updates.
Simultaneously, the Company had also entered into a SaaS agreement with the same vendor that was an Amazon AWS-hosted software service supporting the creation and deployment of Artificial Intelligence. It consisted of a public API, web application, iPhone application, and associated back-end services.
Consistent with the provisions of the agreements, the Company sent formal notice of termination and non-renewal of both agreements to the vendor. The vendor confirmed the end-of-service date effective December 31, 2019 (the Termination Date). No further obligations from either party are in effect beyond the Termination Date.
Effective December 1, 2019, all Artificial Intelligence development and deployment were seamlessly transitioned to the Companys truevue360 platform.
Operating Lease Obligations
The Company has an operating lease agreement for office space of approximately 8,308 square feet that was amended on May 1, 2016 and again on April 1, 2019, increasing the office space to approximately 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 approximately 4,400 square feet on June 1, 2018 and ending May 31, 2021. On December 21, 2020, this lease was extended to 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 December 31, 2020, future minimum lease payments due under Operating Leases are as follows:
|
|
|
|
|
As of December 31,
|
Amount
|
|
2021
|
|
$
|
213,568
|
|
Total minimum operating lease payments
|
|
|
213,568
|
|
Less: interest
|
|
|
(10,771
|
)
|
Total lease liability at December 31, 2020
|
|
$
|
202,797
|
|
F-25
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
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 right of use asset balance at December 31, 2020 was $202,797. These are the Companys only operating leases whose term is greater than 12 months. The adoption of ASU 2016-02 did not materially affect our consolidated statement of operations or our 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.
The current monthly lease payment is $25,098. Rental expense for the office lease during 2020 and 2019 was $279,975 and $262,710, respectively.
Operating Leases
The Company has several non-cancelable operating leases, primarily for equipment, that expire over the next year. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease. Rental expense for operating leases during 2020 and 2019 was $21,341 and $12,104, respectively.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
FP Mailing
|
|
$
|
375
|
|
|
$
|
372
|
|
Brewsmart Beverage/A. Antique Coffee Services
|
|
|
320
|
|
|
|
235
|
|
New Lane
|
|
|
1,800
|
|
|
|
500
|
|
Canon
|
|
|
10,144
|
|
|
|
10,997
|
|
Apple Financial Services
|
|
|
5,018
|
|
|
|
|
|
Ring Power
|
|
|
1,688
|
|
|
|
|
|
Ascentium Leasing
|
|
|
1,060
|
|
|
|
|
|
NFS Leasing
|
|
|
936
|
|
|
|
|
|
Total rent expense
|
|
$
|
21,341
|
|
|
$
|
12,104
|
|
Executive Severance Agreement
On April 1, 2018, the Company entered into an employment agreement (the Arcaini Employment Agreement) with Gianni B. Arcaini, pursuant to which Mr. Arcaini served as Chief Executive Officer and Chairman of the Board of Directors of the Company. Under the Arcaini Employment Agreement, Mr. Arcaini was paid an annual salary of $249,260 and an annual car allowance of $18,000. In addition, as incentive-based compensation, Mr. Arcaini was entitled to 1% of annual gross revenues of the Company and its subsidiaries. The Arcaini Employment Agreement had an initial term through March 31, 2020, subject to renewal for successive one-year terms unless either party gave notice of that partys election to not renew to the other at least 60 days prior to the expiration of the then-current term. The Arcaini Employment Agreement was approved by the Compensation Committee.
As previously disclosed, on July 10, 2020, the Company announced that Mr. Arcaini would retire from these positions, 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. Arcainis 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.
F-26
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
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 bi-weekly installments for 30 months thereafter, as contemplated in the Arcaini Employment Agreement. In addition, the Company will pay one-half of Mr. Arcainis current life insurance premiums for 36 months of approximately $1,200 and provide and pay for his health insurance for 18 months following the Separation Date of approximately $1,700. 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 12 INCOME TAXES
The Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax assets at December 31, 2020 and 2019 consist of net operating loss carryforwards and differences in the book basis and tax basis of intangible assets.
The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income tax benefit at U.S. statutory rate of 21%
|
|
$
|
(1,416,961
|
)
|
|
$
|
(518,885
|
)
|
State income taxes
|
|
|
(242,908
|
)
|
|
|
(88,952
|
)
|
Non-deductible expenses
|
|
|
135,152
|
|
|
|
26,943
|
|
Change in valuation allowance
|
|
|
1,524,717
|
|
|
|
580,894
|
|
Total provision for income tax
|
|
$
|
|
|
|
$
|
|
|
The Companys approximate net deferred tax assets as of December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
6,807,482
|
|
|
$
|
5,224,941
|
|
Intangible assets
|
|
|
31,841
|
|
|
|
53,995
|
|
Allowance for bad debt
|
|
|
|
|
|
|
35,670
|
|
|
|
|
6,839,323
|
|
|
|
5,314,606
|
|
Valuation allowance
|
|
|
(6,839,323
|
)
|
|
|
(5,314,606
|
)
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
The gross operating loss carryforward was approximately $27,672,692 and $21,403,666 at December 31, 2020 and 2019, respectively. The Company provided a valuation allowance equal to the deferred income tax assets for the years ended December 31, 2020 and 2019 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward and other deferred tax assets. The increase in the valuation allowance was $1,524,717 in 2020.
The potential tax benefit arising from the net operating loss carryforward of $4,357,876 from the period prior to January 1, 2018 will expire in 2037. The potential tax benefit arising from the net operating loss carryforward of $2,409,245 from the period following the Acts effective date can be carried forward indefinitely within the annual usage limitations.
F-27
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual limitation as a result of ownership or business changes that may occur in the future. The Company has not conducted a study to determine the limitations on the utilization of these net operating loss carryforwards. If necessary, the deferred tax assets will be reduced by any carryforward that may not be utilized or expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Companys 2019, 2018 and 2017 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE 13 STOCKHOLDERS EQUITY (DEFICIT)
2016 Equity Plan
On March 11, 2016, the Board adopted the 2016 Equity Incentive Plan (the 2016 Plan) and the shareholders approved the 2016 Plan during the annual shareholders meeting on April 21, 2016. On May 27, 2016, the Company filed a registration statement for the securities planned to be issued under the plan which became effective at that date.
The 2016 Plan provided for the issuance of up to 16,327 shares of our common stock. The purpose of the Plan was 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 stockholders. In March 2018, the Board of Directors approved an increase in the total amount of shares or share equivalents that could be issued under the 2016 Plan to 178,572. On July 31, 2019, the shareholders approved an increase in the total maximum amount issuable under the 2016 Plan to 321,429.
On April 23, 2018, the Company issued a total of 160,152 incentive stock options to certain employees and directors under the 2016 Plan. In 2019, the Company issued an additional 17,144 options for two directors who joined the board and a former officer forfeited 14,286 options. On April 1, 2020, the Company cancelled and re-issued 160,866 existing non-qualified options to key staff members, officers and directors which had an exercise price of $14.00 per share with a reduced exercise price of $6.00 per share. In addition, a further 149,424 options were issued to key staff members, officers and directors with an exercise price of $4.74 per share and 536 options were forfeited. From September to December 2020, 140,000 options with strike prices ranging from $4.18 to $4.35 were issued the Companys new CEO and two key staff members as an incentive to join the Company. At the end of 2020 there were 311,898 options issued under the 2016 Plan and 140,000 non-plan options. (see Note 14)
Administration
The 2016 Plan was administered by the Compensation Committee of the Board, which currently consists of two members of the Board, each of whom is a non-employee director within the meaning of Rule 16b-3 promulgated under the Exchange Act and an outside director within the meaning of Code Section 162(m). Among other things, the Compensation Committee had complete discretion, subject to the express limits of the 2016 Plan, to determine the directors, employees and nonemployee consultants to be granted an award, the type of award to be granted the terms and conditions of the award, the form of payment to be made and/or the number of shares of common stock subject to each award, the exercise price of each option and base price of each stock appreciation right (SAR), the term of each award, the vesting schedule for an award, whether to accelerate vesting, the value of the common stock underlying the award, and the required withholding, if any. The Compensation Committee may amend, modify or terminate any outstanding award, provided that the participants consent to such action is required if the action would impair the participants rights or entitlements with respect to that award. The Compensation Committee is also authorized to construe the award agreements and may prescribe rules relating to the 2016 Plan. Notwithstanding the foregoing, the Compensation Committee does not have any authority to modify an award under the 2016 Plan with terms or conditions that would cause the grant, vesting or exercise thereof to be considered nonqualified deferred compensation subject to Code Section 409A.
F-28
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Grant of Awards, Shares Available for Awards
The 2016 Plan provided for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees and nonemployee consultants of the Company or its affiliates. We reserved a total of 321,429 shares of common stock for issuance as or under awards made under the 2016 Plan. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2016 Plan.
Currently, there are twenty-five identified employees (including four executive officers and directors), three non-employee directors, and up to thirty other current or future staff members who would be entitled to receive stock options and/or shares of restricted stock under the 2016 Plan. Future new hires and additional non-employee directors and/or consultants would be eligible to participate in the 2016 Plan as well.
Stock Options
The 2016 Plan provided for either incentive stock options (ISOs), which are intended to meet the requirements for special federal income tax treatment under the Code, or nonqualified stock options (NQSOs). The stockholders approved the 2016 Plan at the annual meeting as previously described. Stock options could be granted on such terms and conditions as the Compensation Committee may determine, provided, however, that the per share exercise price under a stock option could not be less than the fair market value of a share of the Companys common stock on the date of grant and the term of the stock option may not exceed 10 years (110% of such value and five years in the case of an ISO granted to an employee who owned (or was deemed to own) more than 10% of the total combined voting power of all classes of capital stock of our Company or a parent or subsidiary of our Company). ISOs may only be granted to employees. In addition, the aggregate fair market value of our common stock covered by one or more ISOs (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Any excess is treated as a NQSO.
Stock Appreciation Rights
A SAR entitles the participant, upon exercise, to receive an amount, in cash or stock or a combination thereof, equal to the increase in the fair market value of the underlying common stock between the date of grant and the date of exercise. SARs could be granted in tandem with, or independently of, stock options granted under the 2016 Plan. A SAR granted in tandem with a stock option (i) is exercisable only at such times, and to the extent, that the related stock option is exercisable in accordance with the procedure for exercise of the related stock option, (ii) terminates upon termination or exercise of the related stock option (likewise, the common stock option granted in tandem with a SAR terminates upon exercise of the SAR), (iii) is transferable only with the related stock option, and (iv) if the related stock option is an ISO, may be exercised only when the value of the stock subject to the stock option exceeds the exercise price of the stock option. A SAR that is not granted in tandem with a stock option is exercisable at such times as the Compensation Committee may specify.
Performance Shares and Performance Unit Awards
Performance share and performance unit awards entitle the participant to receive cash or shares of our common stock upon the attainment of specified performance goals. In the case of performance units, the right to acquire the units is denominated in cash values.
Restricted Stock Awards and Restricted Stock Unit Awards
A restricted stock award is a grant or sale of common stock to the participant, subject to our right to repurchase all or part of the shares at their purchase price (or to require forfeiture of such shares if issued to the participant at no cost) in the event that conditions specified by the Compensation Committee in the award are not satisfied prior to the end of the time period during which the shares subject to the award may be repurchased by or forfeited to us. Our restricted stock unit entitles the participant to receive a cash payment equal to the fair market value of a share of common stock for each restricted stock unit subject to such restricted stock unit award, if the participant satisfies the applicable vesting requirement.
F-29
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Unrestricted Stock Awards
An unrestricted stock award is a grant or sale of shares of our common stock to the participant that is not subject to transfer, forfeiture or other restrictions, in consideration for past services rendered to the Company or an affiliate or for other valid consideration.
Amendment and Termination
The compensation committee may adopt, amend and rescind rules relating to the administration of the 2016 Plan, but no such amendment or termination will be made that materially and adversely impairs the rights of any participant with respect to any award received thereby under the 2016 Plan without the participants consent, other than amendments that are necessary to permit the granting of awards in compliance with applicable laws. We have attempted to structure the 2016 Plan so that remuneration attributable to stock options and other awards will not be subject to the deduction limitation contained in Code Section 162(m). The 2016 Plan terminated pursuant to its terms on December 31, 2020, although all outstanding awards on such date continue in full force and effect.
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. 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 holders 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 holders affiliates, and any persons acting as a group together with such holder or any of such holders 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 the date hereof, there are 1,705 shares of Series B Convertible Preferred Stock issued and outstanding (see below for 2019 and 2020 conversions to common stock).
Common stock issued for warrants
During the first quarter of 2019, the Company entered into an agreement with two shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 214,286 shares, to reduce the exercise price of these warrants to $7.70 from the original exercise price of $9.10 based on immediate exercise. Both shareholders exercised these warrants in March 2019 for proceeds to the Company of $1,650,000.
The Company also accepted warrant exercises in the second quarter of 2019 from three additional shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 66,756 shares. The exercise price of these warrants was also lowered to $7.70 from the original exercise price of $9.10 based on immediate exercise for further proceeds to the Company of $514,020. Further, during the second quarter of 2019, the Company issued 9,878 shares of common stock upon the cashless exercise of 46,571 common stock warrants.
F-30
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Additionally, the Company also accepted warrant exercises in the third quarter of 2019 from two additional shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 19,643 shares of common stock for proceeds to the Company in the amount of $151,250.
The Company also accepted a warrant exercise in the fourth quarter of 2019 from one shareholder who was also a holder of warrants to purchase shares of common stock in the aggregate amount of 357 shares of common stock for proceeds to the Company in the amount of $2,750.
During the third quarter of 2020, 67,500 warrants previously issued as compensation for banking fees related to the 2020 offering, were released from a contractual lock-up pursuant to the terms of the raise lock-up. In addition, 1,197 warrants expired, and 9,450 warrants were cancelled and re-issued on the direction of the holder.
Common stock issued for services and settlements
The Company issued 2,484 shares of common stock on August 28, 2019 for payment of accrued board fees to two directors in the amount of $19,167 for services to the Board.
The Company issued 2,039 shares of common stock on December 31, 2019 for payment of accrued board fees to three directors in the amount of $13,750 for services to the Board.
The Company issued 1,611 shares of common stock on March 31, 2020 for payment of accrued board fees to three directors in the amount of $7,500 for services to the Board.
The Company issued 1,632 shares of common stock on June 30, 2020 for payment of accrued board fees to three directors in the amount of $7,500 for services to the Board.
The Company issued 7,869 shares of common stock on September 30, 2020 for payment of accrued board fees to three directors in the amount of $37,500 for services to the Board.
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the year ended December 31, 2020 and 2019, was $454,770 and $44,874, respectively, for stock options granted to employees and directors. This expense is included in selling, general and administrative expenses in the 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 is ultimately expected to vest during the period. At December 31, 2020, the total compensation cost for stock options not yet recognized was $264,256. This cost will be recognized over the remaining vesting term of the options of approximately one year.
Series B Convertible Preferred Stock
A holder of Series B Convertible Preferred Stock converted 750 shares into 107,142 shares of common stock, valued at $750,000 during the third quarter of 2019.
A holder of Series B Convertible Preferred Stock converted 375 shares into 53,571 shares of common stock, valued at $375,000 during the fourth quarter of 2019.
F-31
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Treasury Stock
In August 2016, the Companys Board of Directors approved a new class of Preferred Stock, Series A. For shareholders who invested in previous private placements, the Company was offering on a case-by-case basis, the ability to convert the existing amount invested into an equivalent amount in the Series A on the condition that they invest an equivalent additional amount in the Series A. In December of 2017, the Company redeemed all of the Series A and continues to hold 235 shares purchased for $148,000 as a part of the original transaction. In December 2018, the Company entered into an agreement with two shareholders to purchase shares from them at fair market value. The Company purchased 84 shares at $7.00 per shares and 140 shares at $6.30 per share. In 2019, the Company entered into an agreement with two shareholders to purchase shares from them at fair market value. The Company purchased 115 shares at $10.08 per shares and 753 shares at $9.09 per share. Accordingly, as of December 31, 2020, and 2019, the Company held 1,324 shares of Company Series A stock at an aggregate value of $157,452.
NOTE 14 COMMON STOCK OPTIONS AND WARRANTS
Options
2020
During the second quarter of 2020, 160,866 options were cancelled and re-issued to key staff-members, officers, and directors. Of those options granted, 100% vested immediately. The value of the re-issued options granted was $102,800. In addition, 149,424 new options were granted to key staff-members, officers and directors. Of those options granted, 50% vested on January 1, 2021 and the other 50% will vest on January 1, 2022. The value of the new options is $370,312.
During the third quarter of 2020, 100,000 options were issued to the Companys new CEO as a hiring incentive. Of these options 50% will vest on September 1, 2021 and the other 50% will vest on September 1, 2022. The value of these options is $193,388. In addition, as a part of the severance agreement agreed with the former CEO, 50,358 unvested options were vested and the unamortized portion of those options were charged in the amount of $95,127.
During the fourth quarter of 2020, 40,000 options were granted to two new key employees. For 20,000 of those options, 50% of the options will vest on October 12, 2021 and the other 50% will vest on October 12, 2022. For the other 20,000 options, one-third will vest on November 23, 2021, the next third will vest on November 23, 2022 and the final third will vest on November 23, 2023. The value of these options is $91,574.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
Outstanding at December 31, 2018
|
|
|
160,152
|
|
|
$
|
14.00
|
|
|
|
4.3
|
|
|
|
|
|
Granted
|
|
|
17,144
|
|
|
$
|
14.00
|
|
|
|
5.0
|
|
|
|
|
|
Forfeited
|
|
|
(14,286)
|
|
|
|
14.00
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
163,010
|
|
|
$
|
14.00
|
|
|
|
3.4
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
154,438
|
|
|
$
|
14.00
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
163,010
|
|
|
$
|
14.00
|
|
|
|
3.4
|
|
|
|
|
|
Granted
|
|
|
450,290
|
|
|
$
|
5.06
|
|
|
|
4.4
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(161,402
|
)
|
|
$
|
14.00
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
451,898
|
|
|
$
|
5.06
|
|
|
|
4.4
|
|
|
|
$7,200
|
|
Exercisable at December 31, 2020
|
|
|
212,832
|
|
|
$
|
5.76
|
|
|
|
4.2
|
|
|
|
|
|
F-32
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The fair value of the incentive stock option grants for the years ended December 31, 2020 and 2019 were estimated using the following weighted- average assumptions:
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
2020
|
|
2019
|
Risk free interest rate
|
|
0.18% - 0.26%
|
|
1.44 - 2.44%
|
Expected term in years
|
|
2.50 - 3.50
|
|
2.76 - 3.25
|
Dividend yield
|
|
|
|
|
Volatility of common stock
|
|
68.00% - 86.24%
|
|
117.18% - 151.43%
|
Estimated annual forfeitures
|
|
|
|
|
Warrants
2020
During the first quarter of 2020, 67,500 warrants were issued as compensation in the form of bankers warrants in connection with the 2020 Offering for which no other warrants were issued. The warrants had a strike price of $9.00 and were locked up until the third quarter of 2020.
During the second quarter of 2020, 9,450 warrants previously issued as bankers warrants in the first quarter were cancelled and re-issued with no change in terms. In addition, 1,197 warrants previously issued, expired.
During the third quarter of 2020, 67,500 warrants issued in the first quarter became exercisable.
During the fourth quarter of 2020, 12,469 previously issued warrants were cancelled and re-issued with no change in terms as part of a settlement between certain shareholders.
2019
During the first quarter of 2019, 214,286 warrants were exercised for cash in the amount of $1,650,000 and 38 warrants expired.
During the second quarter of 2019, a total of 113,328 warrants were exercised of which 66,756 were for cash in the amount of $137,500 and 46,572 were cashless in exchange for 9,878 shares of common stock. Total common stock issued was 76,634 shares.
During the third quarter of 2019, 44,644 warrants were issued in connection with a $1,000,000 working capital loan (see Note 7). Additionally, 19,643 warrants were exercised for cash in the amount of $151,250.
F-33
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
During the fourth quarter of 2019, 357 warrants were exercised for cash in the amount of $2,750.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
Outstanding at December 31, 2018
|
|
|
1,815,181
|
|
|
$
|
9.52
|
|
|
|
3.9
|
|
|
|
|
|
Warrants expired, forfeited, cancelled or exercised
|
|
|
(338,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
44,644
|
|
|
$
|
7.70
|
|
|
|
4.9
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
1,521,250
|
|
|
$
|
8.78
|
|
|
|
3.9
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
1,521,250
|
|
|
$
|
8.78
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
1,521,250
|
|
|
$
|
8.78
|
|
|
|
3.9
|
|
|
|
|
|
Warrants expired, forfeited, cancelled or exercised
|
|
|
(23,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
89,419
|
|
|
$
|
9.02
|
|
|
|
2.2
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
1,587,333
|
|
|
$
|
8.62
|
|
|
|
2.0
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
1,587,333
|
|
|
$
|
8.69
|
|
|
|
2.0
|
|
|
|
|
|
NOTE 15 SUBSEQUENT EVENTS
On February 1, 2021, the Company received notice that the PPP Cares Act loan that was issued in 2020 in the amount of $1,421,395 including accrued interest, was forgiven by the Small Business Administration.
On February 26, 2021, as previously disclosed, the Company accepted an offer from two existing shareholders to invest $4,500,000 in the form of a newly designated Series C Convertible Preferred Stock. The offer includes a registration rights agreement and contains certain voting limitations subject to shareholder approval.
F-34
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
7,071,913
|
|
|
$
|
3,969,100
|
|
Accounts receivable, net
|
|
|
1,390,152
|
|
|
|
1,244,876
|
|
Contract assets
|
|
|
37,566
|
|
|
|
102,458
|
|
Prepaid expenses and other current assets
|
|
|
694,702
|
|
|
|
486,626
|
|
Total Current Assets
|
|
|
9,194,333
|
|
|
|
5,803,060
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
321,143
|
|
|
|
342,180
|
|
Operating lease right of use asset
|
|
|
154,023
|
|
|
|
196,144
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Patents and trademarks, net
|
|
|
70,508
|
|
|
|
64,415
|
|
Total Other Assets
|
|
|
70,508
|
|
|
|
64,415
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
9,740,007
|
|
|
$
|
6,405,799
|
|
(Continued)
F-35
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
689,649
|
|
|
$
|
599,317
|
|
Accounts payable - related parties
|
|
|
7,700
|
|
|
|
7,700
|
|
Notes payable - financing agreements
|
|
|
237,390
|
|
|
|
42,942
|
|
Payroll taxes payable
|
|
|
3,146
|
|
|
|
3,146
|
|
Accrued expenses
|
|
|
984,174
|
|
|
|
1,038,092
|
|
Current portion - equipment financing agreements
|
|
|
92,224
|
|
|
|
89,620
|
|
Current portion-operating lease obligations
|
|
|
158,556
|
|
|
|
202,797
|
|
Current portion-SBA loan
|
|
|
|
|
|
|
627,465
|
|
Contract liabilities
|
|
|
166,033
|
|
|
|
709,553
|
|
Deferred revenue
|
|
|
1,267,921
|
|
|
|
315,370
|
|
Total Current Liabilities
|
|
|
3,606,793
|
|
|
|
3,636,002
|
|
|
|
|
|
|
|
|
|
|
Equipment financing payable, less current portion
|
|
|
79,128
|
|
|
|
103,184
|
|
SBA loan, less current portion
|
|
|
|
|
|
|
782,805
|
|
Total Liabilities
|
|
|
3,685,921
|
|
|
|
4,521,991
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,480,000 shares available to be designated
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at March 31, 2021 and December 31, 2020, convertible into common stock at $6.30 per share
|
|
|
|
|
|
|
|
|
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 1,705 and 1,705 issued and outstanding at March 31, 2021 and December 31, 2020, convertible into common stock at $7 per share
|
|
|
1,705,000
|
|
|
|
1,705,000
|
|
Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 4,500 issued and outstanding at March 31, 2021 and 0 issued and outstanding at December 31, 2020, convertible into common stock at $5.50 per share
|
|
|
4,500,000
|
|
|
|
|
|
Common stock: $0.001 par value; 500,000,000 shares authorized, 3,535,339 shares issued, 3,534,015 shares outstanding at March 31, 2021 and December 31, 2020, respectively
|
|
|
3,536
|
|
|
|
3,536
|
|
Additional paid-in capital
|
|
|
39,897,175
|
|
|
|
39,820,874
|
|
Total stock & paid-in-capital
|
|
|
46,105,711
|
|
|
|
41,529,410
|
|
Accumulated deficit
|
|
|
(39,894,173
|
)
|
|
|
(39,488,150
|
)
|
Sub-total
|
|
|
6,211,538
|
|
|
|
2,041,260
|
|
Less: Treasury stock (1,324 shares of common stock at March 31, 2021 and December 31, 2020)
|
|
|
(157,452
|
)
|
|
|
(157,452
|
)
|
Total Stockholders' Equity
|
|
|
6,054,086
|
|
|
|
1,883,808
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
9,740,007
|
|
|
$
|
6,405,799
|
|
See accompanying condensed notes to the unaudited consolidated financial statements.
F-36
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
Technology systems
|
|
$
|
1,490,298
|
|
|
$
|
513,674
|
|
Services and consulting
|
|
|
664,456
|
|
|
|
477,271
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
2,154,754
|
|
|
|
990,945
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES:
|
|
|
|
|
|
|
|
|
Technology systems
|
|
|
1,895,485
|
|
|
|
1,092,058
|
|
Services and consulting
|
|
|
331,384
|
|
|
|
293,954
|
|
Overhead
|
|
|
503,593
|
|
|
|
260,421
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
|
2,730,462
|
|
|
|
1,646,433
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
(575,708
|
)
|
|
|
(655,488
|
)
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Sales & marketing
|
|
|
311,801
|
|
|
|
139,852
|
|
Research & development
|
|
|
61,033
|
|
|
|
40,639
|
|
Administration
|
|
|
873,758
|
|
|
|
1,251,936
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,246,592
|
|
|
|
1,432,427
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(1,822,300
|
)
|
|
|
(2,087,915
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(6,220
|
)
|
|
|
(68,932
|
)
|
Other income, net
|
|
|
1,422,497
|
|
|
|
9,798
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
1,416,277
|
|
|
|
(59,134
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(406,023
|
)
|
|
$
|
(2,147,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted Net Loss Per Share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares-Basic & Diluted
|
|
|
3,535,339
|
|
|
|
2,687,482
|
|
See accompanying condensed notes to the unaudited consolidated financial statements.
F-37
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2021 and 2020
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock B
|
|
|
Preferred Stock C
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Shares
|
|
|
Amount
|
|
|
# of Shares
|
|
|
Amount
|
|
|
# of Shares
|
|
|
Amount
|
|
|
Additional Paid-in-Capital
|
|
|
Accumulated Deficit
|
|
|
Treasury Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2020
|
|
|
1,705
|
|
|
$
|
1,705,000
|
|
|
|
|
|
|
$
|
|
|
|
|
3,535,339
|
|
|
$
|
3,536
|
|
|
$
|
39,820,874
|
|
|
$
|
(39,488,150
|
)
|
|
$
|
(157,452
|
)
|
|
$
|
1,883,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,301
|
|
|
|
|
|
|
|
|
|
|
|
76,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C preferred stock issued
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(406,023
|
)
|
|
|
|
|
|
|
(406,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2021
|
|
|
1,705
|
|
|
$
|
1,705,000
|
|
|
|
4,500
|
|
|
$
|
4,500,000
|
|
|
|
3,535,339
|
|
|
$
|
3,536
|
|
|
$
|
39,897,175
|
|
|
$
|
(39,894,173
|
)
|
|
$
|
(157,452
|
)
|
|
$
|
6,054,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2019
|
|
|
1,705
|
|
|
|
1,705,000
|
|
|
|
|
|
|
|
|
|
|
|
1,982,039
|
|
|
|
1,982
|
|
|
|
31,063,915
|
|
|
|
(32,740,715
|
)
|
|
|
(157,452
|
)
|
|
|
(127,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,542,188
|
|
|
|
1,542
|
|
|
|
9,251,586
|
|
|
|
|
|
|
|
|
|
|
|
9,253,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,100
|
|
|
|
|
|
|
|
|
|
|
|
8,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,001,885
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,001,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,611
|
|
|
|
2
|
|
|
|
7,498
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss for the three months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,147,049
|
)
|
|
|
|
|
|
|
(2,147,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2020
|
|
|
1,705
|
|
|
$
|
1,705,000
|
|
|
|
|
|
|
|
|
|
|
|
3,525,838
|
|
|
$
|
3,526
|
|
|
$
|
39,329,214
|
|
|
$
|
(34,887,764
|
)
|
|
$
|
(157,452
|
)
|
|
$
|
5,992,524
|
|
See accompanying condensed notes to the unaudited consolidated financial statements.
F-38
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cash from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(406,023
|
)
|
|
$
|
(2,147,049
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
73,049
|
|
|
|
48,647
|
|
Stock based compensation
|
|
|
76,301
|
|
|
|
8,100
|
|
PPP loan forgiveness including accrued interest
|
|
|
(1,421,577
|
)
|
|
|
|
|
Interest expense related to debt discounts
|
|
|
|
|
|
|
48,926
|
|
Amortization of operating lease right of use asset
|
|
|
42,121
|
|
|
|
55,858
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(197,827
|
)
|
|
|
1,966,072
|
|
Contract assets
|
|
|
64,892
|
|
|
|
992,220
|
|
Prepaid expenses and other current assets
|
|
|
7,579
|
|
|
|
(5,062
|
)
|
Accounts payable
|
|
|
90,332
|
|
|
|
(1,970,190
|
)
|
Accounts payable-related party
|
|
|
|
|
|
|
(300
|
)
|
Payroll taxes payable
|
|
|
|
|
|
|
(102,721
|
)
|
Accrued expenses
|
|
|
(42,611
|
)
|
|
|
(242,303
|
)
|
Lease obligation
|
|
|
(44,241
|
)
|
|
|
(55,965
|
)
|
Contract liabilities
|
|
|
(490,970
|
)
|
|
|
1,509
|
|
Deferred revenue
|
|
|
952,551
|
|
|
|
(254,755
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,296,424
|
)
|
|
|
(1,657,013
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of patents/trademarks
|
|
|
(7,435
|
)
|
|
|
(7,310
|
)
|
Purchase of fixed assets
|
|
|
(50,670
|
)
|
|
|
(28,935
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(58,105
|
)
|
|
|
(36,245
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of line of credit
|
|
|
|
|
|
|
(27,550
|
)
|
Repayments of insurance and equipment financing
|
|
|
(21,206
|
)
|
|
|
(23,094
|
)
|
Repayment of finance lease
|
|
|
(21,452
|
)
|
|
|
(10,702
|
)
|
Proceeds from common stock issued
|
|
|
|
|
|
|
9,253,128
|
|
Issuance cost
|
|
|
|
|
|
|
(1,001,885
|
)
|
Proceeds from preferred stock issued
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,457,342
|
|
|
|
8,189,897
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
3,102,813
|
|
|
|
6,496,639
|
|
Cash, beginning of period
|
|
|
3,969,100
|
|
|
|
56,249
|
|
Cash, end of period
|
|
$
|
7,071,913
|
|
|
$
|
6,552,888
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
5,671
|
|
|
$
|
6,643
|
|
|
|
|
|
|
|
|
|
|
Supplemental Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Common stock issued for accrued BOD fees
|
|
$
|
|
|
|
$
|
7,500
|
|
Note issued for financing of insurance premiums
|
|
$
|
215,654
|
|
|
$
|
165,375
|
|
See accompanying condensed notes to the unaudited consolidated financial statements.
F-39
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 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 Companys 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 Companys OSPI patent which was awarded in 2010. The Company offers dcVue available for license to our customers as a licensed software product.
The Companys 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, 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.
F-40
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 three months ended March 31, 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 Companys 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 expenses for the three months ended March 31, 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 months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Reclassification
|
|
|
|
|
After Reclassification
|
|
|
|
For the Three Months Ended
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
REVENUES:
|
|
|
|
Technology systems
|
|
$
|
513,674
|
|
|
Technology systems
|
|
$
|
513,674
|
|
Technical support
|
|
|
345,187
|
|
|
Services and Consulting
|
|
|
477,271
|
|
Consulting
|
|
|
132,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
990,945
|
|
|
Total Revenue
|
|
|
990,945
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES:
|
|
|
|
|
|
COST OF REVENUES:
|
|
|
|
|
Technology systems
|
|
|
581,544
|
|
|
Technology systems
|
|
|
1,092,058
|
|
Technical support
|
|
|
234,276
|
|
|
Services and consulting
|
|
|
293,954
|
|
Consulting services
|
|
|
72,260
|
|
|
Overhead
|
|
|
260,421
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
|
888,080
|
|
|
Total Cost of Revenues
|
|
|
1,646,433
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
102,865
|
|
|
GROSS MARGIN
|
|
|
(655,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
Sales and marketing
|
|
|
139,852
|
|
|
Sales and marketing
|
|
|
139,852
|
|
Engineering
|
|
|
312,428
|
|
|
Research and development
|
|
|
40,639
|
|
Research and development
|
|
|
406,392
|
|
|
Administration
|
|
|
1,251,936
|
|
Administration
|
|
|
1,015,559
|
|
|
|
|
|
|
|
AI technologies
|
|
|
316,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
2,190,780
|
|
|
Total Operating Expenses
|
|
|
1,432,427
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
$
|
(2,087,915
|
)
|
|
LOSS FROM OPERATIONS
|
|
$
|
(2,087,915
|
)
|
F-41
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
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.
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, 2021, the balance in one financial institution exceeded federally insured limits by approximately $6,646,955.
Significant Customers and Concentration of Credit Risk
The Company had certain customers whose revenue individually represented 10% or more of the Companys total revenue, or whose accounts receivable balances individually represented 10% or more of the Companys total accounts receivable, as follows:
For the three months ended March 31, 2021, one customer accounted for 79% (Customer 2) of revenues. For the three months ended March 31, 2020, three customers accounted for 44% (Customer 1), 13% (Customer 2) and 13% (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.
|
F-42
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
|
|
|
|
●
|
For Customer 2, prior to delivery of products or services, either party may terminate the agreement with the Company 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. 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 March 31, 2021, one customer accounted for 79% 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.
Geographic Concentration
For the three months ended March 31, 2021, approximately 86% of revenue is generated from three customers outside of the United States. For the three months ended March 31, 2020, approximately 54% of revenue is generated from two 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 entitys own assumptions that the market participants would use in the asset or liability based on the best available information.
|
F-43
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Boards (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.
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 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, 2021, there was an aggregate of 1,587,553 outstanding warrants to purchase shares of common stock. At March 31, 2021, there was an aggregate of 471,898 shares of employee stock options to purchase shares of common stock. Also, at March 31, 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.
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 estimated 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.
F-44
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
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 entitys 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.
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 Companys 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 employee 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.
F-45
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 2 LIQUIDITY
As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $406,023 for the three months ended March 31, 2021. During the same period, net cash used in operating activities was $1,296,424. The working capital surplus and accumulated deficit as of March 31, 2021 were $5,587,540 and $39,894,173, 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).
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 Companys 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 Companys cash reserves. This loan was forgiven in the current quarter and leaves the Company essentially debt free. Management has been 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 first quarter, management has taken further significant actions including reorganizing our engineering and technical teams and selectively improving organizational efficiency to effectively grow the business as the expected order flow resumes in 2021.
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) has affected 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. 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 12 months from the date of this report.
NOTE 3 DEBT
Notes Payable - Financing Agreements
The Companys notes payable relating to financing agreements classified as current liabilities consist of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Notes Payable
|
|
Principal
|
|
|
Interest
|
|
|
Principal
|
|
|
Interest
|
|
Third Party - Insurance Note 1
|
|
$
|
16,486
|
|
|
|
7.75
|
%
|
|
$
|
23,327
|
|
|
|
7.75
|
%
|
Third Party - Insurance Note 2
|
|
|
|
|
|
|
5.26
|
%
|
|
|
10,457
|
|
|
|
5.26
|
%
|
Third Party - Insurance Note 3
|
|
|
5,250
|
|
|
|
|
|
|
|
9,158
|
|
|
|
|
|
Third Party - Insurance Note 4
|
|
|
215,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
237,390
|
|
|
|
|
|
|
$
|
42,942
|
|
|
|
|
|
F-46
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
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 March 31, 2021 and December 31, 2020 was $16,486 and $23,327, respectively.
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. At March 31, 2021 and December 31, 2020, the balance of Insurance Note 2 was zero 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 March 31, 2021 and December 31, 2020, the balance of Insurance Note 3 was $5,250 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 March 31, 2021 and December 31, 2020, the balance of Insurance Note 4 was $215,654 and 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 March 31, 2021 and December 31, 2020, the balance of these notes was $171,352 and $192,804, respectively.
At March 31, 2021, future minimum lease payments due under the equipment financing is as follows:
|
|
|
|
|
As of December 31,
|
|
Amount
|
|
2021
|
|
$
|
79,941
|
|
2022
|
|
|
86,735
|
|
2023
|
|
|
23,515
|
|
Total minimum equipment financing payments
|
|
$
|
190,191
|
|
Less: interest
|
|
|
(18,839
|
)
|
Total equipment financing at March 31, 2021
|
|
$
|
171,352
|
|
Less: current portion of equipment financing
|
|
|
(92,224
|
)
|
Long term portion of equipment financing
|
|
$
|
79,128
|
|
Notes Payable SBA Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
Payable To
|
|
Principal
|
|
Interest
|
|
Principal
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loan
|
|
$
|
|
|
|
|
$
|
1,410,270
|
|
|
|
1
|
%
|
Total
|
|
|
|
|
|
|
|
1,410,270
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
|
(863,845
|
)
|
|
|
|
|
Long term portion
|
|
$
|
|
|
|
|
$
|
546,425
|
|
|
|
|
|
F-47
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
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 March 31, 2021 and December 31, 2020, the loan balance was zero 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 March 31, 2021 and December 31, 2020, 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 and late fees in full. At March 31, 2021 and December 31, 2020, the state payroll taxes payable balance was $3,146 and $3,146, respectively. The remaining balance of $3,146 with the state of California will be remitted in 2021.
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 March 31, 2021, future minimum lease payments due under operating leases are as follows:
|
|
|
|
|
As of March 31, 2021
|
|
Amount
|
|
Total minimum financial lease payments
|
|
$
|
164,961
|
|
Less: interest
|
|
|
(6,405
|
)
|
Total lease liability at March 31, 2021
|
|
$
|
158,556
|
|
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 March 31, 2021 was $158,556. These are the Companys only lease whose term is 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.
F-48
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
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. Arcainis 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. Arcainis Separation Agreement. In addition, the Company will pay one-half of Mr. Arcainis 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 Companys 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.
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.
F-49
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
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 is required to hold a meeting of shareholders at the earliest practical date, but in no event later than June 25, 2021 (or July 26, 2021 in the event of a review of the proxy statement by the Securities and Exchange Commission (the SEC)). Nasdaq Marketplace Rule 5635(d) limits the number of shares of common stock (or securities that are convertible into common stock) without shareholder approval. The Company is required to obtain 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 greater of book or market value 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 limit its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval is obtained. If the Company does not obtain the Stockholder Approval at the first meeting, it is required to hold shareholder meetings every four months until the Stockholder Approval is 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 shall file 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 Companys 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 holders 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 holders 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). Notwithstanding anything to the contrary in the Certificate of Designation, until the Company has obtained Stockholder Approval, the Company may not issue upon the conversion of any share of Series C Convertible Preferred Stock a number of shares of common stock which, when aggregated with any shares of common stock issued upon conversion of any other shares of Series C Convertible Preferred Stock, would exceed 706,620 (subject to adjustment).
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the three months ended March 31, 2021 and 2020, was $76,301 and $8,100, 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 is ultimately expected to vest during the period. At March 31, 2021, the total compensation cost for stock options not yet recognized was $284,784. This cost will be recognized over the remaining vesting term of the options ranging from one to three years.
F-50
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Employee Stock Options
A maximum of 178,572 shares were made available for grant under the 2016 Equity Incentive Plan, as amended (the 2016 Plan), and all outstanding options under the 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, are 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 March 31, 2021, and December 31, 2020, options to purchase 311,898 shares of common stock and 311,898 shares of common stock were outstanding under the 2016 Plan, respectively. 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.
In addition to the 140,000 non-plan stock options issued during 2020 as an incentive hiring bonus, during the first quarter of 2021, the Companys Board of Directors granted 20,000 non-plan 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 this quarter in the amount of $7,685 and a balance of unamortized stock option compensation expense of $45,073, that will be expensed over the next 2.75 years.
Warrants
No warrants have been issued during the first quarter of 2021.
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 entitys 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.
F-51
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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.
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 March 31, 2021 and December 31, 2020, contract assets on uncompleted contracts consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
|
December 31. 2020
|
|
Costs and estimated earnings recognized
|
|
$
|
1,679,930
|
|
|
$
|
4,152,850
|
|
Less: Billings or cash received
|
|
|
(1,642,364
|
)
|
|
|
(4,050,392
|
)
|
Contract assets
|
|
$
|
37,566
|
|
|
$
|
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 March 31, 2021 and December 31, 2020, contract liabilities on uncompleted contracts consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
|
December 31. 2020
|
|
Billings and/or cash receipts on uncompleted contracts
|
|
$
|
2,530,216
|
|
|
$
|
2,978,007
|
|
Less: Costs and estimated earnings recognized
|
|
|
(2,364,183
|
)
|
|
|
(2,268,454
|
)
|
Contract liabilities
|
|
$
|
166,033
|
|
|
$
|
709,553
|
|
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. Costs 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.
F-52
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
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 Companys 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 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 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 arrangement is as follows:
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.
F-53
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
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.
|
F-54
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Quantitative:
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 & 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
|
|
|
$
|
157,100
|
|
|
$
|
1,623,275
|
|
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
|
|
For the Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
Rail
|
|
|
Commercial
|
|
|
Government
|
|
|
Banking
|
|
|
IT Suppliers
|
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
713,258
|
|
|
$
|
74,335
|
|
|
$
|
27,149
|
|
|
$
|
44,119
|
|
|
$
|
132,084
|
|
|
$
|
990,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods and Service Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey Projects
|
|
$
|
481,110
|
|
|
$
|
8,622
|
|
|
$
|
|
|
|
$
|
23,942
|
|
|
$
|
|
|
|
$
|
513,674
|
|
Maintenance & Support
|
|
|
232,148
|
|
|
|
65,713
|
|
|
|
27,149
|
|
|
|
20,177
|
|
|
|
|
|
|
|
345,187
|
|
Data Center Auditing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,699
|
|
|
|
129,699
|
|
Software License
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,385
|
|
|
|
2,385
|
|
|
|
$
|
713,258
|
|
|
$
|
74,335
|
|
|
$
|
27,149
|
|
|
$
|
44,119
|
|
|
$
|
132,084
|
|
|
$
|
990,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred over time
|
|
$
|
481,110
|
|
|
$
|
8,622
|
|
|
$
|
|
|
|
$
|
23,942
|
|
|
$
|
132,084
|
|
|
$
|
645,758
|
|
Services transferred over time
|
|
|
232,148
|
|
|
|
65,713
|
|
|
|
27,149
|
|
|
|
20,177
|
|
|
|
|
|
|
|
345,187
|
|
|
|
$
|
713,258
|
|
|
$
|
74,335
|
|
|
$
|
27,149
|
|
|
$
|
44,119
|
|
|
$
|
132,084
|
|
|
$
|
990,945
|
|
F-55
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 Chief Technology Officer, David Ponevac. The Services Agreement provides that Luceon will 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 is 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 three months ended March 31, 2021 and 2020, the total amount expensed is $62,958 and $104,709, respectively. The Company has a payable balance at March 31, 2021 in the amount of $20,986 which is included in accounts payable in the accompanying unaudited consolidated financial statements.
NOTE 9 SUBSEQUENT EVENTS
On April 7, 2021, one shareholder elected to exercise 3,429 warrants using the cashless exercise feature. A total of 1,054 shares of common stock were issued and the warrant was cancelled.
On April 9, 2021, one shareholder elected to exercise 1,429 warrants using the cashless exercise feature. A total of 442 shares of common stock were issued and the warrant was cancelled.
On April 28, 2021, one shareholder elected to exercise 14,286 warrants using the cashless exercise feature. A total of 2,711 shares of common stock were issued and the warrant was cancelled.
On May 3, 2021, one shareholder elected to exercise 3,572 warrants using the cashless exercise feature. A total of 599 shares of common stock were issued and the warrant was cancelled.
F-56
818,182 Shares of Common Stock issuable upon Conversion of Series C Convertible Preferred Stock
PROSPECTUS
June 3, 2021