UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended | |
| OR | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ________________ to ________________
Commission file number
| (Exact name of registrant as specified in its charter) |
|
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
Indicate by check
mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 10, 2023, the registrant has one class of common equity, and the number of shares outstanding of such common equity is .
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 25 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 35 |
| Item 4. | Controls and Procedures | 36 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 37 |
| Item 1A. | Risk Factors | 37 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 37 |
| Item 3. | Defaults Upon Senior Securities | 37 |
| Item 4. | Mine Safety Disclosures | 37 |
| Item 5. | Other Information | 37 |
| Item 6. | Exhibits | 38 |
| SIGNATURES | 39 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||
| (Unaudited) | |||||||||
| ASSETS | |||||||||
| CURRENT ASSETS: | |||||||||
| Cash | $ | $ | |||||||
| Accounts receivable, net | |||||||||
| Contract assets | |||||||||
| Inventory | |||||||||
| Prepaid expenses and other current assets | |||||||||
| Total Current Assets | |||||||||
| Property and equipment, net | |||||||||
| Operating lease right of use asset | |||||||||
| Security deposit | |||||||||
| Convertible note receivable, net | |||||||||
| Patents and trademarks, net | |||||||||
| Software development costs, net | |||||||||
| TOTAL ASSETS | $ | $ | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| CURRENT LIABILITIES: | |||||||||
| Accounts payable | $ | $ | |||||||
| Notes payable - financing agreements | |||||||||
| Accrued expenses | |||||||||
| Equipment financing payable-current portion | |||||||||
| Operating lease obligations-current portion | |||||||||
| Contract liabilities | |||||||||
| Total Current Liabilities | |||||||||
| Operating lease obligations, less current portion | |||||||||
| Total Liabilities | |||||||||
| Commitments and Contingencies (Note 4) | |||||||||
| STOCKHOLDERS' EQUITY: | |||||||||
| Preferred stock: $ par value, authorized, shares available to be designated | |||||||||
| Series A redeemable convertible preferred stock, $stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $per share | |||||||||
| Series B convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | |||||||||
| Series C convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | |||||||||
| Series D convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | |||||||||
| Series E convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | |||||||||
| Common stock: $ par value; shares authorized, and shares issued, and shares outstanding at June 30, 2023 and December 31, 2022, respectively | |||||||||
| Additional paid-in-capital | |||||||||
| Accumulated deficit | ( | ) | ( | ) | |||||
| Sub-total | |||||||||
| Less: Treasury stock ( shares of common stock at June 30, 2023 and December 31, 2022) | ( | ) | ( | ) | |||||
| Total Stockholders' Equity | |||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | |||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| 1 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Three Months Ended | For the Six Months Ended | For the Six Months Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Technology systems | $ | $ | $ | $ | ||||||||||||
| Services and consulting | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| COST OF REVENUES: | ||||||||||||||||
| Technology systems | ||||||||||||||||
| Services and consulting | ||||||||||||||||
| Total Cost of Revenues | ||||||||||||||||
| GROSS MARGIN | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and Administration | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( |
) | ( |
) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest expense | ( |
) | ( |
) | ( | ) | ( | ) | ||||||||
| Other income, net | ||||||||||||||||
| Total Other Income (Expenses) | ||||||||||||||||
| NET LOSS | ( |
) | ( |
) | $ | ( | ) | $ | ( | ) | ||||||
| Basic and Diluted Net Loss Per Share | ) | ) | $ | ) | $ | ) | ||||||||||
| Weighted Average Shares-Basic and Diluted | ||||||||||||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| 2 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three and Six Months Ended June 30, 2023 and 2022
(Unaudited)
Preferred Stock B | Preferred Stock C | Preferred Stock D | Preferred Stock E | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | # of Shares | Amount | # of Shares | Amount | # of Shares | Amount | Additional Paid-in-Capital | Accumulated Deficit | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||||||||
| Series E preferred stock issued | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued under the Employee Stock Purchase Plan for cash and compensation | — | — | — | — | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C preferred stock converted to common stock | — | ( | ) | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2022 | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| 3 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30 | ||||||||
| 2023 | 2022 | |||||||
| Cash from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( |
) | ||
| Depreciation and amortization | ||||||||
| Stock based compensation | ||||||||
| Stock issued for services | ||||||||
| Amortization of operating lease right of use asset | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Note receivable | ( | ) | ||||||
| Contract assets | ( | ) | ( |
) | ||||
| Inventory | ( | ) | ( |
) | ||||
| Security deposit | ||||||||
| Prepaid expenses and other current assets | ( |
) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( |
) | ||||
| Operating lease obligation | ( | ) | ||||||
| Contract liabilities | ||||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of patents/trademarks | ( | ) | ( |
) | ||||
| Purchase of software development | ( | ) | ( |
) | ||||
| Purchase of fixed assets | ( | ) | ( |
) | ||||
| Net cash used in investing activities | ( | ) | ( |
) | ||||
| Cash flows from financing activities: | ||||||||
| Repayments of insurance and equipment financing | ( | ) | ( |
) | ||||
| Repayment of finance lease | ( | ) | ( |
) | ||||
| Proceeds from common stock issued | ||||||||
| Issuance cost | ( | ) | ( |
) | ||||
| Proceeds from shares issued under Employee Stock Purchase Plan | ||||||||
| Proceeds from preferred stock issued | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
| Supplemental Non-Cash Investing and Financing Activities: | ||||||||
| Notes issued for financing of insurance premiums | $ | $ | ||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| 4 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Duos Technologies Group, Inc. (the “Company”), through its operating subsidiaries, Duos Technologies, Inc. (“Duos”) and TrueVue360, Inc. (“TrueVue360”) (collectively the “Company”), is a company that specializes in machine vision and artificial intelligence to analyze fast moving objects such as trains, trucks, automobiles, and aircraft. This technology can help improve safety, maintenance, and operating metrics.
The Company is the inventor of the Railcar Inspection Portal (RIP) and is currently the rail industry leader for machine vision/camera wayside detection systems that include the use of Artificial Intelligence at speeds up to 125 mph. The RIP inspects a train at full speed from the top, sides, and bottom looking at FRA/AAR mandated safety inspection points. The system also detects illegal riders that assists law enforcement agencies. Each rail car is scanned with machine vision cameras and other sensors from the top, sides, and bottom and images are produced within minutes of passing that can be used by the customer to help prevent derailments, improve maintenance operations, and assist with security. The Company self-performs all aspects of hardware, software, IT, and Artificial Intelligence development and engineering and holds several patents and maintains significant intellectual property. The Company also has a proprietary portfolio of over 40 Artificial Intelligence “Use Cases” that automatically flag defects. The Company has deployed this system with several Class 1 and passenger customers and anticipates an increased demand in the future from rail operators, car owners, shippers, and law enforcement agencies.
The Company has also developed the Automated Logistics Information System (ALIS) which automates gatehouse operations 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 will deploy an upgraded Truck Inspection Portal (TIP) which uses the same technology and lessons learned from the ALIS and RIP systems.
The Company’s strategy is to expand our existing customer base in the Class 1, short line, and passenger space in North America; expand our subscription offering to car owners and shippers; and expand operations to meet the demand from international customers. The Company has prepared to respond and scale if necessary to respond to increased demand from potential regulations that may be imposed around wayside detection technology. In the near future the Company will put more emphasis on the trucking and intermodal sector with an updated Truck Inspection Portal solution. The Company continues to focus on operational and technical excellence, customer satisfaction, and maintaining a highly skilled and performance-based work force.
| 5 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 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, 2022 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023.
Principles of Consolidation
The unaudited consolidated financial statements include Duos Technologies Group, Inc. and its wholly owned subsidiaries, Duos Technologies, Inc and TrueVue360 Inc. All inter-company transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts receivable and notes receivable, valuation of common stock warrants received in exchange for an asset sale, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of inventory, estimates of the valuation of right of use assets and corresponding lease liabilities, valuation of warrants issued with debt and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and at
times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of June 30, 2023,
the balance in one financial institution exceeded federally insured limits by approximately $
Significant Customers and Concentration of Credit Risk
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:
For the six months ended June 30, 2023, two customers
accounted for
At June 30, 2023, four customers accounted for
| 6 |
|
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited)
|
Geographic Concentration
For the six months ended June 30, 2023, approximately
Significant Vendors and Concentration of Credit Risk
In some instances, the Company relies on a limited pool of vendors for key components related to the manufacturing of its subsystems. These vendors are primarily focused on camera, server and lighting technologies integral to the Company’s solution. Where possible, the Company seeks multiple vendors for key components to mitigate vendor concentration risk.
Fair Value of Financial Instruments and Fair Value Measurements
The Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
These inputs are prioritized below:
| Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. |
| Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. |
| Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions that the market participants would use in the valuation of the asset or liability based on the best available information. |
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The estimated fair value of certain financial instruments, including accounts receivable, prepaid expense, accounts payable, accrued expenses and notes payable are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
Accounts Receivable
On January 1, 2023, the Company adopted ASC 326, “Financial Instruments - Credit Losses”. In accordance with ASC 326, an allowance is maintained for estimated forward-looking losses resulting from the possible inability of customers to make required payments (current expected losses). The amount of the allowance is determined principally on the basis of past collection experience and known financial factors regarding specific customers.
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.
Inventory
Inventory consists primarily of spare parts and consumables and long lead time components to be used in the production of our technology systems or in connection with maintenance agreements with customers. Inventory is stated at the lower of cost or net realizable value. Inventory cost is primarily determined using the weighted average cost method.
| 7 |
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited)
|
Software Development Costs
Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features, and technical performance requirements. Software development costs incurred after establishing technological feasibility for software sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be Sold, Leased, or Marketed), are capitalized and amortized on a product-by-product basis when the product is available for general release to customers.
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.
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding a number of highly subjective variables.
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for stock options using the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
Revenue Recognition
The Company follows Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), that affects the timing of when certain types of revenues will be recognized. The basic principles in ASC 606 include the following: a contract with a customer creates distinct contract assets and performance obligations, satisfaction of a performance obligation creates revenue, and a performance obligation is satisfied upon transfer of control to a good or service to a customer.
Revenue is recognized by evaluating our revenue contracts with customers based on the five-step model under ASC 606:
| 1. | Identify the contract with the customer; |
| 2. | Identify the performance obligations in the contract; |
| 3. | Determine the transaction price; |
| 4. | Allocate the transaction price to separate performance obligations; and |
| 5. | Recognize revenue when (or as) each performance obligation is satisfied. |
The Company generates revenue from four sources:
(1) Technology Systems
(2) AI Technologies
(3) Technical Support
(4) Consulting Services
Technology Systems
For revenues related to technology systems, the Company recognizes revenue over time using a cost-based input methodology in which significant judgment is required to estimate costs to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding amount of revenue to recognize.
Accordingly, the Company bases its 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.
| 8 |
|
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited)
|
AI Technologies
The Company has revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms which provide important operating information to the users of our systems. The revenue generated from these applications of AI consists of a fixed fee related to the design, development, testing and incorporation of new algorithms into the system, which is recognized as revenue at a point in time upon acceptance, as well as an annual application maintenance fee, which is recognized as revenue ratably over the contracted maintenance term.
Technical Support
Technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and technical support provided outside of a maintenance contract are on an “as-requested” basis, and revenue is recognized over time as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized over time ratably over the term of the contract.
Consulting Services
The Company’s consulting services business generates revenues under contracts with customers from four sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; (3) Customer service training and (4) Maintenance/support.
(1) Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2) For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer;
(3) Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
(4) Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term.
Multiple Performance Obligations and Allocation of Transaction Price
Arrangements with customers may involve multiple performance obligations including project revenue and maintenance services in our Technology Systems business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business, multiple performance obligations may include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each performance obligation is accounted for separately when each has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each performance obligation is recognized using the applicable criteria under GAAP as discussed above for performance obligations sold in single performance obligation arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company sells its various services and software and hardware products at established prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of performance obligations relative selling price allocation. The Company only sells maintenance services or spare parts based on its established rates after it has completed a system integration project for a customer. The customer is not required to purchase maintenance services. All elements in multiple performance obligations arrangements with Company customers qualify as separate units of account for revenue recognition purposes.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited)
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Leases
The Company follows ASC 842 “Leases”. This guidance requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities for most operating leases. In addition, this guidance requires that lessors separate lease and non-lease components in a contract in accordance with the revenue guidance in ASC 606.
The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on the balance sheet and instead recognize the lease payments in expense as incurred. The Company has also elected to account for real estate leases that contain both lease and non-lease components as a single lease component.
At the inception of a contract the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset.
Operating ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the lease commencement date to determine the present value of future payments. The lease term includes all periods covered by renewal and termination options where the Company is reasonably certain to exercise the renewal options or not to exercise the termination options. Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administration expenses in the consolidated statements of operations.
Basic earnings per share (EPS) are computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise or conversion of stock options, stock warrants, convertible debt instruments, convertible preferred stock or other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
At June 30, 2023, there were (i) an aggregate of
At June 30, 2022, there were (i) an aggregate of
Recent Accounting Pronouncements
From time to time, the FASB or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards Update (“ASU”).
In August 2020, the FASB issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023. The Company early adopted this pronouncement for our fiscal year beginning January 1, 2022, and it did not have a material effect on our audited consolidated financial statements.
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited)
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In May 2021, the FASB issued an accounting pronouncement (ASU 2021-04) related to modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. The pronouncement states that an entity should treat the modification as an exchange of the original instrument for a new instrument, and the effect of the modification should be calculated as the difference between the fair value of the modified instrument and the fair value of that instrument immediately before modification. An entity should then recognize the effect of the modification on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. The pronouncement is applied prospectively to all modifications that occur after the initial date of adoption. We adopted this pronouncement for our fiscal year beginning January 1, 2022, and it did not have a material effect on our audited 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 $
The Company was successful during 2022 in raising gross proceeds of over $10,100,000 from the sale of both common shares and Series D Preferred Stock. Additionally, late in the second quarter of 2023, the Company raised gross proceeds of $4,000,000 from the issuance of Series E Preferred Stock. In August 2023, the Company was successful in raising gross proceeds of $5,000,000 from the sale of Series F Convertible Preferred Stock. Additionally, during the second quarter of 2023, the Company renewed its S-3 “shelf registration” statement allowing the Company to sell additional common shares. At the time of this filing, the Company estimates that it has available capacity on its shelf registration which it can utilize to bolster working capital and growth of the business. 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 an anticipated increase in business activity. In the long run, the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing its business plan, generate enough revenue, and attain consistently profitable operations. Although the lingering effects of the global pandemic related to the coronavirus (Covid-19) continue to affect our operations, particularly in our supply chain, we now believe that this is expected to be an ongoing issue and our working capital assumptions reflect this new reality. The Company cannot currently quantify the uncertainty related to the ongoing supply chain delays or inflationary increases and their 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 or available via the capital markets to maintain operations f