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As filed with the Securities and Exchange Commission on January 24, 2020
July 14, 2023.
Registration No. 333-235455333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1/AS-1
(Amendment No. 1)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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DUOS TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in its charter)
| Florida | 7373 | 65-0493217 |
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(State or Other Jurisdiction | (Primary Standard Industrial | (I.R.S. Employer |
6622 Southpoint Drive South, 7660 Centurion Parkway, Suite 310100
Jacksonville, Florida33256
(904)652-1637
(Address and telephone number of registrant’s principal executive offices)
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Andrew W. Murphy
Chief Financial Officer
Duos Technologies Group, Inc.
7660 Centurion Parkway, Suite 100
Jacksonville, Florida 3221633256
(904) 652-1616652-1637
(Address,Name, address. including zip code, and telephone number, includingarea code, of Registrant’s principal executive offices)
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Adrian Goldfarb
(904) 296-2807
(Name, address, including zip code, and telephone number
including area code, of agent for service)
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With copies
Copies to:
Tel. No.: |
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Approximate date of commencement of proposed sale to the public:As soon as practicable after this Registration Statement is declaredbecomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
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 the definitions of “large“large accelerated filer,” “accelerated“accelerated filer,” “smaller“smaller reporting company,” and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer | Smaller reporting company |
Emerging growth company ¨ |
If an emerging growth company, indicate by checkmarkcheck mark if the registrant has elected not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
| Proposed Maximum Aggregate Offering Price(1) |
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| Amount of Registration Fee(6) |
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Common Stock, par value $0.001 per share(2)(3) |
| $ | 9,200,000 |
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| $ | 1,194.16 |
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Underwriter’s Warrant to Purchase Common Stock(4) |
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Shares of Common Stock issuable upon exercise of Representative’s Warrant(2)(5) |
| $ | 600,000 |
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| $ | 77.88 |
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Total |
| $ | 9,800,000 |
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| $ | 1,272.04 |
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The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.
The information in this prospectus is not complete and may be changed. WeThe selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission (“SEC”) is effective. This prospectus is not an offer to sell these securities, and it iswe are not soliciting offers to buy these securities, in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS |
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1,142,857
DUOS TECHNOLOGIES GROUP, INC.
1,333,334 Shares of Common Stock Offered by Selling Stockholders
This prospectus relates to the offering and resale by the Selling Stockholders identified herein of up to 1,333,334 shares of common stock, par value $0.001 per share (the “Common Stock”), of Duos Technologies Group, Inc. (the “Company”) issuable upon the conversion of shares of Series E Convertible Preferred Stock, par value $$0.001 per share (the “Series E Preferred Stock”), which we sold to the Selling Stockholders in a private placement on March 27, 2023.
The Selling Stockholders may from time to time sell, transfer, or otherwise dispose of any or all of the securities in a number of different ways and at varying prices. See “Plan of Distribution” beginning on page 27 of this prospectus for more information.
We are offering an aggregate of 1,142,857not selling any shares of our common stock, $0.001 par value per share. We assume a publicCommon Stock in this offering, priceand we will not receive any proceeds from the sale of $7.00 per share of our common stock which wasshares by the last reported sale price of our common stock on the OTCQX on January 21, 2020.Selling Stockholders.
Our common stockCommon Stock is presentlycurrently quoted on the OTCQX under the symbol “DUOTD”. We have applied to have our common stock listed on The NASDAQNasdaq Capital Market under the symbol “DUOT”. No assurance can be given that our application will be approved. If our application is not approved, we will not complete this offering.“DUOT.” On January 21, 2020,July 13, 2023, the lastclosing price as reported sale price for our common stock on the OTCQXNasdaq Capital Market was $7.00 per share. All share and per-share information, as well asThis price will fluctuate based on the demand for our Common Stock.
The Selling Stockholders may offer all financial information, contained in thisor part of the shares for resale from time to time through public or private transactions, at either prevailing market prices or at privately negotiated prices.
This prospectus has been adjusted to give effect to the one-for-fourteen (1-for-14) reverse stock split, which was implemented on January 16, 2020 and effective at the commencement of trading of our common stock on January 17, 2020.
The final public offering price per share will be determined through negotiation between us and the underwriter in this offering and will take into account the recent market price of our common stock, theprovides a general conditiondescription of the securities market at the time ofbeing offered. You should read this offering, the history of,prospectus and the prospects for, the industryregistration statement of which it forms a part before you invest in which we compete, and our past and present operations and our prospects for future revenues. The recent market price used throughout this prospectus may not be indicative of the public offering price per share.any securities.
Investing in our securities involves a high degree of risk. See “Risk Factors”“Risk Factors” beginning on page 1016 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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We have granted a 45-day option to the representative of the underwriters to purchase up to additional shares of our common stock, solely to cover over-allotments, if any.
The underwriters expect to deliver our shares to purchasers in the offering on or about __, 2020.
ThinkEquitya division of Fordham Financial Management, Inc.
Benchmark Company
The date of this prospectus is __, 2020._______, 2023
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TABLE OF CONTENTS
You should rely only onThis prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission (the “SEC” or the “Commission”). By using such a registration statement, the Selling Stockholders may, from time to time, offer and sell shares of our common stock pursuant to this prospectus. It is important for you to read and consider all of our information contained in this prospectus. Weprospectus before making any decision whether to invest in the common stock. You should also read and consider the information contained in the documents that we have not,incorporated by reference as described in “Where You Can Find Additional Information,” and “Incorporation of Certain Information by Reference” in this prospectus.
We and the underwritersSelling Stockholders have not authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are not making an offer of these securities in any state or other jurisdiction where the offer is not permitted. The information in this prospectus may only be accurate as of the date on the front of this prospectus regardless of time of delivery of this prospectus or any sale of our securities.
No person is authorized in connection with this prospectus to give any information or to make any representations about us, the common stock herebydifferent from that which is contained or any matter discussedincorporated by reference in this prospectus other thanin connection with the informationoffer made by this prospectus and, representations contained in this prospectus. If any other information or representation isif given or made, such information or representation mayrepresentations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell,the Company or a solicitation of an offer to buy our common stock in any circumstance under which the offer or solicitation is unlawful.Selling Stockholder. Neither the delivery of this prospectus nor any distribution of our common stock in accordance with this prospectussale made hereunder and thereunder shall under any circumstances implycreate an implication that there has been no change in ourthe affairs of the Company since the date of this prospectus.
Neither we nor the underwriters have done anythinghereof. You should assume that would permit this offering or possession or distribution ofinformation contained in this prospectus is accurate only as of the date on the front cover hereof. Our business, financial condition, results of operations and prospects may have changed since that date. This prospectus does not constitute an offer or solicitation by anyone in any jurisdiction where action for that purposestate in which such offer or solicitation is required, other thannot authorized or in which the United States. You are requiredperson making such offer or solicitation is not qualified to inform yourself about, anddo so or to observe any restrictions relatinganyone to this offering and the distribution of this prospectus.whom it is unlawful to make such offer or solicitation.
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This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be important information about us, you should carefully read this entire prospectus before investing in our common stock, especially the risks and other information we discuss under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation”Operations” and our consolidated financial statements and related notes beginning on page F-1. Our fiscal year end is December 31 and our fiscal years ended December 31, 2017,2021 and 20182022 are sometimes referred to herein as fiscal years 2017,2021 and 2018,2022, respectively. Some of the statements made in this prospectus discuss future events and developments, including our future strategy and our ability to generate revenue, income, and cash flow. These forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those contemplated in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”. Unless otherwise indicated or the context requires otherwise, the words “we,” “us,” “our”, the “Company” or “our Company” or “Duos” refer to Duos Technologies Group, Inc., a Florida corporation, and our wholly owned subsidiaries,subsidiary, Duos Technologies, Inc. and TrueVue 360, Inc.
Except as otherwise indicated in this prospectus, all common stock and per share information and all exercise prices with respect to our warrants reflect, on a retroactive basis, a 1-for-14 reverse stock split of our common stock, which became effective on the OTCQX on January 17,2020. This prospectus assumes the over-allotment option of the underwriters has not been exercised, unless otherwise indicated.17, 2020.
OverviewOur Corporate History
Information Systems Associates, Inc. (“ISA”) was incorporated in Florida on May 31, 1994. Our original business operations consisted of consulting services for asset management of large corporate data centers and the development and licensing of information technology (“IT”) asset management software. In late 2014, ISA entered negotiations with Duos Technologies, Inc. (“duostech™”) for the purposes of executing a merger between the two organizations (also known as a “reverse triangular merger”). Incorporated under the laws of Florida on November 30, 1990, duostech™ operated in various industry segments, specializing in the design, development and deployment of proprietary technology applications and turn-key engineered systems. This transaction was completed on April 1, 2015, whereby duostech™ became a wholly owned subsidiary of ISA. After the merger was completed, ISA changed its corporate name to Duos Technologies Group, Inc. The Company, throughbased in Jacksonville, Florida, oversees its wholly owned subsidiaries DTI,subsidiary, duostech™ and employs approximately 75 people and is a technology company which designs, develops, deploys and operates intelligent technology solutions with a focus on software applications and artificial intelligence (“AI”). The Company has a strong portfolio of intellectual property. The Company’s headquarters are located at 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 32256 and main telephone number is (904) 296-2807.
Overview
The Company, operating under its brand nameduostech™, develops andtruevue360™, focuses deploys technology systems with focus on inspecting and evaluating moving vehicles. Its technology focus is within the design, developmentVision Technology market sector and, turnkey delivery of proprietary “intelligent technologies” that enable our customers to derive measurable increases in return on investment for their business.
duostech™
The mission ofduostech™ is to develop, market and deploy disruptive technologies and systems that capture, process and present users with an unlimited number and types of data thatmore specifically, the Machine Vision subsector. Machine Vision companies provide our customers with a broad range of sophisticated intelligent technology solutions. With an emphasis on security,imaging-based automatic inspection and operationsanalysis for critical infrastructure, we target a variety of industries including transportation, retail, law enforcement, oil, gas and utilities. Ourprocess control for industry with potential expansion into other markets. Duos has developed key technologies capture, process and present all data in real time. A further differentiator is that these technologies integrate with our customer’s existing business process and create actionable information to streamline mission critical operations. Our technologies have been verified by multiple government and private organizations including but not limited to, Johns Hopkins University Applied Physics Laboratory (JHU/APL), the Department of Homeland Security (DHS) and the Transportation Technology Center, Inc., a wholly owned subsidiary of the Association of American Railroads, a transportation research and testing organization (TTCI) and perhaps most significantly, they have been field tested and found relevant by our customers, which is the main reason for our substantial repeat business. The Company has worked with these organizations over the past several years in software, industry specific hardware and artificial intelligence and has demonstrated industrial strength usability of its systems supporting rail, logistics and intermodal businesses that streamline operations, improve safety and reduce costs. Our team includes engineering subject matter expertise in hardware, software, and information technology as well as industry specific applications of artificial intelligence also referred to as Expert Artificial Intelligence. We also have specific industry experts on staff and as consultants in the rail industry.
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Duos is currently developing industry solutions for its target markets which will address rail, trucking, aviation and other vehicle-based processes. Duos’ initial offering, the Railcar Inspection Portal (RIP), provides both freight and transit railroad customers and select government agencies the ability to conduct fully remote railcar inspections of trains while they are moving at full speed. The RIP utilizes a variety of sophisticated optical, laser and speed sensors to scan each passing railcar to create a high-resolution image-set of the top, sides and undercarriage. These images are then processed with our edge data center using artificial intelligence (AI) algorithms to identify safety and security defects on each railcar. The algorithms are developed in conjunction with industrial application experts, in this case resident Railcar Mechanical Engineers, to provide specific guidance in the analysis (“human in the loop”). Within seconds of the railcar passing through the RIP, a detailed report is sent to the customer where we have supplied funded prototypesthey are able to action identified issues. This solution has the potential to transform the railroad industry immediately increasing safety, improving efficiency and reducing costs. The Company has already deployed this system with several Class 1 railroads and anticipates an increased demand from transit and other railroad customers along with selected government agencies that operate and/or manage rail traffic. The Company has deployed RIPs in Canada, Mexico and the United States and anticipates expanding this solution into Europe, Asia and the Middle East in coming years.
The Company has also developed the Automated Logistics Information System (ALIS) which automates gatehouse operations where transport trucks enter and exit large logistics and intermodal facilities. This solution incorporates a similar set of our technologiessensors, data processing and artificial intelligence to verify technologystreamline the customer’s logistics transactions and operating parameters.
truevue360™
In January 2019,tracking and can also automate the security and safety inspection if called for. The Company launched a dedicated Artificial Intelligence program through its wholly-owned subsidiary True Vue 360, Inc., marketing its serviceshas already deployed this system with one large North American retailer and solutions under the brand nametruevue360™.anticipates increased demand from other large retailers, railroad intermodal operators and select government agencies that manage logistics and border crossing points. The Company is committedevaluating other solutions for moving vehicles including aircraft, which could provide similar benefits in terms of safety and efficiency for required inspections as part of an operations process.
We have developed two proprietary solutions that operate our software and artificial intelligence. centraco® is an Enterprise Information Management Software platform that consolidates data and events from multiple sources into a unified and distributive user interface. Customized to adding significant focus on the development, marketingend user’s Concept of Operations (CONOPS), it provides improved situational awareness and deployment of advanced convolutional neural network-baseddata visualization for operational objectives compared to traditional manual inspections. truevue360™ is our fully integrated platform that we utilize to develop and deploy Artificial Intelligence (“AI”), Deep(AI) algorithms, including Machine Learning, Computer Vision, Object Detection and Advanced AlgorithmsDeep Neural Network-based processing for real-time applications. Whiletruevue360™ will chiefly
These same Artificial Intelligence applications have begun to open up other opportunities for the Company to provide revenue producing solutions with potentially high market adoption.
In 2021, the Company ended support DTI’s business growth, it willof its IT Asset Management (ITAM) solution which cataloged results for data center asset inventory and audit services. We are currently evaluating using our current operations experience within “edge data centers” (as deployed for our Railcar Inspection Portal) to drive additional revenues within other markets requiring this type of solution although no specific offering has been developed at this time.
In the last quarter of 2022, the Company elected not to renew a support contract for its Integrated Correctional Automation System (iCAS) for one customer. The Company subsequently sold its iCAS assets to a buyer during the second quarter of 2023 for $165,000 via a convertible note.
The year 2022 ushered in a new phase in the Company’s development. Although we continue to see an extension of challenges faced in 2021, we also developsee positive changes and market its significant library of AI applications following a stand-alone business development strategy. Accordingly,opportunities for our business is now operatingthat will be discussed in two equally important business units which complement each other and provide comprehensive turn-key, end-to-end, solutions to our customers.greater detail herein. They include:
| · | Introducing a new “subscription” based offering for access to data and images by a much broader target market including Class 1 railroads, railcar owners and lessors, and short-line railroads. |
| · | Owning and operating a network of RIPs with multiple subscribers outside of the Company’s traditional customer base. |
| · | Selling customized RIPs to Class 1, short-line and other industrial companies where specialized applications or routes demand a bespoke solution. |
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Connected Intelligence
duostech™
Over the past 10 years,duostech™ has developed an extensive suite of disruptive technologies, some of the most relevant are described in the following:
Intelligent Railcar Inspection Portal (rip®)rip®)
Federal regulations require each railcar/train to be inspected for mechanical defects prior to leaving a rail yard. Founded in 1934, the Association of American Railroads (AAR) is responsible for setting the standards for the safety and productivity of the U.S./North American freight rail industry, and by extension, has established the inspection parameters for the rail industry’s rolling stock. Also known as the “Why Made” codes, the AAR established approximately 110 inspection points under its guidelines for mechanical inspections.
Under current practice, inspections are conducted manually;manually, a very labor intensive and inefficient process that only covers a select number of inspectionsinspection points and can take up to 3several hours per train. It should be noted that approximately 50% of the rail industry’s operating costs are for maintenance, including 30% of the time trains spend in workshops resulting from manual failure diagnostics.
We invented, designed, deployed, and are currently marketingbelieve our intelligent Railcar Inspection Portal technology, intendedhas the potential to ultimately cover most, if not all,reduce this inspection points and reduceto minutes while the in-yardtrain is moving at speed, improving safety, reducing dwell time to minutes per train. and optimizing maintenance.
Our system combines high definitionhigh-definition image and data capture technologies (developed byduostech™) with our AI-based analytics applications (developed and maintained bytruevue360™) that are typically installed on active tracks located between two rail yards. We inspect railcars traveling through our inspection portal at speeds of up to 70 mph and report mechanical anomalies detected by our system to the ensuinginbound train yard, well ahead of the train(s)train entering the yard. To date, we have successfully completed the development of 21 AI applications
Currently, three Class 1 railroads and are in the process of developing 44 additional applications scheduled to be completed by the end of Q2, 2020.
Over the past two years, several class 1 rail operators have orderedtransit and are currently operatinginternational railroads use ourrip® rip® technology with one of those railroads broadly deploying the ultimate objective to cause a change in federal rules that would allow replacement of the current manual inspection (in the yard) with a fully automated process. The Company is collaborating with certain industry professionals to pursue such regulatory rule changes and we believe that there will be broad acceptance of our technology as soon as a majority of required AI algorithm models are completed and tested.across its network.
Ourrip®system consists of a suite of sub-systems for the automated inspection of freight or transit railcars at high speeds. The combined technologies capture images and other relevant operating data from 360-degrees of each locomotive and railcar passing through our inspection portal. All data is processed and presented in real-time by our proprietary intelligent user interface, branded ascentraco®.
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Mechanical anomalies are detected through a combination of remote visual inspections, utilizing the Company’s proprietary remote user interface which displays ultra-high definition images of a 360-degree view of each railcar, and by a growing number of the Company’s proprietary artificial intelligence (AI) based algorithms, discussed in more detail undertruevue360™. The inspection portal is typically installed between two rail yards and the inspection takes place while the trains are traveling at speeds of up to 70 mph. Detections are reported to the respective rail yards well ahead of the train arrival at the yard.
An expanded version for speeds up to 120 mph with additional sensor technologies for the transit rail is currently under development in anticipation of market entry to the passenger railcar mechanical inspection in early 2020.
The following examples of automated detections are the result of the combination of our image capture technologies designed byduostech™, with our AI-based analytics applications designed and maintained bytruevue360™.Some of these mechanical defects, if unattended, could cause a derailment. Other examples of our AI-based detection applications include inspections at rail border crossings by CBP agents.
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Samples of Automated Detections
The Company continues to expand its detection capabilities through the development and integration of additional sensor technologies necessaryto include laser, infrared, thermal, sound and x-ray to process AI-based analytics of targets not yet coveredinspection points. Currently the Company has a high-reliability catalog of over 35 artificial intelligence algorithms which can be integrated into the RIP to enhance mechanical anomalies detections. These detections support railroads in the active maintenance and overall safety of their railcar fleet and networks.
Markets
We believe the opportunity for our Railcar Inspection Portal business is substantial and continues to be our number one priority. We are currently engaged with the RIP solution with three of seven Class 1 railroad operators with 13 systems already deployed across the North American rail network. Because of our early leadership position, we have been able to accumulate experience and intellectual property that we believe would be time-consuming and expensive for a new competitor to replicate. Furthermore, we believe we have the ability to upgrade and scale our solutions with additional technologies in the future. We believe that the current market for our technologies is substantial. At the same time, we recognize that the technology life cycle is fast and evolving. Potential competitors could move into this sector, and it is possible that some Class 1 railroads could develop their own solutions that limit our total addressable market.
In late 2022, the Company announced it will pursue a subscription platform for the RIPs. Under this new model, the Company will build, own and operate its RIP product and offer the data access for each portal to potential customers. This expansion of the RIP offering would potentially open up the addressable market to other railroads, railcar owners, and car lessors. This shift increases the pool of potential customers by its corelowering the entry point for the RIP and would reshape the Company’s working capital needs to invest in the construction of a RIP ahead of customer revenue inflows. The Company continues to explore this expansion on the long-term effects it may have on future cash flows.
Another market we are pursuing as our second priority is using our Automated Logistics and Information Systems solution (alis™). Potential customers include commercial retail logistics and intermodal operators, Class 1 rail intermodal operators that are moving large amounts of automobiles, and U.S. Government agencies such as the Department of Defense and the Department of Homeland Security. Today, we currently have 20 production systems in use, but we believe the greenfield opportunity here to be substantial. We have identified over 900 lanes of traffic within nearly 300 facilities as potential business opportunities in the near-term.
Currently, we are focused on the North American market, but plan to expand globally in the future with interest from Europe, Asia and the Middle East.
Patents and Trademarks
The Company holds a number of patents and trademarks for our technology solutions. We protect our intellectual property rights by relying on federal, state, and common law rights, as well as contractual restrictions. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with all of our employees and contractors, and confidentiality agreements with third parties. We also actively engage in monitoring activities with respect to infringing uses of our intellectual property by third parties.
Specific Areas of Competition
One of our primary commercial goals is to develop innovative technology solutions and target potential “greenfield” market spaces in order to maximize our business footprint and give us the ability to help define the market parameters for the future.
Other companies that participate in the visual and optical (laser) based railcar inspection applications.systems market include Wabtec (Beena Vision), KLD Labs, WID, IEM, and Camlin Rail. Some Class 1 railroads have stated that they are developing “in-house” solutions. We believe that Duos has a significant competitive advantage in that we have multiple years of deployment experience, have access to millions of images where our RIP has performed scans with AI analysis and in-house industry expertise to train our systems and make identification of common problems more automated.
Our Automated Logistics Information System (ALIS) also represents an opportunity to expand into a mature market that we believe has a significant technology gap. While most facilities, such as distribution centers, that process commercial trucks in and out have sophisticated software management applications for logistics control, they have most often not implemented an advanced gatehouse automation solution. Historically, this category was referred to as “Automated Gate Systems” or AGS. The industry’s main objectivepurpose of AGS technology is to replace the manual inspection process taking place inside rail yards with a fully automated process taking place before trains reach the respective rail yards. To that end, the Company, together with its rail partners, is pursuingstreamline entry in to effect changesand exit out of facilities. The marketplace for this was mostly seaports and intermodal transfer facilities and was relatively expensive technology to current FAA rules, an effort that we expect to be successful and receive wide acceptance by the industry and regulators alike.deploy.
Our Growth Strategy
Our strategyVision
The Company designs, develops, deploys and operates intelligent technology solutions for inspecting and evaluating moving objects. Its technology application focus is to grow our business through a combination of organic growth of bothduostech™within the rail andtruevue360™,as well as through strategic acquisitions. intermodal markets which offers imaging-based automatic inspection and analysis for process control for industry with potential expansion into other markets.
Objectives
| · | Improve our operational and technical execution, customer satisfaction and implementation speed. |
| · | Expand Rail Inspection Portal and Automated Logistics Information System with current and future customers in Rail, Logistics and U.S. Government sectors. |
| · | Offer both CAPEX (one-time sale) and Subscription pricing models that seek to increase recurring revenue and improve profitability. |
| · | Form strategic partnerships that improve market access and credibility. |
| · | Improve policy, processes, and toolsets to become a viable platform for internal growth and for mergers and acquisitions. |
| · | Thoughtfully execute mergers and acquisitions to expand offerings and/or capabilities. |
| · | Promote a performance-based work force where employees enjoy their work and are incentivized to excel and innovate. |
Organic Growthduostech™
Our organic growth strategy is to increasecontinue our focus and prioritization in the rail, logistics and intermodal market sharespace. In this regard, the Company has made significant changes in the senior management team to include a new Chief Executive Officer, who joined the Company in September 2020 and has years of experience successfully leading start-up and turn-around companies. In addition, a key account executive from one of duos’ competitors has joined the executive team during late 2022 as the Senior Vice President of Sales & Marketing to support the continued revenue growth of the business and brings with him over 20 years of sales experience focused in the rail market. In 2021, the Company also hired a new Chief Technology Officer bringing 25 years of experience in designing and delivering value driven technologies. Our new CTO has already led the team through instrumental changes to its approach to software and artificial intelligence development. The team also saw a change in CFO in late 2022 with the expansionnew CFO bringing significant experience in growth for asset-intensive businesses which aligns with the subscription format the Company will expand into.
The new leadership team’s focus is to improve operational and technical execution which will in turn enable the commercial side of the business to expand RIP and ALIS delivery into existing and new customers. Even though supply chain issues are expected to continue through 2023, the Company’s primary customers have indicated readiness to order more equipment and services based upon the Company’s current performance and the new subscription offerings expands the universe of potential customers.
Additionally, the CEO has directed that the Company make continual engineering and software upgrades to the RIP to meet anticipated Federal Railroad Association (FRA) and Association of American Railroad (AAR) standards.
Manufacturing and Assembly
The Company designs and develops technology solutions using a combination of in-house fabrication, commercial off-the-shelf technology, and outsourced manufacturing. On-site installations are performed using a combination of in-house project managers and engineers and using third-party sub-contractors as needed. Throughout the process of design, develop, deploy and operate, the Company maintains responsibility for all aspects. Our internal manufacturing operations consist primarily of materials procurement, assembly, testing and quality control by our engineers. If not manufactured internally, we use third-party manufacturing partners to produce our hardware related components and hardware products and we most often complete final assembly, testing and quality control processes for these components and products. Our manufacturing processes are based on standardization of components across product types, centralization of assembly and distribution centers, and a “build-to-order” methodology in which products generally are built only after customers have placed firm orders. For most of our hardware products, we have existing alternate sources of supply.
For 2023 and possibly beyond, we expect to face significant challenges with macro-economic impacts, specifically inflation and supply chain disruption. Although these started to be identified in late 2021, we believe they continue to manifest themselves in ways that could challenge our business growth in the future. Specifically, the ability to source key components and certain implementation services will dictate just how quickly the Company can meet desired installation deadlines. In the industries in which we operate, the time from concept to contract can be substantial. Although we are now adapting to these challenges, previous bids that have been submitted could be challenging to execute within the financial framework and execution times originally envisaged. We continue to have dialogue with our customers regarding potential price increases and implementation delays, but we may suffer some economic impacts as a result of this. Revenue recognition could be delayed as a result of these factors and profitability could be impacted due to higher costs for materials and other services. The Company will continue to monitor the situation and update shareholders as the situation unfolds.
Research and Development
The Company’s R&D and software development teamteams design and develop all systems and software applications with a combination of full-time in-house software engineers and outside contractors. Internal development allows us to maintain technical control over the design and development of our products. Rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology, and changing customer requirements characterize the markets in which we compete. We plan to continue to dedicate significant resources to research and development talent pool, which will enable usefforts, including software development, to significantly expandmaintain and improve our current solution offeringsproduct and services offerings.
| 5 |
Government Regulations
The Company has worked with additional features,various agencies of the federal government for more than 10 years including the Department of Homeland Security (“DHS”). When our solutions have been deployed into these agencies, they meet specific requirements for certification, safety and security that are stipulated in requirements and contract documents. The Company is currently competing for other government related work and strictly follows the developmentrules and regulations outlined in the Federal Acquisition Regulations.
The Company’s primary customers are all governed by regulations related to the safe and effective transportation of newgoods and enhanced technology applications.passengers, primarily by rail, but in future scenarios by air, road and sea. While changes in the regulatory environment could impact the Company in future years, we believe any changes will be overall positive for the Company. We plancontinuously review potential changes in the regulatory environment and maintain contact with key personnel at certain agencies including the Federal Railroad Administration (FRA), the Transportation Safety Agency (TSA) as well as the DHS previously mentioned. We expect to augment such growthdevelop similar relationships with strategic relationshipsgovernmental agencies in target markets both in the business developmentUS and research development arenas, reducinginternationally. At this time, we believe our offerings are complementary to market with additional industry applications, expansionthe current and evolving standards and that we will adapt to any new regulations as they are promulgated.
Employees
We have a current staff of existing offerings to meet customer requirements, as well as, potential geographical expansion into international territories. The launch75 employees, of our AI software systems through ourtruevue360™ subsidiary is another building blockwhich 67 are full-time, the majority of this strategy.
Organic Growthtruevue360™
truevue360™’s immediate growth will mainly be driven by its already established library of rail applications and existing rail customers. Each of the most recent orders of rail inspection portals included an AI component of between 20 and 30 algorithms per customer per site, with a significant number of additional applications under development. It is expected that future orders will continue to include a significant component of algorithms i.e. AI applications.
Our AI applications are sold as a SaaS model and are priced per application/per site.
In addition to offering our AI modelling to our rail customers, we plan to offer services to our commercial /industrial customerswhich work in the following verticals:
·
Logistics companies
·
Oil & Gas
·
Commercial security
truevue360™is currently developingJacksonville area, none of which are subject to a stand-alone marketing/business development initiative to pursue an expanded number of target markets. Additional verticalscollective bargaining agreement. We have not experienced any work stoppages and we consider our relationship with our employees to be pursued as this unit expands include:good.
·
Automotive
·
Agriculture
·
Banking
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Industrial
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DOD/Government
Strategic Acquisitions
Planned acquisition targets include sector specific technology companies with the objective of augmenting our current capabilities with feature-rich (third-party) solutions. The acquisition metric includes, but is not limited to, weighing time, effort and approximate cost to develop certain technologies in-house, versus acquiring or merging with one or more entities that we believe have a proven record of successfully developing a technology sub-component. Additional criteria include an extended national footprint of available manpower (predominantly technical and software engineering), and evaluating the potential acquisition target’s customer base, stage of technology and merger or acquisition cost as compared to market conditions.
Our Risks and Challenges
An investment in our securities involves a high degree of risk. You should carefully consider the risks summarized below. The risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include, but are not limited to, the following:
| · |
| The nature of the technology management platforms utilized by us is complex and highly integrated, and if we fail to successfully manage releases or integrate new solutions, it could harm our revenues, operating income, and reputation. |
· | Our products and services may fail to keep pace with rapidly changing technology and evolving industry standards. | |
· | The market opportunity for our products and services may not develop in the ways that we anticipate. | |
· | Our revenues are dependent on general economic conditions and the willingness of enterprises to invest in technology. | |
· | Some of our competitors are larger and have greater financial and other resources than we do. | |
· | We have a history of losses and our growth plans may lead to additional losses and negative operating cash flows in the future. | |
· | We may be unable to protect our intellectual property, which could impair our competitive advantage, reduce our revenue, and increase our costs. | |
· | We may be required to incur substantial expenses and divert management attention and resources in defending intellectual property litigation against us. | |
· | We may incur substantial expenses and divert management resources in prosecuting others for their unauthorized use of our intellectual property rights. |
Recent Developments
On April 1, 2023, the Board granted to certain key employees an aggregate of 353,117 non-qualified stock options with a strike price of $4.22, a term of 5-years and 3-year vesting period. The options were granted prior to the certificates being issued subject to a pending modification of specific language contained within the option agreement pertaining to certain rights of the holder in the event of a merger or acquisition. The specific language was approved by the shareholders on May 17, 2023 after which the option certificates were issued with the modified language. The specific language had no bearing on the grant date nor on the valuation. Following the approval by the shareholders but prior to issuance of the certificates, one holder resigned from the Company and forfeited 60,000 unvested options leading to a net issuance during the quarter of 293,117 non-qualified stock options. The Company expects to take a charge of $567,569 during the vesting period.
Our audited consolidated financial statements
As previously reported, on May 16, 2023 the Company held its 2023 annual meeting of stockholders. Certain matters were approved at the meeting including election of Board members, the issuance of shares of common stock upon conversion of shares of Series D Preferred Stock, approval of an Employee Stock Purchase Plan (ESPP), and ratification of the auditors.
On June 29, 2023, the Company announced that based on preliminary unaudited estimates as of that date, it expects total revenue for the fiscal yearsecond quarter of 2023 to be between $1.8 million and $2.1 million. The decrease is due to timing factors primarily related to the booking of revenues versus costs. Based on preliminary second quarter results, the Company expects total revenues for the six months ended December 31, 2019 are not yet available. We have presented preliminary estimated rangesJune 30, 2023 to be approximately $4.5 million.
On July 6, 2023, the Company issued an aggregate of certain5,645 shares of our financial results belowcommon stock for fiscal year 2019, based on information currently availablepayment of board fees to management. We have provided ranges, rather than specific amounts,three directors in the amount of $32,500 for certain financial results below, primarily because our financial closing procedures forservices to the board which was expensed during the three months and year ended December 31,2019 areJune 30, 2023.
Corporate Information
Our principal executive office is located at 7660 Centurion Parkway, Suite 100, Jacksonville, FL 32256. Our telephone number is (904) 296-2807. Our website address is www.duostechnologies.com. Information contained on our website is not yet complete. As a result, our actual results may vary materially from the estimated preliminary results included herein and will not be publicly available until after the closingpart of this offering. Accordingly, you should not place undue reliance on these estimates. The preliminary financial data includedprospectus, and the inclusion of our website address in this prospectus has been prepared by, and is the responsibility of, management. Our independent registered public accounting firm has not audited, reviewed, compiled, or performed any procedures with respectan inactive textual reference only.
THE OFFERING
This prospectus relates to the preliminary estimated financial data belowoffer and does not express an opinion or any other formsale from time to time of assurance with respect thereto. See “Risk Factors,” “Management’s Discussion and Analysisup to 1,333,334 shares of Financial Condition and Results of Operations” and “Special Note Regarding Forward-Looking Statements” for additional information regarding factorsour Common Stock by the Selling Stockholders that could result in differences between the preliminary estimated ranges of certain financial results presented below and the financial results we will ultimately report for fiscal year 2019.
For the quarter ended December 31, 2019, we estimate that our net sales will range from $5.6 million to $5.8 million, an increase of $3.1 million, or 119%, at the mid-pointmay be issued upon conversion of the estimated net sales range when compared with net sales of $2.6 million for the quarter ended December 31, 2018, and an increase of approximately $3.4 million, or 154%, compared with net sales of $2.2 million for the quarter ended September 30, 2019. The increase in net sales was due to an increase in installations of our rail inspection portal products at CSX and one other rail customer.Series E Preferred Stock. See “Selling Stockholders”.
For fiscal year 2019, we estimate that our net sales will range from $13.5 million to $13.7 million, an increase of at least $1.5 million, or 13%, using the mid-point of the estimated net sales range when compared with net sales of $12.1 million for fiscal year 2018. The increase in net sales was due to an increase in total comparable company sales of approximately 13% for fiscal year 2019, primarily driven by an increase in our sales of rail inspection portals.
For fiscal year 2019, we estimate that our operating loss will range from $2.5 million to $3 million, an increase of $1.1 million, or 68%, using the mid-point of the estimated range when compared with net operating loss of $1.6 million for fiscal year 2018. The increase is substantially due to an increase in R&D expenses related to staffing for our new AI subsidiary, TrueVue360 without any compensating revenues during fiscal year 2019.
Our Corporate History
We were incorporated on May 31, 1994 in the State of Florida as Information Systems Associates, Inc. Initially, our business operations consisted of consulting services for asset management of large corporate data centers and development and licensing of Information Technology (IT) asset management software. On April 1, 2015, we completed a reverse triangular merger, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) among Duos Technologies, Inc., a Florida corporation (“DTI”), the Company, and Duos Acquisition Corporation, a Florida corporation and wholly owned subsidiary of the Company (“Merger Sub”). Under the terms of the Merger Agreement, the Merger Sub merged with and into DTI, whereby DTI remained as the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”). On the same date, TrueVue 360, Inc., a Delaware corporation, became a wholly owned subsidiary of the Company. In connection with the Merger, on July 10, 2015, the Company effected a name change to Duos Technologies Group, Inc. Since January 2019, Truevue360, Inc. has been focused on the development and marketing of Artificial Intelligence applications. The Company’s headquarters are located at 6622 Southpoint Drive South, Suite 310, Jacksonville Florida 32216 and main telephone number is 904 652 1616.
Securities offered by |
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| Offering Price Per Share | The Selling Stockholders may sell all or a |
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Risk factors | Investing in our securities is highly speculative and involves a high degree of risk. You should carefully consider the information set forth in the |
Trading | Our common stock is currently quoted on the |
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Unless otherwise indicated in this prospectus, throughout this prospectus the |
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NASDAQ listing requirements include, among other things, a stock price threshold. As a result, on January 9, 2020 we filed a Certificate of Amendment to our Certificate of Incorporation to effectuate a 1-for-14 reverse stock split. On January 17, 2020, the reverse stock split was effected on the OTCQX.
The shares of our common stock to be outstanding after this offeringis based on 7,169,339 shares of our common stock outstanding as of June 30, 2023 and excludes the following:
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Unless we indicate otherwise, all information in this prospectus:
| · | |
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| · | 5,645 shares of common stock issued to |
| · | 125,274 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan; |
| · | 433,000 shares of common stock issuable upon conversion of Series D Convertible Preferred Stock; and |
| · | 1,333,334 shares of common stock issuable upon conversion of Series E Convertible Preferred Stock. |
| 8 |
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated statementsstatement of operations data for the fiscal years ended December 31, 2017,2022 and 20182021 and the summary consolidated balance sheet data as of December 31, 2022 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Additionally, the summaryThe consolidated statement of operations data for the three and nine months ended September 30, 2018March 31, 2023 and 20192022 and the summary consolidated balance sheet data as of March 31, 2023 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2018 are derived from our audited financial statements that are included elsewhere in this prospectus. The summary consolidated balance sheet data as of September 30, 2019 are derived from our consolidated unaudited financial statements that are included elsewhere in this prospectus. The historical financial data presented below isare not necessarily indicative of our financial results in future periods, and the interim results for the three and nine months ended September 30, 2019 isare not necessarily indicative of our operating results to be expected for the full fiscal year ending December 31, 20192023 or any other period. You should read the summary consolidated financial data in conjunction with those financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our unaudited consolidated financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. Except as otherwise noted, all share and per share data for the periods shown have been adjusted, on a retroactive basis, to reflect a 1-for-14 reverse stock split, which became effective on January 17, 2020.
|
| December 31, |
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|
| 2018 |
|
| 2017 |
| ||
REVENUES: |
|
|
|
|
|
|
|
|
Project |
| $ | 10,753,926 |
|
| $ | 1,884,079 |
|
Maintenance and technical support |
|
| 1,170,215 |
|
|
| 1,127,932 |
|
IT asset management services |
|
| 124,478 |
|
|
| 872,577 |
|
Total Revenues |
|
| 12,048,619 |
|
|
| 3,884,588 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
|
|
|
Project |
|
| 6,373,684 |
|
|
| 1,487,516 |
|
Maintenance and technical support |
|
| 409,316 |
|
|
| 458,960 |
|
IT asset management services |
|
| 61,396 |
|
|
| 348,076 |
|
Total Cost of Revenues |
|
| 6,844,396 |
|
|
| 2,294,552 |
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
| 5,204,223 |
|
|
| 1,590,036 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Selling and marketing expenses |
|
| 289,140 |
|
|
| 179,318 |
|
Salaries, wages and contract labor |
|
| 4,299,799 |
|
|
| 3,098,782 |
|
Research and development |
|
| 488,694 |
|
|
| 310,099 |
|
Professional fees |
|
| 245,033 |
|
|
| 393,531 |
|
General and administrative expenses |
|
| 1,451,461 |
|
|
| 1,051,799 |
|
Total Operating Expenses |
|
| 6,774,127 |
|
|
| 5,033,529 |
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
| (1,569,904 | ) |
|
| (3,443,493 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
Interest Expense |
|
| (17,180 | ) |
|
| (4,519,035 | ) |
Gain on settlement of debt |
|
| — |
|
|
| 64,647 |
|
Warrant derivative gain |
|
| — |
|
|
| 2,743,686 |
|
Other income, net |
|
| 6,197 |
|
|
| 1,719 |
|
Total Other Income (Expense) |
|
| (10,983 | ) |
|
| (1,708,983 | ) |
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
| (1,580,887 | ) |
|
| (5,152,477 | ) |
Series A preferred stock dividends |
|
| — |
|
|
| (17,760 | ) |
Net income (loss) applicable to common stock |
| $ | (1,580,887 | ) |
| $ | (5,170,237 | ) |
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share |
| $ | (1.06 | ) |
| $ | (20.07 | ) |
Diluted Net Income(Loss) Per Share |
| $ | (1.06 | ) |
| $ | (20.07 | ) |
Weighted Average Shares-Basic |
|
| 1,485,438 |
|
|
| 257,601 |
|
Weighted Average Shares-Diluted |
|
| 1,485,438 |
|
|
| 257,601 |
|
| 9 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
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|
| September 30, |
|
| September 30, |
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|
| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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REVENUES: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project |
| $ | 1,921,306 |
|
| $ | 4,731,106 |
|
| $ | 6,954,062 |
|
| $ | 8,516,812 |
|
Maintenance and technical support |
|
| 229,008 |
|
|
| 371,110 |
|
|
| 701,552 |
|
|
| 881,004 |
|
IT asset management services |
|
| 48,087 |
|
|
| — |
|
|
| 240,673 |
|
|
| 92,386 |
|
Total Revenues |
|
| 2,198,401 |
|
|
| 5,102,216 |
|
|
| 7,896,287 |
|
|
| 9,490,202 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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COST OF REVENUES: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project |
|
| 984,805 |
|
|
| 2,684,785 |
|
|
| 4,045,448 |
|
|
| 5,079,455 |
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Maintenance and technical support |
|
| 158,785 |
|
|
| 89,077 |
|
|
| 420,451 |
|
|
| 300,593 |
|
IT asset management services |
|
| 29,352 |
|
|
| — |
|
|
| 99,686 |
|
|
| 47,989 |
|
Total Cost of Revenues |
|
| 1,172,942 |
|
|
| 2,773,862 |
|
|
| 4,565,585 |
|
|
| 5,428,037 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
| 1,025,459 |
|
|
| 2,328,354 |
|
|
| 3,330,702 |
|
|
| 4,062,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses |
|
| 98,311 |
|
|
| 73,468 |
|
|
| 336,433 |
|
|
| 189,092 |
|
Salaries, wages and contract labor |
|
| 1,438,608 |
|
|
| 1,072,029 |
|
|
| 4,045,689 |
|
|
| 3,153,138 |
|
Research and development |
|
| 97,273 |
|
|
| 122,755 |
|
|
| 328,403 |
|
|
| 401,116 |
|
Professional fees |
|
| 43,903 |
|
|
| 63,878 |
|
|
| 188,876 |
|
|
| 187,679 |
|
General and administrative expenses |
|
| 479,265 |
|
|
| 359,991 |
|
|
| 1,465,918 |
|
|
| 864,969 |
|
Total Operating Expenses |
|
| 2,157,360 |
|
|
| 1,692,121 |
|
|
| 6,365,319 |
|
|
| 4,795,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
| (1,131,901 | ) |
|
| 636,233 |
|
|
| (3,034,617 | ) |
|
| (733,829 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
| (12,783 | ) |
|
| (4,589 | ) |
|
| (19,095 | ) |
|
| (14,755 | ) |
Other income, net |
|
| 615 |
|
|
| 981 |
|
|
| 4,021 |
|
|
| 3,742 |
|
Total Other Income (Expense) |
|
| (12,168 | ) |
|
| (3,608 | ) |
|
| (15,074 | ) |
|
| (11,013 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
| (1,144,069 | ) |
|
| 632,625 |
|
|
| (3,049,691 | ) |
|
| (744,842 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stock |
| $ | (1,144,069 | ) |
| $ | 632,625 |
|
| $ | (3,049,691 | ) |
| $ | (744,842 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share |
| $ | (0.63 | ) |
| $ | 0.43 |
|
| $ | 1.78 | ) |
| $ | (0.50 | ) |
Diluted Net Income (Loss) Per Share |
| $ | (0.63 | ) |
| $ | 0.34 |
|
| $ | (1.78 | ) |
| $ | (0.50 | ) |
Weighted Average Shares-Basic |
|
| 1,817,289 |
|
|
| 1,482,318 |
|
|
| 1,715,480 |
|
|
| 1,480,297 |
|
Weighted Average Shares-Diluted |
|
| 1,817,289 |
|
|
| 1,886,604 |
|
|
| 1,715,480 |
|
|
| 1,480,297 |
|
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES: | ||||||||
| Technology systems | $ | 11,190,292 | $ | 5,871,666 | ||||
| Services and consulting | 3,822,074 | 2,388,251 | ||||||
| Total Revenues | 15,012,366 | 8,259,917 | ||||||
| COST OF REVENUES: | ||||||||
| Technology systems | 8,376,649 | 4,728,197 | ||||||
| Services and consulting | 1,887,614 | 1,492,176 | ||||||
| Total Cost of Revenues | 10,264,263 | 6,220,373 | ||||||
| GROSS MARGIN | 4,748,103 | 2,039,544 | ||||||
| OPERATING EXPENSES: | ||||||||
| Sales & marketing | 1,337,186 | 1,233,851 | ||||||
| Research & development | 1,651,064 | 2,515,630 | ||||||
| General & administration | 8,625,002 | 5,747,014 | ||||||
| Total Operating Expenses | 11,613,252 | 9,496,495 | ||||||
| LOSS FROM OPERATIONS | (6,865,149 | ) | (7,456,951 | ) | ||||
| OTHER INCOME (EXPENSES): | ||||||||
| Interest expense | (9,191 | ) | (20,268 | ) | ||||
| Other income, net | 9,557 | 1,468,318 | ||||||
| Total Other Income | 366 | 1,448,050 | ||||||
| NET LOSS | $ | (6,864,783 | ) | $ | (6,008,901 | ) | ||
| Net Loss Per Share - Basic | $ | (1.11 | ) | $ | (1.63 | ) | ||
| Net Loss Per Share - Diluted | $ | (1.11 | ) | $ | (1.63 | ) | ||
| Weighted Average Shares - Basic | 6,175,193 | 3,694,293 | ||||||
| Weighted Average Shares - Diluted | 6,175,193 | 3,694,293 | ||||||
| 10 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| September 30, |
|
| December 31, |
| ||||
|
| 2019 |
|
| 2018 |
| ||||
|
| (Unaudited) |
|
|
|
|
| |||
ASSETS |
|
|
|
|
|
| ||||
CURRENT ASSETS: |
|
|
|
|
|
|
|
| ||
Cash |
| $ | 767,339 |
|
| $ | 1,209,301 |
| ||
Accounts receivable, net |
|
| 1,413,983 |
|
|
| 1,538,793 |
| ||
Contract assets |
|
| 1,586,138 |
|
|
| 1,208,604 |
| ||
Prepaid expenses and other current assets |
|
| 258,596 |
|
|
| 235,198 |
| ||
Total Current Assets |
|
| 4,026,056 |
|
|
| 4,191,896 |
| ||
Property and equipment, net |
|
| 323,111 |
|
|
| 204,226 |
| ||
Operating lease right of use asset |
|
| 509,958 |
|
|
| — |
| ||
|
|
|
|
|
|
|
|
| ||
OTHER ASSETS: |
|
|
|
|
|
|
|
| ||
Software Development Costs, net |
|
| 25,000 |
|
|
| 40,000 |
| ||
Patents and trademarks, net |
|
| 61,440 |
|
|
| 53,871 |
| ||
Total Other Assets |
|
| 86,440 |
|
|
| 93,871 |
| ||
TOTAL ASSETS |
| $ | 4,945,565 |
|
| $ | 4,489,993 |
| ||
|
|
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
| ||||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| ||
Accounts payable |
| $ | 1,859,249 |
|
| $ | 1,416,716 |
| ||
Accounts payable - related parties |
|
| 12,791 |
|
|
| 13,473 |
| ||
Notes payable - financing agreements |
|
| 58,947 |
|
|
| 48,330 |
| ||
Notes payable - related parties, net of discounts |
|
| 856,372 |
|
|
| — |
| ||
Notes payable, net of discounts |
|
| 256,250 |
|
|
| — |
| ||
Line of credit |
|
| 28,512 |
|
|
| 31,201 |
| ||
Payroll taxes payable |
|
| 122,453 |
|
|
| 317,573 |
| ||
Accrued expenses |
|
| 250,132 |
|
|
| 222,328 |
| ||
Current portion-finance lease payable |
|
| 43,669 |
|
|
| — |
| ||
Current portion-operating lease obligations |
|
| 241,000 |
|
|
| — |
| ||
Contract liabilities |
|
| 1,107,742 |
|
|
| 2,248,829 |
| ||
Deferred revenue |
|
| 489,062 |
|
|
| 362,528 |
| ||
Total Current Liabilities |
|
| 5,326,179 |
|
|
| 4,660,978 |
| ||
Finance lease payable |
|
| 48,408 |
|
|
|
|
| ||
Operating lease obligations |
|
| 293,415 |
|
|
| — |
| ||
Total Liabilities |
|
| 5,668,002 |
|
|
| 4,660,978 |
| ||
|
|
|
|
|
|
|
|
| ||
Commitments and Contingencies (Note 6) |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
| ||
STOCKHOLDERS' DEFICIT: |
|
|
|
|
|
|
|
| ||
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,485,000 shares available to be designated |
|
|
|
|
|
|
|
| ||
Series A redeemable convertible cumulative preferred stock, $10 stated value per share, 500,000 shares designated; |
|
| — |
|
|
| — |
| ||
Series B convertible cumulative preferred stock, $1,000 stated value per share, 15,000 shares designated; 2,080 and 2,830 issued and outstanding at September 30, 2019 and December 31, 2018, convertible into common stock at |
|
| 2,080,000 |
|
|
| 2,830,000 |
| ||
Common stock: $0.001 par value; 500,000,000 shares authorized, |
|
| 1,926 |
|
|
| 1,505 |
| ||
Additional paid-in capital |
|
| 30,672,613 |
|
|
| 27,416,802 |
| ||
Total stock & paid-in-capital |
|
| 32,754,539 |
|
|
| 30,248,307 |
| ||
Accumulated deficit |
|
| (33,319,524 | ) |
|
| (30,269,833 | ) | ||
Sub-total |
|
| (564,985 | ) |
|
| (21,526 | ) | ||
Less: Treasury stock |
|
| (157,452 | ) |
|
| (149,459 | ) | ||
Total Stockholders' Deficit |
|
| (722,437 | ) |
|
| (170,985 | ) | ||
Total Liabilities and Stockholders' Deficit |
| $ | 4,945,565 |
|
| $ | 4,489,993 |
| ||
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 1,121,092 | $ | 893,720 | ||||
| Accounts receivable, net | 3,418,263 | 1,738,543 | ||||||
| Contract assets | 425,722 | 3,449 | ||||||
| Inventory | 1,428,360 | 298,338 | ||||||
| Prepaid expenses and other current assets | 441,320 | 354,613 | ||||||
| Total Current Assets | 6,834,757 | 3,288,663 | ||||||
| Property and equipment, net | 629,490 | 603,253 | ||||||
| Operating lease right of use asset | 4,689,931 | 4,925,765 | ||||||
| Security deposit | 600,000 | 600,000 | ||||||
| Software development costs, net | 265,208 | — | ||||||
| Patents and trademarks, net | 69,733 | 66,482 | ||||||
| TOTAL ASSETS | $ | 13,089,119 | $ | 9,484,163 | ||||
(Continued)
| 11 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 2,290,390 | $ | 1,044,500 | ||||
| Notes payable - financing agreements | 74,575 | 52,503 | ||||||
| Accrued expenses | 453,023 | 618,093 | ||||||
| Equipment financing agreements-current portion | 22,851 | 80,335 | ||||||
| Operating lease obligation-current portion | 696,869 | 315,302 | ||||||
| Contract liabilities | 957,997 | 1,829,311 | ||||||
| Total Current Liabilities | 4,495,705 | 3,940,044 | ||||||
| Equipment financing agreement, less current portion | — | 22,851 | ||||||
| Operating lease obligation, less current portion | 4,542,943 | 4,739,783 | ||||||
| Total Liabilities | 9,038,648 | 8,702,678 | ||||||
| Commitments and Contingencies (Note 10) | — | — | ||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock: $0.001 par value, 10,000,000 authorized, 9,476,000 shares available to be designated | — | — | ||||||
| Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $6.30 per share | — | — | ||||||
| Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 0 and 851 issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $7 per share | — | 1 | ||||||
| Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 0 and 2,500 issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $5.50 per share | — | 2 | ||||||
| Series D convertible preferred stock, $1,000 stated value per share, 4,000 shares designated; 1,299 and 0 issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $3 per share | 1 | — | ||||||
| Common stock: $0.001 par value; 500,000,000 shares authorized, 7,156,876 and 4,111,047 shares issued, 7,155,552 and 4,109,723 shares outstanding at December 31, 2022 and 2021, respectively | 7,156 | 4,111 | ||||||
| Additional paid-in-capital | 56,562,600 | 46,431,874 | ||||||
| Accumulated deficit | (52,361,834 | ) | (45,497,051 | ) | ||||
| Sub-total | 4,207,923 | 938,937 | ||||||
| Less: Treasury stock (1,324 shares of common stock at December 31, 2022 and 2021) | (157,452 | ) | (157,452 | ) | ||||
| Total Stockholders' Equity | 4,050,471 | 781,485 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 13,089,119 | $ | 9,484,163 | ||||
| 12 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| REVENUES: | ||||||||
| Technology systems | $ | 1,827,764 | $ | 783,269 | ||||
| Services and consulting | 816,524 | 656,047 | ||||||
| Total Revenues | 2,644,288 | 1,439,316 | ||||||
| COST OF REVENUES: | ||||||||
| Technology systems | 1,767,209 | 865,488 | ||||||
| Services and consulting | 339,907 | 351,762 | ||||||
| Total Cost of Revenues | 2,107,116 | 1,217,250 | ||||||
| GROSS MARGIN | 537,172 | 222,066 | ||||||
| OPERATING EXPENSES: | ||||||||
| Sales and marketing | 307,577 | 283,894 | ||||||
| Research and development | 404,885 | 436,717 | ||||||
| General and Administrative Costs | 1,971,508 | 2,143,073 | ||||||
| Total Operating Expenses | 2,683,970 | 2,863,684 | ||||||
| LOSS FROM OPERATIONS | (2,146,798 | ) | (2,641,618 | ) | ||||
| OTHER INCOME (EXPENSES): | ||||||||
| Interest expense | (1,180 | ) | (3,180 | ) | ||||
| Other income, net | 4,295 | 182 | ||||||
| Total Other Income (Expenses) | 3,115 | (2,998 | ) | |||||
| NET LOSS | $ | (2,143,683 | ) | $ | (2,644,616 | ) | ||
| Net Loss Per Share | ||||||||
| Basic | $ | (0.30 | ) | $ | (0.49 | ) | ||
| Diluted | $ | (0.30 | ) | $ | (0.49 | ) | ||
| Weighted Average Shares | ||||||||
| Basic | 7,156,876 | 5,353,620 | ||||||
| Diluted | 7,156,876 | 5,353,620 | ||||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 4,340,947 | $ | 1,121,092 | ||||
| Accounts receivable | 717,346 | 3,418,263 | ||||||
| Contract assets | 1,426,312 | 425,722 | ||||||
| Inventory | 1,529,530 | 1,428,360 | ||||||
| Prepaid expenses and other current assets | 532,381 | 441,320 | ||||||
| Total Current Assets | 8,546,516 | 6,834,757 | ||||||
| Property and equipment, net | 579,689 | 629,490 | ||||||
| Operating lease right of use asset | 4,612,830 | 4,689,931 | ||||||
| Security deposit | 600,000 | 600,000 | ||||||
| Software development costs, net | 454,280 | 265,208 | ||||||
| Patents and trademarks, net | 75,017 | 69,733 | ||||||
| TOTAL ASSETS | $ | 14,868,332 | $ | 13,089,119 | ||||
(Continued)
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 1,282,184 | $ | 2,290,390 | ||||
| Notes payable - financing agreements | 193,094 | 74,575 | ||||||
| Accrued expenses | 367,652 | 453,023 | ||||||
| Equipment financing payable-current portion | 11,566 | 22,851 | ||||||
| Operating lease obligations-current portion | 764,820 | 696,869 | ||||||
| Contract liabilities | 2,066,861 | 957,997 | ||||||
| Total Current Liabilities | 4,686,177 | 4,495,705 | ||||||
| Operating lease obligations, less current portion | 4,466,884 | 4,542,943 | ||||||
| Total Liabilities | 9,153,061 | 9,038,648 | ||||||
| Commitments and Contingencies (Note 4) | — | — | ||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock: $0.001 par value, 10,000,000 shares authorized, 9,446,000 shares available to be designated | — | — | ||||||
| Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $6.30 per share | — | — | ||||||
| Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 0 issued and outstanding at March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $7 per share | — | — | ||||||
| Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 0 issued and outstanding at March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $5.50 per share | — | — | ||||||
| Series D convertible preferred stock, $1,000 stated value per share, 4,000 shares designated; 1,299 and 1,299 issued and outstanding at March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $3 per share | 1 | 1 | ||||||
| Series E convertible preferred stock, $1,000 stated value per share, 30,000 shares designated; 4,000 and 0 issued and outstanding at March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $3 per share | 4 | — | ||||||
| Common stock: $0.001 par value; 500,000,000 shares authorized, 7,169,339 and 7,156,876 shares issued, 7,168,015 and 7,155,552 shares outstanding at March 31, 2023 and December 31, 2022, respectively | 7,168 | 7,156 | ||||||
| Additional paid-in-capital | 60,371,067 | 56,562,600 | ||||||
| Accumulated deficit | (54,505,517 | ) | (52,361,834 | ) | ||||
| Sub-total | 5,872,723 | 4,207,923 | ||||||
| Less: Treasury stock (1,324 shares of common stock at March 31, 2023 and December 31, 2022) | (157,452 | ) | (157,452 | ) | ||||
| Total Stockholders’ Equity | 5,715,271 | 4,050,471 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 14,868,332 | $ | 13,089,119 |
| 15 |
Investing in our securities involves a great deal of risk. Careful consideration should be made of the following factors as well as other information included in this prospectus before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control. Our business, financial condition or operating results could be materially harmed by any of these risks. This could cause the trading price of our securities to decline, and you may lose all or part of your investment. Additional risks that we do not yet know of or that we currently think are immaterial may also affect our business and results of operations.
Risks Related to Our Company and Business
The nature of the technology management platforms utilized by us are complex and highly integrated, and if we fail to successfully manage releases or integrate new solutions, it could harm our revenues, operating income, and reputation.
The technology platforms developed and designed by us accommodate integrated applications that include our own developed technology and third-party technology, thereby substantially increasing their functionality.
Due to this complexity and the condensed development cycles under which we operate, we may experience errors in our software, corruption or loss of our data, or unexpected performance issues from time to time. For example, our solutions may face interoperability difficulties with software operating systems or programs being used by our customers, or new releases, upgrades, fixes or the integration of acquired technologies may have unanticipated consequences on the operation and performance of our other solutions. If we encounter integration challenges or discover errors in our solutions late in our development cycle, it may cause us to delay our launch dates. Any major integration or interoperability issues or launch delays could have a material adverse effect on our revenues, operating income and reputation.
We face risks as a result of the coronavirus (COVID-19 pandemic) lingering effects which could significantly disrupt our research and development, operations, sales, and financial results.
Our business has been adversely impacted by the effects of the COVID-19 pandemic. In addition to global macroeconomic effects, the COVID-19 pandemic and related adverse public health developments caused disruption and/or delays to our operations and sales activities. Our third-party manufacturers and our customers were disrupted by worker absenteeism, quarantines and restrictions on employees’ ability to work, office and factory closures, disruptions to ports and other shipping infrastructure, border closures, or other travel or health-related restrictions. Depending on the magnitude of such effects on our activities or the operations of our third-party manufacturers and third-party distributors, the supply of our products, in some cases, continue to be delayed, which could continue to adversely affect our business, operations and customer relationships. In addition, the pandemic or other disease outbreak have had and may continue to have over the longer term a material adverse effect on the economies and financial markets of many countries, resulting in an economic downturn that will affect demand for our products and services and impact our operating results. There can be no assurance that any decrease in sales resulting from the pandemic slowdown will be offset by increased sales in subsequent periods. Although the magnitude of the impact of the COVID-19 outbreak on our business and operations remains uncertain, the continued spread of COVID-19 and the related public health measures and travel and business restrictions may adversely impact our business, financial condition, operating results and cash flows. In addition, we have experienced and may in the future experience disruptions to our business operations resulting from quarantines, self-isolations, or other restrictions on the ability of our employees to perform their jobs that may impact our ability to develop and design our products and services in a timely manner or meet required milestones or customer commitments.
We may be adversely affected by the effects of inflation and supply chain disruption
Our business operates in an environment of long bid to contract award cycles. Our customer’s bid requirements are such that firm pricing is expected on much or all of our proposals and as such we must commit to certain commercial terms and conditions such as pricing. In addition, the Company hires employees and contractors to perform most (if not all) of the work required to complete a contract. We are beginning to experience the impacts of inflation upon previously forecasted costs including employees that require higher salaries, contractors demanding higher prices for jobs and higher costs for materials necessary to complete contracts. While we endeavor to charge additional costs to our customers, in some cases this may not be possible contractually and as a result our profitability may suffer as a result. Although we anticipate these effects to be mitigated in the long term, we cannot be assured that this will be possible in all or any instances and as such our revenue, profitability and growth prospects may suffer as a result of this.
| 16 |
Current supply chain issues continue to extend deadlines for shipment of key components used in our technology systems. The effect of this may be to delay revenue recognition. We have experienced and expect to continue to experience delays to our business operations resulting from lack of materials availability, delays in securing key components such as video cameras requiring certain computer chips, and other material and personnel shortages that may impact our ability to implement our products and services in a timely manner or meet required milestones or customer commitments. In addition, higher costs for travel may adversely impact our business, financial condition, operating results and cash flows. This has made it necessary for the Company to order certain components prior to receiving a contract to ensure we have key components available when necessary to satisfy future contract obligations.
Our products and services may fail to keep pace with rapidly changing technology and evolving industry standards.
The market in which we operate is characterized by rapid, and sometimes disruptive, technological developments, evolving industry standards, frequent new product introductions and enhancements and changes in customer requirements. In addition, both traditional and new competitors are investing heavily in our market areas and competing for customers. As next-generation video analytics technology continues to evolve, we must keep pace in order to maintain or expand our market position. We recently introduced a significant number ofcontinue to introduce new product offerings and are increasingly focused on new, high value safetyautomating mechanical and security-based surveillance products,security inspections in the rail, logistics, intermodal and government sectors as apotential revenue driver.drivers. If we are not able to successfully add staff resources with sufficient technical skills to develop and bring these new products to market in a timely manner, achieve market acceptance of our products and services or identify new market opportunities for our products and services, our business and results of operations may be materially and adversely affected.
The market opportunity for our products and services may not develop in the ways that we anticipate.
The demand for our products and services cancould change quickly and in ways that we may not anticipate because the market in which we operate is characterized by rapid, and sometimes disruptive, technological developments, evolving industry standards, frequent new product introductions and enhancements, changes in customer requirements and a limited ability to accurately forecast future customer orders.anticipate. Our operating results may be adversely affected if the market opportunity for our products and services does not develop in the ways that we anticipate or if other technologies become more accepted or standard in our industry or disrupt our technology platforms.
Our revenues are dependent on general economic conditions and the willingness of enterprises to invest in technology.
We believe that enterprisesoperators in the business sectors we are focused on continue to be cautious about sustained economic growth and have triedseek to maintain or improve profitability through cost control and constrained spending. While our core technologies are designed to address cost reduction, other factors may cause companies to delay or cancel capital projects, including the implementation of our products and services. In addition, certain industriesthe business sectors in which we operateare focused are under financial pressure to reduce capital investment which may make it more difficult for us to close large contracts in the immediate future. We believe there is a growing market trend toward more customers exploring operating expense models as opposed to capital expense models for procuring technology. We believe the market trend toward operating expense models will continue as customers seek ways of reducing their overhead and other costs. All of the foregoing may result in continued pressure on our ability to increase our revenue and may potentially create competitive pricing pressures and price erosion. If these or other conditions limit our ability to grow revenue or cause our revenue to decline our operating results may be materially and adversely affected.
Our working capital profile may shift over time to require additional investment.
Historically, the Company has leveraged significant milestone payments at a contract onset to fund the purchase of required materials. Expansion into a subscription format would allow the Company to potentially transact faster and more routinely with a larger customer base than it has previously had. In certain instances where the Company would build, own and operate its own assets, it may require a different working capital and capitalization strategy whereby the Company will be required to make upfront investments without significant customer milestone payments to offset the investment. The Company believes that this presents a short-term capital risk but will, long-term, improve the overall performance of the business.
Some of our competitors are larger and have greater financial and other resources than we do.
Some of our product offerings compete and will compete with other similar products from our competitors. These competitive products could be marketed by well-established, successful companies that possess greater financial, marketing, distributional, personnel and other resources than we possess. In certain instances, competitors with greater financial resources also may be able to enter a market in direct competition with us offering attractive marketing tools to encourage the sale of products that compete with our products or present cost features that our target end users may find attractive.
We have a history of losses and our growth plans may lead to additional losses and negative operating cash flows in the future.
Our accumulated deficit was approximately $33$55 million and $52 million as of September 30, 2019.March 31, 2023 and December 31, 2022, respectively. Our operating losses may continue as we continue to expend resources to further develop and enhance our technology offering, to complete prototyping for proof-of-concept, obtain regulatory clearances or approvals as required, expand our business development activities and finance capabilities and conduct further research and development. We also expect to experience negative cash flow in the short-term until our revenues and margins increase at a rate greater than our expenses, which may not occur.
We may be unable to protect our intellectual property, which could impair our competitive advantage, reduce our revenue, and increase our costs.
Our success and ability to compete depend in part on our ability to maintain the proprietary aspects of our technologies and products. We rely on a combination of trade secrets, patents, copyrights, trademarks, confidentiality agreements, and other contractual provisions to protect our intellectual property, but these measures may provide only limited protection. We customarily enter into written confidentiality and non-disclosure agreements with our employees, consultants, customers, manufacturers, and other recipients of information about our technologies and products and assignment of invention agreements with our employees and consultants. We may not always be able to enforce these agreements and may fail to enter into any such agreement in every instance when appropriate. We license from third partiesthird-parties certain technology used in and for our products. These third-party licenses are granted with restrictions; therefore, such third-party technology may not remain available to us on terms beneficial to us. Our failure to enforce and protect our intellectual property rights or obtain from third parties the right to use necessary technology could have a material adverse effect on our business, operating results, and financial condition. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States.
Patents may not issuebe issued from the patent applications that we have filed or may file in the future. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. We have registered certain of our trademarks in the United States and other countries. We cannot assure you that we will obtain registrations of principal or other trademarks in key markets in the future. Failure to obtain registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenge from third parties to our use of our trademarks and brands.
We may be required to incur substantial expenses and divert management attention and resources in defending intellectual property litigation against us.
We cannot be certain that our technologies and products do not and will not infringe on issued patents or other proprietary rights of others. While we are not currently subject to any infringement claim, any future claim, with or without merit, could result in significant litigation costs and diversion of resources, including the attention of management, and could require us to enter into royalty and licensing agreements, any of which could have a material adverse effect on our business. We may not be able to obtain such licenses on commercially reasonable terms, if at all, or the terms of any offered licenses may be unacceptable to us. If forced to cease using such technology, we may be unable to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding, or failure to obtain necessary licenses, could prevent us from manufacturing, using, or selling certain of our products, which could have a material adverse effect on our business, operating results, and financial condition.
Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief, which could effectively block our ability to make, use, or sell our products in the United States or abroad. Such a judgment could have a material adverse effect on our business, operating results, and financial condition. In addition, we are obligated under certain agreements to indemnify the other party in connection with infringement by us of the proprietary rights of third parties. In the event that we are required to indemnify parties under these agreements, it could have a material adverse effect on our business, financial condition, and results of operations.
| 18 |
We may incur substantial expenses and divert management resources in prosecuting others for their unauthorized use of our intellectual property rights.
Other companies, including our competitors, may develop technologies that are similar or superior to our technologies, duplicate our technologies, or design around our patents, and may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Although we do not have foreign operations outside North America at this time, we may compete for contracts in non-USother countries from time to time.in the future. Effective intellectual property protection may be unavailable, or limited, in some foreign countries in which we may do business, such as China. Unauthorized parties may attempt to copy or otherwise use aspects of our technologies and products that we regard as proprietary. Our means of protecting our proprietary rights in the United States or abroad may not be adequate or competitors may independently develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for our technologies and products.
Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions, because our business would be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome is favorable, this proceeding could result in substantial cost to us and disrupt our business.
In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition, and results of operations.
If we are unable to apply technology effectively in driving value for our clients through technology-based solutions or gain internal efficiencies and effective internal controls through the application of technology and related tools, our operating results, client relationships, growth and compliance programs could be adversely affected.
Our future success depends, in part, on our ability to anticipate and respond effectively to the threat and opportunity presented by digitalnew technology disruption and developments in technology.developments. These may include new software applications or related services based on artificial intelligence, machine learning, or robotics. We may be exposed to competitive risks related to the adoption and application of new technologies by established market participants (for example, through disintermediation) or new entrants, start-up companies and others. These new entrants are focused on using technology and innovation, including artificial intelligence, to simplify and improve the client experience, increase efficiencies, alter business models and effect other potentially disruptive changes in the industries in which we operate. We must also develop and implement technology solutions and technical expertise among our employees that anticipate and keep pace with rapid and continuing changes in technology, industry standards, client preferences and internal control standards. We may not be successful in anticipating or responding to these developments on a timely and cost-effective basis and our ideas may not be accepted in the marketplace. Additionally, the effort to gain technological expertise and develop new technologies in our business requires us to incur significant expenses. If we cannot offer new technologies as quickly as our competitors, or if our competitors develop more cost-effective technologies or product offerings, we could experience a material adverse effect on our operating results, client relationships, growth and compliance programs.
We are dependent on information technology networks and systems to securely process, transmit and store electronic information and to communicate among our locations around the worldNorth America and with our people, clients, partners and vendors. As the breadth and complexity of this infrastructure continues to grow, including as a result of the use of mobile technologies, social media and cloud-based services, the risk of security breaches and cyberattacks increases. Such breaches could lead to shutdowns or disruptions of or damage to our systems and those of our clients, alliance partners and vendors, and unauthorized disclosure of sensitive or confidential information, including personal data. In the past, we have experienced data security breaches resulting from unauthorized access to our and our service providers’ systems, which to date have not had a material impact on our operations;operations, however, there is no assurance that such impacts will not be material in the future.
In providing services and solutions to clients, we oftenmay be required to manage, utilize and store sensitive or confidential client data, possibly including personal data, and we expectanticipate these activities to increase, including through the use of artificial intelligence, the internet of things and analytics. Unauthorized disclosure of sensitive or confidential client data, whether through systems failure, employee negligence, fraud, misappropriation, or other intentional or unintentional acts, could damage our reputation, could cause us to lose clients and could result in significant financial exposure. Similarly, unauthorized access to our or through our or our service providers’ information systems or those we develop for our clients, whether by our employees or third parties, including a cyberattack by computer programmers, hackers, members of organized crime and/or state-sponsored organizations, who continuously develop and deploy viruses, ransomware or other malicious software programs or social engineering attacks, could result in negative publicity, significant remediation costs, legal liability, damage to our reputation and government sanctions and could have a material adverse effect on our results of operations. Cybersecurity threats are constantly expanding and evolving, thereby increasing the difficulty of detecting and defending against them and maintaining effective security measures and protocols.
| 19 |
We depend on key personnel who would be difficult to replace, and our business plan will likely be harmed if we lose their services or cannot hire additional qualified personnel.
Our success depends substantially on the efforts and abilities of our senior management and certain key personnel. The competition for qualified management and key personnel, especially engineers, is intense. Although we maintain non-competition and non-disclosure covenants with all our key personnel, we do not have employment agreements with most of them. The loss of services of one or more of our key employees, or the inability to hire, train, and retain key personnel, especially engineers and technical support personnel, could delay the development and sale of our products, disrupt our business, and interfere with our ability to execute our business plan.
Due to our dependence on a limited number of customers, we are subject to a concentration of credit risk.
AsThe Company had certain customers whose revenue individually represented 10% or more of September 30, 2019,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 year ended December 31, 2022, four customers accounted for 85%42%, 18%, 14% and 14% of ourrevenues. For the year ended December 31, 2021, a single customer accounted for 83% of revenues. For the three-months ended March 31, 2023, two customers accounted for 70% and 20% of revenues. For the three months ended March 31, 2022, four customers accounted for 35%, 24%, 13% and 11% of revenues. In all cases, there are no minimum contract values stated. Each contract covers an agreement to deliver a rail inspection portal which, once accepted, must be paid in full, with 30% or more being due and payable prior to delivery. The balances of the contracts are for service and maintenance which is paid annually in advance with revenues recorded ratably over the contract period.
At December 31, 2022, four customers accounted for 34%, 31%, 19% and 10% of accounts receivable. At December 31, 2021, two customers accounted for 81% and 10% of accounts receivable. As of March 31, 2023, three customers accounted for 59%, 15% and 11% of accounts receivable. At March 31, 2022, three customers accounted for 45%, 32% and 17% of accounts receivable. Much of the credit risk is mitigated since all the customers listed here are Class 1 railroads with a history of timely payments to us.
In the case of insolvency by one of our significant customers, accounts receivable with respect to that customer might not be collectible, might not be fully collectible, or might be collectible over longer than normal terms, each of which could adversely affect our financial position. Additionally, our two largest customerscustomer accounted for approximately 80%42% of our total revenues for the nine monthsyear ended September 30, 2019.December 31, 2022. This concentration of credit risk makes us more vulnerable economically. The loss of any of these customers could materially reduce our revenues and net income, which could have a material adverse effect on our business.
Potential strategic alliances may not achieve their objectives, and the failure to do so could impede our growth.
We may enter into strategic alliances. Among other matters, we continually explore strategic alliances designed to enhance or complement our technology or to work in conjunction with our technology; to provide necessary know-how, components, or supplies; to attract additional customers; and to develop, introduce, and distribute products utilizing our technology. Any strategic alliances may not achieve their intended objectives, and parties to our strategic alliances may not perform as contemplated. The failure of these alliances may impede our ability to introduce new products.
The Company owes the IRS penalty payments in connection with the delinquent payment of payroll taxes.
In 2016 the Company was notified by the IRS that it had been delinquent in the payment of payroll taxes. As of the date hereof, the Company has paid its payroll taxes in full. However, the Company had previously appealed to the IRS for a reduction of penalty payments assessed for the late payment of payroll taxes. The IRS has since responded, and the Company will be required to repay the penalties in connection with the delinquent payroll taxes. Beginning in July 2018, the Company has made monthly payments in the amount of $15,000 in order to pay down the accrued late fees. At September 30, 2019, the current payroll taxes payable balance of $122,453 includes accrued late fees in the amount of $33,572.
| 20 |
Risks Related to Our Common Stock
There is currently not an active liquid trading market for the Company’s common stock.
Our common stock is quoted on the OTC Markets QXNasdaq Capital Market tier under the symbol “DUOT”. However, there is currently no regularlimited active trading market in our common stock. Although there are periodic volume spikes from time to time, we cannot give an assurance that a consistent, active trading market will develop. If an active market for our common stock develops, there is a significant risk that our stock price may fluctuate in the future in response to any of the following factors, some of which are beyond our control:
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You may experience dilution of your ownership interest due to future issuanceissuances of our securities.
We are in a capital-intensive business, and we may not have sufficient funds to finance the growth of our business or to support our projected capital expenditures. As a result, we may require additional funds from future equity or debt financings, including potential sales of preferred shares or convertible debt, to complete the development of new projects and pay the general and administrative costs of our business. We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of holders of our common stock. We are currently authorized to issue 500,000,000 shares of common stock and 10,000,000 shares of preferred stock. We may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in future public offerings or private placements for capital raising purposes or for other business purposes. The future issuance of a substantial number of shares of common stock into the public market, or the perception that such issuance could occur, could adversely affect the prevailing market price of our common shares. A decline in the price of our common stock could make it more difficult to raise funds through future offerings of our common stock or securities convertible into common stock.
Our Board of Directors may issue and fix the terms of shares of our Preferred Stock without stockholder approval, which could adversely affect the voting power of holders of our Common Stock or any change in control of our Company.
Our Articles of Incorporation authorize the issuance of up to 10,000,000 shares of "blank check" preferred stock, with such designationdesignations rights and preferences as may be determined from time to time by the Board of Directors. Our Board of Directors is empowered, without shareholderstockholder approval, to issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of our common stock. In the event of such issuances, the preferred stock could be used, under certain circumstances, as a method of discouraging, delaying, or preventing a change in control of our company.Company.
We do not expect to pay dividends and investors should not buy our common stock expecting to receive dividends.
We do not anticipate that we will declare or pay any dividends in the foreseeable future. Consequently, you will only realize an economic gain on your investment in our common stock if the price appreciates. You should not purchase our common stock expecting to receive cash dividends. Since we doAccordingly, our stockholders will not pay dividends, and if an active trading market for our shares does not develop, then you may not have any manner to liquidate or receive any payment on your investment. Therefore, our failure to pay dividends may cause you to not see anyrealize a return on yourtheir investment even if we are successful inunless the trading price of our business operations.common stock appreciates, which is uncertain and unpredictable. In addition, because we do not pay dividends, weour common stock may be less attractive, which may cause us to have trouble raising additional funds which could affect our ability to expand our business operations.
Our operating results are likely to fluctuate from period to period.
We anticipate that there may be fluctuations in our future operating results. Potential causes of future fluctuations in our operating results may include:
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| Period-to-period fluctuations in financial results |
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| · | Issues in manufacturing products | |
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| · | Unanticipated potential product liability claims | |
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| · | The introduction of technological innovations or new commercial products by competitors | |
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| · | The entry into, or termination of, key agreements, including key strategic alliance agreements | |
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| · | The initiation of litigation to enforce or defend any of our intellectual property rights | |
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· | Regulatory changes | |
| · | Failure of any of our products to achieve commercial success |
Our business, financial condition and results of operations could be materially adversely affected by various risks, including, but not limited to the principal risks noted below.
We are subject to the Florida anti-takeover provisions, which may prevent you from exercising a vote on business combinations, mergers or otherwise.
As a Florida corporation, we are subject to certain anti-takeover provisions that apply to public corporations under Florida law. Pursuant to Section 607.0901 of the Florida Business Corporation Act, or the Florida Act, a publicly held Florida corporation, under certain circumstances, may not engage in a broad range of business combinations or other extraordinary corporate transactions with an interested shareholder without the approval of the holders of two-thirds of the voting shares of the corporation (excluding shares held by the interested shareholder), unless the:.
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An interested shareholder is defined as a person who together with affiliates and associates beneficially owns more than 10%15% of a corporation’s outstanding voting shares. We have not made an election in our amended Articles of Incorporation to opt out of Section 607.0901.
In addition, we are subject to Section 607.0902 of the Florida Act which prohibits the voting of shares in a publicly held Florida corporation that are acquired in a control sharecontrol-share acquisition unless (i) our board of directors approved such acquisition prior to its consummation or (ii) after such acquisition, in lieu of prior approval by our board of directors, the holders of a majority of the corporation’s voting shares, exclusive of shares owned by officers of the corporation, employee directors or the acquiring party, approve the granting of voting rights as to the shares acquired in the control sharecontrol-share acquisition. A control sharecontrol-share acquisition is defined as an acquisition that immediately thereafter entitles the acquiring party to 20% or more of the total voting power in an election of directors.
Risks Related to the Offering
Investors in this offering will experience immediate and substantial dilution in net tangible book value.
The public offering price will be substantially higher than the net tangible book value per share of our outstanding shares of common stock. As a result, investors in this offering will incur immediate dilution of $5.12 per share, based on the assumed public offering price of $7.00 per share of common stock (based on the closing price of our common stock on January 21, 2020). See “Dilution” for a more complete description of how the value of your investment will be diluted upon the completion of this offering.
Although our common stock is not currently a penny stock, it has been a penny stock in the past and may be considered a penny stock in the future.
The SEC has adopted a number of rules to regulate “penny stocks” that restricts transactions involving stock which is deemed to be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange Act of 1934, as amended. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity securities with a price of less than $5.00 per share, other than securities: (i) registered on certain national securities exchanges if current price and volume information with respect to transactions in such securities is provided by the exchange; (ii) quoted on the Nasdaq Stock Market if current price and volume information with respect to transactions in such securities is provided by the system; (iii) issued by an issuer that has net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of $2,000,000, if the issuer has been in continuous operation for at least three years, or $5,000,000, if the issuer has been in continuous operation for less than three years; or (iv) issued by an issuer that has average revenue of at least $6,000,000 for the last three years. As we have had average revenue over the last three completed fiscal years (2016 through 2018 inclusive) of over $6 million, our common stock is not a penny stock. Nonetheless, our common stock has in the past constituted, and may again in the future constitute, “penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares and impede their sale in the secondary market.
A U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny stock” regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a “penny stock”, a disclosure schedule prepared in accordance with SEC standards relating to the “penny stock” market, unless the broker-dealer or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing recent price information with respect to the “penny stock” held in a customer’s account and information with respect to the limited market in “penny stocks”.
Stockholders should be aware that, according to the SEC, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
Although our common stock is not currently a penny stock, no assurance can be given that our common stock will, if we complete this offering and become listed on The Nasdaq Capital Market, maintain such listing or a listing on any other exchange, such that our common stock will remain a non-penny stock.
We may need additional capital, and the sale of additional shares or equity or debt securities could result in additional dilution to our stockholders.
We believe that our current cash and cash used in operations, together with the net proceeds from this offering, will be sufficient to meet our anticipated cash needs for the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain one or more credit facilities. The sale of additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section of this prospectus entitled “Use of Proceeds.” You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the net proceeds are being used appropriately. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our securities to decline and delay the development of our product candidates. Pending the application of these funds, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
Risks Related to Our Reverse Stock Split
On January 17, 2020 we implemented a 1 for 14 reverse stock split, however, we cannot assure you that we will be able to continue to comply with the minimum bid price requirement of the The Nasdaq Capital Market.
There can be no assurance that the market price of our common stock following the reverse stock split will remain at the level required for continuing compliance with the mnimum bid price. It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split. If the market price of our common stock declines following the effectuation of the reverse stock split, the percentage decline may be greater than would occur in the absence of the reverse stock split. In any event, other factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results, could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain The Nasdaq Capital Market’s minimum bid price requirement. In addition to specific listing and maintenance standards, The Nasdaq Capital Market has broad discretionary authority over the initial and continued listing of securities, which it could exercise with respect to the listing of our common stock.
Even if the reverse stock split increases the market price of our common stock, there can be no assurance that we will be able to comply with other continued listing standards of The Nasdaq Capital Market.
Even if the market price of our common stock increases sufficiently so that we comply with the minimum bid price requirement, we cannot assure you that we will be able to comply with the other standards that we are required to meet in order to maintain a listing of our common stock on The Nasdaq Capital Market. Our failure to meet these requirements may result in our common stock being delisted from The Nasdaq Capital Market, irrespective of our compliance with the minimum bid price requirement.
The reverse stock split may decrease the liquidity of the shares of our common stock.
The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that are outstanding following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split. In addition, the reverse stock split may increase the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.
Following the reverse stock split, the resulting market price of our common stock may not attract new investors, including institutional investors, and may not satisfy the investing requirements of those investors. Consequently, the trading liquidity of our common stock may not improve.
Although we believe that a higher market price of our common stock may help generate greater or broader investor interest, there can be no assurance that the reverse stock split will result in a share price that will attract new investors, including institutional investors. In addition, there can be no assurance that the market price of our common stock will satisfy the investing requirements of those investors. As a result, the trading liquidity of our common stock may not necessarily improve.
We estimate that the net proceeds from the sale of the common stock in the offering will be approximately $6,900,000, based on an assumed public offering price of $7.00 which was the last reported sale price of our common stock on the OTCQX on January 21, 2020 after deducting the underwriting discounts and commissions and estimated offering expenses, or approximately $8,000,000 if the underwriters exercise their over-allotment option in full.
We currently expect to use the net proceeds of this offering primarily for the following purposes:
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We believe that the expected net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least the next 12 months, although we cannot assure you that this will occur.
The amount and timing of our actual expenditures will depend on numerous factors, including the status of our development efforts, sales and marketing activities and the amount of cash generated or used by our operations. We may find it necessary or advisable to use portions of the proceeds for other purposes, and we will have broad discretion and flexibility in the application of the net proceeds. Pending these uses, the proceeds will be invested in short-term bank deposits.
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Markets Group Inc.’s OTCQX Link quotation platform (the “OTCQX”) under the trading symbol “DUOTD”. We have applied to The Nasdaq Capital Market to list our common stock under the symbol “DUOT”.
On January 17, 2020, we completed a 1-for-14 reverse split of our common stock. All share and per share information gives effect, retroactively, to the reverse stock split.
Immediately following the offering, we expect to have one class of common stock, and one class of preferred stock outstanding. As of January 17, 2020, there were approximately 376 registered holders of record of our common stock, and the last reported sale price of our common stock on the OTCQX was $7.00 per share on January 21, 2020.
Our common stock was initially quoted on the OTCQB in April 2015 and had traded on the OTCQX since June 19, 2019.
Any over-the-counter market quotations of our common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Dividend Policy
To date, we have not paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future. The declaration and payment of dividends on the common stock is at the discretion of our Board and will depend on, among other things, our operating results, financial condition, capital requirements, contractual restrictions or such other factors as our Board may deem relevant. We currently expect to use all available funds to finance the future development and expansion of our business and do not anticipate paying dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
There are 2,282,000 outstanding options to purchase our securities. The weighted average exercise price of these options is $1.00, the average term when issued was five years and the average term remaining is four years.
2016 Equity Incentive Plan
The following table provides equity compensation plan information as of December 31, 2019:
Plan Category |
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Equity compensation plans approved by security holders |
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| 163,010 |
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| $ | 14.00 |
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| 158,419 |
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Equity compensation plans not approved by security holders |
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On March 11, 2016, the Board adopted, subject to the receipt of stockholder approval which was received on April 21, 2016, the 2016 Equity Incentive Plan (the “2016 Plan”) providing for the issuance of up to 16,327 shares of our common stock. The plan was subsequently modified with shareholder approval twice: on January 18, 2018 to increase the total maximum amount issuable under the plan to 178,572 and on July 31, 2019 to increase the total maximum amount issuable under the plan to 321,429. The purpose of the 2016 Plan is to assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals to align their interests with those of our stockholders.
The following table sets forth our consolidated cash and cash equivalents and capitalization as of September 30, 2019. Such information is set forth on the following basis:
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The as adjusted information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and the related notes appearing elsewhere in this prospectus.
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| $ | 767,339 |
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| 4,178,225 |
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Total liabilities |
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| 5,668,002 |
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Preferred Stock, $0.001 par value; 10,000,000 shares authorized;9,485,000 available to be designated; 0 shares issued and outstanding actual, 0 shares issued and outstanding pro forma |
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Redeemable Convertible Cumulative Preferred Stock Series A 500,000 shares authorized, 0 shares issued and outstanding at September 30, 2019, $10 per share redemption amount plus dividends in arrears |
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| 0 |
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Convertible Cumulative Preferred Stock Series B, 15,000 shares designated, 2,080 and 2,830 issued and outstanding at September 30, 2019 and December 31, 2018, convertible into common stock at |
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| $ | 2,080,000 |
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| $ | 2,080,000 |
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Common Stock, $0.001 par value; 500,000,000 shares authorized; |
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| 1,926 |
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Treasury stock |
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| (157,452 | ) |
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Additional paid-in capital |
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| 30,672,613 |
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| 38,671,416 |
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Accumulated deficit |
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Total stockholders’ equity (deficit) |
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The historical net tangible book value (deficit) of our common stock as of September 30, 2019 was approximately $(1,025,420), or $(0.52) per share based upon 1,980,085 shares of common stock outstanding on such date. Historical net tangible book value (deficit) per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of common stock outstanding.
Our adjusted net tangible book value (deficit) of our common stock will be $5,881,862 or $1.88 per share. Adjusted net tangible book value (deficit) per share represents adjusted net tangible book value divided by the total number of shares outstanding after giving effect to the sale of the shares in this offering at the assumed public offering price of $7.00 per share, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. This represents an immediate increase in as adjusted net tangible book value of $2.40 per share to existing stockholders and an immediate dilution of $5.12 per share to investors purchasing shares of common stock in this offering at the assumed public offering price.
The following table illustrates this dilution on a per share basis to new investors:
Assumed public offering price per share |
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Net tangible book value per share as of September 30, 2019 |
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Increase in net tangible book value per share attributable to new investors |
|
| $ | 2.40 |
|
|
|
|
|
As adjusted net tangible book value per share after giving effect to this offering |
|
|
|
|
|
| $ | 1.88 |
|
Dilution in net tangible book value per share to new investors |
|
|
|
|
|
| $ | 5.12 |
|
The information above is as of September 30, 2019 and excludes as of such date the following:
|
| |
|
| |
|
| |
|
| |
|
|
If the underwriters exercise their overallotment option, our adjusted net tangible book value following the offering will be $2.12 per share, and the dilution to new investors in the offering will be $4.88 per share.
A $1.00 increase or decrease in the assumed public offering price per share would increase or decrease our pro forma as adjusted net tangible book value after this offering by approximately $1,040,000, and dilution per share to new investors by approximately $5.78.
| 22 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties and include statements regarding, among other things, our projected revenue growth and profitability, our growth strategies and opportunity, anticipated trends in our market and our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this prospectus generally. In particular, these include statements relating to future actions, prospective products, market acceptance, future performance or results of current and anticipated products, sales efforts, expenses, and the outcome of contingencies such as legal proceedings and financial results.
Examples of forward-looking statements in this prospectus include, but are not limited to, our expectations regarding our business strategy, business prospects, operating results, operating expenses, working capital, liquidity and capital expenditure requirements. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the cost, terms and availability of components, pricing levels, the timing and cost of capital expenditures, competitive conditions and general economic conditions. These statements are based on our management’s expectations, beliefs and assumptions concerning future events affecting us, which in turn are based on currently available information. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.
Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:
| · |
| changes in the market acceptance of our products; |
· | increased levels of competition; | |
· | changes in political, economic or regulatory conditions generally and in the markets in which we operate; | |
· | our relationships with our key customers; | |
· | our ability to retain and attract senior management and other key employees; | |
· | our ability to quickly and effectively respond to new technological developments; | |
· | our ability to protect our trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on the proprietary rights of the Company; and | |
· | other risks, including those described in the “Risk Factors” discussion of this prospectus. |
We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this prospectus are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.
| 23 |
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the Selling Stockholders. All of the net proceeds from the sale of our common stock will go to the Selling Stockholders as described below in the sections entitled “Selling Stockholders” and “Plan of Distribution”. We have agreed to bear the expenses relating to the registration of the common stock for the Selling Stockholders.
| 24 |
SELLING STOCKHOLDERS
On March 27, 2023, the Company entered into a Security Purchase Agreement with the Selling Stockholders, pursuant to which the Selling Stockholders purchased 4,000 shares of a newly authorized Series E Preferred Stock. The Company received proceeds of $4,000,000. The Series E Preferred Stock is convertible into Common Stock at $3.00 a share. If all of the shares of the outstanding Series E Preferred Stock are converted in full, the Company would issue 1,333,334 shares of Common Stock.
The shares of common stock being offered by the Selling Stockholders are those issuable to the Selling Stockholders, upon conversion of the Series E Preferred Stock. We are registering the shares of common stock in order to permit the Selling Stockholders to offer the shares for resale from time to time. Due to the ownership of the shares of Series E Preferred Stock, as well as ownership of common stock, Series D Preferred Stock and warrants, the Selling Stockholders collectively have had a material relationship with us within the past three years and hold the largest percentage ownership of the Company subject to certain limitations as described in the offering.
The table below lists the Selling Stockholders and other information regarding the beneficial ownership of the shares of Common Stock by each of the Selling Stockholders. The first column lists the number of shares of Common Stock beneficially owned by each Selling Stockholder as of June 30, 2023, assuming exercise of the Series E Preferred Stock, as well as conversion of other convertible preferred stock and exercise of any warrants held by the Selling Stockholders on that date. The third column lists the shares of Common Stock being offered by this prospectus by the Selling Stockholders.
In accordance with the terms of a registration rights agreement with the Selling Stockholders, this prospectus generally covers the resale of the maximum number of shares of common stock issuable upon conversion of the Series E Preferred Stock, determined as if the outstanding shares of Series E Preferred Stock were converted in full as of the trading day immediately preceding the applicable date of determination and subject to adjustment as provided in the registration rights agreement, without regard to any limitations on the conversion of the Series E Preferred Stock. The fourth column assumes the sale of all of the shares offered by the Selling Stockholders pursuant to this prospectus.
| 25 |
Under the terms of the Series E Preferred Certificate of Designation, certain previously held warrants and the Series D Preferred Certificate of Designation, a Selling Stockholder may not exercise the warrants or convert the Series B Preferred Stock or the Series E Preferred Stock to the extent such exercise or conversion would cause such Selling Stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of common stock which would exceed 19.99% of our then outstanding common stock following such exercise or conversion, excluding for purposes of such determination shares of common stock issuable upon exercise of the warrants which have not been exercised and shares of common stock issuable upon conversion of the preferred stock which has not been converted. The number of shares in the second column does not reflect this limitation. The Selling Stockholders may sell all, some, or none of their shares in this offering. See “Plan of Distribution.”
| Name of Selling Stockholder | Number of shares of Common Stock Owned Prior to Offering (1) | % of shares of Common Stock Owned Prior to Offering | Maximum Number of Shares of Common Stock to be Sold Pursuant to this Prospectus(1) | Number of shares of Common Stock Owned After Offering | % of shares of Common Stock Owned After Offering | |||||||||||||||
| 21 April Fund Ltd(2) | 1,862,856 | 22.99 | % | 933,334 | 929,522 | 12.97 | % | |||||||||||||
| 21 April Fund LP(2) | 753,640 | 9.96 | % | 400,000 | 353,640 | 4.93 | % | |||||||||||||
| Total of Bleichroeder LP holdings | 2,616,496 | 1,333,334 | 1,283,162 | |||||||||||||||||
———————
| (1) | The actual number of shares of Common Stock offered hereby and included in the registration statement of which this prospectus is a part includes, in accordance with Rule 416 under the Securities Act, such indeterminate number of additional shares of our Common Stock as may become issuable in connection with any proportionate adjustment for any stock splits, stock combinations, stock dividends, recapitalizations, anti-dilution adjustments or similar events with respect to our Common Stock. |
| (2) | Based on Amendment No. 6 to Schedule 13G/A filed by Bleichroeder LP (“Bleichroeder”) with the SEC on February 14, 2023 (the “Bleichroeder 13G/A”). According to the Bleichroeder 13G/A, Bleichroeder is an investment advisor registered under Section 203 of the Investment Advisers Act of 1940 and as of February 14, 2023 was deemed to be the beneficial owner of 1,283,162 shares of our Common Stock as a result of acting as investment advisor to various clients. The number of shares beneficially owned by Bleichroeder does not include warrants to purchase shares of our Common Stock held of record by 21 April Fund, Ltd. in the amount of 32,724 or warrants to purchase shares of our Common Stock held of record by 21 April Fund LP (together with 21 April Fund, Ltd., the “21 April Entities”) in the amount of 11,920 due to a 9.99% beneficial ownership limitation included in such warrants. Bleichroeder acts as an investment advisor to the 21 April Entities. The 21 April Entities also purchased 999 shares of Series D Preferred Stock on September 30, 2022, which is convertible into 333,000 shares of Common Stock, and excluded from the above calculations. The 21 April Entities also purchased 4,000 shares of Series E Preferred Stock on March 27, 2023, which is convertible into 1,333,334 shares of Common Stock and included in the calculations above. |
| 26 |
PLAN OF DISTRIBUTION
Each Selling Stockholder of the securities and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their securities covered hereby on the principal Trading Market or any other stock exchange, market or trading facility on which the securities are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling securities:
| · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; | |
| · | block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; | |
| · | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; | |
| · | an exchange distribution in accordance with the rules of the applicable exchange; | |
| · | privately negotiated transactions; | |
| · | through one or more underwritten offerings on a firm commitment or best efforts basis; | |
| · | settlement of short sales that are not in violation of Regulation SHO; | |
| · | in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such securities at a stipulated price per security; | |
| · | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; | |
| · | through the distribution of securities by any Selling Stockholder to its parents, members or security holders; | |
| · | a combination of any such methods of sale; or | |
| · | any other method permitted pursuant to applicable law. |
The Selling Stockholders may also sell securities under Rule 144 or any other exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus. The Selling Stockholders have the sole and absolute discretion not to accept any purchase offer or make any sale of securities if they deem the purchase price to be unsatisfactory at any particular time.
Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM- 2440.
In connection with the sale of the securities or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The Selling Stockholders may also sell securities short and deliver these securities to close out their short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders may from time to time pledge or grant a security interest in some or all of their securities to their broker-dealers under the margin provisions of customer agreements or to other parties to secure other obligations. If a Selling Stockholder defaults on a margin loan or other secured obligation, the broker-dealer or secured party may, from time to time, offer and sell the securities pledged or secured thereby pursuant to this prospectus. The Selling Stockholders and any other persons participating in the sale or distribution of the securities will be subject to applicable provisions of the Securities Act and the Exchange Act, and the rules and regulations thereunder, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the securities by, the Selling Stockholders or any other person, which limitations may affect the marketability of the securities.
The Selling Stockholders also may transfer the shares of our securities in other circumstances, in which case the transferees, pledgees or other successors-in-interest will be the selling beneficial owners for purposes of this prospectus.
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A Selling Stockholder that is an entity may elect to make a pro rata in-kind distribution of securities to its members, partners or shareholders pursuant to the registration statement of which this prospectus is part by delivering a prospectus. To the extent that such members, partners or shareholders are not affiliates of ours, such members, partners or shareholders would thereby receive freely tradeable securities pursuant to the distribution through a registration statement.
The Selling Stockholders and any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the securities.
The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the securities. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
We agreed to keep this prospectus effective until the earlier of (i) the date on which the securities may be resold by the Selling Stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
| 28 |
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Market Information
Our common stock is quoted on the Nasdaq Capital Markets (“Nasdaq”) under the trading symbol “DUOT”.
(b) Holders
As of June 30, 2023, there were approximately 292 holders of record of our common stock, and the closing price of our common stock as reported on the Nasdaq Capital Market on July 14, 2023 was $7.00 per share.
The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company located at 1 State Street, 30th Floor, New York, NY 10004.
| 29 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Registration Statement on Form S-1 and other information and reports filed by the Company from time to time with the SEC (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. ActualShould one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Registration Statement on Form S-1.
Overview
Duos Technologies Group, Inc.We intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.
Our Company
The Company was incorporated in Florida on May 31, 1994 under the original name of Information Systems Associates, Inc. (“ISA”). Initially, our business operations consisted of consulting services for asset management of large corporate data centers and the development and licensing of information technology (“IT”) asset management software. In late 2014, ISAthe Company entered negotiations with Duos Technologies, Inc. (“duostech”Duos”), for the purposes of executing a reverse triangular merger. This transaction was completed on April 1, 2015, whereby duostechDuos became a wholly owned subsidiary of the Company. duostechDuos was incorporated under the laws of Florida on November 30, 1990 for design, development and deployment of proprietary technology applications and turn-key engineered systems. The Company, based in Jacksonville, Florida, employs approximately 50has a current staff of 76 people of which 69 are full-time, and is a technology and software applications company with a strong portfolio of intellectual property. The Company’s core competencies, including advanced intelligent technologies, are delivered through its proprietary integrated enterprise command and control platform, centraco®Centraco®.
| 30 |
The Company has developed the Rail Inspection Portal (“RIP”) which 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 a 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. We believe this solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The Company has deployed this system with several Class 1 railroad customers and anticipates an increased demand from transit and other railroad customers along with selected government agencies that operate and/or manage rail traffic in the future. Government agencies can conduct digital inspections combined with the incorporated artificial intelligence (“AI”) to improve rail traffic flow across borders which also directly benefits the Class 1 railroads through increasing their velocity.
The Company provideshas also developed the Automated Logistics Information System (“ALIS”) which automates gatehouse operations where transport 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 broad rangeportfolio of sophisticated intelligent technologyIP and patented solutions with an emphasis on security, inspectionthat creates “actionable intelligence” using two core native platforms called Centraco and operationsPraesidium™. All solutions provided include a variant of both applications. Centraco is designed primarily as the user interface for critical infrastructureall 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 variety of industries including transportation, retail, law enforcement, oil, gas and utilities sectors. In January 2019, the Company launched a dedicatedproprietary Artificial Intelligence program truevue360™ through its subsidiary, TrueVue360, Inc.,software platform, Truevue360™ with the objective of focusing the Company’s advanced intelligent technologies in the areas of Artificial Intelligent, Deep Machine LearningAI, deep machine learning and Advance Algorithmsadvanced multi-layered algorithms to further support our business growth. Consequently, our business operations are now in three business units: intelligent technologies, AI/machine learning platforms and IT asset management.
solutions.
The Company’s growth strategy includes expansion of its technology base through organic development efforts, strategic partnerships, and through strategic acquisitions. The Company provides its broad range of technology solutions with an emphasis on mission critical security, inspection and operations within the rail transportation, commercial, petrochemical, government, and banking sectors. The Company also offerspreviously provided professional and consulting services for large data centers.
centers and had developed a system for the automation of asset information marketed as DcVue™. The Company is investing in resources to focus on execution withindeployed its target markets, including but not limited to rail, distribution centers and security. We continue to evaluate key requirements within those markets and add development resources to allow us to compete for additional projects to drive additional revenue growth.
Further, the Company is broadening its offerings in the IT asset management space for large data centers. During the quarter ended June 30, 2018, the Company announced its new dcVueDcVue software platform which is the basis for expanded offerings into this market area. The dcVue offering is a newat one beta site. This software platform that replaces the Company’s On-Site Physical Inventory (OSPI) system that was commercially marketed from 2010 until 2015. OSPI was used by Duos’ ITAMconsulting auditing teams until early this year and has now been replaced by dcVue. dcVue isteams. DcVue was based upon the Company’s OSPI patent which was awarded in 2010. The Company will be making dcVueoffered DcVue available for license to our customers later this year as a licensed software product. We intendThe Company ceased offering this product in 2021.
The Company’s strategy is to further developdeliver operational and technical excellence to our ITAM offerings for large data centerscustomers; expand our RIP and ALIS solutions into current and new customers focused in the Rail, Logistics and U.S. Government Sectors; offer both CAPEX and OPEX pricing models to customers that increases recurring revenue, grows backlog and improves profitability; responsibly grow the business both organically and through selective acquisitions; and promote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with the objectiveCompany.
In late 2022, the Company announced it will pursue a subscription platform for the Railcar Inspection Portals. Under this new model, the Company will build, own and operate its RIP product and offer the data access for each portal to potential customers. This expansion of the RIP offering existing Company technologieswould potentially open up the addressable market to other railroads, railcar owners, and car lessors. This shift increases the pool of potential customers by lowering the entry point for datathe RIP and video analytics.would reshape the Company’s working capital needs to invest in the construction of a RIP ahead of customer revenue inflows. The Company implemented a new plancontinues to explore this expansion on the long-term effects it may have on future cash flows.
Prospects and Outlook
The Company’s focus is to improve operational and technical execution which, we believe, will in turn enable the commercial side of the business to expand RIP and ALIS delivery into existing customers and to expand and focusdiversify our current customer base. Even though the lingering effects of COVID-19 is expected to still be an issue during the remainder of 2023 the Company’s primary customers have indicated readiness to order more equipment and services should the Company execute as expected on key deliverables.
Additionally, the Company is making engineering and software upgrades to the RIP to meet anticipated Federal Railroad Association (FRA) and Association of American Railroad (AAR) standards. Similar upgrades are also being developed to improve the ALIS system. These upgrades will continue to be released throughout 2023 and are expected to drive revenue growth this year and beyond.
The Company is expanding its sales efforts through the addition of strategic partners.
Prospects and Outlook
Over the past several years, we have made substantial investments in product research and development and achieved significant milestones in the development of our technology and turnkey solutions. We have made significant progress in penetrating the market with our proprietary technology solutions, specificallyfocus in the rail industry which is currently undergoingto encompass passenger transportation and was awarded a major shift in maintenance strategies. We believelarge, multi-year contract with a national rail carrier. The Company anticipates that this shiftit will bemanufacture a significant motivating factortwo-RIP solution for the industry’s usecarrier in 2023 and, along with a long-term services agreement, complete delivery during the latter half of 2023.
Although the Company’s prospects and outlook are anticipated to be favorable for the remainder of 2023, investing in our technologies.
Oursecurities involves risk and careful consideration should be made before deciding to purchase our securities. There are many risks that affect our business success in the immediate future will largely dependand results of operations, some of which are beyond our control and unexpected macro events can have a severe impact on the increased penetration into our target markets for our proprietary intelligent analytical technology solutions.business. See “Risk Factors”.
Notwithstanding the foregoing, no assurance can be provided that our product offerings will generate significant orders or maintain market acceptance.
Results of OperationOperations
The following discussion should be read in conjunction with the unauditedconsolidated financial statements included in this prospectus.
Comparison for the Three Months Ended September 30, 2019March 31, 2023 Compared to Three Months Ended September 30, 2018March 31, 2022
The following table sets forth a modified versionsummary of our unaudited Consolidated Statements of Operations and is used in the following discussions of our results of operations:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | 2,644,288 | $ | 1,439,316 | ||||
| Cost of revenues | 2,107,116 | 1,217,250 | ||||||
| Gross margin | 537,172 | 222,066 | ||||||
| Operating expenses | 2,683,970 | 2,863,684 | ||||||
| Loss from operations | (2,146,798 | ) | (2,641,618 | ) | ||||
| Other income (expense) | 3,115 | (2,998 | ) | |||||
| Net loss | $ | (2,143,683 | ) | $ | (2,644,616 | ) | ||
Revenues
| For the Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Revenues: | ||||||||||||
| Technology systems | $ | 1,827,764 | $ | 783,269 | 133 | % | ||||||
| Services and consulting | 816,524 | 656,047 | 24 | % | ||||||||
| Total revenues | $ | 2,644,288 | $ | 1,439,316 | 84 | % | ||||||
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The substantial increase in overall revenues for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, is primarily related to the production and manufacturing of new and upgraded RIPs which are recorded in the technology systems portion of our business as compared to being in the very early stages of developing two portals during the first quarter of 2022. We expect this trend to continue through 2023, although supply chain issues have continued to extend deadlines for shipment of key components used in our technology systems and continue to pose a risk to the timing of revenue recognition. Given recent attention and renewed focus around railway safety, the Management team remains optimistic about the long-term outlook of the Company. We believe the focus on rail safety will prompt additional government oversight on railroads for the implementation of safety systems such as the Company’s RIP product. Additionally, the Company sees opportunities to continue to expand its programs with existing customers during the current year and beyond. Management cautions that, in spite of a positive outlook, the noted slowing of the supply chain coupled with a longer commercial cycle may result in revenue recognition pushing into 2024. The Company remains focused on revenue and margins performance impacts from inflation and continued supply chain challenges and proactively works to address these issues via customer pricing.
The growth of the services portion of revenues is driven by the successful completion and implementation of artificial intelligence detections and represents services and support for those detections. The growth in services revenue is also bolstered by the phasing in of services and maintenance agreements related to new portals coming online during early 2023. The Company expects growth with new revenue from existing customers, including services revenue as the result of new maintenance contracts being established on installations coming on-line during 2023. The Company also anticipates renewals of existing and backlog contracts and a shift to the next generation of technology systems which are currently being manufactured and completed during 2023.
Cost of Revenues
| For the Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Cost of revenues: | ||||||||||||
| Technology systems | $ | 1,767,209 | $ | 865,488 | 104 | % | ||||||
| Services and consulting | 339,907 | 351,762 | -3 | % | ||||||||
| Total cost of revenues | $ | 2,107,116 | $ | 1,217,250 | 73 | % | ||||||
Cost of revenues largely comprises equipment and labor necessary to support the implementation of new systems and support and maintenance of existing systems and software projects.
Cost of revenues on technology systems increased during the three months ended March 31, 2023 over the equivalent period in 2022, in a manner consistent with the increase in revenues and as a result of additional project works ongoing for the Company. In the second quarter of 2022, the Company was awarded two high-speed Rail Inspection Portals for its passenger transit client and by the first quarter of 2023 has phased into the manufacture of these two more expensive and more robust transit-oriented RIPs. By comparison, during the first quarter ended March 31, 2022, the Company had only begun to procure the components for, and the manufacturing of, these two transit-oriented RIPs, thereby contributing to the increase in cost of revenues year-over-year. The Company also continues to face headwinds with supply disruption and cost. While we expect that macro-economic factors will continue to drive prices, the Company continues to manage its costs and, where possible, pass through increased costs to customers in the form of higher prices, although this is not assured.
Cost of revenues on services and consulting slightly decreased in the three months ended March 31, 2023 compared to the prior year period. The cost of revenues decreased as compared to an increase in services revenues. This misalignment in the change between the two is a result of high margin artificial intelligence detections entering service and boosting revenue while the overall cost structure to implement these charges is largely unchanged and partially captured in the capitalization of software development costs.
Gross Margin
| For the Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Revenues | $ | 2,644,288 | $ | 1,439,316 | 84 | % | ||||||
| Cost of revenues | 2,107,116 | 1,217,250 | 73 | % | ||||||||
| Gross margin | $ | 537,172 | $ | 222,066 | 142 | % | ||||||
| 33 |
Gross margin showed a significant improvement for the first quarter of 2023 as compared to the same period in 2022. As noted above, the improvement in margin was a direct result of increased business activity the Company recognized in the first quarter of 2023 related to the manufacturing of two high-speed, transit-focused Rail Inspection Portals for one customer. The Company began to recognize revenue and profit on those activities in conformity with its revenue recognition policy during late 2022 and which continued into the first quarter of 2023. The recognition of the revenue and subsequent profit from this major project yielded the higher gross margins of approximately 20% for the period. By comparison in the first quarter of 2022, the Company had only initiated procurement and some manufacturing for two freight-oriented RIPs for two customers and as a result recognized no profit on the works resulting in a dilutive, low margin for the period. It should be noted that when comparing the results between two periods, the stage of completion for manufacturing and installation can factor into those comparisons and should be taken into account when analyzing those periods.
Operating Expenses
| For the Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | $ | 307,577 | $ | 283,894 | 8 | % | ||||||
| Research and development | 404,885 | 436,717 | -7 | % | ||||||||
| General and administration | 1,971,508 | 2,143,073 | -8 | % | ||||||||
| Total operating expenses | $ | 2,683,970 | $ | 2,863,684 | -6 | % | ||||||
Overall operating expenses during the three months ended March 31, 2023 were marginally lower compared to the equivalent period in 2022. The Company saw only slight increase in cost for sales and marketing as a result of an increased commercial team with a larger decrease in general and administration and research and development costs during the same period for 2023 partially attributable to the Company’s reduced non-cash compensation charges for staff. Overall, the Company continues to focus on stabilizing operating expenses while meeting the increased needs of our customers.
Loss from Operations
The loss from operations for the three months ended March 31, 2023 and 2022 was $2,146,798 and $2,641,618, respectively. The decrease in loss from operations was primarily the result of higher revenues recorded in the quarter resulting from increases in both our technology systems and services and consulting, slower growth in costs of those revenues and flat operating expenses.
Other Income/Expense
Other income for the three months ended March 31, 2023 was $4,295 and $182 for the comparative period in 2022. Interest expense for the three months ended March 31, 2023 was $1,180 and $3,180 for the comparative period in 2022.
Net Loss
The net loss for the three months ended March 31, 2023 and 2022 was $2,143,683 and $2,644,616, respectively. The 19% decrease in net loss was mostly attributed to the increase in revenues as described above along with slower growing expenses. Net loss per common share was $0.30 and $0.49 for the three months ended March 31, 2023 and 2022, respectively.
Liquidity and Capital Resources
As of March 31, 2023, the Company has a working capital surplus of $3,860,339 and the Company had a net loss of $2,143,683 for the three months ended March 31, 2023.
| 34 |
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (7,086 | ) | $ | (827,733 | ) | ||
| Net cash used in investing activities | (261,144 | ) | (102,078 | ) | ||||
| Net cash provided by financing activities | 3,488,085 | 5,365,954 | ||||||
| Net increase in cash | $ | 3,219,855 | $ | 4,436,143 | ||||
Net cash used in operating activities for the three months ended March 31, 2023 and 2022 was $7,086 and $827,733, respectively. The decrease in net cash used in operations for the three months ended March 31, 2023 was the result of cash inflows from new projects offset by cash outflows to procure necessary materials and overall sales, general and administrative expenses. In addition, there are several changes in assets and liabilities compared to the previous period that decreased the use of cash in operations, notably the change in contract liabilities due to the timing of project invoicing milestones and cash receipts.
Net cash used in investing activities for the three months ended March 31, 2023 and 2022 was $261,144 and $102,078, respectively, representing an increase in the purchase of various fixed assets for computer equipment and product and software development.
Net cash provided by financing activities for the three months ended March 31, 2023, and 2022 was $3,488,085 and $5,365,954, respectively. Cash flows provided by financing activities during the first three months of 2023 were primarily attributable to net proceeds of approximately $4,000,000 from issuances of Series E Convertible Preferred Stock. Cash flows from financing activities during the first three months of 2022 were primarily attributable to the issuance of common stock for $6,095,000 of gross proceeds.
On a long-term basis, our liquidity is dependent on continuation and expansion of operations and receipt of revenues. We believe our current capital and revenues are sufficient to fund such expansion and our operations over the next twelve months, although we are dependent on timely payments from our customers for projects and work in process. However, we expect such timely payments to continue. Material cash requirements will be satisfied within the normal course of business including substantial upfront payments from our customers prior to starting projects. The Company may elect to purchase materials and supplies in advance of contract award but where there is a high probability of that award.
Demand for our products and services will be dependent on, among other things, market acceptance of our products and services, the technology market in general, and general economic conditions, which are cyclical in nature. Because a major portion of our activities is the receipt of revenues from the sales of our products and services, our business operations may continue to be challenged by our competitors and prolonged recession periods.
Liquidity
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $2,143,683 for the three months ended March 31, 2023. During the same period, cash used in operating activities was $7,086. The working capital surplus and accumulated deficit as of March 31, 2023, were $3,860,339 and $54,505,517, 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 and private placements which were completed during 2022 as well as the first quarter of 2023.
As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock during 2021. Additionally, the Company was successful during 2022 in raising gross proceeds of over $10,100,000 from the sale of both common shares and Series E Preferred Stock across the year. Additionally, late in the first quarter of 2023, the Company raised gross proceeds of $4,000,000 from the issuance of Series E Preferred Stock (See Note 12). As part of its strategy, the Company will endeavor to utilize the Series E Preferred and the remainder of the Series E Preferred Stock as additional funding mechanisms. Additionally, during the second quarter of 2023, the Company will again have access to its S-3 “shelf registration” statement allowing the Company to sell additional common shares. At the time of this document, 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 in the event it did not have an uptake in the preferred classes of shares previously noted. 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 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 or available via the capital markets to maintain operations for at least 12 months from the date of this prospectus.
| 35 |
In addition, management has been taking and continues to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning both management and staffing with a focus on improving certain skill sets necessary to build growth and profitability and focusing product strategy on opportunities that are likely to bear results in the relatively short term. The Company believes that, as described above, it will have sufficient sources of working capital to meet its obligations over the following twelve months. In the last twelve months the Company has seen significant growth in its contracted backlog as well as positive signs from new commercial engagements that indicate improvements in future commercial opportunities.
Management believes that, at this time, the conditions in our market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding contract and the additional time needed to execute on new contracts previously reported have put a strain on our cash reserves. However, improvements in the commercial outlook, recent common stock offerings and private placements as well as the availability to raise capital via its shelf registration indicate there is no substantial doubt for the Company to continue as a going concern for a period of twelve months. We continue executing the plan to grow our business and achieve profitability with the benefit of potential tailwinds from renewed awareness around railroad safety. The Company may selectively look at opportunities for fund raising in the future. Management has extensively evaluated our requirements for the next 12 months and has determined that the Company currently has sufficient cash and access to capital to operate for at least that period.
While no assurance can be provided, management believes that these actions provide the opportunity for the Company to continue as a going concern and to grow its business and achieve profitability with access to additional capital funding. Ultimately the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing the plan described above which was put in place in late 2022 and will continue in 2023 and beyond. As a result, we expect to generate sufficient revenue and to attain profitable operations with less net cash used in operating activities in the next 12 months. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.
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.
| 36 |
Revenue Recognition and Contract Accounting
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 and (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 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.
Artificial Intelligence
The Company has revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms which provide important operating information to the users of our systems. The revenue generated from these applications of AI consists of a fixed fee related to the design, development, testing and incorporation of new algorithms into the system, which is recognized as revenue at a point in time upon acceptance, as well as an annual application maintenance fee, which 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 the financial statements included in this prospectus, 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 the 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.
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 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.
| 38 |
Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements included in this prospectus.
For the year endedDecember 31, 2022compared to December 31, 2021
The following table sets forth a summary of our Consolidated Statements of Operations that is used in the following discussions of our results of operations:
|
| For the Three Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
|
| ||
Revenue |
| $ | 2,198,401 |
|
| $ | 5,102,216 |
|
Cost of revenue |
|
| 1,172,942 |
|
|
| 2,773,862 |
|
Gross profit |
|
| 1,025,459 |
|
|
| 2,328,354 |
|
Operating expenses |
|
| 2,157,360 |
|
|
| 1,692,121 |
|
Income (loss) from operations |
|
| (1,131,901 | ) |
|
| 636,233 |
|
Other income (expense) |
|
| (12,168 | ) |
|
| (3,608 | ) |
Net income (loss) |
| $ | (1,144,069 | ) |
| $ | 632,625 |
|
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | 15,012,366 | $ | 8,259,917 | ||||
| Cost of revenue | 10,264,263 | 6,220,373 | ||||||
| Gross margin | 4,748,103 | 2,039,544 | ||||||
| Operating expenses | 11,613,252 | 9,496,495 | ||||||
| Loss from operations | (6,865,149 | ) | (7,456,951 | ) | ||||
| Other income | 366 | 1,448,050 | ||||||
| Net loss | $ | (6,864,783 | ) | $ | (6,008,901 | ) | ||
Revenues
|
| For the Three Months Ended |
| |||||||||
|
| September 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues: |
|
|
|
|
|
|
|
|
| |||
Projects |
| $ | 1,921,306 |
|
| $ | 4,731,106 |
|
|
| -59% |
|
Maintenance and technical support |
|
| 229,008 |
|
|
| 371,110 |
|
|
| -38% |
|
IT asset management services |
|
| 48,087 |
|
|
| — |
|
|
|
|
|
Total revenue |
| $ | 2,198,401 |
|
| $ | 5,102,216 |
|
|
| -57% |
|
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenues: | ||||||||||||
| Technology systems | $ | 11,190,292 | $ | 5,871,666 | 91 | % | ||||||
| Services and consulting | 3,822,074 | 2,388,251 | 60 | % | ||||||||
| Total revenues | $ | 15,012,366 | $ | 8,259,917 | 82 | % | ||||||
For the full year 2022, there was an 82% overall increase in revenues compared to 2021. The increase was driven by new revenues being recorded after lengthy delays in receiving “notices to proceed” for anticipated new contracts earlier in the year that pushed delivery dates into the second half of 2022 and into 2023. There was a significant increase in revenue from systems with a slightly lower increase in service revenues of 60% year-over-year. The increase in revenues stems directly from the delivery of two RIP projects across 2022 in addition to the onset of a new high-speed RIP project which the Company will continue to recognize well into 2023. Additionally, the growth in services and consulting stems from the Company’s success in deploying artificial intelligence as well as change orders to existing services agreements during the year. The Company is focusing on increasing its business from services and the increase is the result of new contracts for existing and new systems which the Company anticipates will continue growing throughout 2023 and beyond. As previously discussed, management cautions that because of the delays in anticipated start dates, certain installations may produce revenues towards the end of 2023. Additionally, although the industries in which we operate have improved after the Covid-19 pandemic, other macro-economic effects are anticipated to impact us, including inflation and the current supply chain issues which are extending deadlines for shipment of key components used in our technology systems. The effect of this deferred some revenue recognition into 2023 as previously mentioned. These deferrals resulted in a slightly lower revenue growth performance than originally anticipated. However, the bulk of these deferred revenues are expected to be reported in 2023. The effects of inflation are not fully quantifiable at the current time but are beginning to be evident in increased costs for materials and labor and may result in higher costs for project implementation that cannot be wholly or even partially passed on to our customers and thus resulting in delaying our progress towards profitability.
The majorityCompany’s capital structure continues to allow us to weather the unexpected delays without significant operational impact and enables us to pursue large projects where the ability to deploy major resources is required. It should be noted that the Company recently increased its working capital to account for an increase in pre-contract procurement activities to avoid a slowdown in revenues caused by delays in receiving certain components as had been the case in previous years. The Company undertook a major review of operations during 2021 and made significant changes in staffing including additional engineering staff and revamping its software development and Artificial Intelligence staffing. These efforts have begun to yield benefits in 2022 as reflected in the improved systems revenues. This effort has improved delivery times on major projects and helps to offset some of the decrease in overall revenues forcontinued supply chain lags the quarter is due to slower than anticipated contract awards by two customers pending resolution of certain terms and conditions. These orders have now been received, however, some execution delays by one customer for customer acceptance in the projects portion of our business continue to have an impact, albeit to a lesser degree than previously thought. Although these delays may impact the projects revenue portion of our business, they are not expected to have any material impact for the full year.Company has faced post-Covid-19. The Company continues to make improvements in our project buildmonitor the situation and delivery process largely as a resultprocures materials ahead of contract award where feasible.
| 39 |
The Company also expects to continue the investmentgrowth with new revenue from other existing customers which we expect to be coming on-line in the establishment ofnext several months. In aggregate during 2022, the Engineering and Operations center in 2018 whichCompany has shortened delivery times on major projects.
Maintenance and technical support revenues were lowerbeen successful in the quarter as the resultexpansion of project and services contracts to account for new maintenance contracts being delayed in line with the delays in implementation.work. The renewalsservices portion of existing contracts have somewhat offset this impact and we believe that a shift to the next generation of technology systems which are currently being installed will have a positive impact going forward. The maintenance and technical support revenues are driven by successful completion on projects and representrepresents services and support for those installations. The Company expects new, long term recurring revenue from new customers will be coming on-line in the next several months.
The ITAM division recorded an increase inportion of our revenue in the third quarter of 2019. The increase in ITAM revenues is due to the ITAM division release of a new version of its software which is anticipated to broaden market acceptance of its offerings.
Cost of Revenues
|
|
| For the Three Months Ended |
| |||||||||
|
|
| September 30, |
| |||||||||
|
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Projects |
|
| $ | 984,805 |
|
| $ | 2,684,785 |
|
|
| -63% |
|
Maintenance and technical support |
|
|
| 158,785 |
|
|
| 89,077 |
|
|
| 78% |
|
IT asset management services |
|
|
| 29,352 |
|
|
| — |
|
|
|
|
|
Total cost of revenues |
|
| $ | 1,172,942 |
|
| $ | 2,773,862 |
|
|
| -58% |
|
Cost of revenues on projects decreased in line with the decrease in revenues. The overall gross margin was slightly higher during the period compared to the equivalent period in 2018 due to a continued focus on build costsfor services and certain savings through efficiency. The significant increase in personnel in anticipation of increased execution and support requirements for the second half of the year and into 2020 which we saw in the second quarter was no longer a factor in the current quarter. The tighter cost controls on production of systems and the efficiencies gained through the implementation of projects at the Operations and Engineering Center prior to customer deploymentconsulting, continues to have positive effectmake-up a greater share of our revenues and this trendgrowth is expected to continue as the Company continues its focus on reducing the costs of delivery and streamlining execution for delivery of a greater number of projects. Cost of Revenues increased on maintenance and technical support as a result of additional investments in staffing to support a greater number of installations.
Gross Profit
|
| For the Three Months Ended | |||||||||
|
| September 30, | |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 2,198,401 |
|
| $ | 5,102,216 |
|
|
| -57% |
Cost of revenues |
|
| 1,172,942 |
|
|
| 2,773,862 |
|
|
| -58% |
Gross profit |
| $ | 1,025,459 |
|
| $ | 2,328,354 |
|
|
| -56% |
Gross Profit was $1,025,459 or 47% of revenues compared to $2,328,354 or 46% of revenues for the three months ended September 30, 2019 and 2018, respectively. The overall decrease in gross profit of 56% reflects the lower revenues for the quarter although the gross profit as a percentage of the revenues was slightly higher. Although, the implementation of ASC 606 covering revenue from contracts with customers, had a temporary impact on overall gross margin during some previous reporting periods there was no impact during this quarter. Although this has had a negative overall effect on the typical project gross margin of at least 50%, management anticipates the overall gross margins for the full year to be close to historical norms and continue to improve going forward.
Operating Expenses
|
| For the Three Months Ended |
| |||||||||
|
| September 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses |
| $ | 98,311 |
|
| $ | 73,468 |
|
|
| 34% |
|
Salaries, wages and contract labor |
|
| 1,438,608 |
|
|
| 1,072,029 |
|
|
| 34% |
|
Research and development |
|
| 97,273 |
|
|
| 122,755 |
|
|
| -21% |
|
Professional fees |
|
| 43,903 |
|
|
| 63,878 |
|
|
| -31% |
|
General and administration |
|
| 479,265 |
|
|
| 359,991 |
|
|
| 33% |
|
Total operating expense |
| $ | 2,157,360 |
|
| $ | 1,692,121 |
|
|
| 27% |
|
Operating expenses were higher by 27% for the equivalent period in 2018 reflecting the increase in resources related to the Company’s anticipated growth. Selling and marketing expenses increased in line with the Company’s investment in resources to support that growth. The measurable increase in salaries, wages and contract labor during the period is a result of an anticipated larger order book and the Company continues to invest in staff resources to ensure timely execution. Research and development expenses outside of labor costs decreased. Professional fees were also minimal for the period due to the fact that the Company was not engaged in any significant activities related to fundraising or other activities outside the normal course of business. Other general and administrative costs were higher as the result of additional business and non-project related travel.
Loss From Operations
The loss from operations for the three months ended September 30, 2019 was $1,131,901 versus a profit from operations for the same period in 2018 of $636,233. The 278% increase in losses from operations are the result of lower revenues and gross margins for the period together with an increase in operating expenses. The losses are expected to be temporary and be offset for the full year with the anticipated growth in business from new contracts.
Other Income/Expense
Interest expense for the three months ended September 30, 2019 was $12,783 versus interest expense of $4,589 in the equivalent period in 2018. Interest costs continue to be minimal and are offset by earnings from cash on deposit in the amount of $615 at September 30, 2019 versus $981 in the same period of 2018.
Net Income (Loss)
The net loss for the three months ended September 30, 2019 was $1,144,069 against a net profit for the same period in 2018 of $632,624. The $1,776,693 negative change in net loss is primarily attributable to the decrease in project revenue. Net loss per common share was ($0.56) versus a profit of $0.42 per share for the three months ended September 30, 2019 and 2018, respectively.
Comparison for the Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
The following table sets forth a modified version of our unaudited Consolidated Statements of Operations that is used in the following discussions of our results of operations:
|
| For the Nine Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
|
| ||
Revenue |
| $ | 7,896,287 |
|
| $ | 9,490,202 |
|
Cost of revenue |
|
| 4,565,585 |
|
|
| 5,428,037 |
|
Gross profit |
|
| 3,330,702 |
|
|
| 4,062,165 |
|
Operating expenses |
|
| 6,365,319 |
|
|
| 4,795,994 |
|
Loss from operations |
|
| (3,034,617 | ) |
|
| (733,829 | ) |
Other income (expense) |
|
| (15,074 | ) |
|
| (11,013 | ) |
Net loss |
| $ | (3,049,691 | ) |
| $ | (744,842 | ) |
Revenues
|
| For the Nine Months Ended |
| |||||||||
|
| September 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Projects |
| $ | 6,954,062 |
|
| $ | 8,516,812 |
|
|
| -18% |
|
Maintenance and technical support |
|
| 701,552 |
|
|
| 881,004 |
|
|
| -20% |
|
IT asset management services |
|
| 240,673 |
|
|
| 92,386 |
|
|
| 161% |
|
Total revenue |
| $ | 7,896,287 |
|
| $ | 9,490,202 |
|
|
| -17% |
|
Overall revenues were 17% lower for the period reflecting unanticipated delays in contract executions for two large new projects and the effects of such delay. Since the contracts were expected to be signed in 2019, the Company took the decision to begin acquiring certain components ahead of the contracts in order to ensure no material impacts to the Company’s expected revenues for the year. The decrease in project revenues of 18% for the period was slightly offset by an improvement in the IT Asset Management business. The Company’s stable capital structure enables us to more aggressively pursue large projects requiring the ability to deploy major resources and in the current period allowed us to begin implementation in advance of final contracts. This plus the ongoing investment by the Company in project resources impacted our cash resources which was offset by access to short term loans from two shareholders. By streamlining our project build and delivery process, largely as a result of the investment in the establishment of the Engineering and Operations Center in 2018, we have shortened our delivery times and implementation on major projects thus facilitating our ability to meet our planned revenue goals for the year. Although new maintenance contracts are being established as well as renewals of existing contracts from the shift to the next generation of technology systems, delays in contract signing have caused a temporary decline in maintenance and technical support revenues for the current period. The maintenance and technical support revenues are driven by successful completion on projects and represent services and support for those installations. For the year we do not anticipate a material effect and the Company expects to resumecontinue the growth with new, long term recurring revenue from newexisting customers which will be coming on-line in the next several months.
The ITAM division recorded an increase in revenue in the first nine months of 2019. The increase in ITAM revenues is due to the ITAM division release of a new version of its software which is anticipated to broaden market acceptance of its offerings and we anticipate a positive impact on revenues in 2019.
Cost of Revenues
|
| For the Nine Months Ended |
| |||||||||
|
| September 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Projects |
| $ | 4,045,448 |
|
| $ | 5,079,455 |
|
|
| -20% |
|
Maintenance and technical support |
|
| 420,451 |
|
|
| 300,593 |
|
|
| 40% |
|
IT asset management services |
|
| 99,686 |
|
|
| 47,989 |
|
|
| 108% |
|
Total cost of revenues |
| $ | 4,565,585 |
|
| $ | 5,428,037 |
|
|
| -16% |
|
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Cost of revenues: | ||||||||||||
| Technology systems | $ | 8,376,649 | $ | 4,728,197 | 77 | % | ||||||
| Services and consulting | 1,887,614 | 1,492,176 | 27 | % | ||||||||
| Total cost of revenues | $ | 10,264,263 | $ | 6,220,373 | 65 | % | ||||||
Cost of revenues largely comprises equipment, labor and overhead necessary to support the implementation of new systems and support and maintenance of existing systems. Cost of revenues on projects decreasedtechnology systems increased during the period compared to the equivalent period in line with2021 by a slightly lower rate than the decreaseincrease in revenues but withrevenues. The primary reason for the overallincreased growth in Costs in Project Revenues growingcosts year-over-year stems from additional project work related to the delivery of two Railcar Inspection Portals. Additionally, the Company made significant progress on the manufacturing of a special-purpose, high value Railcar Inspection Portal which it anticipates completing during 2023. The Company’s costs are composed of materials, subcontractor costs and labor consisting of the Company’s engineering, project management and software team’s efforts to deliver on the aforementioned Railcar Inspection Portals. The cost of sales grew at a slower pace. We continuepace than revenues primarily because the Company neared completion of two of its portals and thus recognized additional profits on these projects as it satisfied its project-related obligations. Additionally, the Company saw improved revenue growth related to higher margin services and artificial intelligence during the year which contributed to revenue growth outpacing the change in cost of sales.
These internal costs are being recognized against project and support revenues with a similar reduction in costs previously recognized for research and development, engineering development and internal support. In concert with this, there is a continued focus on tighter cost controls on productionconstruction costs and savings through efficiency, but the Company has elected to expand its key employees in anticipation of expected sales growth in technology systems and services in 2023 and beyond.
Cost of revenues increased on services and consulting year-over-year albeit at a slower pace than the efficiencies gained through the implementationincrease in services and consulting revenues. The increase in costs was a result of projects at the Operations and Engineering Center prior to customer deployment. This positive trend is expected to continue asone-time services completed on existing RIP sites on which the Company continues its focus on reducingincurred some additional material costs as well as project management and engineering team labor to complete the project. The year-over-year revenue from consulting and services increase outpaced the increase in costs of deliverywhich is a positive trend. The Company put into service additional artificial intelligence algorithms and streamlining execution. Cost of Revenues increased on maintenance and technical support as new systemsservices which are being brought online but this increase is expectedhigh margin and represent only marginal increases in the requisite costs to be temporary with costs more in line with historical norms. Some ofdeliver these costs are related toservices.
Gross Margin
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Revenues | $ | 15,012,366 | $ | 8,259,917 | 82 | % | ||||||
| Cost of revenues | 10,264,263 | 6,220,373 | 65 | % | ||||||||
| Gross margin | $ | 4,748,103 | $ | 2,039,544 | 133 | % | ||||||
| 40 |
Gross margin showed a number of new, complex systems being installed oversignificant improvement for the past periods. ITAM costs of revenue were higheryear ended December 31, 2022 as compared to a significant increase in revenue as the result of a larger proportion of the revenue coming from professional services over the total period. This effect is not expected to continue going forward but variances in the individual quarters reflective of the balance of license sales to professional services revenues should be expected.
Gross Profit
|
| For the Nine Months Ended |
| |||||||||
|
| September 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues |
| $ | 7,896,287 |
|
| $ | 9,490,202 |
|
|
| -17% |
|
Cost of revenues |
|
| 4,565,585 |
|
|
| 5,428,037 |
|
|
| -16% |
|
Gross profit |
| $ | 3,330,702 |
|
| $ | 4,062,165 |
|
|
| -18% |
|
Gross Profit was $3,330,702 or 42% of revenues compared to $4,062,165 or 43% of revenues for the nine months ended September 30, 2019 and 2018, respectively. The Gross Margin has remained stable for the period and broadly comparable with the same period in 2021. As noted above, the prior year. As previously discussed,improvement in margin was a direct result of increased business activity the implementationCompany recognized in the latter half of ASC 606 covering2022. The increased business activity was related to the manufacturing and near completion of installation of two Rail Inspection Portals, a number of one-time service events and significant progress made on a special-purpose, high-value RIP. The Company began to recognize revenue and profit on those activities in accord with its revenue recognition policy. The recognition of the revenue and subsequent profit from these major projects, as well as underlying services and maintenance revenues from existing projects, resulted in a 32% gross margin. By comparison for the full-year 2021, the Company had limited business activity from a handful of projects primarily related to customer site upgrades as well as lower underlying service revenues. This was as a result of project timing and delayed A.I. related services, which yielded a 25% gross margin. While the margins are not significantly different year-over-year, the Company’s 82% increase in revenue from contracts with customers, can have a temporary impact onadditional projects and services drove an overall higher gross margin during previous reporting periods as certain costs are recognized ahead of revenues. The effects of this are typically within a quarter and over the project cycle there is expected to be no material impact. As previously stated, management anticipates the overall gross margins for the business to be close to historical norms for the 2019 period even though the current period is below that target due to an increase in resources related to anticipated project revenues from new projects that are expected to begin in the second half of this year.margin-dollar amount.
Operating Expenses
|
| For the Nine Months Ended |
| |||||||||
|
| September 30, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses |
| $ | 336,433 |
|
| $ | 189,092 |
|
|
| 78% |
|
Salaries, wages and contract labor |
|
| 4,045,689 |
|
|
| 3,153,138 |
|
|
| 28% |
|
Research and development |
|
| 328,403 |
|
|
| 401,116 |
|
|
| -18% |
|
Professional fees |
|
| 188,876 |
|
|
| 187,679 |
|
|
| 1% |
|
General and administration |
|
| 1,465,918 |
|
|
| 864,969 |
|
|
| 69% |
|
Total operating expense |
| $ | 6,365,319 |
|
| $ | 4,795,994 |
|
|
| 33% |
|
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | $ | 1,337,186 | $ | 1,233,851 | 8 | % | ||||||
| Research and development | 1,651,064 | 2,515,630 | -34 | % | ||||||||
| General and Administration | 8,625,002 | 5,747,014 | 50 | % | ||||||||
| Total operating expense | $ | 11,613,252 | $ | 9,496,495 | 22 | % | ||||||
OperatingOverall operating expenses were higher by 33%22% in 2022 as compared to the full-year 2021. There was a marginal 8% increase in sales and marketing related to increased investment into the overall capability of the commercial team. Specifically, 2022 saw the Company bring in additional talent with direct experience from the technology and rail spaces. Research and development costs declined 34% during the year. This was the result of some of the technical resources from the IT and Engineering teams being consumed as part of the significant increase in project and service revenues and led to the Company performing additional project and one-time services work year-over-year. The offset of these charges reside in the cost of sales services and consulting. Additionally, general and administration costs increased approximately 50% because of a focus on employee retention and increased headcount to support the growth in its operating plan. Specifically, in 2022 the Company had charges related to staff retention via a discretionary performance program; this was a new initiative for the equivalent periodentire organization to drive higher performance and attract and retain better quality resources in 2018 reflectinga tight labor market as well as the increase in resources related to the anticipated new contracts. Sellingimplementation and marketing expenses increased significantly in line with the Company’s plans to grow the business.subsequent non-cash charges of an employee stock option plan. The 28% increase in salaries, wages and contract labor is higher during the period due to an increase number of employees and additional contract expenses related to an overall expected increase in revenues. These increases are alsoCompany still faces some pressure on existing staff compensation as a result of an increasing investment in the Company’s TrueVue360 subsidiaryinflation during 2022 but remains focused on Artificial Intelligence. For the period, there were no revenues for TrueVue360 although we are anticipating revenues going forward. Researchto manage and development expenses, excluding personnel, decreased for the period. Professional fees were higher duestabilize administrative costs without interruption to an increase in expenses related to legal fees with certain onetime expenses for the recent warrant execution and other expenses related to travel and a much larger workforce including additional facilities. Other G&A costs were in line with the additional staff expenses and the growth of the Company. It is anticipated that, going forward, operating expenses will continue to grow at a slower rate than the revenue increases.customer service.
Loss From Operations
The losslosses from operations for the nine monthsyears ended, September 30, 2019 was $3,034,617December 31, 2022 and the loss2021 were $6,865,149 and $7,456,951, respectively. The decrease in losses from operations forduring the same period in 2018year was $733,829. The 309%the result of mostly improved revenues stemming from the deployment of new portals and receipt of materials and manufacturing related to a high value set of portals to be completed during 2023. These additional projects as well as an increase in loss from operations was mostly due toservices and consulting revenue increases and related margins outpaced the overall increase inCompany’s increased general and administrative costs along withthroughout 2022. As a result, the increaseCompany achieved near breakeven in costs in sellingthe fourth quarter of 2022. The Company has continued to face inflation and marketing expense for the period against a lower overall revenue for the period.supply chain pressures during 2022 and, as normal course of business, has worked to balance these impacts through management of customer contracts and cost control efforts.
Interest ExpenseLoss From Operations
Interest expenseThe losses from operations for the nine monthsyears ended, September 30, 2019 was $19,095December 31, 2022 and the interest expense for same period in 2018 was $14,755. This was offset by $4,021 in interest income for the period versus $3,742 in the same period for 2018. This is due to generally higher amounts of available cash that generate interest income.
Other Expense
Other Expense for the nine months ended September 30, 20192021 were $6,865,149 and 2018 was $15,074 and $11,013,$7,456,951, respectively. The increasedecrease in other expense is due to higher interest costs related to financing short term debt offset by a slightly higher balance inlosses from operations during the money market banking account for the first nine-month period in 2019.
Net Loss
The net loss for the nine months ended September 30, 2019 and 2018year was $3,049,691 and $744,842, respectively. The increase in net loss is the result of lowermostly improved revenues forstemming from the perioddeployment of new portals and receipt of materials and manufacturing related to a high value set of portals to be completed during 2023. These additional projects as well as an increase in operating expenses in 2019 compared toservices and consulting revenue increases and related margins outpaced the same period in 2018. Net loss per common share was $1.82Company’s increased general and $0.56 for administrative costs throughout 2022. As a result, the nine months ended September 30, 2019 and 2018, respectively.
Comparison For the year endedDecember 31, 2018compared to December 31, 2017
The following table sets forth a modified version of our Consolidated Statements of Operations that is usedCompany achieved near breakeven in the following discussionsfourth quarter of our results of operations:
|
| For the Years Ended |
| |||||
|
| December 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
|
|
|
|
|
|
| ||
Revenue |
| $ | 12,048,619 |
|
| $ | 3,884,588 |
|
Cost of revenue |
|
| 6,844,396 |
|
|
| 2,294,552 |
|
Gross profit |
|
| 5,204,223 |
|
|
| 1,590,036 |
|
Operating expenses |
|
| 6,774,127 |
|
|
| 5,033,529 |
|
Income (Loss) from operations |
|
| (1,569,904 | ) |
|
| (3,443,493 | ) |
Other income (expense) |
|
| (10,983 | ) |
|
| (1,708,983 | ) |
Net income (loss) |
|
| (1,580,887 | ) |
|
| (5,152,477 | ) |
Series A preferred stock dividends |
|
| — |
|
|
| (17,760 | ) |
Net income (loss) applicable to common stock |
| $ | (1,580,887 | ) |
| $ | (5,170,237 | ) |
Revenues
|
| For the Years Ended |
| |||||||||
|
| December 31, |
| |||||||||
|
| 2018 |
|
| 2017 |
|
| % Change |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Projects |
| $ | 10,753,926 |
|
| $ | 1,884,079 |
|
|
| 471% |
|
Maintenance and technical support |
|
| 1,170,215 |
|
|
| 1,127,932 |
|
|
| 4% |
|
IT asset management services |
|
| 124,478 |
|
|
| 872,577 |
|
|
| -86% |
|
Total revenue |
| $ | 12,048,619 |
|
| $ | 3,884,588 |
|
|
| 210% |
|
The significant increase in overall revenues is driven by the current strength of the projects portion of our business currently being undertaken. The Company’s stable capital structure enables us to more aggressively pursue large projects requiring the ability to deploy major resources. The significant increase in project revenues was also accompanied by an increase in maintenance and technical support. This revenue source has been in transition for the past year as older legacy systems are replaced by the next generation of technology systems which are currently being installed. There is typically a lag of approximately 3 months from installation of a new system until the recurring revenue is recognized.2022. The Company continueshas continued to replace the declining revenues from one customer with new, long term recurring revenue from new customers which will be coming on-line in the next several months. The maintenanceface inflation and technical support revenues are driven by successful completion on projectssupply chain pressures during 2022 and, represent services and support for those installations.
The ITAM division experienced a significant reduction in revenues for 2018. This was the result of the conclusion of a large project late in 2017 and delays in starting a new project that was anticipated to begin earlier in 2018.
Cost of Revenues
|
| For the Years Ended |
| |||||||||
|
| December 31, |
| |||||||||
|
| 2018 |
|
| 2017 |
|
| % Change |
| |||
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Projects |
| $ | 6,373,684 |
|
| $ | 1,487,516 |
|
|
| 328% |
|
Maintenance and technical support |
|
| 409,316 |
|
|
| 458,960 |
|
|
| -11% |
|
IT asset management services |
|
| 61,396 |
|
|
| 348,076 |
|
|
| -82% |
|
Total cost of revenues |
| $ | 6,844,396 |
|
| $ | 2,294,552 |
|
|
| 198% |
|
Cost of revenues on projects increased at a slower rate than the increase in revenues. The overall gross margin was positively impacted during the period compared to the equivalent period in 2017 due to tighter cost controls on production of systems and the efficiencies gained through the implementation of projects at the Operations and Engineering Center prior to customer deployment. Cost of Revenues decreased by 11% on maintenance and technical support which is a positive trend against an increase in revenues and we expect this trend to continue as economies of scale begin to have a positive impact. The Company also completed certain field work at the request of two major clients which increased revenue but at a margin that is less than in the normal course of business. The effect of this is anticipatedbusiness, has worked to be minimal going forward.
Gross Profit
|
| For the Years Ended | |||||||||
|
| December 31, | |||||||||
|
| 2018 |
|
| 2017 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 12,048,619 |
|
| $ | 3,884,588 |
|
|
| 210% |
Cost of revenues |
|
| 6,844,396 |
|
|
| 2,294,552 |
|
|
| 198% |
Gross profit |
| $ | 5,204,223 |
|
| $ | 1,590,036 |
|
|
| 227% |
Gross Profit was $5,204,223 or 43% of revenues compared to $1,590,036 or 41% of revenues for the twelve months ended December 31, 2018 and 2017, respectively. The overall increase in gross profit of 227% was mainly the result of the increase in project revenues and the positive effect of significant revenue increases from new projects. It should be noted that the accounting treatment was changed to the ASC 606 reporting standard and that the results compared with the previous year are not strictly comparable. As previously discussed, the implementation of ASC 606 covering revenue from contracts with customers, has a temporary impact on overall gross margin as certain costs are recognized ahead of revenues. Also, during the year, certain project revenue related to thebalance these impacts through management of construction requested by two customers were treated as a pass throughcustomer contracts and have between a 10% and a 25% gross margin. This has a negative overall effect on the typical project gross margin for an aggregate of our revenue sources of at least 50%. Despite these factors, the Company recorded an overall increase in Gross Margin for the year compared to the prior year which is a positive trend. Management anticipates the overall gross margins for the business to continue to improve in the coming year excluding the impact of “one-off” lower margin revenues related to field construction work requested by the customer and not in the ordinary course of business.cost control efforts.
Operating Expenses
|
| For the Years Ended |
| |||||||||
|
| December 31, |
| |||||||||
|
| 2018 |
|
| 2017 |
|
| % Change |
| |||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses |
| $ | 289,140 |
|
| $ | 179,318 |
|
|
| 61% |
|
Salaries, wages and contract labor |
|
| 4,299,799 |
|
|
| 3,098,782 |
|
|
| 39% |
|
Research and development |
|
| 488,694 |
|
|
| 310,099 |
|
|
| 58% |
|
Professional fees |
|
| 245,033 |
|
|
| 393,531 |
|
|
| -38% |
|
General and administration |
|
| 1,451,461 |
|
|
| 1,051,799 |
|
|
| 38% |
|
Total operating expense |
| $ | 6,774,127 |
|
| $ | 5,033,529 |
|
|
| 35% |
|
Operating expenses were higher by 35% for the year reflecting the increase in resources related to the significant increase in revenues for the period. Selling and marketing expenses and research and development both increased with the Company’s investment in resources to grow the business. The Company also began investing in its resources for the development of the new truevue360™ AI platform. The 39% increase in salaries, wages and contract labor is due to a planned increase in the number of employees and additional contract expenses related to an overall significant increase in revenues. Professional fees were 38% lower due to a reduction in expenses related to legal fees and prudent management of expenses by management. Other G&A costs increased but were in line with the additional staff expenses and the growth of the Company.
Loss From Operations
The losses from operations for the years ended, December 31, 20182022 and 20172021 were $1,569,904$6,865,149 and $3,443,493,$7,456,951, respectively. This isThe decrease in losses from operations during the year was the result of mostly improved revenues stemming from the deployment of new portals and receipt of materials and manufacturing related to a 54% reductionhigh value set of portals to be completed during 2023. These additional projects as well as an increase in loss asservices and consulting revenue increases and related margins outpaced the Company’s increased general and administrative costs throughout 2022. As a result, the Company moves towardachieved near breakeven in the fourth quarter of 2022. The Company has continued to face inflation and profitability.supply chain pressures during 2022 and, as normal course of business, has worked to balance these impacts through management of customer contracts and cost control efforts.
Interest Expense
Interest expense for the years ended December 31, 20182022 and 2017 were $17,1802021 was $9,191 and $4,519,035$20,268, respectively. The significant decreasereduction in interest expense was primarily due to the Company’s non-cash debt expensesfinancing charges related to certain financing actions prior to completing the capital raise at the end of November 2017. In addition to being non-cash, the expenses were driven by interest expense related to certain warrants which required accounting as derivatives. Some of these extraordinary costs were offset by an overall non-cash gain recorded due to the valuations recordedinsurance policies in those derivative instruments. The affected warrants were cancelled and retired at the end of 2017 and will have no impact on the Company’s financial results going forward.2021.
Other Income
Other income for the years endingended December 31, 20182022 and 20172021 was $6,197$9,557 and $1,719$1,468,318, respectively. The decrease is mainly due to the PPP loan forgiveness recorded in the first quarter of 2021.
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Net Loss
The net loss for the years ended December 31, 20182022 and 20172021 was $1,580,887$6,864,783 and $5,152,477$6,008,901, respectively. The $3,571,590 decreaseincrease in net loss is primarily attributable to the increase in revenue and less than proportionate increase cost of revenue in 2018. Net loss applicable to common stock was $1,580,887 in 2018 versus $5,170,237 in 2017, a decrease of $3,589,350. Mostone-time effect of the difference between Operating Losses and Net Losses were non-cashPPP loan forgiveness gain in nature. Additionally, the first half of 2021. Despite the increased net loss in 2017 included a charge for Series A Preferred Stock Dividends of $17,760.year-over-year, the Company showed an improvement at the operating loss level. Net loss per common share was $1.12 $1.11 and $20.02 $1.63 for the years ended December 31, 20182022 and 2017,2021, respectively.
Liquidity and Capital Resources
As of September 30, 2019,December 31, 2022, the Company has a negative working capitalcash balance of $1,300,123. We generated a net loss of $3,049,691 for the nine months ended September 30, 2019.$1,121,092.
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
|
| September 30, |
|
| September 30, |
| ||
Net cash (used) provided in operating activities |
| $ | (3,623,876 | ) |
| $ | (92,459 | ) |
Net cash (used) in investing activities |
|
| (144,634 | ) |
|
| (223,304 | ) |
Net cash provided (used) in financing activities |
|
| 3,326,548 |
|
|
| (54,004 | ) |
Net decrease in cash |
| $ | (441,962 | ) |
| $ | (369,767 | ) |
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (7,873,307 | ) | $ | (6,579,378 | ) | ||
| Net cash used in investing activities | (644,888 | ) | (552,940 | ) | ||||
| Net cash provided in financing activities | 8,745,567 | 4,056,938 | ||||||
| Net increase (decrease) in cash | $ | 227,372 | $ | (3,075,380 | ) | |||
Net cash used in operating activities for the nine monthsyears ended September 30, 2019December 31, 2022 and 2021 was $3,623,876$7,873,307 and net cash used during the same period of 2018 was $92,459.$6,579,378, respectively. The increase in net cash used in operations for the nine monthsyear ended September 30, 2019December 31, 2022 was the result of higher expenditures related to current and future project executionprojects as previously discussed as well as expenditures related to projects which the Company anticipates will be completed in anticipation of new projects.2023. In addition, there are a number ofseveral changes in assets and liabilities compared to the previous period that added toincreased the use of cash in operations. Notable changes were an increaseoperations including increases in inventory for some long-lead components and accounts payable and decreasereceivable. Additionally, $1,410,270 in contract liabilities reflecting less cashfunding from the CARES Act PPP loan program received for project execution due to delays in contract signing. In addition, cash is being used to further development activities within2021 plus deferred interest was forgiven during the TrueVue360 subsidiary where there are no current offsetting revenues during this period.first quarter of 2021.
Net cash used in investing activities for the nine monthsyears ended September 30, 2019December 31, 2022 and 2018 were $144,6342021 was $644,888 and $223,304, respectively representing continued investments$552,940, respectively. The Company continues to invest in various fixed assets duringcomputing, lab equipment and software and artificial development as reflected in the nine months of 2019.increase in 2022.
Net cash provided in financing activities for the nine monthsyears ended September 30, 2019December 31, 2022 and 2021 was $3,326,548$8,745,567 and cash flows used in the same period 2018 was $54,004.$4,056,938, respectively. Cash flows provided inby financing activities during the nine-month period in 20192022 were primarily attributable to warrants exercised by four shareholders andgross proceeds from short-term loans. Cash flows usedthe issuance of common and preferred stock to shareholders in the amount of $10,100,004, offset by $942,946 in issuance costs. 2022 marked an increase from 2021 financing activities during 2018 were$4,056,938 which was primarily attributable to repaymentsunderpinned from the gross proceeds of existing notes and short-term credit facilities offset by proceeds from a warrant execution.private placement of $4,500,000.
Previously,During 2022, we have funded our operations primarily through the sale of our equity (or equity linked) securities, and debt securities. During 2019, we have funded our operations through revenues generated and cash received from ongoing project execution, services and associated maintenance revenues as well as warrant executions and short-term loans from two shareholders.revenues. As of November 11, 2019,March 28, 2023, we hadhave cash on hand of approximately $859,000.$4,500,000. We have approximately $135,000$165,500 in monthly lease and other mandatory payments, not including payroll and ordinary expenses which are due monthly.
On a long-term basis, our liquidity is dependent on the continuation and expansion of operations and receipt of revenues. Our current capital and access to further capital and revenues are sufficient to fund such expansion although we are now less dependent on timely payments by our customers for projects and work in process.process, however we expect such timely payments to continue. Material cash requirements will be satisfied within the normal course of business including substantial upfront payments from our customers prior to starting projects. In some cases, the Company may elect to purchase materials and supplies in advance of contract award but where there is a high probability of that award. Most, if not all, high value items that are pre-purchased, can be re-purposed if necessary. The maximum amount of material cash requirements not currently supported by up-front customer deposits is expected to be less than $1 million.
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Demand for the products and services will be dependent on, among other things, continuing market acceptance of our products and services, the technology market in general, and general economic conditions, which are cyclical in nature. In as much as a major portion of our activities is the receipt of revenues from the sales of our products and services, our business operations may be adversely affected by our competitors and prolonged recession periods although these are not considered to be a factor at present.
AsIn the event of December 31, 2018,expansion into owning and operating its own Railcar Inspection Portals, the Company’s cash requirements and timing may shift. Specifically, the Company haswould endeavor to buy all materials ahead of time and invest in the RIP with follow-on contracts for long-term services and licensing. While this would shift the Company’s cash requirements, it anticipates a 12 – 18 month cash balance of $1,209,301.
Cash Flows
The following table sets forth the major components of our statements ofbreak-even point for each site and an opportunity for improved cash flows data forover time with high-margin agreements with the periods presented:
|
| December 31, |
|
| December 31, |
| ||
Net cash used in operating activities |
| $ | (345,287 | ) |
| $ | (3,562,306 | ) |
Net cash used in investing activities |
|
| (285,678 | ) |
|
| (41,709 | ) |
Net cash used/provided in financing activities |
|
| (101,552 | ) |
|
| 5,371,457 |
|
Net (decrease) increase in cash |
| $ | (732,517 | ) |
| $ | 1,767,442 |
|
Net cash used in operating activities for the years ended December 31, 2018 and 2017 were $345,287 and $3,562,306 respectively. The decrease in net cash used in operations for the year ended December 31, 2018 was almost exclusively dueinvestment bolstered by access to a more than $2 million increase in contract liabilities.
Net cash used in investing activities for the years ended December 31, 2018 and 2017 were $285,678 and $41,709, respectively representing an increase in investments in software development and lab equipment during 2018.
Net cash used in financing activities for the year ended December 31, 2018 was $101,552 and cash flows provided in the year ended December 31, 2017 was $5,371,457. Cash flows used in financing activities during 2018 were primarily attributable to repayments of existing notes and short-term credit facilities. Cash flows provided by financing activities during 2017 were primarily attributable to proceeds from the issuance offurther funding via common stock offset by repayments of existing notes and short-term credit facilities.private placement offerings.
Liquidity
Under Accounting Standards Update, or ASU, 2014-15,Codification ASC 205, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.
AfterAs reflected in the 2017 raise, management eliminated all debt other thanaccompanying consolidated financial statements, the Company had a net loss of $6,864,783 for normal course of business financing which reduced monthly obligations for interest payments, secured sufficientthe year ended December 31, 2022. During the same period, cash used in operating activities was $7,873,307. The working capital for ongoing operations. The Company continues to be successful in closing businesssurplus and establishing a backlog. Most importantly,accumulated deficit as of December 31, 2022, were $2,339,052 and $52,361,834, respectively. In previous financial reports, the Company has been successful in increasing itshad raised substantial doubt about continuing as a going concern. This was principally due to a lack of working capital cushion after receiving proceeds of $1,650,000 in connection with warrant exercisesprior to an underwritten offerings and a private placement which were completed during the first quarter of 20192022 and has secured another $665,270during third and fourth quarters of 2022 as well as the first quarter of 2023.
As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock during 2021. Additionally, the Company was successful during 2022 in further warrant exercisesraising gross proceeds of over $10,100,000 from the sale of both common shares and Series E Preferred Stock. Additionally, late in subsequent quarters. Thethe first quarter of 2023, the Company has also been successful in obtaining $1.25M in short-term loansraised gross proceeds of $4,000,000 from the issuance of Series E Preferred Stock (See Note 16). As part of its strategy, the Company will endeavor to supportutilize the increasing backlogPreferred Series E and the remainder of business. These loansthe Series E as additional funding mechanisms. Additionally, during the second quarter of 2023, the Company will again have allowedaccess to its S-3 “shelf registration” statement allowing the Company to sell additional common shares. At the time of this document, 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 in the event it did not have an uptake in the preferred classes of shares previously noted. Although additional investment is not assured, the Company is comfortable that it would be more flexibleable to raise sufficient capital to support expanded operations based on an anticipated increase in procurementbusiness activity. In the long run, the continuation of necessary componentsthe 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 issues 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 or available via the capital markets to maintain operations for at least 12 months from the date of this prospectus.
In addition, management has been taking and continues to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning both management and staffing requirements.
Management nowwith 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. The Company believes that, these actionswith the combination of Series E Preferred Stock offering coupled with an S-3 shelf registration availability starting in the second quarter of 2023, it will have alleviatedsufficient working capital to meet its obligations over the following twelve months. In the last twelve months the Company has seen significant growth in its contracted backlog as well as positive signs from new commercial engagements that indicate improvements in future commercial opportunities.
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Management believes that, at this time, the conditions in our market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding contract and the additional time needed to execute on new contracts previously reported have put a strain on our cash reserves. However, recent common stock offerings and private placements as well as the availability to raise capital via its shelf registration indicate there is no substantial doubt for the Company to continue as a going concern for a period of twelve months. We continue executing the plan to grow our business and willachieve profitability. The Company may selectively look at opportunities for fund raising in the future. Management has extensively evaluated our requirements for the next 12 months and has determined that the Company currently has sufficient cash and access to capital to operate for at least that period.
While no assurance can be provided, management believes that these actions provide the opportunity for the Company to continue as a going concern and to grow its business and achieve profitability without the absolute requirementwith access to raise additional capital for existing operations. Managementfunding. Ultimately the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing the plan described above which was put in place in late 2022 and will continue in 2023 and beyond. As a result, we expect to evaluate these plansgenerate sufficient revenue and to attain profitable operations with minimal cash use in future filings.the next 12 months. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Off Balance Sheet Arrangements
We have no-off balance sheet contractual arrangements, as that term is defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
Revenue Recognition and Contract Accounting
The Company generates revenue from four sources: (1) Technology Systems; (2) AI Technology which is included in the consolidated statements of operations line-item Technology systems; (3) Technical Support; and (4) Consulting Services which is included in the consolidated statements of operations line-item Services and consulting.
Technology Systems
The Company constructs intelligent technology systems consisting of materials and labor under customer contracts. Revenues and related costs on technology systems revenue are recognized based on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured and revenue is recognized accordingly.
In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation.
Under this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct labor, subcontract labor and other allocable direct costs. All un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.
A contract is considered complete when all costs except insignificant items have been incurred and the installation is operating according to specifications or has been accepted by the customer.
The Company has contracts in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. Cost estimates are reviewed periodically on a contract-by-contract basis throughout the life of the contract such that adjustments to the profit resulting from revisions are made cumulative to the date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects, must be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional information becomes available.
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Artificial Intelligence
The Company has revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms which provide important operating information to the users of our systems. The revenue generated from these applications of AI consists of a fixed fee related to the design, development, testing and incorporation of new algorithms into the system, which is recognized as revenue at a point in time upon acceptance, as well as an annual application maintenance fee, which revenue is recognized ratably over the contracted maintenance term.
Technical Support
Maintenance and technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and technical support provided outside of a maintenance contract are on an as-requested basis, and revenue is recognized over time as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized over time ratably over the term of the contract.
For sales arrangements that do not involve multiple performance obligations such as professional services, which are of short-term duration, revenues are recognized when services are completed.
Consulting Services
The Company’s consulting services business generates revenues under contracts with customers from three sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; and (3) Customer Service (training and maintenance support).
| (1) | Revenues for professional services, which are of short-term duration, are recognized when services are completed; | |
| (2) | For all periods reflected in the financial statements included in this prospectus, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized at a point in time upon delivery of the software and delivery of the hardware, as applicable, to the customer; | |
| (3) | Training sales are one-time upfront short-term training sessions and are recognized at a point in time after the service has been performed; and | |
| (4) | Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over time ratably over the contract term. |
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.
Share-Based Compensation
The Company accounts for employee and non-employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the 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.
In June 2018,The Company estimates the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718).fair value of stock options granted using the Black-Scholes option-pricing formula. This updatefair value is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example,then amortized on a straight-line basis over the requisite service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standardawards, which is permitted.generally the vesting period. The standard willCompany’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.
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Long-Lived Assets
The Company evaluates the recoverability of its property, equipment, and other long-lived assets in accordance with FASB ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets”, which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceed the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate. This guidance requires that long-lived assets and certain identifiable intangibles be appliedreviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a retrospective approach for each period presented. Management implemented on January 1, 2019.comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
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 audited 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,inventory, estimates of the valuation of right of use assets and corresponding lease liabilities, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible 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.
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Overview
Our Corporate History
Information Systems Associates, Inc. (“ISA”) was incorporated in Florida on May 31, 1994. Our original business operations consisted of consulting services for asset management of large corporate data centers and the development and licensing of information technology (“IT”) asset management software. In late 2014, ISA entered negotiations with Duos Technologies, Inc. (“duostech™”) for the purposes of executing a merger between the two organizations (also known as a “reverse triangular merger”). Incorporated under the laws of Florida on November 30, 1990, duostech™ operated in various industry segments, specializing in the design, development and deployment of proprietary technology applications and turn-key engineered systems. This transaction was completed on April 1, 2015, whereby duostech™ became a wholly owned subsidiary of ISA. After the merger was completed, ISA changed its corporate name to Duos Technologies Group, Inc. The Company, throughbased in Jacksonville, Florida, oversees its wholly owned subsidiaries DTI,subsidiary, duostech™ and employs approximately 75 people and is a technology company which designs, develops, deploys and operates intelligent technology solutions with a focus on software applications and AI. The Company has a strong portfolio of intellectual property. The Company’s headquarters are located at 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 32256 and main telephone number is (904) 296-2807.
Overview
The Company, operating under its brand nameduostech™tech®, designs, develops andtruevue360™, focuses deploys technology with focus on inspecting and evaluating moving vehicles. Its technology focus is within the design, developmentVision Technology market sector and, turnkey delivery of proprietary “intelligent technologies” that enable our customers to derive measurable increases in return on investment for their business.
duostech
The mission ofduostech is to develop, market and deploy disruptive technologies and systems that capture, process and present users with an unlimited number and types of data thatmore specifically, the Machine Vision subsector. Machine Vision companies provide our customers with a broad range of sophisticated intelligent technology solutions. With an emphasis on security,imaging-based automatic inspection and operationsanalysis for critical infrastructure, we target a variety of industries including transportation, retail, law enforcement, oil, gas and utilities. Ourprocess control for industry with potential expansion into other markets. Duos has developed key technologies capture, process and present all data in real time. A further differentiator is that these technologies integrate with our customer’s existing business process and create actionable information to streamline mission critical operations. Our technologies have been verified by multiple government and private organizations including but not limited to, Johns Hopkins University Applied Physics Laboratory (JHU/APL), the Department of Homeland Security (DHS) and the Transportation Technology Center, Inc., a wholly owned subsidiary of the Association of American Railroads, a transportation research and testing organization (TTCI) and perhaps most significantly, they have been field tested and found relevant by our customers, which we believe is the chief reason for our substantial repeat business. Overover the past several years wein software, industry specific hardware and artificial intelligence and has demonstrated industrial strength usability of its systems supporting rail, logistics and intermodal businesses that streamline operations, improve safety and reduce costs. Our team includes engineering subject matter expertise in hardware, software, and information technology as well as industry specific applications of artificial intelligence also referred to as Expert Artificial Intelligence. We also have supplied funded prototypesspecific industry experts on staff and consultants in the rail industry.
Duos is currently developing industry solutions for its target markets which will address rail, trucking, aviation and other vehicle-based processes. Duos’ initial offering, the Railcar Inspection Portal (RIP), provides both freight and transit railroad customers and select government agencies the ability to conduct fully remote railcar inspections of trains while they are moving at full speed. The RIP utilizes a variety of sophisticated optical, laser and speed sensors to scan each passing railcar to create a high-resolution image-set of the top, sides and undercarriage. These images are then processed with our technologiesedge data center using AI algorithms to verify technologyidentify safety and operating parameters.security defects on each railcar. The algorithms are developed in conjunction with industrial application experts, in this case resident Railcar Mechanical Engineers, to provide specific guidance in the analysis (“human in the loop”). Within seconds of the railcar passing through the RIP, a detailed report is sent to the customer where they are able to action identified issues. This solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The Company has already deployed this system with several Class 1 railroads and anticipates an increased demand from transit and other railroad customers along with selected government agencies that operate and/or manage rail traffic. The Company has deployed RIPs in Canada, Mexico and the United States and anticipates expanding this solution into Europe, Asia and the Middle East in coming years.
truevue360
In January 2019,The Company has also developed the Automated Logistics Information System (ALIS) which automates gatehouse operations where transport trucks enter and exit large logistics and intermodal facilities. This solution incorporates a similar set of sensors, data processing and artificial intelligence to streamline the customer’s logistics transactions and tracking and can also automate the security and safety inspection if called for. The Company launched a dedicated Artificial Intelligence program through its wholly-owned subsidiary True Vue 360, Inc., marketing its serviceshas already deployed this system with one large North American retailer and solutions under the brand nametruevue360.anticipates increased demand from other large retailers, railroad intermodal operators and select government agencies that manage logistics and border crossing points. The Company is committedevaluating other solutions for moving vehicles including aircraft, which could provide similar benefits in terms of safety and efficiency for required inspections as part of an operations process.
We have developed two proprietary solutions that operate our software and artificial intelligence. centraco® is an Enterprise Information Management Software platform that consolidates data and events from multiple sources into a unified and distributive user interface. Customized to adding significant focus on the development, marketingend user’s Concept of Operations (CONOPS), it provides improved situational awareness and deployment of advanced convolutional neural network-baseddata visualization for operational objectives compared to traditional manual inspections. truevue360™ is our fully integrated platform that we utilize to develop and deploy AI algorithms, including Machine Learning, Computer Vision, Object Detection and Deep Neural Network-based processing for real-time applications.
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These same Artificial Intelligence (“AI”), Deep Machine Learningapplications have begun to open up other opportunities for the Company to provide revenue producing solutions with potentially high market adoption.
In 2021, the Company ended support of its IT Asset Management (ITAM) solution which cataloged results for data center asset inventory and Advanced Algorithms applications. Whiletruevue360 will chieflyaudit services. We are currently evaluating using our current operations experience within “edge data centers” (as deployed for our Railcar Inspection Portal) to drive additional revenues within other markets requiring this type of solution although no specific offering has been developed at this time.
In the last quarter of 2022, the Company elected not to renew a support DTI’s business growth, it willcontract for its Integrated Correctional Automation System (iCAS) for one customer. The Company subsequently sold its iCAS assets to a buyer during the second quarter of 2023 for $165,000 via a convertible note.
The year 2022 ushered in a new phase in the Company’s development. Although we continue to see an extension of challenges faced in 2021, we also developsee positive changes and market its significant library of AI applications following a stand-alone business development strategy. Accordingly,opportunities for our business is now operatingthat will be discussed in two equally important business units which complement each other and provide comprehensive turn-key, end-to-end, solutions to our customers.
![[duot_s1011.gif]](https://capedge.com/proxy/S-1A/0001553350-20-000090/duot_s1011.gif)
Connected Intelligence
truevue360 has fully staffed its AI operation and completed:
greater detail later herein. They include:
| · | Introducing a new “subscription” based offering for access to data and images by a much broader target market including Class 1 railroads, railcar owners and lessors, short line railroads. |
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duostech®
Under a recently launched initiative, discussed in more detail below,duostech™is in the process of developing 30+ additional aspect modules targeting an expanded detection scope of mechanical defects, using predominantly oblique image capture, which will be followed bytruevue360developing an additional 40+ AI railcar inspection models/applications between now and the end of the 2nd quarter of 2020.
Starting in January of 2020, we intend to market our AI platform and application developments to third parties.
duostech™
Over the past 10 years ,duostech™ has developed an extensive suite of disruptive technologies, some of the most relevant of which are described below.
Intelligent Railcar Inspection Portal (rip®)rip®)
Federal regulations require each railcar/train to be inspected for mechanical defects prior to leaving a rail yard. Founded in 1934, the Association of American Railroads (AAR) is responsible for setting the standards for the safety and productivity of the U.S./North American freight rail industry, and by extension, has established the inspection parameters for the rail industry’s rolling stock. Also known as the “Why Made” codes, the AAR established approximately 110 inspection points under its guidelines for mechanical inspections.
Under current practice, inspections are conducted manually;manually, a very labor intensive and inefficient process that only covers a select number of inspectionsinspection points and can take up to 3several hours per train. It should be noted that approximately 50% of the rail industry’s operating costs are for maintenance, including 30% of the time trains spend in workshops resulting from manual failure diagnostics.
We invented, designed, deployed, and are currently marketingbelieve our intelligent Railcar Inspection Portal technology, intendedhas the potential to ultimately cover most, if not all,reduce this inspection points and reduceto minutes while the in-yardtrain is moving at speed improving safety, reducing dwell time to minutes per train. and optimizing maintenance.
Our system combines high definitionhigh-definition image and data capture technologies (developed byduostech) with our AI-based analytics applications (developed and maintained bytruevue360) that are typically installed on active tracks located between two rail yards. We inspect railcars traveling through our inspection portal at speeds of up to 70 mph and report mechanical anomalies detected by our system to the ensuing yard; well ahead of the train(s) entering the yard. To date, we have successfully completed the development of 21 AI applications and are in the process of developing 44 additional applications scheduled to be completed by the end of Q2, 2020.
Over the past two years, several class 1 rail operators have ordered and are currently operating ourriptechnology with the ultimate objective to cause a change in federal rules that would allow replacement of the current manual inspection (in the yard) with a fully automated process. The Company is collaborating with certain industry professionals to pursue such regulatory rule changes and we believe that there will be broad acceptance of our technology as soon as a majority of required AI algorithm models are completed and tested.
Ourripsystem consists of a suite of sub-systems for the automated inspection of freight or transit railcars at high speeds. The combined technologies capture images and other relevant operating data from 360-degrees of each locomotive and railcar passing through our inspection portal. All data is processed and presented in real-time by our proprietary intelligent user interface, branded ascentraco®.
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Mechanical anomalies are detected through a combination of remote visual inspections, utilizing the Company’s proprietary remote user interface which displays ultra-high definition images of a 360-degree view of each railcar, and by a growing number of the Company’s proprietary artificial intelligence (AI) based algorithms, discussed in more detail undertruevue360™. The inspection portal is typically installed between two rail yards and the inspection takes place while the trains are traveling at speeds of up to 70 mph. Detections are reported to the respective rail yardsinbound train yard, well ahead of the train arrival atentering the yard.
An expanded version for speeds up to 120 mphCurrently, three Class 1 railroads and several transit and international railroads are using our rip® technology with additional sensor technologies forone of those railroads broadly deploying the transit rail is currently under development in anticipation of market entry to the passenger railcar mechanical inspection in early 2020.
The following examples of automated detections are the result of the combination of our image capture technologies designed byduostech, with our AI-based analytics applications designed and maintained bytruevue360.Some of these mechanical defects, if unattended, could cause a derailment. Other examples of our AI-based detection applications include inspections at rail border crossings by CBP agents.
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Samples of Automated Detections
technology across its network.
The Company continues to expand its detection capabilities through the development and integration of additional sensor technologies necessaryto include laser, infrared, thermal, sound and x-ray to process AI-based analytics of targets not yet covered by its core railcar inspection applications.
The industry’s main objective is to replace the manual inspection process taking place inside rail yards with a fully automated process taking place before trains reach the respective rail yards. To that end,points. Currently, the Company togetherhas a high-reliability catalog of over 35 artificial intelligence algorithms which can be integrated into the RIP to enhance mechanical anomalies detections. These detections support railroads in the active maintenance and overall safety of their railcar fleet and networks.
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Markets
We believe the opportunity for our Railcar Inspection Portal business is substantial and continues to be our number one priority. We are currently engaged with its rail partners, is seeking to effect changes to current FAA rules, an effort to which we are committed and believe will be successful and receive wide acceptance by the industry and regulators alike.
A recent article by the Canadian Financial Post, which followed CN’s announcement and demonstrationRIP solution with three of seven Class 1 railroad operators with 13 systems already deployed. Because of our first series of Railcar Inspection Portals deployedearly leadership position, we have been able to accumulate experience and intellectual property that we believe would be time-consuming and expensive for a new competitor to replicate. Furthermore, we believe we have the ability to upgrade and scale our solutions with additional technologies in Winnipeg, CAN, stated that: “CN Rail expects automation to save up to $400 million over next three years”andthe future. We believe that “Artificial intelligence can inspect 120 cars inthe current market for our technologies is substantial. At the same time, we recognize that the technology life cycle is fast and evolving. Potential competitors could move into this sector, and it takes workeris possible that some Class 1 railroads could develop their own solutions that limit our total addressable market.
In late 2022, the Company announced it will pursue a subscription platform for the RIPs. Under this new model, the Company will build, own and operate its RIP product and offer the data access for each portal to check a single car.”
The following proprietary capture and sensor technologies are sold as stand-alone systems as well as sub-systemspotential customers. This expansion of the modular Railcar Inspection Portal system:RIP offering would potentially open up the addressable market to other railroads, railcar owners, and car lessors. This shift increases the pool of potential customers by lowering the entry point for the RIP and would reshape the Company’s working capital needs to invest in the construction of a RIP ahead of customer revenue inflows. The Company continues to explore this expansion on the long-term effects it may have on future cash flows.
Vehicle Undercarriage Examiner(vue)
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Thermal Undercarriage Examiner (t-vue™)
Under a development award from the TTCI (the technology evaluation arm of the American Association of Railroads (“AAR”)), the Company developedAnother market we are pursuing as our second priority is using our Automated Logistics and deployed a prototype thermal undercarriage examiner during the latter part of 2018. The firstInformation Systems solution (alis™). Potential customers include commercial unit was purchased by CNretail logistics and has been installed at the most recentripdeployment site at Trimble, TN. The system uses high-speed thermal imaging technology to inspect the thermal signature of undercarriage components, with the focus on locomotives. Thermal monitoring of component heat signatures while underway will provide indications of the overall operating health of the locomotiveintermodal operators, Class 1 rail intermodal operators that are not possible to observe during static yard inspections.
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Pantograph Inspection System (apis®)
A system designed to inspect pantographs (structure connecting transit locomotives to high voltage power lines) for the detectionmoving large amounts of excessive depletion of carbon liners, which may cause power line ruptures. The Company is in the process of upgrading these technologies to add 3-D image captureautomobiles, and artificial intelligence-based automated detection capabilities. The prototype will be deployed at a transit location in Chicago, IL during the 1st quarter of 2020 and we expect to deploy commercial systems starting in the 3rd quarter of 2020.
Other proprietary technologies we have developed and are currently marketing to various verticals include:
Tunnel and Bridge Security
A suite of intelligent technologies-based homeland security applications for the security of critical tunnels and bridges.
Virtual Security Shield
A suite of intelligent technologies-based homeland security applications for the security of critical areas and buffer zones. This application includes intrusion detection zone, Radio Frequency Identification (RFID) tracking and discriminating “Friend or Foe” modules (Friend or Foe refers to a Radio Frequency - based tagging system that validates individuals authorized to be in a specific area).
Facility Safety and Security
A suite of intelligent technologies-based homeland security applications for the “hardening” or safety and resilience of facilities against natural or man originated threats for the protection of critical facilities (energy, water, chemical facilities). The Company and most of its staff are CFATS (Chemical Facility Anti-Terrorism Standards) certified.
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Remote Bridge Operation
Proprietary system for remote control of draw bridges.
Multi-Layered Enterprise Command and Control Interface(centraco®)
This feature-rich intelligent user interface is at the core of all our systems and enables end users to connect to an unlimited number of operational sites from one central interface, thecentracoEnterprise Command and Control Suite. A multi-layered command and control interface, designed to functionU.S. Government agencies such as the central pointDepartment of Defense and aggregator for information consolidation, connectivity and communications. The platform is browser based and agnostic to the interconnected sub-systems. It provides full LDAP (Lightweight Directory Access Protocol, also known as Active Directory) integration for seamless user credentialing and performs the following major functions:
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Collection: Device management independently collects data from any number of disparate devices or sub-systems.
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Analysis: Correlates and analyzes data, events and alarms to identify real-time situations and their priorities for response measures and end-user’s Concept of Operations (“CONOPS”).
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Verification: The contextual layer represents relevant information in a quick and easily interpreted format which provides operators optimal situational awareness.
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Resolution: Event-specific presentation of user-defined Standard Operating Procedures (“SOPs”), that includes step-by-step instructions on how to resolve situations.
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Reporting: Tracking of data and events for statistical, pattern and/or forensic analysis. Features include mathematical, statistical and comparative data reporting as well as interoperability with 3rd-party databases. Reports are customized to the end user’s data formats and infrastructure.
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Auditing: Device-level drill down that records each operator’s login interaction with the system and tracks manual changes including calculations of operator alertness and reaction time for each event.
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AutoCheck: The system pings each device connected to its wide area network and performs periodic functionality audits. A variable alert feature sends out error messages to an unlimited number of user-definable stakeholders in case any device does not perform to specifications.
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centraco®User Interface
Automated Logistics Information Systems(alis™)
We have completed the development and commercially deployed a proprietary intelligent system to automate security gate operations at nine (9) distribution centers owned and operated by a national retail chain. Leveraging our proprietary multi-layered Enterprise Command and Control Interface technology (centraco), the automation of gatehouse operations provides substantial improvements to the efficiency of distribution center traffic flow, resulting in the potential for significant return on investment to the customer. The Company initiated marketing this new technology to enterprise-level owners of distribution centers throughout the United States and beyond and expects to scale sales of this product line starting in early 2020.
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Automated Gate Operationalisdeployed at nine Kohl’s distribution centers
Intelligent Analytics Suite(praesidium®)
praesidium is an integrated suite of analytics applications which processes and analyzes data streams from a virtually unlimited number of conventional or specialized sensors and/or data points. Our algorithms compare analyzed data against user-defined criteria, rules in real time and automatically reports any exceptions, deviations and/or anomalies. This application suite also includes a broad range of conventional operational system components and sub-systems, including an embedded feature-rich video management engine and a proprietary Alarm Management Service (“AMS”). The AMS provides continuous monitoring of all connected devices, processes, equipment and sub-systems, and automatically communicates tocentraco, the Company’s enterprise information management suite, if and when an issue, event or performance anomaly is detected. The processed information is instantly distributed simultaneously to an unlimited number of users in a visualized and correlated user interface using thecentraco command and control platform.
Our core modules are tailored to specific industry applications and the analytics engine(s) process any type of conventional sensor outputs, also adding “intelligence” to any third-party sensor technology. A key benefit is that the customer may often retain existing systems and we would integrate these into an overall solution.
As listed on the Safetyact.gov website, thepraesidiumvideo analyticstechnology has received “Safety Act” designation from the US Department of Homeland Security. To our knowledge,Today, we currently have 20 production systems in use, but we believe the greenfield opportunity here to be substantial. We have identified over 900 lanes of traffic within nearly 300 facilities as potential business opportunities in the near term.
Currently, we are one of only ten companiesfocused on the North American market, but plan to have received this designation for video related solutions andpraesidiumis the only video analytics application with this designation.
Over the years, our proprietary analytics suite has been expanded to meet a significant number of security objectives and environments, adaptable to a broad range of critical infrastructure target verticals, including but not limited to, commercial transportation (rail, air and seaports), retail, healthcare, utilities, oil, gas, chemical and government.
Markets
Currently, our target market is North America and we expect to soon expand globally through strategic partnerships. Our customers are in the $60 billion North American Rail market,future with interest from Europe, Asia and the $2 billion video analytics market and the $28.6 billion (projected to grow to $53 billion by 2024) enterprise information systems market. The addition of our dedicated AI subsidiary expands our target market by $9.5 billion by 2022(Source: IDC). We originally implemented our products in railcar security inspection with a focus on providing our customers with the capability of performing mission critical security inspections of inbound trains crossing US/Mexican borders from a centralized, remote location. The U.S. Customs and Border Protection (“CBP”) agency uses our systems at critical border rail crossings. Over the last two years we have developed new systems based on this original technology to greatly expand our business by offering mission critical mechanical and safety inspection systems with the goal of improving operational efficiency. Many opportunities exist within this operating environment. Our initial emphasis on freight carriers by providing mechanical inspection portals for the remote inspection of railcars while traveling at high speeds has had a significant positive impact on our revenue. Unlike trucks, barges and airlines; freight railroads operate almost exclusively on infrastructure that they own, build and maintain. According to the AAR article on Freight Railroad Capacity and Investment dated June 2019, from 1980 to 2018 freight railroads alone reinvested approximately $685 billion of their own funds in capital expenditures and maintenance projects related to locomotives, freight cars, tracks, bridges, tunnels and other infrastructure related equipment. The AAR further reports that more than 40 cents out of every revenue dollar is reinvested into a rail network.
According to AAR’s statistical railroad report, there are approximately 1.56 million freight cars and 26,086 locomotives in service operated on approximately 250,000 miles of active rail tracks throughout North America. Rail tracks are predominantly owned by the Class-I railroad industry which include:
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Middle East.
Patents and Trademarks
Since inception, we have developedThe Company holds a number of patents and patented key software components that provide a significant competitive advantage in specialized solutionstrademarks for our target markets. We believe an important factor in this development is that the Company’s intellectual property is “industry agnostic” and can be deployed to many different industries.
technology solutions. We protect our intellectual property rights by relying on federal, state, and common law rights, as well as contractual restrictions. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with all of our employees and contractors, and confidentiality agreements with third parties. We also actively engage in monitoring activities with respect to infringing uses of our intellectual property by third parties.
In addition to these contractual arrangements, we also rely on a combination of trade secret, copyright, trademark, trade dress, domain name and patents to protect our products and other intellectual property. We typically own the copyright to our software code, as well as the brand or title name trademark under which our products are marketed. We pursue the registration of our domain names, trademarks, and service marks in the United States and in locations outside the United States. As discussed in the risk factors section herein, we may face allegations by third parties, including our competitors and non-practicing entities, that we have infringed their trademarks, copyrights, patents and other intellectual property rights.
Patents
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Trademarks
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Specific Areas of Competition
One of our primary commercial goals is to develop innovative technology solutions and target potential “greenfield” market spaces in order to maximize our business footprint and give us the ability to help define the market parameters for the future.
Since inception,Other companies that participate in the visual and optical (laser) based railcar inspection systems market include Wabtec (Beena Vision), KLD Labs, WID, IEM, and Camlin Rail. Some Class 1 railroads have stated that they are developing “in-house” solutions. We believe that Duos has a significant competitive advantage in that we have multiple years of deployment experience, have access to millions of images where our RIP has performed scans with AI analysis and have in-house industry expertise to train our systems and make identification of common problems more automated.
Our Automated Logistics Information System (ALIS) also represents an opportunity to expand into a mature market that we believe has a significant technology gap. While most facilities, such as distribution centers, that process commercial trucks in and out have sophisticated software management applications for logistics control, they have most often not implemented a strategyan advanced gatehouse automation solution. Historically, this category was referred to as “Automated Gate Systems” or AGS. The purpose of diversificationAGS technology is to mitigate the potential vulnerabilities experienced by companies with a narrow business scope. We believe many public companies in the micro-streamline entry into and nano-cap ecosystem suffer major challenges dueexit out of facilities. The marketplace for this was mostly seaports and intermodal transfer facilities and was relatively expensive technology to their lack of diversification.deploy.
During the past several years, we have made considerable investments in, and have successfully developed, our two core technology platforms, praesidium® and centraco®.
praesidium is an open architecture, modular engine that manages an unlimited number of “back end” process and analytics frameworks. In addition to driving our own proprietary sensor and data analytics, this core technology also allows for the integration of an unlimited number of third-party technologies, systems and sub-systems. Third-party industry or task-specific processes are modularized and embedded into the praesidium® engine, thereby substantially expanding the functionality of such third-party system. While we believe most companies tailor their products and services to a specific industry, this core platform is “industry agnostic” which we believe will allow us to penetrate multiple industries. Our past and current concentration on specific target markets such as rail, retail, utilities, chemical, gas, oil and government has enabled us to test the markets with our innovative technology solutions.
We believe we are the first to develop the concept of an intelligent rail inspection portal used for comprehensive inspection of security threats and at this time we are unaware of any competitor in this sector. We believe our potential competitors in this area are currently focusing chiefly on the inspection of wheels, bearings, breaks and track alignment. We expect that any competitor interested in expanding their inspection technologies to the ones we have developed over the past four years would require at least 2-3 years of research and development before being able to produce similar systems for real time testing. We believe the testing cycle will take at least an additional year for potential competition. Similarly, the CBP (US Customs and Border Protection) and Union Pacific Railroad are using our systems as their only security inspection infrastructure at the US border.
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Our Growth Strategy
Our strategyVision
The Company designs, develops, deploys and operates intelligent technology solutions for inspecting and evaluating moving objects. Its technology application focus is within the rail and intermodal markets which offers imaging-based automatic inspection and analysis for process control for industry with potential expansion into other markets.
Objectives
Organic Growthduostech
Our organic growth strategy is to increasecontinue our market share through the expansion of our business development teamfocus and our research and development talent pool, which will enable us to significantly expand our current solution offerings with additional features, and the development of new and enhanced technology applications. We plan to augment such growth with strategic relationships bothprioritization in the business developmentrail, logistics and research development arenas, reducing time tointermodal market with additional industry applications, expansion of existing offerings to meet customer requirements, as well as, potential geographical expansion into international territories. The launch of our AI software systems through ourtruevue360 subsidiary is another building block ofspace. In this strategy.
Our immediately “Accessible Market” consists of a pipeline of identified targets for both,duostech’ssuite of intelligent technologies andtruevue360’s AIapplications. Based on our current staffing, planned expansion of our resource pool for 2020, our currently developed and available suite of products and solutions, and our prospective customer database, we believe our immediate target market forduostech amounts to over $239 million.
Organic Growthtruevue360™
truevue360’s immediate growth will mainly be driven by its already established library of rail applications and existing rail customers. Each ofregard, the most recent orders of rail inspection portals included an AI component of between 20 and 30 algorithms per customer per site, with aCompany has made significant number of additional applications under development. It is expected that future orders will continuechanges in the senior management team to include a significant componentnew Chief Executive Officer, who joined the Company in 2020 and has years of algorithms i.e. AI applications.
Our AI applications are sold as a SaaS modelexperience successfully leading start-up and are priced per application/per site.
turn-around companies. In addition, a key account executive from one of duos’ competitors has joined the executive team during late 2022 as the Senior Vice President of Sales & Marketing to offering our AI modelling to our rail customers, we plan to offer services to our commercial /industrial customerssupport the continued revenue growth of the business and brings with him over 20 years of sales experience focused in the following verticals:
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Logistics companies
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Oil & Gas
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Commercial security
truevue360™is currently developingrail market. In 2021, the Company also hired a stand-alone marketing /business development initiativenew Chief Technology Officer bringing 25 years of experience in designing and delivering on value driven technologies. Our new CTO has already led the team through instrumental changes to pursue an expanded number of target markets. Additional verticalsits approach to be pursued as this unit expands include:
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Automotive
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Agriculture
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Banking
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Industrial
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DOD/Government
Strategic Acquisitions
Planned acquisition targets include sector specific technology companiessoftware and artificial intelligence development. The team also saw a change in CFO in late 2022 who brings significant experience in growth for asset-intensive businesses which aligns with the objectivesubscription format the Company will expand into.
The new leadership team’s focus is to improve operational and technical execution which will in turn enable the commercial side of augmenting ourthe business to expand RIP and ALIS delivery into existing customers. Even though supply chain issues are expected to continue through 2023, the Company’s primary customers have indicated readiness to order more equipment and services based upon the Company’s current capabilities with feature-rich (third-party) solutions. The acquisition metric includes, but is not limited to, weighing time, effortperformance and approximate cost to develop certain technologies in-house, versus acquiring or merging with one or more entitiesthe new subscription offerings expands the universe of potential customers.
Additionally, the CEO has directed that we believe have a proven record of successfully developing a technology sub-component. Additional criteria include an extended national footprint of available manpower (predominantly technicalthe Company make continual engineering and software engineering),upgrades to the RIP to meet anticipated Federal Railroad Association (FRA) and evaluating the potential acquisition target’s customer base, stageAssociation of technology and merger or acquisition cost as compared to market conditions.
American Railroad (AAR) standards.
Manufacturing and Assembly
The Company streamlines its manufacturing by outsourcing component manufacturing to qualified fabricators.designs and develops technology solutions using a combination of in-house fabrication, commercial off-the-shelf technology, and outsourced manufacturing. On-site installations are performed using a combination of in-house project managers/managers and engineers and specialistusing third-party sub-contractors as necessary. We maintainneeded. Throughout the process of design, develop, deploy and operate, the Company maintains responsibility for the system implementation, servicing and tech support for our solutions.all aspects. Our internal manufacturing operations consist primarily of materials procurement, assembly, testing and quality control ofby our engineers. If not manufactured internally, we generally rely on third partyuse third-party manufacturing partners to produce our hardware related components and hardware products and we may involve our internal manufacturing operations in themost often complete final assembly, testing and quality control processes for these components and products. We distribute most of our hardware products either from our facilities or partner facilities. Our manufacturing processes are based on standardization of components across product types, centralization of assembly and distribution centers, and a “build-to-order” methodology in which products generally are built only after customers have placed firm orders. For most of our hardware products, we have existing alternate sources of supply.
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For 2023 and possibly beyond, we expect to face significant challenges with macro-economic impacts, specifically inflation and supply or such sourceschain disruption. Although these started to be identified in late 2021, we believe they continue to manifest themselves in ways that could challenge our business growth in the future. Specifically, the ability to source key components and certain implementation services will dictate just how quickly the Company can meet desired installation deadlines. In the industries in which we operate, the time from concept to contract can be substantial. Although we are readily available.
now adapting to these challenges, previous bids that have been submitted could be challenging to execute within the financial framework and execution times originally envisaged. We continue to have dialogue with our customers regarding potential price increases and implementation delays, but we may suffer some economic impacts as a result of this. Revenue recognition could be delayed as a result of these factors and profitability could be impacted due to higher costs for materials and other services. The Company will continue to monitor the situation and update shareholders as the situation unfolds.
Research and Development
The Company’s R&D and software development teams design and develop all systems and software applications with a combination of full-time in-house software engineers and full-timeoutside contractors. Internal development allows us to maintain technical control over the design and development of our products. We have several United States and foreign patents and patent-pending applications that relate to various aspects of our products and technology. Rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology, and changing customer requirements characterize the markets in which we compete. We plan to continue to dedicate significant resources to research and development efforts, including software development, to maintain and improve our current product and services offerings. We continue to increase our expenditures on R&D staffing in anticipation
Government Regulations
The Company has worked with various agencies of the launchfederal government for more than 10 years including the Department of Homeland Security (“DHS”). When our AI software systems throughtruevue360.solutions have been deployed into these agencies, they meet specific requirements for certification, safety and security that are stipulated in requirements and contract documents. The Company is currently competing for other government-related work and strictly follows the rules and regulations outlined in the Federal Acquisition Regulations.
The Company’s primary customers are all governed by regulations related to the safe and effective transportation of goods and passengers, primarily by rail, but in future scenarios by air, road and sea. While changes in the regulatory environment could impact the Company in future years, we believe any changes will be overall positive for the Company. We continually review potential changes in the regulatory environment and maintain contact with key personnel at certain agencies including the Federal Railroad Administration (FRA), Transportation Safety Agency (TSA) as well as the DHS previously mentioned. We expect to develop similar relationships with governmental agencies in target markets both in the US and internationally. At this time, we dobelieve our offerings are complementary with the current and evolving standards and that we will adapt to any new regulations as they are promulgated.
Employees
We have a current staff of 75 employees of which 67 are full-time, the majority of which work in the Jacksonville area, none of which are subject to a collective bargaining agreement. We have not ownexperienced any real property. Thework stoppages and we consider our relationship with our employees to be good.
Properties
On July 26, 2021, as amended on November 24, 2021, the Company has twoentered into a new operating lease agreementsagreement for office and warehouse combination space of approximately 12,70840,000 square feet located in Jacksonville, Florida. On March 8, 2016,with the current lease was amended commencing on MayNovember 1, 2016 and ending on October 31, 2021. Rental expense for the months of March 2016 through May 2016 were $0, followed by monthly rent of $14,816 (including operating cost and taxes) effective the month of June 2016. 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 space on June 1, 20182021 and ending May 31, 2021.2032. This additional space allows for resource growth and engineering efforts for operations before deploying to the field. The rent for the first 12 months of the term was calculated as rentable base space on 30,000 square feet. The rent is subject to an annual escalation of 2.5%, beginning December 1, 2022. The Company made a security deposit payment in the amount of $600,000 on July 26, 2021. The Company has applied the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”) in the fourth quarter of 2021.
The Company now has a total of office and warehouse space of 40,000 square feet.
Rental expense for the office lease during 20182022 and 20172021 was $209,389$782,591 and $174,878,$414,085, respectively.
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On July 12, 2018From time to time, we may be involved in litigation relating to claims arising out of our operations in the Company filed an action against onenormal course of the Company’s vendors (the “Vendor”). The Vendor suppliedbusiness. We are currently not involved in any litigation that we believe could have a component that was subsequently determined by the Company’s engineering staff to not meet the stated criteria for implementation and did not meet the Vendor’s own stated technical specifications. Attempts to resolve the situation with the Vendor directly were not successful. On January 15, 2019, the Company elected to not pursue the case further due to costmaterial adverse effect on our financial condition or results of legal proceedings versus the likely recovery. Both companies have dismissed the claims against each other and the matter is now closed.
Other than the matter described above, to the best of management knowledge, thereoperations. There is no other action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company,Company, our common stock, any of our subsidiaries or of our companiesCompany’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Employees
We have a current staff of 75 employees of which 54 are full-time , the majority of which work in the Jacksonville area, none of which are subject to a collective bargaining agreement. We also have 11 contract staff based in Europe who are primarily focused on our AI software development. We have not experienced any work stoppages and we consider our relationship with our employees to be good.
Our Corporate History
We were incorporated on May 31, 1994 in the State of Florida as Information Systems Associates, Inc. Initially, our business operations consisted of consulting services for asset management of large corporate data centers and development and licensing of Information Technology (IT) asset management software. On April 1, 2015, we completed a reverse triangular merger, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) among Duos Technologies, Inc., a Florida corporation (“DTI”), the Company, and Duos Acquisition Corporation, a Florida corporation and wholly owned subsidiary of the Company (“Merger Sub”). Under the terms of the Merger Agreement, the Merger Sub merged with and into DTI, whereby DTI remained as the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”). In connection with the Merger, TrueVue360, a wholly owned subsidiary formed in July 2014 by Information Systems Associates also became a wholly owned subsidiary of the Company. Further, in connection with the Merger, on July 10, 2015, the Company effected a name change to Duos Technologies Group, Inc. Since January 2019, Truevue360, Inc. has been focused on the development and marketing of Artificial Intelligence applications.
DIRECTORS, AND EXECUTIVE OFFICERS AND KEY EMPLOYEES
Directors, Executive Officers and Corporate Governance
AsThe following is a list of the date of this prospectus, our directors and executive officers are as follows:
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Blair M. Fonda, Kenneth Ehrman and Ned Mavrommatis each serves as a member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Each director serves for a one year term,directors. All directors serve one-year terms or until his successor istheir successors are duly electedqualified and qualifiedelected or his earlier resignation, removal or disqualification. Mr. Ehrman serves as the ChairmanThe officers of the Compensation Committee and Nominating and Corporate Governance Committee. Messrs. Fonda and Mavrommatis serve as Co-ChairsCompany are elected by our Board of the Audit Committee.Directors.
| Name | Age | Position | ||
| Charles P. Ferry | 57 | Chief Executive Officer, Director | ||
| Andrew W. Murphy | 40 | Chief Financial Officer | ||
| Kenneth Ehrman(1) | 52 | Chairman | ||
| Ned Mavrommatis(2) | 52 | Director | ||
| James Craig Nixon (3) | 63 | Director |
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| (1) | Chairman of our Board of Directors, member of the Compensation Committee and Audit Committee, Chairman of the Corporate Governance and Nominating Committee. |
| (2) | Chairman of the Audit Committee, member of the Compensation Committee and Corporate Governance and Nominating Committee. |
| (3) | Chairman of the Compensation Committee, member of the Audit Committee and the Corporate Governance and Nominating Committee. |
The business experience of each of our directors and executive officers for the following:
Gianni B. Arcaini, Age 71, Chairman,Charles P. Ferry, Chief Executive Officer, and PresidentDirector
Mr. Arcaini has been the Chairman of the Board,Ferry was appointed Chief Executive Officer, effective September 1, 2020. Mr. Ferry was then elected as a member of our Board of Directors on November 19, 2020 by our shareholders. Mr. Ferry combines over three years of experience in the energy industry and seven years in the defense contracting industry following 26 years of active-duty service in the United States Army. Previously, Mr. Ferry had been involved in two companies in the defense industry holding positions including Director, Business Development and Operations, Vice President since April 1, 2015,of Operations, and heldGeneral Manager. From 2018 through 2020, Mr. Ferry was the same positionsChief Executive Officer for APR Energy, a global fast-track power company. Prior to this, Mr. Ferry was the President and Chief Operating Officer of APR Energy from 2016 to 2018. From 2014 to 2016, Mr. Ferry was the General Manager for ARMA Global Corporation, a wholly owned subsidiary of General Dynamics, a defense contracting company that delivered Information Technology engineering, services, and logistics. Mr. Ferry was the Vice President of ARMA Global Corporation from 2010 to 2014 before being acquired by General Dynamics. From 2009 to 2010, Mr. Ferry was the Director, Business Development and Operations at Lockheed-Martin. His leadership assignments in the U.S. Army include: Director, NORAD-NORTHCOM Current Operations, Infantry Battalion Task Force Commander, Joint Special Operations Task Force Commander, Regimental and Battalion Operations Officer, and Airborne Rifle Company Commander. His military leadership assignments include 48 months of combat in Somalia, Afghanistan and Iraq.
Mr. Ferry has an undergraduate degree from Brigham Young University.
Our Board of Directors believes Mr. Ferry brings significant commercial and operational experience to the Company and has shown demonstrable leadership skills as both a Military officer with our subsidiary,a distinguished service record and in leading companies to profitable growth.
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Andrew W. Murphy, Chief Financial Officer
Mr. Murphy has over 16 years of progressive business experience in accounting and finance including nearly five years of public company experience for a London Stock Exchange-based company. He joined Duos Technologies, Inc. since 2002.in 2020 where he served on the Commercial team to support new project bids while also building out the Finance function. Prior to joining Duos, from 2011 to 2020 Mr. Murphy held progressive senior Finance roles within APR Energy, a global fast-track power and asset management company formerly listed on the London Stock Exchange (LSE). In these roles Mr. Murphy oversaw the pricing & risk management efforts for more than $800 million in new business and asset transactions across the globe. Additionally, he was also responsible for managing the FP&A function as well as supporting M&A activity and the investor relations function during APR Energy’s time on the LSE. Prior to his involvementtime with Environmental Capital Holdings, Inc.,APR, Mr. Murphy served in corporate accounting roles within a predecessor of the Company, Mr. Arcaini spent over 10 yearsFortune 500 company as well as time working in various executive capacitiespublic accounting with Robex International, a joint venture of Royal Volker Stevin, Royal Bijenkorffocus on tax and the Westland Utrecht Bank, ultimately acquiring the Robex International in a management buyout after having expanded its operations into the United States.business services.
Mr. Arcaini completed his early education at a Jesuit Boarding school in Austria and Germany, andMurphy graduated from a state business school in Frankfurt, Germany. He is fluent in German, Dutch, Italian, Spanish and English.
The Board believes Mr. Arcaini has significant experience in the Company’s industry, a deep knowledge of our business and customers and contributes a perspective based on his many years of involvement with our company which will be of great value to the Company as it grows. Mr. Arcaini is also the visionary leader of the Company and is personally involved in creating the initial design of our technologies prior to implementation by our research and development teams.
Adrian G. Goldfarb, Age 62, Chief Financial Officer, Executive Vice President and Director
Mr. Goldfarb has served as a Director since April 2010. Effective July 1, 2012, he was appointed as President and Chief Financial Officer of Information Systems Associates, Inc., which merged with Duos Technologies, Inc in April 2015 upon which he agreed to continue serving the merged company, Duos Technologies Group, Inc., as Chief Financial Officer and Director. Mr. Goldfarb also currently serves as a non-Executive Chairman of Gelstat Corporation, a public company engaged in the development, manufacturing and marketing of homeopathic and natural supplements. Mr. Goldfarb is a 35-year technology industry veteran including more than 25 years in information technology. Mr. Goldfarb graduatedJacksonville University “cum laude” with a business degree specializing in Finance from Rutgers University, Newark, NJ.Accounting and later received his Master’s degree in Business Administration with a focus in Finance.
The Board believes Mr. Goldfarb’s significant experience in financial stewardship of small public companies will be of great value to the Company as it grows.
Connie L. Weeks, Age 61, Chief Financial Officer, Executive Vice President
Ms. Weeks has over 35 years of accounting experience and is responsible for all aspects of financial reporting, internal controls, and cash management. She has been a key member of the Company for over 30 years (including time spent at Environmental Capital Holdings, Inc., a predecessor of the Company) and has served as Chief Accounting Officer, Executive Vice President since April 1, 2018.
Blair M. Fonda, Age 53, Director
Mr. Fonda was appointed as a Director on May 3, 2017 and serves as Co-Chairman of the Audit Committee and a member of the Compensation Committee and Nominating and Governance Committee. Since 2013, Mr. Fonda has served as the Chief Financial Officer of Emergent Financial Partners (“EFP”). EFP is an accounting and consulting services firm which offers financial consulting services to businesses and organizations throughout the United States and the Caribbean Islands. From 2013 to 2016, Mr. Fonda was contracted through EFP to serve as the outside Chief Financial Officer of Mountainstar Capital Engagement, a private equity and commercial real estate company. From 2007 to 2013, Mr. Fonda served as the Vice President and Controller of the Hospitality Division of Gate Petroleum, an owner and operator of convenience stores, resorts, construction and real estate operations throughout the United States. Mr. Fonda has previously served as Controller for Enterprise Rent-a-Car. Mr. Fonda is a Certified Public Accountant (CPA).
The Board believes that Mr. Fonda’s education and background qualify him as a financial expert. He has extensive and directly applicable accounting experience qualifying him to serve as Chairman of the Audit Committee.
Kenneth Ehrman, Age 50, DirectorChairman
Mr. Kenneth Ehrman joined the Board on January 29,31, 2019. He was elected as Chairman of the Board in November 2020 and is a member of the Audit, and Compensation Committees. As an innovator in intelligent machine to machine (MtoM wireless technology) and industrial applications of the internet of things (IoT), Mr. Kenneth Ehrman has coauthored more than 40 patents in wireless communications, mobile data, asset tracking, power management cargo and impact sensing as well as rental car management. Mr. Ehrman is the founder of Halo Collar, which invented a technology used for the tracking of canines to replace GPS-based wireless fences. Halo Collar has recorded more than 20,000-unit sales since its inception in July 2020. He also currently serves as an independent consultant to several high-technology companies in supply chain/logistics and transportation. Mr. Ehrman advises technology companies focused on solutions for these industries and joins the Company with a strong background in technology. As an innovator in intelligent machine-to-machine (“M2M”) wireless technology and industrial applications of the Internet of Things (“IoT”),industries.
Prior to joining our Board, Mr. Ehrman has been awarded more than 20 patents in wireless communications, mobile data, asset tracking, power management, cargo and impact sensing, and connected car technology. Mr. Ehrman previously served as Chief Executive Officer of I.D. Systems, Inc. (“IDS”), a company he founded in 1993 as a Stanford University engineering student, pioneeringstudent. During his tenure at I.D. Systems, he pioneered the commercial use of radio frequency identification (“RFID”) technology for industrial asset management. Under Mr. Ehrman’s leadership, IDS began tradingmanagement and took the company public on the NASDAQNasdaq in 1999 and1999. Under his leadership, I.D. Systems was named one of North America’s fastest growing technology companies by Deloitte in 2005, 2006, and 2012. During his tenure at IDS, Mr. Ehrman received multiple awards during his time at I.D. Systems, including Deloitte Entrepreneur of the Year and Ground Support Worldwide Engineer/Innovator Leader. He
Mr. Ehrman is also served on the BoardChairman of Financial Services, Inc. from 2012-2016 before it was successfully sold tothe Corporate Governance & Nominating Committee as well as a large financial software company.
member of the Audit and Compensation Committees. The Board believes that Mr. Ehrmans’ extensive background workingEhrman’s management experience, engineering expertise and long history and familiarity with industries the Company currently operates in, technology makesmake him ideally qualified to help lead the Company towards continued growth.
Ned Mavrommatis, Age 49, Director
Mr. Ned Mavrommatis joined the Board on August 13, 2019. Mr. Mavrommatis has served as the Chief Financial Officer of IDHalo Collar since May 2022. The Halo Collar is the newest smart safety system for dogs. Co-founded by Cesar Millan, this patented system utilizes proprietary technology & dog psychology to provide a wireless smart fence, smart training, GPS tracker and activity tracker combined into one easy-to-use smart collar. Prior to Halo Collar Mr. Mavrommatis served as the Chief Financial Officer of PowerFleet, Inc. (NASDAQ: PWFL) from October 2019 to May 2022 and I.D Systems, Inc. (“ID Systems”) since(NASDAQ: IDSY) from August 1999 as ID Systems’ Treasurer since June 2001, and as ID Systems’ Corporate Secretary since November 2003.to October 2019. Mr. Mavrommatis is also the Managing Director of ID Systems’ wholly-owned subsidiaries, I.D. Systems GmbH and I.D. Systems (UK) Ltd. Prior to joining ID Systems, Mr. Mavrommatis was a Senior Manager at the accounting firm of Eisner LLP (currently known as EisnerAmper LLP).started his career in public accounting.
Mr. Mavrommatis received a Master of Business Administration in finance from New York University’s Leonard Stern School of Business and a Bachelor of Business Administration in accounting from Bernard M. Baruch College, The City University of New York. Mr. Mavrommatis is also a Certified Public Accountant.
The
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James Craig Nixon, Director
Mr. Nixon joined our Board of Directors on July 15, 2021 and serves as Chairman of the Compensation Committee and a member of the Corporate Governance and Nominating Committees. Brigadier General Craig Nixon (Ret.) is a combat decorated, special operations soldier. Over a 29-year Army career, Brigadier General Nixon served in a wide range of assignments including seven tours in special operations units including assignments as the Commander, 75th Ranger Regiment and Director of Operations for Joint Special Operations Command (JSOC) and US Special Operations Command. He is a combat decorated soldier whose awards include the Distinguished Service Medal, Silver Star, three Bronze Stars, and the Purple Heart.
After retiring from the Army in 2011, he was an original Partner at McChrystal Group, helped create a highly successful leadership consulting company and led their engagements with a number of technology focused Fortune 500 companies. In 2013 he became the Chief Executive Officer of ACADEMI and over three years through a combination of organic growth and acquisitions built Constellis Group, a global leader in security and training with over 10,000 employees in 30 countries. During his tenure Constellis tripled in revenue to over $1 billion annually and saw a fivefold increase in EBITDA. Mr. Nixon is founder and Chief Executive Officer of Nixon Six Solutions from January 2016 until present, a consulting firm focusing on growth and market entry strategy, leadership, and mergers & acquisitions. He is on a number of government and technology boards and is also a frequent speaker on geopolitics, leadership, and veterans’ challenges.
Brigadier General Nixon is a graduate of Auburn University and has earned master’s degrees from the Command and Staff College and the Air War College. He is a decorated retired General Officer, successful entrepreneur, and passionate supporter of veteran non-profit organizations. He was selected for the Ranger Hall of Fame and Auburn University at Montgomery Top Fifty Alumni in 2017.
Our Board of Directors believes that Mr. Mavrommatis’Nixon’s extensive military and management experience accounting expertise and long history and familiarity with technology industries the Company currently operates in, makesmake him ideally qualifiedsuited to help lead the Company towards continued growth.excellence in operations and strategic planning.
Key Employees
Jeff Necciai, Chief Technology Officer, Operating Subsidiary Duos Technologies, Inc.
Mr. Necciai brings over 25 years of experience in designing, developing, and delivering value-driven technology solutions across a wide range of industries to Duos. Prior to joining Duos in January 2021, Jeff served as the Chief Technology Officer of NASCENT Technology, where he cultivated and led high-performing cross-functional product teams to develop and deliver comprehensive gate automation solutions to rail and maritime terminal customers. Jeff was responsible for the solution design and software architecture for many of the company's innovations, including an advanced OCR and imaging solution, proprietary point-to-point VoIP technology, an automated work queue management system, a line of integrated "smart" outdoor IP-based callboxes, and a comprehensive human-assisted security and surveillance platform. In 2001, Jeff co-founded and served as Lead Systems Architect for Solution Dynamics, which developed remote digital video surveillance products for institutional customers. Jeff is listed on several technology-based patents and has contributed articles for publications such as American Shipper, World Cargo News, and the Journal of Commerce. Jeff holds a Bachelor of Science Degree in Business Administration from Clarion University of Pennsylvania.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s executive officers and directors, and persons who own more than 10% of the Company’s common stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC.
Based solely on our review of certain reports filed with the SEC pursuant to Section 16(a) of the Exchange Act, the reports required to be filed with respect to transactions in our Common Stock during the fiscal year ended December 31, 2022, were filed timely, except for one Form 4 for each of the directors reflecting issuance of director compensation shares were not filed timely.
Code of Ethics
The Company has adopted a Code of Ethics for adherence by its Chief Executive Officer and Chief Financial Officer, to ensure honest and ethical conduct, full, fair and proper disclosure of financial information in the Company’s periodic reports filed pursuant to the Securities Exchange Act of 1934, and compliance with applicable laws, rules, and regulations. Any person may obtain a copy of our Code of Ethics by mailing a request to the Company at 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 33256.
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Board Composition and Director Independence
AsOur Board of the date of this prospectus, our board of directorsDirectors currently consists of fivefour members: (1) Mr. Gianni B. Arcaini, (2) Mr. Blair M. Fonda, (3) Mr. Kenneth Ehrman, (4) Mr. Adrian G. Goldfarb,Charles P. Ferry, Mr. Ned Mavrommatis, and (5) Ned Mavrommatis.Mr. James Craig Nixon. The directors will serve until our next annual meeting and until their successors are duly elected and qualified. The Company defines “independent” as that term is defined in Nasdaq Listing Rule 5605(a)(2) of the NASDAQ listing standards..
In making the determination of whether a member of the board is independent, our board considers, among other things, transactions and relationships between each director and his immediate family and the Company, including those reported under the caption “Related Party Transactions”. The purpose of this review is to determine whether any such relationships or transactions are material and, therefore, inconsistent with a determination that the directors are independent. On the basis ofBased on such review and its understanding of such relationships and transactions, our board affirmatively determined that Blair M. Fonda, KennethMr. Ehrman, Mr. Mavrommatis and Ned MavrommatisMr. Nixon are all qualified as independent and do notnone of them have any material relationshipsrelationship with us that might interfere with theirhis exercise of independent judgment.
Board Committees
Our boardBoard of directorsDirectors has established an audit committee, a compensation committee and a nominatingcorporate governance and corporate governancenominating committee. Each committee has its own charter, which is available on our website at www.duostech.com. Each of the board committees has the composition and responsibilities described below.
Members will serve on these committees until their resignation or until otherwise determined by our Board of Directors.
The members of each committee are KennethMr. Mavrommatis, Mr. Nixon and Mr. Ehrman, Ned Mavrommatis and Blair M. Fonda, all of whom are independent directors within the meaning of the Nasdaq Stock Market rules.
Nasdaq’s listing rules, are the Chairman of the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee, respectively. Each of the independent members of our Board of Directors also serves on one or more committees as previously disclosed.
Audit Committee
The Audit Committee oversees our accounting and financial reporting processes and overseeoversees the audit of our financial statements and the effectiveness of our internal control over financial reporting. The specific functions of this Committee include, but are not limited to:
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Our board has determined that both Mr. Fonda and Mr. Mavrommatis areis currently qualified as an “audit committee financial expert”, as such term is defined in Item 407(d)(5) of Regulation S-K. Mr. Fonda and Mr. Mavrommatis serveserves as Co-Chairs onthe Chairman of the Audit Committee.
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Compensation Committee
The Committee’s compensation-related responsibilities include, but are not limited to:
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Mr. EhrmanNixon serves as the Chairman of the Compensation Committee.
Nominating and Corporate Governance and Nominating Committee
The responsibilities of the Corporate Governance and Nominating Committee include:
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Mr. Kenneth EhrmanErhman serves as the Chairman of Nominating andthe Corporate Governance and Nominating Committee.
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Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
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The following table sets forth the total compensation received for services rendered in all capacities to our Company for the last two fiscal years, which was awarded to, earned by, or paid to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer (the “Named Executive Officers”).
Name and Principal Position |
| Year |
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| Salary |
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| Bonus |
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| Stock |
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| Options ($) |
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| Other Comp. |
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| Total |
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Gianni B. Arcaini, |
| 2019 |
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| 249,260 |
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| 143,411 | (1) |
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| — |
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| — |
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| 25,382 | (3) |
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| 418,053 |
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Chairman of the Board, Chief Executive Officer, President, Director (PEO) |
| 2018 |
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| 249,260 |
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| 183,386 | (1) |
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| — |
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| 144,384 | (2) |
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| 27,116 | (4) |
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| 604,146 |
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Adrian G. Goldfarb, |
| 2019 |
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| 180,250 |
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| 7,500 | (6) |
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| 187,750 |
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Chief Financial Officer, EVP, Director (PFO) |
| 2018 |
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| 175,000 |
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| 5,000 |
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| — |
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| 54,272 | (5) |
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| 5,625 | (6) |
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| 240,397 |
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Connie L. Weeks, |
| 2019 |
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| 150,000 |
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| — |
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| 150,000 |
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Chief Accounting Officer, EVP |
| 2018 |
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| 148,338 |
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| 14,451 |
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| 54,272 | (7) |
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| 217,061 |
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| Name and Principal Position | Year | Salary ($) | Bonus ($) | Options ($) | Other Comp. | Total ($) | |||||||||||||||||
| Charles P. Ferry, | 2022 | 250,000 | 150,000 | (1) | 235,144 | (2) | — | 635,144 | |||||||||||||||
| Chief Executive Officer (CEO) | 2021 | 250,000 | — | — | — | 250,000 | |||||||||||||||||
| Andrew W. Murphy, | 2022 | 206,500 | 60,000 | (4) | 188,115 | (5) | — | 454,615 | |||||||||||||||
| Chief Financial Officer (CFO)(3) | 2021 | 169,497 | 129 | — | — | 169,626 | |||||||||||||||||
| Adrian G. Goldfarb, | 2022 | 214,385 | 50,000 | (7) | 176,358 | (8) | — | 440,743 | |||||||||||||||
| Former Chief Financial Officer(6), Former Director | 2021 | 205,250 | — | — | 2,500 | (9) | 207,750 | ||||||||||||||||
| Connie L. Weeks, | 2022 | 167,030 | 20,000 | (11) | 94,058 | (12) | — | 281,088 | |||||||||||||||
| Former Chief Accounting Officer(10) | 2021 | 150,000 | — | — | — | 150,000 | |||||||||||||||||
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(1) | Represents |
(2) |
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| For the Years Ended | ||
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| 2019 |
| 2018 |
Risk free interest rate |
| — |
| 2.59% |
Expected term in years |
| — |
| 2.5 – 2.76 |
Dividend yield |
| — |
| — |
Volatility of common stock |
| — |
| 197.13% - 207.27% |
Estimated annual forfeitures |
| — |
| — |
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.
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| Represents $60,000 objectives bonus. |
| (5) | Option compensation is the fair market value of |
(6) |
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(7) | Represents $50,000 objectives bonus. |
| (8) | Option compensation is the fair market value of |
| (9) | Comprised of $2,500 annual car allowance in 2021. |
| (10) | On December 31, 2022 Ms. Weeks retired from the Company. |
| (11) | Represents bonus award for long service to the Company. |
| (12) | Option compensation is the fair market value of 40,000 share, five-year options with a strike price of $6.41 and initial three-year vesting granted to Ms. Weeks |
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Risk free interest rate | 0.97% | — | ||||||
| Expected term in years | 3.50 | — | ||||||
| Dividend yield | — | — | ||||||
| Volatility of common stock | 72% | — | ||||||
| Estimated annual forfeitures | — | — | ||||||
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Outstanding Equity Awards at December 31, 2019 2022
| Name | Number of shares underlying unexercised options exercisable | Equity Incentive Plan Awards; Number of shares underlying unexercised unearned options | Option exercise price | Option Expiration date | Number of shares or units of stock that have not vested | Market value of shares or units of stock that have not vested $ | Equity Incentive Plan Awards: Number of unearned shares, units or other rights that have not vested | Equity Incentive Plan Awards: Market or payout value of unearned shares, units or other rights that have not vested $ | ||||||||||||||||||||||||
| Charles P. Ferry | — | 100,000 | $ | 6.41 | 12/31/2026 | — | — | 100,000 | $0 | |||||||||||||||||||||||
| Charles P. Ferry | 100,000 | — | $ | 4.18 | 08/31/2025 | — | — | — | — | |||||||||||||||||||||||
| Andrew W. Murphy | — | 80,000 | $ | 6.41 | 12/31/2026 | — | — | 80,000 | $0 | |||||||||||||||||||||||
| Andrew W. Murphy | 13,333 | 6,667 | $ | 4.35 | 11/22/2025 | — | — | 6,667 | $0 | |||||||||||||||||||||||
| Adrian G. Goldfarb | — | 75,000 | $ | 6.41 | 12/31/2026 | — | — | 75,000 | $0 | |||||||||||||||||||||||
| Adrian G. Goldfarb | 18,929 | — | $ | 6.00 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||
| Adrian G. Goldfarb | 18,929 | — | $ | 4.74 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||
| Connie L. Weeks | 40,000 | — | $ | 6.41 | 12/31/2026 | — | — | — | — | |||||||||||||||||||||||
| Connie L. Weeks | 18,929 | — | $ | 6.00 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||
| Connie L. Weeks | 18,929 | — | $ | 4.74 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||
There were no outstanding equity awards to any of our Named Executive Officers as of December 31, 2019.Employment Agreements
2016 Equity Incentive PlanCharles P. Ferry
On March 11, 2016,September 1, 2020, the Board adopted, subjectCompany entered into an employment agreement (the “Ferry Employment Agreement”) with Charles P. Ferry pursuant to which Mr. Ferry serves as Chief Executive Officer of the Company. The Ferry Employment Agreement is for a term of one year (the “Initial Term”) and shall be automatically extended for additional terms of successive one-year periods (the “Additional Term”) unless the Company or Mr. Ferry gives at least 60 days written notice of non-renewal prior to the receiptexpiration of stockholder approval which wasthe Initial Term or an Additional Term. During 2021 and 2022 Mr. Ferry received a base salary at an annual rate of $250,000. Mr. Ferry also received a bonus in the amount of $150,000 during 2022 for achievement of certain objectives in 2022 in accordance with criteria determined by our Board of Directors and based on April 21, 2016, the 2016 Equity Incentive Plan (the “2016 Plan”) providingreview and recommendation of the Compensation Committee. Mr. Ferry continues to be eligible for the issuance ofan annual bonus in an amount up to 16,327 $150,000 in accordance with criteria, including but not limited to, revenue targets, profitability and other key performance indicators. Additionally, Mr. Ferry initially received 100,000 non-qualified stock options that are exercisable into 100,000 shares of our common stock.stock at an exercise price of $4.18, of which 100% were vested as of September 1, 2022. He received a further grant in January 2022 in the amount of 100,000 non-qualified options with a term of five years and a strike price of $6.41. The planoptions have a three-year vesting period. The Ferry Employment Agreement can be terminated with or without cause at any time during the Initial Term or during an Additional Term. As a full-time employee of the Company, Mr. Ferry is eligible to participate in all of the Company’s benefit programs.
Potential Payments upon Change of Control or Termination following a Change of Control and Severance
The Ferry Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to up to six months of base salary then in effect. Generally, we do not provide any severance specifically upon a change in control, nor do we provide for accelerated vesting upon a change in control.
Adrian G. Goldfarb
On April 1, 2018, the Company entered into an employment agreement (the “Goldfarb Employment Agreement”) with Adrian G. Goldfarb, pursuant to which Mr. Goldfarb served as Chief Financial Officer of the Company through November 15, 2022 and subsequently, assumed a new role as Strategic Advisor to the CEO. During 2021, Mr. Goldfarb was paid an annual salary of $207,750 and an annual car allowance of $2,500 which has subsequently modified with shareholder approval twice: on January 18, 2018been cancelled. In 2022, Mr. Goldfarb’s annual salary was increased to increase the total maximum amount issuable under the plan to 178,572 shares$220,000 and he was paid a bonus of common stock and on July$50,000. The Goldfarb Employment Agreement had an initial term through March 31, 2019, subject to increaserenewal for successive one-year terms unless either party gives the total maximum amount issuable underother notice of that party’s election to not renew at least 60 days prior to the plan to 321,429. The purposeexpiration of the 2016 Planthen-current term. The Goldfarb Employment Agreement remains in effect through March 31, 2024 as neither part has terminated the agreement. The Goldfarb Employment Agreement was approved by the Compensation Committee and it is anticipated that Mr. Goldfarb’s compensation terms will be revisited in the future by the Compensation Committee.
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Potential Payments upon Change of Control or Termination following a Change of Control and Severance
The Goldfarb Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to assistone year of base salary then in effect. Generally, we do not provide any severance specifically upon a change in control, nor do we provide for accelerated vesting upon change in control.
Connie L. Weeks
On April 1, 2018, the Company entered into an employment agreement (the “Weeks Employment Agreement”) with Connie L. Weeks, pursuant to which Ms. Weeks served as Chief Accounting Officer of the Company. During 2022, Ms. Weeks was paid an annual salary of $152,260 as well as a $20,000 performance bonus and $14,770 in attractingcompensations for unused paid time off. The Weeks Employment Agreement had an initial term that extended through March 31, 2019, subject to renewal for successive one-year terms unless either party gives notice of that party’s election to not renew to the other party at least 60 days prior to the expiration of the then-current term. Ms. Weeks gave notice to the Company that she would be retiring effective December 31, 2022. As a consequence, the Weeks Employment Agreement terminated effective December 31, 2022. The Weeks Employment Agreement was approved by the Compensation Committee.
Potential Payments upon Change of Control or Termination following a Change of Control and retaining key employees, directorsSeverance
The Weeks Employment Agreement contained certain provisions for early termination, which may have resulted in a severance payment equal to two years of base salary then in effect. This provision is no longer in effect and consultants and to provide incentives to such individuals to align their interests with those of ourstockholders. As of September 30, 2019, 321,429 shares of common stock have been approved for issuance under the 2016 Plan of which 163,010 shares of common stock have been issued.Ms. Weeks will not receive any further compensation following her retirement.
Director Compensation
Starting in 2021, the Compensation Committee determined that directors will receive $40,000 for serving as a member of a committee and $10,000 for serving as Chairman of a committee. The $10,000 fee is also inclusive of any services rendered as a member of one or more committees. The board compensation will be paid 40% in cash and 60% in shares of restricted common stock or options to purchase shares of our common stock, as elected by the board member. Each independent director was entitledboard member may further elect to receive $15,000 annually for service on our Board in 2019. In addition, Chairmenup to 100% of committees are awarded an additional $5,000 annually in compensation in connection with their service in such capacity.restricted stock.
The following table summarizes data concerning the compensation of our non-employee directors for the year ended December 31, 2019. 2022.
|
| Fees Earned or Paid ($) |
|
| Stock Awards ($) |
|
| Option Awards ($)(5) |
|
| Non-Equity Incentive Plan Compensation ($) |
|
| Non-Qualified Deferred Compensation Earnings ($) |
|
| All Other Compensation ($) |
|
| Total ($) |
| |||||||
Blair Fonda (1) |
|
| 10,000 |
|
|
| — |
|
|
| 10,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20,000 |
|
Alfred J. (Fred) Mulder (2) |
|
| 9,792 |
|
|
| — |
|
|
| 0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,792 |
|
Kenneth Ehrman (3) |
|
| 9,167 |
|
|
| — |
|
|
| 9,167 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,334 |
|
Ned Mavrommatis (4) |
|
| 3,750 |
|
|
| — |
|
|
| 3,750 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,500 |
|
Fees Earned or Paid ($) | Stock Awards ($)(5) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||
| Kenneth Ehrman (1) | 0 | 50,000 | 0 | 0 | 0 | 0 | 50,000 | |||||||||||||||||||||
| Edmond L. Harris (2) | 18,333 | 27,500 | 0 | 0 | 0 | 0 | 45,833 | |||||||||||||||||||||
| Ned Mavrommatis (3) | 20,000 | 30,000 | 0 | 0 | 0 | 0 | 50,000 | |||||||||||||||||||||
| James Craig Nixon (4) | 0 | 50,000 | 0 | 0 | 0 | 0 | 50,000 | |||||||||||||||||||||
———————
(1) |
|
|
|
| Kenneth Ehrman was appointed to the board in January |
| Edmond L. Harris was appointed to the board on November 19, 2020. Since his appointment, he served as Chairman of the Corporate Governance and Nominating Committee and a member of the Audit Committee. Mr. Harris resigned from the Board of Directors effective November 28, 2022. |
| (3) | Ned Mavrommatis was appointed to the board on August 13, |
|
|
| (5) | Reflects the aggregate grant date fair value of stock |
Employment Agreement with Gianni B. Arcaini
On April 1, 2018, the Company entered into an employment agreement (the “Arcaini Employment Agreement”) with Gianni B. Arcaini, pursuant to which Mr. Arcaini serves as Chief Executive Office and Chairman of the Board of Directors of Duos Technologies Group, Inc. Under the Arcaini Employment Agreement, Mr. Arcaini is paid an annual salary of $249,260 and an annual car allowance of $18,000. In addition, as incentive-based compensation, Mr. Arcaini is entitled to 1% of annual gross revenues of the Company and its subsidiaries. The Arcaini Employment Agreement has an initial term through March 31, 2020, subject to renewal for successive one-year terms unless either party gives notice of that party’s election to not renew to the other at least 60 days prior to the expiration of the then-current term. The Arcaini Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to three years of base salary then in effect. The Arcaini Employment Agreement was approved by the Compensation Committee and it is anticipated that Mr. Arcaini’s compensation terms will be revisited in the future by the Compensation Committee of the Company’s Board.
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Potential Payments upon Change of Control or Termination following a Change of Control
Our employment agreement with Mr. Arcaini, our Chief Executive Officer, provides incremental compensation in the event of termination, as described herein. Generally, we currently do not provide any severance specifically upon a change in control nor do we provide for accelerated vesting upon change in control.
Employment Agreement with Adrian G. Goldfarb
On April 1, 2018, the Company entered into an employment agreement (the “Goldfarb Employment Agreement”) with Adrian G. Goldfarb, pursuant to which Mr. Goldfarb serves as Chief Financial Officer, Executive Vice President and Director of Duos Technologies Group, Inc. Under the Goldfarb Employment Agreement, Mr. Goldfarb is paid an annual salary of $175,000 and an annual car allowance of $7,500. The Goldfarb Employment Agreement had an initial term through March 31, 2019, subject to renewal for successive one-year terms unless either party gives the other notice of that party’s election to not renew at least 60 days prior to the expiration of the then-current term. The Goldfarb Employment Agreement remains in effect through March 31, 2020. The Goldfarb Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to one year of base salary then in effect. The Goldfarb Employment Agreement was approved by the Compensation Committee and it is anticipated that Mr. Goldfarb’s compensation terms will be revisited in the future by the Compensation Committee of the Company’s Board.
Potential Payments upon Change of Control or Termination following a Change of Control
The Goldfarb Employment Agreement provides for incremental compensation in the event of termination, as described herein. Generally, we do not provide any severance specifically upon a change in control, nor do we provide for accelerated vesting upon change in control.
Employment Agreement with Connie L. Weeks
On April 1, 2018, the Company entered into an employment agreement (the “Weeks Employment Agreement”) with Connie L. Weeks, pursuant to which Ms. Weeks serves as Chief Accounting Officer, and Executive Vice President of Duos Technologies Group, Inc. Under the Weeks Employment Agreement, Ms. Weeks is paid an annual salary of $131,000. The Weeks Employment Agreement had an initial term that extended through March 31, 2019, subject to renewal for successive one-year terms unless either party gives notice of that party’s election to not renew to the other party at least 60 days prior to the expiration of the then-current term. The Weeks Employment Agreement remains in effect through March 31, 2020. The Weeks Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to two-years of base salary then in effect. The Weeks Employment Agreement was approved by the Compensation Committee and it is anticipated that Ms. Weeks’s compensation terms will be revisited in the future by the Compensation Committee of the Company’s Board.
Potential Payments upon Change of Control or Termination following a Change of Control
The Weeks Employment Agreement provides for incremental compensation in the event of termination, as described herein. Generally, we do not provide any severance specifically upon a change in control, nor do we provide for accelerated vesting upon change in control.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
As of January 21, 2020, July 14, 2023, our authorized capitalization was 500,000,000 shares of common stock $0.001 par value per share, 500,000 shares of Series A Redeemable Convertible Preferred Stock, 15,000 shares of Series B Convertible Preferred Stock (“Preferred B”), 5,000 shares of Series C Convertible Preferred Stock (“Preferred C”), 4,000 shares of Series D Convertible Preferred Stock (“Preferred D”), and 30,000 shares of Series E Convertible Preferred Stock (“Preferred E”). As of the same date, there are 1,980,085were, 0 shares of Preferred A, 0 shares of Preferred B, 0 shares of Preferred C outstanding, 1,299 shares of Preferred D outstanding, and 4,000 shares of Preferred E outstanding, respectively and 7,174,984 shares of our common stock issued and outstanding. Ourissued. Additionally, our common stock entitles its holder to one vote on each matter submitted to the stockholders.
The following table sets forth, as of January 21, 2020, July 14, 2023, the number of shares of our common stock beneficially owned by (i) each person who is known by us to own of record or beneficially five percent (5%) or more of our outstanding shares, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our common stock beneficially owned. The address of our directors and executive officers is c/o Duos TechnologyTechnologies Group, Inc., at 6622 Southpoint Drive S.,7660 Centurion Parkway, Suite 310,100, Jacksonville, Florida 32216.32256.
Name and Address of Beneficial Owner(1) |
| Outstanding Common |
|
|
| Percentage of Ownership of Common |
| ||
5% Beneficial Shareholders |
|
|
|
|
|
|
| ||
Bleichroeder LP 1345 Avenue of the Americas, 48th Floor New York, NY 10105 (4) |
|
| 330,358 |
|
|
|
| 17.40 | % |
Alpha Capital Anstalt Lettstrasse 32, FL-9490 Vaduz Furstentums, Liechtenstein |
|
| 147,363 |
|
|
|
| 7.44 | % |
AIGH Capital Management 6006 Berkeley Avenue Baltimore MD 21209 (5) |
|
| 85,735 |
|
|
|
| 4.33 | % |
Pessin Family Holdings 500 Fifth Avenue, Suite 2240 New York, NY 10110 (6) |
|
| 191,101 |
|
|
|
| 9.99 | % |
Catalysis Partners, LLC 610 Main Street Venice, CA 90291 (7) |
|
| 125,329 |
|
|
|
| 6.33 | % |
|
|
|
|
|
|
|
|
|
|
Officers and Directors |
|
|
|
|
|
|
|
|
|
Gianni B. Arcaini(8) |
|
| 177,040 |
|
|
|
| 8.94 | % |
Adrian G. Goldfarb(9) |
|
| 39,182 |
|
|
|
| 1.98 | % |
Ned Mavrommatis(10) |
|
| 10,000 |
|
|
|
| * |
|
Blair M. Fonda(11) |
|
| 11,063 |
|
|
|
| * |
|
Kenneth Ehrman(12) |
|
| 15,867 |
|
|
|
| * |
|
Connie L. Weeks(13) |
|
| 18,929 |
|
|
|
| * |
|
|
|
|
|
|
|
|
|
|
|
Officers and Directors as a Group (6 persons) |
|
| 272,081 |
|
|
|
| 13.74 | % |
| Name and Address of Beneficial Owner | Number of Shares of Common Stock Beneficially Owned | Percentage of Shares of Common Stock Beneficially Owned | ||||||
| 5% Beneficial Shareholders | ||||||||
| Bleichroeder LP 1345 Avenue of the Americas, 47th Floor New York, NY 10105 (1) | 2,994,140 | 36.75 | % | |||||
| Pessin Family Holdings 500 Fifth Avenue, Suite 2240 New York, NY 10110 (2) | 1,459,945 | 20.45 | % | |||||
Bard Associates, Inc. 135 South LaSalle Street, Ste 3700 Chicago, Illinois 60603(3) | 475,853 | 6.65 | % | |||||
Laurence W. Lytton 467 Central Park West New York, New York 10025(4) | 734,025 | 10.11 | % | |||||
| Directors and Named Executive Officers | ||||||||
| Charles P. Ferry(5) | 106,000 | 1.46 | % | |||||
| Andrew W. Murphy(6) | 40,750 | * | ||||||
| Kenneth Ehrman(7) | 64,851 | * | ||||||
| Ned Mavrommatis(8) | 36,734 | * | ||||||
| James C. Nixon | 26,451 | * | ||||||
| Executive Officers and Directors as a Group (5 persons) | 274,785 | 4.32% | ||||||
———————
*Denotes less than 1%
(1) |
| Based on Amendment No. 6 to Schedule 13G/A filed by Bleichroeder LP (“Bleichroeder”) with |
|
| |
|
|
| Bleichroeder |
| (2) | Based on Amendment No. 5 to Schedule 13D/A filed by Norman H. Pessin, Sandra F. Pessin and Brian L. Pessin with the SEC on October 7, 2022 (the “Pessin 13D/A”) disclosing that Norman H. Pessin owns 57,972 shares of our Common Stock, Sandra F. Pessin beneficially owns 1,221,062 shares of our Common Stock and Brian L. Pessin beneficially owns 180,911 shares of our Common Stock. |
| (3) | Based on Schedule 13G filed by Bard Associates, Inc. (“Bard”) with the SEC on February 6, 2023, disclosing that Bard has sole voting and dispositive power as to 10,000 shares of Common Stock and |
| (4) | Based on Amendment No. 3 to Schedule 13G/A filed by Mr. Lytton with the SEC on February 13, 2023. Mr. Lytton also purchased 300 shares of Series D Preferred Stock | |
|
| |
|
|
| (5) | Includes (i) 100,000 shares of our Common Stock |
|
| Includes (i) |
|
| |
|
| |
|
|
|
|
|
|
|
|
| (8) | Includes (i) options to purchase 8,572 shares of our Common Stock at $4.74 per share, all of which are fully vested and currently exercisable, and (ii) options to purchase 8,572 shares of our Common Stock at $6.00 per share, all of which are fully vested and currently exercisable. |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On August 1, 2012, the Company entered into an independent contractor master services agreement (the “Services Agreement”) with Luceon, LLC, a Florida limited liability company, owned by our former Chief Technology Officer, David Ponevac. Pursuant to theThe Services Agreement provided that Luceon willwould provide DUOS with support services including management, coordination andor software development services.
services and related services to duos. In January 2019, additional services were contracted with Luceon for TrueVue360™ primarily for software development through the provision of 7 additional full-time contractors located in Slovakia at a cost of $16,250 for January initially, rising to $25,583 after fully staffed, per month starting February 2019. This was in addition to the existing contract of $7,480 per month for duos for 4 full-time contractors which increased to $8,231 per month in June of 2019. During 2020 efforts in reducing cost, Luceon reduced its staff for the TrueVue360 software development team from a staff of 7 to 3 full-time employees at a cost of $11,666 per month starting June 1, 2020. As of January 1, 2021, the Company ceased recording activities in TrueVue360 nor its combined billings for a total of $20,986 per month. For the years ended December 31, 2022 and 2021, the total amount expensed was $0 and $93,422, respectively. The Company entered into an agreementhad no open accounts payable with 21 April Fund LP on September 25, 2019 whereby Luceon at December 31, 2022 or 2021. On May 14, 2021, the Company formally ended its relationship with Luceon in concert with the resignation of our Chief Technology Officer and as such there is no longer a related party loaned the Company an aggregate principal amount of $267,000, pursuant to a note, repayable on June 25, 2020. The note carries an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 11,920 shares of the Company’s common stock at a price of $7.70 per share.relationship.
The Company entered into an agreement with 21April Fund LP on September 25, 2019 whereby the related party loaned the Company the principal aggregate in the amount of $733,000, pursuant to a note, repayable on June 25, 2020. The note carries an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 32,724 shares of the Company’s common stock at a price of $7.70 per share.
Policy on Future Related Party Transactions
The Company requires that any related party transactions must be approved by a majority of the Company’s independent directors.directors and also be approved by the Company’s Corporate Governance and Nominating Committee.
| 62 |
In the discussion that follows, we have summarized selected provisions of our articlescertificate of incorporation, bylaws and the Florida Business Corporation Act relating to our capital stock. This summary is not complete. This discussion is subject to the relevant provisions of Florida law and is qualified by reference to our certificate of incorporation and our bylaws. You should read the provisions of our articlescertificate of incorporation and our bylaws as currently in effect for provisions that may be important to you.
GeneralMarket Information
Our common stock is quoted on the Nasdaq Capital Markets (“Nasdaq”) under the trading symbol “DUOT”.
Authorized Capital
The Company is authorized to issue an aggregate number of 510,000,000 shares of capital stock, of which 10,000,000 shares are blank check preferred stock, $0.001 par value per share, and 500,000,000 shares are common stock, $0.001 par value per share.
On January 17, 2020, we effected a 1-for-14 reverse stock split of our outstanding common stock, which caused our then outstanding common stock to decrease from 27,714,277 to 1,980,085 shares while keeping our authorized capitalization unchanged.
Preferred Stock
The Company ishas 10,000,000 authorized shares of preferred stock par value $0.001 per share, which have five series. As of July 5, 2023, the Series A Preferred Stock has 0 shares issued and outstanding, the Series B Preferred Stock has 0 shares issued and outstanding, the Series C Preferred Stock has 0 shares issued and outstanding, the Series D Preferred Stock has 1,299 shares issued and outstanding, and the Series E Preferred Stock has 4,000 shares issued and outstanding.
Our Board has the authority, within the limitations and restrictions in our certificate of incorporation, to issue 10,000,000 shares of blank check preferred stock $0.001 par value per share. Subjectin one or more series and to fix the limitations prescribed by our articlesrights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of incorporation, our board of directors is authorized to establishredemption, redemption prices, liquidation preferences and the number of shares constituting eachany series or the designation of preferred stock and to fix the designations, powers, preferences and rights of the shares of each of thoseany series, and the qualifications, limitations and restrictions of each of those series, all without any further vote or action by the stockholders. The issuance of shares of preferred stock may have the effect of delaying, deferring or preventing a change in our control without further action by the stockholders. The issuance of shares of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of our common stock. In some circumstances, this issuance could have the effect of decreasing the market price of our common stock.
Undesignated preferred stock may enable our Board to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of our management. The issuance of shares of preferred stock may adversely affect the rights of our common stockholders. For example, any shares of preferred stock issued may rank senior to the common stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of common stock. As a result, the issuance of shares of preferred stock, or the issuance of rights to purchase shares of preferred stock, may discourage an unsolicited acquisition proposal or bids for our common stock or may otherwise adversely affect the market price of our common stock or any existing preferred stock.
Series A Convertible Preferred Stock
Our board of directors has designated 500,000 of the 10,000,000 authorized shares of preferred stock as Series A Convertible Preferred Stock.
As of January 21, 2020, we have noThere are 0 shares of Series A Convertible Preferred Stock issued and outstanding.
Series B Convertible Preferred Stock
Our board of directors has designated 15,000 of the 10,000,000 authorized shares of preferred stock as Series B Convertible Preferred Stock.
Each share of the Series B Preferred Stock is convertible into 143 shares of common stock. Holders of Series B Preferred Stock shall vote together with the holders of common stock on an as-converted basis (subject to the applicable beneficial ownership limitation) on all matters on which holders of the common stock are entitled to vote.
There are 0 shares of Series B Preferred Stock outstanding.
| 63 |
Series C Preferred Stock
Our board of directors has designated 5,000 of the 10,000,000 authorized shares of preferred stock as Series C Convertible Preferred Stock.
Each share of the Series C Preferred Stock is convertible into 182 shares of common stock. Holders of Series C Preferred Stock shall have 172 votes (subject to the applicable beneficial ownership limitation) for each share of Series C Preferred Stock and shall vote together with the holders of common stock on all matters on which holders of the common stock are entitled to vote.
There are 0 shares of Series C Preferred Stock outstanding.
Series D Preferred Stock
Each share of Series BD Convertible Preferred Stock is convertible at any time at the holder’s option into a number of shares of common stock equal to $1,000 divided by the conversion price of $7.00 $3.00 per share. Notwithstanding the foregoing, we shall not effect any conversion of Series BD Convertible Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series BD Convertible Preferred Stock (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares of our common stock in excess of 4.99% (or, at the election of the purchaser, 9.99%19.99%) of the shares of our common stock then outstanding after giving effect to such exercise. Holders of Series BD Convertible Preferred will vote on an as converted basis on all matters on which the holders of common stock are entitled to vote and will have 333 votes per share, subject to beneficial ownership limitations.
As of December 31, 2019,June 30, 2023, there are 1,7051,299 shares of Series BD Convertible Preferred Stock issued and outstanding.
CommonSeries E Convertible Preferred Stock
The CompanyOur board of directors has designated 30,000 of the 10,000,000 authorized shares of preferred stock as Series E Convertible Preferred Stock.
Each share of Series E Convertible Preferred Stock is authorized to issue 500,000,000convertible at any time at the holder’s option into a number of shares of common stock $0.001 par valueequal to $1,000 divided by the conversion price of $3.00 per share. AsNotwithstanding the foregoing, we shall not effect any conversion of January 21, 2020, we have 1,980,085 Series E Convertible Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series E Convertible Preferred Stock (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares of our common stock in excess of 4.99% (or, at the election of the purchaser, 19.99%) of the shares of our common stock then outstanding after giving effect to such exercise. Holders of Series E Convertible Preferred will vote on all matters on which the holders of common stock are entitled to vote and will have 333 votes per share, subject to beneficial ownership limitations.
As of June 30, 2023, there are 4,000 shares of Series E Convertible Preferred Stock issued and outstanding.
Each share
| 64 |
Options and Warrants
As of common stock has one (1) vote per share for all purpose. Our common stock does not provide a preemptive, subscription or conversion rights andJune 30, 2023, there is no redemption or sinking fund provisions or rights. Our common stock holders are not entitled1,217,775outstandingoptions to cumulative voting for purposes of electing members to our board of directors.
Dividends
We have not paid any cash dividends to our shareholders. The declaration of any future cash dividends is at the discretionpurchase shares of our boardcommon stock. The weighted average exercise price of directorsthese options is $5.37, the average term when issued was five years and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. Itthe average term remaining is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.three years.
Warrants
As of January 21, 2020, June 30, 2023, there are warrants outstanding to purchase 1,521,250 80,091 shares of our common stock of which none are subject to full ratchet price protection on the exercise price potentially increasing the total number of common shares issuable upon exercise.price. The warrants are exercisable for a term of five years with a weighted average remaining term of one year and a weighted average exercise price of $8.78. $8.53.
Underwriters’ WarrantsDividends
To date, we have not paid any dividends on our common stock and do not anticipate paying any such dividends in the foreseeable future. The underwriters’ warrants declaration and payment of dividends on the common stock is at the discretion of our board of directors and will be exercisable at any time,depend on, among other things, our operating results, financial condition, capital requirements, contractual restrictions or such other factors as our board of directors may deem relevant. We currently expect to use all available funds to finance the future development and from time to time, in whole or in part, during the three-year period commencing six months from the effective dateexpansion of the registration statement at a per share exercise price equal to 150% of the public offering price per share ofour business and do not anticipate paying dividends on our common stock in the offering.foreseeable future.
The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.
The underwriters’ warrants and underlying shares are included in this prospectus.
Transfer Agent
The transfer agent and registrar for our common stockCommon Stock is Continental Stock Transfer & Trust, Company located at 1 State Street, 30th30th Floor, New York, NY 10004.10004-1561.
Florida Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Florida law and our Charter and bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, may discourage certain types of takeover practices and takeover bids, and encourage persons seeking to acquire control of our companyCompany to first negotiate with us. We believe that the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms.
Florida Law
As a Florida corporation, we are subject to certain anti-takeover provisions that apply to public corporations under Florida law.
Pursuant to Section 607.0901 of the Florida Business Corporation Act, or the FBCA, a publicly held Florida corporation, under certain circumstances, may not engage in a broad range of business combinations or other extraordinary corporate transactions with an interested shareholder without the approval of the holders of two-thirds of the voting shares of the corporation (excluding shares held by the interested shareholder), unless:.
The transaction is approved by a majority of disinterested directors before the shareholder becomes an interested shareholder;
The interested shareholder has owned at least 80% of the corporation’s outstanding voting shares for at least five years preceding the announcement date of any such business combination;
The interested shareholder is the beneficial owner of at least 90% of the outstanding voting shares of the corporation, exclusive of shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; or
The consideration paid to the holders of the corporation’s voting stock is at least equal to certain fair price criteria.
An interested shareholder is defined as a person who, together with affiliates and associates, beneficially owns more than 10%15% of a corporation’s outstanding voting shares. We have not made an election in our amended Articles of Incorporation to opt out of Section 607.0901.
In addition, we are subject to Section 607.0902 of the FBCA which prohibits the voting of shares in a publicly held Florida corporation that are acquired in a control share acquisition unless (i) our Board of Directors approved such acquisition prior to its consummation or (ii) after such acquisition, in lieu of prior approval by our Board of Directors, the holders of a majority of the corporation’s voting shares, exclusive of shares owned by officers of the corporation, employee directors or the acquiring party, approve the granting of voting rights as to the shares acquired in the control share acquisition. A control share acquisition is defined as an acquisition that immediately thereafter entitles the acquiring party to 20% or more of the total voting power in an election of directors.
| 65 |
UNDERWRITINGINTERESTS OF NAMED EXPERTS AND COUNSEL
ThinkEquity, a division of Fordham Financial Management, Inc. is actingNo expert or counsel named in this prospectus as representative of the underwriters of the offering. We have entered into an underwriting agreement dated , 2020 with the representative. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to each underwriter named below, and each underwriter named below has severally agreed to purchase, at the public offering price less the underwriting discounts set forth on the cover pagehaving prepared or certified any part of this prospectus the number of shares of common stock listed next to its name in the following table:
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| ||||
The underwriters are committed to purchase all the shares offered by us, other than those covered by the over-allotment option to purchase additional shares described below, if they purchase any shares. The obligations of the underwriters may be terminatedor having given an opinion upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.
We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof.
The underwriters are offering the shares subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase up to an aggregate of additional shares of common stock (equal to 15% of the common stock sold in the offering) in any combination thereof, at the public offering price per share, less underwriting discounts and commissions, solely to cover over-allotments, if any. If this option is exercised in full, the total price to the public will be $___ and the total net proceeds, before expenses, to us will be $___.
Discounts, Commissions and Reimbursement
The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
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The underwriters propose to offer the shares to the public at the public offering price set forth on the cover of this prospectus. In addition, the underwriters may offer some of the shares to other securities dealers at such price less a concession not in excess of $_______ per share. If all of the shares offered by us are not sold at the public offering price, the representative may change the offering price and other selling terms by means of a supplement to this prospectus.
We have also agreed to pay certain expenses of the representative relating to the offering, including: (a) fees, expenses and disbursements relating to background checks of our officers and directors, in an aggregate amount not to exceed $5,000; (b) the costs associated with bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones, up to $3,000; (c) $29,500 for fees and expenses for the underwriters’ use of book-building, prospectus tracking and compliance software for this offering; (d) the fees and expenses of the representative’s legal counsel, up to $75,000; and (e) up to $20,000 of the representative’s actual accountable road show expenses for the offering.
We have paid an advance of $10,000 to the representative, which will be applied against actual out-of-pocket accountable expenses and reimbursed to the Company to the extent any portion thereof is not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).
We estimate that the total expenses of the offering payable by us, excluding the total underwriting discount, will be approximately $492,000.
Underwriters’ Warrants
We have also agreed to issue to the representative or its designees, at the closing of this offering, warrants (the “Underwriters’ Warrants”) to purchase shares of common stock (5% of the number of shares sold in the offering, excluding the over-allotment option). The Underwriters’ Warrants will be exercisable at any time and from time to time, in whole or in part, during a three year period commencing six months from the effective date of this offering. The Underwriters’ Warrants will be exercisable at a price equal to 150% of the public offering price per share. The Underwriters’ Warrants have been deemed compensation by FINRA and are, therefore, subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The representative or its permitted assignees under this Rule 5110(g)(1) shall not sell, transfer, assign, pledge or hypothecate the Underwriters’ Warrants, nor engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Underwriters’ Warrants, for a period of 180 days from the effective date of the offering, except that they may be assigned, in whole or in part, as specifically set forth in the underwriting agreement. The Underwriters’ Warrants will provide for cashless exercise and customary anti-dilution provisions (for share dividends, splits and recapitalizations and the like) consistent with FINRA Rule 5110, and the number of shares underlying the Underwriters’ Warrants shall be reduced, or the exercise price increased, if necessary, to comply with FINRA rules or regulations. Further, the Underwriters’ Warrants will provide for a one-time demand registration right and unlimited piggyback rights.
Discretionary Accounts
The underwriters do not intend to confirm salesvalidity of the securities offered hereby to any accounts over which they have discretionary authority.
Lock-Up Agreements
Pursuant to “lock-up” agreements, we and our executive officers and directors have agreed, subject to limited exceptions, without the prior written consent of the representative not to directlybeing registered or indirectly offer to sell, sell, pledge or otherwise transfer or dispose of any of shares of (or enter into any transaction or device that is designed to, or could be expected to, result in the transfer or disposition by any person at any time in the future of) our common stock, enter into any swap orupon other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of our common stock, make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any of our other securities or publicly disclose the intention to do any of the foregoing, subject to customary exceptions, for a period of 90 days from the date of this prospectus.
Right of First Refusal
We have granted the representative a right of first refusal, for a period of 12 months from the consummation of this offering, to act as sole investment banker, book-runner and/or placement agent, at the representative’s sole discretion, for each and every future public and private equity offering, including all equity linked financings (each, a “Subject Transaction”), during such 12 month period, of the Company, or any successor to or subsidiary of the Company, on terms and conditions customary to the representative for such Subject Transactions.
Electronic Offer, Sale and Distribution of Securities
A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling group members. The representative may agree to allocate a number of securities to underwriters and selling group members for sale to its online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us, and should not be relied upon by investors.
Stabilization
In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and purchases to cover positions created by short sales.
Stabilizing transactions permit bids to purchase shares so long as the stabilizing bids do not exceed a specified maximum, and are engaged in for the purpose of preventing or retarding a decline in the market price of the shares while the offering is in progress.
Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment option and/or purchasing shares in the open market.
Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared with the price at which they may purchase shares through exercise of the over-allotment option. If the underwriters sell more shares than could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed out only by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely affect investors who purchase in the offering.
Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the shares originally sold by that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As a result, the price of our common stock in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.
Passive market making
In connection with this offering, underwriters and selling group members may engage in passive market making transactions in our common stock on the Nasdaq Capital Market in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, then that bid must then be lowered when specified purchase limits are exceeded.
Other Relationships
Certain of the underwriters and their affiliates have in the past and may in the future provide various investment banking, commercial banking and other financial services for us and our affiliates for which they have received or may in the future receive customary fees.
Offer restrictions outside the United States
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisementslegal matters in connection with the offer and sale of any such securities be distributedregistration or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
The validity of the securities offered hereby has been passed upon for us by Lucosky Brookman LLP. Sichenzia Ross Ference LLPCommon Stock was employed on a contingency basis, or had, or is acting as counsel to the underwritersreceive, in connection with certain legal matters relating to this offering.the offering, a substantial interest, direct or indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
Our consolidated balance sheets as of December 31, 20182022 and 2017,2021, and the related consolidated statements of operations, stockholders’ equity, (deficit), and cash flows for each of thosethe two years in the period ended December 31, 2022 have been audited by Salberg & Company, P.A., an independent registered public accounting firm, as set forth in its report appearing herein and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The validity of the Common Stock offered by this prospectus will be passed upon for us by Shutts & Bowen LLP.
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting company and file annual, quarterly and special reports, and other information with the Securities and Exchange Commission. Such reports and other information may be accessed at the SEC’sThe SEC maintains a web site athttp://www.sec.gov whichthat contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC.
This prospectus is part of a registration statement on Form S-1 that we filed with the SEC. Certain information in the registration statement has been omitted from this prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits and schedules with the registration statement that are excluded from this prospectus. For further information you may:
| · | read a copy of the registration statement, including the exhibits and schedules, without charge at the SEC’s Public Reference Room; or | |
| · | obtain a copy from the SEC upon payment of the fees prescribed by the SEC. |
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the SEC are incorporated by reference into this prospectus. You should carefully read and consider all of these documents before making an investment decision:
| • | Our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023; |
| • | Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 15, 2023; |
| • | Our Current Reports on Form 8-K, filed with the SEC on January 3, 2023, March 29, 2023, May 19, 2023 and June 28, 2023; and |
| • | The description of our Common Stock contained in Exhibit 4.4 to our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022, and any amendment or report filed with the SEC for the purpose of updating the description. |
All documents that we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of the initial registration statement and prior to the effectiveness of the registration statement as well as on or after the date of this prospectus and prior to the termination of this offering are also incorporated herein by reference and will automatically update and supersede information contained or incorporated by reference in this prospectus and previously filed documents that are incorporated by reference in this prospectus. However, anything herein to the contrary notwithstanding, no document, exhibit or information or portion thereof that we have “furnished” or may in the future “furnish” to (rather than “file” with) the SEC, including, without limitation, any document, exhibit or information filed pursuant to Item 2.02, Item 7.01 and certain exhibits furnished pursuant to Item 9.01 of our Current Reports on Form 8-K, shall be incorporated by reference into this prospectus.
We will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the reports or documents that have been incorporated by reference into this prospectus but not delivered with this prospectus. We will provide these reports upon written or oral request at no cost to the requester. Please direct your request, either in writing or by telephone, to the Secretary, Duos Technologies Group, Inc., 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 32256, telephone number (904) 652-6616. We maintain a website at http://www.duostechnologies.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed at the SEC’s website.
through, our website is not incorporated by reference in, and is not part of, this prospectus.
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Unaudited Consolidated Financial Statements
| Description | Page | ||||
| 2022 |
| F-35 | |||
| F-36 | ||||
| 2022 (Unaudited) |
| F-37 | |||
| F-38 | ||||
|
| F-39 |
| F-1 |
![[duot_s1031.jpg]](https://capedge.com/proxy/S-1A/0001553350-20-000090/duot_s1031.jpg)
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors of:
Duos Technologies Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Duos Technologies Group, Inc. and Subsidiaries (the “Company”) as of December 31, 20182022 and 2017,2021, the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 20182022 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20182022 and 2017,2021, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2018,2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company had a net loss and net cash used in operations of $1,580,887 and $345,287 respectively in 2018 and had a working capital deficit, an accumulated deficit and a stockholders’ deficit of $469,082, $30,269,833 and $170,985 respectively at December 31, 2018. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s Plan regarding these matters is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Percentage of Completion Revenue Recognition & Related Contract Assets and Contract Liabilities
As described in footnote 1, “Revenue Recognition – Technology Systems” and footnote 8, “Revenues and Contract Accounting” to the consolidated financial statements, the Company recognizes revenue over time using a cost-based input methodology in which significant judgement 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. In addition, contract assets on uncompleted contracts represent cumulative revenues in excess of billings on uncompleted contracts accounted for under the percentage of completion contract method. Contract liabilities on uncompleted contracts represent billings that exceed cumulative revenues recognized on uncompleted contracts accounted for under the percentage of completion contract method.
We identified this percentage of completion revenue recognition as a critical audit matter. Auditing management’s estimates and judgments regarding forecasts of total estimated costs to complete projects is especially challenging and complex.
The primary procedures we performed to address this critical audit matter included (a) evaluated the reasonableness of management’s cost estimates to complete projects by comparing them to historical information, year-to-date current information, information available on projects subsequent to year end, and other supporting information, (b) performed ratio analysis and gross margin comparisons when applicable on a sample of technology systems revenues (c) agreed cost details to supporting documents, (d) confirmed billings with customers and/or traced cash receipts to bank statements, (e) recomputed the revenue earned and recognized, and (f) recomputed the contract asset or liability
Analysis of Liquidity and Going Concern
As summarized in Footnote 2 “Liquidity” to the consolidated financial statements, the Company has a history of net losses and net cash used in operating activities and believes such conditions will continue for a period of time into the future. These are considered adverse conditions or events that lead management to consider whether there is substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time or whether such concerns are alleviated with management’s plans.
We identified the going concern risk analysis as a critical audit matter. Auditing management’s going concern analysis including their process to develop the analysis and the projections of future cash flows, operating trends, and assessments of internal and external matters that may affect the Company’s future operations and cash flows involved a high degree of subjectivity. Additionally, auditing management’s plans to address the going concern risk involved highly subjective auditor judgment.
The primary procedures we performed to address this critical audit matter included (a) Assessed the reasonableness of management’s process for developing their assessment of whether a going concern risk exists, (b) Assessed the reasonableness of assumptions management used in their future cash flow projections including comparison to prior year results, consideration of positive and negative evidence impacting management’s forecasts, and consideration of the Company’s financing arrangements in place as of the report date, (c) Developed our own independent calculation of expected source and use of funds, and cash flows and needs of the Company over the one year period from the date of issuance of the consolidated financial statements, (d) Confirmed cash balances as of December 31, 2022 with the banks and tested management’s bank reconciliations and inspected the bank balances in March 2023 after the $4,000,000 capital raise, (e) Identified management’s plans for dealing with the adverse conditions and events discussed above and assessed the reasonableness of the assumptions of such plans, (f) Assessed whether it is probable that management’s plans, when implemented, will mitigate the adverse effects of the conditions and events discussed above, (g) Concluded whether substantial doubt exists as to whether the Company can continue as a going concern for a period of one year after the consolidated financial statements are issued and (h) considered the effect of such conclusion on the consolidated financial statement disclosures.
/s/ Salberg & Company, P.A.
SALBERG & COMPANY, P.A.
We have served as the Company’s auditor since 2013
Boca Raton, Florida
April 12, 2019, except as to footnote 17, to which the date is January 24, 2020March 31, 2023
2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431
Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920
www.salbergco.com • info@salbergco.com
Member National Association of Certified Valuation Analysts • Registered with the PCAOB
Member CPAConnect with Affiliated Offices Worldwide•Member Center for Public Company Audit Firms
| F-3 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||||||||||
|
| December 31, |
| December 31, |
| 2022 | 2021 | |||||||||
|
| 2018 |
| 2017 |
| |||||||||||
ASSETS |
|
|
|
|
|
| ||||||||||
CURRENT ASSETS: |
|
|
|
|
| |||||||||||
Cash |
| $ | 1,209,301 |
| $ | 1,941,818 |
| $ | 1,121,092 | $ | 893,720 | |||||
Accounts receivable, net |
| 1,538,793 |
| 298,304 |
| 3,418,263 | 1,738,543 | |||||||||
Contract assets |
| 1,208,604 |
| 423,793 |
| 425,722 | 3,449 | |||||||||
| Inventory | 1,428,360 | 298,338 | ||||||||||||||
Prepaid expenses and other current assets |
|
| 235,198 |
|
|
| 90,923 |
| 441,320 | 354,613 | ||||||
Total Current Assets |
|
| 4,191,896 |
|
|
| 2,754,838 |
| 6,834,757 | 3,288,663 | ||||||
|
|
|
|
|
| |||||||||||
Property and equipment, net |
| 204,226 |
| 65,362 |
| 629,490 | 603,253 | |||||||||
| Operating lease right of use asset | 4,689,931 | 4,925,765 | ||||||||||||||
| Security deposit | 600,000 | 600,000 | ||||||||||||||
| Software development costs, net | 265,208 | — | ||||||||||||||
| Patents and trademarks, net | 69,733 | 66,482 | ||||||||||||||
|
|
|
|
|
| |||||||||||
OTHER ASSETS: |
|
|
|
|
| |||||||||||
Software Development Costs, net |
| 40,000 |
| — |
| |||||||||||
Patents and trademarks, net |
|
| 53,871 |
|
|
| 45,978 |
| ||||||||
Total Other Assets |
|
| 93,871 |
|
|
| 45,978 |
| ||||||||
TOTAL ASSETS |
| $ | 4,489,993 |
|
| $ | 2,866,178 |
| $ | 13,089,119 | $ | 9,484,163 | ||||
(Continued)
See accompanying notes to the consolidated financial statements.
| F-4 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
|
| December 31, |
|
| December 31, |
| ||
|
| 2018 |
|
| 2017 |
| ||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,416,716 |
|
| $ | 812,618 |
|
Accounts payable - related parties |
|
| 13,473 |
|
|
| 12,598 |
|
Notes payable - financing agreements |
|
| 48,330 |
|
|
| 49,657 |
|
Notes payable - related parties |
|
| — |
|
|
| 9,078 |
|
Line of credit |
|
| 31,201 |
|
|
| 34,513 |
|
Payroll taxes payable |
|
| 317,573 |
|
|
| 149,448 |
|
Accrued expenses |
|
| 222,328 |
|
|
| 497,277 |
|
Contract liabilities |
|
| 2,248,829 |
|
|
| 200,410 |
|
Deferred revenue |
|
| 362,528 |
|
|
| 438,907 |
|
Total Current Liabilities |
|
| 4,660,978 |
|
|
| 2,204,506 |
|
|
|
|
|
|
|
|
|
|
Notes payable - related party |
|
| — |
|
|
| 39,137 |
|
Total Liabilities |
|
| 4,660,978 |
|
|
| 2,243,643 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT): |
|
|
|
|
|
|
|
|
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,485,000 shares available to be designated |
|
|
|
|
|
|
|
|
Series A redeemable convertible cumulative preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at December 31, 2018 and December 31, 2017, convertible into common stock at |
|
| — |
|
|
| — |
|
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 2,830 issued and outstanding at December 31, 2018 and December 31, 2017, convertible into common stock at |
|
| 2,830,000 |
|
|
| 2,830,000 |
|
Common stock: $0.001 par value; 500,000,000 shares authorized, |
|
| 1,506 |
|
|
| 1,476 |
|
Additional paid-in capital |
|
| 27,416,801 |
|
|
| 26,628,005 |
|
Total stock & paid-in-capital |
|
| 30,248,307 |
|
|
| 29,459,481 |
|
Accumulated deficit |
|
| (30,269,833 | ) |
|
| (28,688,946 | ) |
Sub-total |
|
| (21,526 | ) |
|
| 770,535 |
|
Less: Treasury stock |
|
| (149,459 | ) |
|
| (148,000 | ) |
Total Stockholders' Equity (Deficit) |
|
| (170,985 | ) |
|
| 622,535 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity (Deficit) |
| $ | 4,489,993 |
|
| $ | 2,866,178 |
|
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 2,290,390 | $ | 1,044,500 | ||||
| Notes payable - financing agreements | 74,575 | 52,503 | ||||||
| Accrued expenses | 453,023 | 618,093 | ||||||
| Equipment financing agreements-current portion | 22,851 | 80,335 | ||||||
| Operating lease obligation-current portion | 696,869 | 315,302 | ||||||
| Contract liabilities | 957,997 | 1,829,311 | ||||||
| Total Current Liabilities | 4,495,705 | 3,940,044 | ||||||
| Equipment financing agreement, less current portion | — | 22,851 | ||||||
| Operating lease obligation, less current portion | 4,542,943 | 4,739,783 | ||||||
| Total Liabilities | 9,038,648 | 8,702,678 | ||||||
| Commitments and Contingencies (Note 10) | — | — | ||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock: $ par value, authorized, shares available to be designated | — | — | ||||||
| Series A redeemable convertible preferred stock, $ stated value per share, shares designated; issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $ per share | — | — | ||||||
| Series B convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $ per share | — | 1 | ||||||
| Series C convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $ per share | — | 2 | ||||||
| Series D convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $ per share | 1 | — | ||||||
| Common stock: $ par value; shares authorized, and shares issued, and shares outstanding at December 31, 2022 and 2021, respectively | 7,156 | 4,111 | ||||||
| Additional paid-in-capital | 56,562,600 | 46,431,874 | ||||||
| Accumulated deficit | (52,361,834 | ) | (45,497,051 | ) | ||||
| Sub-total | 4,207,923 | 938,937 | ||||||
| Less: Treasury stock ( shares of common stock at December 31, 2022 and 2021) | (157,452 | ) | (157,452 | ) | ||||
| Total Stockholders' Equity | 4,050,471 | 781,485 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 13,089,119 | $ | 9,484,163 | ||||
See accompanying notes to the consolidated financial statements.
| F-5 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| For the Years Ended |
| |||||
|
| December 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
|
|
|
|
|
|
| ||
REVENUES: |
|
|
|
|
|
|
|
|
Project |
| $ | 10,753,926 |
|
| $ | 1,884,079 |
|
Maintenance and technical support |
|
| 1,170,215 |
|
|
| 1,127,932 |
|
IT asset management services |
|
| 124,478 |
|
|
| 872,577 |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
| 12,048,619 |
|
|
| 3,884,588 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
|
|
|
Project |
|
| 6,373,684 |
|
|
| 1,487,516 |
|
Maintenance and technical support |
|
| 409,316 |
|
|
| 458,960 |
|
IT asset management services |
|
| 61,396 |
|
|
| 348,076 |
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
| 6,844,396 |
|
|
| 2,294,552 |
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
| 5,204,223 |
|
|
| 1,590,036 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Selling and marketing expenses |
|
| 289,140 |
|
|
| 179,318 |
|
Salaries, wages and contract labor |
|
| 4,299,799 |
|
|
| 3,098,782 |
|
Research and development |
|
| 488,694 |
|
|
| 310,099 |
|
Professional fees |
|
| 245,033 |
|
|
| 393,531 |
|
General and administrative expenses |
|
| 1,451,461 |
|
|
| 1,051,799 |
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 6,774,127 |
|
|
| 5,033,529 |
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
| (1,569,904 | ) |
|
| (3,443,493 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
Interest Expense |
|
| (17,180 | ) |
|
| (4,519,035 | ) |
Gain on settlement of debt |
|
| — |
|
|
| 64,647 |
|
Warrant derivative gain |
|
| — |
|
|
| 2,743,686 |
|
Other income, net |
|
| 6,197 |
|
|
| 1,719 |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
| (10,983 | ) |
|
| (1,708,983 | ) |
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
| (1,580,887 | ) |
|
| (5,152,477 | ) |
|
|
|
|
|
|
|
|
|
Series A preferred stock dividends |
|
| — |
|
|
| (17,760 | ) |
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock |
| $ | (1,580,887 | ) |
| $ | (5,170,237 | ) |
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share |
| $ | (1.06 | ) |
| $ | (20.07 | ) |
Diluted Net Income(Loss) Per Share |
| $ | (1.06 | ) |
| $ | (20.07 | ) |
|
|
|
|
|
|
|
|
|
Weighted Average Shares-Basic |
|
| 1,485,438 |
|
|
| 257,600 |
|
Weighted Average Shares-Diluted |
|
| 1,485,438 |
|
|
| 257,600 |
|
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES: | ||||||||
| Technology systems | $ | 11,190,292 | $ | 5,871,666 | ||||
| Services and consulting | 3,822,074 | 2,388,251 | ||||||
| Total Revenues | 15,012,366 | 8,259,917 | ||||||
| COST OF REVENUES: | ||||||||
| Technology systems | 8,376,649 | 4,728,197 | ||||||
| Services and consulting | 1,887,614 | 1,492,176 | ||||||
| Total Cost of Revenues | 10,264,263 | 6,220,373 | ||||||
| GROSS MARGIN | 4,748,103 | 2,039,544 | ||||||
| OPERATING EXPENSES: | ||||||||
| Sales & marketing | 1,337,186 | 1,233,851 | ||||||
| Research & development | 1,651,064 | 2,515,630 | ||||||
| General & administration | 8,625,002 | 5,747,014 | ||||||
| Total Operating Expenses | 11,613,252 | 9,496,495 | ||||||
| LOSS FROM OPERATIONS | (6,865,149 | ) | (7,456,951 | ) | ||||
| OTHER INCOME (EXPENSES): | ||||||||
| Interest expense | (9,191 | ) | (20,268 | ) | ||||
| Other income, net | 9,557 | 1,468,318 | ||||||
| Total Other Income | 366 | 1,448,050 | ||||||
| NET LOSS | $ | (6,864,783 | ) | $ | (6,008,901 | ) | ||
| Net Loss Per Share - Basic | $ | (1.11 | ) | $ | (1.63 | ) | ||
| Net Loss Per Share - Diluted | $ | (1.11 | ) | $ | (1.63 | ) | ||
| Weighted Average Shares - Basic | 6,175,193 | 3,694,293 | ||||||
| Weighted Average Shares - Diluted | 6,175,193 | 3,694,293 | ||||||
See accompanying notes to the consolidated financial statements.
| F-6 |
DUOS TECHNOLOGIES GROUP, INC.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended DecemberDECEMBER 31, 2018 and 20172022 AND 2021
|
| Series B |
|
|
|
|
| Additional |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Preferred Stock |
|
| Common Stock |
|
| Paid-in |
|
| Accumulated |
|
| Treasury |
|
|
|
| ||||||||||||||
|
| # of Shares |
|
| Amount |
|
| # of Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Total |
| ||||||||
Balance December 31, 2016 |
|
| — |
|
| $ | — |
|
|
| 135,144 |
|
| $ | 135 |
|
| $ | 18,143,386 |
|
| $ | (23,518,709 | ) |
| $ | (148,000 | ) |
| $ | (5,523,188 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for settlement of accounts payable |
|
| — |
|
|
| — |
|
|
| 25,689 |
|
|
| 26 |
|
|
| 214,074 |
|
|
| — |
|
|
| — |
|
|
| 215,000 |
|
Promissory notes settled by issuance of common stock |
|
| — |
|
|
| — |
|
|
| 124,403 |
|
|
| 124 |
|
|
| 947,142 |
|
|
| — |
|
|
| — |
|
|
| 947,267 |
|
Issuance of origination shares (JMJ) |
|
| — |
|
|
| — |
|
|
| 107,143 |
|
|
| 107 |
|
|
| 749,893 |
|
|
| — |
|
|
| — |
|
|
| 750,000 |
|
Officer salary settled for common stock |
|
| — |
|
|
| — |
|
|
| 50,039 |
|
|
| 50 |
|
|
| 699,888 |
|
|
| — |
|
|
| — |
|
|
| 700,543 |
|
Series A preferred stock dividends |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (17,760 | ) |
|
| — |
|
|
| (17,760 | ) |
Issuance of common stock |
|
| — |
|
|
| — |
|
|
| 1,033,143 |
|
|
| 1033 |
|
|
| 7,230,957 |
|
|
| — |
|
|
| — |
|
|
| 7,232,000 |
|
Warrant liability extinguished |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 95,760 |
|
|
| — |
|
|
| — |
|
|
| 95,760 |
|
Stock issuance costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,454,610 | ) |
|
| — |
|
|
| — |
|
|
| (1,454,610 | ) |
Series B convertible preferred stock issued for cash |
|
| 1,000 |
|
|
| 1,000,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,000,000 |
|
Series B convertible preferred stock issued for debt conversion |
|
| 1,830 |
|
|
| 1,830,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,830,000 |
|
Net Loss for the year ended December 31, 2017 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,152,477 | ) |
|
| — |
|
|
| (5,152,477 | ) |
Balance December 31, 2017 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,475,561 |
|
| $ | 1,475 |
|
| $ | 26,628,005 |
|
| $ | (28,688,946 | ) |
| $ | (148,000 | ) |
| $ | 622,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services |
|
| — |
|
|
| — |
|
|
| 3,729 |
|
|
| 4 |
|
|
| 73,704 |
|
|
| — |
|
|
| — |
|
|
| 73,708 |
|
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 447,826 |
|
|
| — |
|
|
| — |
|
|
| 447,826 |
|
Common stock issued for warrants exercised |
|
| — |
|
|
| — |
|
|
| 21,429 |
|
|
| 21 |
|
|
| 194,979 |
|
|
| — |
|
|
| — |
|
|
| 195,000 |
|
Common stock issued for conversion of salary |
|
| — |
|
|
| — |
|
|
| 5,164 |
|
|
| 5 |
|
|
| 72,287 |
|
|
| — |
|
|
| — |
|
|
| 72,292 |
|
Acquisition of stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,459 | ) |
|
| (1,459 | ) |
Net Loss for the year ended December 31, 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | (1,580,887 | ) |
|
| — |
|
|
| (1,580,887 | ) |
Balance December 31, 2018 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,505,883 |
|
| $ | 1,505 |
|
| $ | 27,416,801 |
|
| $ | (30,269,833 | ) |
| $ | (149,459 | ) |
| $ | (170,985 | ) |
| Preferred Stock B | Preferred Stock C | Preferred Stock D | Common Stock | Additional | ||||||||||||||||||||||||||||||||||||||||||||
| # of | # of | # of | # of | Paid-in- | Accumulated | Treasury | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | 851 | $ | 1 | 2,500 | $ | 2 | — | $ | — | 4,111,047 | $ | 4,111 | $ | 46,431,874 | $ | (45,497,051 | ) | $ | (157,452 | ) | $ | 781,485 | ||||||||||||||||||||||||||
| Series C preferred stock converted to common stock | — | — | (2,500 | ) | (2 | ) | — | — | 454,546 | 455 | (453 | ) | — | — | — | |||||||||||||||||||||||||||||||||
| Series B preferred stock converted to common stock | (851 | ) | (1 | ) | — | — | — | — | 121,572 | 122 | (121 | ) | — | — | — | |||||||||||||||||||||||||||||||||
| Series D preferred stock issued for cash | — | — | — | — | 1,299 | 1 | — | — | 1,298,999 | — | — | 1,299,000 | ||||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | — | — | — | 819,191 | — | — | 819,191 | ||||||||||||||||||||||||||||||||||||
| Common stock issued for cash | — | — | — | — | — | — | 2,425,752 | 2,425 | 8,798,579 | — | — | 8,801,004 | ||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | — | — | — | — | — | (942,926 | ) | — | — | (942,926 | ) | ||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | — | — | 43,959 | 43 | 157,457 | — | — | 157,500 | ||||||||||||||||||||||||||||||||||||
| Net loss for the year ended December 31, 2022 | — | — | — | — | — | — | — | — | — | (6,864,783 | ) | — | (6,864,783 | ) | ||||||||||||||||||||||||||||||||||
| Balance December 31, 2022 | — | $ | — | — | $ | — | 1,299 | $ | 1 | 7,156,876 | $ | 7,156 | $ | 56,562,600 | $ | (52,361,834 | ) | $ | (157,452 | ) | $ | 4,050,471 | ||||||||||||||||||||||||||
| Balance December 31, 2020 | 1,705 | $ | 2 | — | — | — | — | 3,535,339 | $ | 3,536 | $ | 41,525,872 | $ | (39,488,150 | ) | $ | (157,452 | ) | $ | 1,883,808 | ||||||||||||||||||||||||||||
| Stock options granted to employees | — | — | — | — | — | — | — | — | 262,411 | — | — | 262,411 | ||||||||||||||||||||||||||||||||||||
| Series C Preferred stock issued for cash | — | — | 4,500 | 4 | — | — | — | — | 4,499,996 | — | — | 4,500,000 | ||||||||||||||||||||||||||||||||||||
| Series B preferred converted to common stock | (854 | ) | (1 | ) | — | — | — | — | 122,000 | 122 | (121 | ) | — | — | — | |||||||||||||||||||||||||||||||||
| Series C preferred converted to common stock | — | — | (2,000 | ) | (2 | ) | — | — | 363,636 | 364 | (362 | ) | — | — | — | |||||||||||||||||||||||||||||||||
| Common stock issued for cashless warrants exercised | 50,588 | 50 | (50 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | 24,541 | 24 | 144,143 | 144,167 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cashless employee stock options exercised | 14,576 | 15 | (15 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Rounding-split in 2020 | 367 | 0 | (0 | ) | 0 | |||||||||||||||||||||||||||||||||||||||||||
| Net loss for the year ended December 21, 2021 | (6,008,901 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | 851 | $ | 1 | 2,500 | $ | 2 | — | $ | — | 4,111,047 | $ | 4,111 | $ | 46,431,874 | $ | (45,497,051 | ) | $ | (157,452 | ) | $ | 781,485 | ||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
| F-7 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||||||||||
|
| For the Years Ended |
| December 31, | ||||||||||||
|
| December 31, |
| 2022 | 2021 | |||||||||||
|
| 2018 |
| 2017 |
| |||||||||||
Cash from operating activities: |
|
|
|
|
| |||||||||||
Net loss |
| $ | (1,580,887 | ) |
| $ | (5,152,477 | ) | $ | (6,864,783 | ) | $ | (6,008,901 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
| |||||||||||
| Bad debt expense | — | 76,046 | ||||||||||||||
Depreciation and amortization |
| 98,922 |
| 48,283 |
| 350,192 | 275,346 | |||||||||
Gain on settlement of debt |
| — |
| (64,647 | ) | |||||||||||
Stock issued per origination fee |
| — |
| 750,000 |
| |||||||||||
Stock option expense |
| 447,826 |
| — |
| |||||||||||
Amortization of debt discounts |
| — |
| 2,724,389 |
| |||||||||||
Initial fair value of warrant liability |
| — |
| 735,347 |
| |||||||||||
Warrant derivative gain |
| — |
| (2,743,686 | ) | |||||||||||
| Loss on disposal of assets | — | 14,454 | ||||||||||||||
| Stock based compensation | 819,191 | 262,411 | ||||||||||||||
| Stock issued for services | 157,500 | 144,167 | ||||||||||||||
| PPP loan forgiveness including accrued interest | — | (1,421,577 | ) | |||||||||||||
| Amortization of operating lease right of use asset | 235,834 | 250,482 | ||||||||||||||
Changes in assets and liabilities: |
|
|
|
|
| |||||||||||
Accounts receivable |
| (1,240,489 | ) |
| (41,315 | ) | (1,679,720 | ) | (611,023 | ) | ||||||
Contract assets |
| (784,811 | ) |
| 52,880 |
| (422,273 | ) | 99,009 | |||||||
| Inventory | (1,130,022 | ) | (185,915 | ) | ||||||||||||
Prepaid expenses and other current assets |
| 97,964 |
| 263,827 |
| 266,539 | 423,905 | |||||||||
| Security deposit | — | (600,000 | ) | |||||||||||||
Accounts payable |
| 604,096 |
| 184,829 |
| 1,245,890 | 445,184 | |||||||||
Accounts payable-related party |
| 875 |
| (27,538 | ) | — | (7,700 | ) | ||||||||
Payroll taxes payable |
| 168,125 |
| (295,028 | ) | — | (3,146 | ) | ||||||||
Accrued expenses |
| (128,948 | ) |
| 258,307 |
| (165,069 | ) | (408,692 | ) | ||||||
| Operating lease obligation | 184,728 | (127,816 | ) | |||||||||||||
Contract liabilities |
| 2,048,419 |
| (19,215 | ) | (871,314 | ) | 804,388 | ||||||||
Deferred revenue |
|
| (76,379 | ) |
|
| (236,262 | ) | ||||||||
Net cash used in operating activities |
| (345,287 | ) |
| (3,562,306 | ) | (7,873,307 | ) | (6,579,378 | ) | ||||||
|
|
|
|
|
| |||||||||||
Cash flows from investing activities: |
|
|
|
|
| |||||||||||
Software development costs |
| (60,000 | ) |
| — |
| ||||||||||
Purchase of patents/trademarks |
| (13,285 | ) |
| — |
| (18,190 | ) | (7,435 | ) | ||||||
| Purchase of software development | (281,783 | ) | — | |||||||||||||
Purchase of fixed assets |
|
| (212,393 | ) |
|
| (41,709 | ) | (344,915 | ) | (545,505 | ) | ||||
Net cash used in investing activities |
| (285,678 | ) |
| (41,709 | ) | (644,888 | ) | (552,940 | ) | ||||||
|
|
|
|
|
| |||||||||||
Cash flows from financing activities: |
|
|
|
|
| |||||||||||
Repayments of line of credit |
| (3,312 | ) |
| (3,506 | ) | ||||||||||
Repayments of related party notes |
| (48,215 | ) |
| (432,527 | ) | ||||||||||
Repayments of insurance and equipment financing |
| (243,566 | ) |
| — |
| (331,175 | ) | (353,444 | ) | ||||||
Repayments of notes payable |
| — |
| (1,766,250 | ) | |||||||||||
Repayments of series A convertible stock |
| — |
| (319,680 | ) | |||||||||||
Repurchase of common stock |
| (1,459 | ) |
| — |
| ||||||||||
Proceeds from series B preferred stock |
| — |
| 1,000,000 |
| |||||||||||
Proceeds from common stock, net |
| — |
| 5,777,390 |
| |||||||||||
Proceeds from warrants exercised |
| 195,000 |
| — |
| |||||||||||
Repayments from financing agreements |
| — |
| (217,470 | ) | |||||||||||
Proceeds of notes payable |
|
| — |
|
|
| 1,333,500 |
| ||||||||
Net cash (used in) provided by financing activities |
| (101,552 | ) |
| 5,371,457 |
| ||||||||||
| Repayment of finance lease | (80,335 | ) | (89,618 | ) | ||||||||||||
| Proceeds from common stock issued | 8,801,003 | — | ||||||||||||||
| Issuance cost | (942,926 | ) | — | |||||||||||||
| Proceeds from preferred stock issued | 1,299,000 | 4,500,000 | ||||||||||||||
| Net cash provided by financing activities | 8,745,567 | 4,056,938 | ||||||||||||||
|
|
|
|
|
| |||||||||||
Net (decrease) increase in cash |
| (732,517 | ) |
| 1,767,442 |
| ||||||||||
| Net increase (decrease) in cash | 227,372 | (3,075,380 | ) | |||||||||||||
Cash, beginning of year |
|
| 1,941,818 |
|
|
| 174,376 |
| 893,720 | 3,969,100 | ||||||
Cash, end of year |
| $ | 1,209,301 |
|
| $ | 1,941,818 |
| $ | 1,121,092 | $ | 893,720 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||||||||||
| Interest paid | $ | 9,292 | $ | 30,817 | ||||||||||||
| Taxes paid | $ | 1,264 | $ | — | ||||||||||||
| Supplemental Non-Cash Investing and Financing Activities: | ||||||||||||||||
| Lease right of use asset and liability | $ | — | $ | 4,980,104 | ||||||||||||
| Notes issued for financing of insurance premiums | $ | 353,244 | $ | 363,005 | ||||||||||||
(Continued)
See accompanying notes to the consolidated financial statements.
| F-8 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
|
| For the Years Ended |
| |||||
|
| December 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest paid |
| $ | 7,411 |
|
| $ | 126,975 |
|
Tax paid |
| $ | — |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
Supplemental Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Common stock issued for accrued BOD fees |
| $ | 73,708 |
|
| $ | — |
|
Common stock issued for accounts payable |
| $ | — |
|
| $ | 215,000 |
|
Common stock issued for related party notes payable |
| $ | — |
|
| $ | 95,000 |
|
Common stock issued for loans and convertible notes |
| $ | — |
|
| $ | 2,424,371 |
|
Common stock issued for accrued interest and penalties |
| $ | — |
|
| $ | 257,895 |
|
Common stock issued for accrued officer salary |
| $ | 72,292 |
|
| $ | 700,543 |
|
Accrued interest forgiven related to note payable settlement |
| $ | — |
|
| $ | 20,697 |
|
Accrued dividends |
| $ | — |
|
| $ | 17,760 |
|
Debt discount related to notes payable |
| $ | — |
|
| $ | 1,571,250 |
|
Note issued for financing of insurance premiums |
| $ | 242,239 |
|
| $ | 220,760 |
|
See accompanying notes to the consolidated financial statements.
F-8
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20182022 AND 20172021
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Duos Technologies Group, Inc. (“Company”(the “Company”), through its operating subsidiarysubsidiaries, Duos Technologies, Inc. (“duostech”Duos”) and TrueVue360, Inc. (“TrueVue360”) (collectively the “Company”), develops and deploys vision based analytical technology solutions that will help to transform precision railroading, logistics and inter-modal transportation operations. Additionally, these unique patented solutions can be employed into many other industries.
The Company has developed the Railcar Inspection Portal (RIP) that provides both freight and transit railroad customers and select government agencies the ability to conduct fully automated inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies, illumination and other sensors, scans each passing railcar to create an extremely high-resolution image set from a variety of angles including the undercarriage. These images are then processed through various methods of artificial intelligence (“AI”) algorithms to identify specific defects and/or areas of interest on each railcar. This is primarily engagedall accomplished within minutes of a railcar passing through our portal. This solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The Company has successfully deployed this system with several Class 1 railroad customers and anticipates an increased demand in the designfuture. 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 deploymentreduces/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 state-of-the-art, artificial intelligence driven intelligent technologies systems. duostech converges traditional security measures with information technologies to createIP and patented solutions that creates “actionable intelligence.” duostech’s IPintelligence” using two core native platforms called Centraco® and Praesidium™. All solutions provided include a variant of both applications. Centraco is built upon two of its core technology platforms (praesidium® and centraco®), both distributeddesigned primarily as licensed software suites, and natively embedded within engineered turnkey systems. praesidium® is a modular suite of analytics applications which process and simultaneously analyze data streams from a virtually unlimited number of conventional sensors and/or data points. Native algorithms compare analyzed data against user-defined criteria and rules in real time and automatically report any exceptions, deviations and/or anomalies. This application suite also includes a broad range of conventional operational system components and sub-systems, including an embedded feature-rich video management engine and a proprietary Alarm Management Service (AMS). This unique service provides continuous monitoring of all connected devices, processes, equipment and sub-systems, and automatically communicates to the front end-user interface, if and when an issue, event or performance anomalies are detected. centraco® is a comprehensive user interface that includes the functionalities of a Physical Security Information Management (PSIM) systemto all our systems as well as those of an Enterprise Information System (EIS)the backend connection to third-party applications and databases through both Application Programming Interfaces (APIs) and Software Development Kits (SDKs). This multi-layered interface can be securely installedis 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 a stand-alone application suite inside a local area network or pushed outside a wide area network usingmiddleware in our systems and manages the same browser-based interface. It leverages industry standardsvarious image capture devices and some sensors for data security, access, and encryption as appropriate. The platform also operates as a cloud-hosted solution.input into the Centraco software.
The Company’s strategy includes expansion of its technology base through organic development efforts, strategic partnerships, and growth through strategic acquisitions. The Company provides its broad range of technology solutions with an emphasis on mission critical security, inspection and operations within the rail transportation, commercial, petrochemical, government, and banking sectors. The Company also offersdeveloped 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.
Through September 30, 2021, the Company also provided professional and consulting services for large data centers.
ISA’s original businesscenters and had developed a system for the automation of IT Asset Management (ITAM) servicesasset information marketed as DcVue™. The Company had deployed its DcVue software at one beta site. This software was used by Duos’ consulting auditing teams. DcVue was based upon the Company’s OSPI patent which was awarded in 2010. The Company offered DcVue available for large data centers is now operatedlicense to our customers as a divisionlicensed software product. The Company ceased offering this product in 2021.
The Company’s strategy is to deliver operational and technical excellence to our customers, expand our RIP and ALIS solutions into current and new customers focused in the Rail, Logistics and U.S. Government Sectors, offer both one-time equipment sales and capital lease pricing models, and longer-term offer subscription pricing, to customers that increases recurring revenue, grows backlog and improves profitability, responsibly grow the business both organically and through selective acquisitions, and promote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with the Company.
| F-9 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Reclassifications
The Company reclassified $850,999 of Series B Convertible Preferred Stock and $2,499,998 of Series C Convertible Preferred Stock as previously presented on the December 31, 2021 Consolidated Balance Sheet to additional paid-in capital to conform to the presentation at December 31, 2022 of new Series D Preferred Stock at par value rather than at stated value. There was no net effect on the total shareholders’ equity of such reclassification.
The Company that continues its sales efforts through large strategic partners. ISA developed a methodologyreclassified certain operating expenses for the efficient data collectionyear ended December 31, 2021 to conform to 2022 classification. There was no net effect on the total expenses of assets contained within large data centers and was awarded a patent in 2010 for specific methods to collect and audit data.such reclassification.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted infollowing table reflects the United States of America (“GAAP”).reclassification adjustment effect for the year ended December 31, 2021:
| Schedule of Reclassifications | ||||||||||
| Before Reclassification | After Reclassification | |||||||||
| For the Year Ended | For the Year Ended | |||||||||
| December 31, | December 31, | |||||||||
| 2021 | 2021 | |||||||||
| REVENUES: | REVENUES: | |||||||||
| Technology systems | $ | 5,871,666 | Technology systems | $ | 5,871,666 | |||||
| Technical support | 2,388,251 | Services and consulting | 2,388,251 | |||||||
| Total Revenue | 8,259,917 | Total Revenue | 8,259,917 | |||||||
| COST OF REVENUES: | COST OF REVENUES: | |||||||||
| Technology systems | 7,151,276 | Technology systems | 4,728,197 | |||||||
| Technical support | 1,369,985 | Services and consulting | 1,492,176 | |||||||
| Overhead | 2,297,826 | — | — | |||||||
| Total Cost of Revenues | 10,819,087 | Total Cost of Revenues | 6,220,373 | |||||||
| GROSS MARGIN | (2,559,170) | GROSS MARGIN | 2,039,544 | |||||||
| OPERATING EXPENSES: | OPERATING EXPENSES: | |||||||||
| Sales and marketing | 1,233,851 | Sales and marketing | 1,233,851 | |||||||
| Research and development | 251,563 | Research and development | 2,515,630 | |||||||
| General and administration | 3,412,367 | General and administration | 5,747,014 | |||||||
| Total Operating Expenses | 4,897,781 | Total Operating Expenses | 9,496,495 | |||||||
| LOSS FROM OPERATIONS | $ | (7,456,951 | ) | LOSS FROM OPERATIONS | $ | (7,456,951 | ) |
All share and per share amounts have been presented to give retroactive effect to a 1-for-35 reverse-stock split that occurred in May 2017.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-ownedwholly owned subsidiaries, duostechDuos Technologies, Inc. and TrueVue 360,TrueVue360, Inc. All inter-company transactions and balances are eliminated in consolidation.
F-9
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of derivatives,inventory, estimates of the valuation of warrants issued with debt,right of use assets and corresponding lease liabilities, valuation of beneficial conversion features in convertible debt,warrants 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.
| F-10 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Cash and Cash EquivalentsConcentrations
For the purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be a cash equivalent. There were no cash equivalents at December 31, 2018 or 2017.
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of December 31, 2018, and 2017, balance2022, the Company had balances in onea financial institution which combined exceeded federally insured limits by $1,007,029approximately $688,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s consolidated financial condition, results of operation and $1,724,594, respectively.cash flows.
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 year ended December 31, 2018, two2022, four customers accounted for 50%42%,18%, 14% and 33%14% of revenues. For the year ended December 31, 2017, three customers2021, a single customer accounted for 22%, 20%83% of revenues. In all cases, there are no minimum contract values stated. Each contract covers an agreement to deliver a rail inspection portal which, once accepted, must be paid in full, with 30% or more being due and 18%payable prior to delivery. The balances of revenues.the contracts are for service and maintenance which is paid annually in advance with revenues recorded ratably over the contract period.
At December 31, 2018, two2022, four customers accounted for 58%34%, 31%, 19% and 34%10% of accounts receivable. At December 31, 2017, four2021, two customers accounted for 42%, 17%, 13%81% and 11%10% of accounts receivable.
The two customers that make up the concentration of Credit Risk are both large companies with established businesses. One is the third largest retailer in the United States and is a Fortune 200 company. The other is one Much of the largestcredit risk is mitigated since all of seventhe customers listed here are Class 1 railroads and operates in both Canada and the United States.with a history of timely payments to us.
Geographic Concentration
Approximately 53%41% and 4.35%86% of revenue in 20182022 and 2017,2021, respectively, is generated from customers outside of the United States.
| F-11 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
F-10
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017Significant Vendors and Concentration
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
We measure our financialThe Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities in accordance withmeasured 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. For certainprinciples that requires the use of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for notes payable, net of discount, and loans payable also approximate fair value because current interest rates available to us for debt with similar terms and maturities are substantially the same.
We follow accounting guidance for financial assets and liabilities. This standard defines fair value, provides guidancemeasurements, establishes a framework for measuring fair value and requires certain disclosures. This standard does not require any newexpands disclosure about such fair value measurements, but rather applies to all other accounting pronouncements that require or permitmeasurements.
ASC 820 defines fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (costprice that would be received to replace the service capacity ofsell an asset or replacement cost).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. |
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 guidance utilizes aestimated fair value hierarchy that prioritizesof certain financial instruments, including accounts receivable, prepaid expenses, accounts payable, accrued expenses and notes payable are carried at historical cost basis, which approximates their fair values because of the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief descriptionshort-term nature of those three levels:these instruments.
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs, other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on the account,accounts, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.
Inventory
Inventory consists primarily of spare parts, consumables and long-lead 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. Any inventory determined to be obsolete is written off. Inventory cost is primarily determined using the weighted average cost method.
| F-12 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Property and Equipment
Property and equipment isare stated at cost, less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated economic life of the property and equipment (three 3to five5 years). When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the statement of operations. Leasehold improvements are expensed over the shorter of the term of our lease or their useful lives.
Software Development Costs
Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features, and technical performance requirements. Software development costs incurred after establishing technological feasibility for software sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be sold,Sold, Leased, or Marketed) are capitalized and amortized on a product-by-product basis when the product is available for general release to customers.
F-11
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Patents and Trademarks
Patents and trademarks which are stated at amortized cost, relate to the development of video surveillance security system technology and are being amortized over 17 years.
Long-Lived Assets
The Company evaluates the recoverability of its property, equipment, and other long-lived assets in accordance with FASB ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets”, which requires recognition of impairment of long-lived assets in the event the net book valuevalues of such assets exceed the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate. This guidance requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Accrual of Legal Costs Associated with Loss ContingenciesProduct Warranties
The Company expenses legal costs associated with loss contingencies, as incurred.
Product Warranties
The Company has a 90 day-day warranty period for materials and labor after final acceptance of all projects.a project. If any parts are defective they are replaced under our vendor warranty which is usually 12-3612 to 36 months. Final acceptance terms vary by customer. Some customers have a cure period for any material deviation and if the Company fails or is unable to correct any deviations, a full refund of all payments made by the customer will be arranged by the Company. As of December 31, 20182022 and 2017,2021, the warranty costs have been de-minimis;de-minimis, therefore no accrual of warranty reservesliability has been made.
Loan Costs
Loan costs paid to lenders, or third-partiesthird parties are recorded as debt discounts to the related loans and amortized to interest expense over the loan term.
Sales Returns Liabilities
Our systems are sold as integrated systems and there are no sales returns allowed.
Revenue Recognition
Project Revenue
As of January 1, 2018, theThe Company adoptedfollows Accounting Standards Update (“ASU”) 2014-89,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 unrecognized contract assets and performance obligations;obligations, satisfaction of a performance obligation creates revenue;revenue, and a performance obligation is satisfied upon transfer of control to a good or service to a customer.
Revenue is recognized for sales of systems and services over time using cost-based input methods, in which significant judgement is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.
F-12
| F-13 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
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. |
1.The Company generates revenue from four sources:
Identify(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 withcompletion and the customer;corresponding amount of revenue to recognize.
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 obligations is satisfied.
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.
MaintenanceUnder 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.
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
Maintenance and technicalTechnical 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“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.
| F-14 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
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.
IT Asset ManagementConsulting Services
The Company recognizes revenue from its IT asset management business in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605-25 which addresses Revenue Recognition for the software industry. The general criteria for revenue recognition under ASC 985-605 for our Company, which sells software licenses, which do not require any significant modification or customization, is that revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.
The Company’s IT asset managementconsulting services business generates revenues under contracts with customers from threefour sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales andsales; (3) Customer Service (trainingservice training and maintenance support).(4) Maintenance support.
For sales arrangements that do not involve multiple elements:
(1)
Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2)
For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third partythird-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.
F-13
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Deferred RevenueMultiple Performance Obligations and Allocation of Transaction Price
Deferred revenues represent billingsArrangements 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 cash receivedon an as-needed basis. In our consulting services business, multiple performance obligations may include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each performance obligation is accounted for separately when each has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each performance obligations is recognized using the applicable criteria under GAAP as discussed above for performance obligations sold in excesssingle 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 recognizable on service agreements that are not accountedis then determined for under the percentagethose combined deliverables as a single unit of completion method.
Disaggregation of Revenue
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 following the guidancenot required to purchase maintenance services. All elements in multiple performance obligations arrangements with Company customers qualify as separate units of ASC 606-10-55-296 and 297account 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 three distinct revenue sources:
a.
Turnkey, engineered projects;
b.
Associated maintenance and support services; and
c.
Professional services related to auditing of data center assets.
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 1 year in duration and are typically three to nine 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 Year Ended December 31, 2018
Segments |
| Rail |
|
| Commercial |
|
| Petrochemical |
|
| Government |
|
| Banking |
|
| IT Suppliers |
|
| Total |
| |||||||||||||||||||||||||||
Primary Geographical Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
North America |
| $ | 7,426,613 |
|
| $ | 3,523,964 |
|
| $ | 61,626 |
|
| $ | 515,465 |
|
| $ | 396,473 |
|
| $ | 124,478 |
|
| $ | 12,048,619 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Major Goods and Service Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Turnkey Projects |
| $ | 6,378,927 |
|
| $ | 3,520,919 |
|
| $ | 20,022 |
|
| $ | 437,585 |
|
| $ | 396,473 |
|
| $ | — |
|
| $ | 10,753,926 |
| ||||||||||||||||||||
Maintenance & Support |
|
| 1,047,686 |
|
|
| 3,045 |
|
|
| 41,604 |
|
|
| 77,880 |
|
|
| — |
|
|
| — |
|
|
| 1,170,215 |
| ||||||||||||||||||||
Data Center Auditing Services |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 124,478 |
|
|
| 124,478 |
| ||||||||||||||||||||
|
| $ | 7,426,613 |
|
| $ | 3,523,964 |
|
| $ | 61,626 |
|
| $ | 515,465 |
|
| $ | 396,473 |
|
| $ | 124,478 |
|
| $ | 1,2048,619 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Timing of Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Goods transferred over time |
| $ | 6,378,927 |
|
| $ | 3,520,919 |
|
| $ | 20,022 |
|
| $ | 437,585 |
|
| $ | 396,473 |
|
| $ | — |
|
| $ | 10,753,926 |
| ||||||||||||||||||||
Services transferred over time |
|
| 1,047,686 |
|
|
| 3,045 |
|
|
| 41,604 |
|
|
| 77,880 |
|
|
| — |
|
|
| 124,478 |
|
|
| 1,294,693 |
| ||||||||||||||||||||
|
| $ | 7,426,613 |
|
| $ | 3,523,964 |
|
| $ | 61,626 |
|
| $ | 515,465 |
|
| $ | 396,473 |
|
| $ | 124,478 |
|
| $ | 12,048,619 |
| ||||||||||||||||||||
F-14
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017recognition purposes.
Advertising
The Company expenses the cost of advertising. During the years ended December 31, 20182022 and 2017,2021, there were no advertising costs.
| F-15 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
The Company accounts for employee and non-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 accounts for non-employee stock-based compensation in accordance with ASC 505-50-25, “Equity Based Payments to Non-Employees,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to non-employees 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 thea number of highly subjective variables.
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for employee stock options using the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
Income Taxes
The Company accounts for income taxes in accordance with the Financial Accounting Standards Board FASB Accounting Standards Codification (“ASC”) 740, Income Taxes, which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company evaluates all significant tax positions as required by ASC 740. As of December 31, 2018,2022, the Company does not believe that it has taken any positions that would require the recording of any additional tax liability, nor does it believe that there are any unrealized tax benefits that would either increase or decrease within the next year.
Any penalties and interest assessed by income taxing authorities are included in operating expenses.
The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed. Tax years 2016, 20172019, 2020 and 20182021 remain open for potential audit.
Basic earnings per share (EPS) are computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options, stock warrants, convertible debt instruments, convertible preferred stock or other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. At December 31, 2018 and 2017,2022, there werewas an aggregate of 1,793,753 and 1,801,167147,591 outstanding warrants to purchase shares of common stock respectively; 160,143 and 0 incentivestock. At December 31, 2022, there was an aggregate of employee stock options to purchase shares of common stock atstock. At December 31, 2018 and 2017 respectively; and at December 31, 2018 and 2017, 404,2862022, common shares were issuable upon conversion of Series B convertible preferred stock,D Convertible Preferred Stock, all of which were excluded from the computation of dilutive earnings per share because their inclusion would have been anti-dilutive.
F-15
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBERAt December 31, 2018 AND 20172021, there was an aggregate of 1,376,466 outstanding warrants to purchase shares of common stock. At December 31, 2021, there was an aggregate of employee stock options to purchase shares of common stock. At December 31, 2021, common shares were issuable upon conversion of Series B Convertible Preferred Stock, all of which were excluded from the computation of dilutive earnings per share because their inclusion would have been anti-dilutive. Also, at December 31, 2021, 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.
| F-16 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Recent Accounting PronouncementsLeases
In February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2016-02, “LeasesLeases (Topic 842)” (“ASU 2016-02”). The FASB issued ASU 2016-02updated guidance requires lessees to increase transparency and comparability among organizations by recognizing leaserecognize right-of-use (“ROU”) assets and lease liabilities onfor most operating leases. In addition, the balance sheetupdated guidance requires that lessors separate lease and disclosing key information about leasing arrangements. Under ASU 2016-02,non-lease components in a lessee will recognizecontract in accordance with the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. The amendments of this ASU arenew revenue guidance in ASC 606. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018,2018.
The Company adopted this guidance effective January 1, 2019, using the modified retrospective method, whereby a cumulative effect adjustment was made as of the date of initial application. The Company also applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and (ii) initial direct costs for any existing leases. The Company made an accounting policy election to not recognize short-term leases with earlyterms 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.
The adoption permitted.of ASU 2016-02 did not materially affect our consolidated statement of operations or our consolidated statement of cash flows.
For contracts entered into on or after the effective date, at the inception of a contract the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset.
Operating ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the lease commencement date to determine the present value of future payments. The lease term includes all periods covered by renewal and termination options where the Company is reasonably certain to exercise the renewal options or not to exercise the termination options. Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
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. During 2022, the Company did not issue any convertible instruments or contracts and does not foresee any such issuances in the near future.
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 will be required toshould then recognize and measure leases at the beginningeffect of the earliest period presented using a modified retrospective approach. Management currentlymodification 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. During 2022, the Company did not issue any equity classified written call options or warrant during the year and does not plan to early adopt this guidance and is evaluatingforesee any issuances in the potential impact of this guidance on the consolidated financial statements as well as transition methods.near future.
In June 2018,2016, the FASB issued ASU 2018-07, Compensation – Stock CompensationNo. 2016-13, Financial Instruments—Credit Losses (Topic 718). This update326): Measurement of Credit Losses on Financial Instruments, which significantly changes how entities will measure credit losses for most financial assets, including accounts receivable. ASU No. 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. On November 15, 2019, the FASB delayed the effective date of Topic 326 for certain small public companies and other private companies until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company is intended to reduce costcurrently evaluating the new guidance and complexityhas not yet determined whether the adoption of the new standard will have a material impact on its consolidated financial statements or the method of adoption.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.)Vintage Disclosures. The guidance was issued as improvements to ASU expands the scopeNo. 2016-13 described above. The vintage disclosure changes require an entity to disclose current-period gross write-offs by year of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employeesorigination for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will befinancing receivables. The guidance is effective for financial statements issued by public companies for the annual and interim periodsfiscal years beginning after December 15, 2018.2022, and interim periods within those fiscal years. The amendments should be applied prospectively. Early adoption of the standardamendments is permitted.permitted, including adoption in an interim period. The standardamendments will be applied in a retrospective approach for each period presented. Management currently doesimpact our disclosures but will not plan to early adopt this guidance and is evaluating the potentialotherwise impact of this guidance on the consolidated financial statements as well as transition methods.statements. The Company is currently evaluating the new guidance.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
| F-17 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
NOTE 2 – GOING CONCERNLIQUIDITY
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $1,580,887 in 2018.$6,864,783 for the year ended December 31, 2022. During the same period, cash used in operating activities was $345,287.$7,873,307. The working capital deficit,surplus and accumulated deficit and stockholders’ deficit as of December 31, 2018 was $469,082, $30,269,833 2022, were $2,339,052 and $170,985,$52,361,834, respectively. These matters raiseIn 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 and a private placement which were completed during the Company’sfirst quarter of 2022 and during third and fourth quarters of 2022 as well as the first quarter of 2023.
As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock during 2021. Additionally, 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 first quarter of 2023, the Company raised gross proceeds of $4,000,000 from the issuance of Series E Preferred Stock (See Note 16). As part of its strategy, the Company will endeavor to utilize the Preferred Series E and the remainder of the Series D as additional funding mechanisms. Additionally, during the second quarter of 2023, the Company will again have access to its S-3 “shelf registration” statement allowing the Company to sell additional common shares. At the time of this document, 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 in the event it did not have an uptake in the preferred classes of shares previously noted. 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 issues 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 or available via the capital markets to maintain operations for at least twelve months from the date of this report.
In addition, management has been taking and continues to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning both management and staffing with a focus on improving certain skill sets necessary to build growth and profitability and focusing product strategy on opportunities that are likely to bear results in the relatively short term. The Company believes that, with the combination of Series E Preferred Stock offering coupled with an S-3 shelf registration availability starting in the second quarter of 2023, it will have sufficient working capital to meet its obligations over the following twelve months. In the last twelve months the Company has seen significant growth in its contracted backlog as well as positive signs from new commercial engagements that indicate improvements in future commercial opportunities.
Management believes that, at this time, the conditions in our market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding contract and the additional time needed to execute on new contracts previously reported have put a strain on our cash reserves. However, recent common stock offerings and private placements as well as the availability to raise capital via its shelf registration indicate there is no substantial doubt for the Company to continue as a going concern for a period of twelve months. We continue executing the plan to grow our business and achieve profitability. The Company may selectively look at opportunities for fund raising in the future. Management has extensively evaluated our requirements for the next 12 months from the issuance date of this report.
The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, drive significant additional revenue and become profitable.
Management believeshas determined that the Company currently has reached the point where anticipated profitable operations from current backlog in the final quarter of the year will allow continuation as a going concernsufficient cash and access to capital to operate for a period of at least twelve months from the date these financial statements have been issued. The ability to recognize revenue and ultimately cash receipts is contingent upon, but not limited to, acceptable performance of the delivered services. If the Company is unable to complete on some of its revenue producing opportunities in the near term, the ability to continue as a going concern based on management’s assessment may be impacted.that period.
While no assurance can be provided, management believes that these actions provide the opportunity for the Company to continue as a going concern and to grow its business and achieve profitability without the requirementwith access to raise additional capital for existing operations although such additional capital is expected in the near future (see Note 16).funding. Ultimately the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing the plan described above which was put in place in 2018late 2022 and will continue in 20192023 and beyond. As a result, we expect to generate sufficient revenue and to attain profitable operations with minimal cash use in the next 12 months. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
F-16
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
| F-18 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable were as follows at December 31, 20182022 and 2017:2021:
| Schedule of Accounts Receivable | ||||||||||||||||
| December 31, | December 31, | |||||||||||||||
|
| 2018 |
| 2017 |
| 2022 | 2021 | |||||||||
Accounts receivable |
| $ | 1,538,793 |
| $ | 298,304 |
| $ | 3,418,263 | $ | 1,738,543 | |||||
Allowance for doubtful accounts |
|
| — |
|
|
| — |
| — | — | ||||||
|
| $ | 1,538,793 |
|
| $ | 298,304 |
| ||||||||
| Accounts Receivable, Net | $ | 3,418,263 | $ | 1,738,543 | ||||||||||||
ThereThe Company’s bad debt expense was zero in 2022 and there was bad debt expense related to accounts receivable of $0 $76,046 in 2018 and 2017.2021.
NOTE 4–PROPERTY AND EQUIPMENT
The major classes of property and equipment are as followfollows at December 31, 20182022 and 2017:2021:
| Schedule of major classes of property and equipment | |||||||||||||||||
| December 31, | December 31, | ||||||||||||||||
|
| 2018 |
|
| 2017 |
| 2022 | 2021 | |||||||||
Furniture, fixtures and equipment |
| $ | 1,074,976 |
|
| $ | 862,582 |
| $ | 1,606,451 | $ | 1,264,001 | |||||
Less: Accumulated depreciation |
|
| (870,750 | ) |
|
| (797,220 | ) | (976,961 | ) | (660,748 | ) | |||||
|
| $ | 204,226 |
|
| $ | 65,362 |
| |||||||||
| Furniture, fixtures and equipment, Net | $ | 629,490 | $ | 603,253 | |||||||||||||
Total depreciation Depreciation expense in 20182022 and 20172021 was $73,530$319,928 and $42,838,$269,978, respectively.
NOTE 5–PATENTS AND TRADEMARKS
| Schedule of patents and trademarks | ||||||||||||||||
| December 31, | December 31, | |||||||||||||||
|
| 2018 |
| 2017 |
| 2022 | 2021 | |||||||||
Patents and trademarks |
| $ | 280,490 |
| $ | 267,205 |
| $ | 326,145 | $ | 309,205 | |||||
Less: Accumulated amortization |
|
| (226,619 | ) |
|
| (221,227 | ) | (256,412 | ) | (242,723 | ) | ||||
|
| $ | 53,871 |
|
| $ | 45,978 |
| ||||||||
| Patents and trademarks, Net | $ | 69,733 | $ | 66,482 | ||||||||||||
Total amortization of patentsAmortization expense in 20182022 and 20172021 was $5,392$13,688 and $5,445,$5,368, respectively.
NOTE 6–SOFTWARE DEVELOPMENT COSTS
In 2018, the Company capitalized $60,000,$60,000, relating to the development of new software products. These software products were developed by a third-partythird party and had passed the preliminary project stage prior to capitalization. During 2022, the Company capitalized $281,783 of software products developed by a third party related to artificial intelligence products placed in service.
| Schedule of Software Development Costs | ||||||||||||||||
| December 31, | December 31, | |||||||||||||||
|
| 2018 |
| 2017 |
| 2022 | 2021 | |||||||||
Software development costs |
| $ | 60,000 |
| $ | — |
| $ | 341,784 | $ | 60,000 | |||||
Less: Accumulated amortization |
|
| (20,000 | ) |
|
| — |
| (76,576 | ) | (60,000 | ) | ||||
|
| $ | 40,000 |
|
| $ | — |
| ||||||||
| Software Development Costs, net | $ | 265,208 | $ | — | ||||||||||||
Total amortizationAmortization of patentssoftware development costs in 20182022 and 20172021 was $20,000$16,576 and zero, 0respectively.
F-17
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
| F-19 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
NOTE 7–DEBT
Notes Payable -– Insurance Premium Financing Agreements
The Company’s notes payable relating to financing agreements classified as current liabilities consist of the following as of December 31, 2018 and 2017: of:
| Schedule of Notes Payable - Financing Agreements | |||||||||||||||||||||||||||||||||
|
| December 31, 2018 |
| December 31, 2017 |
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||
Notes Payable |
| Principal |
| Interest |
| Principal |
| Interest |
| Principal | Interest | Principal | Interest | ||||||||||||||||||||
Third Party - Insurance Note 1 |
| $ | 25,066 |
|
| 9.29 | % |
| $ | 25,075 |
|
| 10.30 | % |
| $ | — | — | $ | 22,266 | 7.75 | % | |||||||||||
Third Party - Insurance Note 2 |
|
| 8,501 |
| 10.75 | % |
|
| 11,679 |
| 10.00 | % |
| 17,753 | 6.24 | % | 12,667 | 6.24 | % | ||||||||||||||
Third Party - Insurance Note 3 |
|
| 14,763 |
|
| 10.25 | % |
|
| 12,903 |
|
| 9.24 | % |
| 16,094 | — | 17,570 | — | ||||||||||||||
| Third Party - Insurance Note 4 | 40,728 | — | — | — | |||||||||||||||||||||||||||||
Total |
| $ | 48,330 |
|
|
|
|
| $ | 49,657 |
|
|
|
|
| $ | 74,575 | $ | 52,503 | ||||||||||||||
The Company entered into an agreement on December 23, 20172021 with its insurance provider by executingissuing a $25,075$22,266 note payable (Insurance Note 1) issued tofor the purchase of an insurance policy, secured by that policy with an annual interest rate of 10.30%7.75% payable in monthly installments of principal and interest totaling $2,234$2,104 through OctoberNovember 23, 2018. The Company renewed the insurance policy by executing a $25,066 note payable with an annual interest rate of 9.29% payable in monthly installments of principal and interest totaling $2,172.2022. The balance of Insurance Note 1 as of December 31, 20182022 and December 31, 20172021 was $25,066zero and $25,075,$22,266, respectively.
The Company entered into an agreement on SeptemberApril 15, 2018 renewing2021 with its insurance provider by executingissuing a $15,810 note payable (Insurance Note 2) for the purchase of an insurance policy in the amount of $62,041, secured by that policy with an annual interest rate of 10.75%6.24% and payable in 10 monthly installments of principal and interest totaling $1,660 through July 15, 2019. At December 31, 2018 and December 31, 2017, the balance of Insurance Note 2 was $8,501 and $11,679, respectively.
$6,383. The Company entered into an agreementpolicy renewed on April 15, 2017 with its insurance provider by executing2022 and, in connection therewith, the Company issued a $49,000new note payable (Insurance Note 3) issued to purchase an insurance policy,the insurer on April 15, 2022 in the amount $63,766 secured by that policy with an annual interest rate of 9.24%6.24% and payable in 11 monthly installments of principal and interest totaling $5,979. At December 31, 2022 and December 31, 2021, the balance of Insurance Note 2 was $17,753 and $12,667, respectively.
The Company entered into an agreement on September 15, 2021, with its insurance provider by issuing a note payable (Insurance Note 3) for the purchase of an insurance policy in the amount of $19,965 and payable in 10 monthly installments of $1,997. The policy renewed on September 23, 2022 and, in connection therewith, the Company issued a new note payable to the insurer on September 23, 2022 in the amount $24,140 secured by that policy and payable in 12 monthly installments of principal totaling $2,012. At December 31, 2022 and December 31, 2021, the balance of Insurance Note 3 was $16,094 and $17,570, respectively.
The Company entered into an agreement on February 3, 2021 with its insurance provider by issuing a note payable (Insurance Note 4) for the purchase of an insurance policy in the amount of $215,654 with a down payment paid in the amount of $37,000 on April 6, 2021 and ten monthly installments of $17,899. The Company received a refund on October 5, 2021 for the annual audit of the policy resulting in the refund being applied to the outstanding amount of $35,787. The policy renewed on February 3, 2022 and, in connection therewith, the Company issued a new note payable to the insurer in the amount of $242,591 with a down payment paid in the amount of $41,854 and payable in ten monthly installments of $20,074. At December 31, 2022 and December 31, 2021, the balance of Insurance Note 4 was $40,728 and zero, 0 respectively.
Equipment Financing
The Company entered into an agreement on August 26, 2019 with an equipment financing company by issuing a $147,899 note secured by the equipment being financed, with an annual interest rate of 12.72% and payable in monthly installments of principal and interest totaling $4,373$4,963 through February 15, 2018.August 1, 2022. The policy renewedCompany entered into an additional agreement on April 15, 2018 inMay 22, 2020 with the amount of $49,000same equipment financing company by issuing a $121,637 secured note, with an annual interest rate of 10.25%9.90% and payable in monthly installments of principal and interest totaling $4,378.$3,919 through June 1, 2023. At December 31, 20182022 and December 31, 2017,2021, the aggregate balance of Insurance Note 4these notes was $14,763$22,851 and $12,903,$103,186, respectively.
| F-20 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
At December 31, 2022, future minimum lease payments due under the equipment financing is as follows:
| Schedule of Future Minimum Lease Payments Under Finance Lease | ||||
| Calendar year: | ||||
| Amount | ||||
| 2023 | 23,515 | |||
| Total minimum equipment financing payments | $ | 23,515 | ||
| Less: interest | (664 | ) | ||
| Total equipment financing at December 31, 2022 | $ | 22,851 | ||
| Less: current portion of equipment financing | (22,851 | ) | ||
| Long-term portion of equipment financing | $ | — | ||
Notes Payable - Related Parties– PPP Loan
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 Company’s notes payableLoan had a two-year term and an interest at a rate of 1.00% per annum (APR 1.014%). Monthly principal and interest payments were deferred for seven months after the date of disbursement and was extended an additional six months from the date of disbursement. The Loan could be prepaid at any time prior to related parties classified as current liabilities consistmaturity with no prepayment penalties. The Company applied for the PPP loan forgiveness and was granted forgiveness on February 1, 2021. The balance of the following as ofloan forgiveness associated with PPP was recognized in the Income Statement in “Other Income, net” during 2021. At December 31, 2018 and 2017:
|
| December 31, 2018 |
| December 31, 2017 |
| ||||||||||||
Notes Payable |
| Principal |
|
|
| Interest |
| Principal |
|
|
| Interest |
| ||||
CEO |
| $ | — |
|
|
|
|
|
| $ | 9,078 |
|
|
| 8 | % |
|
Sub-total current portion |
|
| — |
|
|
|
|
|
|
| 9,078 |
|
|
|
|
|
|
Add long-term portion-CEO |
|
| — |
|
|
|
|
|
|
| 39,137 |
|
|
|
|
|
|
Total |
| $ | — |
|
|
|
|
|
| $ | 48,215 |
|
|
|
|
|
|
On July 19, 2016, the Company received a $60,000 loan less fees of $75 for a related party loan with proceeds of $59,925 from the Company’s CEO. The promissory note carries an annual interest rate of 7.99% with a monthly installment payment of $1,052 through July 19, 2022. On January 5, 2018, the Company repaid the loan in full from the funds received in November 2017 as a result of a capital raise. As of December 31, 2018,2022 and December 31, 2017,2021, the outstandingloan balance was zero 0and $48,215,zero, 0 respectively.
NOTE 8–LINE OF CREDITREVENUES AND CONTRACT ACCOUNTING
The Company assumed a linegenerates revenue from four sources: (1) Technology Systems; (2) AI Technology which is included in the consolidated statements of credit with Wells Fargo Bank upon merger with ISA on April 1, 2015. The lineoperations line-item Technology Systems; (3) Technical Support; and (4) Consulting Services which is included in the consolidated statements of credit provided for borrowings up to $40,000 but is now closed to future borrowing. The balance as of December 31, 2018operations line-item Services and 2017, was $31,201 and $34,513, respectively, including accrued interest. This line of credit has no maturity date. The annual interest rate is the Prime Rate plus 8% (12% at December 31, 2018). The former CEO of ISA is the personal guarantor.
F-18
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017Consulting.
Contract assets and contract liabilities on uncompleted contracts for revenues recognized over time are as follows:
NOTE 9 –CONTRACT ACCOUNTINGContract Assets
Contract Assets
Contract assets on uncompleted contracts represents costs and estimated earningsrepresent cumulative revenues recognized in excess of billings and/or cash received on uncompleted contracts accounted for under the percentagecost-to-cost input method which recognizes revenue based on the ratio of completion contract method.costs incurred to total estimated costs.
At December 31, 20182022 and 2017,2021, contract assets on uncompleted contracts consisted of the following:
| Schedule Of Contract Assets On Uncompleted Contracts | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
|
| 2018 |
| 2017 |
| |||||||||||
Costs and estimated earnings recognized |
| $ | 4,273,057 |
| $ | 1,613,731 |
| |||||||||
| Cumulative revenues recognized | $ | 5,934,205 | $ | 5,266,930 | ||||||||||||
Less: Billings or cash received |
|
| (3,064,453 | ) |
|
| (1,189,938 | ) | (5,508,483 | ) | (5,263,481 | ) | ||||
Contract Assets |
| $ | 1,208,604 |
|
| $ | 423,793 |
| $ | 425,722 | $ | 3,449 | ||||
Contract Liabilities
Contract liabilities on uncompleted contracts representsrepresent billings and/or cash received that exceed accumulatedcumulative revenues recognized on uncompleted contracts accounted for under the percentagecost-to-cost input method.
Contract liabilities on services and consulting revenues represent billings and/or cash received in excess of completionrevenue recognized on service agreements that are not accounted for under the cost-to-cost input method.
The Company expects to recognize all contract method.liabilities within 12 months from the consolidated balance sheet date.
| F-21 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
At December 31, 20182022 and 2017,2021, contract liabilities on uncompleted contracts consisted of the following:
|
| 2018 |
|
| 2017 |
| ||
Billings and/or cash receipts on uncompleted contracts |
| $ | 8,563,241 |
|
| $ | 573,847 |
|
Less: Costs and estimated earnings recognized |
|
| (6,314,412 | ) |
|
| (373,437 | ) |
Contract Liabilities |
| $ | 2,248,829 |
|
| $ | 200,410 |
|
| Schedule of Contract Liabilities on Uncompleted Contracts | ||||||||
| 2022 | 2021 | |||||||
| Billings and/or cash receipts on uncompleted contracts | $ | 4,355,470 | $ | 4,473,726 | ||||
| Less: Cumulative revenues | (4,144,018 | ) | (3,041,088 | ) | ||||
| Contract liabilities, technology systems | $ | 211,452 | $ | 1,232,638 | ||||
| Contract Liabilities, services and consulting | 746,545 | 596,673 | ||||||
| Total Contract Liabilities | $ | 957,997 | $ | 1,829,311 | ||||
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. Technology Systems (Turnkey, engineered projects);
b. AI Technology (Associated maintenance and support services);
c. Technical Support (Licensing and professional services related to auditing of data center assets); and
d. Consulting Services (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, government, banking and IT suppliers.
4. Our technology systems and equipment projects fall into two types:
a. Transfer of goods and services are over time.
b. Goods delivered at point in time.
5. Our services & maintenance 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 one to two quarters in length; and
b. Maintenance and support contracts ranging from one to five years in length.
Quantitative:
For the Year Ended December 31, 2022
| Schedule of Disaggregation of Revenue | ||||||||||||||||||||||||||||||||
| Segments | Rail | Commercial | Petrochemical | Government | Banking/Other | IT Suppliers | Artificial Intelligence | Total | ||||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||||||
| North America | $ | 13,710,777 | $ | 115,443 | $ | — | $ | 237,414 | $ | — | $ | — | $ | 948,732 | $ | 15,012,366 | ||||||||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||||||||||||||
| Turnkey Projects | $ | 10,789,693 | $ | 9,297 | $ | — | $ | 156,530 | $ | — | $ | — | $ | 234,772 | $ | 11,190,292 | ||||||||||||||||
| Maintenance & Support | 2,921,084 | 106,146 | — | 80,884 | — | — | — | 3,108,114 | ||||||||||||||||||||||||
| Data Center Auditing Services | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Software License | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Algorithms | — | — | — | — | — | — | 713,960 | 713,960 | ||||||||||||||||||||||||
| $ | 13,710,777 | $ | 115,443 | $ | — | $ | 237,414 | $ | — | $ | — | $ | 948,732 | $ | 15,012,366 | |||||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||
| Goods transferred over time | $ | 10,789,693 | $ | 9,297 | $ | — | $ | 156,530 | $ | — | $ | — | $ | 234,772 | $ | 11,190,292 | ||||||||||||||||
| Services transferred over time | 2,921,084 | 106,146 | — | 80,884 | — | — | 713,960 | 3,822,074 | ||||||||||||||||||||||||
| $ | 13,710,777 | $ | 115,443 | $ | — | $ | 237,414 | $ | — | $ | — | $ | 948,732 | $ | 15,012,366 | |||||||||||||||||
| F-22 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Quantitative:
For the Year Ended December 31, 2021
| Segments | Rail | Commercial | Petrochemical | Government | Banking | IT Suppliers | Artificial Intelligence | Total | ||||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||||||
| North America | $ | 6,883,670 | $ | 213,517 | $ | (867 | ) | $ | 314,030 | $ | 23,340 | $ | 134,717 | $ | 691,510 | $ | 8,259,917 | |||||||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||||||||||||||
| Turnkey Projects | $ | 5,255,491 | $ | 27,831 | $ | — | $ | 233,145 | $ | 1,537 | $ | — | $ | — | $ | 5,518,004 | ||||||||||||||||
| Maintenance & Support | 1,628,179 | 185,686 | (867 | ) | 80,885 | 21,803 | — | 341,915 | 2,257,601 | |||||||||||||||||||||||
| Data Center Auditing Services | — | — | — | — | — | 131,537 | — | 131,537 | ||||||||||||||||||||||||
| Software License | — | — | — | — | — | 3,180 | — | 3,180 | ||||||||||||||||||||||||
| Algorithms | — | — | — | — | — | — | 349,595 | 349,595 | ||||||||||||||||||||||||
| $ | 6,883,670 | $ | 213,517 | $ | (867 | ) | $ | 314,030 | $ | 23,340 | $ | 134,717 | $ | 691,510 | $ | 8,259,917 | ||||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||
| Goods transferred over time | $ | 5,255,491 | $ | 27,831 | $ | — | $ | 233,145 | $ | 1,537 | $ | 131,537 | $ | 349,595 | $ | 5,999,136 | ||||||||||||||||
| Services transferred over time | 1,628,179 | 185,686 | (867 | ) | 80,885 | 21,803 | 3,180 | 341,915 | 2,260,781 | |||||||||||||||||||||||
| $ | 6,883,670 | $ | 213,517 | $ | (867 | ) | $ | 314,030 | $ | 23,340 | $ | 134,717 | $ | 691,510 | $ | 8,259,917 | ||||||||||||||||
Segment Information
The Company operates in one reportable segment.
NOTE 109 –DEFERRED COMPENSATION
As of December 31, 2018,2022, and 2017,2021, the Company has accrued $169,136$297,620 and $304,203,$505,896, respectively, of deferred compensation relating to the individual agreements with the former CEO and sales staff, which are included in the accompanying consolidated balance sheet in accrued expenses. (See Note 10)
NOTE 1110 –COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has several non-cancelable operating leases, primarily for equipment, that expire over the next year. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease. Rental expense for operating leases during 2018 and 2017 was $9,485 and $12,320, respectively.
|
| Year Ended December 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Purchase Power/FP Mailing |
| $ | 195 |
|
| $ | 369 |
|
Coffee Perks/A. Antique Coffee Services |
|
| 310 |
|
|
| 382 |
|
Canon |
|
| 8,980 |
|
|
| 11,569 |
|
Total Operating Leases rent expense |
| $ | 9,485 |
|
| $ | 12,230 |
|
TheOperating Lease Obligations
On July 26, 2021, the Company has anentered a new operating lease agreement through the former parent, for office and warehouse combination space located in Jacksonville, Florida that expiredof 40,000 square feet, with the lease commencing on November 1, 2021, and ending April 30, 2016.2032. This new space combines the Company’s two separate work locations into one facility, which allows for greater collaboration and also accommodates a larger anticipated workforce and manufacturing facility. On March 8, 2016,November 24, 2021, the former parent executed an amendmentlease was amended to commence on December 1, 2021, and end on May 31, 2032. The Company recognized a ROU asset and operating lease liability in the currentamount of $4,980,104 at lease with a start datecommencement. Rent for the first eleven months of May 1, 2016 and endingthe term was calculated based on October 31, 2021.30,000 rentable square feet. The rent is subject to an annual escalation of 3%2.5%, beginning MayNovember 1, 2017.2023. The Company enteredmade a new lease agreementsecurity deposit payment in the amount of $600,000 on July 26, 2021. The right of use asset balance at December 31, 2022, net of amortization, was $4,689,931.
| F-23 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
As of December 31, 2022, the office and warehouse space on June 1, 2018lease is the Company’s only lease with a term greater than twelve months. The office and ending May 31, 2021. This additional space allows for resource growth and engineering efforts for operations before deploying to the field.
F-19
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Minimum rent payments under these leases are recognized onwarehouse lease has a straight-line basis over theremaining term of approximately 9.5 years and includes an option to extend for two renewal terms of five years each. The renewal options are not reasonably certain to be exercised, and therefore, they are not included when determining the leases.lease term used to establish the right-of use asset and lease liability. The current monthlyCompany also has several short-term leases, primarily related to equipment. The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on the consolidated balance sheet and instead recognize the lease payment is $20,177. Rentalpayments in expense as incurred. The Company has also elected to account for the officereal estate leases that contain both lease during 2018 and 2017 was $209,389 and $174,878, respectively.non-lease components (such as common area maintenance) as a single lease component.
The following is a schedule oftable shows supplemental information related to leases:
| Schedule of supplemental information related to leases | ||||||||
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Lease cost: | ||||||||
| Operating lease cost | $ | 782,591 | $ | 414,085 | ||||
| Short-term lease cost | 33,751 | 21,628 | ||||||
| Other information: | ||||||||
| Operating cash outflow used for operating leases | 416,250 | 285,959 | ||||||
| Weighted average discount rate | 9.0 | % | 9.0 | % | ||||
| Weighted average remaining lease term | 9.5 years | 10.4 years | ||||||
At December 31, 2022, future minimum lease payments for non-cancelabledue under the operating leaseslease are as follows:
2019 |
|
| $ | 233,658 |
|
2020 |
|
|
| 235,019 |
|
2021 |
|
|
| 212,471 |
|
Total |
|
| $ | 681,148 |
|
| Schedule of future minimum lease payments for non-cancellable operating leases | ||||
As of December 31, 2022 | ||||
| Fiscal year: | ||||
| 2023 | $ | 696,869 | ||
| 2024 | 779,087 | |||
| 2025 | 798,556 | |||
| 2026 | 818,518 | |||
| 2027 | 838,984 | |||
| Thereafter | 4,043,427 | |||
| Total undiscounted future minimum lease payments | 7,975,441 | |||
| Less: Impact of discounting | (2,735,629 | ) | ||
| Total present value of operating lease liability | 5,239,812 | |||
| Current portion | (696,869 | ) | ||
| Operating lease liability, less current portion | $ | 4,542,943 | ||
Delinquent Payroll Taxes PayableExecutive Severance Agreement
On April 1, 2018, the Company entered into an employment agreement (the “Arcaini Employment Agreement”) with Gianni B. Arcaini, pursuant to which Mr. Arcaini served as Chief Executive Officer and Chairman of the Board of Directors of the Company. Under the Arcaini Employment Agreement, Mr. Arcaini was paid an annual salary of $249,260 and an annual car allowance of $18,000. In addition, as incentive-based compensation, Mr. Arcaini was entitled to 1% of annual gross revenues of the Company and its subsidiaries. The Arcaini Employment Agreement had an initial term through March 31, 2020, subject to renewal for successive one-year terms unless either party gave notice of that party’s election to not renew to the other at least 60 days prior to the expiration of the then-current term. The Arcaini Employment Agreement was approved by the Compensation Committee.
As previously disclosed, on July 10, 2020, the Company announced that Mr. Arcaini would retire from these positions, effective as of September 1, 2020 (the “CEO Transition”). In order to facilitate a transition of his duties, the Company and Mr. Arcaini entered into a separation agreement which became effective as of July 10, 2020 (the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. 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 date hereof,Board of Directors of the Company. The Corporate Governance and Nominating Committee did not submit Mr. Arcaini for re-election as a director and on November 19, 2020 at the Annual Shareholders meeting a new non-Executive Chairman was appointed.
| F-24 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
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 paid its payroll taxes in full andthe 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 had appealedpaid to Mr. Arcaini a lump-sum amount equal to the IRS penaltyfirst six months of payments, for a reduction which was under review. The IRS has since responded,or $124,631, owed to Mr. Arcaini and the Company will be requiredcontinue to repay the penaltiespay him in connection with the delinquent payroll taxes. Atsemi-monthly installments for 30 months thereafter, as contemplated in Mr. Arcaini’s Separation Agreement. The remaining balance of approximately $228,673 as of December 31, 2018,2022 is included in accrued expenses in the payroll taxes payableaccompanying consolidated balance sheet. In addition, the Company will pay one-half of $317,573 includes accrued late feesMr. 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 $123,572.50,358 became exercisable and vested in their entirety on the Separation Date valued at $95,127. The Company has started making monthly payments inmade payment of his attorneys’ fees for legal work associated with the amountnegotiation and drafting of $15,000 starting in July 2018 to pay down the accrued late fees.
LicensingSeparation Agreement
The Company has entered into a new software license and configuration services agreement with a third-party vendor. The annual support and maintenance fees of approximately $300,000 include support and updates to the vendor’s Gateway software and customer access to their services (including web application, mobile application, and associated APIs) for gateway configuration, gateway monitoring and management, application configuration, application management, and automatic model updates.$17,000.
The Company has also entered into a SaaS Agreement with the same vendor that is an Amazon AWS-hosted software service enabling the automation of visual observation tasks using deep convolutional neural networks and other computer vision techniques. It consists of a public API, web application, iPhone application, and associated backend services. The system supports the labeling of example image data, the automatic building of classification, detection, localization, measuring and counting applications based on the labeled example data, and the run-time deployment of the trained application models.
NOTE 1211 –INCOME TAXES
The Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax assets (liabilities) at December 31, 20182022 and 20172021 consist of net operating loss carryforwards and differences in the book basis and tax basis of intangible assets.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent.
The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.
F-20
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 20182022 and 20172021 were as follows:
| Schedule of difference between income taxes at effective statutory rate and provision for income taxes | ||||||||||||||||
| Years Ended December 31, | ||||||||||||||||
|
| Years Ended December 31, |
| 2022 | 2021 | |||||||||||
|
| 2018 |
| 2017 |
| |||||||||||
Income tax benefit at U.S. statutory rate of 21% in 2018 and 34% in 2017 |
| $ | (331,986 | ) |
| $ | (1,751,842 | ) | ||||||||
| Income tax benefit at U.S. statutory rate of 21% | $ | (1,441,624 | ) | $ | (1,261,869 | ) | ||||||||||
State income taxes |
| (56,912 | ) |
| (185,489 | ) | (247,135 | ) | (216,321 | ) | ||||||
Non-deductible expenses |
| 110,165 |
|
| 551,235 |
| 201,521 | 64,553 | ||||||||
Effect of change in federal statutory rate to 21% |
| — |
| 490,618 |
| |||||||||||
Change in valuation allowance |
|
| 278,733 |
|
|
| 895,478 |
| 1,487,238 | 1,413,637 | ||||||
Total provision for income tax |
| $ | — |
|
| $ | — |
| $ | — | $ | — | ||||
The Company’s approximate net deferred tax assets as of December 31, 20182022 and 20172021 were as follows:
| Schedule of net deferred tax assets | ||||||||||||||||
| December 31, | ||||||||||||||||
|
|
|
|
|
| 2022 | 2021 | |||||||||
|
| December 31, |
| |||||||||||||
|
| 2018 |
| 2017 |
| |||||||||||
Deferred Tax Assets: |
|
|
|
|
| |||||||||||
| Deferred Tax Asset (Liability): | ||||||||||||||||
Net operating loss carryforward |
| $ | 4,653,240 |
| $ | 4,357,876 |
| $ | 9,772,854 | $ | 8,247,427 | |||||
Intangible assets |
|
| 80,472 |
| 97,103 |
| (32,656 | ) | 5,553 | |||||||
|
| 4,733,712 |
| 4,454,979 |
| 9,740,198 | 8,252,960 | |||||||||
Valuation allowance |
|
| (4,733,712 | ) |
|
| (4,454,979 | ) | (9,740,198 | ) | (8,252,960 | ) | ||||
Net deferred tax assets |
| $ | — |
|
| $ | — |
| $ | — | $ | — | ||||
The gross operating loss carryforward was approximately $18,915,611$39,727,050 and $17,715,000$33,522,769 at December 31, 20182022 and 2017,2021, respectively. The Company provided a valuation allowance equal to the net deferred income tax assets for the years ended December 31, 20182022, and 20172021 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward and other deferred tax assets. The increase in the valuation allowance was $278,733$1,487,238 in 2018.2022.
The potential tax benefit arising from the net operating loss carryforward of $4,357,876$4,357,876 from the period prior to Act’s effective dateJanuary 1, 2018, will expire in 2037. The potential tax benefit arising from the net operating loss carryforward of $295,364 from the period following to the Act’s effective date$5,382,322 generated after January 1, 2018 can be carried forward indefinitely within the annual usage limitations.
| F-25 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual limitationslimitation as a result of ownership or business changes that may occur in the future. The Company has not conducted a study to determine the limitations on the utilization of these net operating loss carryforwards. If necessary, the deferred tax assets will be reduced by any carryforward that may not be utilized or expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2018, 20172021, 2020 and 20162019 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE 1312 –SERIES A REDEEMABLE CONVERTIBLE CUMLATIVE PREFERRED STOCKSTOCKHOLDERS’ EQUITY
Our board of directors has designated 500,000 of the 10,000,000 authorized shares of preferred stock as Series A Convertible Preferred Stock. In September through October 2016, the Company sold 29,600 shares of Series A Convertible Preferred Stock for cash proceeds equal to the stated value of $296,000. Accrued cumulative dividends during 2017 was $17,760 and $5,920 during 2016. The total redeemed on November 24, 2017 was for a total of $319,680.
F-21
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Rank. The Series A Convertible Preferred Stock will rank senior to our common stock to the extent of its liquidation preference of $10 per share (the “Stated Value”).
Conversion. Each share of the Series A Preferred is convertible into shares of our common stock at any time at the option of the holder, into that number of shares of common stock determined by dividing the sum of (i) the Stated Value of such shares of Series A Preferred and (ii) the accrued and unpaid dividends per share by the conversion price of $88.20 (the “Conversion Price”). In the event the Company undertakes a registered offering; the holder may elect to convert at the terms of that offering for a period of 30 days after the offering is closed after which only the conversion terms described above will be available. In all cases, any conversion rights will always be tied to the price of the Company’s stock. (see “Certain Adjustments” below).
Liquidation Preference. In the event of our liquidation, dissolution or winding up, whether voluntary or involuntary (the “Liquidation Event”), holders of the Series A Preferred then outstanding shall be entitled to receive, out of assets of the Company available for distribution to its stockholders, an amount equal to the Stated Value plus any accrued and unpaid dividends as of the date of such Liquidation Event.
Voting Rights. Holders of Series A Preferred will vote on an as converted basis on all matters on which the holders of common stock are entitled to vote. In addition, as long as the Series A Preferred remains outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series A Preferred (i) alter or change adversely the powers, preferences or rights given to the Series A Preferred (ii) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a Liquidation Event senior to, or otherwise pari passu with, the Series A Preferred (iii) amend its Articles of Incorporation or other charter documents in any way that may adversely affect any rights of Series A Preferred, (iv) increase the authorized shares of Series A Preferred or (v) enter into any agreement with respect to the foregoing.
Dividends. Each share of Series A Convertible Preferred Stock shall be entitled to receive, an annual 8% dividend. Such dividend will be accrued and be paid either as part of conversion to common stock where such dividend will be converted at the same rate or on redemption at the end of three years. The holders of shares of the Series A shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefore, cumulative cash dividends at an annual rate of eight percent (8%) of the Stated Value (the “Dividend Rate”). Such dividends on shares of Series A shall be cumulative from the date such shares are issued, whether or not in any period there shall be funds of the Company legally available for the payment of such dividends and whether or not such dividends are declared, and shall be payable quarterly, when as, and if declared by the Board of Directors, on April 10, July 10, October 10, and January 10 in each year (each a “Dividend Payment Date”_ to holders of record as of March 31, June 30, September 30 and December 31 in each year (the “Record Date”). Cumulative dividends shall always accrue a compounded rate equal to the Dividend Rate and shall accrue from and including the date of issuance of such shares to and including a Dividend Payment Date. Such dividends shall accrue whether or not there shall be (at the time such dividend becomes payable or at any other time) profits, surplus or other funds of the Company legally available for the payment of dividends.
Certain Adjustments. The conversion price of the Series A Convertible Preferred Stock is subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, combinations and reclassifications of our common stock. Additionally, if the Company sells or issues any shares of Common Stock or Common Stock Equivalents at a price per share less than the Conversion price (a “Lower-Price Issuance”) in connection with a financing where one of the purposes is to permit the Company’s Common Stock being accepted for listing on a National Securities Exchange, then for a period of 30 days after the Common Stock begins to trade on a National Securities Exchange the Conversion Price shall be reduced to the Lower Price Issuance. After the 30-day period has expired, the Conversion Price shall increase to the level immediately prior to commencement of the 30-day period.
Redemption. The holder has the right to request redemption of the Series A Preferred Stock after a period of three years in an amount equal to the Stated Value plus accrued and unpaid dividends.
The Series A convertible preferred stock has been reflected as temporary equity at its redemption value on the accompanying consolidated balance sheet because of its redemption feature.
F-22
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Additionally, in connection with the conversion and redemption portion of the Private Offering, the Company entered into Letter Agreements (the “Preferred Stock Letter Agreements”) with holders of the Company’s Series A Preferred Stock (the “Preferred Holders”) for repayment of an aggregate amount of $319,680. All Series A holders were repaid in full and no stock or warrants were issued.
NOTE 14 –STOCKHOLDERS’ EQUITY (DEFICIT)
2016 Equity Plan
On March 11, 2016,We maintained the Board adopted the plan and the shareholders approved the plan during the annual shareholders meeting on April 21, 2016. On May 27, 2016, the Company filed a registration statement for the securities planned to be issued under the plan which became effective at that date.
The 2016 Equity Incentive Plan (the “2016 Plan”) providesfor employees, officers, directors and other entities and individuals whose efforts contribute to our success. The 2016 Plan terminated pursuant to its terms on December 31, 2020, although all outstanding awards on such date continue in full force and effect.
2021 Equity Plan
On May 12, 2021, the Board adopted, with shareholder approval as of July 15, 2021, the 2021 Equity Incentive Plan (the “2021 Plan”) providing for the issuance of up to 16,327 shares of our common stock.Common Stock. The purpose of the 2021 Plan is to assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals to align their interests with those of our stockholders. In March 2018,shareholders.
General Description of the Board of Directors approved an increase in the total amount of shares or share equivalents that could be issued under the plan to 178,572.2021 Plan
On April 23, 2018, the Company issued a total of 160,143 incentive stock options to certain employees and directors under the plan.
Administration
The 2016following is a summary of the material provisions of the 2021 Plan and is qualified in its entirety by reference to the complete text of the 2021 Plan, which you are encouraged to read in full.
Administration
The 2021 Plan is administered by the Compensation Committee of the Board, which currently consists of twothree members of the Board, each of whom is a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act and an “outside director” within the meaning of Code Section 162(m). Among other things, the compensation committeeCompensation Committee has complete discretion, subject to the express limits of the 20162021 Plan, to determine the directors, employees and nonemployee consultants to be granted an award, the type of award to be granted, the terms and conditions of the award, the form of payment to be made and/or the number of shares of common stockCommon Stock subject to each award, the exercise price of each option and base price of each stock appreciation right (“SAR”), the term of each award, the vesting schedule for an award, whether to accelerate vesting, the value of the common stockCommon Stock underlying the award, and the required withholding, if any. The Compensation Committee may amend, modify or terminate any outstanding award, provided that the participant’s consent to such action is required if the action would impair the participant’s rights or entitlements with respect to that award. The Compensation Committee is also authorized to construe the award agreements and may prescribe rules relating to the 20162021 Plan. Notwithstanding the foregoing, the compensation committeeCompensation Committee does not have any authority to grant or modify an award under the 20162021 Plan with terms or conditions that would cause the grant, vesting or exercise thereof to be considered nonqualified “deferred compensation” subject to Code Section 409A.
Grant of Awards; Shares Available for Awards
The 20162021 Plan provides for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees and nonemployee consultants of the Company or its affiliates. We have reserved a total of 158,419 shares of common stockCommon Stock for issuance as or under awards to be made under the 20162021 Plan. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 20162021 Plan.
Currently, there are eleven identified employees (including two executive officers and directors), three non-employee directors, and up to thirty other current or future staff members who would be entitled to receive stock options and/or shares of restricted stock under the 2016 Plan. Future new hires and additional non-employee directors and/or consultants would be eligible to participate in the 2016 Plan as well.
F-23
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
| F-26 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Stock Options
The 20162021 Plan provides for either “incentive stock options” (“ISOs”), which are intended to meet the requirements for special federal income tax treatment under the Code, or “nonqualified stock options” (“NQSOs”);. On May 12, 2021, the stockholders2021 Plan was approved by shareholders and adopted by the 2016 Plan at the annual meeting as previously described.board of directors. Stock options may be granted on such terms and conditions as the compensation committeeCompensation Committee may determine; provided, however, that the per share exercise price under a stock option may not be less than the fair market value of a share of the Company’s common stockCommon Stock on the date of grant and the term of the stock option may (110% of such value and five years in the case of an ISO granted to an employee who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of capital stock of our companythe Company or a parent or subsidiary of our company)the Company). ISOs may only be granted to employees. In addition, the aggregate fair market value of our common stockCommon Stock covered by one or more ISOs (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not exceed $100,000.$100,000. Any excess is treated as a NQSO.
Stock Appreciation Rights
AAn SAR entitles the participant, upon exercise, to receive an amount, in cash or stock or a combination thereof, equal to the increase in the fair market value of the underlying common stockCommon Stock between the date of grant and the date of exercise. SARs may be granted in tandem with, or independently of, stock options granted under the 20162021 Plan. AAn SAR granted in tandem with a stock option (i) is exercisable only at such times, and to the extent, that the related stock option is exercisable in accordance with the procedure for exercise of the related stock option; (ii) terminates upon termination or exercise of the related stock option (likewise, the common stockCommon Stock option granted in tandem with a SAR terminates upon exercise of the SAR); (iii) is transferable only with the related stock option; and (iv) if the related stock option is an ISO, may be exercised only when the value of the stock subject to the stock option exceeds the exercise price of the stock option. AAn SAR that is not granted in tandem with a stock option is exercisable at such times as the compensation committeeCompensation Committee may specify.
Performance SharesShare and Performance Unit Awards
Performance share and performance unit awards entitle the participant to receive cash or shares of our common stockCommon Stock upon the attainment of specified performance goals. In the case of performance units, the right to acquire the units is denominated in cash values.
Restricted Stock Awards and Restricted Stock Unit Awards
A restricted stock award is a grant or sale of common stockCommon Stock to the participant, subject to our right to repurchase all or part of the shares at their purchase price (or to require forfeiture of such shares if issued to the participant at no cost) in the event that conditions specified by the compensation committeeCompensation Committee in the award are not satisfied prior to the end of the time period during which the shares subject to the award may be repurchased by or forfeited to us. Our restricted stock unit entitles the participant to receive a cash payment equal to the fair market value of a share of common stockCommon Stock for each restricted stock unit subject to such restricted stock unit award, if the participant satisfies the applicable vesting requirement.
Unrestricted Stock Awards
An unrestricted stock award is a grant or sale of shares of our common stockCommon Stock to the participant that is not subject to transfer, forfeiture or other restrictions, in consideration for past services rendered to the Company or an affiliate or for other valid consideration.
Amendment and Termination
The compensation committeeCompensation Committee may adopt, amend and rescind rules relating to the administration of the 20162021 Plan, and amend, suspend or terminate the 20162021 Plan, but no such amendment, rescission, suspension or termination will be made that materially and adversely impairs the rights of any participant with respect to any award received thereby under the 20162021 Plan without the participant’s consent, other than amendments that are necessary to permit the granting of awards in compliance with applicable laws. We have attempted to structure the 2016 Plan so that remuneration attributable to stock options and other awards will not be subject to the deduction limitation contained in Code Section 162(m).
F-24
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
| F-27 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Series B Convertible Preferred Stock
The following summary of certain terms and provisions of our Series B Convertible Preferred Stock (the “Series B Preferred”Convertible Preferred Stock”) is subject to, and qualified in its entirety by reference to, the terms and provisions set forth in our certificate of designation of preferences, rights, and limitations of Series B Convertible Preferred Stock (the “Series B Convertible Preferred Certificate of Designation”) as previously filed. Subject to the limitations prescribed by our articles of incorporation, our board of directors is authorized to establish the number of shares constituting each series of preferred stock and to fix the designations, powers, preferences, and rights of the shares of each of those series and the qualifications, limitations and restrictions of each of those series, all without any further vote or action by our stockholders. Our board of directors has designated of the authorized shares of preferred stock as Series B Convertible Preferred Stock. When issued, theThe shares of Series B Convertible Preferred Stock will beare validly issued, fully paid and non-assessable.
Each share of Series B Convertible Preferred Stock is convertible at any time at the holder’s option into a number of shares of common stock equal to $1,000 $1,000 divided by the conversion price of $7.00 $7.00 per share. Notwithstanding the foregoing, we shall not effect any conversion of Series B Convertible Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series B Convertible Preferred Stock (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares of our common stock in excess of 4.99% (or, at the election of the purchaser, 9.99%) of the shares of our common stock then outstanding after giving effect to such exercise. Effective November 24, 2017 (the “Effective Date”), the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) which included the issuance of shares of Series B Convertible Preferred Stock worth $2,830,000 (including$(including the conversion of liabilities at a price of $1,000 $per Class B Unit.Unit). During 2021, Series B shares were converted into common shares. During the third quarter of 2022, shares of Series B Convertible Stock were converted into shares of common stock. As of the date hereof,December 31, 2022 and December 31, 2021, there are 2,830 zero and shares, respectively, of Series B Convertible Preferred Stock issued and outstanding.
Common stock issuedSeries C Convertible Preferred Stock
Effective November 24, 2017 (the “Effective Date”),On February 26, 2021, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights“Purchase Agreement”) with 57certain existing investors in the Company (the “Purchasers”). Pursuant to the Securities Purchase Agreement, the Purchasers purchased 1,171,652 shares of common stock, 1,575,911 purchaser warrants (the “Purchaser Warrants”), and 2,830 shares ofa newly authorized Series BC Convertible Preferred Stock (collectively,(the “Series C Convertible Preferred Stock”), and the “SPA Securities”) worth $11,031,371 (including the conversionCompany received proceeds of liabilities and redemptions of shares of Series A Preferred Stock) at a price of $7.00 per Class A Unit (as defined in the Securities Purchase Agreement) and $1,000 per Class B Unit (as defined in the Securities Purchase Agreement) (the “Private Offering”)$4,500,000. The Purchaser Warrants have a strike price of $9.10, expiring five years from the Initial Exercise Date (as defined in the Purchaser Warrants). The Securities Purchase Agreement contains customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. Additionally,
Under the Purchasers may participate inPurchase Agreement, the Company was required to hold a subsequent offeringmeeting of shareholders at the earliest practical date, and such meeting occurred on July 15, 2021. Nasdaq Marketplace Rule 5635(d) limits the number of shares of common stock (or securities that are convertible into common stock) without shareholder approval and the terms of the Company’s securitiesSeries C Convertible Preferred Stock limit its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval is obtained. The Company obtained shareholder approval (the “Stockholder Approval”) in an aggregate amountorder to issue shares of up to 35%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 subsequent offering onnumber of shares of common stock outstanding before the twenty-fourth (24th) month anniversaryissuance. As described below, the terms of the Private Offering. Series C Convertible Preferred Stock limited its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval was obtained.
In connection with the Private Offering,Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series C Convertible Preferred Stock are convertible. The Company caused the registration statement to be declared effective on June 3, 2021. The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
| F-28 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
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 had 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”). All holders of the Series C Preferred Stock elected the 19.99% Beneficial Ownership Limitation.
In 2021, Series C shares were converted into common shares. In January 2022, the outstanding shares of Series C Convertible Preferred Stock were converted into shares of common stock. As of December 31, 2022 and December 2021, respectively, there are 1,339,728were zero and shares of Series C Convertible Preferred Stock issued and outstanding.
Series D Convertible Preferred Stock
On September 28, 2022 the Company amended its articles of incorporation to designate 4,000 shares as the Series D Convertible Preferred Stock (the “Series D Convertible Preferred Stock”). Each share of the Series D Convertible Preferred Stock has a stated value of $1,000. The holders of the Series D 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 D Convertible Preferred Stock has 333 votes (subject to standard anti-dilution adjustment); provided that in no event may a holder of Series D 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 D Convertible Preferred Stock is convertible, subject to shareholder approval (which has not yet been granted); 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 $3.00 (subject to standard anti-dilution). The Company shall not effect any conversion of the Series D Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Series D 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”). All holders of the Series D Preferred Stock have elected the 19.99% Beneficial Ownership Limitation. The Company shall, subject to shareholder approval, reserve and keep available out of its authorized and unissued Common Stock, solely for the issuance upon the conversion of the Series D Convertible Preferred Stock, such a number of shares of Common Stock as shall from time to time be issuable upon the conversion of all of the shares of the Series D Convertible Preferred Stock then outstanding. Additionally, the Series D Convertible Preferred Stock does not have the right to dividends and in the event of an involuntary liquidation, the Series D shares shall be treated as a pro rata equivalent of common stock outstanding at the date of the liquidation event and have no liquidation preference.
On September 30, 2022, 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 shares of the newly authorized Series D Convertible Preferred Stock (the “Series D Convertible Preferred Stock”), and shares of common stock and the Company received gross proceeds of $3,454,003 with $999,000 related to the Series D sale at $ per share. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
| F-29 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
On October 29, 2022, the Company sold to an existing investor in the Company and two other accredited investors in a private placement 83,667 shares of common stock at a price of $ a share and shares of Series D Convertible Preferred Stock at a price of $ a share, resulting in gross proceeds of $551,001 to the Company with $300,000 of the proceeds related to the Series D sale.
In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock issued pursuant to the Purchase Agreements and outstanding, 2,830the shares of common stock into which the shares of Series BD Convertible Preferred Stock issued,are convertible. The Registration Rights Agreement contains customary representations, warranties, agreements and outstandingindemnification rights and 1,560,998 common stock purchase warrants issued and outstanding. obligations of the parties.
Common stock issued for servicesPrivate Placements, Preferred Stock Conversions, Services and settlementsSettlements
During2022 Transactions
On January 11, 2022, shareholders converted and for a total of 2,500 shares of Series C Convertible Preferred Stock collectively with a stated value of $2.5 million owned by two entities related to each other with a conversion price of $5.50 per common share resulting in the first quarterissuance of 2017,129,091 and 325,455 shares of the Company’s common stock.
On February 3, 2022, the Company issued 208closed an offering of shares of common stock for services valued atin the quoted trading priceamount of $5,300,000 or $ per share before certain underwriting fees and offering expenses with net proceeds of $4,779,000.
On February 21, 2022, the Company closed on respective grant dates resulting in a consulting expensean “over-allotment” offering of $15,000.
The Company issued 482 shares of common stock duringin the third quarteramount of 2017$795,000 or $ per share before certain underwriting fees and offering expenses with net proceeds of $739,350. Both this and the previous offering were “takedowns” from a previously filed “shelf” registration statement for services valued at the quoted trading price on respective grant dates resultingoffer of up to $50,000,000 in a consulting expensethe aggregate of $25,000. These shares were issuedcommon stock, Preferred Stock, Debt Securities, Warrants, Rights or Units from time to time in November 2017.one or more offerings.
TheOn March 31, 2022, the Company issued 25,000 shares of common stock on November 24, 2017 for legal fees in the amount of $175,000.
The Company issued 3,730 shares of common stock on January 31, 2018 for payment of board fees to threefour directors in the amount of $73,708$40,000 for services to the board which was expensed during the three months ended March 31, 2022.
On June 30, 2022, the Company issued shares of common stock for payment of board fees to four directors in the amount of $40,000 for services to the board which was expensed during the three months ended June 30, 2022.
On August 25, 2022, common shares were issued upon conversion of shares of Series B Preferred Stock.
On September 30, 2022, the Company issued shares of common stock for payment of board fees to four directors in the amount of $40,000, or $4.09 per share based on the daily trading price, for services to the board which was expensed during the three months ended September 30, 2022.
On December 30, 2022, the Company issued shares of common stock for payment of board fees to four directors in the amount of $37,500 for services to the board which was expensed during the three months ended December 31, 2022.
On September 30, 2022, we sold to certain existing investors in the Company in a private placement 818,335 shares of common stock at a price of $ a share and shares of Series D Preferred Stock at a price of $ a share, resulting in the gross amount raised of $3,454,003 and we accrued estimated offering costs of $260,816 as of September 30, 2022. Subsequently, we adjusted the estimated offering costs to the actual amount of $257,240.
On October 29, 2022, we sold to an existing investor in the Company and two accredited investors in a private placement 83,667 shares of common stock at a price of $ a share and shares of Series D Preferred Stock at a price of $ a share, resulting in the gross amount raised of $551,001, including gross proceeds of $251,001 for common stock and $300,000 for Series D Preferred Stock, and recorded offering costs of $105,460.
2021 Transactions
The Company issued shares of common stock on August 5, 2021 for payment of accrued board fees to four directors in the amount of $30,000 for services to the Board.
The Company issued 21,429 shares of common stock on September 30, 20182021 for payment of accrued board fees to five directors in the exerciseamount of 21,429 warrants by a shareholder at $9.10 per share or $195,000.
F-25
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017 $45,000 for services to the Board.
The Company issued 5,164 shares of common stock on November 5, 2021 for payment of accrued board fees to four directors in the amount of $19,167 for services to the Board.
| F-30 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
The Company issued shares of common stock on December 31, 20182021 for payment of accrued board fees to an employeefour directors in exchangethe amount of $50,000 for deferred salary at $14.00 per share or $72,292.services to the Board.
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the year ended December 31, 2022 and 2021, was $ and $, respectively, for stock options granted to employees and directors. This expense is included in general and administrative expenses in the consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At December 31, 2022, the total compensation cost for stock options that was not yet recognized was $. This cost will be recognized over the remaining vesting term of the options of approximately years.
Treasury Stock
In August 2016, the Company’s Board of Directors approved a new class of Preferred Stock, “Series A”. For shareholders who invested in previous private placements, the Company was offering on a case by casecase-by-case basis, the ability to convert the existing amount invested into an equivalent amount in the Series A on the condition that they invest an equivalent additional amount in the Series A. In December of 2017, the Company redeemed all of the Series A and continues to hold shares purchased for $148,000$148,000 as a part of the original transaction. In December 2018, the Company entered into an agreement with two shareholders to purchase shares from them at fair market value. The Company purchased shares at $7.00 $ per shareshares and shares at $6.30 $ per share. In 2019, the Company entered into an agreement with two shareholders to purchase shares from them at fair market value. The Company purchased shares at $ per shares and shares at $ per share. Accordingly, as of December 31, 2018,2022, and 2017,2021, the Company held 457 and 235 shares of Company Series A stock at an aggregate value of $149,459, and $148,000 respectively.$157,452.
Options
20182022
During the first quarter of 2022, the Company’s Board of Directors granted new stock options and in the third quarter granted a further new stock options both with a strike price of $6.41 per share to 16 key employees. These options were awarded as a one-time award as a retention incentive and have a fair value of $1,596,804 for the January 1, 2022 awards and $33,096 for the July 1, 2022 award and carry a three-year vesting period. The issuance of these options generated stock option compensation expense in the year in the amount of $ and a balance of unamortized stock option compensation expense of $426,004, that is being expensed over the following years.
During the second quarter of 2018, 160,143 incentive2022, three former staff members forfeited non-qualified stock options. Additionally, during the third quarter of 2022, two employees forfeited non-qualified stock options.
2021
During the first quarter of 2021, the Company’s Board of Directors granted new stock options with a strike price of $4.32 per share to its new VP of Product Innovation. These options were issuedawarded as a one-time award as a hiring incentive and have a fair value of $52,758 as of January 4, 2021. The issuance of these options generated stock option compensation expense in that quarter in the amount of $ and a balance of unamortized stock option compensation expense of $45,073, that is being expensed over the following years.
During the second quarter of 2021, five former staff members and one contractor exercised 31,710 and forfeited non-qualified stock options. These transactions were ultimately consummated in the third quarter. Accordingly, in the third quarter the Company recorded a charge of $63,860 for the remaining unvested option which was offset by a credit of $1,270 for an over accrual recorded in the second quarter related to the forfeited options.
| F-31 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
During the third quarter of 2021, the shareholders approved the issuance of up to one million shares or share equivalents in the form of stock options for the purposes of share issuance for compensation to Board Members and grants to certain staff members for recruiting and Directors underretention. On July 14, 2021, the 2016Company filed an S-8 registration statement in concert with the 2021 Equity Compensation plan.Incentive Plan which was deemed effective on August 5, 2021. The plan covers a period of ten years.
| Schedule of Options Activity | ||||||||||||||||
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Term (Years) | Value | |||||||||||||
| Outstanding at December 31, 2020 | 451,898 | $ | 5.06 | — | ||||||||||||
| Granted | 20,000 | $ | 4.32 | — | ||||||||||||
| Forfeited | (40,632 | ) | $ | 14.00 | — | — | ||||||||||
| Outstanding at December 31, 2021 | 431,266 | $ | 4.98 | $ | 197,506 | |||||||||||
| Exercisable at December 31, 2021 | 312,310 | $ | 5.25 | — | ||||||||||||
| Outstanding at December 31, 2021 | 431,266 | $ | 4.98 | — | ||||||||||||
| Granted | 685,000 | $ | 6.41 | — | ||||||||||||
| Exercised/Forfeited | (190,000 | ) | $ | 6.41 | — | — | ||||||||||
| Outstanding at December 31, 2022 | 926,266 | $ | 5.74 | $ | 0 | |||||||||||
| Exercisable at December 31, 2022 | 404,599 | $ | 5.02 | — | ||||||||||||
The fair value of the incentive stock option grants for the yearyears ended December 31, 20182022 and 2021 were estimated using the following weighted- average assumptions:
| Schedule of Fair Value Assumptions | ||||||||
|
| For the Years Ended | For the Years Ended December 31, | |||||
|
| 2018 |
| 2017 | 2022 | 2021 | ||
Risk free interest rate |
| 2.59% |
| — | – % | % | ||
Expected term in years |
| 2.5 – 2.76 |
| — | - | |||
Dividend yield |
| — |
| — | — | — | ||
Volatility of common stock |
| 197.13% - 207.27% |
| — | -% | % | ||
Estimated annual forfeitures |
| — |
| — | ||||
Warrants
20182022
During the third quarter of 2018, a shareholder exercised 21,429 warrants in the amount of $195,000.
During the fourth quarter of 2018, the Board approved the issuance of2022, warrants to purchase 35,444held by 63 holders representing shares expired. All of the Company’s Common Stock to six shareholders.expired warrants can no longer be exercised.
20172021
During the first quarter of 2017, 13,921 warrants were issued with the Securities Purchase Agreement and the amended Placement Agent Agreement. During the same period, 27 warrants expired.
During the second quarter of 2017, 4,2542021, warrants representing 205,574 shares were exercised by seven holders. All the exercises were cashless exercises with exercise prices of $7.70 and stock prices ranging from $ to $ resulting in a total of 50,588 common shares. No new warrants were issued during the third and fourth quarter of 2021.
| F-32 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
| Schedule of Warrants Outstanding | ||||||||||||||||
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Warrants | Price | Term (Years) | Value | |||||||||||||
| Outstanding at December 31, 2020 | 1,587,553 | $ | 8.62 | — | ||||||||||||
| Warrants expired, forfeited, cancelled or exercised | (232,517 | ) | ||||||||||||||
| Warrants issued | 21,430 | $ | 7.70 | — | ||||||||||||
| Outstanding at December 31, 2021 | 1,376,466 | $ | 8.18 | — | ||||||||||||
| Exercisable at December 31, 2021 | 1,376,466 | $ | 8.18 | — | ||||||||||||
| Outstanding at December 31, 2021 | 1,376,466 | $ | 8.18 | — | ||||||||||||
| Warrants expired, forfeited, cancelled or exercised | (1,228,875 | ) | — | |||||||||||||
| Warrants issued | 0 | $ | — | — | — | |||||||||||
| Outstanding at December 31, 2022 | 147,591 | $ | 8.63 | — | ||||||||||||
| Exercisable at December 31, 2022 | 147,591 | $ | 8.63 | — | ||||||||||||
NOTE 14 – DEFINED CONTRIBUTION PLAN
The Company has a 401(k)-retirement savings plan (the “401(k) Plan”) covering all eligible employees. The 401(k) Plan allows employees to defer a portion of their annual compensation, and the Company may match a portion of the employees’ contributions generally after the first six months of service. During the year ended December 31, 2022, the Company matched 100% of the first 4% of eligible employee compensation that was contributed to the 401(k) Plan. For the year ended December 31, 2022, the Company recognized expense for matching cash contributions to the 401(k) Plan totaling $155,766.
NOTE 15 – RELATED PARTY TRANSACTIONS
On August 1, 2012, the Company entered into an independent contractor master services agreement (the “Services Agreement”) with Luceon, LLC, a Florida limited liability company, owned by our former Chief Technology Officer, David Ponevac. The Services Agreement provided that Luceon would provide support services including management, coordination or software development services and related services to duos. In January 2019, additional services were contracted with Luceon for TrueVue360™ primarily for software development through the provision of 7 additional full-time contractors located in Slovakia at a cost of $16,250 for January initially, rising to $25,583 after fully staffed, per month starting February 2019. This was in addition to the existing contract of $7,480 per month for Duos for 4 full-time contractors which increased to $8,231 per month in June of 2019. During 2020 efforts in reducing cost, Luceon reduced its staff for the TrueVue360 software development team from a staff of 7 to 3 full-time employees at a cost of $11,666 per month starting June 1, 2020. As of January 1, 2021, the Company no longer records activities in TrueVue360 and has combined billings for a total of $20,986 per month. For the twelve months ended December 31, 2021 and 2020, the total amount expensed was $93,422 and $335,334, respectively. The Company had no open accounts payable with Luceon at December 31, 2021. On May 14, 2021, the Company formally ended its relationship with Luceon in concert with the resignation of our Chief Technology Officer and as such there is no longer a related party relationship.
NOTE 16 – SUBSEQUENT EVENTS
On February 1, 2023, the board of directors authorized management to reserve an additional shares of common stock for issuance under the 2021 Equity Incentive Plan at a strike price of $. The purpose of the additional shares is to serve as a retention tool for staff.
| F-33 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
On November 9, 2022 the board of directors adopted, subject to shareholder approval, the Employee Stock Purchase Plan (“ESPP”) which would become effective as of January 1, 2023. The ESPP provisions for the issuance of up to common shares for eligible employees to purchase shares during designated offering periods under Section 423 of the Internal Revenue Code of 1986. Eligible employees are permitted to purchase shares equivalent of up to 15% of their eligible compensation with offering periods occurring twice per year whereby shares are purchased at 85% of the lower of the fair market value of common shares on the first trading date of the offering period or on the last trading day of the purchase period.
On March 27, 2023, as previously disclosed, the Company sold to an existing, accredited investor in the Company in a private placement 4,000 shares of Series E Preferred Stock at a price of $1,000 a share, resulting in gross proceeds of $4,000,000 to the Company. The issuance of the Series E Preferred Stock was accompanied with a stock purchase agreement containing certain rights pertaining to the accredited investor and a registration rights agreement.
The Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an existing investor in the Company (the “Purchaser”). Pursuant to the Purchase Agreement, the Purchaser purchased 4,000 shares of a newly authorized Series E Convertible Preferred Stock (the “Series E Convertible Preferred Stock”), and the amended Placement Agent Agreement.Company received proceeds of $4,000,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
During the third quarter of 2017, 3,866 warrants were issuedIn connection with the Securities 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 E Preferred Stock are convertible. Subject to certain conditions, the Company must cause the registration statement to be declared effective by 90 days after closing (or in the event of a full review by the SEC, by 120 days). The Registration Rights 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 120 days after closing (or 150 days in the event of a review of the proxy statement by the Securities and Exchange Commission (the “SEC”)). As described below, the terms of the Series E Preferred Stock limit its convertibility until the Company receives shareholder approval (the “Stockholder Approval”). 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.
The Company’s Board of Directors has designated 30,000 shares as the Series E Convertible Preferred Stock. Each share of the Series E Convertible Preferred Stock has a stated value of $1,000. The holder of the Series E Convertible Preferred Stock, the holder of the common stock and the amended Placement Agent Agreement.holder of any other class or series of shares entitled to vote with the common stock shall vote as one class on all matters submitted to a vote of shareholders of the Company. Each share of Series E 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 $3.00 (subject to standard anti-dilution other than provisions described below in the Purchase Agreement). The Company shall not effect any conversion of the Series E Convertible Preferred Stock, and the holder shall not have the right to convert any portion of the Series E 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”).
The holder of the Series E 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 E Preferred Stock has 333 votes (subject to adjustment); provided that in no event may a holder of Series E 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).
F-26
The Purchase Agreement also provides that the Company will not, with certain exceptions, sell or issue common stock or Common Stock Equivalents (as defined in the Purchase Agreement) on or prior to December 31, 2023 that entitles any person to acquire shares of common stock at an effective price per share less than the then conversion price of the Series E Preferred Stock without the consent of the Purchaser.
The Registration Rights Agreement contains provisions for liquidated damages equal to 1% multiplied by the aggregate subscription amount paid, paid each month, in the event certain deadlines are missed.
| F-34 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
During the fourth quarter of 2017, 1,033,143 warrants were issued with the Securities Purchase Agreement and the amended Placement Agent Agreement, 603,728 warrants were issued for debt/services and 157,591 warrants were issued to the Placement Agent. During the same period, 30,934 warrants were cancelled.
|
| Number of |
|
| Weighted Avg. Exercise Price |
|
| Remaining |
| |||
Outstanding at December 31, 2016 |
|
| 15,626 |
|
| $ | 117.60 |
|
|
| 4.6 |
|
Warrants expired, forfeited or cancelled |
|
| (30,961 | ) |
|
| 3,268.30 |
|
|
|
|
|
Warrants issued with debt, debt modifications or services |
|
| 783,358 |
|
|
| 9.10 |
|
|
| 4.6 |
|
Warrants issued |
|
| 1,033,143 |
|
|
| — |
|
|
|
|
|
Outstanding at December 31, 2017 |
|
| 1,801,066 |
|
|
| 9.10 |
|
|
| 4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired, forfeited, cancelled or exercised |
|
| (21,429 | ) |
|
|
|
|
|
| 3.9 |
|
Warrants issued |
|
| 35,444 |
|
|
| 9.10 |
|
|
| 4.9 |
|
Outstanding at December 31, 2018 |
|
| 1,815,181 |
|
|
| 9.52 |
|
|
| 3.9 |
|
Exercisable at end of period |
|
| 1,815,181 |
|
| $ | 9.24 |
|
|
| 3.9 |
|
NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under which convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from derivative accounting treatment. As a result, certain warrants that were issued as a part of a bridge financing in 2017 were initially recorded as a liability at fair value and were revalued at fair value at each reporting date in 2017, including the period ending December 31, 2017. As of November 2017, the company had issued 30,934 warrants in connection with a debt financing of $2,105,263. The warrants were for a five-year term and were exercisable initially at $73.50 per share and carried a re-pricing feature in the event that the stock price declined prior to repayment of the underlying debt instrument. These warrants were cancelled as agreed with the investor as part of the Private Offering.
The Company re-calculated the estimated fair values of the liabilities for warrant derivative instruments at March 31, June 30,September 30 and November 24, 2017 and at the warrant issuance dates of January 25, 2017 through August 22, 2017with the Black Scholes Pricing Model (“BSM”) option pricing model and Monte Carlo simulations using the closing prices of the Company’s common stock ranging from $14.70 to $122.50 and the ranges for volatility, expected term and risk-free interest indicated below that follows (BSM inputs only). The Monte Carlo simulations were used to determine a range of expected volatilities and the implied volatility used was determined with a correlation to the highest probability results from that simulation. Thus, for the year ended December 31, 2017, the Company recognized a gain from the change in derivative liability of $2,743,686 included in the statement of operations under Other Income (Expense), Warrant Derivative Gain related to these warrant derivative instruments.
| ||||
| ||||
|
| |||
|
|
| ||
|
|
| ||
|
|
| ||
F-27
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 17 –SUBSEQUENT EVENTS
On January 29, 2019, the Board of Directors appointed a new independent director and Chairman of the Compensation Committee. As a result of the appointment, the new director was granted 8,572 stock options at $14.00 strike vesting in 1-year.
On March 14, 2019, the Company entered into an agreement with two current shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 71,429 and 35,417 shares, respectively, to reduce the exercise price of these warrants to $7.70 from the original exercise price of $9.10 based on immediate exercise. Both shareholders exercised these warrants on March 15, 2019 for proceeds to the Company of $1,650,000.
On March 29, 2019, the Company entered into an agreement with a current shareholder to reduce the exercise price of warrants to purchase shares of common stock the shareholder held to $7.70 from the original exercise price of $9.10 based on the immediate exercise of these 48,899 warrants. The deal which was completed on April 1, 2019 for a total amount of $376,520.
On April 1, 2019, an employee resigned from the Company who had previously been granted 14,286 stock options. As a result of the resignation, all of the options were cancelled.
On April 3, 2019, the Company entered into an agreement with the surviving spouse of a shareholder to purchase 115 shares of common stock at fair the market value of $10.36 per share.
On January 9, 2020 the Company filed an Amendment to the Articles of Incorporation to effectuate a reverse split of the Company’s issued and outstanding common stock at an exchange ratio of 1-for -14. The reverse stock split was effective as of January 17, 2020. All share and per share data in the accompanying consolidated financial statements and footnotes has been retroactively restated to reflect the effects of the reverse stock split.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| September 30, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
|
| (Unaudited) |
|
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash |
| $ | 767,339 |
|
| $ | 1,209,301 |
|
Accounts receivable, net |
|
| 1,413,983 |
|
|
| 1,538,793 |
|
Contract assets |
|
| 1,586,138 |
|
|
| 1,208,604 |
|
Prepaid expenses and other current assets |
|
| 258,596 |
|
|
| 235,198 |
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
| 4,026,056 |
|
|
| 4,191,896 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 323,111 |
|
|
| 204,226 |
|
Operating lease right of use asset |
|
| 509,958 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
Software Development Costs, net |
|
| 25,000 |
|
|
| 40,000 |
|
Patents and trademarks, net |
|
| 61,440 |
|
|
| 53,871 |
|
Total Other Assets |
|
| 86,440 |
|
|
| 93,871 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 4,945,565 |
|
| $ | 4,489,993 |
|
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 4,340,947 | $ | 1,121,092 | ||||
| Accounts receivable | 717,346 | 3,418,263 | ||||||
| Contract assets | 1,426,312 | 425,722 | ||||||
| Inventory | 1,529,530 | 1,428,360 | ||||||
| Prepaid expenses and other current assets | 532,381 | 441,320 | ||||||
| Total Current Assets | 8,546,516 | 6,834,757 | ||||||
| Property and equipment, net | 579,689 | 629,490 | ||||||
| Operating lease right of use asset | 4,612,830 | 4,689,931 | ||||||
| Security deposit | 600,000 | 600,000 | ||||||
| Software development costs, net | 454,280 | 265,208 | ||||||
| Patents and trademarks, net | 75,017 | 69,733 | ||||||
| TOTAL ASSETS | $ | 14,868,332 | $ | 13,089,119 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 1,282,184 | $ | 2,290,390 | ||||
| Notes payable - financing agreements | 193,094 | 74,575 | ||||||
| Accrued expenses | 367,652 | 453,023 | ||||||
| Equipment financing payable-current portion | 11,566 | 22,851 | ||||||
| Operating lease obligations-current portion | 764,820 | 696,869 | ||||||
| Contract liabilities | 2,066,861 | 957,997 | ||||||
| Total Current Liabilities | 4,686,177 | 4,495,705 | ||||||
| Operating lease obligations, less current portion | 4,466,884 | 4,542,943 | ||||||
| Total Liabilities | 9,153,061 | 9,038,648 | ||||||
| Commitments and Contingencies (Note 4) | — | — | ||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock: $ par value, shares authorized, shares available to be designated | — | — | ||||||
| Series A redeemable convertible preferred stock, $ stated value per share, shares designated; issued and outstanding at March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | — | — | ||||||
| Series B convertible preferred stock, $ stated value per share, shares designated; issued and outstanding at March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | — | — | ||||||
| Series C convertible preferred stock, $ stated value per share, shares designated; issued and outstanding at March 31, 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 March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | 1 | 1 | ||||||
| Series E convertible preferred stock, $stated value per share, shares designated; and issued and outstanding at March 31, 2023 and December 31, 2022, respectively, convertible into common stock at $per share | 4 | — | ||||||
| Common stock: $ par value; shares authorized, and shares issued, and shares outstanding at March 31, 2023 and December 31, 2022, respectively | 7,168 | 7,156 | ||||||
| Additional paid-in-capital | 60,371,067 | 56,562,600 | ||||||
| Accumulated deficit | (54,505,517 | ) | (52,361,834 | ) | ||||
| Sub-total | 5,872,723 | 4,207,923 | ||||||
| Less: Treasury stock ( shares of common stock at March 31, 2023 and December 31, 2022) | (157,452 | ) | (157,452 | ) | ||||
| Total Stockholders’ Equity | 5,715,271 | 4,050,471 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 14,868,332 | $ | 13,089,119 | ||||
(Continued)
See accompanying condensed notes to the unaudited consolidated financial statements.
| F-35 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)STATEMENTS OF OPERATIONS
(Unaudited)
|
| September 30, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
|
| (Unaudited) |
|
|
|
|
| |
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,859,249 |
|
| $ | 1,416,716 |
|
Accounts payable - related parties |
|
| 12,791 |
|
|
| 13,473 |
|
Notes payable - financing agreements |
|
| 58,947 |
|
|
| 48,330 |
|
Notes payable - related parties, net of discounts |
|
| 856,372 |
|
|
| — |
|
Notes payable, net of discounts |
|
| 256,250 |
|
|
| — |
|
Line of credit |
|
| 28,512 |
|
|
| 31,201 |
|
Payroll taxes payable |
|
| 122,453 |
|
|
| 317,573 |
|
Accrued expenses |
|
| 250,132 |
|
|
| 222,328 |
|
Current portion-finance lease payable |
|
| 43,669 |
|
|
| — |
|
Current portion-operating lease obligations |
|
| 241,000 |
|
|
| — |
|
Contract liabilities |
|
| 1,107,742 |
|
|
| 2,248,829 |
|
Deferred revenue |
|
| 489,062 |
|
|
| 362,528 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
| 5,326,179 |
|
|
| 4,660,978 |
|
|
|
|
|
|
|
|
|
|
Finance lease payable |
|
| 48,408 |
|
|
|
|
|
Operating lease obligations |
|
| 293,415 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
| 5,668,002 |
|
|
| 4,660,978 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT: |
|
|
|
|
|
|
|
|
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,485,000 shares available to be designated |
|
|
|
|
|
|
|
|
Series A redeemable convertible cumulative preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at September 30, 2019 and December 31, 2018, convertible into common stock at |
|
| — |
|
|
| — |
|
Series B convertible cumulative preferred stock, $1,000 stated value per share, 15,000 shares designated; 2,080 and 2,830 issued and outstanding at September 30, 2019 and December 31, 2018, convertible into common stock at |
|
| 2,080,000 |
|
|
| 2,830,000 |
|
Common stock: $0.001 par value; 500,000,000 shares authorized, |
|
| 1,926 |
|
|
| 1,505 |
|
Additional paid-in capital |
|
| 30,672,613 |
|
|
| 27,416,802 |
|
Total stock & paid-in-capital |
|
| 32,754,539 |
|
|
| 30,248,307 |
|
Accumulated deficit |
|
| (33,319,524 | ) |
|
| (30,269,833 | ) |
Sub-total |
|
| (564,985 | ) |
|
| (21,526 | ) |
Less: Treasury stock |
|
| (157,452 | ) |
|
| (149,459 | ) |
Total Stockholders' Deficit |
|
| (722,437 | ) |
|
| (170,985 | ) |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit |
| $ | 4,945,565 |
|
| $ | 4,489,993 |
|
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| REVENUES: | ||||||||
| Technology systems | $ | 1,827,764 | $ | 783,269 | ||||
| Services and consulting | 816,524 | 656,047 | ||||||
| Total Revenues | 2,644,288 | 1,439,316 | ||||||
| COST OF REVENUES: | ||||||||
| Technology systems | 1,767,209 | 865,488 | ||||||
| Services and consulting | 339,907 | 351,762 | ||||||
| Total Cost of Revenues | 2,107,116 | 1,217,250 | ||||||
| GROSS MARGIN | 537,172 | 222,066 | ||||||
| OPERATING EXPENSES: | ||||||||
| Sales and marketing | 307,577 | 283,894 | ||||||
| Research and development | 404,885 | 436,717 | ||||||
| General and Administrative Costs | 1,971,508 | 2,143,073 | ||||||
| Total Operating Expenses | 2,683,970 | 2,863,684 | ||||||
| LOSS FROM OPERATIONS | (2,146,798 | ) | (2,641,618 | ) | ||||
| OTHER INCOME (EXPENSES): | ||||||||
| Interest expense | (1,180 | ) | (3,180 | ) | ||||
| Other income, net | 4,295 | 182 | ||||||
| Total Other Income (Expenses) | 3,115 | (2,998 | ) | |||||
| NET LOSS | $ | (2,143,683 | ) | $ | (2,644,616 | ) | ||
| Net Loss Per Share | ||||||||
| Basic | $ | (0.30 | ) | $ | (0.49 | ) | ||
| Diluted | $ | (0.30 | ) | $ | (0.49 | ) | ||
| Weighted Average Shares | ||||||||
| Basic | 7,156,876 | 5,353,620 | ||||||
| Diluted | 7,156,876 | 5,353,620 | ||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| F-36 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONSCHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2023 and 2022
(Unaudited)
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project |
| $ | 1,921,306 |
|
| $ | 4,731,106 |
|
| $ | 6,954,062 |
|
| $ | 8,516,812 |
|
Maintenance and technical support |
|
| 229,008 |
|
|
| 371,110 |
|
|
| 701,552 |
|
|
| 881,004 |
|
IT asset management services |
|
| 48,087 |
|
|
| — |
|
|
| 240,673 |
|
|
| 92,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
| 2,198,401 |
|
|
| 5,102,216 |
|
|
| 7,896,287 |
|
|
| 9,490,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project |
|
| 984,805 |
|
|
| 2,684,785 |
|
|
| 4,045,448 |
|
|
| 5,079,455 |
|
Maintenance and technical support |
|
| 158,785 |
|
|
| 89,077 |
|
|
| 420,451 |
|
|
| 300,593 |
|
IT asset management services |
|
| 29,352 |
|
|
| — |
|
|
| 99,686 |
|
|
| 47,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
| 1,172,942 |
|
|
| 2,773,862 |
|
|
| 4,565,585 |
|
|
| 5,428,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
| 1,025,459 |
|
|
| 2,328,354 |
|
|
| 3,330,702 |
|
|
| 4,062,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses |
|
| 98,311 |
|
|
| 73,468 |
|
|
| 336,433 |
|
|
| 189,092 |
|
Salaries, wages and contract labor |
|
| 1,438,608 |
|
|
| 1,072,029 |
|
|
| 4,045,689 |
|
|
| 3,153,138 |
|
Research and development |
|
| 97,273 |
|
|
| 122,755 |
|
|
| 328,403 |
|
|
| 401,116 |
|
Professional fees |
|
| 43,903 |
|
|
| 63,878 |
|
|
| 188,876 |
|
|
| 187,679 |
|
General and administrative expenses |
|
| 479,265 |
|
|
| 359,991 |
|
|
| 1,465,918 |
|
|
| 864,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 2,157,360 |
|
|
| 1,692,121 |
|
|
| 6,365,319 |
|
|
| 4,795,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
| (1,131,901 | ) |
|
| 636,233 |
|
|
| (3,034,617 | ) |
|
| (733,829 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
| (12,783 | ) |
|
| (4,589 | ) |
|
| (19,095 | ) |
|
| (14,755 | ) |
Other income, net |
|
| 615 |
|
|
| 981 |
|
|
| 4,021 |
|
|
| 3,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
| (12,168 | ) |
|
| (3,608 | ) |
|
| (15,074 | ) |
|
| (11,013 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
| (1,144,069 | ) |
|
| 632,625 |
|
|
| (3,049,691 | ) |
|
| (744,842 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stock |
| $ | (1,144,069 | ) |
| $ | 632,625 |
|
| $ | (3,049,691 | ) |
| $ | (744,842 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share |
| $ | (0.63 | ) |
| $ | 0.43 |
|
| $ | (1.78 | ) |
| $ | (0.50 | ) |
Diluted Net Income (Loss) Per Share |
| $ | (0.63 | ) |
| $ | 0.34 |
|
| $ | (1.78 | ) |
| $ | (0.50 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares-Basic |
|
| 1,817,289 |
|
|
| 1,482,318 |
|
|
| 1,715,480 |
|
|
| 1,480,297 |
|
Weighted Average Shares-Diluted |
|
| 1,817,289 |
|
|
| 1,886,604 |
|
|
| 1,715,480 |
|
|
| 1,480,297 |
|
| Preferred Stock B | Preferred Stock C | Preferred Stock D | Preferred Stock E | Common Stock | Additional | |||||||||||||||||||||||||||||||||||||||||||||||||||
| # of | # of | # of | # of | # of | Paid-in- | Accumulated | Treasury | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2022 | — | $ | — | — | $ | — | 1,299 | $ | 1 | — | $ | — | 7,156,876 | $ | 7,156 | $ | 56,562,600 | $ | (52,361,834 | ) | $ | (157,452 | ) | $ | 4,050,471 | |||||||||||||||||||||||||||||||
| Series E preferred stock issued | — | — | — | — | — | — | 4,000 | 4 | — | — | 3,999,996 | — | — | 4,000,000 | ||||||||||||||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | — | — | — | — | — | 75,128 | — | — | 75,128 | ||||||||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | — | — | — | — | — | — | — | (299,145 | ) | — | — | (299,145 | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | — | — | — | — | 12,463 | 12 | 32,488 | — | — | 32,500 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | — | — | — | — | — | — | — | — | — | — | — | (2,143,683 | ) | — | (2,143,683 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2023 | — | $ | — | — | $ | — | 1,299 | $ | 1 | 4,000 | $ | 4 | 7,169,339 | $ | 7,168 | $ | 60,371,067 | $ | (54,505,517 | ) | $ | (157,452 | ) | $ | 5,715,271 | |||||||||||||||||||||||||||||||
| Balance December 31, 2021 | 851 | $ | 1 | 2,500 | $ | 2 | — | $ | — | — | $ | — | 4,111,047 | $ | 4,111 | $ | 46,431,874 | $ | (45,497,051 | ) | $ | (157,452 | ) | $ | 781,485 | |||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | — | — | — | — | — | 250,577 | — | — | 250,577 | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued | 1,523,750 | 1,524 | 6,093,476 | — | — | 6,095,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C preferred stock converted into common stock | — | — | (2,500 | ) | (2 | ) | — | — | — | — | 454,546 | 455 | (453 | ) | — | — | (0 | ) | ||||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | — | — | — | — | — | — | — | (576,650 | ) | — | — | (576,650 | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | — | — | — | — | 7,198 | 7 | 39,993 | — | — | 40,000 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2022 | — | — | — | — | — | — | — | — | — | — | — | (2,644,616 | ) | — | (2,644,616 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | 851 | $ | 1 | — | $ | — | — | $ | — | — | $ | — | 6,096,541 | $ | 6,097 | $ | 52,238,817 | $ | (48,141,667 | ) | $ | (157,452 | ) | $ | 3,945,796 | |||||||||||||||||||||||||||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)CASH FLOWS
For the Three and Nine Months Ended September 30, 2018 and 2019(Unaudited)
|
| Preferred Stock |
|
| Common Stock |
|
| Additional |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| # of |
|
|
|
|
| # of |
|
|
|
|
| Paid-in- |
|
| Accumulated |
|
| Treasury |
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance December 31, 2017 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,475,561 |
|
| $ | 1,475 |
|
| $ | 26,628,006 |
|
| $ | (28,688,946 | ) |
| $ | (148,000 | ) |
|
| 622,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services |
|
| — |
|
|
| — |
|
|
| 3,730 |
|
|
| 4 |
|
|
| 73,704 |
|
|
| — |
|
|
| — |
|
|
| 73,708 |
|
Net Loss for the three months ended March 31, 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | (743,104 | ) |
|
| — |
|
|
| (743,104 | ) |
Balance March 31, 2018 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,478,648 |
|
| $ | 1,479 |
|
| $ | 26,701,710 |
|
| $ | (29,432,050 | ) |
| $ | (148,000 | ) |
| $ | (46,861 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 403,070 |
|
|
| — |
|
|
| — |
|
|
| 403,070 |
|
Net Loss for the three months ended June 30, 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | (634,363 | ) |
|
| — |
|
|
| (634,363 | ) |
Balance June 30, 2018 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,479,291 |
|
| $ | 1,479 |
|
| $ | 27,104,780 |
|
| $ | (30,066,413 | ) |
| $ | (148,000 | ) |
| $ | (278,154 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commons stock issued for warrants exercised |
|
| — |
|
|
| — |
|
|
| 21,429 |
|
|
| 21 |
|
|
| 194,979 |
|
|
| — |
|
|
| — |
|
|
| 195,000 |
|
Net income for the three months ended September 30, 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | 632,625 |
|
|
| — |
|
|
| 632,625 |
|
Balance September 30, 2018 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,500,720 |
|
| $ | 1,500 |
|
| $ | 27,299,759 |
|
| $ | (29,433,788 | ) |
| $ | (148,000 | ) |
| $ | 549,471 |
|
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash from operating activities: | ||||||||
| Net loss | $ | (2,143,683 | ) | $ | (2,644,616 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 116,588 | 73,628 | ||||||
| Stock based compensation | 75,128 | 250,577 | ||||||
| Stock issued for services | 32,500 | 40,000 | ||||||
| Amortization of operating lease right of use asset | 77,101 | 77,636 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 2,700,917 | 1,449,908 | ||||||
| Contract assets | (1,000,590 | ) | (264,223 | ) | ||||
| Inventory | (101,167 | ) | (24,426 | ) | ||||
| Prepaid expenses and other current assets | 228,941 | (264,687 | ) | |||||
| Accounts payable | (1,008,207 | ) | (95,708 | ) | ||||
| Accrued expenses | (85,371 | ) | (30,622 | ) | ||||
| Operating lease obligation | (8,107 | ) | 70,094 | |||||
| Contract liabilities | 1,108,864 | 534,706 | ||||||
| Net cash used in operating activities | (7,086 | ) | (827,733 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of patents/trademarks | (7,339 | ) | (600 | ) | ||||
| Purchase of software development | (212,067 | ) | — | |||||
| Purchase of fixed assets | (41,738 | ) | (101,478 | ) | ||||
| Net cash used in investing activities | (261,144 | ) | (102,078 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayments of insurance and equipment financing | (201,485 | ) | (128,437 | ) | ||||
| Repayment of finance lease | (11,285 | ) | (23,959 | ) | ||||
| Proceeds from common stock issued | — | 6,095,000 | ||||||
| Issuance cost | (299,145 | ) | (576,650 | ) | ||||
| Proceeds from preferred stock issued | 4,000,000 | — | ||||||
| Net cash provided by financing activities | 3,488,085 | 5,365,954 | ||||||
| Net increase in cash | 3,219,855 | 4,436,143 | ||||||
| Cash, beginning of period | 1,121,092 | 893,720 | ||||||
| Cash, end of period | $ | 4,340,947 | $ | 5,329,863 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Interest paid | $ | 1,180 | $ | 3,180 | ||||
| Taxes paid | $ | — | $ | — | ||||
| Supplemental Non-Cash Investing and Financing Activities: | ||||||||
| Notes issued for financing of insurance premiums | $ | 320,004 | $ | 242,591 | ||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| F-38 |
DUOS TECHNOLOGIES GROUP, INC. SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Three and Nine Months Ended September 30, 2018 and 2019
|
| Preferred Stock |
|
| Common Stock |
|
| Additional |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| # of |
|
|
|
|
| # of |
|
|
|
|
| Paid-in- |
|
| Accumulated |
|
| Treasury |
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Stock |
|
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance December 31, 2018 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,505,882 |
|
| $ | 1,505 |
|
| $ | 27,416,802 |
|
| $ | (30,269,833 | ) |
| $ | (149,459 | ) |
| $ | (170,985 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commons stock issued for warrants exercised |
|
| — |
|
|
| — |
|
|
| 214,286 |
|
|
| 214 |
|
|
| 1,649,786 |
|
|
| — |
|
|
| — |
|
|
| 1,650,000 |
|
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 21,892 |
|
|
| — |
|
|
| — |
|
|
| 21,892 |
|
Net Income for the three months ended March 31, 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 44,169 |
|
|
| — |
|
|
| 44,169 |
|
Balance March 31, 2019 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,720,168 |
|
| $ | 1,720 |
|
| $ | 29,088,479 |
|
| $ | (30,225,664 | ) |
| $ | (149,459 | ) |
|
| 1,545,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commons stock issued for warrants exercised |
|
| — |
|
|
| — |
|
|
| 76,634 |
|
|
| 77 |
|
|
| 513,943 |
|
|
| — |
|
|
| 0 |
|
|
| 514,020 |
|
Stock Repurchase |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,151 | ) |
|
| (1,151 | ) |
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,241 |
|
|
| — |
|
|
| — |
|
|
| 6,241 |
|
Stock issuance cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,000 | ) |
|
| — |
|
|
| — |
|
|
| (10,000 | ) |
Net loss for the three months ended June 30, 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,949,791 | ) |
|
| — |
|
|
| (1,949,791 | ) |
Balance June 30, 2019 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,796,802 |
|
| $ | 1,797 |
|
| $ | 29,598,663 |
|
| $ | (32,175,455 | ) |
| $ | (150,610 | ) |
| $ | 104,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commons stock issued for warrants exercised |
|
| — |
|
|
| — |
|
|
| 19,643 |
|
|
| 20 |
|
|
| 151,230 |
|
|
| — |
|
|
| — |
|
|
| 151,250 |
|
Series B preferred converted to common stock |
|
| (750 | ) |
|
| (750,000 | ) |
|
| 107,143 |
|
|
| 107 |
|
|
| 749,893 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,884 |
|
|
| — |
|
|
| — |
|
|
| 6,884 |
|
Common stock issued for services |
|
| — |
|
|
| — |
|
|
| 2,484 |
|
|
| 2 |
|
|
| 19,164 |
|
|
| — |
|
|
| — |
|
|
| 19,166 |
|
Debt discount from warrants issued with promissory note |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 146,779 |
|
|
| — |
|
|
| — |
|
|
| 146,779 |
|
Stock Repurchase |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,842 | ) |
|
| (6,842 | ) |
Net loss for the three months ended September 30, 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,144,069 | ) |
|
| — |
|
|
| (1,144,069 | ) |
Balance September 30, 2019 |
|
| 2,080 |
|
| $ | 2,080,000 |
|
|
| 1,926,072 |
|
| $ | 1,926 |
|
| $ | 30,672,613 |
|
| $ | (33,319,524 | ) |
| $ | (157,452 | ) |
| $ | (722,437 | ) |
See accompanying notes to the unaudited consolidated financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| For the Nine Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (3,049,691 | ) |
| $ | (744,842 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 136,108 |
|
|
| 71,318 |
|
Stock based compensation |
|
| 35,017 |
|
|
| 403,070 |
|
Interest expense related to debt discounts |
|
| 9,401 |
|
|
| — |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 124,810 |
|
|
| (1,093,143 | ) |
Contract assets |
|
| 379,136 |
|
|
| 76,228 |
|
Prepaid expenses and other current assets |
|
| (562,263 | ) |
|
| 58,934 |
|
Operating lease right of use asset |
|
| (509,958 | ) |
|
| — |
|
Accounts payable |
|
| 461,701 |
|
|
| 168,692 |
|
Related payable-related party |
|
| (682 | ) |
|
| 875 |
|
Payroll taxes payable |
|
| (195,120 | ) |
|
| 50,671 |
|
Accrued expenses |
|
| 27,804 |
|
|
| 17,523 |
|
Operating lease obligation |
|
| 534,415 |
|
|
| — |
|
Contract liabilities |
|
| (1,141,088 | ) |
|
| 1,057,747 |
|
Deferred revenue |
|
| 126,534 |
|
|
| (159,532 | ) |
Net cash used in operating activities |
|
| (3,623,876 | ) |
|
| (92,459 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Software development costs |
|
| — |
|
|
| (60,000 | ) |
Purchase of patents/trademarks |
|
| (11,595 | ) |
|
| (5,500 | ) |
Purchase of fixed assets |
|
| (133,039 | ) |
|
| (157,804 | ) |
Net cash used in investing activities |
|
| (144,634 | ) |
|
| (223,304 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
| (7,993 | ) |
|
| — |
|
Repayments of line of credit |
|
| (2,689 | ) |
|
| (2,997 | ) |
Repayments of related party notes |
|
| (80,000 | ) |
|
| (48,215 | ) |
Issuance cost |
|
| (10,000 | ) |
|
| — |
|
Repayments of insurance and equipment financing |
|
| (207,187 | ) |
|
| (197,792 | ) |
Payments of financial lease |
|
| (10,851 | ) |
|
| — |
|
Proceeds from notes payable-related parties |
|
| 1,080,000 |
|
|
| — |
|
Proceeds from notes payable |
|
| 250,000 |
|
|
| — |
|
Proceeds from warrants exercised |
|
| 2,315,268 |
|
|
| 195,000 |
|
Net cash provided by (used in) financing activities |
|
| 3,326,548 |
|
|
| (54,004 | ) |
|
|
|
|
|
|
|
|
|
Net decrease in cash |
|
| (441,962 | ) |
|
| (369,767 | ) |
Cash, beginning of period |
|
| 1,209,301 |
|
|
| 1,941,818 |
|
Cash, end of period |
|
| 767,339 |
|
|
| 1,572,051 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest paid |
| $ | 5,728 |
|
| $ | 7,411 |
|
|
|
|
|
|
|
|
|
|
Supplemental Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Common stock issued for accrued BOD fees |
| $ | 19,166 |
|
| $ | 73,708 |
|
Note issued for financing of insurance premiums |
| $ | 217,804 |
|
| $ | 217,173 |
|
Debt discount on Notes issued |
| $ | 12,500 |
|
| $ | — |
|
Note issued for equipment financing lease |
| $ | 102,928 |
|
| $ | — |
|
See accompanying notes to the unaudited consolidated financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019MARCH 31, 2023
(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”“Company”), through its operating subsidiaries, Duos Technologies, Inc. (“duostech”Duos”) and TrueVue360, IncInc. (“TrueVue360”, duostech Group and duostech, collectively) (collectively the “Company”), develops and deploys vision based analytical technology solutions that will help to transform precision railroading, logistics and inter-modal transportation operations. Additionally, these unique patented solutions can be employed into many other industries.
The Company has developed the Railcar Inspection Portal (RIP) that provides both freight and transit railroad customers and select government agencies the ability to conduct fully automated inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies, illumination and other sensors, scans each passing railcar to create an extremely high-resolution image set from a variety of angles including the undercarriage. These images are then processed through various methods of artificial intelligence (“AI”) algorithms to identify specific defects and/or areas of interest on each railcar. This is primarily engagedall accomplished within minutes of a railcar passing through our portal. This solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The Company has successfully deployed this system with several Class 1 railroad customers and anticipates an increased demand in the designfuture. 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 deploymentreduces/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 state-of-the-art, artificial intelligence driven intelligent technologies systems. duostech converges traditional security measures with information technologies to createIP and patented solutions that creates “actionable intelligence.” duostech’s IPintelligence” using two core native platforms called Centraco® and Praesidium™. All solutions provided include a variant of both applications. Centraco is built upon two of its core technology platforms (praesidium® and centraco®), both distributeddesigned primarily as licensed software suites, and natively embedded within engineered turnkey systems. praesidium® is a modular suite of analytics applications which process and simultaneously analyze data streams from a virtually unlimited number of conventional sensors and/or data points. Native algorithms compare analyzed data against user-defined criteria and rules in real time and automatically report any exceptions, deviations and/or anomalies. This application suite also includes a broad range of conventional operational system components and sub-systems, including an embedded feature-rich video management engine and a proprietary Alarm Management Service (AMS). This unique service provides continuous monitoring of all connected devices, processes, equipment and sub-systems, and automatically communicates to the front end-user interface, if and when an issue, event or performance anomalies are detected. centraco® is a comprehensive user interface that includes the functionalities of a Physical Security Information Management (PSIM) systemto all our systems as well as those of an Enterprise Information System (EIS)the backend connection to third-party applications and databases through both Application Programming Interfaces (APIs) and Software Development Kits (SDKs). This multi-layered interface can be securely installedis 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 a stand-alone application suite inside a local area network or pushed outside a wide area network usingmiddleware in our systems and manages the same browser-based interface. It leverages industry standardsvarious image capture devices and some sensors for data security, access, and encryption as appropriate. The platform also operates as a cloud-hosted solution.input into the Centraco software.
The Company providesalso developed a broad range of sophisticated intelligent technology solutions with an emphasis on security, inspection and operations for critical infrastructure within a variety of industries including transportation, retail, law enforcement, oil, gas and utilities sectors. In January 2019, the Company launched a dedicatedproprietary Artificial Intelligence (AI) software platform, truevue360™, through its subsidiary TrueVue360Truevue360™ with the objective of focusing the Company’s advanced intelligent technologies in the areas of Artificial Intelligent, Deep Machine LearningAI, deep machine learning and Advance Algorithmsadvanced multi-layered algorithms to further support our business growth. Consequently, our business operations are now in three business units: intelligent technologies, AI/machine learning platforms and IT asset management.solutions.
The Company’s strategy includes expansion of its technology baseis 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 one-time equipment sales and capital lease pricing models, and longer-term offer subscription pricing, to customers that increases recurring revenue, grows backlog and improves profitability, responsibly grow the business both organically and through organic development efforts, strategic partnerships,selective acquisitions, and growth through accretive acquisitions. The Company provides its broad range of technology solutionspromote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with an emphasis on mission critical security, inspection and operations within the rail transportation, commercial, petrochemical, government, and banking sectors. The Company also offers professional and consulting services for large data centers.Company.
| F-39 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
Basis of Presentation
The accompanying unaudited condensed 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 ninethree months ended September 30, 2019March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 20192023 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, 20182022 filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2019.March 31, 2023.
Principles of Consolidation
The unaudited consolidated financial statements include duostechDuos Technologies Group, Inc. and its wholly owned subsidiaries, Duos Technologies, Inc.Inc and TrueVue 360,TrueVue360 Inc. All inter-company transactions and balances are eliminated in consolidation.
F-35
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of derivatives,inventory, estimates of the valuation of right of use assets and corresponding lease liabilities, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible 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 September 30, 2019,March 31, 2023, the balance in one financial institution exceeded federally insured limits by approximately $490,005.$3,907,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s consolidated financial condition, results of operation and cash flows.
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 ninethree months ended September 30, 2019,March 31, 2023, two customers accounted for 66%,70% and 14%20% of revenues. For the ninethree months ended September 30, 2018, two customers accounted for 47% and 36% of revenues.
At September 30, 2019,March 31, 2022, four customers accounted for 32%35%, 23%24%, 17%13% and 13%11% of revenues. In all cases, there are no minimum contract values stated. Each contract covers an agreement to deliver a rail inspection portal which, once accepted, must be paid in full, with 30% or more being due and payable prior to delivery. The balances of the contracts are for service and maintenance which is paid annually in advance with revenues recorded ratably over the contract period.
At March 31, 2023, three customers accounted for 59%, 15%, and 11% of accounts receivable. At December 31, 2018, two2022, four customers accounted for 58%34%, 31%, 19% and 34%10% of accounts receivable. Much of the credit risk is mitigated since all the customers listed here are Class 1 railroads with a history of timely payments to us.
| F-40 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
Geographic Concentration
Approximately 69%For the three months ended March 31, 2023, approximately 25% of revenue iswas generated from twothree customers outside of the United States. For the three months ended March 31, 2022, approximately 54% of revenue was generated from three customers outside of the United States. These customers are Canadian and Mexican, and two of the three are Class 1 railroads operating in the United States.
Significant Vendors and Concentration of Credit Risk
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
We measure our financialThe Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities in accordance withmeasured 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. For certainprinciples that requires the use of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for notes payable, net of discount, and loans payable also approximate fair value because current interest rates available to us for debt with similar terms and maturities are substantially the same.
We follow accounting guidance for financial assets and liabilities. This standard defines fair value, provides guidancemeasurements, establishes a framework for measuring fair value and requires certain disclosures. This standard does not require any newexpands disclosure about such fair value measurements, but rather applies to all other accounting pronouncements that require or permitmeasurements.
ASC 820 defines fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (costprice that would be received to replace the service capacity ofsell an asset or replacement cost).
F-36
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)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 guidance utilizes aCompany 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 hierarchy that prioritizes the inputs to valuation techniques used to measuremeasurement.
The estimated fair value into three broad levels.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 followingamount of the allowance is a brief descriptiondetermined principally on the basis of those three levels:past collection experience and known financial factors regarding specific customers.
Level 1: Observable inputs such as quoted prices (unadjusted) in active marketsAccounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for identical assets or liabilities.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.
Level 2: Inputs, other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
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.
| F-41 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 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,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 ShareRevenue Recognition
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 September 30, 2019, there was an aggregate of 1,521,571 outstanding warrants to purchase shares of common stock. At September 30, 2019, there was an aggregate of 163,010 shares of employee stock options to purchase shares of common stock. Also, at September 30, 2019, 297,143 common shares were issuable upon conversion of Series B convertible preferred stock, all of which were excluded from the computation of dilutive earnings per share because their inclusion would have been anti-dilutive.
Revenue Recognition
As of January 1, 2018, theThe Company adoptedfollows Accounting Standards Update (“ASU”) 2014-09,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 unrecognized contract assets and performance obligations;obligations, satisfaction of a performance obligation creates revenue;revenue, and a performance obligation is satisfied upon transfer of control to a good or service to a customer.
Revenue is recognized for sales of systems and services over time using cost-based input methods, in which significant judgement is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.
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. |
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.
RecognizeThe Company generates revenue when (or as) each performance obligations are satisfied.
F-37
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)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 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.
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.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. Management implemented this standard on January 1, 2019.
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 2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company will be evaluating the impact this standard will have on the Company’s financial statements.
F-38
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
NOTE 2 – LIQUIDITY
As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $3,049,691 for the nine months ended September 30, 2019. During the same period, cash used in operating activities was $3,623,876. The working capital deficit and accumulated deficit as of September 30, 2019 were $1,300,123 and $33,319,524 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 a capital raise which was completed in late 2017 (the “2017 Offering”). Prior to this event, the Company was carrying significant debt obligations including a senior secured note with cash interest payments. The Company recently secured two short-term, unsecured loans for a total of $1,262,500.
After the 2017 Offering, management paid down all debt which eliminated monthly obligations for interest payments other than for normal course of business financing, secured sufficient working capital for ongoing operations and was successful in closing business and establishing a backlog such that we were breakeven or profitable in two of the last four quarters excluding the current quarter. The Company has been successful in increasing its ongoing working capital upon realizing proceeds of $2,315,268 from the exercise of certain warrants. Further, the Company continues to be successful in identifying, closing and executing large contracts in the Freight railroad industry. We expect to receive a substantial order in the fourth quarter from an existing client which will substantially boost our cash reserves in the short term.
Management continues to believe that 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 other than encouraging early conversions of cash warrants. Ultimately, 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 sufficient revenue and to attain consistently profitable operations. Additionally, the Company expects potential further warrant exercises, in addition to potential capital raises of its equity or debt securities, though no guarantees can be made with respect to the foregoing. Management will continue to evaluate these plans in future filings.
NOTE 3 – SOFTWARE DEVELOPMENT COSTS
At September 30, 2019 and December 31, 2018, the Company capitalized $60,000, relating to the development of new software products. These software products were developed by a third-party and had passed the preliminary project stage prior to capitalization.
Software development costs consisted of the following at September 30, 2019 and December 31, 2018:
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||
Software Development Costs |
| $ | 60,000 |
|
| $ | 60,000 |
|
Less: Accumulated amortization |
|
| (35,000 | ) |
|
| (20,000 | ) |
Total |
| $ | 25,000 |
|
| $ | 40,000 |
|
Amortization expense of software development costs for the nine months ended September 30, 2019 and 2018 was $15,000 and $15,000, respectively.
F-39
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
NOTE 4 – DEBT
Notes Payable - Financing Agreements
The Company’s notes payable relating to financing agreements classified as current liabilities consist of the following as of:
|
| September 30, 2019 |
| December 31, 2018 |
| ||||||||||||
Notes Payable |
| Principal |
|
|
| Interest |
| Principal |
|
|
| Interest |
| ||||
Third Party - Insurance Note 1 |
| $ | — |
|
|
| 9.29 | % |
| $ | 25,066 |
|
|
| 9.29 | % |
|
Third Party - Insurance Note 2 |
|
| 15,844 |
|
|
| 6.36 | % |
|
| 8,501 |
|
|
| 10.25 | % |
|
Third Party - Insurance Note 3 |
|
| — |
|
|
| 10.75 | % |
|
| 14,763 |
|
|
| 10.75 | % |
|
Third Party - Insurance Note 4 |
|
| 43,103 |
|
|
| 6.36 | % |
|
| — |
|
|
| — |
|
|
Total |
| $ | 58,947 |
|
|
|
|
|
| $ | 48,330 |
|
|
|
|
|
|
The Company entered into an agreement on December 23, 2018 with its insurance provider by issuing a $25,066 note payable (Insurance Note 1) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 9.29% payable in monthly installments of principal and interest totaling $2,172 through September 23, 2019. The balance of Insurance Note 1 as of September 30, 2019 and December 31, 2018 was zero and $25,066, respectively.
The Company entered into an agreement on April 15, 2018 with its insurance provider by issuing a $49,000 note payable (Insurance Note 2) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 10.25% payable in monthly installments of principal and interest totaling $4,378 through February 15, 2019. The policy renewed on April 15, 2019 in the amount of $51,940 with an annual interest rate of 6.36% payable in monthly installments of principal and interest totaling $5,326. At September 30, 2019 and December 31, 2018, the balance of Insurance Note 2 was $15,844 and $8,501, respectively.
The Company entered into an agreement on September 15, 2018 renewing with its insurance provider by issuing a $15,810 note payable (Insurance Note 3), secured by that policy, with an annual interest rate of 10.75% payable in monthly installments of principal and interest totaling $1,660 through July 15, 2019. At September 30, 2019 and December 31, 2018, the balance of Insurance Note 3 was zero and $14,763, respectively.
The Company entered into an agreement on February 3, 2018 with its insurance provider by issuing a $127,561 note payable (Insurance Note 4) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 8.80% payable in monthly installments of principal and interest totaling $13,276 through November 3, 2018. The policy renewed on February 3, 2019 in the amount of $141,058 with an annual interest rate of 6.36% payable in monthly installments of principal and interest totaling $14,520. At September 30, 2019 and December 31, 2018, the balance of Insurance Note 4 was $43,103 and zero, respectively.
Notes Payable – Related Parties
|
|
|
|
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||
Payable To |
|
|
|
|
|
|
| Principal |
|
| Interest |
|
| Principal |
|
| Interest* |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
|
|
|
|
|
|
| $ | 267,000 |
|
|
| 3% |
|
|
| — |
|
|
| — |
|
Related party |
|
|
|
|
|
|
|
|
|
| 733,000 |
|
|
| 3% |
|
|
| — |
|
|
| — |
|
Total |
|
|
|
|
|
|
|
|
|
| 1,000,000 |
|
|
|
|
|
|
| — |
|
|
|
|
|
Less unamortized discounts |
|
|
|
|
|
|
|
|
|
| (143,628) |
|
|
|
|
|
|
| — |
|
|
|
|
|
Total, net |
|
|
|
|
|
|
|
|
| $ | 856,372 |
|
|
|
|
|
| $ | — |
|
|
|
|
|
The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company an aggregate principal amount of $267,000, pursuant to a note, repayable on June 25, 2020. The note carries an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 11,920 shares of the Company’s common stock at a price of $7.70 per share. The balance of this note as of September 30, 2019 was $267,000.
F-40
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the principal aggregate in the amount of $733,000, pursuant to a note, repayable on June 25, 2020. The note carries an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 32,724 shares of the Company’s common stock at a price of $7.70 per share. The balance of this note as of September 30, 2019 was $733,000.
The Company determined the relative fair value between the note and the warrants on the issue date utilizing the Bi-nominal Lattice Pricing Model for the warrants. As a result, the Company allocated $146,779 to the warrants and was recorded as a debt discount with an offset to additional paid in capital in the accompanying consolidated financial statements. The fair value pricing model used the following assumptions; stock price $7.00, warrant exercise price $7.70 expected term of 5 years, expected volatility of 86% and discount rate of 1.609%.
For the nine months ended September 30, 2019, the Company recorded $3,151 for amortization of the debt discount discussed above to interest expense in the accompanying consolidated financial statements.
The Company entered into an agreement with a related party on August 29, 2019 whereby the related party loaned the Company an aggregate principal amount of $80,000. The note carries an annual percentage rate of 8% which was repaid on September 25, 2019 in addition to $456 in accrued interest.
Notes Payable
|
|
|
|
|
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||
Payable To |
|
|
|
|
|
|
|
| Principal |
|
| Interest |
|
| Principal |
|
| Interest* |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder |
|
|
|
|
|
|
|
|
|
| $ | 262,500 |
|
|
|
|
|
| $ | — |
|
|
| — |
|
Less unamortized discounts |
|
|
|
|
|
|
|
|
|
|
| (6,250 | ) |
|
|
|
|
|
| — |
|
|
|
|
|
Total, net |
|
|
|
|
|
|
|
|
|
| $ | 256,250 |
|
|
|
|
|
| $ | — |
|
|
|
|
|
The Company entered into an agreement on August 12, 2019 with a shareholder by executing a short-term $262,500 note repayable on November 11, 2019. The note was issued with a 5% original issue discount and the company received a net amount of $250,000. No other consideration was given. The balance of the note as of September 30, 2019 was $256,250.
NOTE 5 – 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 to future borrowing. The balance as of September 30, 2019 and December 31, 2018, was $28,512 and $31,201, respectively, including accrued interest. This line of credit has no maturity date. The annual interest rate is 11.75% at September 30, 2019. The former CEO of ISA is the personal guarantor.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Delinquent Payroll Taxes Payable
As of the date hereof, the Company has paid its payroll taxes in full. However, the Company had previously appealed to the IRS for a reduction of penalty payments assessed for the late payment of payroll taxes. The IRS has since responded, and the Company will be required to repay the penalties in connection with the delinquent payroll taxes. Beginning in July 2018, the Company has made monthly payments in the amount of $15,000 in order to pay down the accrued late fees. At September 30, 2019, the payroll taxes payable balance of $122,453 includes accrued late fees in the amount of $33,572.
F-41
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Licensing Agreement
The Company has entered into a new software license and configuration services agreement with a third-party vendor. The annual support and maintenance fees of approximately $300,000 include support and updates to the vendor’s Gateway software and customer access to their services (including web application, mobile application, and associated APIs) for gateway configuration, gateway monitoring and management, application configuration, application management, and automatic model updates.
The Company has also entered into a SaaS Agreement with the same vendor that is an Amazon AWS-hosted software service enabling the automation of visual observation tasks using deep convolutional neural networks and other computer vision techniques. It consists of a public API, web application, iPhone application, and associated backend services. The system supports the labeling of example image data, the automatic building of classification, detection, localization, measuring and counting applications based on the labeled example data, and the run-time deployment of the trained application models.
Finance Lease
At September 30, 2019, future minimum lease payments due under Finance Lease is as follows:
As of September 30, | Amount |
| ||
2019 |
| $ | 9,270 |
|
2020 |
|
| 37,080 |
|
2021 |
|
| 37.080 |
|
2022 |
|
| 27,811 |
|
Total minimum financial lease payments |
| $ | 111,241 |
|
Less: interest |
|
| (19,164 | ) |
Total lease liability at September 30, 2019 |
| $ | 92,077 |
|
Less: current portion of Finance Lease |
|
| (43,669 | ) |
Long Term portion of Finance Lease |
| $ | 48,408 |
|
Operating Lease Obligations
The Company has two operating lease agreements for office and warehouse space of approximately 12,708 square feet located in Jacksonville, Florida. On April 1, 2019, the Company increased the office square feet from 8,308 to 10,203 office space. The Company now has a total of office and warehouse space of approximately 14,603 square feet. The current lease was amended on May 1, 2016 and again on April 1, 2019 and ends 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 space on June 1, 2018 and ending May 31, 2021.
At September 30, 2019, future minimum lease payments due under Operating Leases are as follows:
As of September 30, | Amount |
| ||
2019 |
| $ | 76,353 |
|
2020 |
|
| 279,997 |
|
2021 |
|
| 213,568 |
|
Total minimum financial lease payments |
| $ | 569,918 |
|
Less: interest |
|
| (35,503 | ) |
Total lease liability at September 30, 2019 |
| $ | 534,415 |
|
Less: current portion of Operating Leases |
|
| (241,000 | ) |
Long Term portion of Operating Leases |
| $ | 293,415 |
|
F-42
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
In February 2016, the FASB issued ASU No. 2016-02Leases (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 $597,103. The right of use asset balance at September 30, 2019 was $509,958, the operating lease liability – current portion was $241,000 and the operating lease liability – long term portion was $293,415. This is the Company’s only lease whose term is greater than 12 months. The adoption of ASU 2016-02 did not materially affect our consolidated statement of operations or our consolidated statements of cash flows. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and to recognize all lease payments for leases with a term greater than 12 months on a straight-line basis over the lease term in our consolidated statements of operations.
NOTE 7 – STOCKHOLDERS’ EQUITY
Common stock issued for exercise of warrants
During the first quarter of 2019, the Company entered into an agreement with two shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 214,286 shares, to reduce the exercise price of these warrants to $7.70 from the original exercise price of $9.10 based on immediate exercise. Both shareholders exercised these warrants in March 2019 for proceeds to the Company of $1,650,000. The Company also accepted warrant exercises in the second quarter of 2019 from three additional shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 66,756 shares. The exercise price of these warrants was also lowered to $7.70 from the original exercise price of $9.10 based on immediate exercise for further proceeds to the Company of $514,020. Further, during the second quarter of 2019, the Company issued 9,878 shares of common stock upon the cashless exercise of 46,571 common stock warrants. Additionally, the Company also accepted warrant exercises in the third quarter of 2019 from two additional shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 19,643 shares of common stock for proceeds to the Company in the amount of $151,250.
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the nine months ended September 30, 2019, was $35,017 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 September 30, 2019, the total compensation cost for stock options not yet recognized was $39,155. This cost will be recognized over the remaining vesting term of the options of approximately one year.
F-43
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Employee Stock Options
A maximum of 178,572 shares were made available for grant under the 2016 Plan, as amended, and all outstanding options under the Plan provide a cashless exercise feature. 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 September 30, 2019, and December 31, 2018, options to purchase 163,010 shares of common stock and 160,143 shares of common stock were outstanding under the 2016 Plan, respectively.
The Company has no expired employee stock options under the 2016 Plan at September 30, 2019.
|
|
|
|
| September 30, 2019 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| Weighted |
| ||||
|
|
|
|
|
|
|
|
|
|
| Average |
| ||||
|
|
|
|
|
|
|
|
|
|
| Exercise |
| ||||
|
|
|
|
|
|
|
| Shares |
|
| Price |
| ||||
Outstanding at December 31, 2018 |
|
|
|
|
|
|
|
|
|
| 160,152 |
|
| $ | 14.00 |
|
Granted |
|
|
|
|
|
|
|
|
|
| 17,144 |
|
| $ | 14.00 |
|
Exercised |
|
|
|
|
|
|
|
|
|
| — |
|
| $ | — |
|
Forfeited |
|
|
|
|
|
|
|
|
|
| (14,286 | ) |
| $ | 14.00 |
|
Expired |
|
|
|
|
|
|
|
|
|
| — |
|
| $ | — |
|
Outstanding at September 30, 2019 |
|
|
|
|
|
|
|
|
|
| 163,010 |
|
| $ | 14.00 |
|
Exercisable at September 30, 2019 |
|
|
|
|
|
|
|
|
|
| 145,858 |
|
| $ | 14.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3.82 |
|
Aggregate intrinsic value |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | — |
|
Weighted average grant date fair value (per share) |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3.55 |
|
Aggregate intrinsic value |
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
On January 29, 2019, the Board of Directors appointed a new independent director and Chairman of the Compensation Committee. As a result of the appointment, the new director was granted 8,572 stock options exercisable at $14.00 per share vesting one year from the date of grant. On March 31, 2019, the President and Chief Operating Officer of Duos Technologies Inc., resigned from her positions. Due to the resignation, the individual forfeited 14,286 stock options previously granted. On August 15, 2019, the Board of Directors appointed a new independent director and Chairman of the Audit Committee. As a result of the appointment, the new director was granted 8,572 stock options exercisable at $14.00 per share vesting one year from the date of grant.
F-44
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
Warrants
The following is a summary of activity for warrants to purchase common stock for the nine months ended September 30, 2019:
|
| September 30, 2019 |
| |||||||||
|
| Number of Warrants |
|
| Weighted Avg. Exercise Price |
|
| Remaining Contractual Life (Years) |
| |||
Outstanding at December 31, 2018 |
|
| 1,815,181 |
|
| $ | 9.80 |
|
|
| 3.9 |
|
Warrants expired |
|
| (39 | ) |
|
| 1,176.00 |
|
|
|
|
|
Warrants issued |
|
| 44,643 |
|
|
| 7.70 |
|
|
| 5.0 |
|
Warrants cancelled/exercised |
|
| (347,256 | ) |
|
| 7.84 |
|
|
|
|
|
Outstanding at end of period |
|
| 1,512,529 |
|
|
| 8.82 |
|
|
| 3.3 |
|
Exercisable at end of period |
|
| 1,512,529 |
|
| $ | 8.82 |
|
|
| 3.3 |
|
During the first quarter of 2019, the Company received $1,650,000 for the exercise of warrants for 214,286 shares of common stock.
During the second quarter of 2019, the Company received an aggregate of $514,020 for the exercise of warrants to purchase 66,756 shares of common stock. Also, during the second quarter of 2019, the Company issued 9,878 shares of common stock upon the cashless exercise of 46,572 common stock warrants.
During the third quarter of 2019, the Company received $151,250 for the exercise of warrants for 19,643 shares of common stock.
NOTE 8 -REVENUE
Revenue Recognition and Contract Accounting
The Company generates revenue from three sources: (1) Project Revenue; (2) Maintenance and Technical Support and (3) IT Asset Management (software licensing, consulting and auditing).
The Company constructs intelligent technology systems consisting of materials and labor under customer contracts. Revenues and related costs on project revenue are recognized based on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured and revenue is recognized accordingly.
In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company has adopted the implementation guidance as set out in ASC 606-10-55-187 through 192.
Under this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct labor, subcontract labor and other allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.
F-45
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
| F-42 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
NOTE 9 –CONTRACT ACCOUNTING
Contract Assets
Contract assets on uncompleted contracts represents 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.AI Technologies
At September 30, 2019 and December 31, 2018, contract assets on uncompleted contracts consisted of the following:
|
| September 30, 2019 |
|
| December 31. 2018 |
| ||
Costs and estimated earnings recognized |
| $ | 15,063,602 |
|
| $ | 4,273,057 |
|
Less: Billings or cash received |
|
| (13,477,464 | ) |
|
| (3,064,453 | ) |
Contract assets |
| $ | 1,586,138 |
|
| $ | 1,208,604 |
|
Contract Liabilities
Contract liabilities on uncompleted contracts represents 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 September 30, 2019 and December 31, 2018, contract liabilities on uncompleted contracts consisted of the following:
|
| September 30, 2019 |
|
| December 31. 2018 |
| ||
Billings and/or cash receipts on uncompleted contracts |
| $ | 2,665,570 |
|
| $ | 8,563,241 |
|
Less: Costs and estimated earnings recognized |
|
| (1,557,828 | ) |
|
| (6,314,412 | ) |
Contract liabilities |
| $ | 1,107,742 |
|
| $ | 2,248,829 |
|
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 contractsrevenue from applications that incorporate artificial intelligence (AI) in various stagesthe form 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 adjustmentspredetermined algorithms which provide important operating information to the profit resultingusers of our systems. The revenue generated from revisions are made cumulativethese applications of AI consists of a fixed fee related to the datedesign, development, testing and incorporation of new algorithms into the revision. Significant management judgments and estimates, includingsystem, 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 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.contracted maintenance term.
Maintenance and Technical Support
Maintenance and technicalTechnical 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“as-requested” basis, and revenue is recognized over time as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized over time ratably over the term of the contract.
For sales arrangements that do not involve multiple elements such as professional services, which are of short-term duration, revenues are recognized when services are completed.Consulting Services
IT Asset Management Services (“ITAM”)
The Company’s ITAMconsulting services business generates revenues under contractcontracts with customers from threefour sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; and (3) Customer Service (trainingservice training and maintenance support).
F-46
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)(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 arrangements that do not involve performance obligations: 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 ElementsPerformance Obligations and Allocation of Transaction Price
Arrangements with customers may involve multiple elementsperformance obligations including project revenue and maintenance services in our Intelligent Technology Systems business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our ITAMconsulting services business, multiple elementsperformance 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 elementperformance obligations arrangement is as follows:
Each elementperformance obligation 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 elementperformance obligation is recognized using the applicable criteria under GAAP as discussed above for elementsperformance obligations sold in non-multiple elementsingle 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 multiple elementperformance 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 elementperformance obligations arrangements with Company customers qualify as separate units of account for revenue recognition purposes.
Deferred Revenue
| F-43 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
DeferredLeases
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 administrative 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 March 31, 2023, there were (i) an aggregate of 80,091 outstanding warrants to purchase shares of common stock, (ii) employee stock options to purchase an aggregate of shares of common stock, (iii) common shares issuable upon conversion of Series D Convertible Preferred Stock and (iv) common shares issuable upon conversion of Series E Convertible Preferred Stock, all of which were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
At March 31, 2022, there were (i) an aggregate of 1,376,466 outstanding warrants to purchase shares of common stock, (ii) employee stock options to purchase an aggregate of shares of common stock and (iii) common shares issuable upon conversion of Series B Convertible Preferred Stock, all of which were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
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.
| F-44 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
In May 2021, the FASB issued an accounting pronouncement (ASU 2021-04) related to modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. The pronouncement states that an entity should treat the modification as an exchange of the original instrument for a new instrument, and the effect of the modification should be calculated as the difference between the fair value of the modified instrument and the fair value of that instrument immediately before modification. An entity should then recognize the effect of the modification on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. The pronouncement will be applied prospectively to all modifications that occur after the initial date of adoption. We adopted this pronouncement for our fiscal year beginning January 1, 2022, and it did not have a material effect on our 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 $2,143,683 for the three months ended March 31, 2023. During the same period, cash used in operating activities was $7,086. The working capital surplus and accumulated deficit as of March 31, 2023, were $3,860,339 and $54,505,517, 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 and a private placements which were completed during the first quarter of 2022 and during the third and fourth quarters of 2022 as well as the first quarter of 2023.
As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock during 2021. Additionally, 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 first quarter of 2023, the Company raised gross proceeds of $4,000,000 from the issuance of Series E Preferred Stock. As part of its strategy, the Company will endeavor to utilize the Preferred Series E and the remainder of the Series D as additional funding mechanisms. Additionally, during the second quarter of 2023, the Company will again have access to 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 in the event it did not have an uptake in the preferred classes of shares previously noted. 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 for at least twelve months from the date of this report.
In addition, management has been taking and continues to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning both management and staffing with a focus on improving certain skill sets necessary to build growth and profitability and focusing product strategy on opportunities that are likely to bear results in the relatively short term. The Company believes that, as described above, it will have sufficient sources of working capital to meet its obligations over the following twelve months. In the last twelve months the Company has seen significant growth in its contracted backlog as well as positive signs from new commercial engagements that indicate improvements in future commercial opportunities.
Management believes that, at this time, the conditions in our market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding contract and the additional time needed to execute on new contracts previously reported have put a strain on our cash reserves. However, recent common stock offerings and private placements as well as the availability to raise capital via its shelf registration indicate there is no substantial doubt for the Company to continue as a going concern for a period of twelve months. We continue executing the plan to grow our business and achieve profitability. The Company may selectively look at opportunities for fund raising in the future. Management has extensively evaluated our requirements for the next 12 months and has determined that the Company currently has sufficient cash and access to capital to operate for at least that period.
| F-45 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
While no assurance can be provided, management believes that these actions provide the opportunity for the Company to continue as a going concern and to grow its business and achieve profitability with access to additional capital funding. Ultimately the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing the plan described above which was put in place in late 2022 and will continue in 2023 and beyond. As a result, we expect to generate sufficient revenue and to attain profitable operations with less net cash used in operating activities in the next 12 months. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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, 2023 and December 31, 2022:
| Schedule of Notes Payable - Financing Agreements | ||||||||||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||||
| Notes Payable | Principal | Interest | Principal | Interest | ||||||||||||
| Third Party - Insurance Note 1 | $ | 18,737 | 8.73 | % | $ | — | — | |||||||||
| Third Party - Insurance Note 2 | — | 17,753 | 6.24 | % | ||||||||||||
| Third Party - Insurance Note 3 | 6,526 | — | 16,094 | — | ||||||||||||
| Third Party - Insurance Note 4 | 167,830 | — | 40,728 | — | ||||||||||||
| Total | $ | 193,094 | $ | 74,575 | ||||||||||||
The Company entered into an agreement on December 23, 2022 with its insurance provider by issuing a $26,484 note payable (Insurance Note 1) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 8.73% payable in monthly installments of principal and interest totaling $2,755 through October 23, 2023. The balance of Insurance Note 1 as of March 31, 2023 and December 31, 2022 was $18,737 and 0 zero, respectively.
The Company entered into an agreement on April 15, 2022 with its insurance provider by issuing a note payable (Insurance Note 2) for the purchase of an insurance policy in the amount of $63,766, secured by that policy with an annual interest rate of 6.24% and payable in 11 monthly installments of principal and interest totaling $5,979. At March 31, 2023 and December 31, 2022, the balance of Insurance Note 2 was 0 zero and $17,753, respectively.
The Company entered into an agreement on September 15, 2022 with its insurance provider by issuing a note payable (Insurance Note 3) for the purchase of an insurance policy in the amount of $24,140 and payable in 12 monthly installments of $4,024. At March 31, 2023 and December 31, 2022, the balance of Insurance Note 3 was $6,526 and $16,094, respectively.
The Company entered into an agreement on February 3, 2022 with its insurance provider by issuing a note payable (Insurance Note 4) for the purchase of an insurance policy in the amount of $242,591 with a down payment paid in the amount of $102,075 in the first quarter of 2022 and ten monthly installments of $20,073. The Company received a refund on September 30, 2022 as result of the annual audit of the policy resulting in the refund being applied to the outstanding amount of $53,175. The policy renewed on February 3, 2023 and, in connection therewith, the Company issued a new note payable to the insurer in the amount of $293,520 with a down payment paid in the amount of $125,690 and payable in ten monthly installments of $23,976. At March 31, 2023 and December 31, 2022, the balance of Insurance Note 4 was $167,830 and $40,728, respectively.
Equipment Financing
The Company entered into an agreement on May 22, 2020 with an 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, 2023 and December 31, 2022, the aggregate balance of this note was $11,566 and $22,851, respectively.
| F-46 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
At March 31, 2023, future minimum lease payments due under the equipment financing is as follows:
| Schedule of Future Minimum Lease Payments Under Finance Lease | ||||
| Calendar year: | Amount | |||
| 2023 | 11,757 | |||
| Total minimum equipment financing payments | $ | 11,757 | ||
| Less: interest | (191 | ) | ||
| Total equipment financing at March 31, 2023 | $ | 11,566 | ||
| Less: current portion of equipment financing | (11,566 | ) | ||
| Long term portion of equipment financing | $ | — | ||
NOTE 4 – COMMITMENTS AND CONTINGENCIES
Operating Lease Obligations
On July 26, 2021, the Company entered into a new operating lease agreement for office and warehouse combination space of 40,000 square feet, with the lease commencing on November 1, 2021 and ending April 30, 2032. This new space combines the Company’s two separate work locations into one facility, which allows for greater collaboration and also accommodates a larger anticipated workforce and manufacturing facility. On November 24, 2021, the lease was amended to commence on December 1, 2021 and end on May 31, 2032. The Company recognized a ROU asset and operating lease liability in the amount of $4,980,104 at lease commencement. Rent for the first eleven months of the term was calculated based on 30,000 rentable square feet. The rent is subject to an annual escalation of 2.5%, beginning November 1, 2023. The Company made a security deposit payment in the amount of $600,000 on July 26, 2021. The right of use asset balance at March 31, 2023, net of amortization, was $4,612,830.
As of March 31, 2023, the office and warehouse lease is the Company’s only lease with a term greater than twelve months. The office and warehouse lease have a remaining term of approximately 9.3 years and includes an option to extend for two renewal terms of five years each. The renewal options are not reasonably certain to be exercised, and therefore, they are not included when determining the lease term used to establish the right of use asset and lease liability. The Company also has several short-term leases, primarily related to equipment. The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on the consolidated balance sheet and instead recognize the lease payments in expense as incurred. The Company has also elected to account for real estate leases that contain both lease and non-lease components (such as common area maintenance) as a single lease component.
The following table shows supplemental information related to leases:
| Schedule of supplemental information related to leases | ||||||||
Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Lease cost: | ||||||||
| Operating lease cost | $ | 195,409 | $ | 193,980 | ||||
| Short-term lease cost | 7,104 | 6,749 | ||||||
| Other information: | ||||||||
| Operating cash outflow used for operating leases | 126,416 | 46,250 | ||||||
| Weighted average discount rate | 9.0 | % | 9.0 | % | ||||
| Weighted average remaining lease term | 9.2 years | 10.2 years | ||||||
| F-47 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
As of March 31, 2023, future minimum lease payments due under our operating leases are as follows:
| Schedule of future minimum lease payments for non-cancellable operating leases | ||||
| Amount | ||||
| Calendar year: | ||||
| 2023 | $ | 570,453 | ||
| 2024 | 779,087 | |||
| 2025 | 798,556 | |||
| 2026 | 818,518 | |||
| 2027 | 838,984 | |||
| Thereafter | 4,043,427 | |||
| Total undiscounted future minimum lease payments | 7,849,025 | |||
| Less: Impact of discounting | (2,617,321 | ) | ||
| Total present value of operating lease obligations | 5,231,704 | |||
| Current portion | (764,820 | ) | ||
| Operating lease obligations, less current portion | $ | 4,466,884 | ||
Executive Severance Agreement
Pursuant to a separation agreement with Gianni Arcaini, our former Chief Executive Officer and Chairman of the Board (the “Separation Agreement”), Mr. Arcaini’s employment with the Company ended on September 1, 2020 (“Separation Date”). The Separation Agreement provides that 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.
In accordance with the Separation Agreement, the Company will pay to Mr. Arcaini the total sum of $747,788. On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631, owed to Mr. Arcaini and the Company will continue to pay him in semi-monthly installments for 30 months thereafter, as contemplated in Mr. Arcaini’s Separation Agreement. The remaining balance of approximately $114,275 as of March 31, 2023 is included in accrued expenses in the accompanying unaudited consolidated balance sheet. In addition, the Company will pay one-half of Mr. Arcaini’s current life insurance premiums for 36 months of approximately $1,200 per month and provide and pay for his health insurance for 36 months following the Separation Date of approximately $400 per month, which are also included in accrued expenses as described above.
NOTE 5 – STOCKHOLDERS’ EQUITY
Series B Convertible Preferred Stock
The following summary of certain terms and provisions of our Series B Convertible Preferred Stock (the “Series B Convertible Preferred Stock”) is subject to, and qualified in its entirety by reference to, the terms and provisions set forth in our certificate of designation of preferences, rights and limitations of Series B Convertible Preferred Stock (the “Series B Convertible Preferred Certificate of Designation”) as previously filed. Subject to the limitations prescribed by our articles of incorporation, our board of directors is authorized to establish the number of shares constituting each series of preferred stock and to fix the designations, powers, preferences, and rights of the shares of each of those series and the qualifications, limitations and restrictions of each of those series, all without any further vote or action by our stockholders. Our board of directors designated of the authorized shares of preferred stock as Series B Convertible Preferred Stock with a stated value of $1,000 per share. The shares of Series B Convertible Preferred Stock were validly issued, fully paid and non-assessable.
| F-48 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
Each share of Series B Convertible Preferred Stock was convertible at any time at the holder’s option into a number of shares of common stock equal to $1,000 divided by the conversion price of $7.00 per share. Notwithstanding the foregoing, we shall not effect any conversion of Series B Convertible Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series B Convertible Preferred Stock (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares of our common stock in excess of 4.99% (or, at the election of the purchaser, 9.99%) of the shares of our common stock then outstanding after giving effect to such exercise. The Series B Convertible Preferred Certificate of Designation does not prohibit the Company from waiving this limitation. Upon any liquidation, dissolution or winding-up of Company, whether voluntary or involuntary (a “Liquidation”), the holders shall be entitled to participate on an as-converted-to-common stock basis (without giving effect to the Beneficial Ownership Limitation) with holders of the common stock in any distribution of assets of the Company to the holders of the common stock. As of March 31, 2023 and December 31, 2022, respectively, there are zero and zero shares of Series B Convertible Preferred Stock issued and outstanding.
Series C Convertible Preferred Stock
The Company’s Board of Directors designated 5,000 shares as the Series C Convertible Preferred Stock (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”). All holders of the Series C Preferred Stock have elected the 19.99% Beneficial Ownership Limitation.
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, and the Company received proceeds of $4,500,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties. In January 2022, the 2,500 outstanding shares of Series C Convertible Preferred Stock were converted into shares of common stock. As of March 31, 2023 and December 31, 2022, respectively, there were zero and zero shares of Series C Convertible Preferred Stock issued and outstanding.
| F-49 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series C Convertible Preferred Stock were convertible. The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
Series D Convertible Preferred Stock
On September 28, 2022, the Company amended its articles of incorporation to designate 4,000 shares as the Series D Convertible Preferred Stock (the “Series D Convertible Preferred Stock”). Each share of the Series D Convertible Preferred Stock has a stated value of $1,000. The holders of the Series D 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 D Convertible Preferred Stock has 333 votes (subject to standard anti-dilution adjustment); provided that in no event may a holder of Series D 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 D Convertible Preferred Stock is convertible, subject to shareholder approval (which has not yet been granted); 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 $3.00 (subject to adjustment). The Company shall not effect any conversion of the Series D Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Series D 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”). All holders of the Series D Preferred Stock have elected the 19.99% Beneficial Ownership Limitation. The Company shall, subject to shareholder approval, reserve and keep available out of its authorized and unissued Common Stock, solely for the issuance upon the conversion of the Series D Convertible Preferred Stock, such a number of shares of Common Stock as shall from time to time be issuable upon the conversion of all of the shares of the Series D Convertible Preferred Stock then outstanding. Additionally, the Series D Convertible Preferred Stock does not have the right to dividends and in the event of an involuntary liquidation, the Series D shares shall be treated as a pro rata equivalent of common stock outstanding at the date of the liquidation event and have no liquidation preference.
On September 30, 2022, 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 shares of the newly authorized Series D Convertible Preferred Stock (the “Series D Convertible Preferred Stock”), and the Company received proceeds of $999,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
On October 29, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a certain existing investor in the Company (the “Purchaser”). Pursuant to the Purchase Agreement, the Purchasers purchased shares of the newly authorized Series D Convertible Preferred Stock, and the Company received proceeds of $300,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series D Convertible Preferred Stock are convertible. The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
As of March 31, 2023 and December 31, 2022, respectively, there were and shares of Series D Convertible Preferred Stock issued and outstanding.
Series E Convertible Preferred Stock
The Company’s Board of Directors has designated 30,000 shares as the Series E Convertible Preferred Stock. Each share of the Series E Convertible Preferred Stock has a stated value of $1,000. The holders of the Series E 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 as one class on all matters submitted to a vote of shareholders of the Company. Each share of Series E Preferred Stock has 333 votes (subject to adjustment); provided that in no event may a holder of Series E 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). Each share of Series E Convertible Preferred Stock is convertible, subject to shareholder approval (which has not yet been granted); 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 $3.00 (subject to standard anti dilution provisions). The Company shall not effect any conversion of the Series E Convertible Preferred Stock, and the holder shall not have the right to convert any portion of the Series E 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”).
The Company on March 27, 2023 entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an existing investor in the Company (the “Purchaser”). Pursuant to the Purchase Agreement, the Purchaser purchased shares of a newly authorized Series E Convertible Preferred Stock at a price of $ per share (the “Series E Convertible Preferred Stock”), and the Company received proceeds of $4,000,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
| F-50 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
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 E Preferred Stock are convertible. Subject to certain conditions, the Company must cause the registration statement to be declared effective by 90 days after closing (or in the event of a full review by the SEC, by 120 days). The Registration Rights 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 120 days after closing (or 150 days in the event of a review of the proxy statement by the Securities and Exchange Commission (the “SEC”)). As described below, the terms of the Series E Preferred Stock limit its convertibility until the Company receives shareholder approval (the “Stockholder Approval”). 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.
As of March 31, 2023 and December 31, 2022, respectively, there were and shares of Series E Convertible Preferred Stock issued and outstanding.
The existing investors Purchase Agreement also provides that the Company will not, with certain exceptions, sell or issue common stock or Common Stock Equivalents (as defined in the Purchase Agreement) on or prior to December 31, 2023 that entitles any person to acquire shares of common stock at an effective price per share less than the then conversion price of the Series E Preferred Stock without the consent of the Purchaser.
The Registration Rights Agreement contains provisions for liquidated damages equal to 1% multiplied by the aggregate subscription amount paid, paid each month, in the event certain deadlines are missed.
Common stock issued
Three Months Ended March 31, 2022
During the three months ended March 31, 2022, shareholders converted and shares of Series C Convertible Preferred Stock collectively with a stated value of $2.5 million owned by two entities related to each other with a conversion price of $per common share resulting in the issuance of 129,091 and 325,455 shares of the Company’s common stock.
On February 3, 2022, the Company closed an offering of shares of common stock in the amount of $5,300,000 or $ per share before certain underwriting fees and offering expenses with net proceeds of $4,779,000.
On February 21, 2022, the Company closed on an “over-allotment” offering of shares of common stock in the amount of $795,000 or $ per share before certain underwriting fees and offering expenses with net proceeds of $739,350. Both this and the previous offering were “takedowns” from a previously filed “shelf” registration statement for the offer of up to $50,000,000 in the aggregate of common stock, Preferred Stock, Debt Securities, Warrants, Rights or Units from time to time in one or more offerings.
On March 31, 2022, the Company issued shares of common stock for payment of board fees to four directors in the amount of $40,000 for services to the board which was expensed during the three months ended March 31, 2022.
Three Months Ended March 31, 2023
During the three months ended March 31, 2023, the Company issued shares of common stock for payment of board fees to three directors in the amount of $32,500 for services to the board which was expensed during the three months ended March 31, 2023. The value-weighted average price per share is $.
Employee Stock Purchase Plan
In the fourth quarter of 2022, the board of directors adopted an Employee Stock Purchase Plan (“ESPP”) which, subject to shareholder approval, was effective as of 1 January 2023 with a term of 10 years. The ESPP allows eligible employees to purchase shares of the Company's common stock at a discounted price, through payroll deductions from a minimum of 1% and up to 25% of their eligible compensation up to a maximum of $ or the IRS allowable limit per calendar year. The Company’s Chief Financial Officer administers the ESPP in conjunction with approvals from the Company’s Compensation Committee, including with respect to the frequency and duration of offering periods, the maximum number of shares that an eligible employee may purchase during an offering period, and, subject to certain limitations set forth in the ESPP, the per-share purchase price. The Company must receive (and expects to obtain) shareholder approval within 12 months before or after the date of the Plan is adopted by the Board. Currently, the maximum number of shares that can be purchased by an eligible employee under the ESPP is 10,000 shares per offering period and there are two six-month offering periods that begin in the first and third quarter of each fiscal year. The purchase price for one share of Common Stock under the ESPP is currently equal to 85% of the fair market value of one share of Common Stock on the first trading day of the offering period or the purchase date, whichever is lower. Although not required by the plan, all payroll deductions received or held by the Company under the Plan, are segregated and deemed as “restricted cash” until the completion of the offering period and redemption of the applicable shares. The maximum aggregate number of shares of the Common Stock that may be issued under the ESPP is no more than shares (the “ESPP Plan Share Reserve”).
| F-51 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the three months ended March 31, 2023 and 2022, was $ and $, respectively, for stock options granted to employees. 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 grant-date fair value of the portion of share-based payment awards that are ultimately expected to vest during the period. At March 31, 2023, the total compensation cost for stock options not yet recognized was $350,876. This cost will be recognized over the remaining vesting term of the options ranging from six months to two- and one-half years.
On May 12, 2021, the Board adopted, with shareholder approval, the 2021 Equity Incentive Plan (the “2021 Plan”) providing for the issuance of up to shares of our common stock. The purpose of the 2021 Plan is to assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals to align their interests with those of our shareholders. During the third quarter of 2021, the shareholders approved the issuance of up to one million shares or share equivalents pursuant to the 2021 Plan. On July 14, 2021, the Company filed an S-8 registration statement in concert with the 2021 Plan which was deemed effective on August 5, 2021. The plan covers a period of ten years.
On January 1, 2022, the Company awarded certain senior management and key employees non-qualified stock options under the 2021 Plan. Specifically, a total of options were awarded by the Company’s Compensation Committee and approved by the Board, with a strike price of $6.41 per share, a five-year term and vesting equally over a three-year period. The options serve as a retention tool and contain key provisions that the holder must remain in good standing with the Company. The options were valued on the grant date at $ using a Black-Scholes model with the following assumptions: (1) expected term of years using the simplified method, (2) expected volatility rate of % based on historical volatility, (3) dividend yield of zero, and (4) a discount rate of 0.97%.
As of March 31, 2023, and December 31, 2022, options to purchase a total of (net of forfeitures discussed below) shares of common stock and shares of common stock were outstanding, respectively. At March 31, 2023, 574,658 options were exercisable. Of the total options issued, and options were outstanding under the 2016 Equity Incentive Plan, 495,000 and no options were outstanding under the 2021 Plan and a further and non-plan options to purchase common stock were outstanding as of March 31, 2023 and December 31, 2022, respectively. The non-plan options were granted to four executives as hiring incentives, including the Company’s CEO in the fourth quarter of 2020.
| Schedule of stock option issuance of shares | ||||||||||||||||
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Options | Price | Term (Years) | Value | |||||||||||||
| Outstanding at December 31, 2021 | 431,266 | $ | 4.98 | — | ||||||||||||
| Granted | 685,000 | $ | 6.41 | — | ||||||||||||
| Forfeited | (190,000 | ) | $ | 6.41 | — | — | ||||||||||
| Outstanding at December 31, 2022 | 926,266 | $ | 5.74 | — | ||||||||||||
| Exercisable at December 31, 2022 | 404,599 | $ | 5.02 | — | ||||||||||||
| Outstanding at December 31, 2022 | 926,266 | $ | 5.74 | — | ||||||||||||
| Granted | — | — | — | — | ||||||||||||
| Exercised/Forfeited/Expired | (1,608 | ) | $ | 14.00 | — | — | ||||||||||
| Outstanding at March 31, 2023 | 924,658 | $ | 5.73 | — | ||||||||||||
| Exercisable at March 31, 2023 | 574,658 | $ | 5.36 | — | ||||||||||||
| F-52 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
Warrants
| Schedule of Warrants Outstanding | ||||||||||||||||
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Warrants | Price | Term (Years) | Value | |||||||||||||
| Outstanding at December 31, 2021 | 1,376,466 | $ | 8.18 | — | ||||||||||||
| Warrants expired, forfeited, cancelled or exercised | (1,228,875 | ) | — | — | — | |||||||||||
| Warrants issued | — | — | — | — | ||||||||||||
| Outstanding at December 31, 2022 | 147,591 | $ | 8.63 | — | ||||||||||||
| Exercisable at December 31, 2022 | 147,591 | $ | 8.63 | — | ||||||||||||
| Outstanding at December 31, 2022 | 147,591 | $ | 8.63 | — | ||||||||||||
| Warrants expired, forfeited, cancelled or exercised | (67,500 | ) | — | — | — | |||||||||||
| Warrants issued | — | — | — | — | ||||||||||||
| Outstanding at March 31, 2023 | 80,091 | $ | 8.53 | — | ||||||||||||
| Exercisable at March 31, 2023 | 80,091 | $ | 8.53 | — | ||||||||||||
NOTE 6 - REVENUE AND CONTRACT ACCOUNTING
Revenue Recognition and Contract Accounting
The Company generates revenue from four sources: (1) Technology Systems; (2) AI Technology which is included in the consolidated statements of operations line-item Technology Systems; (3) Technical Support; and (4) Consulting Services which is included in the consolidated statements of operations line-item Services and Consulting.
Contract assets and contract liabilities on uncompleted contracts for revenues recognized over time are as follows:
Contract Assets
Contract assets on uncompleted contracts represent cumulative revenues recognized in excess of billings and/or cash received on uncompleted contracts accounted for under the cost-to-cost input method, which recognizes revenue based on the ratio of cost incurred to total estimated costs.
At March 31, 2023 and December 31, 2022, contract assets on uncompleted contracts consisted of the following:
| Schedule Of Contract Assets On Uncompleted Contracts | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
| Cumulative revenues recognized | $ | 7,144,602 | $ | 5,934,205 | ||||
| Less: Billings or cash received | (5,718,290 | ) | (5,508,483 | ) | ||||
| Contract assets | $ | 1,426,312 | $ | 425,722 | ||||
Contract Liabilities
Contract liabilities, on uncompleted contracts represent billings and/or cash received that exceed cumulative revenues recognized on uncompleted contracts accounted for under the cost-to-cost input method, which recognizes revenues based on the ratio of the cost incurred to total estimated costs.
Contract liabilities on services and consulting revenues represent billings and/or cash received in excess of revenue recognizablerecognized on service agreements that are not accounted for under the percentagecost-to-cost input method.
| F-53 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
At March 31, 2023 and December 31, 2022, contract liabilities on uncompleted contracts and contract liabilities on services and consulting consisted of completion method.the following:
| Schedule of Contract Liabilities on Uncompleted Contracts | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
| Billings and/or cash receipts on uncompleted contracts | $ | 323,207 | $ | 4,355,470 | ||||
| Less: Cumulative revenues recognized | (262,988 | ) | (4,144,018 | ) | ||||
| Contract liabilities, technology systems | 60,219 | 211,452 | ||||||
| Contract liabilities, services and consulting | 2,006,642 | 746,545 | ||||||
| Total contract liabilities | $ | 2,066,861 | $ | 957,997 | ||||
Contract Liabilities at December 31, 2022 were $957,997; of which $151,233 for technology systems and $248,856 in services and consulting has been recognized as of March 31, 2023
The Company expects to recognize all contract liabilities within 12 months from the consolidated balance sheet date.
Disaggregation of Revenue
The Company is following the guidance of ASC 606-10-55-296 and 297 for disaggregation of revenue. Accordingly, revenue has been disaggregated according to the nature, amount, timing and uncertainty of revenue and cash flows. We are providing qualitative and quantitative disclosures.
Qualitative:
| 1. | We have four distinct revenue sources: |
1.
| a. | Technology Systems (Turnkey, engineered projects); |
We have three distinct revenue sources:
| b. | AI Technology (Associated maintenance and support services); |
a.
| c. | Technical Support (Licensing and professional services related to auditing of data center assets); and |
Turnkey, engineered projects;
| d. | Consulting Services (Predetermined algorithms to provide important operating information to the users of our systems). |
b.
| 2. | We currently operate in North America including the USA, Mexico and Canada. |
Associated maintenance and support services; and
| 3. | Our customers include rail transportation, commercial, government, banking and IT suppliers. |
c.
| 4. | Our services & maintenance contracts are fixed price and fall into two duration types: |
Licensing and professional services related to auditing of data center assets.
| a. | Turnkey engineered projects and professional service contracts that are less than one year in duration and are typically one to two quarters in length; and |
| b. | Maintenance and support contracts ranging from one to five years in length |
F-47
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
| F-54 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
Quantitative:
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 1 year in duration and are typically three to nine 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 NineThree Months Ended September 30, 2019March 31, 2023
| Schedule of Disaggregation of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||
Segments |
| Rail |
| Commercial |
| Petrochemical |
| Government |
| Banking |
| IT Suppliers |
|
| Total |
| Rail | Commercial | Government | Artificial Intelligence | Total | |||||||||||||||||||||||||||
Primary Geographical Markets |
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North America |
| $ | 6,039,521 |
|
| $ | 317,222 |
|
| $ | 76,586 |
|
| $ | 147,011 |
|
| $ | 1,075,274 |
|
| $ | 240,673 |
|
| $ | 7,896,287 |
| $ | 2,376,449 | $ | 28,831 | $ | 11,353 | $ | 227,655 | $ | 2,644,288 | ||||||||||
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Major Goods and Service Lines |
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| |||||||||||||||||||||||||
Turnkey Projects |
| $ | 5,433,356 |
| $ | 315,025 |
| $ | 53,169 |
| $ | 86,348 |
| $ | 1,066,164 |
| $ | — |
|
| $ | 6,954,062 |
| $ | 1,827,764 | $ | — | $ | — | $ | — | $ | 1,827,764 | |||||||||||||||
Maintenance & Support |
|
| 606,165 |
|
| 2,197 |
|
| 23,417 |
|
| 60,663 |
|
| 9,110 |
|
| — |
|
|
| 701,552 |
| |||||||||||||||||||||||||
Data Center Auditing Services |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 198,838 |
|
|
| 198,838 |
| |||||||||||||||||||||||||
Software License |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 41,835 |
|
|
| 41,835 |
| ||||||||||||||||||||
| Maintenance and Support | 548,685 | 28,831 | 11,353 | — | 588,869 | |||||||||||||||||||||||||||||||||||||||||||
| Algorithms | — | — | — | 227,655 | 227,655 | |||||||||||||||||||||||||||||||||||||||||||
|
| $ | 6,039,521 |
|
| $ | 317,222 |
|
| $ | 76,586 |
|
| $ | 147,011 |
|
| $ | 1,075,274 |
|
| $ | 240,673 |
|
| $ | 7,896,287 |
| $ | 2,376,449 | $ | 28,831 | $ | 11,353 | $ | 227,655 | $ | 2,644,288 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Timing of Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Goods transferred over time |
| $ | 5,433,356 |
| $ | 315,025 |
| $ | 53,169 |
| $ | 86,348 |
| $ | 1,066,164 |
| $ | 240,673 |
|
| $ | 7,194,735 |
| $ | 1,827,764 | $ | — | $ | — | $ | — | $ | 1,827,764 | |||||||||||||||
Services transferred over time |
|
| 606,165 |
|
|
| 2,197 |
|
|
| 23,417 |
|
|
| 60,663 |
|
|
| 9,110 |
|
|
| — |
|
|
| 701,552 |
| 548,685 | 28,831 | 11,353 | 227,655 | 816,524 | |||||||||||||||
|
| $ | 6,039,521 |
|
| $ | 317,222 |
|
| $ | 76,586 |
|
| $ | 147,011 |
|
| $ | 1,075,274 |
|
| $ | 240,673 |
|
| $ | 7,896,287 |
| $ | 2,376,449 | $ | 28,831 | $ | 11,353 | $ | 227,655 | $ | 2,644,288 | ||||||||||
For the Three Months Ended March 31, 2022
| Segments | Rail | Commercial | Government | Artificial Intelligence | Total | |||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||
| North America | $ | 1,007,273 | $ | 17,300 | $ | 152,142 | $ | 262,601 | $ | 1,439,316 | ||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||
| Turnkey Projects | $ | 520,657 | $ | (498 | ) | $ | 131,921 | $ | — | $ | 652,080 | |||||||||
| Maintenance and Support | 486,616 | 17,798 | 20,221 | 131,412 | 656,047 | |||||||||||||||
| Algorithms | — | — | — | 131,189 | 131,189 | |||||||||||||||
| $ | 1,007,273 | $ | 17,300 | $ | 152,142 | $ | 262,601 | $ | 1,439,316 | |||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Goods transferred over time | $ | 520,657 | $ | (498 | ) | $ | 131,921 | $ | — | $ | 652,080 | |||||||||
| Goods delivered at point in time | $ | — | — | — | 131,189 | 131,189 | ||||||||||||||
| Services transferred over time | 486,616 | 17,798 | 20,221 | 131,412 | 656,047 | |||||||||||||||
| $ | 1,007,273 | $ | 17,300 | $ | 152,142 | $ | 262,601 | $ | 1,439,316 | |||||||||||
| F-55 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (Unaudited) |
NOTE 107 – SUBSEQUENT EVENTSDEFINED CONTRIBUTION PLAN
On November 12, 2019,The Company has a 401(k)-retirement savings plan (the “401(k) Plan”) covering all eligible employees. The 401(k) Plan allows employees to defer a portion of their annual compensation, and the Company repaidmay match a note payable inportion of the amountemployees’ contributions generally after the first six months of $262,500. (see Note 4)
On January 9, 2020service. During the three months ended March 31, 2023, the Company filed an Amendmentmatched 100% of the first 4% of eligible employee compensation that was contributed to the Articles of Incorporation401(k) Plan. For the three months ended March 31, 2023, the Company recognized expense for matching cash contributions to effectuate a reverse split of the Company’s issued and outstanding common stock at an exchange ratio of 1-for -14. The reverse stock split was effective as of January 17, 2020. All share and per share data in the accompanying consolidated financial statements and footnotes has been retroactively restated to reflect the effects of the reverse stock split.401(k) Plan totaling $42,241.
National Rail Network
![[duot_s1032.jpg]](https://capedge.com/proxy/S-1A/0001553350-20-000090/duot_s1032.jpg)
![[duot_s1033.jpg]](https://capedge.com/proxy/S-1A/0001553350-20-000090/duot_s1033.jpg)
| F-56 |
1,142,857
1,333,334 Shares of Common Stock issuable upon Conversion of Series E Convertible Preferred Stock
![[duot_s1035.gif]](https://capedge.com/proxy/S-1A/0001553350-20-000090/duot_s1035.gif){kind=small}
——————————
PROSPECTUS
——————————
ThinkEquity
a division of Fordham Financial Management, Inc.
Benchmark Company
_____________, 2020
_____________, 2023
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than underwriting discounts and commissions, to be paid by the Registrantall of which we will pay in connection with the issuance and distribution of the common stocksecurities being registered. All amounts other than the SEC registration fee, the FINRA filing fee, and the NASDAQ Capital Markets Listing Feefees are estimates.
SEC Registration Fee |
| $ | 1,272.04 |
| $ | 441 | ||
FINRA Filing Fee |
| $ | 1,970 |
| ||||
NASDAQ Capital Markets Listing Fee |
| $ | 50,000 |
| ||||
Printing Fees and Expenses |
| $ | 25,000 |
| $ | |||
Accounting Fees and Expenses |
| $ | 35,000 |
| $ | |||
Legal Fees and Expenses |
| $ | 225,000 |
| $ | |||
Transfer Agent and Registrar Fees |
| $ | 35,000 |
| $ | |||
Miscellaneous Fees and Expenses |
| $ | 15,000 |
| $ | |||
Total |
| $ | 388,242.04 |
| $ | 441 | ||
Item 14. Indemnification of Directors and Officers
Florida law permits, under certain circumstances, the indemnification of any person with respect to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, to which such person was or is a party or is threatened to be made a party, by reason of his or her being an officer, director, employee or agent of the corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against liability incurred in connection with such proceeding, including appeals thereof; provided, however, that the officer, director, employee or agent acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any such third-party action by judgment, order, settlement, or conviction or upon a plea of nolo contendere or its equivalent does not, of itself, create a presumption that the person (i) did not act in good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the corporation or (ii) with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. In the case of proceedings by or in the right of the corporation, Florida law permits indemnification of any person by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against liability incurred in connection with such proceeding, including appeals thereof; provided, however, that the officer, director, employee or agent acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification is made where such person is adjudged liable, unless a court of competent jurisdiction determines that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.
To the extent that such person is successful on the merits or otherwise in defending against any such proceeding, Florida law provides that he or she shall be indemnified against expenses actually and reasonably incurred by him or her in connection therewith.
Also, under Florida law, expenses incurred by an officer or director in defending a civil or criminal proceeding may be paid by the corporation in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if he or she is ultimately found not to be entitled to indemnification by the corporation pursuant to thisthe applicable section. Expenses incurred by other employees and agents may be paid in advance upon such terms or conditions that the Board of Directors deems appropriate.
II-1
Our articlesAmended and Restated Articles of incorporation providesIncorporation provide that we shall indemnify our officers and directors and(and other employees and agents unless specificallyif approved in writing by the Board of Directors,Directors) to the fullest extent authorized or permitted by law, as it existed when the Amended and suchRestated Article of Incorporation were adopted or as it may thereafter be amended. Such right to indemnification shall continue as to a person who has ceased to be a director or officer of the Company(and, if applicable, other employee or agent) and shall inure to the benefit of his or her heirs, executors and personal and legal representatives; provided, however, that, except for proceedings to enforce rights to indemnification, the Companywe shall not be obligated to indemnify any director or officersuch person (or his or her heirs, executors or personal or legal representatives) in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized foror consented to by the directorsour Board of the Company.Directors.
| II-1 |
The articlesAmended and Restated Articles of incorporationIncorporation also provide that such rightsright of indemnification shall be a contract right and shall include the right to be paid by us for all reasonablethe expenses incurred in defending or otherwise participating in any such proceeding in advance of final disposition; provided, however, that the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer in advance of theits final disposition of such proceeding shall be made only upon delivery to usour receipt of an undertaking, by or on behalf of such director or officer, to repay such amounts so advanced if it should be ultimately determined ultimately that such directorhe or officershe is not entitled to be indemnified by us as authorized by the Company.Amended and Restated Articles of Incorporation.
The rights to indemnification and to the advance of expenses conferred in the Amended and Restated Articles of Incorporation are not exclusive of any other right which and person may have or hereafter acquire under the Amended and Restated Articles of Incorporation, the Bylaws, any statute, agreement, vote of shareholders or disinterested directors or otherwise.
Any repeal or modification of the applicable provisions of the Amended and Restated Articles of Incorporation shall not adversely affect any rights to indemnification and to the advancement of expenses as a director or officer existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.
In addition to the authority granted to us by Florida law to indemnify our directors, certain other provisions of the FDCAFlorida Business Corporation Act have the effect of further limiting the personal liability of our directors. Pursuant to Florida law, a director of a Florida corporation cannot be held personally liable for monetary damages to the corporation or any other person for any act or failure to act regarding corporate management or policy except in the case of certain qualifying breaches of the director’s duties.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to our directors and officers, or to persons controlling us, pursuant to our charter documents and Florida law, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is therefore unenforceableunenforceable.
Item 15. Recent Sales of Unregistered Securities
On May 8, 2017, the Company issued 307 shares of common stock valued at $15,000 to a consultant for services rendered to the Company.
Effective November 24, 2017 (the “Effective Date”), the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with 57 investors (the “Purchasers”). Pursuant to the Securities Purchase Agreement, the Purchasers purchased 1,171,625 shares of common stock, 1,575,911 purchaser warrants (the “Purchaser Warrants”), and 2,830 shares of Series B Preferred Stock (collectively, the “SPA Securities”) worth $11,031,371 (including the conversion of liabilities and redemptions of shares of Series A Preferred Stock) at a price of $7.00 per Class A Unit (as defined in the Securities Purchase Agreement) and $1,000 per Class B Unit (as defined in the Securities Purchase Agreement) (the “Private Offering”). The Purchaser Warrants have a strike price of $9.10, expiring five years from the Initial Exercise Date (as defined in the Purchaser Warrants).
Additionally, in connection with the Private Offering, the Company issued to Joseph Gunnar & Co., LLC (Placement Agent) in the Private Offering 157,591 Placement Agent Warrants with a strike price of $9.10 expiring five years from the Initial Exercise Date.
In connection with the conversion and redemption portion of the Private Offering, on the Effective Date, the Company entered into that certain Agreement to Convert Promissory Note (the “JMJ Letter Agreement”) with JMJ Financial, a sole proprietorship (“JMJ”), whereby JMJ agreed to convert $2,105,263 of liabilities and their additional investment of $1,000,000, into 443,609 shares of common stock of the Company at a conversion price equal to $7.00 per share. Additionally, JMJ was issued warrants to purchase 443,609 shares of the Company’s common stock at an exercise price equal to $9.10 per share, expiring five years from the Initial Exercise Date.
Additionally, in connection with the conversion and redemption portion of the Private Offering, the Company entered into Letter Agreements (the “Debt and Preferred Stock Letter Agreements”) with certain debt holders and holders of the Company’s Series A Preferred Stock (the “Debt and Preferred Holders”) for conversion or repayment of an additional aggregate amount of $1,013,788 including certain trade payables. All Series A holders were repaid in full and no stock or warrants were issued. The remaining debt holders and trade payables were converted into 99,159 shares of common stock of the Company at a conversion price equal to $7.00 per share. Additionally, the debt holders and certain trade payables which were converted, were issued warrants to purchase 99,159 shares of the Company’s common stock at an exercise price equal to $9.10 per share, expiring five years from the Initial Exercise Date.
II-2
Simultaneously with the closing of the Private Offering, (i) Gianni B. Arcaini, the Chief Executive Officer, converted $700,543 of accrued salary into 50,039 shares of the Company’s common stock at a $14.00 per share and 50,039 warrants to purchase shares of common stock of the Company at an exercise price of $14.00 per share, expiring five years from the Initial Exercise Date, (ii) Adrian G. Goldfarb, the Chief Financial Officer of the Company, converted $34,020 of liabilities into 2,430 shares of the Company’s common stock at a $14.00 per share and 2,430 warrants to purchase shares of common stock of the Company at an exercise price of $14.00 per share, expiring five years from the Initial Exercise Date, (iii) a non-related entity converted $118,875 of liabilities into 8,492 shares of the Company’s common stock at a $14.00 per share and 8,492 warrants to purchase shares of common stock of the Company at an exercise price of $14.00 per share, expiring five years from the Initial Exercise Date.
On January 1, 2018, the Company issued 3,730 restricted shares of common stock to current and past members of the Company’s Board of Directors for the conversion of a portion of accrued board of director fees at a price valued at $14.00 per share. These 3,730 shares were issued under the 2016 Equity Compensation plan.
During the three months ended June 30, 2018, the Company issued 160,143 options to purchase shares of the Company's common stock exercisable immediately and over a 5-year period at an exercise price of $14.00 per share granted to employees and directors.
During the three months ended September 30, 2018, the Company issued 21,429 shares of common stock in the amount of $195,000 upon the exercise of certain warrants.
On October 10, 2018, the Company’s Board of Directors approved the issuance of an aggregate of 35,444 five-year warrants with an exercise price of $9.10 to six investors.
On October 10, 2018, the Company’s Board of Directors approved the issuance of up to 6,574 shares in exchange for $92,033 of accrued salary owed to a former officer of the Company.
During the three months ended March 31, 2019, the Company issued 214,286 restricted shares of common stock upon the exercise of warrants to purchase 214,286 shares of common stock for aggregate gross proceeds to the Company of $1,650,000.
The Company issued 66,756 shares of common stock upon acceptance of warrant exercises in the second quarter of 2019 from three shareholders for further proceeds to the Company of $514,020.
During the secondthird quarter of 2019, the Company issued 9,878 warrants to purchase 44,644 shares of common stock upon the cashless exercise of 46,572 common stock warrants.
stock. The Company issued 2,484 shares of common stock for services to the members of the board during the third quarter of 2019.
During the 3rd Quarter of 2019 a shareholder of Series B preferred stock converted 750 shares into 107,143 shares of common stock.
The Company issued 19,643 shares of common stock upon acceptance of warrant exercises in the third quarter of 2019 from two shareholders for further proceeds to the Company of $151,250.
The Company issued 1,149 shares of common stock for services to the members of the board during the fourth quarter of 2019.
The securities issued pursuant to the above offeringswarrants were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified forwere issued in reliance upon the exemption under Section 4(a)(2) of the Securities Act and/or Regulation D. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as definedcontained in Section 4(a)(2) of the Securities Act dueand on Rule 506 of Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering.
In February 2021, the Company issued 4,500 shares of Series C Convertible Preferred Stock. These shares were not registered under the Securities Act but were issued in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act and on Rule 506 of Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering.
In April and May 2021, the Company issued an aggregate of 50,588 shares of common stock upon the exercise of warrants on a cashless basis. These shares were not registered under the Securities Act but were issued in reliance upon the exemption from registration contained in Rule 144 promulgated under the Securities Act.
On September 30, 2022, the Company issued 818,335 shares of common stock and 999 shares of Series D Convertible Preferred Stock in a private placement. These shares were not registered under the Securities Act but were issued in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act and on Rule 506 of Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering.
On October 29, 2022, we sold in a private placement an additional 83,667 shares of common stock and 300 shares of Series D Preferred Stock. These shares were not registered under the Securities Act but were issued in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act and on Rule 506 of Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering.
On March 27, 2023, the Company issued 4,000 shares of Series E Convertible Preferred Stock to the insubstantial number of persons involvedSelling Stockholders. These shares were not registered under the Securities Act but were issued in reliance upon the transaction, sizeexemption from registration contained in Section 4(a)(2) of the offering, mannerSecurities Act and on Rule 506 of the offering and number of securities offered.Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering.
II-3
| II-2 |
Item 16. Exhibits and Financial Statement Schedules
(a)Exhibits
We have filed the exhibits listed on the accompanying Exhibit Index of this registration statement and below in this Item 16:
Exhibit No. | Exhibit Description | |
| ||
| First Amendment to Merger and Plan of Merger, dated March 15, 2015 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 2.1 on March 19, 2015) | |
2.2 | Merger Agreement and Plan of Merger, dated February 6, 2015 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 2.1 on February 9, 2015) | |
3.1 | Amendment to Amended and Restated Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 on July 13, 2015) | |
3.2 | Amended and Restated Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 on April 7, 2015) | |
3.3 | Amended and Restated Bylaws, as amended(incorporated | |
3.4 | Articles of Amendment to Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 with the Securities and Exchange Commission on April 28, 2017) | |
|
| |
| Certificate of Amendment to Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2020) | |
| 3.7 | Articles of Amendment to Articles of Incorporation Designation of Series C Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2021) | |
| 3.8 | Amendments to Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.8 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2021) | |
| 3.9 | Articles of Amendment to Articles of Incorporation Designation of Series D Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2022). | |
| 3.10 | Articles of Amendment to Articles of Incorporation Designation of Series E Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 2023) | |
| 4.1 | Common Stock Purchase Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.1 on December 23, 2016) | |
| Form of Purchaser Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.1 on November 29, 2017) | |
| 4.3 | Form of Placement Agent Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.2 on November 29, 2017) | |
| 4.4 | Form of Representative’s Warrant | |
| Shutts & Bowen, LLP. | |
| Employment Agreement, dated | |
10.2 | Securities Purchase Agreement, dated March 31, 2016, by and between Duos Technologies Group, Inc. and the Schedule of Buyers attached thereto (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 on April 6, 2016) | |
10.3 | Security and Pledge Agreement, dated April 1, 2016, by and among Duos Technologies Group, Inc., each of the Company’s Subsidiaries named therein and GPB Debt Holdings II, LLC (in its capacity as collateral agent) (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.2 on April 6, 2016) | |
10.4 | Guaranty, dated April 1, 2016, by and among each of Duos Technologies Group, Inc.’s Subsidiaries named therein and GPB Debt Holdings II, LLC (in its capacity as collateral agent) (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.3 on April 6, 2016) | |
10.5 | Warrant, dated April 1, 2016, issued by Duos Technologies Group, Inc. (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.4 on April 6, 2016) | |
| 2016 Equity Incentive Plan (incorporated herein by reference to the Proxy Statement on Schedule 14A filed on April 1, 2016) | |
10.7 | Securities Purchase Agreement, dated December 20, 2016, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 on December 23, 2016) |
|
| 10.8 | Promissory Note, dated December 20, 2016, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.2 on December 23, 2016) | |
10.9 | Form of | |
10.10 | Form of | |
| 10.11 | Amendment #1 to the Securities Purchase Agreement and to the Note, dated May 22, 2017 (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.5 with the Securities and Exchange Commission on August 15, 2017) | |
| 10.12 | Amendment #2 to the Securities Purchase Agreement and to the Note, dated July 12, 2017 (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.6 with the Securities and Exchange Commission on August 15, 2017) | |
| 10.13 | Amendment #3 to the Securities Purchase Agreement and to the Note, dated August 14, 2017 (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.7 with the Securities and Exchange Commission on August 15, 2017) | |
| 10.14 | Amendment #4 to the Securities Purchase Agreement and Note, dated November 14, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.8 on November 20, 2017) | |
| 10.15 | Amendment #5 to the Securities Purchase Agreement and Note, dated November 16, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.9 on November 20, 2017) | |
| 10.16 | Amendment #6 to the Securities Purchase Agreement and Note, dated November 20, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.10 on November 20, 2017) | |
| 10.17 | Forbearance Agreement, dated May 12, 2017, by and among Duos Technologies Group, Inc. and GPB Debt Holdings II, LLC (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.13 on November 20, 2017) | |
| 10.18 | Form of Note Holder Letter Agreement, dated June 9, 2017 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 with the Securities and Exchange Commission on June 15, 2017) | |
| Form of Arcaini Letter Agreement, dated June 9, 2017 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.2 with the Securities and Exchange Commission on June 15, 2017) | |
| 10.20+ | Form of Goldfarb Letter Agreement, dated June 9, 2017 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.3 with the Securities and Exchange Commission on June 15, 2017) | |
| GPB Debt Holdings II, LLC Letter Agreement, dated August 1, 2017 (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.4 with the Securities and Exchange Commission on August 15, 2017) | |
| 10.22 | Form of Conversion Letter (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.5 with the Securities and Exchange Commission on November 29, 2017) | |
| 10.23 | Form of Redemption Letter (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.4 with the Securities and Exchange Commission on November 29, 2017) | |
| 10.24 | Form of Pay-off Letter (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.3 with the Securities and Exchange Commission on November 29, 2017) | |
| 10.25+ | Amendment to 2016 Equity Incentive Plan (incorporated by reference to Appendix B of the Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on December 18, 2017). | |
| 10.26+ | Amendment to 2016 Equity Incentive Plan (incorporated by reference to the Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on June 21, 2019) | |
| 10.27+ | Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2020) | |
| 10.28 | Paycheck Protection Program Note, dated April 23, 2020 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2020) | |
| 10.29 | Separation Agreement, dated July 10, 2020, by and between Duos Technologies Group, Inc. and Gianni B. Arcaini (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2020) | |
| 10.30 | Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2021) |
| II-4 |
| 10.31 | Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2021) | |
| 10.32+ | 2021 Equity Incentive Plan (incorporated herein by reference to the Proxy Statement on Schedule 14A filed on June 23, 2021) | |
| 10.33+ | Employment Agreement, dated April 1, 2018, | |
| Employment Agreement, dated April 1, 2018, | |
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| Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2022) | |
| 10.36 | Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2022) | |
| 10.37 | Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 2023) | |
| 10.38 | Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 2023) | |
| 10.39+ | 2021 Equity Incentive Plan as amended (incorporated herein by reference to Exhibit C to the definitive Proxy Statement filed with the Securities and Exchange Commission on April 7, 2023) | |
| 10.40+ | Duos Technologies Group, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit B to the definitive Proxy Statement filed with the Securities and Exchange Commission on April 7, 2023) | |
| 21 | List of Subsidiaries (incorporated by reference to Exhibit 21 to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on May 28, 2021) | |
| 23.1* | Consent of Salberg & Company, P.A. | |
| 23.2** | Consent of Shutts & Bowen, LLP. | |
| 24.1 | Power of Attorney for Duos Technologies Group, Inc. (included on signature page) | |
| 99.1 | Audit Committee Charter (incorporated by reference to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April | |
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| Corporate Governance and Nominating Committee Charter (incorporated by reference to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2019) | |
| 101.INS * | ||
| 101.SCH * | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL * | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF * | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB * | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE * | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
| 107* | Filing Fee Table |
———————
| * | filed herewith |
| ** | to be filed by amendment |
| # | Management contract or compensatory | |
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(b) Financial Statement Schedules.
| II-5 |
All schedules have been omitted because either they are not required, are not applicable or the information is otherwise set forth in the financial statements and related notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
| (1) | ||
| To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) |
| To include any prospectus required by |
| (ii) |
| To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than |
| (iii) |
| To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i), (a)(1)(ii) and (a)(l)(iii) do not apply if the registration statement is on Form S-1, Form S-3, Form SF-3 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or, as to a registration statement on Form S-3, Form SF-3 or Form F-3, is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement. |
| (2) | ||
| That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
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| (3) | ||
| To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (4) | ||
| That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: |
| (i) | If the registrant is relying on Rule 430B: |
| A. | Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and |
| II-6 |
| B. | Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date. |
| (ii) | If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
| (5) | ||
| That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: |
| The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| (i) |
| Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule |
| (ii) |
| Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned |
| (iii) |
| The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned |
| (iv) |
| Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
| (6) | ||
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| (7) | ||
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| (8) | For purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| II-8 |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Jacksonville, State of Florida, on January 24, 2020. July 14, 2023.
Duos Technologies Group, Inc. | |||
By: | /s/ | ||
Name: | |||
POWER OF ATTORNEY: KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Gianni B. Arcaini,Charles Ferry, his true and lawful attorneys-in-factattorney-in-fact and agentsagent with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-factattorney-in-fact and agents, and each of them,agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-factattorney-in-fact and agents or any of them,agent, or his, her or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
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/s/ | Chief Executive Officer |
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/s/ | Chief Financial Officer (Principal Financial Officer) |
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/s/ |
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/s/ Kenneth Ehrman |
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Kenneth | ||||||
/s/ | Director |
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