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 Company’s advanced intelligent technologies in the areas of AI, deep machine learning and advanced multi-layered algorithms
to further support our solutions.
The
Company also provides professional and consulting services for large data centers and has been developing a system for the automation
of asset information marketed as dcVue™. The Company is now deploying its dcVue software. This software is used by Duos’
consulting auditing teams. dcVue is based upon the Company’s OSPI patent which was awarded in 2010. The Company offers dcVue available
for license to our customers as a licensed software product.
The
Company’s strategy is to deliver operational and technical excellence to our customers, expand our RIP and ALIS solutions into
current and new customers focused in the Rail, Logistics and U.S. Government Sectors, offer both CAPEX and OPEX pricing models to customers
that increases recurring revenue, backlog and improves profitability, responsibly grow the business both organically and through selective
acquisitions, and promote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with
the Company.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March
31, 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 Company’s Annual
Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on
March 30, 2021.
Reclassifications
The
Company reclassified certain 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
|
)
|
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 Company’s total revenue, or whose accounts
receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:
For
the three months ended March 31, 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.
|
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 party’s material breach of a representation, warranty, term, covenant
or undertaking in the agreement if, within 30 days following the delivery of a written notice
to the defaulting party setting forth in reasonable detail the basis of such default, the
defaulting party has not rectified such default to the reasonable satisfaction of the non-defaulting
party. Failure to perform due to a force majeure condition shall not be considered a material
default under the agreement.
|
|
●
|
For
Customer 3, prior to delivery of products or services if the customer terminates the statement
of work for convenience, no refund of any advance payments will be due to Customer 3. ln
the event of a material breach by the Company, which breach is not cured, or cure has not
begun within 30 days of written notice to the Company by Customer 3, Customer 3 may terminate
this statement of work for cause. In the event of termination by Customer 3 for cause, the
Company shall reimburse Customer 3 any unused prepaid fees on a pro rata basis.
|
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 entity’s own assumptions that the market participants would use in the
asset or liability based on the best available information.
|
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 Board’s
(“FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the fair value measurement.
The
estimated fair value of certain financial instruments, including accounts receivable, prepaid expense, accounts payable, accrued expenses
and notes payable are carried at historical cost basis, which approximates their fair values because of the short-term nature of these
instruments.
Software
Development Costs
Software
development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development
costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding,
and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features,
and technical performance requirements. Software development costs incurred after establishing technological feasibility for software
sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be Sold, Leased, or Marketed) are capitalized
and amortized on a product-by-product basis when the product is available for general release to customers.
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.
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 entity’s
performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance
completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously
as the goods are manufactured and revenue is recognized accordingly.
In
addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying
the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company
will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. To accurately reflect revenue
recognition based on the input method, the Company has adopted the implementation guidance as set out in ASC-606-10-55-187 through 192.
Under
this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred.
Costs include direct material, direct labor, subcontract labor and other allocable indirect costs. All un-allocable indirect costs and
corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed
to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are
recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will
recognize the loss when such loss is determined.
Segment
Information
The
Company operates in one reportable segment.
Stock
Based Compensation
The
Company accounts for employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which
requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including
employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.
Determining
Fair Value Under ASC 718-10
The
Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized
on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s
determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number
of highly subjective variables.
The
Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for 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.
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 Company’s success in increasing its working capital
surplus after receiving proceeds from the 2020 Offering of more than $8,200,000 and more recently, in the first quarter of 2021, receiving
net proceeds of $4,500,000 from the issuance of Series C Preferred Stock to two large shareholders, continues to give us the capital
required to fund the fundamental business changes that we undertook in the last quarter of 2020 and maintain our business strategy overall.
In addition, the Company was successful in securing a loan of $1,410,270 during the second quarter of 2020 from the Small Business Administration
via the PPP/CARES Act program which further bolstered the Company’s cash reserves. This loan was forgiven in the 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
Company’s 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
|
|
|
|
|
|
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
|
|
|
|
|
|
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 Company’s 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.
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. Arcaini’s employment with the Company ended on September 1, 2020 and he will receive
separation payments over a 36-month period equal to his base salary plus $75,000 as well as certain limited health and life insurance
benefits. The Separation Agreement also contains confidentiality, non-disparagement and non-solicitation covenants and a release of claims
by Mr. Arcaini who continued to serve as Chairman of the Board of Directors of the Company. The Corporate Governance and Nominating Committee
did not submit Mr. Arcaini for re-election as a director and on November 19, 2020 at the Annual Shareholders meeting a new non-Executive
Chairman was appointed.
In
accordance with the Separation Agreement, the Company will pay to Mr. Arcaini the total sum of $747,788. Notwithstanding the foregoing,
the status of Mr. Arcaini as a “Specified Employee” as defined in Internal Revenue Code Section 409A has the effect of delaying
any payments to Mr. Arcaini under the Separation Agreement for six months after the Separation Date. On March 1, 2021, the Company paid
to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631, owed to Mr. Arcaini and the Company will continue
to pay him in semi-monthly installments for 30 months thereafter, as contemplated in Mr. Arcaini’s Separation Agreement. In addition,
the Company will pay one-half of Mr. Arcaini’s current life insurance premiums for 36 months of approximately $1,200 per month
and provide and pay for his health insurance for 36 months following the Separation Date of approximately $450 per month. Unvested options
in the amount of 50,358 became exercisable and vested in their entirety on the Separation Date valued at $95,127. The Company made payment
of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation Agreement of approximately
$17,000.
NOTE
6 – STOCKHOLDERS’ EQUITY
Common
stock issued
On
February 12, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity, a
division of Fordham Financial Management, Inc. (“ThinkEquity”), as representative of the underwriters listed therein (the
“Underwriters”), pursuant to which the Company agreed to sell to the Underwriters in a firm commitment underwritten public
offering (the “Offering”) an aggregate of 1,350,000 shares of the Company’s common stock, par value $0.001 per share
(the “Common Stock”), at a public offering price of $6.00 per share. In addition, the Underwriters were granted an over-allotment
option (the “Over-allotment Option”) for a period of 45 days to purchase up to an additional 202,500 shares of Common Stock.
The Offering closed on February 18, 2020. The Common Stock began trading on the Nasdaq Capital Market under the symbol DUOT on February
13, 2020.
On
February 20, 2020, pursuant to and in compliance with the terms and conditions of the aforementioned Underwriting Agreement and the Offering,
the Underwriters partially exercised the Over-allotment Option to purchase 192,188 shares of Common Stock at $6.00 per share (the
“Over-Allotment Exercise”). The sale of the Over-Allotment Exercise to purchase 192,188 shares of Common Stock closed
on February 21, 2020.
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.
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
Company’s Board of Directors has designated 5,000 shares as the Series C Convertible Preferred Stock. Each share of the Series
C Convertible Preferred Stock has a stated value of $1,000. The holders of the Series C Convertible Preferred Stock, the holders of the
common stock and the holders of any other class or series of shares entitled to vote with the common stock shall vote together as one
class on all matters submitted to a vote of shareholders of the Company. Each share of Series C Convertible Preferred Stock has 172 votes
(subject to adjustment); provided that in no event may a holder of Series C Convertible Preferred Stock be entitled to vote a number
of shares in excess of such holder’s Beneficial Ownership Limitation (as defined in the Certificate of Designation and as described
below). Each share of Series C Convertible Preferred Stock is convertible, at any time and from time to time, at the option of the holder,
into that number of shares of common stock (subject to the Beneficial Ownership Limitation) determined by dividing the stated value of
such share ($1,000) by the conversion price, which is $5.50 (subject to adjustment).
The
Company shall not effect any conversion of the Series C Convertible Preferred Stock, and a holder shall not have the right to convert
any portion of the Series C Convertible Preferred Stock, to the extent that after giving effect to the conversion sought by the holder
such holder (together with such holder’s Attribution Parties (as defined in the Certificate of Designation)) would beneficially
own more than 4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock outstanding immediately after giving
effect to the issuance of shares of common stock issuable upon such conversion (the “Beneficial Ownership Limitation”). 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.
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 471,898 shares
of common stock and 451,898 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.
During
the first quarter of 2021, the Company’s Board of Directors granted 20,000 new stock options with a strike price of $4.32 per share
to its new VP of Product Innovation. These options were awarded as a one-time award as a hiring incentive and have a fair value
of $52,758 as of January 4, 2021. The issuance of these options generated stock option compensation expense 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
entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to
payment for performance completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the
customer instantaneously as the goods are manufactured and revenue is recognized accordingly.
In
addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying
the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company
will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. To accurately reflect revenue
recognition based on the input method, the Company has adopted the implementation guidance as set out in ASC 606-10-55-187 through 192.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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
Company’s consulting services business generates revenues under contract with customers from three sources: (1) Professional Services
(consulting and auditing); (2) Software licensing with optional hardware sales; and (3) Customer Service (training and maintenance support).
For
sales arrangements that do not involve performance obligations:
(1)
|
Revenues
for professional services, which are of short-term duration, are recognized when services are completed;
|
(2)
|
For
all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software
product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software
license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the
customer;
|
(3)
|
Training
sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
|
(4)
|
Maintenance/support
is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received
upfront are deferred and recognized over the contract term.
|
Multiple
Elements
Arrangements
with customers may involve multiple elements including project revenue and maintenance services in our 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.
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.
|
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
|
|
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2021
(Unaudited)
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
|
|
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.