![[duot_s1002.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1002.gif)
Rail Inspection Portal rip® - Canadian Location
Operator Interface - centraco®
As filed with the Securities and Exchange Commission on May 28, 2021.October 5, 2023.
Registration No. 333-256110333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
————————
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
————————
DUOS TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in its charter)
| Florida | 7373 | 65-0493217 |
|
|
|
(State or Other Jurisdiction | (Primary Standard Industrial | (I.R.S. Employer |
6622 Southpoint Drive South, Suite 310
Jacksonville, Florida 32216
7660 Centurion Parkway, Suite 100
Jacksonville, Florida33256
(904) 296-2807652-1637
(Address and telephone number of registrant’s principal executive offices)
————————
Adrian G. GoldfarbAndrew W. Murphy
Chief Financial Officer
Duos Technologies Group, Inc.
6622 Southpoint Drive South,7660 Centurion Parkway, Suite 310100
Jacksonville, Florida 3321633256
(904) 652-1616 652-1637
(Name, address. including zip code, and telephone number,
including area code, of agent for service)
————————
Copies to:
J. Thomas Cookson, Esq. Tel. No.: (305) 358-6300 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes 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 accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
CALCULATION OF REGISTRATION FEE
Title of Each Class of |
| Amount |
|
| Proposed |
|
| Proposed |
|
| Amount of |
| ||||
Common Stock, par value $0.001 per share(2)(3) |
|
| 818,182 | (4) |
| $ | 5.50 |
|
| $ | 4,500,000 |
|
| $ | 491 |
|
|
|
|
|
|
|
|
|
|
|
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.
The information in this prospectus is not complete and may be changed. The 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 securities, and we are not soliciting offers to buy these securities, in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS |
|
|
DUOS TECHNOLOGIES GROUP, INC.
818,182806,452 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 818,182806,452 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 CF Convertible Preferred Stock, par value $$0.001$0.001 per share (the “Series CF Preferred Stock”), which we sold to the Selling Stockholders in a private placement on February 26, 2021.August 2, 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“Plan of Distribution”Distribution” beginning on page 27 of this prospectus for more information.
We are not selling any shares of Common Stock in this offering, and we will not receive any proceeds from the sale of shares by the Selling Stockholders.
Our Common Stock is currently quoted on the Nasdaq Capital Market under the symbol “DUOT.” On May 28, 2021,October 3, 2023, the closing price as reported on the Nasdaq Capital Market was $9.75 $4.90 per share. This price will fluctuate based on the demand for our Common Stock.
The Selling Stockholders may offer all or 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 provides a general description of the securities being offered. You should read this prospectus and the registration statement of which it forms a part before you invest in any securities.
Investing in our securities involves a high degree of risk. See “Risk Factors”“Risk Factors” beginning on page 1716 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.
The date of this prospectus is _____________, 2021______, 2023
TABLE OF CONTENTS
| PAGE | ||
| ||
1 | ||
| 8 | ||
| Summary of Consolidated Financial Information |
| |
| ||
23 | ||
24 | ||
25 | ||
27 | ||
29 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | |
| ||
| ||
| 60 | ||
| Security Ownership of Certain Beneficial Owners and Management | 63 | |
| ||
| ||
| ||
| ||
| ||
F-1 |
This 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 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 incorporated by reference as described in “Where You Can Find AdditionalMore Information,” and “Incorporation of Certain Information by Reference” in this prospectus.
We and the Selling Stockholders have not authorized anyone to give any information or to make any representations different from that which is contained or incorporated by reference in this prospectus in connection with the offer made by this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any Selling Stockholder. Neither the delivery of this prospectus nor any sale made hereunder and thereunder shall under any circumstances create an implication that there has been no change in the affairs of the Company since the date hereof. You should assume that information 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 state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation.
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”“Risk Factors” and “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”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, 20192021 and 20202022 are sometimes referred to herein as fiscal years 20192021 and 2020,2022, 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 January 17,2020.17, 2020.
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, based in Jacksonville, Florida, oversees its wholly owned subsidiary, duostech™ whichand employs 55 approximately 79 people and is a technology integrator,company which designs, develops, deploys and operates intelligent technology solutions with a focus on software applications and artificial intelligence (“AI”) company with. The Company has a strong portfolio of intellectual property. The Company’s headquarters are located at 6622 Southpoint Drive South,7660 Centurion Parkway, Suite 310,100, Jacksonville, Florida 3221632256 and main telephone number is (904) 296-2807.
Overview
The Company, operating under its brand name duostech, designs, develops and deploys technology systems with focus on inspecting and operates intelligentevaluating moving vehicles. Its technology solutionsfocus is within the Vision Technology market sector and, more specifically, the Machine Vision subsector. Machine Vision companies provide imaging-based automatic inspection and analysis for process control for industry with potential expansion into other markets. Duos has developed key technologies 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 employee 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 in the rail industry on staff and information technology.as consultants.
Our mainDuos 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 automatedremote 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 minutesseconds of the railcar passing through the RIP, a detailed report is sent to the customer where they are able to take action items immediately.on 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 short lineother railroad customers along with selected government agencies that operate and/or manage rail traffic. The Company currently operates with our RIPhas deployed RIPs in Canada, Mexico and the United States and anticipates expanding this solution into Europe, Asia and Australiathe 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 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 has already deployed this system with one large North American retailer and anticipates increased demand from other large retailers, railroad intermodal operators and select government agencies that manage logistics and border crossing points. The Company is evaluating 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.
To support the RIP and ALIS, the Company hasWe 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 the end user’s Concept of Operations (CONOPS), it provides improved situational awareness and data visualization for operational objectives. centraco® supports the integration of data from existing systems, including cameras and other sensor-based systems, within the same user interface. With centraco®, authorized personnel can simultaneously view, monitor and analyze data and other events from multiple geographic locations. objectives compared to traditional manual inspections. truevue360™is our fully integrated platform that we utilize to develop and deploy Artificial Intelligence (AI) algorithms, including Machine Learning, Computer Vision, Object Detection and Deep Neural Network-based processing for real-time applications. We develop and deploy turn-key intelligent
These same Artificial Intelligence applications thathave begun to open up other opportunities for the Company to provide highly accurate results to automate and optimize our customer’s operations.revenue producing solutions with potentially high market adoption.
Another offering is ourIn 2021, the Company ended support of its IT Asset Management (ITAM) solution which utilizes dcVue® to help data center operators more effectively manage mission critical assets. This proprietary enterprise system utilizes intelligent bar code scanning technology, which quickly and seamlessly provides accurate, cataloged results for data center asset inventory and audit services. We have over 15 yearsare 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 experience physically reviewing data center equipment and documenting customer defined attributes associatedsolution although no specific offering has been developed at this time.
In the last quarter of 2022, the Company elected not to each piecerenew 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 equipment such as location, make, model, asset tag, serial number, number of blades, and power connectivity. Our team of trained professionals will quickly and efficiently gather the required data without disruption to your data center’s operation. All of the solutions can be offered as service or through licensing, the end-user can perform the service internally.2023 for $165,000 via a convertible note.
The year 2020 brought significant2022 ushered in a new phase in the Company’s development. Although we continue to see an extension of challenges faced in 2021, we also see positive changes and opportunities for our business that will be discussed in greater detail later in this prospectus.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. |
·duostech™
The up listing onto a national exchange (Nasdaq) in first quarter, 2020.
·
Responding to the COVID-19 pandemic beginning in first quarter, 2020 and which continues as of the date of this prospectus.
·
The delay of new orders from existing customers beginning in first quarter, 2020 with a restart being expected in second quarter 2021.
·
The retirement of Gianni Arcaini as Chairman and CEO, and the hiring of new CEO and Director Charles Ferry in third quarter, 2020.
·
Restructuring of the organization by establishing a CCO (Scott Carns) and hiring a new COO (Ben Eiser) in third quarter, 2020.
·
Addition of Mr. Edmond Harris, former COO of CSX and CN, to our Board of Directors in fourth quarter, 2020.
duostech™
Over the past 10 years, duostech™ has developed a series of industry specific technologies some of which are described below.
Railcar Inspection Portal (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, a very labor intensive and inefficient process that only covers a select number of inspection points and can take several hours per train. OurWe believe our Railcar Inspection Portal canhas the potential to reduce this inspection to minutes while the train is moving at speed, improving safety, reducing dwell time and optimizing maintenance.
Our system combines high-definition image and data capture technologies with our AI-based analytics applications 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 inbound train yard, well ahead of the train entering the yard.
Currently, three Class 1 railroads are operatingand several transit and international railroads use our rip®rip® technology with one of those railroads broadly deploying the ultimate objective to change inspection regulations that would allow replacement of the current manual inspection (in the yard) with our fully automated process.technology across its network.
| |
|
|
The following examples of automated detections are the result of the combination of our image capture technologies. 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 in support of the Customs and Border Protection Agency.
![[duot_s1004.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1004.gif)
Samples of Automated Detections
The Company continues to expand its detection capabilities through the development and integration of additional sensor technologies to include laser, infrared, thermal, sound and x-ray to process AI-based analytics of inspection points.
The following proprietary capture and sensor technologies are sold as stand-alone systems as well as sub-systems ofCurrently the modular Railcar Inspection Portal system:
Vehicle Undercarriage Examiner (vue®)
A system that inspects the undercarriage of railcars (both freight and transit rail) traveling at speeds of up to 70 mph. We are currently developing an expanded version for higher speeds with additional sensor technologies. We are developing additional algorithms for an increasing number of automated detection of anomalies, which we believe once completed and successfully tested, may have a significant impact on our revenues.
|
|
|
Thermal Undercarriage Examiner (t-vue™)
The Company has developeda high-reliability catalog of over 40 artificial intelligence algorithms which can be integrated into the RIP to enhance mechanical anomalies detections. These detections support railroads in the active maintenance and deployed a new thermal undercarriage examiner. The system uses high-speed thermal imaging technology to inspect the thermal signatureoverall safety of undercarriage components. Thermal monitoring of component heat signatures while underway will provide indications of the overall operating health of the railcars that are not possible to observe during static yard inspections.their railcar fleet and networks.
![[duot_s1009.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1009.gif)
Enterprise Command and Control Suite (centraco®)
This 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, the centraco®Enterprise Command and Control Suite. A multi-layered command and control interface, it is designed to function as the central point and aggregator for information consolidation, connectivity and communications. The platform is browser based and agnostic to the interconnected sub-systems. It provides full integration for seamless user credentialing and performs the following major functions:
·
Collection: Device management independently collects data from any number of disparate devices or sub-systems.
·
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”).
·
Verification: The contextual layer represents relevant information in a quick and easily interpreted format which provides operators optimal situational awareness.
·
Resolution: Event-specific presentation of user-defined Standard Operating Procedures (“SOPs”), that includes step-by-step instructions on how to resolve situations.
·
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 third-party databases. Reports are customized to the end user’s data formats and infrastructure.
·
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.
·
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.
![[duot_s1011.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1011.gif)
centraco®User Interface
Automated Logistics Information Systems (alis™)
We have developed and deployed a proprietary intelligent system to automate security gate operations at nine distribution centers owned and operated by a national retail chain. Using similar technology that is used in our Rail Inspection Portal, this solution automates the process of entering and exiting a large logistics or intermodal yard. This automates the logistics transaction, improves throughput and can also be used to automate security and maintenance screening/detection if desired by the customer.
![[duot_s1013.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1013.gif)
Automated Gate Operation alis™deployed at nine Kohl’s distribution centers
Markets
TheWe believe the opportunity for our RailRailcar Inspection Portal business is substantial and continues to be our number one priority at this time.priority. We are currently providing thisengaged with the RIP solution towith three of seven Class 1 railroad operators with 1013 systems already deployed.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 consumingtime-consuming and expensive for a new competitor to replicate. Furthermore, we believe we have given ourselves the ability to upgrade and scale our solutions with additional technologies in the future. Recently,We believe that the new CEO directedcurrent market for our operations and technical teams to improve our current design to meet anticipated Federal Railroad Administration, or FRA and Association of American Railroads regulatory guidelines. We currently estimate the total Class 1 railroads addressable market at 156 systems in North America alone. Between initial RIP installations, upgrades and long-term service agreements, we believe this equates to $800 million, whichtechnologies is realistically attainable in the coming years.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 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.
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. The addressable market equates to well over $100 million.
Currently, we are focused on the North American market, but plan to expand globally in the future.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.
With regards to our Railcar Inspection Portal (RIP), we currently have no direct competition domestically or globally. There are several companies that do provide visual and optical (laser) based imaging systems, but they are specifically designed to focus on a single aspect of a railcar whereas our latest RIP will identify 50+ inspection points on each car. This is not to be confused with track inspection technologies, which we do not compete with. We are the only company, to our best knowledge, that creates images of the entire car from multiple perspectives and with many inspection points. Other companies that participate in the visual and optical (laser) based railcar inspection systems market include:
·
Trimble Rail Solutions/Beena Vision – Atlanta, GA– Trimble Rail Solutions is a conglomerate of companies focused on various aspects of the maintenanceinclude Wabtec (Beena Vision), KLD Labs, WID, IEM, and construction of rail infrastructure or management of rail transportation assets. In 2017, they acquired Beena Vision which focuses on wayside inspection systems to analyze specific aspects of a railcar such as wheels and brakes among other critical points. All their systems are currently designed to focus on a singular aspect of a railcar. While they do advertise a full-scale train imaging and inspection portal, it is generally not comparable to our offering nor, to our knowledge, has it been widely adopted by North AmericanCamlin Rail. Some Class 1 railroads for automated wayside inspection purposes.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.
·
KLD Labs – Hauppauge, NY – KLD Labs develops and deploys wayside measurement and inspection systems for railcar inspection. Like most others, their products are focused on singular aspects of a railcar such as wheels and brakes. They have also developed some technologies for rail track assessment and measurement.
·
Class 1 Railroads– Some of the Class 1 railroads, such as Union Pacific, have worked to develop their own “in-house” solutions but are also specifically focusing on singular aspects of a railcar.
Our Automated Logistics Information System (ALIS) also represents an opportunity to expand into a very mature market withthat we believe has a majorsignificant 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 purpose of AGS technology is to streamline entry in to and exit out of facilities. The marketplace for this was mostly seaports and intermodal transfer facilities and was relatively expensive technology to deploy. We identified a market gap with regards to distribution facilities that all currently utilize manual processes and heavy staffing to accomplish commercial truck entry and exit. The barrier to entry for distribution centers was predominately “cost”, as well as the requirement for a different set of logistics management software and tools. The current defined competition is as follows:
·
Nascent – Charlotte, NC– Their primary market focus has been on seaports and intermodal transfer facilities.
·
Potential End Users/Customers– In communications with potential customers, many have identified the desire to add this technology but have faced difficulties in finding companies offering a solution that meets their specific needs.
Due to the nature of our innovations, our current customer base, which is predominately in the railroad industry, constantly challenges us to develop new systems that do not yet exist in the marketplace. Each of these opportunities for new product development is evaluated from both a business and technical perspective. We evaluate the following: “can it technically be accomplished?”; “Does it leverage our core technology competencies?”; and ultimately, “Is there a market for this product?” Recently, we were asked to develop a variant of our Railcar Inspection Portal to assess for damaged automobiles being transported by the railroads. This is a perfect example of being able to leverage our experience with imaging, system development and field deployment combined with an addressable market into penetrating a new greenfield.
Our Growth Strategy
Vision
DuosThe Company designs, develops, deploys and operates cutting-edge technologies that help to transform precision railroading, logisticsintelligent technology solutions for inspecting and evaluating moving objects. Its technology application focus is within the rail and intermodal transportation solutions.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. |
·
Improve our operational and technical execution, customer satisfaction and 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 and OPEX pricing models that 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 once the business is more mature and profitable 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 Growth
Our organic growth strategy is to continue our focus and prioritization in the rail, logistics and intermodal market space. To ensure our success,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 joined the former divisional COO who has 20 yearsteam during late 2022 to support continued revenue growth of the business bringing significant sales experience withfocused around the rail market. In the third quarter of 2023, the Company delivering technology into rail, logistics, intermodal, and other industries, has been promoted toalso brought on a new Chief Commercial Officer (CCO)bringing significant experience from the sales and operations aspects of our wholly owned subsidiary, duostech. We havethe intermodal and power industries. In 2021, the Company also hired a divisionalnew Chief OperatingTechnology Officer (COO) with a strong background in operations in multiple former assignments. The Company’s CFO will continue in the same role providing continuity and multiple years of public company experience. The Company’s Board of Directors is being strengthened with the addition of a retired Chief Operating Officer for a Class 1 railroad with more than 50bringing 25 years of experience in designing and delivering value driven technologies. Our new CTO has already led the rail industry.team through instrumental changes to its approach to software and artificial intelligence development. The shareholdersteam also approvedsaw a change in CFO in late 2022 with the appointment of our CEO tonew CFO bringing significant experience in growth for asset-intensive businesses which aligns with the Board of Directors.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 the COVID-19 pandemic issupply chain issues are expected to still be an issue during 2021,continue through 2023, the Company’s primary customers have indicated readiness to order more equipment and services based upon the Company’s current performance.performance and the new subscription offerings expands the universe of potential customers.
Additionally, the new 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. Similar upgrades are also being developed to improve the ALIS system. These upgrades are anticipated to be released throughout 2021 and are expected to drive revenue growth in 2021 and beyond.
The Company is expanding its focus in the rail industry to encompass passenger transportation and is currently in the last stages of a bid for a large, multi-year contract with a national rail carrier. If successful, the Company is expected to deliver at least two RIP solutions along with a long-term services agreement in late 2021 or early 2022.
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 teams 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 efforts, including software development, to maintain and improve our current product and services offerings.
| 5 |
Government Regulations
The Company has worked with 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 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 continuously 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 develop similar relationships with governmental agencies in target markets both in the US and internationally. At this time, we believe our offerings are complementary to 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 55 79 employees, of which 52 73 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 experienced any work stoppages and we consider our relationship with our employees to be good.
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”“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 a 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.
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 30, 2023, the Company issued 65,561 shares of common stock to employees participating in the Company’s Employee Stock Purchase Plan at the end of a six-month offering period. The employee participation totaled $117,048 for the six months ended June 30, 2023 and represented a purchase price $1.79 per share based upon 85% of the lower of either the first trading day of the offering period or the purchase date.
On July 1, 2023, the Company awarded an employee 50,000 non-qualified stock options, subject to final board approval, which have a 5-year term and a 3-year vesting period.
On July 6, 2023, the Company issued an aggregate of 5,645 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 June 30, 2023.
On July 19, 2023, the Board of Directors elected Frank Lonegro as a member of the Board, effective immediately.
On August 30, 2023, the Company hired Christopher King as its Chief Commercial Officer. Mr. King is a veteran of the logistics and energy markets who has led numerous commercial teams who successfully won over $1 billion in new revenue, asset sales and contract extensions as well as brings Six Sigma leadership expertise to the team.
On August 30, 2023, the Company awarded 70,000 non-qualified stock options for a new employee, subject to final board approval, which have a 5-year term and a 3-year vesting period.
On September 29, 2023, the Company issued an aggregate of 7,910 shares of common stock for payment of board fees to four directors in the amount of $40,565 for services to the board which was expensed during the three months ended September 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 a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.
This prospectus relates to the offer and sale from time to time of up to 818,182806,452 shares of our Common Stock by the Selling Stockholders that may be issued upon conversion of the Series CF Preferred Stock. See “Selling Stockholders”“Selling Stockholders”.
Securities offered by the Selling Stockholders |
|
Offering Price Per Share | The Selling Stockholders may sell all or a portion of the shares being offered by this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices. See |
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 |
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 symbol | Our common stock is currently quoted on the Nasdaq Capital Market under the trading symbol “DUOT”. |
Unless otherwise indicated in this prospectus, throughout this prospectus the number of shares of our common stock outstanding is based on 7,248,455 shares of our common stock outstanding as of September 30, 2023 and excludes the following:
| · | 80,091 shares of common stock issuable upon exercise of warrants to purchase shares of common stock outstanding as of June 30, 2023, with a weighted average exercise price of $8.53 per share; |
| · | 1,217,775 shares of common stock issuable upon the exercise of options to purchase shares of common stock outstanding as of June 30, 2023, with a weighted average exercise price of $5.37 per share; | |
| · | 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; | |
| · | 1,333,334 shares of common stock issuable upon conversion of Series E Convertible Preferred Stock; and | |
| · | 806,452 shares of common stock issuable upon conversion of Series F Convertible Preferred Stock. |
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated statementsstatement of operations data for the fiscal years ended December 31, 20202022 and 20192021 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. The consolidated statement of operations data for the three and six months ended June 30, 2023 and 2022 and the summary consolidated balance sheet data as of December 31, 2020 are derived from our consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of operations data for the three months ended March 31, 2021 and 2020June 30, 2023 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of March 31, 2021 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The historical financial data presented below are not necessarily indicative of our financial results in future periods, and the interim results are not necessarily indicative of our operating results to be expected for the full fiscal year ending December 31, 20212023 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 interim 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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| For the Years Ended |
| |||||
|
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
|
|
|
|
|
| ||
REVENUES: |
|
|
|
|
|
| ||
Technology systems |
| $ | 4,956,130 |
|
| $ | 11,963,438 |
|
Technical support |
|
| 1,801,043 |
|
|
| 1,377,459 |
|
Consulting services |
|
| 273,604 |
|
|
| 300,418 |
|
AI technologies |
|
| 1,008,671 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
| 8,039,448 |
|
|
| 13,641,315 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
|
|
|
Technology systems |
|
| 3,665,493 |
|
|
| 6,510,658 |
|
Technical support |
|
| 1,109,741 |
|
|
| 528,966 |
|
Consulting services |
|
| 117,004 |
|
|
| 120,253 |
|
AI technologies |
|
| 360,817 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
| 5,253,055 |
|
|
| 7,159,877 |
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
| 2,786,393 |
|
|
| 6,481,438 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Sales & marketing |
|
| 717,809 |
|
|
| 950,962 |
|
Engineering |
|
| 1,358,925 |
|
|
| 1,254,235 |
|
Research and development |
|
| 1,022,188 |
|
|
| 1,479,334 |
|
Administration |
|
| 5,011,913 |
|
|
| 3,987,941 |
|
AI technologies |
|
| 1,309,986 |
|
|
| 1,215,488 |
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 9,420,821 |
|
|
| 8,887,960 |
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
| (6,634,428 | ) |
|
| (2,406,522 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
Interest Expense |
|
| (150,137 | ) |
|
| (69,322 | ) |
Other income, net |
|
| 37,130 |
|
|
| 4,962 |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
| (113,007 | ) |
|
| (64,360 | ) |
|
|
|
|
|
|
|
|
|
NET LOSS |
| $ | (6,747,435 | ) |
| $ | (2,470,882 | ) |
|
|
|
|
|
|
|
|
|
Basic & Diluted Net Loss Per Share |
| $ | (2.03 | ) |
| $ | (1.39 | ) |
|
|
|
|
|
|
|
|
|
Weighted Average Shares-Basic & Diluted |
|
| 3,320,193 |
|
|
| 1,781,704 |
|
| 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 | ||||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||||||||||
|
| December 31, |
| December 31, |
| 2022 | 2021 | |||||||||
|
| 2020 |
| 2019 |
| |||||||||||
ASSETS |
|
|
|
|
| |||||||||||
CURRENT ASSETS: |
|
|
|
|
| |||||||||||
Cash |
| $ | 3,969,100 |
| $ | 56,249 |
| $ | 1,121,092 | $ | 893,720 | |||||
Accounts receivable, net |
| 1,244,876 |
| 2,611,608 |
| 3,418,263 | 1,738,543 | |||||||||
Contract assets |
| 102,458 |
| 1,375,920 |
| 425,722 | 3,449 | |||||||||
| Inventory | 1,428,360 | 298,338 | ||||||||||||||
Prepaid expenses and other current assets |
|
| 486,626 |
|
|
| 716,598 |
| 441,320 | 354,613 | ||||||
|
|
|
|
|
| |||||||||||
Total Current Assets |
|
| 5,803,060 |
|
|
| 4,760,375 |
| 6,834,757 | 3,288,663 | ||||||
|
|
|
|
|
| |||||||||||
Property and equipment, net |
| 342,180 |
| 260,181 |
| 629,490 | 603,253 | |||||||||
Operating lease right of use asset |
| 196,144 |
| 430,146 |
| 4,689,931 | 4,925,765 | |||||||||
|
|
|
|
|
| |||||||||||
OTHER ASSETS: |
|
|
|
|
| |||||||||||
Software Development Costs, net |
| — |
| 20,000 |
| |||||||||||
| Security deposit | 600,000 | 600,000 | ||||||||||||||
| Software development costs, net | 265,208 | — | ||||||||||||||
Patents and trademarks, net |
|
| 64,415 |
|
|
| 61,598 |
| 69,733 | 66,482 | ||||||
Total Other Assets |
|
| 64,415 |
|
|
| 81,598 |
| ||||||||
|
|
|
|
|
| |||||||||||
TOTAL ASSETS |
| $ | 6,405,799 |
|
| $ | 5,532,300 |
| $ | 13,089,119 | $ | 9,484,163 | ||||
(Continued)
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
|
| December 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 599,317 |
|
| $ | 2,641,437 |
|
Accounts payable - related parties |
|
| 7,700 |
|
|
| 12,791 |
|
Notes payable - financing agreements |
|
| 42,942 |
|
|
| 42,299 |
|
Notes payable - related parties, net of discounts |
|
| — |
|
|
| 905,373 |
|
Line of credit |
|
| — |
|
|
| 27,615 |
|
Payroll taxes payable |
|
| 3,146 |
|
|
| 115,111 |
|
Accrued expenses |
|
| 1,038,092 |
|
|
| 393,272 |
|
Current portion-equipment financing agreements |
|
| 89,620 |
|
|
| 45,072 |
|
Current portion-operating lease obligations |
|
| 202,797 |
|
|
| 239,688 |
|
Current portion-SBA loan |
|
| 627,465 |
|
|
| — |
|
Contract liabilities |
|
| 709,553 |
|
|
| 8,661 |
|
Deferred revenue |
|
| 315,370 |
|
|
| 936,428 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
| 3,636,002 |
|
|
| 5,367,747 |
|
|
|
|
|
|
|
|
|
|
Equipment financing payable, less current portion |
|
| 103,184 |
|
|
| 89,026 |
|
Operating lease obligations, less current portion |
|
| — |
|
|
| 202,797 |
|
SBA loan, less current portion |
|
| 782,805 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
| 4,521,991 |
|
|
| 5,659,570 |
|
|
|
|
|
|
|
|
|
|
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 preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at December 31, 2020 and December 31, 2019, convertible into common stock at $6.30 per share |
|
| — |
|
|
| — |
|
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 1,705 and 1,705 issued and outstanding at December 31, 2020 and December 31, 2019, convertible into common stock at $7 per share |
|
| 1,705,000 |
|
|
| 1,705,000 |
|
Common stock: $0.001 par value; 500,000,000 shares authorized, 3,535,339 and 1,982,039 shares issued, 3,534,015 and 1,980,715 shares outstanding at December 31, 2020 and December 31, 2019, respectively |
|
| 3,536 |
|
|
| 1,982 |
|
Additional paid-in capital |
|
| 39,820,874 |
|
|
| 31,063,915 |
|
Total stock & paid-in-capital |
|
| 41,529,410 |
|
|
| 32,770,897 |
|
Accumulated deficit |
|
| (39,488,150 | ) |
|
| (32,740,715 | ) |
Sub-total |
|
| 2,041,260 |
|
|
| 30,182 |
|
Less: Treasury stock (1,324 shares of common stock at December 31, 2020 and December 31, 2019) |
|
| (157,452 | ) |
|
| (157,452 | ) |
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity (Deficit) |
|
| 1,883,808 |
|
|
| (127,270 | ) |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity (Deficit) |
| $ | 6,405,799 |
|
| $ | 5,532,300 |
|
| 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 | ||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
REVENUES: |
|
|
|
|
|
| ||
Technology systems |
| $ | 1,490,298 |
|
| $ | 513,674 |
|
Services and consulting |
|
| 664,456 |
|
|
| 477,271 |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
| 2,154,754 |
|
|
| 990,945 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
|
|
|
Technology systems |
|
| 1,895,485 |
|
|
| 1,092,058 |
|
Services and consulting |
|
| 331,384 |
|
|
| 293,954 |
|
Overhead |
|
| 503,593 |
|
|
| 260,421 |
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
| 2,730,462 |
|
|
| 1,646,433 |
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN |
|
| (575,708 | ) |
|
| (655,488 | ) |
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Sales & marketing |
|
| 311,801 |
|
|
| 139,852 |
|
Research & development |
|
| 61,033 |
|
|
| 40,639 |
|
Administration |
|
| 873,758 |
|
|
| 1,251,936 |
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 1,246,592 |
|
|
| 1,432,427 |
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
| (1,822,300 | ) |
|
| (2,087,915 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
Interest expense |
|
| (6,220 | ) |
|
| (68,932 | ) |
Other income, net |
|
| 1,422,497 |
|
|
| 9,798 |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
| 1,416,277 |
|
|
| (59,134 | ) |
|
|
|
|
|
|
|
|
|
NET LOSS |
| $ | (406,023 | ) |
| $ | (2,147,049 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted Net Loss Per Share |
| $ | (0.11 | ) |
| $ | (0.80 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares-Basic & Diluted |
|
| 3,535,339 |
|
|
| 2,687,482 |
|
| For the Three Months Ended | For the Three Months Ended | For the Six Months Ended | For the Six Months Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Technology systems | $ | 870,494 | $ | 2,780,045 | $ | 2,698,258 | $ | 3,563,314 | ||||||||
| Services and consulting | 899,565 | 837,097 | 1,716,089 | 1,493,144 | ||||||||||||
| Total Revenues | 1,770,059 | 3,617,142 | 4,414,347 | 5,056,458 | ||||||||||||
| COST OF REVENUES: | ||||||||||||||||
| Technology systems | 1,072,106 | 1,974,302 | 2,839,315 | 2,839,790 | ||||||||||||
| Services and consulting | 456,616 | 360,226 | 796,523 | 711,988 | ||||||||||||
| Total Cost of Revenues | 1,528,722 | 2,334,528 | 3,635,838 | 3,551,778 | ||||||||||||
| GROSS MARGIN | 241,337 | 1,282,614 | 778,509 | 1,504,680 | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Sales and marketing | 301,077 | 375,986 | 608,654 | 659,880 | ||||||||||||
| Research and development | 537,801 | 530,339 | 942,686 | 967,056 | ||||||||||||
| General and Administration | 2,550,709 | 1,770,764 | 4,522,217 | 3,913,837 | ||||||||||||
| Total Operating Expenses | 3,389,587 | 2,677,089 | 6,073,557 | 5,540,773 | ||||||||||||
| LOSS FROM OPERATIONS | (3,148,250 | ) | (1,394,475 | ) | (5,295,048 | ) | (4,036,093 | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest expense | (3,230 | ) | (2,706 | ) | (4,410 | ) | (5,886 | ) | ||||||||
| Other income, net | 162,080 | 54,509 | 166,375 | 54,691 | ||||||||||||
| Total Other Income (Expenses) | 158,850 | 51,803 | 161,965 | 48,805 | ||||||||||||
| NET LOSS | $ | (2,989,400 | ) | $ | (1,342,672 | ) | $ | (5,133,083 | ) | $ | (3,987,288 | ) | ||||
| Basic and Diluted Net Loss Per Share | $ | (0.42 | ) | $ | (0.22 | ) | $ | (0.72 | ) | $ | (0.70 | ) | ||||
| Weighted Average Shares-Basic and Diluted | 7,169,340 | 6,096,541 | 7,163,142 | 5,727,133 | ||||||||||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| March 31, |
| December 31, |
| June 30, | December 31, | |||||||||
|
| 2021 |
| 2020 |
| 2023 | 2022 | |||||||||
|
| (Unaudited) |
|
|
| (Unaudited) | ||||||||||
ASSETS |
|
|
|
|
| |||||||||||
CURRENT ASSETS: |
|
|
|
|
| |||||||||||
Cash |
| $ | 7,071,913 |
| $ | 3,969,100 |
| $ | 2,452,248 | $ | 1,121,092 | |||||
Accounts receivable, net |
| 1,390,152 |
| 1,244,876 |
| |||||||||||
| Accounts receivable | 286,871 | 3,418,263 | ||||||||||||||
Contract assets |
| 37,566 |
| 102,458 |
| 1,006,791 | 425,722 | |||||||||
| Inventory | 1,544,755 | 1,428,360 | ||||||||||||||
Prepaid expenses and other current assets |
|
| 694,702 |
|
|
| 486,626 |
| 496,545 | 441,320 | ||||||
Total Current Assets |
|
| 9,194,333 |
|
|
| 5,803,060 |
| 5,787,210 | 6,834,757 | ||||||
|
|
|
|
|
| |||||||||||
Property and equipment, net |
| 321,143 |
| 342,180 |
| 609,941 | 629,490 | |||||||||
Operating lease right of use asset |
| 154,023 |
| 196,144 |
| 4,534,593 | 4,689,931 | |||||||||
|
|
|
|
|
| |||||||||||
OTHER ASSETS: |
|
|
|
|
| |||||||||||
| Security deposit | 550,000 | 600,000 | ||||||||||||||
| Convertible note receivable, net | 150,625 | — | ||||||||||||||
Patents and trademarks, net |
|
| 70,508 |
|
|
| 64,415 |
| 92,603 | 69,733 | ||||||
Total Other Assets |
|
| 70,508 |
|
|
| 64,415 |
| ||||||||
| Software development costs, net | 579,655 | 265,208 | ||||||||||||||
|
|
|
|
|
| |||||||||||
TOTAL ASSETS |
| $ | 9,740,007 |
|
| $ | 6,405,799 |
| $ | 12,304,627 | $ | 13,089,119 | ||||
(Continued)
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
|
| March 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (Unaudited) |
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 689,649 |
|
| $ | 599,317 |
|
Accounts payable - related parties |
|
| 7,700 |
|
|
| 7,700 |
|
Notes payable - financing agreements |
|
| 237,390 |
|
|
| 42,942 |
|
Payroll taxes payable |
|
| 3,146 |
|
|
| 3,146 |
|
Accrued expenses |
|
| 984,174 |
|
|
| 1,038,092 |
|
Current portion - equipment financing agreements |
|
| 92,224 |
|
|
| 89,620 |
|
Current portion-operating lease obligations |
|
| 158,556 |
|
|
| 202,797 |
|
Current portion-SBA loan |
|
| — |
|
|
| 627,465 |
|
Contract liabilities |
|
| 166,033 |
|
|
| 709,553 |
|
Deferred revenue |
|
| 1,267,921 |
|
|
| 315,370 |
|
Total Current Liabilities |
|
| 3,606,793 |
|
|
| 3,636,002 |
|
|
|
|
|
|
|
|
|
|
Equipment financing payable, less current portion |
|
| 79,128 |
|
|
| 103,184 |
|
SBA loan, less current portion |
|
| — |
|
|
| 782,805 |
|
Total Liabilities |
|
| 3,685,921 |
|
|
| 4,521,991 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,480,000 shares available to be designated |
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at March 31, 2021 and December 31, 2020, convertible into common stock at $6.30 per share |
|
| — |
|
|
| — |
|
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 1,705 and 1,705 issued and outstanding at March 31, 2021 and December 31, 2020, convertible into common stock at $7 per share |
|
| 1,705,000 |
|
|
| 1,705,000 |
|
Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 4,500 issued and outstanding at March 31, 2021 and 0 issued and outstanding at December 31, 2020, convertible into common stock at $5.50 per share |
|
| 4,500,000 |
|
|
| — |
|
Common stock: $0.001 par value; 500,000,000 shares authorized, 3,535,339 shares issued, 3,534,015 shares outstanding at March 31, 2021 and December 31, 2020, respectively |
|
| 3,536 |
|
|
| 3,536 |
|
Additional paid-in capital |
|
| 39,897,175 |
|
|
| 39,820,874 |
|
Total stock & paid-in-capital |
|
| 46,105,711 |
|
|
| 41,529,410 |
|
Accumulated deficit |
|
| (39,894,173 | ) |
|
| (39,488,150 | ) |
Sub-total |
|
| 6,211,538 |
|
|
| 2,041,260 |
|
Less: Treasury stock (1,324 shares of common stock at March 31, 2021 and December 31, 2020) |
|
| (157,452 | ) |
|
| (157,452 | ) |
Total Stockholders' Equity |
|
| 6,054,086 |
|
|
| 1,883,808 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity |
| $ | 9,740,007 |
|
| $ | 6,405,799 |
|
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 760,029 | $ | 2,290,390 | ||||
| Notes payable - financing agreements | 259,062 | 74,575 | ||||||
| Accrued expenses | 302,108 | 453,023 | ||||||
| Equipment financing payable-current portion | — | 22,851 | ||||||
| Operating lease obligations-current portion | 769,563 | 696,869 | ||||||
| Contract liabilities | 2,439,640 | 957,997 | ||||||
| Total Current Liabilities | 4,530,402 | 4,495,705 | ||||||
| Operating lease obligations, less current portion | 4,389,690 | 4,542,943 | ||||||
| Total Liabilities | 8,920,092 | 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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 June 30, 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, 7,240,545 and 7,156,876 shares issued, 7,239,221 and 7,155,552 shares outstanding at June 30, 2023 and December 31, 2022, respectively | 7,240 | 7,156 | ||||||
| Additional paid-in-capital | 61,029,659 | 56,562,600 | ||||||
| Accumulated deficit | (57,494,917 | ) | (52,361,834 | ) | ||||
| Sub-total | 3,541,987 | 4,207,923 | ||||||
| Less: Treasury stock (1,324 shares of common stock at June 30, 2023 and December 31, 2022) | (157,452 | ) | (157,452 | ) | ||||
| Total Stockholders’ Equity | 3,384,535 | 4,050,471 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 12,304,627 | $ | 13,089,119 |
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 related toas a result of the coronavirus (COVID-19) pandemic(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 have caused disruption and/or delays to our operations and sales activities. Our third-party manufacturers and our customers have beenwere 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, couldin 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, wewe have experienced and may in the future experience disruptions to our business operations resulting from quarantines, self-isolations, or other movement and 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.
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 continue to introduce new product offerings focused on automating mechanical and security inspections in the rail, logistics, intermodal and government sectors as potential revenue 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 could change quickly and in ways that we may not 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 operators in the business sectors we are focused on continue to be cautious about sustained economic growth and seek 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, the business sectors in which we are 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 $40 $57 million and $52 million as of March June 30, 2023 and December 31, 2021.2022, 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-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 be 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 operations outside North America at this time, we may compete for contracts in other countries 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 new technology disruption and 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 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, however, there is no assurance that such impacts will not be material in the future.
In providing services and solutions to clients, we may be required to manage, utilize and store sensitive or confidential client data, possibly including personal data, and we anticipate 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 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 Marchthe 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 42%, 18%, 14% and 14% of revenues. For the year ended December 31, 2021, onea single customer accounted for 79%83% of our accounts receivable and, as of December 31, 2020,revenues. For the six months ended June 30, 2023, two customers accounted for 86%61% and 25% of ourrevenues. For the six months ended June 30, 2022, four customers accounted for 22%, 26%, 24% and 18% 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 June 30, 2023, four customers accounted for 37%, 23%, 16% and 12% 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 largest customer accounted for approximately 79% of our total revenues for the three months ended March 31, 2021, and our two largest customers accounted for approximately 68%42% of our total revenues for the year ended December 31, 2020.2022. 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.
The Company owed the IRS penalty payments in connection with the delinquent payment of payroll taxes.
The Company has paid its delinquent IRS payroll taxes and late fees. At March 31, 2021, December 31, 2020 and December 31, 2019, the payroll taxes payable balance of $3,146, $3,146 and $115,111 includes accrued late fees in the amount of zero, zero and $37,210, respectively. The remaining balance of $3,146 with the state of California will be remitted in 2021.
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 Nasdaq Capital Market tier under the symbol “DUOT”. However, there is currently limited active trading 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:
| · |
| Variations in our quarterly operating |
| ||
| · | Announcements that our revenue or income are below analysts’ | |
| ||
| · | General economic | |
| ||
| · | Sales of large blocks of our common | |
| ||
| · | Announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments. |
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”"blank check" preferred stock, with such designations 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.
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. Accordingly, our stockholders will not realize a return on their investment unless the trading price of our 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:
| · |
| Period-to-period fluctuations in financial results |
| ||
| · | Issues in manufacturing products | |
| ||
| · | Unanticipated potential product liability claims | |
| ||
| · | The introduction of technological innovations or new commercial products by competitors | |
| ||
| · | The entry into, or termination of, key agreements, including key strategic alliance agreements | |
| ||
| · | The initiation of litigation to enforce or defend any of our intellectual property rights | |
|
| |
· | Regulatory changes | |
| · | Failure of any of our products to achieve commercial success |
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).
An interested shareholder is defined as a person who together with affiliates and associates beneficially owns more than 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-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.
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.
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”“Selling Stockholders” and “Plan“Plan of Distribution”Distribution”. We have agreed to bear the expenses relating to the registration of the common stock for the Selling Stockholders.
On February 26, 2021,August 1, 2023, the Company entered into a Security Purchase Agreement with the Selling Stockholders, pursuant to which the Selling Stockholders purchased 4,5005,000 shares of a newly-authorized Series CF Preferred Stock. The Company received proceeds of $4,500,000.$5,000,000. The Series CF Preferred Stock is convertible into Common Stock at $5.50$6.20 a share. If all of the shares of the outstanding Series CF Preferred Stock are converted in full, the Company would issue 818,182806,452 shares of Common Stock.
NASDAQ Marketplace Rule 5635(d), however, limits the number of shares of Common Stock (or securities that are convertible into Common Stock) issuable without shareholder approval in the case of private offerings of Common Stock at a price less than the Minimum Price (which is defined as the lower of (i) the closing price of the Common Stock immediately preceding the signing of the Purchase Agreement or (ii) the average closing price of the Common Stock for the five trading days immediately preceding the signing of the Purchase Agreement. The conversion price of the Series C Preferred Stock ($5.50 per share) was less than the Minimum Price. As a result, the Company is required to obtain shareholder approval (the “Stockholder Approval”) to issue shares of Common Stock upon conversion of the Series C Preferred Stock which equal 20% or more of the number of shares of Common Stock issued and outstanding before the issuance of Series C Preferred Stock. There were 3,534 869 shares of Common Stock issued and outstanding before the issuance of the Series C Preferred Stock and, as a result, until the Company has obtained the Stockholder Approval, the Company may not issue upon the conversion of the Series C Preferred Stock a number of shares of Common Stock which, when aggregated with any other shares of Common Stock issued upon conversion of any other shares of Series C Preferred Stock, would exceed 706,620.
The shares of common stock being offered by the Selling Stockholders are those issuable to the Selling Stockholders, upon conversion of the Series CF 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 CF Preferred Stock, as well as ownership of common stock, Series BD Preferred Stock, Series E 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.herein.
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 March 26, 2021,September 30, 2023, assuming exerciseconversion of the Series CF 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 CF Preferred Stock, determined as if the outstanding shares of Series CF 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 CF Preferred Stock. The fourth column assumes the sale of all of the shares offered by the Selling Stockholders pursuant to this prospectus.
Under the terms of the Series CF Preferred Certificate of Designation, certain previously held warrantsthe Series D Preferred Certificate of Designation, and the Series BE Preferred Certificate of Designation, a Selling Stockholder may not exercise the warrants or convert the Series BD Preferred Stock, the Series E Preferred Stock or the Series CF 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 conversion. The warrants held by the Selling Stockholders limit the exercise or conversion, excluding for purposes of such warrants if such exercise 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 9.99% of our then outstanding common stock following such exercise. In the case of each such conversion or exercise, the determination of beneficial ownership would exclude 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 numbernumbers of shares in the second column does not reflect this limitation.these limitations. The Selling Stockholders may sell all, some, or none of their shares in this offering. See “Plan“Plan of Distribution.Distribution.”
Name of Selling Stockholder |
| Number of |
|
| % of shares |
|
| Maximum |
|
| Number of |
|
| % of |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Brian and Diana Pessin |
|
| 165,911 | (2) |
|
| 4.99% | (3) |
|
| 90,909 (2) |
|
|
| 75,002 |
|
|
| 4.99% | (3) |
Sandra Pessin |
|
| 587,729 | (4) |
|
| 4.99% | (3) |
|
| 272,727 (4) |
|
|
| 315,002 |
|
|
| 4.99% | (3) |
21 April Fund, Ltd. |
|
| 703,148 | (5) |
|
| 19.99% | (6) |
|
| 325,454(5) |
|
|
| 377,694 |
|
|
| 19.99% | (6) |
21 April Fund L.P. |
|
| 249,657 | (7) |
|
| 19.99% | (6) |
|
| 129,091(5) |
|
|
| 120,566 |
|
|
| 19.99% | (6) |
| 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) | 2,672,903 | 27.37 | % | 540,323 | 2,132,580 | 21.84 | % | |||||||||||||
| 21 April Fund LP(2) | 1,127,689 | 11.55 | % | 266,129 | 861,560 | 8.82 | % | |||||||||||||
| Total of Bleichroeder LP holdings | 3,800,592 | 806,452 | 2,994,140 | |||||||||||||||||
———————
(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 |
|
|
|
|
|
|
|
|
|
|
| 26 |
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.
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).
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 May 28, 2021,October 3, 2023, there were approximately 81 294 holders of record of our common stock, and the closing price of our common stock as reported on the Nasdaq Capital Market on May 28, 2021October 3, 2023 was $9.75 $4.90 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Registration Statement on Form S-1 and other 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. Should 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
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.
OurThe Company
Information Systems Associates, Inc. (“ISA”), was incorporated in Florida on May 31, 1994. Our1994 under the original name of Information Systems Associates, Inc. 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 merger betweenreverse triangular merger. This transaction was completed on April 1, 2015, whereby Duos became a wholly owned subsidiary of the two organizations (also known as a “reverse triangular merger”). IncorporatedCompany. Duos was incorporated under the laws of Florida on November 30, 1990 duostech™ operated in various industry segments, specializing in thefor 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, based in Jacksonville, Florida, oversees its wholly owned subsidiary, duostech™has a current staff of 79 people of which employs 55 people73 are full-time, and is a technology integrator,and software applications and artificial intelligence (“AI”) company with a strong portfolio of intellectual property. The Company’s headquarterscore competencies, including advanced intelligent technologies, are located at 6622 Southpoint Drive South, Suite 310, Jacksonville, Florida 32216delivered through its proprietary integrated enterprise command and main telephone number is (904) 296-2807.control platform, Centraco®.
Plan of Operation
The Company’s growth strategy includes expansion of its technology base through organic development efforts, strategic partnerships, and strategic acquisitions where appropriate. The Company provides its broad range of technology solutions with an emphasis on mission critical security, mechanical inspection and operations withinhas developed the rail transportation sector includingRail Inspection Portal (“RIP”) which provides both freight and passenger modes.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 ishas deployed this system with several Class 1 railroad customers and anticipates increased demand from transit and other railroad customers along with selected government agencies that operate and/or manage rail traffic in the future. Both commercial customers and potential regulatory Government agencies can conduct digital inspections combined with the incorporated artificial intelligence (“AI”) to improve rail traffic flow across borders which also enhancing its offerings for automatingdirectly benefits the Class 1 railroads through increasing their velocity. The Company’s subscription offering will facilitate the delivery of safety and efficiency data to other railcar owners and lessors who do not currently benefit from such information.
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 also incorporates sensors and data points as necessary for commercial clientseach operation and offersdirectly interconnects with backend logistics databases and processes to streamline operations, and significantly improve operations and security and significantly improves the vehicle throughput on each lane on which the technology is deployed. In the future, the Company intends to expand this offering into a Truck Inspection Portal (TIP) leveraging the same technologies and lessons learned from the implementation of the RIP and ALIS solutions.
| 30 |
The Company has built a portfolio of IP and patented solutions that creates “actionable intelligence” using two core native platforms called Centraco and Praesidium™. All solutions provided include a variant of both applications. Centraco is designed primarily as the user interface for all our systems as well as the backend connection to third-party applications and databases through both Application Programming Interfaces (APIs) and Software Development Kits (SDKs). This interface is browser based and hosted within each one of our systems and solutions. It is typically also customized for each unique customer and application. Praesidium typically resides as middleware in our systems and manages the various image capture devices and some sensors for input into the Centraco software.
The Company also developed a proprietary Artificial Intelligence 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. This platform is in use with a number of Class 1 railroads and the Company maintains a growing catalog of Artificial Intelligence “Use Case” detections.
The Company previously provided professional and consulting services for large data centers.
Specifically,centers and had developed a system for the automation of asset information marketed as DcVue™. The Company 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 license to our customers as a licensed 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 anticipatednew customers focused in the Rail, Logistics and U.S. Government Sectors; offer both CAPEX and subscription pricing models to customers that increases recurring revenue, grows backlog and improves profitability; responsibly grow the business growth,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.
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 is expected to potentially expand 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.
| 31 |
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 diversify 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 investing in resourcesmaking engineering and software upgrades to focus on execution within its target markets, including but not limitedthe RIP to rail, distribution centersmeet anticipated Federal Railroad Association (FRA) and data center operations. WeAssociation of American Railroad (AAR) standards. Similar upgrades are also being developed to improve the ALIS system. These upgrades will continue to evaluate key requirements within those marketsbe released throughout 2023 and add development resources to allow us to compete for additional projectsare expected to drive additional revenue growth.growth this year and beyond.
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, specificallyThe Company is expanding its focus 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 above, no assurance can be provided that our product offerings will generate the market acceptance and orders that we contemplate.
Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements included in this prospectus.
Comparison for the Three Months Ended March 31, 2021June 30, 2023 Compared to Three Months Ended March 31, 2020June 30, 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 | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | 1,770,059 | $ | 3,617,142 | ||||
| Cost of revenues | 1,528,722 | 2,334,528 | ||||||
| Gross margin | 241,337 | 1,282,614 | ||||||
| Operating expenses | 3,389,587 | 2,677,089 | ||||||
| Loss from operations | (3,148,250 | ) | (1,394,475 | ) | ||||
| Other income (expense) | 158,850 | 51,803 | ||||||
| Net loss | $ | (2,989,400 | ) | $ | (1,342,672 | ) | ||
Revenues
| For the Three Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Revenues: | ||||||||||||
| Technology systems | $ | 870,494 | $ | 2,780,045 | -69 | % | ||||||
| Services and consulting | 899,565 | 837,097 | 7 | % | ||||||||
| Total revenues | $ | 1,770,059 | $ | 3,617,142 | -51 | % | ||||||
The decrease in overall revenues for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022, is primarily attributed to the delays outside of the Company’s control with ongoing production and manufacturing of our two high-speed Rail Inspection Portals for a passenger transit client, which are recorded in the technology systems portion of our business. During the second quarter of 2022, when these same two high-speed Rail Inspection Portals had only just been awarded and were in the early procurement and design phase, we were also in the advanced stages of manufacturing and installing two additional Rail Inspection Portals for freight railroad customers. Given recent attention and renewed focus around railway safety, the Company remains optimistic about its long-term outlook. 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. In spite of a positive outlook, the noted slowing of the supply chain coupled with a longer commercial cycles or customer delays 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 that came 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 expected to be completed during 2023.
Cost of Revenues
| For the Three Months Ended June 30, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Cost of revenues: | ||||||||||||
| Technology systems | $ | 1,072,106 | $ | 1,974,302 | -46 | % | ||||||
| Services and consulting | 456,616 | 360,226 | 27 | % | ||||||||
| Total cost of revenues | $ | 1,528,722 | $ | 2,334,528 | -35 | % | ||||||
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.
During the three months ended June 30, 2023, the cost of revenues on technology systems decreased compared to the equivalent period in 2022, in line with the decrease in revenues. This decline in cost is mainly attributed to the Company being in the production and manufacturing phase of our two high-speed Rail Inspection Portals. In contrast, during the second quarter of 2022, the Company had just been awarded the two high-speed Rail Inspection Portals for its passenger transit client and was in the early stages of procuring and allocating material costs to these more expensive and robust transit-oriented RIPs. Additionally, during that time, the Company was still incurring costs related to the manufacturing and installation of additional Rail Inspection Portals for two other Class 1 customers, thereby contributing to the decrease 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 increased in the three months ended June 30, 2023 compared to the prior year period. The rise in cost can be attributed to higher labor costs as well as costs associated with new portals coming online during early 2023, as opposed to the corresponding period in 2022.
Gross Margin
| For the Three Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Revenues | $ | 1,770,059 | $ | 3,617,142 | -51 | % | ||||||
| Cost of revenues | 1,528,722 | 2,334,528 | -35 | % | ||||||||
| Gross margin | $ | 241,337 | $ | 1,282,614 | -81 | % | ||||||
Gross margin decreased for the second quarter of 2023 as compared to the same period in 2022. As noted above, the decrease in margin was a direct result of the timing of business activity in the second quarter of 2023 related to the manufacturing of two high-speed, transit-focused Rail Inspection Portals for one customer. During the second quarter of 2022, these same two high-speed Rail Inspection Portals had just been awarded and were in the early procurement and design phase contributing little in terms of revenue or gross margin. Additionally, during the second quarter of 2022, we were in the advanced stages of manufacturing and installing two freight-oriented Rail Inspection Portals for two customers. The additional freight RIP activity during the second quarter of 2022 resulted in additional revenue and margin compared to the same period in 2023. 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 June 30, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | $ | 301,077 | $ | 375,986 | -20 | % | ||||||
| Research and development | 537,801 | 530,339 | 1 | % | ||||||||
| General and administration | 2,550,709 | 1,770,764 | 44 | % | ||||||||
| Total operating expenses | $ | 3,389,587 | $ | 2,677,089 | 27 | % | ||||||
During the three months ended June 30, 2023, the Company experienced a slight increase in overall operating expenses compared to the same period in 2022. Sales and marketing costs saw only marginal decreases, while research and development expenses increased slightly. The largest increase was observed in general and administration costs, which can be primarily attributed to the timing of the Company's awarding of discretionary performance-based compensation that took effect in April 2023. Overall, the Company continues to focus on stabilizing operating expenses while meeting the increased needs of our customers. 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.
Loss from Operations
The loss from operations for the three months ended June 30, 2023 and 2022 was $3,148,250 and $1,394,475, respectively. The increase in loss from operations was primarily the result of lower revenues recorded in the quarter as a consequence of delays in going to field for the two high-speed Rail Inspection Portals for a passenger transit client, offset by continued increase in services and consulting revenue.
Other Income/Expense
Other income for the three months ended June 30, 2023 was $162,080 and $54,509 for the comparative period in 2022. Interest expense for the three months ended June 30, 2023 was $3,230 and $2,706 for the comparative period in 2022.
Net Loss
The net loss for the three months ended June 30, 2023 and 2022 was $2,989,400 and $1,342,672, respectively. The 123% increase in net loss was mostly attributed to the decrease in revenues as described above from timing delays along with growing expenses. Net loss per common share was $0.42 and $0.22 for the three months ended June 30, 2023 and 2022, respectively.
Comparison for the Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
The following table sets forth a summary of our unaudited Consolidated Statements of Operations and is used in the following discussions of our results of operations:
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | 4,414,347 | $ | 5,056,458 | ||||
| Cost of revenues | 3,635,838 | 3,551,778 | ||||||
| Gross margin | 778,509 | 1,504,680 | ||||||
| Operating expenses | 6,073,557 | 5,540,773 | ||||||
| Loss from operations | (5,295,048 | ) | (4,036,093 | ) | ||||
| Other income (expense) | 161,965 | 48,805 | ||||||
| Net loss | $ | (5,133,083 | ) | $ | (3,987,288 | ) | ||
Revenues
| For the Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Revenues: | ||||||||||||
| Technology systems | $ | 2,698,258 | $ | 3,563,314 | -24 | % | ||||||
| Services and consulting | 1,716,089 | 1,493,144 | 15 | % | ||||||||
| Total revenues | $ | 4,414,347 | $ | 5,056,458 | -13 | % | ||||||
The decrease in overall revenues for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, is primarily attributed to delays outside of the Company’s control with ongoing production and manufacturing of our two high-speed Rail Inspection Portals for a passenger transit client, which are recorded in the technology systems portion of our business. During the second quarter of 2022, when these same two high-speed Rail Inspection Portals had only just been awarded and were in the early procurement and design phase, we were also in the advanced stages of manufacturing and installing two additional Rail Inspection Portals. We expect timing to continue to be a challenge 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 Company remains optimistic about its long-term outlook. 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. 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 Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Cost of revenues: | ||||||||||||
| Technology systems | $ | 2,839,315 | $ | 2,839,790 | 0 | % | ||||||
| Services and consulting | 796,523 | 711,988 | 12 | % | ||||||||
| Total cost of revenues | $ | 3,635,838 | $ | 3,551,778 | 2 | % | ||||||
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 remained flat during the six months ended June 30, 2023 over the equivalent period in 2022. In the second quarter of 2022, the Company was awarded two high-speed Rail Inspection Portals for its passenger transit client and by the second quarter of 2023 has phased into the manufacture of these two more expensive and more robust transit-oriented RIPs. By comparison, during the second quarter ended June 30, 2022, the Company had only begun to procure the components for, and the manufacturing of, these two transit-oriented RIPs, but were also in the advanced stages of manufacturing and installing two additional freight-oriented RIPS, thereby resulting in flat year-over-year cost of revenues. 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. 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.
Cost of revenues on services and consulting slightly increased in the six months ended June 30, 2023 compared to the prior year period. The marginal rise in cost can be attributed to higher labor costs as well as costs associated with new portals that came online during early 2023, as opposed to the corresponding period in 2022.
Gross Margin
| For the Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Revenues | $ | 4,414,347 | $ | 5,056,458 | -13 | % | ||||||
| Cost of revenues | 3,635,838 | 3,551,778 | 2 | % | ||||||||
| Gross margin | $ | 778,509 | $ | 1,504,680 | -48 | % | ||||||
Gross margin decreased for the six months ended on June 30, 2023 as compared to the same period in 2022. As noted above, the decrease in margin was a direct result of the timing of business activity in the second quarter of 2023 related to the manufacturing of two high-speed, transit-focused Rail Inspection Portals for one customer. During the second quarter of 2022, these same two high-speed Rail Inspection Portals had just been awarded and were in the early procurement and design phase, we were also in the advanced stages of manufacturing and installing two additional freight-oriented Rail Inspection Portals for two customers resulting in additional revenue and margin compared to the same period in 2023. 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 Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | $ | 608,654 | $ | 659,880 | -8 | % | ||||||
| Research and development | 942,686 | 967,056 | -3 | % | ||||||||
| General and administration | 4,522,217 | 3,913,837 | 16 | % | ||||||||
| Total operating expenses | $ | 6,073,557 | $ | 5,540,773 | 10 | % | ||||||
During the six months ended June 30, 2023, overall operating expenses experienced a slight increase compared to the equivalent period in 2022. The Company managed to maintain its costs for sales and marketing, and research and development at a consistent level, while observing a slight rise in general and administration costs. This increase can be primarily attributed to the timing of performance-based bonuses awarded in 2023 compared to the same period in 2022. Despite these changes, the Company remains committed to stabilizing operating expenses while meeting the increased needs of our customers.
Loss from Operations
The loss from operations for the six months ended June 30, 2023 and 2022 was $5,295,048 and $4,036,093, respectively. The increase in loss from operations was primarily the result of lower revenues recorded in the six months as a consequence of delays in going to field for the two high-speed Rail Inspection Portals for a passenger transit client, offset by continued increase in services and consulting revenue.
Other Income/Expense
Other income for the six months ended June 30, 2023 was $166,375 and $54,691 for the comparative period in 2022. Interest expense for the six months ended June 30, 2023 was $4,410 and $5,886 for the comparative period in 2022.
Net Loss
The net loss for the six months ended June 30, 2023 and 2022 was $5,133,083 and $3,987,288, respectively. The 29% increase in net loss was mostly attributed to the decrease in revenues as described above along with growing expenses. Net loss per common share was $0.72 and $0.70 for the six months ended June 30, 2023 and 2022, respectively.
Liquidity and Capital Resources
As of June 30, 2023, the Company has a working capital surplus of $1,256,808 and the Company had a net loss of $5,133,083 for the six months ended June 30, 2023.
| 36 |
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash (used in) provided by operating activities | $ | (1,923,071 | ) | $ | 287,784 | |||
| Net cash used in investing activities | (548,360 | ) | (169,209 | ) | ||||
| Net cash provided by financing activities | 3,802,587 | 5,256,134 | ||||||
| Net increase in cash | $ | 1,331,156 | $ | 5,374,709 | ||||
Net cash (used in) provided by operating activities for the six months ended June 30, 2023 and 2022 was $(1,923,071) and $287,784, respectively. The increase in net cash used in operating activities for the six months ended June 30, 2023 was the result of cash outflows to procure necessary materials and overall sales, general and administrative expenses offset by cash inflows from milestone payments related to current projects. In addition, there are several changes in assets and liabilities compared to the previous period that increase the use of cash in operating activities, 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 six months ended June 30, 2023 and 2022 was $548,360 and $169,209, 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 six months ended June 30, 2023, and 2022 was $3,802,587 and $5,256,134, respectively. Cash flows provided by financing activities during the first six 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 six 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 the 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 $5,133,083 for the six months ended June 30, 2023. During the same period, cash used in operating activities was $1,923,071. The working capital surplus and accumulated deficit as of June 30, 2023, were $1,256,808 and $57,494,917, 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 the second, third and fourth quarters of 2022 as well as the first and third quarters of 2023.
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. In August 2023, the Company was successful in raising gross proceeds of $5,000,000 from the sale of Series F Convertible Preferred Stock. Additionally, during the second quarter of 2023, the Company renewed its S-3 “shelf registration” statement allowing the Company to sell additional common shares. At the time of this filing, the Company estimates that it has available capacity on its shelf registration which it can utilize to bolster working capital and growth of the business. Although additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded operations based on an anticipated increase in business activity. In the long run, the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing its business plan, generate enough revenue, and attain consistently profitable operations. Although the lingering effects of the global pandemic related to the coronavirus (Covid-19) continue to affect our operations, particularly in our supply chain, we now believe that this is expected to be an ongoing issue and our working capital assumptions reflect this new reality. The Company cannot currently quantify the uncertainty related to the ongoing supply chain delays or inflationary increases and their effects on our customers in the coming quarters. We have analyzed our cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand or available via the capital markets to maintain operations for at least twelve 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 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 growth in its contracted backlog as well as positive signs from new commercial engagements that indicate improvements in future commercial opportunities for both one-time capital and recurring services revenues.
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.
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.
| 38 |
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, notes receivable, valuation of common stock warrants received in exchange for an asset sale, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of inventory, estimates of the valuation of right of use assets and corresponding lease liabilities, valuation of warrants issued with debt, and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
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 |
| For the Years Ended | ||||||||||||
|
| March 31, |
| December 31, | ||||||||||||
|
| 2021 |
|
| 2020 |
| 2022 | 2021 | ||||||||
|
|
|
|
|
|
| ||||||||||
Revenues |
| $ | 2,154,754 |
|
| $ | 990,945 |
| $ | 15,012,366 | $ | 8,259,917 | ||||
Cost of revenues |
|
| 2,730,462 |
|
|
| 1,646,433 |
| ||||||||
| Cost of revenue | 10,264,263 | 6,220,373 | ||||||||||||||
Gross margin |
|
| (575,708) |
|
|
| (655,488) |
| 4,748,103 | 2,039,544 | ||||||
Operating expenses |
|
| 1,246,592 |
|
|
| 1,432,427 |
| 11,613,252 | 9,496,495 | ||||||
Loss from operations |
|
| (1,822,300 | ) |
|
| (2,087,915 | ) | (6,865,149 | ) | (7,456,951 | ) | ||||
Other income (expense) |
|
| 1,416,277 |
|
|
| (59,134 | ) | ||||||||
| Other income | 366 | 1,448,050 | ||||||||||||||
Net loss |
| $ | (406,023 | ) |
| $ | (2,147,049 | ) | $ | (6,864,783 | ) | $ | (6,008,901 | ) | ||
Revenues
|
| For the Three Months Ended |
| For the Years Ended | ||||||||||||||||||||
|
| March 31, |
| December 31, | ||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| % Change |
| 2022 | 2021 | % Change | |||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Technology systems |
| $ | 1,490,298 |
|
| $ | 513,674 |
|
| 190% |
| $ | 11,190,292 | $ | 5,871,666 | 91 | % | |||||||
Services and Consulting |
|
| 664,456 |
|
|
| 477,271 |
|
|
| 39% |
| ||||||||||||
| Services and consulting | 3,822,074 | 2,388,251 | 60 | % | ||||||||||||||||||||
Total revenues |
| $ | 2,154,754 |
|
| $ | 990,945 |
|
|
| 117% |
| $ | 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 overallrevenue from systems with a slightly lower increase in service revenues is driven by the projects portion of our business which is showing early signs of recovery60% year-over-year. The increase in revenues stems directly from the delaysdelivery 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 awell 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. 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 Company’s stable capital structure allowedcontinues to allow us to weather the unexpected delays without significant operational impact and enables us to pursue large projects requiringwhere the ability to deploy major resources. An additional effect of thisresources is the ongoing investment byrequired. It should be noted that the Company recently increased its working capital to account for an increase in streamlining our project build and delivery process and quality control processes.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 in the final quarter of 2020during 2021 and made significant changes in staffing including additional engineering staff. Earlystaff and revamping its software development and Artificial Intelligence staffing. These efforts have begun to yield benefits in 2022 as reflected in the quarter, the Company implemented a “rapid development” initiative to be able to respond to market driven demand more quickly. Although not fully visible in this quarter’s financials, thisimproved systems revenues. This effort has shortenedimproved delivery times on major projects and is expectedhelps to result in significant revenue growth inoffset some of the last six months of this year and beyond. AI technologies recorded their first quarter of revenue duringcontinued supply chain lags the second quarter of 2020 andCompany has faced post-Covid-19. The Company continues to record revenues inmonitor the first quartersituation and procures materials ahead of 2021 that is included in the technology systems total. contract award where feasible.
The Company received a large ($2+ million) contract for AI related development from a large client which is expected to add revenues in the following quarters of 2021. The Companyalso expects to continue the growth with new revenue from other existing customers which also willwe expect to be coming on-line in the next several months. The increaseIn aggregate during 2022, the Company has been successful in the expansion of project revenues was also accompanied by an increase inand services revenue as the result ofcontracts to account for new maintenance contracts being established as well as renewals of existing contracts and a shift to the next generation of technology systems which are currently being installed.work. The services portion of revenues are driven by successful completion on projects and representrepresents services and support for those installations. The recurring revenue portion of our revenue for services and consulting, continues to make-up a greater share of our revenues and this growth is expected to continue going forward. The Company expects to continue the growth with new, long term recurring revenue from existing customers which will be coming on-line in the next several months. The consulting source of revenue generated in 2021 is comparable to 2020.
Cost of Revenues
|
|
| For the Three Months Ended |
| For the Years Ended | ||||||||||||||||||||
|
|
| March 31, |
| December 31, | ||||||||||||||||||||
|
|
| 2021 |
|
| 2020 |
| % Change |
| 2022 | 2021 | % Change | |||||||||||||
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Technology systems |
|
| $ | 1,895,485 |
|
| $ | 1,092,058 |
|
| 74% |
| $ | 8,376,649 | $ | 4,728,197 | 77 | % | |||||||
Services and consulting |
|
|
| 331,384 |
|
|
| 293,954 |
|
|
| 13% |
| 1,887,614 | 1,492,176 | 27 | % | ||||||||
Overhead |
|
|
| 503,593 |
|
|
| 260,421 |
|
| 93% |
| |||||||||||||
Total cost of revenues |
|
| $ | 2,730,462 |
|
| $ | 1,646,433 |
|
|
| 66% |
| $ | 10,264,263 | $ | 6,220,373 | 65 | % | ||||||
Cost of revenues for both technology systems and services and consultinglargely comprises equipment, labor and overhead necessary to support the implementation of new systems and support and maintenance of existing systems. Cost of revenues on technology systems increased during the period compared to the equivalent period in 2020, as2021 by a partslightly lower rate than the increase in revenues. The primary reason for the increased growth in costs 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 strategic review that senior management undertook in the final months of 2020.special-purpose, high value Railcar Inspection Portal which it anticipates completing during 2023. The Company’s organizationcosts are composed of materials, subcontractor costs and related cost structure was realigned to give the capability to manufacture, install and support multiple production systems simultaneously. Prior to this realignment,labor consisting of the Company’s organization was focusedengineering, project management and software team’s efforts to deliver on the aforementioned Railcar Inspection Portals. The cost of sales grew at a slower pace than revenues primarily researchbecause the Company neared completion of two of its portals and development with implementation resources being allocatedthus recognized additional profits on these projects as necessary. In accordance with this shiftit 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 structure, certain staff were re-assigned or replaced, and new staff added in key areas, particularly engineering, IT and AI.cost of sales.
In conjunction with this change, increasedThese internal costs are now 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 buildconstruction 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 through the end of this yearin 2023 and in 2022. In addition, certain expenses related to installed equipment upgrades were greater than anticipated for a variety of reasons including cost overruns on the first installation of new technologies and certain implementation inefficiencies related to Covid-19 restrictions such as extended quarantines and additional contract staff necessary to complete projects on time. These changes had a negative impact on the gross margin (see below), but this is expected to be a short-term impact, offset by increases in revenue later in the year. It is also expected to have positive long-term impact as the Company is prepared to deliver a higher number of systems in a given period, with a shorter time of implementation and with better quality and reliability as the operations become standardized in anticipation of expected higher demand for systems, particularly in the rail industry.beyond.
Cost of revenues increased on technical supportservices and consulting year-over-year albeit at a lower rateslower pace than the increase in services and consulting revenues. The increase in costs was a result of one-time services completed on existing RIP sites on which the Company incurred some additional material costs as well as project management and engineering team labor to complete the project. The year-over-year revenue for technical supportfrom consulting and services increase outpaced the increase in costs which is a positive trend going forward as more of the Company’s revenue comes from this recurring revenue business. However, thetrend. The Company put into service additional artificial intelligence algorithms and maintenance and support services which are high margin and consulting services recorded a substantial increase in cost of revenuesrepresent only marginal increases in the quarter reflecting the additional resources allocatedrequisite costs to deliver these activities. services.
Gross Margin
|
| For the Three Months Ended |
| For the Years Ended | ||||||||||||||||||||
|
| March 31, |
| December 31, | ||||||||||||||||||||
|
| 2021 |
|
| 20120 |
| % Change |
| 2022 | 2021 | % Change | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Revenues |
| $ | 2,154,754 |
|
| $ | 990,945 |
|
| 117% |
| $ | 15,012,366 | $ | 8,259,917 | 82 | % | |||||||
Cost of revenues |
|
| 2,730,462 |
|
|
| 1,646,433 |
|
|
| 66% |
| 10,264,263 | 6,220,373 | 65 | % | ||||||||
Gross margin |
| $ | (575,708) |
|
| $ | (655,488) |
|
|
| -12% |
| $ | 4,748,103 | $ | 2,039,544 | 133 | % | ||||||
Gross margin showed a significant improvement for the year ended December 31, 2022 as compared to the same period in 2021. As previously discussed,noted above, the improvement in margin was a direct result of increased business activity the Company has revamped its operationsrecognized in the latter half of 2022. The increased business activity was related to support an anticipated increase inthe manufacturing and near completion of installation of two Rail Inspection Portals, a number of new systems going forward.one-time service events and significant progress made on a special-purpose, high-value RIP. The resultant additional cost of revenues, while somewhat offset by decreasesCompany began to recognize revenue and profit on those activities in SG&A expenses, is not yet covered by a comparable increase in revenues asaccord with its revenue recognition policy. The recognition of the first quarter 2021. The overall negativerevenue and subsequent profit from these major projects, as well as underlying services and maintenance revenues from existing projects, resulted in a 32% gross marginmargin. By comparison for the full-year 2021, the Company had limited business activity from a handful of $575,708projects primarily related to customer site upgrades as well as lower underlying service revenues. This was an improvement over the comparable period in 2020 which was $655,488, 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 additional projects and services drove an overall higher recorded revenues during the first quarter of 2021 compared to the equivalent period in 2020. We anticipate an improvement in the overall gross margin for the full year reporting in 2021, with much of those improvements coming in the second half of the year.margin-dollar amount.
Operating Expenses
|
| For the Three Months Ended |
| For the Years Ended | ||||||||||||||||||||
|
| March 31, |
| December 31, | ||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| % Change |
| 2022 | 2021 | % Change | |||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Sales and marketing |
| $ | 311,801 |
|
| $ | 139,852 |
|
| 123% |
| $ | 1,337,186 | $ | 1,233,851 | 8 | % | |||||||
Research and development |
|
| 61,033 |
|
|
| 40,639 |
|
| 50% |
| 1,651,064 | 2,515,630 | -34 | % | |||||||||
Administration |
|
| 873,758 |
|
|
| 1,251,936 |
|
|
| -30% |
| ||||||||||||
| General and Administration | 8,625,002 | 5,747,014 | 50 | % | ||||||||||||||||||||
Total operating expense |
| $ | 1,246,592 |
|
| $ | 1,432,427 |
|
|
| -13% |
| $ | 11,613,252 | $ | 9,496,495 | 22 | % | ||||||
Overall operating expenses were lowerhigher by 13% than22% in 2022 as compared to the equivalent period in 2020. A significantfull-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 a smallerEngineering teams being consumed as part of the significant increase in researchproject and development was more than offset by a substantial decrease in overall administration costs. This decrease was in part due to certain cost reductions that were implemented dueservice revenues and led to the anticipated reductionCompany performing additional project and one-time services work year-over-year. The offset of these charges reside in revenues due to the Covid-19 pandemic.cost of sales services and consulting. Additionally, certaingeneral 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 entire organization to drive higher performance and attract and retain better quality resources in a tight labor market as it operated at that time were eliminatedwell as the related implementation and increased subsequent non-cash charges of an offsetemployee stock option plan. The Company still faces some pressure on existing staff compensation as a result of inflation during 2022 but remains focused to the increases in operations staff as described previously. manage and stabilize administrative costs without interruption to customer service.
Loss fromFrom Operations
The losslosses from operations for the three monthsyears ended, MarchDecember 31, 2022 and 2021 was $1,822,300, an improvement compared to a $2,087,915 loss from operations for the same period in 2020.were $6,865,149 and $7,456,951, respectively. The decrease in losses from operations during the quarter areyear was the result of highermostly improved revenues recorded in the quarter. This increase in revenues was partially offset by an aggregate of higher costs for cost of sales related to the recent organizational changes and certain cost overruns on the initial deployment of some newly developed systems. The combination of these led to temporary negative gross margins for the quarter offset by an overall lower operating cost. The Company expects to achieve profitability in the latter half of the year through improvements in gross marginstemming from higher revenues and lower operating costs. This is due to the anticipated growth in business from new contracts previously delayed through the first half of this year and the effects of greater efficiencies in the deployment of new systems anticipatedportals 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 services and consulting revenue increases and related margins outpaced the Company’s increased general and administrative costs throughout 2022. As a result, the Company achieved near breakeven in the second halffourth quarter of 2021.2022. The Company has continued to face inflation and 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.
Other Income/Interest Expense
Interest expense for the three monthsyears ended MarchDecember 31, 2022 and 2021 was $6,220 versus$9,191 and $20,268, respectively. The reduction in interest expense of $68,932was primarily due to the financing charges related to insurance policies in 2021.
Other Income
Other income for the equivalent period in 2020.years ended December 31, 2022 and 2021 was $9,557 and $1,468,318, respectively. The decrease is due to a reduction in interest bearing debt that was repaid in the second quarter of 2020 in addition to the interest expense recorded for the PPP loan that was forgiven in the first quarter. Other income increased significantlymainly due to the PPP loan forgiveness recorded in Februarythe first quarter of 2021.
Net Loss
The net loss for the three monthsyears ended MarchDecember 31, 2022 and 2021 was $6,864,783 and 2020 was $406,023 and $2,147,049,$6,008,901, respectively. The 81% decreaseincrease in net loss was mostly attributedis primarily attributable to the forgivenessone-time effect of the CARES Act PPP loan.loan forgiveness gain in the first half of 2021. Despite the increased net loss year-over-year, the Company showed an improvement at the operating loss level. Net loss per common share was $0.11$1.11 and $0.80$1.63 for the three monthsyears ended MarchDecember 31, 20212022 and 2020,2021, respectively.
Liquidity and Capital Resources
As of MarchDecember 31, 2021,2022, the Company has working capitala cash balance of $5,587,540 and a net loss of $406,023 for the three months ended March 31, 2021.$1,121,092.
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
| For the Years Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
|
| March 31, |
| March 31, |
| |||||||||||
Net cash used in operating activities |
| $ | (1,296,424 | ) |
| $ | (1,657,013 | ) | $ | (7,873,307 | ) | $ | (6,579,378 | ) | ||
Net cash used in investing activities |
|
| (58,105 | ) |
|
| (36,245 | ) | (644,888 | ) | (552,940 | ) | ||||
Net cash provided by financing activities |
|
| 4,457,342 |
|
|
| 8,189,897 |
| ||||||||
Net increase in cash |
| $ | 3,102,813 |
|
| $ | 6,496,639 |
| ||||||||
| 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 three monthsyears ended MarchDecember 31, 2022 and 2021 was $1,296,424$7,873,307 and net cash used during the same period of 2020 was $1,657,013.$6,579,378, respectively. The decreaseincrease in net cash used in operations for the three monthsyear ended MarchDecember 31, 20212022 was the result of lowerhigher 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 several changes in assets and liabilities compared to the previous period that added toincreased the use of cash in operations. Notable changes were a significant increaseoperations including increases in inventory for some long-lead components and accounts receivable and contract assets reflecting better availability of working capital as a result ofreceivable. Additionally, $1,410,270 in funding from the recent capital raise completedCARES Act PPP loan program received in 2021 plus deferred interest was forgiven during the first quarter of 2021. In addition, cash that was being used to further development activities for our AI platform is significantly reduced as well as the product generating revenues during this period.
Net cash used in investing activities for the three monthsyears ended MarchDecember 31, 2022 and 2021 was $644,888 and 2020 were $58,105$552,940, respectively. The Company continues to invest in computing, lab equipment and $36,245, respectively, representing ansoftware and artificial development as reflected in the increase in investments in various fixed assets during the three months of 2021 related to new technology offerings.2022.
Net cash provided byin financing activities for the three monthsyears ended MarchDecember 31, 2022 and 2021 was $4,457,342$8,745,567 and for the same period of 2020 was $8,189,897.$4,056,938, respectively. Cash flows provided by financing activities during the three-month period in 20202022 were primarily attributable to a significant capital raise undertaken during that period in conjunction with listing on the Nasdaq Capital Market. Cash flowsgross proceeds from financing activities during the first quarter of 2021 were primarily attributable to the issuance of Series C Convertible Preferred Stock forcommon 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 $4,056,938 which was primarily underpinned from the gross proceeds of a private placement of $4,500,000. These activities created sufficient cash and positive working capital including a reserve which alleviates the previous substantial doubt related to a going concern and the need for a going concern risk disclosure.
Previously,During 2022, we have funded our operations primarily through the sale of our equity (or equity linked) securities, and debt securities. During 2021, we have funded our operations through a combination of a recent capital raise, revenues generated and cash received from ongoing project execution, services and associated maintenance revenues. As of May 12, 2021,March 28, 2023, we hadhave cash on hand of approximately $6,931,000.$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 enoughsufficient to fund operationssuch expansion we are now less dependent on timely payments by our customers for at leastprojects and work in process, however we expect such timely payments to continue. Material cash requirements will be satisfied within the next 12 months. However,normal course of business including substantial upfront payments from our customers prior to starting projects. In some cases, the Company cannotmay 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 quantify the uncertainty relatedsupported by up-front customer deposits is expected to the pandemic and its effects on the business in the coming quarters.be less than $1 million.
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 and are currently impacted by the Covid-19 pandemic.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 continue to be adversely affected by this situation as well as the potential for aour competitors and prolonged recession period.periods although these are not considered to be a factor at present.
In the event of expansion into owning and operating its own Railcar Inspection Portals, the Company’s cash requirements and timing may shift. Specifically, the Company would 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 break-even point for each site and an opportunity for improved cash flows over time with high-margin agreements with the investment bolstered by access to further funding via common stock and 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.
As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $406,023$6,864,783 for the three monthsyear ended MarchDecember 31, 2021.2022. During the same period, net cash used in operating activities was $1,296,424.$7,873,307. The working capital surplus and accumulated deficit as of MarchDecember 31, 20212022, were $5,587,540$2,339,052 and $39,894,173,$52,361,834, 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 offeringofferings and a private placement which waswere completed during the first quarter of 2020 (the “2020 Offering”)2022 and a further capital raiseduring 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 E Preferred Stock. Additionally, late in the first quarter of 2021.
Upon completion of the 2020 Offering, management raised sufficient working capital to meet its needs for the next 12-months without the need to raise further capital. Since the advent of the Covid-19 pandemic,2023, the Company has experienced a significant slowdown in closing new projects due to cautious actions by current and potential clients. We continue to be successful in identifying new business opportunities and are focused on re-establishing a backlog of projects. Most importantly, the Company’s success in increasing its working capital surplus after receiving proceeds from the 2020 Offering of more than $8,200,000 and more recently, in the first quarter of 2021, receiving netraised gross proceeds of $4,500,000$4,000,000 from the issuance of Series CE Preferred Stock to two large shareholders, continues to give us the capital required to fund the fundamental business changes that we undertook in the last quarter(See Note 16). As part of 2020 and maintain our businessits strategy, overall. In addition, the Company was successful in securing a loanwill endeavor to utilize the Preferred Series E and the remainder of $1,410,270the Series E as additional funding mechanisms. Additionally, during the second quarter of 20202023, 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 12 months from the Small Business Administration via the PPP/CARES Act program which further bolstered the Company’s cash reserves. This loan was forgiven in the current quarter and leaves the Company essentially debt free. Managementdate of this prospectus.
In addition, management has been taking and continues to take actions including, but not limited to, elimination of certain costs that diddo 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. DuringThe Company believes that, with the firstcombination of Series E Preferred Stock offering coupled with an S-3 shelf registration availability starting in the second quarter managementof 2023, it will have sufficient working capital to meet its obligations over the following twelve months. In the last twelve months the Company has taken furtherseen significant actions including reorganizing our engineering and technical teams and selectively improving organizational efficiency to effectively grow the businessgrowth in its contracted backlog as the expected order flow resumeswell as positive signs from new commercial engagements that indicate improvements in 2021.future commercial opportunities.
Management believes that, at this time, wethe 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 alleviatedput 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.concern for a period of twelve months. We arecontinue 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.
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. As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock. Although additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded operations based on this increase in business activity. In the long run,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 enoughsufficient revenue and to attain consistently profitable operations. Althoughoperations with minimal cash use in the current global pandemicnext 12 months. These consolidated financial statements do not include any adjustments related to the coronavirus (Covid-19) has affected our operations,recoverability and we do believe this is expected toclassification of recorded asset amounts and classification of liabilities that might be a long-term issue,necessary should the Company cannot currently quantify the uncertainty relatedbe unable to the pandemic and its effects on our customers in the coming quarters. We have analyzed our cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand to maintain operations for at least 12 months from the filing date of the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2021.continue as a going concern.
Off Balance Sheet ArrangementsLoss From Operations
We have no-off balance sheet contractual arrangements,The losses from operations for the years ended, December 31, 2022 and 2021 were $6,865,149 and $7,456,951, respectively. The 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 high value set of portals to be completed during 2023. These additional projects as that term is definedwell as an increase in Item 303(a)(4)services and consulting revenue increases and related margins outpaced the Company’s increased general and administrative costs throughout 2022. As a result, the Company achieved near breakeven in the fourth quarter 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.
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.2022. The Company reviews its accountshas continued to estimate losses resulting fromface inflation and 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 inabilityyears ended December 31, 2022 and 2021 was $9,191 and $20,268, respectively. The reduction in interest expense was primarily due to the financing charges related to insurance policies in 2021.
Other Income
Other income for the years ended December 31, 2022 and 2021 was $9,557 and $1,468,318, respectively. The decrease is mainly due to the PPP loan forgiveness recorded in the first quarter 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.2021.
Share-Based CompensationNet Loss
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 is effective for financial statements issued by public companiesnet loss for the annualyears ended December 31, 2022 and interim periods beginning after December 15, 2018. Early adoption2021 was $6,864,783 and $6,008,901, respectively. The increase in net loss is primarily attributable to the one-time effect of the standard was permitted. Management implemented this standard on January 1, 2019. The standard was applied in a retrospective approach for each period presented.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally acceptedPPP loan forgiveness gain in the United Statesfirst half of America requires management to make estimates and assumptions that affect2021. Despite the reported amounts of assets and liabilities and disclosures of contingent assets and liabilitiesincreased net loss year-over-year, the Company showed an improvement at the date ofoperating loss level. Net loss per common share was $1.11 and $1.63 for the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of derivatives, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible debt, estimates of the valuation of right of use assets and corresponding lease liabilities and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
For the yearyears endedDecember 31, 2020compared to2022 and 2021, respectively.
Liquidity and Capital Resources
As of December 31, 20192022, the Company has a cash balance of $1,121,092.
Cash Flows
The following table sets forth a modified versionthe major components of our Consolidated Statementsstatements of Operations that iscash flows data for the periods presented:
| 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 the following discussions of our results of operations:
|
| For the Years Ended |
| |||||
|
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
|
|
|
|
|
| ||
Revenues |
| $ | 8,039,448 |
|
| $ | 13,641,315 |
|
Cost of revenue |
|
| 5,253,055 |
|
|
| 7,159,877 |
|
Gross profit |
|
| 2,786,393 |
|
|
| 6,481,438 |
|
Operating expenses |
|
| 9,420,821 |
|
|
| 8,887,960 |
|
Loss from operations |
|
| (6,634,428 | ) |
|
| (2,406,522 | ) |
Other income (expense) |
|
| (113,007 | ) |
|
| (64,360 | ) |
Net loss |
|
| (6,747,435 | ) |
|
| (2,470,882 | ) |
Net loss applicable to common stock |
| $ | (6,747,435 | ) |
| $ | (2,470,882 | ) |
Revenues
|
| For the Years Ended |
| |||||||||
|
| December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| % Change |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Technology systems |
| $ | 4,956,130 |
|
| $ | 11,963,438 |
|
|
| -59% |
|
Technical support |
|
| 1,801,043 |
|
|
| 1,377,459 |
|
|
| 31% |
|
Consulting services |
|
| 273,604 |
|
|
| 300,418 |
|
|
| -9% |
|
AI technologies |
|
| 1,008,671 |
|
|
| — |
|
|
| NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
| $ | 8,039,448 |
|
| $ | 13,641,315 |
|
|
| -41% |
|
Revenues were substantially lower in 2020, largely as the result of significant delays in receiving expected new orders due to the Covid-19 pandemic, which became a factor late in the first quarter. The effect of this was to postpone planned implementations that were originally anticipated during the year as well as impacting installations that were underway due to travel and other constraints. Importantly, the Company received no cancellations of current contracts or expected orders and the order flow began to recover in the fourth quarter where revenues were substantially better than in the prior quarters. Management focused its efforts during the slowdown to working on technology innovations and improvements in quality and execution, the results of which are expected to manifest themselves in 2021 and beyond. Management believes this was an anomaly in the otherwise steady increase in overall revenues experienced in prior years driven by the strength of the technology systems portion of our business. The Company’s stable capital structure since the raise in early 2020 as well as certain organizational changes, enables us to more aggressively pursue large projects requiring the ability to deploy major resources. The temporary decrease in systems deployments was offset by an increase in technical support revenues which are recurring in nature. 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 6 months from installation of a new system until the recurring revenue is recognized. The Company continues 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 maintenance and technical support revenues are driven by successful completion on projects and represent services and support for those installations. The expectation is that revenues from this area will continue to grow based on the success of multiple installations anticipated in 2021.
Our consulting services business is focused into the area of data center asset management. It experienced a decrease in revenues for 2020 due to the effects of the pandemic where two going projects were delayed significantly. The Company released a new version of its dcVue™ software which is anticipated to broaden market acceptance of its offerings. The software was beta tested at a financial institution with the objective of ultimately rolling out to additional locations and was deployed at a number of locations in 2020. The division continues to execute consulting services engagements through its partners.
The AI technologies recorded their first quarter of revenue during the second quarter of 2020 and recorded additional revenues for the rest of the year. The Company received a large (over $2 million) contract for AI related development from a large client which is expected to add revenues in the following quarters in 2021. The Company expects to continue the growth with new revenue from other existing customers which also will be coming on-line in the next several months.
Cost of Revenues
|
| For the Years Ended |
| |||||||||
|
| December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| % Change |
| |||
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Technology systems |
| $ | 3,665,493 |
|
| $ | 6,510,658 |
|
|
| -44% |
|
Technical support |
|
| 1,109,741 |
|
|
| 528,966 |
|
|
| 110% |
|
Consulting services |
|
| 117,004 |
|
|
| 120,253 |
|
|
| -3% |
|
AI technologies |
|
| 360,817 |
|
|
| — |
|
|
| NM |
|
Total cost of revenues |
| $ | 5,253,055 |
|
| $ | 7,159,877 |
|
|
| -27% |
|
Cost of revenues on technology systems decreased during the year compared to 2019, although at a slower rate than the decline in revenues. This is due to higher staffing costs related to project implementation which were put in place early in the year, prior to the impact from COVID-19. There is a continued focus on build costs and savings through efficiency, but the Company has elected to maintain key employees in anticipation of expected sales of such systems in 2021. Cost of revenues overall increased on technical support at a higher rate than the increase in revenue for technical support which is a negative trend for the year albeit the rate of increase was lower for the last half of the year and this trend is expected to continue with the re-organization in operations and focus on costs. Going forward the expectation is that more of the Company’s revenue will come from this recurring revenue business.
The consulting services recorded a small decrease in cost of revenues for the year reflecting the improvements in execution efficiency put in place from the Company’s new dcVue™ software. This trend is expected to continue as additional revenue from expected license sales of this software are recognized in 2021. The current pandemic related to COVID-19 has impacted both expected receipt of awards and delays in execution due to travel and other restrictions. These delays will continue to impact the consulting services revenue portion of our business at this time.
The AI technologies recorded costs during the last three quarters of 2020. The Company expects to continue the growth with new revenue from existing customers which will be coming on-line in the next several months.
Gross Profit
|
| For the Years Ended | |||||||||
|
| December 31, | |||||||||
|
| 2020 |
|
| 2019 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 8,039,448 |
|
| $ | 13,641,315 |
|
|
| -41% |
Cost of revenues |
|
| 5,253,055 |
|
|
| 7,159,877 |
|
|
| -27% |
Gross profit |
| $ | 2,786,393 |
|
| $ | 6,481,438 |
|
|
| -57% |
Gross profit was $2,786,393 or 35% of revenues compared to $6,481,438 or 48% of revenuesoperating activities for the years ended December 31, 20202022 and 2019,2021 was $7,873,307 and $6,579,378, respectively. The decreaseincrease in gross profit of 57%net cash used in operations for the year ended December 31, 2022 was mainly the result of the significant slowdowns in project revenues duehigher expenditures related to the delay in new orderscurrent projects as previously discussed. This was offset by continued growthdiscussed as well as expenditures related to projects which the Company anticipates will be completed in our technical support2023. In addition, there are several changes in assets and liabilities that increased the positive effectuse of new revenuescash in operations including increases in inventory for some long-lead components and accounts receivable. Additionally, $1,410,270 in funding from the deploymentCARES Act PPP loan program received in 2021 plus deferred interest was forgiven during the first quarter of AI applications. It should be noted that2021.
Net cash used in investing activities for the accounting treatmentyears ended December 31, 2022 and 2021 was changed to the ASC 606 reporting standard for 2019$644,888 and that the results compared with the previous year are now 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.$552,940, respectively. The Company recorded an overall increasecontinues to invest in gross margin for the year compared to the prior year fourth quarter which is a positive trend highlighting that the business is starting a recovery from the pandemic delayscomputing, lab equipment and software and artificial development as reflected in implementation. Management anticipates the overall gross margins for the business to continue to improve in the coming year driven by higher sales from both existing and new customers and certain “economies of scale” from larger projects. In late September 2020, the Company began several initiatives to improve margins from projects by focusing on costs of materials, implementation efficiencies and a better understanding of our overall costs for completing projects. We also expect that the increase in recurring technical support revenues will continue2022.
Net cash provided in financing activities for the years ended December 31, 2022 and 2021 was $8,745,567 and $4,056,938, respectively. Cash flows provided by financing activities during 2022 were primarily attributable to positively impact overall revenues with an expected increase in gross margin.
Operating Expenses
|
| For the Years Ended |
| |||||||||
|
| December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| % Change |
| |||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
| $ | 717,809 |
|
| $ | 950,962 |
|
|
| -25% |
|
Engineering |
|
| 1,358,925 |
|
|
| 1,254,235 |
|
|
| 8% |
|
Research and development |
|
| 1,022,188 |
|
|
| 1,479,334 |
|
|
| -31% |
|
Administration |
|
| 5,011,913 |
|
|
| 3,987,941 |
|
|
| 26% |
|
AI technologies |
|
| 1,309,986 |
|
|
| 1,215,488 |
|
|
| 8% |
|
Total operating expense |
| $ | 9,420,821 |
|
| $ | 8,887,960 |
|
|
| 6% |
|
Operating expenses were higher by 6% than in 2019 largely asproceeds from the resultissuance of a one-time charge for severance payment duecommon and preferred stock to the retirement of the Company’s former CEOshareholders in the amount of $10,100,004, offset by $942,946 in issuance costs. 2022 marked an increase from 2021 financing activities $4,056,938 which was primarily underpinned from the gross proceeds of a private placement of $4,500,000.
During 2022, we funded our operations through the sale of our equity (or equity linked) securities, and through revenues generated and cash received from ongoing project execution, services and associated maintenance revenues. As of March 28, 2023, we have cash on hand of approximately $885,000. Excluding$4,500,000. We have approximately $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 we are now less dependent on timely payments by 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. 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.
Demand for the 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. 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.
In the event of expansion into owning and operating its own Railcar Inspection Portals, the Company’s cash requirements and timing may shift. Specifically, the Company would 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 amount, expenseswould shift the Company’s cash requirements, it anticipates a 12 – 18 month cash break-even point for each site and an opportunity for improved cash flows over time with high-margin agreements with the investment bolstered by access to further funding via common stock and private placement offerings.
Liquidity
Under Accounting 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.
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $6,864,783 for the year ended December 31, 2022. During the same period, cash used in operating activities was $7,873,307. The working capital surplus and accumulated deficit as of December 31, 2022, were $2,339,052 and $52,361,834, respectively. In previous financial reports, the Company had raised substantial doubt about continuing operations would have decreased overall by 4%. The Company implemented some staff cutsas a going concern. This was principally due to a lack of working capital prior to underwritten offerings and a private placement which were completed during the year but maintained key personnel reflecting necessary resourcesfirst 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 E 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 E 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 Company’s anticipated growthcoronavirus (Covid-19) continue to affect our operations, particularly in 2021. Research and development and AI development expenses, as an aggregate, decreased due to the completion of the TrueVue360 platform and a focus shift to executing machine learning algorithms for current contractsour supply chain, we now believe that arethis is expected to be complete by year end.an ongoing issue and our working capital assumptions reflect this new reality. The increase in engineering expenses is largely dueCompany cannot currently quantify the uncertainty related to increased staffing for unfilled positions that were identified earlierthe ongoing supply chain issues and its effects on our customers in the yearcoming 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 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 necessarywell 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 implementing new projects in 2021. Sales and marketing expense also decreased duethe Company to fluctuations in staffing and limited travel expensecontinue as a resultgoing 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.
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 pandemic. Administration expenses increased significantlyCompany as discusseda going concern is dependent upon the ability of the Company to continue executing the plan described above relating largelywhich was put in place in late 2022 and will continue in 2023 and beyond. As a result, we expect to a one-time charge for severance costsgenerate sufficient revenue and increased legal and hiring costs for the new CEO. These costs were offset by lower overall expensesto attain profitable operations with minimal cash use in the other functional areas.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.
Loss From Operations
The losses from operations for the years ended, December 31, 20202022 and 20192021 were $6,634,428$6,865,149 and $2,406,522,$7,456,951, respectively. The decrease in losses for 2020 were considerably higher than originally anticipated largely asfrom operations during the year was the result of delayedmostly improved revenues stemming from the deployment of new portals and one-time costsreceipt of materials and manufacturing related to senior management severancea high value set of portals to be completed during 2023. These additional projects as previously discussed. The delayed revenues had a significant impact in that given the anticipatedwell as an increase in business post-pandemic,services and although certain staffing cuts were made,consulting revenue increases and related margins outpaced the Company’s increased general and administrative costs throughout 2022. As a result, the Company elected to maintain key operations and technical staff to allow for a faster rebound. These extra costs were financed through a CARES Act PPP loanachieved near breakeven in the amountfourth quarter of $1,410,270, the expectation being that because of the staff levels that were maintained, much or all of the loan would be forgiven in accordance with its terms (see Note 15).2022. The Company continueshas continued to focus on measuresface inflation and supply chain pressures during 2022 and, as normal course of business, has worked to move toward breakevenbalance these impacts through management of customer contracts and profitability through a strategic plan that is being implemented in 2021.cost control efforts.
Interest Expense
Interest expense for the years ended December 31, 20202022 and 2019 were $150,1372021 was $9,191 and $69,322,$20,268, respectively. The increasereduction in interest expense was primarily due to the Company’s financing actionscharges related to fund certain staffing during the slowdowns experiencedinsurance policies in the second and third quarters. This was partially offset by interest earned from substantial additional capital held in reserve (see Other Income).2021.
Other Income
Other income for the years ended December 31, 20202022 and 20192021 was $ 37,130$9,557 and $4,962,$1,468,318, respectively. The increasedecrease is money earned on deposits and which offsets somemainly due to the PPP loan forgiveness recorded in the first quarter of the interest cost of short-term borrowings as previously discussed.2021.
Net Loss
The net loss for the years ended December 31, 20202022 and 20192021 was $6,747,435$6,864,783 and $2,470,882,$6,008,901, respectively. The large increase in net loss is primarily attributable to the decreaseone-time effect of the PPP loan forgiveness gain in revenues as previously discussed as well as certain one-time charges related to the former CEO severance. Netfirst half of 2021. Despite the increased net loss applicable to Common Stock was $6,747,435 in 2020 versus $2,470,882 in 2019,year-over-year, the Company showed an increase of $4,276,553.improvement at the operating loss level. Net loss per common share was $2.03$1.11 and $1.39$1.63 for the years ended December 31, 20202022 and 2019,2021, respectively.
Liquidity and Capital Resources
As of December 31, 2020,2022, the Company has a cash balance of $3,969,100. $1,121,092.
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
|
| For the Years Ended |
| For the Years Ended | ||||||||||||
|
| December 31, |
| December 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2022 | 2021 | |||||||||
|
|
|
|
|
| |||||||||||
Net cash used in operating activities |
| $ | (4,231,439 | ) |
| $ | (4,019,560 | ) | $ | (7,873,307 | ) | $ | (6,579,378 | ) | ||
Net cash used in investing activities |
|
| (287,331 | ) |
| (219,575 | ) | (644,888 | ) | (552,940 | ) | |||||
Net cash provided in financing activities |
|
| 8,431,621 |
|
|
| 3,086,083 |
| 8,745,567 | 4,056,938 | ||||||
Net increase (decrease) in cash |
| $ | 3,912,851 |
|
| $ | (1,153,052 | ) | $ | 227,372 | $ | (3,075,380 | ) | |||
Net cash used in operating activities for the years ended December 31, 20202022 and 20192021 was $4,231,439$7,873,307 and $4,019,560,$6,579,378, respectively. The slight increase in net cash used in operations for the year ended December 31, 20202022 was duethe result of higher expenditures related to higher operating costscurrent projects as previously discussed as well as expenditures related to projects which the Company anticipates will be completed in 2023. In addition, there are several changes in assets and liabilities that increased the use of cash in operations including increases in inventory for some long-lead components and accounts receivable. Additionally, $1,410,270 in funding from the CARES Act PPP loan program received in 2021 plus deferred interest was offset by cash generated from our AI and technical support,forgiven during the majorityfirst quarter of which is recurring in nature.2021.
Net cash used in investing activities for the years ended December 31, 20202022 and 20192021 was $287,331$644,888 and $219,575, respectively, representing continuing investments$552,940, respectively. The Company continues to invest in computing, and lab equipment during 2020 related to supportingand software and artificial development as reflected in the machine learning activities of TrueVue360.increase in 2022.
Net cash provided in financing activities for the years ended December 31, 20202022 and 20192021 was $8,431,621$8,745,567 and $3,086,083,$4,056,938, respectively. Cash flows provided by financing activities during 20202022 were primarily attributable to gross proceeds from the issuance of common and preferred stock as a result of our registered direct offering in conjunction with up-listing to a national exchange. We also received $1,410,270 in funding from the CARES Act PPP loan program. This loan, including the deferred interest was forgiven. The Company accrued interestshareholders in the amount of $10,577 during 2020.$10,100,004, offset by $942,946 in issuance costs. 2022 marked an increase from 2021 financing activities $4,056,938 which was primarily underpinned from the gross proceeds of a private placement of $4,500,000.
During 2020,2022, we funded our operations through a combination of the sale of our equity (or equity linked) securities, non-equity based debt and through revenues generated and cash received from ongoing project execution, services and associated maintenance revenues. As of March 26, 2021,28, 2023, we have cash on hand of approximately $7,435,000.$4,500,000. We have approximately $140,500$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, 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.
Demand for the 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. 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.
In the event of expansion into owning and operating its own Railcar Inspection Portals, the Company’s cash requirements and timing may shift. Specifically, the Company would 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 break-even point for each site and an opportunity for improved cash flows over time with high-margin agreements with the investment bolstered by access to further funding via common stock and 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.
As reflected in the accompanying consolidated financial statements, the Company had a positive working capitalnet loss of $2,167,058 and an accumulated deficit of $39,488,150 at$6,864,783 for the year ended December 31, 2020.2022. During the same period, cash used in 2019, the Company had a negativeoperating activities was $7,873,307. The working capital of $607,372surplus and an accumulated deficit as of $32,740,715.December 31, 2022, were $2,339,052 and $52,361,834, 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 offeringofferings and a private placement which waswere completed during the first quarter of 2020 (the “2020 Offering”).2022 and during third and fourth quarters of 2022 as well as the first quarter of 2023.
Upon completionAs 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. 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 2020 OfferingSeries E as additional funding mechanisms. Additionally, during the second quarter of approximately $8,200,000 after payment2023, 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 expensesthis document, the Company estimates that it has available capacity on its shelf registration which it can utilize to bolster working capital and fees,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 12 months from the date of this prospectus.
In addition, management has securedbeen 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 fundmeet its obligations over the Company for at least 12following twelve months. AlthoughIn the Company continues to be successful in attracting new business and establishing a backlog of projects, the effects of business delays to starting and implementing identified projects manifested themselves during the year. The Company was able to maintain operations due to this additional working capital which was further bolstered with the CARES Act loan previously discussed. This extra working capital allowed the Company to maintain key staffing and put us in a good position to move forward once the restrictions were lifted. Most importantly,last twelve months the Company has been successfulseen significant growth in maintainingits 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 sufficient workingbinding 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 cushion despite the setbacks that were encountered during the year.
As of the filing date ofvia its Annual Report on Form 10-K, management believed that these actions allowedshelf 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 followingplan 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 it willthe 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.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 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.
Off Balance Sheet Arrangements
We have no offno-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.
Share-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. Management implemented on January 1, 2019. The standard was applied in a retrospective approach for each period presented.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of derivatives, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible debt 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.
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 threefour sources: (1) Project Revenue;Technology Systems; (2) Maintenance andAI Technologies; (3) Technical Support and (3) IT Asset Management (software licensing, consulting and auditing).(4) Consulting Services.
Project RevenueTechnology Systems
The Company constructs intelligentFor revenues related to technology systems, consistingthe 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 materials and labor under customer contracts. Revenues and related costs on project revenue are recognized basedto 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 606-10-55-187ASC-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.
Maintenance
| 46 |
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 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 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
The Company recognizes revenue from its IT asset management business in accordance with the Securities and Exchange Commission (the “SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition” and 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 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 | |
(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. |
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 IT Asset Managementconsulting 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 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 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.
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.
| 47 |
Stock-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.
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.
Long-Lived Assets
The Company evaluates the recoverability of its property, equipment, and other long-lived assets in accordance with FASB ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets”, which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceed the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate. This guidance requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
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 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.
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, based in Jacksonville, Florida, oversees its wholly owned subsidiary, duostech™ whichand employs approximately 5979 people and is a technology integrator,company which designs, develops, deploys and operates intelligent technology solutions with a focus on software applications and artificial intelligence (“AI”) company withAI. The Company has a strong portfolio of intellectual property. The Company’s headquarters are located at 6622 Southpoint Drive South,7660 Centurion Parkway, Suite 310,100, Jacksonville, Florida 3221632256 and main telephone number is (904) 296-2807.
Overview
The Company, operating under its brand name duostechtech®, designs, develops and deploys technology with focus on inspecting and operates intelligentevaluating moving vehicles. Its technology solutionsfocus is within the Vision Technology market sector and, more specifically, the Machine Vision subsector. Machine Vision companies provide imaging-based automatic inspection and analysis for process control for industry with potential expansion into other markets. Duos has developed key technologies 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 employee team includeincludes 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 in the rail industry on staff and information technology.as consultants.
Our mainDuos 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 automatedremote 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)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 minutesseconds of the railcar passing through the RIP, a detailed report is sent to the customer where they are able to take action items immediately.on 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 short lineother railroad customers along with selected government agencies that operate and/or manage rail traffic. The Company currently operates with our RIPhas deployed RIPs in Canada, Mexico and the United States and anticipates expanding this solution into Europe, Asia and Australiathe 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 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 has already deployed this system with one large North American retailer and anticipates increased demand from other large retailers, railroad intermodal operators and select government agencies that manage logistics and border crossing points. The Company is evaluating 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.
To support the RIP and ALIS, the Company hasWe 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 the end user’s Concept of Operations (CONOPS), it provides improved situational awareness and data visualization for operational objectives. centraco® supports the integration of data from existing systems, including cameras and other sensor-based systems, within the same user interface. With centraco®, authorized personnel can simultaneously view, monitor and analyze data and other events from multiple geographic locations. objectives compared to traditional manual inspections. truevue360™ is our fully integrated platform that we utilize to develop and deploy Artificial Intelligence (AI)AI algorithms, including Machine Learning, Computer Vision, Object Detection and Deep Neural Network-based processing for real-time applications. We develop and deploy turn-key intelligent
These same Artificial Intelligence applications thathave begun to open up other opportunities for the Company to provide highly accurate results to automate and optimize our customer’s operations.revenue producing solutions with potentially high market adoption.
Another offering is ourIn 2021, the Company ended support of its IT Asset Management (ITAM) solution which utilizes dcVue® to help data center operators more effectively manage mission critical assets. This proprietary enterprise system utilizes intelligent bar code scanning technology, which quickly and seamlessly provides accurate, cataloged results for data center asset inventory and audit services. We have over 15 yearsare 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 experience physically reviewing data center equipment and documenting customer defined attributes associatedsolution although no specific offering has been developed at this time.
In the last quarter of 2022, the Company elected not to each piecerenew 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 equipment such as location, make, model, asset tag, serial number, number of blades, and power connectivity. Our team of trained professionals will quickly and efficiently gather the required data without disruption to your data center’s operation. All of the solutions can be offered as service or through licensing, the end-user can perform the service internally.
2023 for $165,000 via a convertible note.
The year 2020 brought significant2022 ushered in a new phase in the Company’s development. Although we continue to see an extension of challenges faced in 2021, we also see positive changes and opportunities for our business that will be discussed in greater detail later in this prospectus.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. |
| · | 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. |
·duostech®
The up listing onto a national exchange (Nasdaq) in first quarter, 2020.
·
Responding to the COVID-19 pandemic beginning in first quarter, 2020 and which continues as of the date of this prospectus.
·
The delay of new orders from existing customers beginning in first quarter, 2020 with a restart being expected in second quarter 2021.
·
The retirement of Gianni Arcaini as Chairman and CEO, and the hiring of new CEO and Director Charles Ferry in third quarter, 2020.
·
Restructuring of the organization by establishing a CCO (Scott Carns) and hiring a new COO (Ben Eiser) in third quarter, 2020.
·
Addition of Mr. Edmond Harris, former COO of CSX and CN, to our Board of Directors in fourth quarter, 2020.
duostech™
Over the past 10 years, duostech™ has developed a series of industry specific technologies some of which are described below.
Railcar Inspection Portal (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, a very labor intensive and inefficient process that only covers a select number of inspection points and can take several hours per train. OurWe believe our Railcar Inspection Portal canhas the potential to reduce this inspection to minutes while the train is moving at speed improving safety, reducing dwell time and optimizing maintenance.
Our system combines high-definition image and data capture technologies with our AI-based analytics applications 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 inbound train yard, well ahead of the train entering the yard.
Currently, three Class 1 railroads and several transit and international railroads are operatingusing our rip®rip® technology with one of those railroads broadly deploying the ultimate objective to change inspection regulations that would allow replacement of the current manual inspection (in the yard) with our fully automated process.
| |
|
|
The following examples of automated detections are the result of the combination of our image capture technologies. 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 in support of the Customs and Border Protection Agency.
![[duot_s1017.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1017.gif)
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 to include laser, infrared, thermal, sound and x-ray to process AI-based analytics of inspection points.
The following proprietary capture and sensor technologies are sold as stand-alone systems as well as sub-systems ofCurrently, the modular Railcar Inspection Portal system:
Vehicle Undercarriage Examiner (vue®)
A system that inspects the undercarriage of railcars (both freight and transit rail) traveling at speeds of up to 70 mph. We are currently developing an expanded version for higher speeds with additional sensor technologies. We are developing additional algorithms for an increasing number of automated detection of anomalies, which we believe once completed and successfully tested, may have a significant impact on our revenues.
|
|
|
Thermal Undercarriage Examiner (t-vue™)
The Company has developeda 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 deployed a new thermal undercarriage examiner. The system uses high-speed thermal imaging technology to inspect the thermal signatureoverall safety of undercarriage components. Thermal monitoring of component heat signatures while underway will provide indications of the overall operating health of the railcars that are not possible to observe during static yard inspections.
![[duot_s1022.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1022.gif)
Enterprise Commandtheir railcar fleet and Control Suite (centraco®)
This 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, the centraco®Enterprise Command and Control Suite. A multi-layered command and control interface, it is designed to function as the central point and aggregator for information consolidation, connectivity and communications. The platform is browser based and agnostic to the interconnected sub-systems. It provides full integration for seamless user credentialing and performs the following major functions:
·
Collection: Device management independently collects data from any number of disparate devices or sub-systems.
·
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”).
·
Verification: The contextual layer represents relevant information in a quick and easily interpreted format which provides operators optimal situational awareness.
·
Resolution: Event-specific presentation of user-defined Standard Operating Procedures (“SOPs”), that includes step-by-step instructions on how to resolve situations.
·
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 third-party databases. Reports are customized to the end user’s data formats and infrastructure.
·
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.
·
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.
![[duot_s1024.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1024.gif)
centraco®User Interface
Automated Logistics Information Systems (alis™)
We have developed and deployed a proprietary intelligent system to automate security gate operations at nine distribution centers owned and operated by a national retail chain. Using similar technology that is used in our Rail Inspection Portal, this solution automates the process of entering and exiting a large logistics or intermodal yard. This automates the logistics transaction, improves throughput and can also be used to automate security and maintenance screening/detection if desired by the customer.
![[duot_s1026.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1026.gif)
Automated Gate Operation alis™deployed at nine Kohl’s distribution centers
networks.
Markets
TheWe believe the opportunity for our RailRailcar Inspection Portal business is substantial and continues to be our number one priority at this time.priority. We are currently providing thisengaged with the RIP solution towith three of seven Class 1 railroad operators with 1013 systems already deployed. Because of our early leadership position, we have been able to accumulate experience and intellectual property that we believe would be time consumingtime-consuming and expensive for a new competitor to replicate. Furthermore, we believe we have given ourselves the ability to upgrade and scale our solutions with additional technologies in the future. Recently,We believe that the new CEO directedcurrent market for our operations and technical teams to improve our current design to meet anticipated Federal Railroad Administration, or FRA and Association of American Railroads regulatory guidelines. We currently estimate the total Class 1 railroads addressable market at 156 systems in North America alone. Between initial RIP installations, upgrades and long-term service agreements, we believe this equates to $800 million, whichtechnologies is realistically attainable in the coming years.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 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.
Another market we are pursuing as our second priority is using our Automated Logistics and Information Systems solution (a(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. The addressable market equates to well over $100 million.
near term.
Currently, we are focused on the North American market, but plan to expand globally in the future.
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.
With regards to our Railcar Inspection Portal (RIP), we currently have no direct competition domestically or globally. There are several companies that do provide visual and optical (laser) based imaging systems, but they are specifically designed to focus on a single aspect of a railcar whereas our latest RIP will identify 50+ inspection points on each car. This is not to be confused with track inspection technologies, which we do not compete with. We are the only company, to our best knowledge, that creates images of the entire car from multiple perspectives and with many inspection points. Other companies that participate in the visual and optical (laser) based railcar inspection systems market include:
·
Trimble Rail Solutions/Beena Vision – Atlanta, GA– Trimble Rail Solutions is a conglomerate of companies focused on various aspects of the maintenanceinclude Wabtec (Beena Vision), KLD Labs, WID, IEM, and construction of rail infrastructure or management of rail transportation assets. In 2017, they acquired Beena Vision which focuses on wayside inspection systems to analyze specific aspects of a railcar such as wheels and brakes among other critical points. All their systems are currently designed to focus on a singular aspect of a railcar. While they do advertise a full-scale train imaging and inspection portal, it is generally not comparable to our offering nor, to our knowledge, has it been widely adopted by North AmericanCamlin Rail. Some Class 1 railroads for automated wayside inspection purposes.
·
KLD Labs – Hauppauge, NY – KLD Labs developshave 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 deploys wayside measurementhave in-house industry expertise to train our systems and inspection systems for railcar inspection. Like most others, their products are focused on singular aspectsmake identification of a railcar such as wheels and brakes. They have also developed some technologies for rail track assessment and measurement.
·
Class 1 Railroads– Some of the Class 1 railroads, such as Union Pacific, have worked to develop their own “in-house” solutions but are also specifically focusing on singular aspects of a railcar.
common problems more automated.
Our Automated Logistics Information System (ALIS) also represents an opportunity to expand into a very mature market withthat we believe has a majorsignificant 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 purpose of AGS technology is to streamline entry in tointo and exit out of facilities. The marketplace for this was mostly seaports and intermodal transfer facilities and was relatively expensive technology to deploy. We identified a market gap with regards to distribution facilities that all currently utilize manual processes and heavy staffing to accomplish commercial truck entry and exit. The barrier to entry for distribution centers was predominately “cost”, as well as the requirement for a different set of logistics management software and tools. The current defined competition is as follows:
·
Nascent – Charlotte, NC– Their primary market focus has been on seaports and intermodal transfer facilities.
·
Potential End Users/Customers– In communications with potential customers, many have identified the desire to add this technology but have faced difficulties in finding companies offering a solution that meets their specific needs.
Due to the nature of our innovations, our current customer base, which is predominately in the railroad industry, constantly challenges us to develop new systems that do not yet exist in the marketplace. Each of these opportunities for new product development is evaluated from both a business and technical perspective. We evaluate the following: “can it technically be accomplished?”; “Does it leverage our core technology competencies?”; and ultimately, “Is there a market for this product?” Recently, we were asked to develop a variant of our Railcar Inspection Portal to assess for damaged automobiles being transported by the railroads. This is a perfect example of being able to leverage our experience with imaging, system development and field deployment combined with an addressable market into penetrating a new greenfield.
Our Growth Strategy
Vision
Vision
DuosThe Company designs, develops, deploys and operates cutting-edge technologies that help to transform precision railroading, logisticsintelligent technology solutions for inspecting and evaluating moving objects. Its technology application focus is within the rail and intermodal transportation solutions.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. |
Objectives
| • | 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. |
·
Improve our operational and technical execution, customer satisfaction and 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 and OPEX pricing models that 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 once the business is more mature and profitable to expand offerings and/or capabilities.
·
Promote a performance-based work force where employees enjoy their work and are incentivized to excel and innovate.
| • | Promote a performance-based work force where employees enjoy their work and are incentivized to excel and innovate. |
Organic Growth
Our organic growth strategy is to continue our focus and prioritization in the rail, logistics and intermodal market space. To ensure our success,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 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 former divisional COO who hasexecutive 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 withfocused in the rail market. In 2021, the Company delivering technology into rail, logistics, intermodal, and other industries, has been promoted to Chief Commercial Officer (CCO) of our wholly owned subsidiary, duostech. We have also hired a divisionalnew Chief OperatingTechnology Officer (COO) with a strong background in operations in multiple former assignments. The Company’s CFO will continue in the same role providing continuity and multiple years of public company experience. The Company’s Board of Directors is being strengthened with the addition of a retired Chief Operating Officer for a Class 1 railroad with more than 50bringing 25 years of experience in designing and delivering on value driven technologies. Our new CTO has already led the rail industry.team through instrumental changes to its approach to software and artificial intelligence development. The shareholdersteam also approvedsaw a change in CFO in late 2022 who brings significant experience in growth for asset-intensive businesses which aligns with the appointment of our CEO tosubscription format the Board of Directors.
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 customers. Even though the COVID-19 pandemic issupply chain issues are expected to still be an issue during 2021,continue through 2023, the Company’s primary customers have indicated readiness to order more equipment and services based upon the Company’s current performance.
performance and the new subscription offerings expands the universe of potential customers.
Additionally, the new 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. Similar upgrades are also being developed to improve the ALIS system. These upgrades are anticipated to be released throughout 2021 and are expected to drive revenue growth in 2021 and beyond.
The Company is expanding its focus in the rail industry to encompass passenger transportation and is currently in the last stages of a bid for a large, multi-year contract with a national rail carrier. If successful, the Company is expected to deliver at least two RIP solutions along with a long-term services agreement in late 2021 or early 2022.
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 teams 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 efforts, including software development, to maintain and improve our current product and services offerings.
Government Regulations
The Company has worked with 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 relatedgovernment-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 believe 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 55 79 employees of which 52 73 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 experienced any work 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 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 May 31, 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 2022 and 2021 was $782,591 and $414,085, respectively.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no 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, our common stock, any of our subsidiaries or our Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Directors, Executive Officers and Corporate Governance
The following is a list of our executive officers and directors. All directors serve one-year terms or until their successors are duly qualified and elected or his earlier resignation, removal or disqualification. The officers of the Company are elected by the Board.our Board of Directors.
| Name | Age | Position | ||
|
|
| ||
Charles P. Ferry |
| Chief Executive Officer, Director | ||
|
| Chief Financial Officer | ||
|
|
| ||
Kenneth Ehrman(1) |
| Chairman | ||
|
| Director | ||
|
| Director | ||
|
| Director |
———————
Charles P. Ferry, Chief Executive Officer, Director
Mr. Ferry was appointed Chief Executive Officer, effective September 1, 2020. Mr. Ferry was further appointedthen elected as a Directormember of our Board of Directors on November 19, 2020 by a vote of theour 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 of Operations, and General Manager. From 2018 through 2020, Mr. Ferry was the Chief 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.
TheOur 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 a distinguished service record and in leading companies to profitable growth.
Adrian G. Goldfarb,
| 54 |
Andrew W. Murphy, Chief Financial Officer
Mr. Goldfarb served asMurphy has over 16 years of progressive business experience in accounting and finance including nearly five years of public company experience for a Director from April 2010 to November 2020. Effective July 1, 2012, he was appointed as President and Chief Financial Officer of Information Systems Associates, Inc., which merged withLondon Stock Exchange-based company. He joined Duos Technologies, IncInc. in April 2015 upon which2020 where he agreed to continue serving the merged company, Duos Technologies Group, Inc., as Chief Financial Officer and Director. Mr. Goldfarb managed the Company’s listingserved on the Nasdaq Capital Market in 2020.Commercial team to support new project bids while also building out the Finance function. Prior to joining Duos, from 2011 to 2020 Mr. Goldfarb served as CFOMurphy 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 Ecosphere Technologies, overseeing growth from $0 to $24more than $800 million in new business and profitability. Mr. Goldfarbasset transactions across the globe. Additionally, he was also Managing Director of WSI Europe,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 time with APR, Mr. Murphy served in corporate accounting roles within a division of the Weather Channel from 1998 until 2002. From 2002 to 2007, Mr. Goldfarb servedFortune 500 company as interim-CFO for MOWIS GmbH,well as time working in public accounting with a weather technology media start-up company which was successfully sold to a large European media group. Mr. Goldfarb’s extensivefocus on tax and business and financial experience includes 10 years at a subsidiary of Fujitsu where he served as Director of Operations for a new software venture. Mr. Goldfarb started his formal career at IBM and was given responsibility for an account team focused on Latin America and Southeast Asia.services.
Mr. Goldfarb also currently serves as non-Executive Chairman of GelStat Corporation, a public company engaged in the development and marketing of homeopathic and natural supplements. Mr. Goldfarb is a 35-year technology industry veteran including more than 25 years in information technology.
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. Mr. Goldfarb has over 40 years of business experience in technology companies including more than 12 years as CFO of public companies. Mr. Goldfarb did his initial accounting training in London andMurphy graduated from Jacksonville University “cum laude” with a business degree specializing in Finance from Rutgers University, Newark, NJ. Mr. Goldfarb also has more than 20 years’ experienceAccounting and later received his Master’s degree in financial derivatives including model development for valuation of complex financial instruments and has served asBusiness Administration with a consultant for small companies dealing with restructuring issues.focus in Finance.
Connie L. Weeks, Chief Accounting Officer
Ms. Weeks has been a key member of the Company for 35 years and now serves as Chief Accounting Officer with responsibility for all aspects of financial reporting, internal controls, and cash management.
Ms. Weeks has over 40 years of operational accounting experience and is responsible for overseeing and managing the day-to-day accounting and financial reporting, internal controls, and cash management. She has been a key member of the Duos team progressing from an assistant to the staff accountant and subsequently being promoted to roles with increasingly more responsibility including serving as Vice President of Finance and Corporate Controller. In 2015, when the Company became public, Ms. Weeks continued to serve as VP of Finance, overseeing the audit process and interfacing with PCAOB auditors, managing the audit process. As the Company’s most senior female executive, Ms. Weeks is actively engaged with management and provides guidance on diversity matters and has also taken courses in Human Resources. Ms. Weeks attended Florida State College of Jacksonville where she majored in Accounting.
The Board believes that Ms. Weeks’s long service with the Company and her expertise in the areas of project accounting is of considerable value to the Company.
Kenneth Ehrman, DirectorChairman
Mr. Ehrman joined the Board on January 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 Corporate Governanceindustrial applications of the internet of things (IoT), Mr. Ehrman has coauthored more than 40 patents in wireless communications, mobile data, asset tracking, power management cargo and Nominating Committees.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 to 2016 before it was successfully sold tothe Corporate Governance and Nominating Committee as well as a large financial software company.
member of the Audit and Compensation Committees. The Board believes that Mr. Ehrman’s management experience, engineering expertise and long history and familiarity with industries the Company currently operates in, makesmake him ideally qualified to help lead the Company towards continued growth.
Blair M. Fonda,Frank A. Lonegro, Director
Mr. Lonegro was elected to the Board of Directors on July 19, 2023. Since 2020, Mr. Lonegro has been an Executive Vice President and the Chief Financial Officer of Beacon Roofing Supply, Inc., the largest publicly traded distributor of roofing materials and complementary building products in North America. Prior to Beacon, he had a nearly 20-year career with CSX Corporation, a $12 billion Fortune 500 transportation company, where he most recently served as Executive Vice President and Chief Financial Officer from 2015 to 2019. Mr. Lonegro’s career at CSX entailed a unique blend of cross-functional experience, combining financial, operational and functional executive leadership roles. As Chief Financial Officer, he helped lead transformative operational changes yielding substantial productivity savings and markedly improved operating margins which led to significant stockholder value creation. Prior to his role as Chief Financial Officer, Mr. Lonegro delivered strong results in key leadership roles of increasing responsibility across operations, service, information technology and internal audit. Prior to joining CSX, Mr. Lonegro practiced law for seven years, focusing on complex commercial litigation, loan workouts and business transactions. Mr. Lonegro earned a bachelor’s degree from Duke University, a law degree from the University of Florida and an MBA from the University of Florida.
Ned Mavrommatis, Director
Mr. Fonda was appointed as a Director on May 3, 2017 and serves as Chairman of the Audit Committee and a member of the Compensation Committee. Since 2013, Mr. FondaMavrommatis has served as the Chief Financial Officer of Emergent Financial Partners (“EFP”). EFPHalo Collar since May 2022. The Halo Collar is an accountingthe 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 consulting services firm which offers financial consulting servicesactivity tracker combined into one easy-to-use smart collar. Prior to businesses and organizations throughout the United States and the Caribbean Islands. From 2013 to 2016,Halo Collar 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. FondaMavrommatis 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.
Edmond L. Harris, Director
Mr. Harris was appointed as a Director on November 19, 2020 and serves as Chairman of the Corporate Governance and Nominating Committee and serves as a member of the Audit Committee. From April 2010 until his retirement in April 2011, Mr. Harris served as Executive VP of Operations at Canadian Pacific Railway. In December of 2011 he was appointed to CP’s Board, where he served until May of 2012. He also served as Omnitrax’s Chairman of the Board (a privately held regional railroad company in Denver, CO). He served as Executive Vice President of Operations at Canadian National Railway Company (“CN”) from March 2005 to January 2007, as its Senior Vice President of Operations from July 2003 to March 2005, and as Chief Transportation Officer from January 2001 to June 2003. Mr. Harris also held various key operating positions at Illinois Central Railroad prior to its acquisition by CN. At Illinois Central Railroad and CN, Mr. Harris worked closely with E. Hunter Harrison, the company’s former President and Chief Executive Officer, to implement the Precision Scheduled Railroad model. Mr. Harris has also served as an independent rail operations consultant providing advice to various rail shippers and railroads, including CSX, from June 2007 to March 2010, and again following his retirement for Canadian Pacific Limited and Canadian Pacific Railway Company in April 2011. Mr. Harris has a B.S. in Business Management from the University of Illinois and served in the US Marine Corps from 1969 to 1973.
The Board believes that Mr. Harris’ extensive background in the railroad industry and as a large company executive serving in many roles makes him a significant addition to the Company’s Board and will provide leadership and direction to the Company’s management team.
Ned Mavrommatis, Director
Mr. Mavrommatis joined the Board on August 13, 2018 and serves as Chairman of the Compensation Committee and a member of the Audit and Corporate Governance and Nominating Committees. Mr. Mavrommatis has served as Chief Financial Officer of PowerFleet, Inc. (“PowerFleet”) since(NASDAQ: PWFL) from October 2019 to May 2022 and I.D Systems, Inc. (NASDAQ: IDSY) from August 1999 to October 2019. PowerFleet is a global leader and provider of subscription-based wireless IoT and M2M solutions for securing, controlling, tracking, and managing high-value enterprise assets such as industrial trucks, tractor trailers, containers, cargo, and vehicles and truck fleets. From August 1999 until October 2019, he served as Chief Financial Officer of IDS. Mr. Mavrommatis serves on the Board of PowerFleets’ wholly owned subsidiary PowerFleet Israel and is also the Managing Director of PowerFleets’ wholly owned subsidiaries, PowerFleet GmbH and PowerFleet Systems Ltd.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
| 55 |
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
Wm. Scott Carns,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.
Chris King, Chief Commercial Officer, Operating Subsidiary Duos Technologies, Inc.
Mr. Carns is Chief Commercial Officer for the operating subsidiary,King joins Duos Technologies Inc., and is responsible for overseeing and managing day to day commercial operations. He is also directly responsible for account management of Duos’ major accounts. Mr. Carns is an original founding employee of Duos Technologies and has spentwith over 20 years withof operational and commercial leadership experience within the organization in a variety of roles. In this current position, he is responsible for the developmentenergy and execution of Duos’ growth strategy and expansion. His management and capabilities provide leadership and direction to the entire organization. Mr. Carns has extensive experience in the information technology industry. He works with Duostech’s major clients to develop and create solutions to meet their operational challenges. He is a co-inventor of the Company’s Train Rider Detection System developed for U.S. Customs and Border Protection which is the predecessor of the Railcar Inspection Portal (RIP) and in use at many Class 1 freight railroads today. Prior to joining Duostech, Mr. Carns worked as the Information Technologies Coordinator for Environmental Capital Holdings, Inc. and was the owner and President of Software Solutions Group, Inc. He served in the United States Army as a Military Police Officer and attended Kansas State University.
Ben Eiser, Chief Operating Officer, Operating Subsidiary Duos Technologies, Inc.
Mr. Eiser was newly appointed to the operating subsidiary in late 2020. He has over 27 years of active-duty military service and private-sector leadership, Project and IT Management experience.supply chain sectors. Prior to joining Duos, Technologies, he was the Vice President for Global Projects forserved in a series of progressive management roles within APR Energy from 2016(“APR”), a global fast track power company. During Mr. King’s time at APR, his responsibilities included: leading all power plant operations, which consisted of 16 sites around the world and over 500 employees; managing acquisition integrations of over $300 million in new projects; maintaining full P&L accountability for all operations; and building and heading up a team that closed over $1 billion in new revenue, asset sales, and contract extensions. Prior to 2020 leadinghis time at APR, Mr. King held several operational leadership roles at CEVA Logistics, including a Project Management Teamrole as Lean Six Sigma Leader in charge of designing and executing continuous improvement projects for global fast-track power, responsible forCEVA operations across the installation and demobilization of temporary power plants, synchronization and coordination for the deployment of personnel and materials, ensuring that all projects were completed on-time and under budget. The APR PMO Team was able to deliver 17 power plants faster than ever completed in the company’s history while becoming profitable and implementing process and procedures to ensure mission success. Mr. Eiser was the Director of Projects for ARMA Global where he was the operations officer for a large, complex IT program in US Special Operations Command. He supervised hiring over 300 people across six different locations in just 60 days. He then provided the leadership and management to deliver more than 50 complex projects with a very demanding customer. He served 21 years on active duty in the U.S. Army leading Infantry (Light, Airborne and Mechanized), and Ranger Units for over 48 months that includes four combat tours in Afghanistan, and three combat tours in Iraq. Mr. Eiser has an undergraduate degree from Illinois State University in Industrial Technology Construction and earned his MBA while still serving his Country.world
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 the Company’sour review of certain reports filed with the copiesSEC pursuant to Section 16(a) of such Forms and written representations from certain reporting persons, the Company believes that all filingsExchange Act, the reports required to be made by the Company’s Section 16(a) reporting personsfiled with respect to transactions in our Common Stock during the Company’s fiscal year ended December 31, 20202022, were made on afiled timely, basis.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 6622 Southpoint Drive South,7660 Centurion Parkway, Suite 310,100, Jacksonville, Florida 32216; Attention: Secretary.33256.
Board Composition and Director Independence
Our boardBoard of directorsDirectors currently consists of five members: Mr. Kenneth Ehrman, Mr. Charles P. Ferry, Mr. Edmond Harris, Mr. Ned Mavrommatis, Mr. Blair M. FondaJames Craig Nixon, and Mr. Kenneth Ehrman.Frank Lonegro. 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. Based on such review and its understanding of such relationships and transactions, our board affirmatively determined that Mr. Ehrman, Mr. Fonda,Mavrommatis, Mr. HarrisNixon, and Mr. MavrommatisLonegro are all qualified as independent and none of them have any material relationship with us that might interfere with his exercise of independent judgment.
Board Committees
Our boardBoard of directorsDirectors has established an audit committee, a compensation committee and a corporate governance and nominating 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 Chairman of each committee are Blair M. Fonda, NedMr. Mavrommatis, Mr. Nixon and Edmond L. Harris, respectively,Mr. Ehrman, 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 membersof Directors also serves on one or more committees as previously disclosed.
Audit Committee
The Audit Committee oversees our accounting and financial reporting processes and oversees 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:
| • | appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm; |
| • | overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm; |
| • | reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures; |
| • | monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics; |
| • | discussing our risk management policies; |
| • | establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns; |
| • | meeting independently with our independent registered public accounting firm and management; |
| • | reviewing and approving or ratifying any related person transactions; and |
| • | preparing the audit committee report required by SEC rules. |
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. FondaMavrommatis serves as the Chairman of the Audit Committee.
Compensation Committee
The Committee’s compensation-related responsibilities include, but are not limited to:
| • |
| reviewing and approving on an annual basis the corporate goals and objectives with respect to compensation for our Chief Executive Officer; |
| reviewing, approving and recommending to our | |
| determining the need for and the appropriateness of employment agreements and change in control agreements for each of our executive officers and any other officers recommended by | |
| providing oversight of management’s decisions concerning the performance and compensation of other Company officers, employees, consultants and advisors; | |
| reviewing our incentive compensation and other equity-based plans and recommending changes in such plans to our | |
| reviewing and recommending to our | |
| selecting, retaining and terminating such compensation consultants, outside counsel or other advisors as it deems necessary or appropriate. |
Mr. MavrommatisNixon serves as the Chairman of the Compensation Committee.
Corporate Governance and Nominating Committee
The responsibilities of the Corporate Governance and Nominating Committee include:
| • |
| recommending to |
| considering candidates proposed by | |
| overseeing the administration of the Company’s Code of Ethics; | |
| reviewing with the entire | |
|
| |
| recommending to | |
| overseeing an annual self-evaluation of | |
| developing and recommending to the board a set of corporate governance guidelines applicable to the Company. |
Mr. HarrisErhman serves as the Chairman of the Corporate Governance and Nominating Committee.
| 58 |
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
| • |
| been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; | |
| been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
| been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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.
| 59 |
Executive Compensation.EXECUTIVE COMPENSATION
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 |
|
| Salary |
|
| Bonus |
|
| Stock |
|
| Options ($) |
|
| Other Comp. |
|
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gianni B. Arcaini, |
| 2020 |
|
|
| 913,961 | (1) |
|
| 114,423 | (2) |
|
| — |
|
|
| 157,070 | (3) |
|
| 16,921 | (4) |
|
| 1,202,375 |
|
Former Chairman of the Board, Chief Executive Officer, President, Director (PEO) |
| 2019 |
|
|
| 249,260 |
|
|
| 143,411 | (2) |
|
| — |
|
|
| — |
|
|
| 25,382 | (4) |
|
| 418,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles P. Ferry, Chief Executive Officer (PEO) |
| 2020 |
|
|
| 83,333 |
|
|
| 50,217 | (5) |
|
| — |
|
|
| 36,293 | (6) |
|
| — |
|
|
| 169,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adrian G. Goldfarb, |
| 2020 |
|
|
| 197,750 |
|
|
| 849 |
|
|
| — |
|
|
| 45,632 | (7) |
|
| 7,500 | (8) |
|
| 251,731 |
|
Chief Financial Officer, Former Director (PFO) |
| 2019 |
|
|
| 180,250 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,500 | (8) |
|
| 187,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connie L. Weeks, |
| 2020 |
|
|
| 150,000 |
|
|
| 6,667 | (9) |
|
| — |
|
|
| 45,632 | (10) |
|
| — |
|
|
| 202,299 |
|
Chief Accounting Officer |
| 2019 |
|
|
| 150,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 | |||||||||||||||||
———————
(1)
| Represents
|
|
|
|
| For the Years Ended | ||
|
| 2020 |
| 2019 |
Risk free interest rate |
| 0.18% - 0.26% |
| 1.40% - 2.44% |
Expected term in years |
| 2.50 – 3.50 |
| 2.76 – 3.25 |
Dividend yield |
| — |
| — |
Volatility of common stock |
| 68.00% - 86.24% |
| 117.18% - 151.43% |
Estimated annual forfeitures |
| — |
| — |
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula with expected volatility derived from a binomial lattice model. 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 defined by the Federal Reserve Statistical Release, 3-year treasury bond.
|
|
|
|
| Option compensation is the fair market value of 100,000 |
| Mr. Murphy became Chief Financial Officer effective November 15, 2022. |
| (4) | Represents |
| (5) | Option compensation is the fair market value of |
| (6) | Mr. Goldfarb |
| (7) | Represents $50,000 objectives bonus. |
| (8) | Option compensation is the fair market value of |
| Comprised of |
| On December 31, 2022 Ms. Weeks retired from the Company. |
| (11) | Represents bonus award for long service to the Company. |
|
|
| 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 | — | — | ||||||
Outstanding Equity Awards at December 31, 20202022
Name |
| Number of |
|
| Number of |
|
| Equity |
|
|
|
|
| Option |
|
| Number of |
|
| Market |
|
| Equity |
|
| Equity |
| 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 |
|
| $ | 4.18 |
|
|
| 08/31/2025 |
|
| — |
|
| — |
|
| — |
|
| — |
| — | 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 |
|
| — |
|
| — |
|
| — |
|
| — |
| 18,929 | — | $ | 6.00 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||||||||
Adrian G. Goldfarb |
|
| 9,465 |
|
| — |
|
| 9,465 |
|
| $ | 4.74 |
|
|
| 03/31/2025 |
|
| — |
|
| — |
|
| — |
|
| — |
| 18,929 | — | $ | 4.74 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||||||||
Connie L. Weeks |
|
| 18,929 |
|
| — |
|
| — |
|
| $ | 6.00 |
|
|
| 03/31/2025 |
|
| — |
|
| — |
|
| — |
|
| — |
| 40,000 | — | $ | 6.41 | 12/31/2026 | — | — | — | — | |||||||||||||||||||||||||||||
Connie L. Weeks |
|
| 9,465 |
|
| — |
|
| 9,465 |
|
| $ | 4.74 |
|
|
| 03/31/2025 |
|
| — |
|
| — |
|
| — |
|
| — |
| 18,929 | — | $ | 6.00 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||||||||
Gianni B. Arcaini |
|
| 50,358 |
|
| — |
|
| — |
|
| $ | 6.00 |
|
|
| 03/31/2025 |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||||||||||||||||||||||||||||||||||
Gianni B. Arcaini | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Connie L. Weeks | 18,929 | — | $ | 4.74 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Executive Severance Agreement
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 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 Board of Directors of the Company. The Corporate Governance and Nominating Committee did not submit Mr. Arcaini for re-election as a director and on November 19, 2020 at the Annual Shareholders meeting a new non-Executive Chairman was appointed.
In accordance with the Separation Agreement the Company will pay to Mr. Arcaini the total sum of $747,788. Notwithstanding the foregoing, the status of Mr. Arcaini as a “Specified Employee” as defined in Internal Revenue Code Section 409A has the effect of delaying any payments to Mr. Arcaini under the Separation Agreement for six months after the Separation Date. On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631, owed to Mr. Arcaini and the Company will continue to pay him in bi-weekly installments for 30 months thereafter, as contemplated in the Arcaini Employment Agreement. In addition, the Company will pay one-half of Mr. Arcaini’s current life insurance premiums for 36 months of approximately $1,200 and provide and pay for his health insurance for 18 months following the Separation Date of approximately $1,700. Unvested options in the amount of 50,358 became exercisable and vested in their entirety on the Separation Date valued at $95,127. The Company made payment of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation Agreement of approximately $17,000.
Employment Agreements
On September 1, 2020, the Company 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 expiration of the Initial Term or an Additional Term. During 2021 and 2022 Mr. Ferry is to receivereceived a base salary at an annual rate of $250,000. Mr. Ferry also received a one-time cash incentive bonus in the amount of $50,000 $150,000 during 2022 for achievement of certain objectives in 2022 in accordance with criteria determined by theour Board of Directors and based on the review and recommendation of the Compensation Committee. Mr. Ferry is alsocontinues to be eligible for an annual bonus in an amount up to $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 at an exercise price of $4.18, of which 50% will vest on100% were vested as of September 1, 20212022. He received a further grant in January 2022 in the amount of 100,000 non-qualified options with a term of five years and the balance which will vest on September 1, 2022.a strike price of $6.41. The options have a three-year vesting period. The Ferry Employment Agreement can be terminated with or without casecause 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 servesserved as Chief Financial Officer of the Company.Company through November 15, 2022 and subsequently, assumed a new role as Strategic Advisor to the CEO. During 2020,2021, Mr. Goldfarb was paid an annual salary of $197,750$207,750 and an annual car allowance of $7,500.$2,500 which has subsequently been cancelled. In 2022, Mr. Goldfarb’s annual salary was increased to $220,000 and he was paid a bonus of $50,000. 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, 2022.2024 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 of the Company’s Board.Committee.
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 one 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 servesserved as Chief Accounting Officer of the Company. During 2020,2022, Ms. Weeks was paid an annual salary of $150,000.$152,260 as well as a $20,000 performance bonus and $14,770 in compensations 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. TheMs. Weeks gave notice to the Company that she would be retiring effective December 31, 2022. As a consequence, the Weeks Employment Agreement remains in effect through Marchterminated effective December 31, 2022. 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.Committee.
Potential Payments upon Change of Control or Termination following a Change of Control and Severance
The Weeks Employment Agreement containscontained certain provisions for early termination, which may resulthave resulted in a severance payment equal to two years of base salary then in effect. Generally, we doThis provision is no longer in effect and Ms. Weeks will not providereceive any severance specifically upon a change in control, nor do we provide for accelerated vesting upon a change in control.further compensation following her retirement.
Director Compensation
Each independent director was entitled to receive $15,000 annually for service on our Board in 2020. In addition, Chairmen of committees were awarded an additional $5,000 annually in compensation in connection with their service in such capacity. The Company could elect to pay up to 50% of awarded compensation in restricted common stock.
Starting in 2021, the Compensation Committee has 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 $10,000 fee is also inclusive of any services rendered as a member of one or more committees. The board compensation will be paid 40% in cash and 60% in shares of restricted common stock or options to purchase shares of our common stock, as elected by the board member. Each board member may further elect to receive up to 100% of compensation in restricted stock.
The following table summarizes data concerning the compensation of our non-employee directors for the year ended December 31, 2020.2022.
|
| Fees Earned or Paid ($) |
|
| Stock Awards ($)(5) |
|
| Option Awards ($)(6) |
|
| Non-Equity Incentive Plan Compensation ($) |
|
| Non-Qualified Deferred Compensation Earnings ($) |
|
| All Other Compensation ($)(7) |
|
| Total ($) |
| |||||||
Blair M. Fonda (1) |
|
| 12,500 |
|
|
| 7,500 |
|
|
| 20,662 |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
|
|
| 50,662 |
|
Edmond L. Harris (2) |
|
| 2,500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,500 |
|
Kenneth Ehrman (3) |
|
| 12,500 |
|
|
| 7,500 |
|
|
| 20,662 |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
|
|
| 50,662 |
|
Ned Mavrommatis (4) |
|
| 12,500 |
|
|
| 7,500 |
|
|
| 20,662 |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
|
|
| 50,662 |
|
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 | |||||||||||||||||||||
———————
|
|
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 26, 2021,September 30, 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 (“Preferred A”), 15,000 shares of Series B Convertible Preferred Stock and(“Preferred B”), 5,000 shares of Series C Convertible Preferred Stock.Stock (“Preferred C”), 4,000 shares of Series D Convertible Preferred Stock (“Preferred D”), 30,000 shares of Series E Convertible Preferred Stock (“Preferred E”), and 5,000 shares of Series F Convertible Preferred Stock (“Preferred F”). As of the same date, there are issuedwere 0 shares of Preferred A, 0 shares of Preferred B, 0 shares of Preferred C, 1,299 shares of Preferred D, 4,000 shares of Preferred E, and 5,000 shares of Preferred F outstanding, 3,535,339respectively, and 7,248,455 shares of our common stock 1,705 shares of Series B Preferred Stock and 4,500 shares of Series C Preferred Stock, respectively. Ourissued. Additionally, our common stock entitles its holder to one vote on each matter submitted to the stockholders. Our Series B Preferred Stock allows its holder one vote for each common stock equivalent, subject to a maximum represented by 9.99% of total Common Stock. Our Series C Preferred Stock allows its holder 172 votes per share, subject to a maximum represented by 19.99% of total Common Stock.
The following table sets forth, as of March 26, 2021,September 30, 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 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 Technologies Group, Inc., at 6622 Southpoint Drive S.,7660 Centurion Parkway, Suite 310,100, Jacksonville, Florida 32216.32256.
Name and Address of Beneficial Owner(1) |
| Common |
|
|
| Percentage of Ownership of Common |
| ||
5% Beneficial Shareholders(2) |
|
|
|
|
|
|
| ||
Bleichroeder LP 1345 Avenue of the Americas, 47th Floor New York, NY 10105 (4) |
|
| 765,293 |
|
|
|
| 19.99 | % |
Justin W. Keener 3960 Howard Hughes Parkway Las Vegas, NV 89169 (5) |
|
| 353,048 |
|
|
|
| 9.99 | % |
Bard Associates, Inc. 135 S. Lasalle Street, Suite 3700 Chicago IL 60603 (6) |
|
| 242,570 |
|
|
|
| 6.90 | % |
Laurence W. Lytton 467 Central Park West New York, NY 10025 |
|
| 215,700 |
|
|
|
| 6.10 | % |
Pessin Family Holdings 500 Fifth Avenue, Suite 2240 New York, NY 10110 (7) |
|
| 249,404 |
|
|
|
| 7.06 | % |
5% Beneficial Shareholders as a Group |
|
| 1,826,015 |
|
|
|
| 43.49 | % |
Executive Officers and Directors |
|
|
|
|
|
|
|
|
|
Charles P. Ferry(8) |
|
| — |
|
|
|
| * | % |
Adrian G. Goldfarb(9) |
|
| 48,650 |
|
|
|
| 1.36 | % |
Kenneth Ehrman(10) |
|
| 19,955 |
|
|
|
| * | % |
Blair M. Fonda(11) |
|
| 20,375 |
|
|
|
| * | % |
Edmond L. Harris |
|
| — |
|
|
|
| * | % |
Ned Mavrommatis(12) |
|
| 12,838 |
|
|
|
| * | % |
Connie L. Weeks(13) |
|
| 28,394 |
|
|
|
| * | % |
Executive Officers and Directors as a Group (7 persons) |
|
| 130,212 |
|
|
|
| 3.60 | % |
| 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) | 3,800,592 | 38.92 | % | |||||
| Pessin Family Holdings 500 Fifth Avenue, Suite 2240 New York, NY 10110 (2) | 1,459,945 | 20.14 | % | |||||
Bard Associates, Inc. 135 South LaSalle Street, Suite 3700 Chicago, Illinois 60603(3) | 475,853 | 6.56 | % | |||||
Laurence W. Lytton 467 Central Park West New York, New York 10025(4) | 734,025 | 9.99 | % | |||||
| Directors and Executive Officers | ||||||||
| Charles P. Ferry(5) | 139,334 | 1.89 | % | |||||
| Andrew W. Murphy(6) | 42,288 | * | ||||||
| Kenneth Ehrman(7) | 67,288 | * | ||||||
| Ned Mavrommatis(8) | 38,197 | * | ||||||
| James C. Nixon | 33,682 | * | ||||||
| Frank A. Lonegro | 1,573 | * | ||||||
| Executive Officers and Directors as a Group (6 persons) | 322,362 | 4.32 | % | |||||
———————
*Denotes less than 1%
|
|
| 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 |
| (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 owns 1,221,062 shares of our Common Stock and Brian L. Pessin 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 |
| (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 |
| (5) | Includes 100,000 shares of our Common Stock underlying the vested and | |
|
|
| (7) | Includes (i) options to purchase 8,572 shares of our Common Stock at $4.74 per share, all of which |
|
| Includes |
|
|
|
|
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. The Services Agreement provided that Luceon would provide support services including management, coordination or software development services and related services to Duos.duos. In January 2019, additional services were contracted with Luceon for TrueVue360TrueVue360™ primarily for software development through the provision of seven 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 Technologies, Incduos for four 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 seven 7 to three 3 full-time employees at a cost of $11,666 per month starting June 1, 2020. TheAs 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 to Luceon for 2020 is $335,334. All agreementswas $0 and $93,422, respectively. The Company had no open accounts payable with Luceon were terminated effectiveat December 31, 2022 or 2021. On May 31, 2021.14, 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.
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 and also be approved by the Company’s Corporate Governance and Nominating Committee.
In the discussion that follows, we have summarized selected provisions of our certificate 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 certificate of incorporation and our bylaws as currently in effect for provisions that may be important to you.
Market 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.
Preferred Stock
The Company has 10,000,000 authorized shares of preferred stock par value $0.001 per share, which have five series. As of October 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, the Series E Preferred Stock has 4,000 shares issued and outstanding. and the Series F Preferred Stock has 5,000 shares issued and outstanding.
Our Board has the authority, within the limitations and restrictions in our certificate of incorporation, to issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of any series, without 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 March 31, 2021, we have no
There 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.
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 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. Holders of Series B Convertible Preferred will vote on an as converted basis on all matters on which the holders of common stock are entitled to vote, subject to beneficial ownership limitations. As of March 31, 2021, there are 1,705 shares of Series B Convertible Preferred Stock issued and outstanding.
Series C Convertible 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 Series C 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 $5.50 per share. Notwithstanding the foregoing, we shall not effect any conversion of Series C Convertible Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series CD 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 CD Convertible Preferred will vote on all matters on which the holders of common stock are entitled to vote and will have 172 333 votes per share, subject to beneficial ownership limitations.
As of March 31, 2021,June 30, 2023, there are 4,5001,299 shares of Series CD Convertible Preferred Stock issued and outstanding.
Series E Convertible Preferred Stock
Our board of directors has designated 30,000 of the 10,000,000 authorized shares of preferred stock as Series E Convertible Preferred Stock.
The Company's Board of Directors designated 5,000 shares as the Series F Preferred Stock. Each share of Series F 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 described below) determined by dividing the stated value of such share ($1,000) by the conversion price, which is $6.20 (subject to standard anti-dilution provisions). The Company, however, shall not effect any conversion of the Series F Preferred Stock, and the holder shall not have the right to convert any portion of the Series F 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 purchasers of the Series F Preferred Stock have elected that their ownership limitation will be 19.99%.
As of June 30, 2023, there are 4,000 shares of Series E Convertible Preferred Stock issued and outstanding.
Series F Convertible Preferred Stock
On August 2, 2023, the Company issued 5,000 shares of Series F Convertible Preferred Stock.
The Company's Board of Directors designated 5,000 shares as the Series F Preferred Stock. Each share of Series F 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 described below) determined by dividing the stated value of such share ($1,000) by the conversion price, which is $6.20 (subject to standard anti-dilution provisions). The Company, however, shall not effect any conversion of the Series F Preferred Stock, and the holder shall not have the right to convert any portion of the Series F 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 purchasers of the Series F Preferred Stock have elected that their ownership limitation will be 19.99%.
The holders of the Series F 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 F Preferred Stock has 161 votes (subject to adjustment); provided that in no event may a holder of Series F Preferred Stock be entitled to vote a number of shares in excess of such holder’s ownership limitation.
The Company also agreed that it will not, with certain exceptions, sell or issue common stock or Common Stock Equivalents (as defined in the Purchase Agreement relating to the Series F Preferred Stock) 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 F Preferred Stock without the consent of the holders.
Options and Warrants
As of June 30, 2023, there are 1,217,775 outstanding options to purchase shares of our common stock. The weighted average exercise price of these options is $5.37, the average term when issued was five years and the average term remaining is three years.
As of June 30, 2023, there are warrants outstanding to purchase 80,091 shares of our common stock of which none are subject to full ratchet price protection on the 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 $8.53.
Dividends
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 declaration and payment of dividends on the common stock is at the discretion of our board of directors and will 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 expansion of our business and do not anticipate paying dividends on our common stock in the foreseeable future.
Transfer Agent
The transfer agent and registrar for our Common Stock is Continental Stock Transfer & Trust, 1 State Street, 30th Floor, New York, NY 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 Company 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).
An interested shareholder is defined as a person who, together with affiliates and associates, beneficially owns more than 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.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the Common Stock was employed on a contingency basis, or had, or is to receive, in connection with 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, 20202022 and 2019,2021, and the related consolidated statements of operations, changes in stockholders’ deficit,equity, and cash flows for each of the two years in the period ended December 31, 20202022 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. The SEC maintains a web site at http://www.sec.gov that 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 Current | |
|
|
| • | The description of our Common Stock contained in Exhibit 4.4to 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., 6622 Southpoint Drive South,7660 Centurion Parkway, Suite 310,100, Jacksonville, Florida 32216,32256, telephone number (904) 652-1616.652-6616. 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 through, our website is not incorporated by reference in, and is not part of, this prospectus.
Audited Consolidated Financial Statements
| Description | Page | ||||
|
| ||||
Report of Independent Registered Public Accounting Firm | F-2 | ||||
Consolidated Balance Sheets as of December 31, | F-4 | ||||
Consolidated Statements of Operations for the Years Ended December 31, | F-6 | ||||
| 2021 | F-7 | ||||
Consolidated Statements of Cash Flows for the Years Ended December 31, | F-8 | ||||
| F-9 |
F-10
Unaudited Consolidated Financial Statements
| Description | Page | ||||
|
| ||||
Consolidated Balance Sheets as of | F-35 | ||||
| |||||
| |||||
| |||||
Condensed Notes to the Consolidated Financial Statements (Unaudited) |
|
![[duot_s1027.jpg]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1027.jpg)
Report of Independent Registered Public Accounting Firm
To the Stockholders 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, 20202022 and 2019,2021, 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, 20202022 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, 20202022 and 2019,2021, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2020,2022, in conformity with accounting principles generally accepted in the United States of America.
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.
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 AssociationPercentage of Certified Valuation Analysts • RegisteredCompletion 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 PCAOBrevenue earned and recognized, and (f) recomputed the contract asset or liability
Member CPAConnect with Affiliated Offices Worldwide • Member Center for Public Company Audit Firms
Going Concern
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 entityCompany to continue as a going concern for a reasonable period of time. time or whether such concerns are alleviated with management’s plans.
However, management believes that cash raises through an underwritten offering for $8.1 million in 2020 and the issuance of Series C Convertible Preferred Stock for $4.5 million in the 1st quarter of 2021, created a cash balance and positive working capital alleviates the substantial doubt related to going concern and the need for a going concern risk disclosure.
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, 20202022 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) Consideredconsidered the effect of such conclusion on the consolidated financial statement disclosures and our report of an independent registered public accounting firm. We agreed with management’s assessment that the going concern risk is alleviated and a liquidity footnote would be sufficient.disclosures.
Percentage of Completion Revenue Recognition & Related Contract Assets and Contract Liabilities
As described in footnote 1, “Revenue Recognition – Technology Systems” and footnote 9, “Contract Accounting” to the consolidated financial statements, the Company recognizes revenue over time using a cost-based input methodology in which significant judgment is required to estimated costs to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding amount of revenue to recognize. In addition, contract assets on uncompleted contracts represent costs and estimated earnings in excess of billings and/or cash received on uncompleted contracts accounted for under the percentage of completion contract method. Contract liabilities on uncompleted contracts represent billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under the percentage of completion contract method.
We identified this percentage of completion revenue recognition as a critical audit matter. Auditing management’s judgments regarding forecasts of total estimated costs to complete projects involves a high degree of subjectivity.
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 and other supporting contracts or information, (b) agreed cost details to supporting documents, (c) confirmed billings with customers and/or tracing cash receipts to bank statements, (d) computed the revenue earned and recognized, (e) computed the contract asset or liability and (f) performed ratio analysis and gross margin comparisons on a sample of technology systems revenues.
/s/ Salberg & Company, P.A.
SALBERG & COMPANY, P.A.
We have served as the Company’s auditor since 2013
Boca Raton, Florida
March 30, 202131, 2023
| F-3 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||||||||||
|
| December 31, |
| December 31, |
| 2022 | 2021 | |||||||||
|
| 2020 |
| 2019 |
| |||||||||||
ASSETS |
|
|
|
|
| |||||||||||
CURRENT ASSETS: |
|
|
|
|
| |||||||||||
Cash |
| $ | 3,969,100 |
| $ | 56,249 |
| $ | 1,121,092 | $ | 893,720 | |||||
Accounts receivable, net |
| 1,244,876 |
| 2,611,608 |
| 3,418,263 | 1,738,543 | |||||||||
Contract assets |
| 102,458 |
| 1,375,920 |
| 425,722 | 3,449 | |||||||||
| Inventory | 1,428,360 | 298,338 | ||||||||||||||
Prepaid expenses and other current assets |
|
| 486,626 |
|
|
| 716,598 |
| 441,320 | 354,613 | ||||||
|
|
|
|
|
| |||||||||||
Total Current Assets |
|
| 5,803,060 |
|
|
| 4,760,375 |
| 6,834,757 | 3,288,663 | ||||||
|
|
|
|
|
| |||||||||||
Property and equipment, net |
| 342,180 |
| 260,181 |
| 629,490 | 603,253 | |||||||||
Operating lease right of use asset |
| 196,144 |
| 430,146 |
| 4,689,931 | 4,925,765 | |||||||||
|
|
|
|
|
| |||||||||||
OTHER ASSETS: |
|
|
|
|
| |||||||||||
Software Development Costs, net |
| — |
| 20,000 |
| |||||||||||
| Security deposit | 600,000 | 600,000 | ||||||||||||||
| Software development costs, net | 265,208 | — | ||||||||||||||
Patents and trademarks, net |
|
| 64,415 |
|
|
| 61,598 |
| 69,733 | 66,482 | ||||||
Total Other Assets |
|
| 64,415 |
|
|
| 81,598 |
| ||||||||
|
|
|
|
|
| |||||||||||
TOTAL ASSETS |
| $ | 6,405,799 |
|
| $ | 5,532,300 |
| $ | 13,089,119 | $ | 9,484,163 | ||||
See accompanying notes to the consolidated financial statements.
| F-4 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
|
| December 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 599,317 |
|
| $ | 2,641,437 |
|
Accounts payable - related parties |
|
| 7,700 |
|
|
| 12,791 |
|
Notes payable - financing agreements |
|
| 42,942 |
|
|
| 42,299 |
|
Notes payable - related parties, net of discounts |
|
| — |
|
|
| 905,373 |
|
Line of credit |
|
| — |
|
|
| 27,615 |
|
Payroll taxes payable |
|
| 3,146 |
|
|
| 115,111 |
|
Accrued expenses |
|
| 1,038,092 |
|
|
| 393,272 |
|
Current portion-equipment financing agreements |
|
| 89,620 |
|
|
| 45,072 |
|
Current portion-operating lease obligations |
|
| 202,797 |
|
|
| 239,688 |
|
Current portion-SBA loan |
|
| 627,465 |
|
|
| — |
|
Contract liabilities |
|
| 709,553 |
|
|
| 8,661 |
|
Deferred revenue |
|
| 315,370 |
|
|
| 936,428 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
| 3,636,002 |
|
|
| 5,367,747 |
|
|
|
|
|
|
|
|
|
|
Equipment financing payable, less current portion |
|
| 103,184 |
|
|
| 89,026 |
|
Operating lease obligations, less current portion |
|
| — |
|
|
| 202,797 |
|
SBA loan, less current portion |
|
| 782,805 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
| 4,521,991 |
|
|
| 5,659,570 |
|
|
|
|
|
|
|
|
|
|
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 preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at December 31, 2020 and December 31, 2019, convertible into common stock at $6.30 per share |
|
| — |
|
|
| — |
|
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 1,705 and 1,705 issued and outstanding at December 31, 2020 and December 31, 2019, convertible into common stock at $7 per share |
|
| 1,705,000 |
|
|
| 1,705,000 |
|
Common stock: $0.001 par value; 500,000,000 shares authorized, 3,535,339 and 1,982,039 shares issued, 3,534,015 and 1,980,715 shares outstanding at December 31, 2020 and December 31, 2019, respectively |
|
| 3,536 |
|
|
| 1,982 |
|
Additional paid-in capital |
|
| 39,820,874 |
|
|
| 31,063,915 |
|
Total stock & paid-in-capital |
|
| 41,529,410 |
|
|
| 32,770,897 |
|
Accumulated deficit |
|
| (39,488,150 | ) |
|
| (32,740,715 | ) |
Sub-total |
|
| 2,041,260 |
|
|
| 30,182 |
|
Less: Treasury stock (1,324 shares of common stock at December 31, 2020 and December 31, 2019) |
|
| (157,452 | ) |
|
| (157,452 | ) |
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity (Deficit) |
|
| 1,883,808 |
|
|
| (127,270 | ) |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity (Deficit) |
| $ | 6,405,799 |
|
| $ | 5,532,300 |
|
| 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, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
|
|
|
|
|
| ||
REVENUES: |
|
|
|
|
|
| ||
Technology systems |
| $ | 4,956,130 |
|
| $ | 11,963,438 |
|
Technical support |
|
| 1,801,043 |
|
|
| 1,377,459 |
|
Consulting services |
|
| 273,604 |
|
|
| 300,418 |
|
AI technologies |
|
| 1,008,671 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
| 8,039,448 |
|
|
| 13,641,315 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
|
|
|
Technology systems |
|
| 3,665,493 |
|
|
| 6,510,658 |
|
Technical support |
|
| 1,109,741 |
|
|
| 528,966 |
|
Consulting services |
|
| 117,004 |
|
|
| 120,253 |
|
AI technologies |
|
| 360,817 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
| 5,253,055 |
|
|
| 7,159,877 |
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
| 2,786,393 |
|
|
| 6,481,438 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Sales & marketing |
|
| 717,809 |
|
|
| 950,962 |
|
Engineering |
|
| 1,358,925 |
|
|
| 1,254,235 |
|
Research and development |
|
| 1,022,188 |
|
|
| 1,479,334 |
|
Administration |
|
| 5,011,913 |
|
|
| 3,987,941 |
|
AI technologies |
|
| 1,309,986 |
|
|
| 1,215,488 |
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 9,420,821 |
|
|
| 8,887,960 |
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
| (6,634,428 | ) |
|
| (2,406,522 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
Interest Expense |
|
| (150,137 | ) |
|
| (69,322 | ) |
Other income, net |
|
| 37,130 |
|
|
| 4,962 |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
| (113,007 | ) |
|
| (64,360 | ) |
|
|
|
|
|
|
|
|
|
NET LOSS |
| $ | (6,747,435 | ) |
| $ | (2,470,882 | ) |
|
|
|
|
|
|
|
|
|
Basic & Diluted Net Loss Per Share |
| $ | (2.03 | ) |
| $ | (1.39 | ) |
|
|
|
|
|
|
|
|
|
Weighted Average Shares-Basic & Diluted |
|
| 3,320,193 |
|
|
| 1,781,704 |
|
| 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 | $ | ) | $ | ) | ||||
| Net Loss Per Share - Diluted | $ | ) | $ | ) | ||||
| Weighted Average Shares - Basic | ||||||||
| Weighted Average Shares - Diluted | ||||||||
See accompanying notes to the consolidated financial statements.
| F-6 |
DUOS TECHNOLOGIES GROUP, INC.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended DecemberDECEMBER 31, 2020 and 20192022 AND 2021
|
| Preferred Stock |
|
| Common Stock |
|
| Additional |
|
| Accumulated |
|
| Treasury |
|
|
|
| ||||||||||||||
|
| # of Shares |
|
| Amount |
|
| # of Shares |
|
| Amount |
|
| Paid-in-Capital |
|
| Deficit |
|
| Stock |
|
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance December 31, 2019 |
|
| 1,705 |
|
| $ | 1,705,000 |
|
|
| 1,982,039 |
|
| $ | 1,982 |
|
| $ | 31,063,915 |
|
| $ | (32,740,715 | ) |
| $ | (157,452 | ) |
| $ | (127,270 | ) |
Common stock issued for cash and warrants |
|
| — |
|
|
| — |
|
|
| 1,542,188 |
|
|
| 1,542 |
|
|
| 9,251,586 |
|
|
| — |
|
|
| — |
|
|
| 9,253,128 |
|
Modification of employee stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 102,800 |
|
|
| — |
|
|
| — |
|
|
| 102,800 |
|
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 351,970 |
|
|
| — |
|
|
| — |
|
|
| 351,970 |
|
Stock issuance cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,001,885 | ) |
|
| — |
|
|
| — |
|
|
| (1,001,885 | ) |
Common stock issued for services |
|
| — |
|
|
| — |
|
|
| 11,112 |
|
|
| 12 |
|
|
| 52,488 |
|
|
| — |
|
|
| — |
|
|
| 52,500 |
|
Net loss for the year ended December 31, 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,747,435 | ) |
|
| — |
|
|
| (6,747,435 | ) |
Balance December 31, 2020 |
|
| 1,705 |
|
| $ | 1,705,000 |
|
|
| 3,535,339 |
|
| $ | 3,536 |
|
| $ | 39,820,874 |
|
| $ | (39,488,150 | ) |
| $ | (157,452 | ) |
| $ | 1,883,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2018 |
|
| 2,830 |
|
| $ | 2,830,000 |
|
|
| 1,505,883 |
|
| $ | 1,505 |
|
| $ | 27,416,802 |
|
| $ | (30,269,833 | ) |
| $ | (149,459 | ) |
| $ | (170,985 | ) |
Common stock issued for warrants exercised |
|
| — |
|
|
| — |
|
|
| 301,042 |
|
|
| 302 |
|
|
| 2,317,718 |
|
|
| — |
|
|
| — |
|
|
| 2,318,020 |
|
Common stock issued for cash less warrants exercised |
|
| — |
|
|
| — |
|
|
| 9,878 |
|
|
| 10 |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 44,874 |
|
|
| — |
|
|
| — |
|
|
| 44,874 |
|
Stock repurchase |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,993 | ) |
|
| (7,993 | ) |
Stock issuance cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,000 | ) |
|
| — |
|
|
| — |
|
|
| (20,000 | ) |
Series B convertible preferred converted to common stock |
|
| (1,125 | ) |
|
| (1,125,000 | ) |
|
| 160,713 |
|
|
| 161 |
|
|
| 1,124,839 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Common stock issued for services |
|
| — |
|
|
| — |
|
|
| 4,523 |
|
|
| 4 |
|
|
| 32,913 |
|
|
| — |
|
|
| — |
|
|
| 32,917 |
|
Debt discount from warrants issued with promissory note |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 146,779 |
|
|
| — |
|
|
| — |
|
|
| 146,779 |
|
Net loss for the year ended December 31, 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,470,882 | ) |
|
| — |
|
|
| (2,470,882 | ) |
Balance December 31, 2019 |
|
| 1,705 |
|
| $ | 1,705,000 |
|
|
| 1,982,039 |
|
| $ | 1,982 |
|
| $ | 31,063,915 |
|
| $ | (32,740,715 | ) |
| $ | (157,452 | ) |
| $ | (127,270 | ) |
| 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, | ||||||||||||
|
| 2020 |
| 2019 |
| 2022 | 2021 | |||||||||
|
|
|
|
|
| |||||||||||
Cash from operating activities: |
|
|
|
|
| |||||||||||
Net loss |
| $ | (6,747,435 | ) |
| $ | (2,470,882 | ) | $ | (6,864,783 | ) | $ | (6,008,901 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
| |||||||||||
Bad debt expense (recovery) |
| (3,217 | ) |
| 220,405 |
| ||||||||||
| Bad debt expense | — | 76,046 | ||||||||||||||
Depreciation and amortization |
| 222,514 |
| 184,620 |
| 350,192 | 275,346 | |||||||||
| Loss on disposal of assets | — | 14,454 | ||||||||||||||
Stock based compensation |
| 351,970 |
| 44,874 |
| 819,191 | 262,411 | |||||||||
Modification of employee stock options |
| 102,800 |
| — |
| |||||||||||
Interest expense related to debt discounts |
| 94,627 |
| 64,652 |
| |||||||||||
| 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 |
| 234,001 |
| 214,100 |
| 235,834 | 250,482 | |||||||||
Changes in assets and liabilities: |
|
|
|
|
| |||||||||||
Accounts receivable |
| 1,369,949 |
| (1,293,219 | ) | (1,679,720 | ) | (611,023 | ) | |||||||
Contract assets |
| 1,273,462 |
| (167,316 | ) | (422,273 | ) | 99,009 | ||||||||
| Inventory | (1,130,022 | ) | (185,915 | ) | ||||||||||||
Prepaid expenses and other current assets |
| 491,598 |
| (174,202 | ) | 266,539 | 423,905 | |||||||||
| Security deposit | — | (600,000 | ) | |||||||||||||
Accounts payable |
| (2,042,118 | ) |
| 1,224,720 |
| 1,245,890 | 445,184 | ||||||||
Related payable-related party |
| (5,091 | ) |
| (682 | ) | ||||||||||
| Accounts payable-related party | — | (7,700 | ) | |||||||||||||
Payroll taxes payable |
| (111,965 | ) |
| (202,462 | ) | — | (3,146 | ) | |||||||
Accrued expenses |
| 697,320 |
| 203,861 |
| (165,069 | ) | (408,692 | ) | |||||||
Operating lease obligation |
| (239,688 | ) |
| (201,761 | ) | 184,728 | (127,816 | ) | |||||||
Contract liabilities |
| 700,892 |
| (2,240,168 | ) | (871,314 | ) | 804,388 | ||||||||
Deferred revenue |
|
| (621,058 | ) |
|
| 573,900 |
| ||||||||
|
|
|
|
|
| |||||||||||
Net cash used in operating activities |
| (4,231,439 | ) |
| (4,019,560 | ) | (7,873,307 | ) | (6,579,378 | ) | ||||||
|
|
|
|
|
| |||||||||||
Cash flows from investing activities: |
|
|
|
|
| |||||||||||
Purchase of patents/trademarks |
| (8,185 | ) |
| (13,095 | ) | (18,190 | ) | (7,435 | ) | ||||||
| Purchase of software development | (281,783 | ) | — | |||||||||||||
Purchase of fixed assets |
|
| (279,146 | ) |
|
| (206,480 | ) | (344,915 | ) | (545,505 | ) | ||||
|
|
|
|
|
| |||||||||||
Net cash used in investing activities |
| (287,331 | ) |
| (219,575 | ) | (644,888 | ) | (552,940 | ) | ||||||
|
|
|
|
|
| |||||||||||
Cash flows from financing activities: |
|
|
|
|
| |||||||||||
Repurchase of common stock |
| — |
| (7,993 | ) | |||||||||||
Repayments of line of credit |
| (27,615 | ) |
| (3,586 | ) | ||||||||||
Repayments of related party notes |
| — |
| (80,000 | ) | |||||||||||
Stock issuance costs |
| (1,001,885 | ) |
| (20,000 | ) | ||||||||||
Repayments of notes payable |
| (1,000,000 | ) |
| (262,500 | ) | ||||||||||
Repayments of insurance and equipment financing |
| (260,983 | ) |
| (266,134 | ) | (331,175 | ) | (353,444 | ) | ||||||
Repayment of finance lease |
| (62,931 | ) |
| (24,652 | ) | (80,335 | ) | (89,618 | ) | ||||||
Proceeds from SBA loan |
| 1,410,270 |
| — |
| |||||||||||
Proceeds from notes payable-related parties |
| — |
| 1,080,000 |
| |||||||||||
Proceeds from notes payable |
| — |
| 250,000 |
| |||||||||||
Proceeds from equipment leasing |
| 121,637 |
| 102,928 |
| |||||||||||
Proceeds from common stock issued |
| 9,253,128 |
| — |
| 8,801,003 | — | |||||||||
Proceeds from warrants exercised |
|
| — |
|
|
| 2,318,020 |
| ||||||||
|
|
|
|
|
| |||||||||||
| Issuance cost | (942,926 | ) | — | |||||||||||||
| Proceeds from preferred stock issued | 1,299,000 | 4,500,000 | ||||||||||||||
Net cash provided by financing activities |
| 8,431,621 |
| 3,086,083 |
| 8,745,567 | 4,056,938 | |||||||||
|
|
|
|
|
| |||||||||||
Net increase (decrease) in cash |
| 3,912,851 |
| (1,153,052 | ) | 227,372 | (3,075,380 | ) | ||||||||
Cash, beginning of period |
|
| 56,249 |
|
|
| 1,209,301 |
| ||||||||
Cash, end of period |
| $ | 3,969,100 |
|
| $ | 56,249 |
| ||||||||
| Cash, beginning of year | 893,720 | 3,969,100 | ||||||||||||||
| Cash, end of year | $ | 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 | ||||||||||||
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, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest paid |
| $ | 33,698 |
|
| $ | 6,320 |
|
|
|
|
|
|
|
|
|
|
Supplemental Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Common stock issued for accrued BOD fees |
| $ | 52,500 |
|
| $ | 32,917 |
|
Lease right of use asset and liability |
| $ | — |
|
| $ | 644,245 |
|
Note issued for financing of insurance premiums |
| $ | 261,626 |
|
| $ | 260,103 |
|
Debt discount on Notes issued |
| $ | — |
|
| $ | 12,500 |
|
Note issued for equipment financing lease |
| $ | — |
|
| $ | 55,822 |
|
Relative fair value of warrant recorded as debt discount |
| $ | — |
|
| $ | 146,779 |
|
See accompanying notes to the consolidated financial statements.
F-9
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20202022 AND 20192021
NOTE 1 – NATURE OF OPERATIONS 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, Inc. (“TrueVue360”), collectively (collectively the (“Company”“Company”), develops and deploys cutting-edge technologiesvision 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 remote railcarautomated inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies, illumination and other sensors, scans each passing railcar to create an extremely high-resolution image set from a variety of angles including the undercarriage. These images are then processed through various methods of artificial intelligence (“AI”) algorithms to identify specific defects and/or areas of interest on each railcar. This is all accomplished within secondsminutes of a railcar passing through our portal. This solution has the potential to transform the railroad industry immediatelyby increasing safety, improving efficiency and reducing costs. The Company has successfully deployed this system with several Class 1 railroad customers and anticipates an increased demand in the future. Government agencies can conduct digital inspections combined with the incorporated AI to improve rail traffic flow across borders which also directly benefits the Class 1 railroads through increasing their velocity.
The Company has also developed the Automated Logistics Information System (ALIS) which automates and reduces/removes personnel from gatehouses where trucks enter and exit large logistics and intermodal facilities. This solution also incorporates sensors and data points as necessary for each operation and directly interconnects with backend logistics databases and processes to streamline operations and significantly improve operations and security and importantly dramatically improves the vehicle throughput on each lane on which the technology is deployed.
The Company has built a portfolio of IP and patented solutions that creates “actionable intelligence” using two core native platforms called centraco®Centraco® and praesidium®Praesidium™. All solutions provided include a variant of both applications. Centraco is designed primarily as the user interface to all our systems as well as the backend connection to third-party applications and databases through both Application Programming Interfaces (APIs) and Software Development Kits (SDKs). This interface is browser based and hosted within each one of our systems and solutions. It is typically also customized for each unique customer and application. Praesidium typically resides as middleware in our systems and manages the various image capture devices and some sensors for input into the Centraco software.
The Company also developed a proprietary Artificial Intelligence (AI) software platform, truevue360™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.
TheThrough September 30, 2021, the Company also providesprovided professional and consulting services for large data centers and has been developinghad developed a system for the automation of asset information marketed as dcVue™DcVue™. The Company is now deployinghad deployed its dcVue software.DcVue software at one beta site. This software iswas used by Duos’ consulting auditing teams. dcVue isDcVue was based upon the Company’s OSPI patent which was awarded in 2010. The Company offers dcVueoffered DcVue available for license to our customers as a licensed 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 CAPEXone-time equipment sales and OPEXcapital 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 finally 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 |
Basis of PresentationReclassifications
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted inCompany reclassified $850,999 of Series B Convertible Preferred Stock and $2,499,998 of Series C Convertible Preferred Stock as previously presented on the United StatesDecember 31, 2021 Consolidated Balance Sheet to additional paid-in capital to conform to the presentation at December 31, 2022 of America (“GAAP”).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.
F-10
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Reverse Stock Split
All share and per share amounts have been presented to give retroactive effect to a 1-for-14 reverse-stock split that occurred in January 2020.
Reclassifications
The Company reclassified certain operating expenses for the year ended December 31, 20192021 to conform to 20202022 classification. There was no net effect on the total operating expenses of such reclassification.
The following table reflects the reclassification adjustment effect for the year ended December 31, 2019:2021:
|
| Before Reclassification |
|
|
|
| After Reclassification |
| ||
|
| For the Year Ended |
|
|
|
| For the Year Ended |
| ||
|
| December 31, |
|
|
|
| December 31, |
| ||
|
| 2019 |
|
|
|
| 2019 |
| ||
OPERATING EXPENSES: |
|
|
|
|
|
|
|
| ||
Selling and marketing expenses |
| $ | 421,535 |
|
| Sales and marketing |
| $ | 950,962 |
|
Salaries, wages and contract labor |
|
| 5,570,140 |
|
| Engineering |
|
| 1,254,235 |
|
Research and development |
|
| 431,425 |
|
| Research and development |
|
| 1,479,334 |
|
Professional fees |
|
| 252,825 |
|
| AI technologies |
|
| 1,215,488 |
|
General and administrative expenses |
|
| 2,212,035 |
|
| Administration |
|
| 3,987,941 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
| $ | 8,887,960 |
|
|
|
| $ | 8,887,960 |
|
| 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 | ) |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Duos Technologies, Inc. and TrueVue360, Inc. All inter-company transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of inventory, estimates of the valuation of right of use assets and corresponding lease liabilities, valuation of 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 |
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of December 31, 2020, balance2022, the Company had balances in onea financial institution which combined exceeded federally insured limits by approximately $3,490,000.$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 cash flows.
F-11
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Significant Customers and Concentration of Credit Risk
The Company had certain customers whose revenue individually represented 10% or more of the 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, 2020 two2022, four customers accounted for 45%42%,18%, 14% and 23%14% of revenues. For the year ended December 31, 2019, three customers2021, a single customer accounted for 48%, 13% and 10%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 payable prior to delivery. The balances of the contracts are for service and maintenance which is paid annually in advance with revenues recorded ratably over the contract period. Each of the customers referenced has the following termination provisions:
·
For Customer 1, termination can be made, prior to delivery of products or services, in the case where either party breach any of its obligations under the agreement with the Company. The other party may terminate the agreement effective fifteen (15) Business Days following notice from the non-defaulting party, if the non-performance has not been cured within such period, and without prejudice to damages that could be claimed by the non-defaulting party. Either party may terminate the agreement if the other party becomes unable to pay its debts in the ordinary course of business; goes into liquidation (other than for the purpose of a genuine amalgamation or restructuring); has a receiver appointed over all or part of its assets; enters into a composition or voluntary arrangement with its creditors; or any similar event occurs in any jurisdiction, all to the extent permitted by law.
·
For Customer 2, prior to delivery of products or services, either party may terminate the agreement with the Company upon the other party’s material breach of a representation, warranty, term, covenant or undertaking in the agreement if, within thirty (30) days following the delivery of a written notice to the defaulting party setting forth in reasonable detail the basis of such default, the defaulting party has not rectified such default to the reasonable satisfaction of the non-defaulting party. Failure to perform due to a force majeure condition shall not be considered a material default under the agreement.
At December 31, 2020, two2022, four customers accounted for 56%34%, 31%, 19% and 30%10% of accounts receivable. At December 31, 2019,2021, two customers accounted for 68%81% and 10%10% of accounts receivable. Much of the credit risk is mitigated since all of the customers listed here are Class 1 railroads with a history of timely payments to us.
Geographic Concentration
Approximately 51%41% and 59%86% of revenue in 20202022 and 2019,2021, 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 |
Significant Vendors and Concentration
In some instances, the Company relies on a limited pool of Credit Riskvendors 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.
At December 31, 2020, one vendor accounted for 36% of accounts payable. At December 31, 2019, three vendors accounted for 15%, 13% and 12% of accounts payable.
One supplier accounted for approximately 11% of total purchases for the year ended December 31, 2020. One supplier accounted for approximately 28% of total purchases for the year ended December 31, 2019.
Fair Value of Financial Instruments and Fair Value Measurements
The Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
F-12
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
These inputs are prioritized below:
Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities
|
Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data
|
Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting 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 estimated fair value of certain financial instruments, including accounts receivable, prepaid expense,expenses, accounts payable, accrued expenses and notes payable are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on accounts, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.
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 are stated at cost, less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated economic life of the property and equipment (three 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.
Patents and Trademarks
Patents and trademarks which are stated at amortized cost, relate to the development of video surveillance security system technology and are being amortized over 17 years.
F-13
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Long-Lived Assets
The Company evaluates the recoverability of its property, equipment, and other long-lived assets in accordance with FASB ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets”, which requires recognition of impairment of long-lived assets in the event the net book 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.
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 to36 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, 20202022 and 2019,2021, the warranty costs have been de-minimis, therefore no accrual of warranty liability has been made.
Loan Costs
Loan costs paid to lenders, or third parties are recorded as debt discounts to the related loans and amortized to interest expense over the loan term.
Sales Returns
Our systems are sold as integrated systems and there are no sales returns allowed.
Revenue Recognition
Technology Systems
As of January 1, 2018, 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, 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.
| 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 the contract with the customer;(1) Technology Systems
2.(2) AI Technologies
Identify the performance obligations in the contract;(3) Technical Support
3.(4) Consulting Services
Determine the transaction price;
4.Technology Systems
Allocate the transaction price to separate performance obligations; and
5.
Recognize revenue when (or as) each performance obligation is satisfied.
For revenues related to technology systems, the Company recognizes revenue over time using a cost-based input methodology in which significant judgment is required to estimatedestimate costs to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding amount of revenue to recognize.
F-14
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Accordingly, the Company now bases its revenue recognition on ASC 606-10-25-27, where control of a good or service transfers over time if the 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. (see Note 9)
Under this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct labor, subcontract labor and other allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.
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.
Consulting Services
The Company recognizes revenue from its IT asset management business in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605-25 which addresses revenue recognition for the software industry. The general criteria for revenue recognition under ASC 985-605 for our Company, which sells software licenses, which do not require any significant modification or customization, is that revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.
The 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
F-15
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
(4)
Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term.
AI TechnologiesMultiple Performance Obligations and Allocation of Transaction Price
Arrangements with customers may involve multiple performance obligations including project revenue and maintenance services in our Technology Systems business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business, multiple performance obligations may include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each performance obligation is accounted for separately when each has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each performance obligations 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.
Advertising
The Company expenses the cost of advertising. During the years ended December 31, 2022 and 2021, there were no advertising costs.
| F-15 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Stock 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 including stock options, restricted stock units, and 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 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, 2022, the Company does not believe that it has beguntaken 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 deriveexamination by the IRS and state taxing authorities, generally for three years after they were filed. Tax years 2019, 2020 and 2021 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, 2022, there was an aggregate of 147,591 outstanding warrants to purchase shares of common stock. At December 31, 2022, there was an aggregate of employee stock options to purchase shares of common stock. At December 31, 2022, common shares were issuable upon conversion of Series 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.
At December 31, 2021, 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 |
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018.
The Company adopted this guidance effective January 1, 2019, 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 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.
The adoption 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 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. During 2022, the Company did not issue any equity classified written call options or warrant during the year and does not foresee any issuances in the near future.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): 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 currently evaluating the new guidance and has 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 Vintage Disclosures. The guidance was issued as improvements to ASU No. 2016-13 described above. The vintage disclosure changes require an entity to disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should be applied prospectively. Early adoption of the amendments is permitted, including adoption in an interim period. The amendments will impact our disclosures but will not otherwise impact the consolidated financial 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 – LIQUIDITY
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $6,864,783 for the year ended December 31, 2022. During the same period, cash used in operating activities was $7,873,307. The working capital surplus and accumulated deficit as of December 31, 2022, were $2,339,052 and $52,361,834, 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 placement which were completed during the first 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 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 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-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, 2022 and 2021:
| Schedule of Accounts Receivable | ||||||||
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts receivable | $ | 3,418,263 | $ | 1,738,543 | ||||
| Allowance for doubtful accounts | — | — | ||||||
| Accounts Receivable, Net | $ | 3,418,263 | $ | 1,738,543 | ||||
The Company’s bad debt expense was zero in 2022 and there was bad debt expense related to accounts receivable of $76,046 in 2021.
NOTE 4 – PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows at December 31, 2022 and 2021:
| Schedule of major classes of property and equipment | ||||||||
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Furniture, fixtures and equipment | $ | 1,606,451 | $ | 1,264,001 | ||||
| Less: Accumulated depreciation | (976,961 | ) | (660,748 | ) | ||||
| Furniture, fixtures and equipment, Net | $ | 629,490 | $ | 603,253 | ||||
Depreciation expense in 2022 and 2021 was $319,928 and $269,978, respectively.
NOTE 5 – PATENTS AND TRADEMARKS
| Schedule of patents and trademarks | ||||||||
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Patents and trademarks | $ | 326,145 | $ | 309,205 | ||||
| Less: Accumulated amortization | (256,412 | ) | (242,723 | ) | ||||
| Patents and trademarks, Net | $ | 69,733 | $ | 66,482 | ||||
Amortization expense in 2022 and 2021 was $13,688 and $5,368, respectively.
NOTE 6 – SOFTWARE DEVELOPMENT COSTS
In 2018, the Company capitalized $60,000, relating to the development of new software products. These software products were developed by a third party and had passed the preliminary project stage prior to capitalization. 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, | |||||||
| 2022 | 2021 | |||||||
| Software development costs | $ | 341,784 | $ | 60,000 | ||||
| Less: Accumulated amortization | (76,576 | ) | (60,000 | ) | ||||
| Software Development Costs, net | $ | 265,208 | $ | — | ||||
Amortization of software development costs in 2022 and 2021 was $16,576 and zero, 0 respectively.
| 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:
| Schedule of Notes Payable - Financing Agreements | ||||||||||||||||
| December 31, 2022 | December 31, 2021 | |||||||||||||||
| Notes Payable | Principal | Interest | Principal | Interest | ||||||||||||
| Third Party - Insurance Note 1 | $ | — | — | $ | 22,266 | 7.75 | % | |||||||||
| Third Party - Insurance Note 2 | 17,753 | 6.24 | % | 12,667 | 6.24 | % | ||||||||||
| Third Party - Insurance Note 3 | 16,094 | — | 17,570 | — | ||||||||||||
| Third Party - Insurance Note 4 | 40,728 | — | — | — | ||||||||||||
| Total | $ | 74,575 | $ | 52,503 | ||||||||||||
The Company entered into an agreement on December 23, 2021 with its insurance provider by issuing a $22,266 note payable (Insurance Note 1) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 7.75% payable in monthly installments of principal and interest totaling $2,104 through November 23, 2022. The balance of Insurance Note 1 as of December 31, 2022 and December 31, 2021 was zero and $22,266, respectively.
The Company entered into an agreement on April 15, 2021 with its insurance provider by issuing a 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 6.24% and payable in 10 monthly installments of principal and interest totaling $6,383. The policy renewed on April 15, 2022 and, in connection therewith, the Company issued a new note payable to the insurer on April 15, 2022 in the amount $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 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 $4,963 through August 1, 2022. The Company entered into an additional agreement on May 22, 2020 with the same equipment financing company by issuing a $121,637 secured note, with an annual interest rate of 9.90% and payable in monthly installments of principal and interest totaling $3,919 through June 1, 2023. At December 31, 2022 and December 31, 2021, the aggregate balance of these notes was $22,851 and $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 – 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 Loan 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 maturity with no prepayment penalties. The Company applied for the PPP loan forgiveness and was granted forgiveness on February 1, 2021. The balance of the loan forgiveness associated with PPP was recognized in the Income Statement in “Other Income, net” during 2021. At December 31, 2022 and December 31, 2021, the loan balance was zero 0 and zero, 0 respectively.
NOTE 8 – REVENUES AND CONTRACT ACCOUNTING
The Company generates revenue from applications that incorporate artificial intelligence (AI)four sources: (1) Technology Systems; (2) AI Technology which is included in the formconsolidated statements of predetermined algorithmsoperations 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 costs incurred to provide important operating information tototal estimated costs.
At December 31, 2022 and 2021, contract assets on uncompleted contracts consisted of the users of our systems. The revenue generated from these applications of AI consists of an annual application maintenance fee which will befollowing:
| Schedule Of Contract Assets On Uncompleted Contracts | ||||||||
| 2022 | 2021 | |||||||
| Cumulative revenues recognized | $ | 5,934,205 | $ | 5,266,930 | ||||
| Less: Billings or cash received | (5,508,483 | ) | (5,263,481 | ) | ||||
| Contract Assets | $ | 425,722 | $ | 3,449 | ||||
Contract Liabilities
Contract liabilities on uncompleted contracts represent billings and/or cash received that exceed cumulative revenues recognized ratably overon uncompleted contracts accounted for under the year, plus fees for the design, development, testingcost-to-cost input method.
Contract liabilities on services and incorporation of new algorithms into the system which will be recognized upon completion of each deliverable.
Deferred Revenue
Deferredconsulting revenues represent billings and/or cash received in excess of revenue recognizablerecognized on service agreements that are not accounted for under the percentage of completioncost-to-cost input method.
The Company expects to recognize all contract 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, 20202022 and 2019,2021, contract liabilities on uncompleted contracts consisted of the balance of deferred revenue was $315,370 and $936,428, respectively. The amounts will be recorded to revenue over the next 12 months.following:
| 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:Qualitative:
1.
We have four distinct revenue sources:
a.
Turnkey, Technology Systems (Turnkey, engineered projects;projects);
b.
Associated AI Technology (Associated maintenance and support services;services);
c.
Licensing Technical Support (Licensing and professional services related to auditing of data center assets;assets); and
d.
Predetermined Consulting Services (Predetermined algorithms to provide important operating information to the users of our systems.systems).
2.
We currently operate in North America including the United States,USA, Mexico and Canada.
3.
Our customers include rail transportation, commercial, petrochemical, 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 to three monthsquarters in length; and
b.
Maintenance and support contracts ranging from one to five years in length.
5.
Our goods and services are transferred over time.
F-16
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Quantitative:
For the Year Ended December 31, 20202022
| Schedule of Disaggregation of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segments |
| Rail |
| Commercial |
| Petrochemical |
| Government |
| Banking |
| IT |
| Artificial |
| Total |
| Rail | Commercial | Petrochemical | Government | Banking/Other | IT Suppliers | Artificial Intelligence | Total | |||||||||||||||||||||||||||||||||||||||
Primary Geographical Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
North America |
| $ | 5,558,405 |
|
| $ | 298,705 |
|
| $ | 23,951 |
|
| $ | 687,293 |
|
| $ | 188,819 |
|
| $ | 273,604 |
|
| $ | 1,008,671 |
|
| $ | 8,039,448 |
| $ | 13,710,777 | $ | 115,443 | $ | — | $ | 237,414 | $ | — | $ | — | $ | 948,732 | $ | 15,012,366 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Major Goods and Service Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||
Turnkey Projects |
| $ | 4,131,155 |
| $ | 59,616 |
| $ | 33,363 |
| $ | 599,481 |
| $ | 132,515 |
| $ | — |
|
| $ | — |
| $ | 4,956,130 |
| $ | 10,789,693 | $ | 9,297 | $ | — | $ | 156,530 | $ | — | $ | — | $ | 234,772 | $ | 11,190,292 | ||||||||||||||||||||||
Technical Support |
|
| 1,427,250 |
|
| 239,089 |
|
| (9,412 | ) |
|
| 87,812 |
|
| 56,304 |
|
| — |
|
| — |
|
| 1,801,043 |
| ||||||||||||||||||||||||||||||||||||||
| Maintenance & Support | 2,921,084 | 106,146 | — | 80,884 | — | — | — | 3,108,114 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Data Center Auditing Services |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 266,449 |
|
| — |
|
| 266,449 |
| — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Software License |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 7,155 |
|
| — |
|
| 7,155 |
| — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Algorithms |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,008,671 |
|
|
| 1.008,671 |
| — | — | — | — | — | — | 713,960 | 713,960 | ||||||||||||||||||||||||
|
| $ | 5,558,405 |
|
| $ | 298,705 |
|
| $ | 23,951 |
|
| $ | 687,293 |
|
| $ | 188,819 |
|
| $ | 273,604 |
|
| $ | 1,008,671 |
|
| $ | 8,039,448 |
| $ | 13,710,777 | $ | 115,443 | $ | — | $ | 237,414 | $ | — | $ | — | $ | 948,732 | $ | 15,012,366 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||
Timing of Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||
Goods transferred over time |
| $ | 4,131,155 |
| $ | 59,616 |
| $ | 33,363 |
| $ | 599,481 |
| $ | 132,515 |
| $ | 273,604 |
|
| $ | 1,008,671 |
| $ | 6,238,405 |
| $ | 10,789,693 | $ | 9,297 | $ | — | $ | 156,530 | $ | — | $ | — | $ | 234,772 | $ | 11,190,292 | ||||||||||||||||||||||
Services transferred over time |
|
| 1,427,250 |
|
|
| 239,089 |
|
|
| (9,412 | ) |
|
| 87,812 |
|
|
| 56,304 |
|
| — |
|
|
| — |
|
|
| 1,801,043 |
| 2,921,084 | 106,146 | — | 80,884 | — | — | 713,960 | 3,822,074 | |||||||||||||||||||||||||
|
| $ | 5,558,405 |
|
| $ | 298,705 |
|
| $ | 23,951 |
|
| $ | 687,293 |
|
| $ | 188,819 |
|
| $ | 273,604 |
|
| $ | 1,008,671 |
|
| $ | 8,039,448 |
| $ | 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:
F-17
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
For the Year Ended December 31, 20192021
Segments |
| Rail |
|
| Commercial |
| Petrochemical |
| Government |
| Banking |
| IT Suppliers |
| Total |
| Rail | Commercial | Petrochemical | Government | Banking | IT Suppliers | Artificial Intelligence | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Primary Geographical Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
North America |
| $ | 11,201,794 |
|
| $ | 465,782 |
|
| $ | 99,841 |
|
| $ | 201,659 |
|
| $ | 1,371,821 |
|
| $ | 300,418 |
|
| $ | 13,641,315 |
| $ | 6,883,670 | $ | 213,517 | $ | (867 | ) | $ | 314,030 | $ | 23,340 | $ | 134,717 | $ | 691,510 | $ | 8,259,917 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Major Goods and Service Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Turnkey Projects |
| $ | 10,020,318 |
|
| $ | 422,230 |
|
| $ | 70,545 |
| $ | 88,723 |
| $ | 1,361,622 |
| $ | — |
|
| $ | 11,963,438 |
| $ | 5,255,491 | $ | 27,831 | $ | — | $ | 233,145 | $ | 1,537 | $ | — | $ | — | $ | 5,518,004 | |||||||||||||||||||||||||||||||||||||||
Maintenance & Support |
|
| 1,181,476 |
|
|
| 43,552 |
|
|
| 29,296 |
|
| 112,936 |
|
| 10,199 |
|
| — |
|
| 1,377,459 |
| 1,628,179 | 185,686 | (867 | ) | 80,885 | 21,803 | — | 341,915 | 2,257,601 | |||||||||||||||||||||||||||||||||||||||||||||||
Data Center Auditing Services |
|
| — |
|
|
| — |
|
|
| — |
|
| — |
|
|
| — |
|
|
| 246,658 |
|
| 246,658 |
| — | — | — | — | — | 131,537 | — | 131,537 | ||||||||||||||||||||||||||||||||||||||||||||||
Software License |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 53,760 |
|
|
| 53,760 |
| — | — | — | — | — | 3,180 | — | 3,180 | ||||||||||||||||||||||||||||||||||||||||||||
| Algorithms | — | — | — | — | — | — | 349,595 | 349,595 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| $ | 11,201,794 |
|
| $ | 465,782 |
|
| $ | 99,841 |
|
| $ | 201,659 |
|
| $ | 1,371,821 |
|
| $ | 300,418 |
|
| $ | 13,641,315 |
| $ | 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 |
| $ | 10,020,318 |
|
| $ | 422,230 |
|
| $ | 70,545 |
| $ | 88,723 |
| $ | 1,361,622 |
| $ | 300,418 |
| $ | 12,263,856 |
| $ | 5,255,491 | $ | 27,831 | $ | — | $ | 233,145 | $ | 1,537 | $ | 131,537 | $ | 349,595 | $ | 5,999,136 | ||||||||||||||||||||||||||||||||||||||||
Services transferred over time |
|
| 1,181,476 |
|
|
| 43,552 |
|
|
| 29,296 |
|
|
| 112,936 |
|
|
| 10,199 |
|
| — |
|
|
| 1,377,459 |
| 1,628,179 | 185,686 | (867 | ) | 80,885 | 21,803 | 3,180 | 341,915 | 2,260,781 | ||||||||||||||||||||||||||||||||||||||||||||
|
| $ | 11,201,794 |
|
| $ | 465,782 |
|
| $ | 99,841 |
|
| $ | 201,659 |
|
| $ | 1,371,821 |
|
| $ | 300,418 |
|
| $ | 13,641,315 |
| $ | 6,883,670 | $ | 213,517 | $ | (867 | ) | $ | 314,030 | $ | 23,340 | $ | 134,717 | $ | 691,510 | $ | 8,259,917 | |||||||||||||||||||||||||||||||||||
AdvertisingSegment Information
The Company expenses the cost of advertising. During the years ended December 31, 2020 and 2019, there were no advertising costs.
Stock Based Compensation
The Company accounts for employee stock-based compensationoperates in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for employee stock options using the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
Income Taxes
The Company accounts for income taxes in accordance with the Financial Accounting Standards Board FASB Accounting Standards Codification (“ASC”) 740, Income Taxes, which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
F-18
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The Company evaluates all significant tax positions as required by ASC 740. As of December 31, 2020, the Company does not believe that it has taken any positions that would require the recording of any additional tax liability nor does it believe that there are any unrealized tax benefits that would either increase or decrease within the next year.
Any penalties and interest assessed by income taxing authorities are included in operating expenses.
The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed. Tax years 2017, 2018 and 2019 remain open for potential audit.
Earnings (Loss) Per Share
Basic earnings per share (EPS) are computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options, stock warrants, convertible debt instruments, convertible preferred stock or other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. At December 31, 2020, there was an aggregate of 1,587,553 outstanding warrants to purchase shares of common stock. At December 31, 2020, there was an aggregate of 451,898 employee stock options to purchase shares of common stock. Also, at December 31, 2020, 243,571 common shares were issuable upon conversion of Series B Convertible Preferred Stock, all of which were excluded from the computation of dilutive earnings per share because their inclusion would have been anti-dilutive.
Leasesone reportable segment.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this guidance effective January 1, 2019.
On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases, and (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The 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. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.
Operating lease right of use assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
Recent Accounting Pronouncements
From time to time, the FASB or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards Update (“ASU”).
F-19
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
In August 2020, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible instruments and contracts in an entity’s own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity’s own equity. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. We plan to adopt this pronouncement for our fiscal year beginning January 1, 2022, and we do not expect it to have a material effect on our consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
NOTE 2 – LIQUIDITY
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $6,747,435 for the year ended December 31, 2020. During the same period, cash used in operating activities was $4,231,439. The working capital surplus and accumulated deficit as of December 31, 2020 were $2,167,058 and $39,488,150, respectively. In previous financial reports, the Company had raised substantial doubt about continuing as a going concern. This was principally due to a lack of working capital prior to an underwritten offering which was completed during the first quarter of 2020 (the “2020 Offering”).
Upon completion of the 2020 Offering, management raised sufficient working capital to meet its needs for the next 12-months without the need to raise further capital. Since the advent of the Covid-19 pandemic, the Company has experienced a significant slowdown in closing new projects due to cautious actions by current and potential clients. We continue to be successful in identifying new business opportunities and are focused on re-establishing a backlog of projects. Most importantly, the Company’s success in increasing its working capital surplus after receiving proceeds from the 2020 Offering of more than $8.1 million has given us the runway required to maintain our business strategy overall. In addition, the Company was successful in securing a loan of $1.4 million during the second quarter from the Small Business Administration via the PPP/CARES Act program which further bolstered the Company’s cash reserves. Management has been and continues to take actions including, but not limited to, elimination of certain costs that did not contribute to short term revenue, re-aligning management with a focus on improving certain skill sets necessary to build growth and profitability and focusing product strategy on opportunities that are likely to bear results in the relatively short term. During February 2021, management has taken further significant actions including reorganizing senior management and selectively improving organizational efficiency to effectively grow the business as the expected order flow resumes in 2021. (see Note 15)
Management believes that, at this time, we have alleviated the substantial doubt for the Company to continue as a going concern. We are executing the plan to grow our business and achieve profitability without the requirement to raise additional capital for existing operations. However, if we experience a significant increase in business in 2021 beyond current forecasts, we may require an increase in working capital in that year. In the first quarter of 2021, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock (see Note 15). Although additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded operations based on this increase in business activity. In the long run, the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing the plan described above, generate enough revenue and to attain consistently profitable operations. Although the current global pandemic related to the coronavirus (Covid-19) has affected our operations, and we do believe this is expected to be a long-term issue, the Company cannot currently quantify the uncertainty related to the recent pandemic and its effects on our customers in the coming quarters. We have analyzed our cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand to maintain operations for at least 12 months from the date of this report.
F-20
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable were as follows at December 31, 2020 and 2019:
|
| December 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Accounts receivable |
| $ | 1,244,876 |
|
| $ | 2,757,013 |
|
Allowance for doubtful accounts |
|
| — |
|
|
| (145,405 | ) |
|
| $ | 1,244,876 |
|
| $ | 2,611,608 |
|
There was bad debt (recovery) expense related to accounts receivable of (3,217) and $220,405 in 2020 and 2019, respectively.
NOTE 4–PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follow at December 31, 2020 and 2019:
|
| December 31, |
|
| December 31, |
| |||
|
| 2020 |
|
| 2019 |
| |||
Furniture, fixtures and equipment |
| $ | 1,569,328 |
|
| $ | 1,290,183 |
| |
Less: Accumulated depreciation |
|
| (1,227,148 | ) |
|
| (1,030,002 | ) | |
|
| $ | 342,180 |
|
| $ | 260,181 |
| |
Depreciation expense in 2020 and 2019 was $197,146 and $159,252, respectively.
NOTE 5–PATENTS AND TRADEMARKS
|
| 2020 |
|
| 2019 |
| ||
Patents and trademarks |
| $ | 301,770 |
|
| $ | 293,585 |
|
Less: Accumulated amortization |
|
| (237,355 | ) |
|
| (231,987 | ) |
|
| $ | 64,415 |
|
| $ | 61,598 |
|
Amortization expense in 2020 and 2019 was $5,368 and $5,368, respectively.
NOTE 6–SOFTWARE DEVELOPMENT COSTS
In 2018, the Company capitalized $60,000, relating to the development of new software products. These software products were developed by a third party and had passed the preliminary project stage prior to capitalization.
|
| December 31, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Software development costs |
| $ | 60,000 |
|
| $ | 60,000 |
|
Less: Accumulated amortization |
|
| (60,000 | ) |
|
| (40,000 | ) |
|
| $ | — |
|
| $ | 20,000 |
|
Amortization of software development costs in 2020 and 2019 was $20,000 and $20,000, respectively.
F-21
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 7–DEBT
Notes Payable – Insurance Premium Financing Agreements
The Company’s notes payable relating to financing agreements classified as current liabilities consist of the following as of:
|
| December 31, 2020 |
| December 31, 2019 |
| ||||||||||||
Notes Payable |
| Principal |
|
|
| Interest |
| Principal |
|
|
| Interest |
| ||||
Third Party - Insurance Note 1 |
| $ | 23,327 |
|
|
| 7.75 | % |
| $ | 28,500 |
|
|
| 7.31 | % |
|
Third Party - Insurance Note 2 |
|
| 10,457 |
|
|
| 5.26 | % |
|
| — |
|
|
| 6.36 | % |
|
Third Party - Insurance Note 3 |
|
| 9,158 |
|
|
| — |
|
|
| 13,799 |
|
|
| — |
|
|
Third Party - Insurance Note 4 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
Total |
| $ | 42,942 |
|
|
|
|
|
| $ | 42,299 |
|
|
|
|
|
|
The Company entered into an agreement on December 23, 2019 with its insurance provider by issuing a $28,500 note payable (Insurance Note 1) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 7.31% payable in monthly installments of principal and interest totaling $2,218 through October 23, 2020. The policy renewed on December 23, 2020 in the amount of $30,994 with an annual interest rate of 7.75% payable in monthly installments of principal and interest totaling $2,416 through October 23, 2021. The balance of Insurance Note 1 as of December 31, 2020 and December 31, 2019 was $23,327 and $28,500, respectively.
The Company entered into an agreement on April 15, 2019 in the amount of $51,940 with an annual interest rate of 6.36% payable (Insurance Note 2) with monthly installments of principal and interest totaling $5,326 through December 15, 2019 and the Company renewed the policy on April 15, 2020 in the amount of $51,379 with an annual interest rate of 5.26% payable in monthly installments of principal and interest totaling $5,263 through February 15, 2021. At December 31, 2020 and December 31, 2019, the balance of Insurance Note 2 was $10,457 and zero, respectively.
The Company entered into an agreement on September 15, 2019 in the amount of $13,799 with its insurance provider by issuing a note payable (Insurance Note 3) for the purchase of an insurance policy, secured by 5 installment payments. The Company renewed the policy on September 15, 2020, secured by 12 monthly installments. At December 31, 2020 and December 31, 2019, the balance of Insurance Note 3 was $9,158 and $13,799, respectively.
The Company entered into an agreement on February 3, 2019 in the amount of $141,058 with an annual interest rate of 6.36% payable in monthly installments of principal and interest totaling $14,520 (Insurance Note 4) through December 3, 2019. The policy renewed on February 3, 2020 in the amount of $109,812 with eight monthly installments of $13,726. At December 31, 2020 and December 31, 2019, the balance of Insurance Note 4 was zero and zero, respectively.
Equipment Financing
The Company entered into an agreement on August 26, 2019 with an equipment financing company by issuing a $147,810 secured note, with an annual interest rate of 12.72% and payable in monthly installments of principal and interest totaling $4,963 through August 1, 2022. The Company entered into an additional agreement on May 22, 2020 with the same equipment financing company by issuing a $121,637 secured note, with an annual interest rate of 9.90% and payable in monthly installments of principal and interest totaling $3,919 through June 1, 2023. At December 31, 2020 and 2019, the balance of these notes was $192,804 and $134,098 respectively.
F-22
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
At December 31, 2020, future minimum note payments due under the equipment financing agreements are as follows:
As of December 31, | Amount |
| ||
2021 |
| $ | 106,588 |
|
2022 |
|
| 86,735 |
|
2023 |
|
| 23,515 |
|
Total minimum equipment financing payments |
| $ | 216,838 |
|
Less: interest |
|
| (24,034 | ) |
Total equipment financing at December 31, 2020 |
| $ | 192,804 |
|
Less: current portion of equipment financing |
|
| (89,620 | ) |
Long-term portion of equipment financing |
| $ | 103,184 |
|
Notes Payable – Related Parties
|
|
|
|
|
|
|
| December 31, 2020 |
|
| December 31, 2019 |
| ||||||||||||
Payable To |
|
|
|
|
|
|
| Principal |
|
| Interest |
|
| Principal |
|
| Interest |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
|
|
|
|
|
|
| $ | — |
|
|
|
|
|
| $ | 267,000 |
|
|
| 3% |
|
Related party |
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
| 733,000 |
|
|
| 3% |
|
Total |
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
| 1,000,000 |
|
|
|
|
|
Less unamortized discounts |
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
| (94,627 | ) |
|
|
|
|
Total, net |
|
|
|
|
|
|
|
|
| $ | — |
|
|
|
|
|
| $ | 905,373 |
|
|
|
|
|
The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the aggregate principal amount of $267,000, pursuant to a note, repayable on June 25, 2020. The note carried an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 11,920 shares of the Company’s common stock at a price of $7.70 per share. On June 22, 2020, the Company repaid this short-term note in the amount of $267,000. The balance of this note as of December 31, 2020 and 2019 was zero and $267,000, respectively.
The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the aggregate principal amount of $733,000, pursuant to a note, repayable on June 25, 2020. The note carried an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 32,724 shares of the Company’s common stock at a price of $7.70 per share. On June 22, 2020, the Company repaid this short-term note in the amount of $733,000. The balance of this note as of December 31, 2020 and 2019 was zero and $733,000, respectively.
The Company determined the relative fair value between the notes and the warrants on the issue date utilizing the Bi-nominal Lattice Pricing Model for the warrants. As a result, the Company allocated $146,779 to the warrants, which was recorded as a debt discount with an offset to additional paid in capital in the accompanying consolidated financial statements. The fair value pricing model used the following assumptions: stock price $7.00, warrant exercise price $7.70, expected term of 5 years, expected volatility of 86% and discount rate of 1.609%.
For the year ended December 31, 2020, the Company recorded $94,627 for amortization of the debt discount discussed above to interest expense in the accompanying consolidated financial statements.
Notes Payable
The Company entered into an agreement on August 12, 2019 with a shareholder by executing a short-term $262,500 note repayable on November 11, 2019. The note was issued with a 5% original issue discount and the Company received a net amount of $250,000. No other consideration was given. On November 12, 2019, the Company repaid the short-term note in the amount of $262,500. The original issue discount of $12,500 was fully amortized in 2019.
F-23
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Notes Payable – SBA Loan
|
|
|
|
|
|
|
| December 31, 2020 |
|
| December 31, 2019 |
| ||||||||||||
Payable To |
|
|
|
|
|
|
| Principal |
|
| Interest |
|
| Principal |
|
| Interest |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loan |
|
|
|
|
|
|
|
|
| $ | 1,410,270 |
|
|
| 1% |
|
| $ | — |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
| 1,410,270 |
|
|
|
|
|
|
| — |
|
|
|
|
|
Less current portion |
|
|
|
|
|
|
|
|
|
| (627,465 | ) |
|
|
|
|
|
| — |
|
|
|
|
|
Long-term portion |
|
|
|
|
|
|
|
|
| $ | 782,805 |
|
|
|
|
|
| $ | — |
|
|
|
|
|
On April 23, 2020, the Company entered into a promissory note (the “Note”) with BBVA USA, which provides for a loan in the amount of $1,410,270 (the “Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Loan has a two-year term and bears interest at a rate of 1.00% per annum (APR 1.014%). Monthly principal and interest payments are deferred for seven months after the date of disbursement and was extended additional six months from the date of disbursement. The Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Company applied for the PPP loan forgiveness and was granted forgiveness on February 1, 2021. (see Note 15)
NOTE 8–LINE OF CREDIT
The Company assumed a line of credit with Wells Fargo Bank upon merger with ISA on April 1, 2015. The line of credit provided for borrowings up to $40,000 but is now closed. This line of credit has been paid in full as of May 5, 2020.The balance as of December 31, 2020 and December 31, 2019, was zero and $27,615, respectively, including accrued interest.
NOTE 9 –CONTRACT ACCOUNTINGDEFERRED COMPENSATION
Contract Assets
Contract assets on uncompleted contracts represent costs and estimated earnings in excess of billings and/or cash received on uncompleted contracts accounted for under the percentage of completion contract method.
At December 31, 2020 and 2019, contract assets on uncompleted contracts consisted of the following:
|
| 2020 |
|
| 2019 |
| ||
Costs and estimated earnings recognized |
| $ | 4,152,850 |
|
| $ | 3,700,124 |
|
Less: Billings or cash received |
|
| (4,050,392 | ) |
|
| (2,324,204 | ) |
Contract Assets |
| $ | 102,458 |
|
| $ | 1,375,920 |
|
Contract Liabilities
Contract liabilities on uncompleted contracts represent billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under the percentage of completion contract method.
At December 31, 2020 and 2019, contract liabilities on uncompleted contracts consisted of the following:
|
| 2020 |
|
| 2019 |
| ||
Billings and/or cash receipts on uncompleted contracts |
| $ | 2,978,007 |
|
| $ | 35,665 |
|
Less: Costs and estimated earnings recognized |
|
| (2,268,454 | ) |
|
| (27,004 | ) |
Contract Liabilities |
| $ | 709,553 |
|
| $ | 8,661 |
|
F-24
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 10 –DEFERRED COMPENSATION
As of December 31, 2020,2022, and 2019,2021, the Company has accrued $797,042$297,620 and $277,850,$505,896, respectively, of deferred compensation relating to 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
Delinquent Payroll Taxes PayableOperating Lease Obligations
The Company has subsequently paid its delinquent IRS payroll taxes and late fees. At December 31, 2020 and December 31, 2019, the payroll taxes payable balance of $3,146 and $115,111 included accrued late fees in the amount of zero and $37,210, respectively. The remaining balance of $3,146 with the state of California will be remitted in 2021.
Licensing Agreement
In 2018,On July 26, 2021, the Company had entered into a software license and configuration services agreement with a third-party vendor. The support and maintenance fees of approximately $300,000 included support and updates to the 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.
Simultaneously, the Company had also entered into a SaaS agreement with the same vendor that was an Amazon AWS-hosted software service supporting the creation and deployment of Artificial Intelligence. It consisted of a public API, web application, iPhone application, and associated back-end services.
Consistent with the provisions of the agreements, the Company sent formal notice of termination and non-renewal of both agreements to the vendor. The vendor confirmed the end-of-service date effective December 31, 2019 (the “Termination Date”). No further obligations from either party are in effect beyond the Termination Date.
Effective December 1, 2019, all Artificial Intelligence development and deployment were seamlessly transitioned to the Company’s truevue360 platform.
Operating Lease Obligations
The Company has annew operating lease agreement for office and warehouse combination space of approximately 8,308 square feet that was amended on May 1, 2016 and again on April 1, 2019, increasing the office space to approximately 10,20340,000 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 OctoberDecember 1, 2021, and end on May 31, 2021.2032. 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 3%2.5%, beginning MayNovember 1, 2017.
2023. The Company enteredmade a new lease agreement of office and warehouse combination space of approximately 4,400 square feet on June 1, 2018 and ending May 31, 2021. On December 21, 2020, this lease was extended to October 31, 2021. This additional space allows for resource growth and engineering efforts for operations before deploying to the field. The rent is subject to an annual escalation of 3%.
The Company now has a total of office and warehouse space of approximately 14,603 square feet.
At December 31, 2020, future minimum lease payments due under Operating Leases are as follows:
As of December 31, | Amount |
| ||
2021 |
| $ | 213,568 |
|
Total minimum operating lease payments |
|
| 213,568 |
|
Less: interest |
|
| (10,771 | ) |
Total lease liability at December 31, 2020 |
| $ | 202,797 |
|
F-25
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”), which requires all leases with a term greater than 12 months to be recognized on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance. We adopted ASU 2016-02 effective January 1, 2019, on a modified retrospective basis, without adjusting comparative periods presented. Effective January 1, 2019, the Company established a right-of-use model (ROU) asset and operating lease liabilitysecurity deposit payment in the amount of $644,245.$600,000 on July 26, 2021. The right of use asset balance at December 31, 20202022, net of amortization, was $202,797. These are$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 lease is the Company’s only operating leases whoselease with a term is greater than 12twelve months. The adoptionoffice and warehouse lease has a remaining term of ASU 2016-02 didapproximately 9.5 years and includes an option to extend for two renewal terms of five years each. The renewal options are not materially affect our consolidated statement of operations or our consolidated statements of cash flows. Wereasonably 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 keepnot recognize short-term leases with an initial termterms of 12twelve months or less offon the consolidated balance sheet and toinstead recognize allthe lease payments for leases with a term greater than 12 months on a straight-line basis over the lease term in our unaudited consolidated statements of operations.
The current monthly lease payment is $25,098. Rental expense for the office lease during 2020 and 2019 was $279,975 and $262,710, respectively.
Operating Leases
as incurred. The Company has several non-cancelablealso 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 | ||||||||
| 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 due under the operating leases, primarily for equipment, that expire over the next year. Minimum rent payments under operating leaseslease are recognized on a straight-line basis over the term of the lease. Rental expense for operating leases during 2020 and 2019 was $21,341 and $12,104, respectively.as follows:
|
| Year Ended December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
FP Mailing |
| $ | 375 |
|
| $ | 372 |
|
Brewsmart Beverage/A. Antique Coffee Services |
|
| 320 |
|
|
| 235 |
|
New Lane |
|
| 1,800 |
|
|
| 500 |
|
Canon |
|
| 10,144 |
|
|
| 10,997 |
|
Apple Financial Services |
|
| 5,018 |
|
|
| — |
|
Ring Power |
|
| 1,688 |
|
|
| — |
|
Ascentium Leasing |
|
| 1,060 |
|
|
| — |
|
NFS Leasing |
|
| 936 |
|
|
| — |
|
Total rent expense |
| $ | 21,341 |
|
| $ | 12,104 |
|
| 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 | ||
Executive Severance Agreement
On April 1, 2018, the Company entered into an employment agreement (the “Arcaini Employment Agreement”) with Gianni B. Arcaini, pursuant to which Mr. Arcaini served as Chief Executive Officer and Chairman of the Board of Directors of the Company. Under the Arcaini Employment Agreement, Mr. Arcaini was paid an annual salary of $249,260$249,260 and an annual car allowance of $18,000.$18,000. In addition, as incentive-based compensation, Mr. Arcaini was entitled to 1%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$75,000 as well as certain limited health and life insurance benefits. The Separation Agreement also contains confidentiality, non-disparagement and non-solicitation covenants and a release of claims by Mr. Arcaini who continued to serve as Chairman of the Board of Directors of the Company. The Corporate Governance and Nominating Committee did not submit Mr. Arcaini for re-election as a director and on November 19, 2020 at the Annual Shareholders meeting a new non-Executive Chairman was appointed.
| F-24 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
F-26
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
In accordance with the Separation Agreement, the Company will pay to Mr. Arcaini the total sum of $747,788.$747,788. Notwithstanding the foregoing, the status of Mr. Arcaini as a “Specified Employee” as defined in Internal Revenue Code Section 409A has the effect of delaying any payments to Mr. Arcaini under the Separation Agreement for six months after the Separation Date. On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631,$124,631, owed to Mr. Arcaini and the Company will continue to pay him in bi-weeklysemi-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, 2022 is included in accrued expenses in the Arcaini Employment Agreement.accompanying consolidated balance sheet. In addition, the Company will pay one-half of Mr. Arcaini’s current life insurance premiums for 36 months of approximately $1,200$1,200 per month and provide and pay for his health insurance for 1836 months following the Separation Date of approximately $1,700.$450 per month. Unvested options in the amount of 50,358 became exercisable and vested in their entirety on the Separation Date valued at $95,127.$95,127. The Company made payment of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation Agreement of approximately $17,000.$17,000.
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, 20202022 and 20192021 consist of net operating loss carryforwards and differences in the book basis and tax basis of intangible assets.
The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 20202022 and 20192021 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, | ||||||||||||
|
| 2020 |
| 2019 |
| 2022 | 2021 | |||||||||
Income tax benefit at U.S. statutory rate of 21% |
| $ | (1,416,961 | ) |
| $ | (518,885 | ) | $ | (1,441,624 | ) | $ | (1,261,869 | ) | ||
State income taxes |
|
| (242,908 | ) |
|
| (88,952 | ) | (247,135 | ) | (216,321 | ) | ||||
Non-deductible expenses |
|
| 135,152 |
|
|
| 26,943 |
| 201,521 | 64,553 | ||||||
Change in valuation allowance |
|
| 1,524,717 |
|
|
| 580,894 |
| 1,487,238 | 1,413,637 | ||||||
Total provision for income tax |
| $ | — |
|
| $ | — |
| $ | — | $ | — | ||||
The Company’s approximate net deferred tax assets as of December 31, 20202022 and 20192021 were as follows:
| Schedule of net deferred tax assets | ||||||||||||||||
| December 31, | ||||||||||||||||
|
|
|
|
|
|
|
| 2022 | 2021 | |||||||
|
| December 31, |
| |||||||||||||
|
| 2020 |
| 2019 |
| |||||||||||
Deferred Tax Assets: |
|
|
|
|
|
|
| |||||||||
| Deferred Tax Asset (Liability): | ||||||||||||||||
Net operating loss carryforward |
| $ | 6,807,482 |
| $ | 5,224,941 |
| $ | 9,772,854 | $ | 8,247,427 | |||||
Intangible assets |
|
| 31,841 |
|
| 53,995 |
| (32,656 | ) | 5,553 | ||||||
Allowance for bad debt |
|
| — |
|
|
| 35,670 |
| ||||||||
|
|
| 6,839,323 |
|
| 5,314,606 |
| 9,740,198 | 8,252,960 | |||||||
Valuation allowance |
|
| (6,839,323 | ) |
|
| (5,314,606 | ) | (9,740,198 | ) | (8,252,960 | ) | ||||
Net deferred tax assets |
| $ | — |
|
| $ | — |
| $ | — | $ | — | ||||
The gross operating loss carryforward was approximately $27,672,692$39,727,050 and $21,403,666$33,522,769 at December 31, 20202022 and 2019,2021, respectively. The Company provided a valuation allowance equal to the net deferred income tax assets for the years ended December 31, 20202022, and 20192021 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward and other deferred tax assets. The increase in the valuation allowance was $1,524,717$1,487,238 in 2020.2022.
The potential tax benefit arising from the net operating loss carryforward of $4,357,876$4,357,876 from the period prior to January 1, 2018, will expire in 2037. The potential tax benefit arising from the net operating loss carryforward of $2,409,245 from the period following the 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 |
F-27
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual limitation as a result of ownership or business changes that may occur in the future. The Company has not conducted a study to determine the limitations on the utilization of these net operating loss carryforwards. If necessary, the deferred tax assets will be reduced by any carryforward that may not be utilized or expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2019, 20182021, 2020 and 20172019 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE 1312 –STOCKHOLDERS’ EQUITY (DEFICIT)
2016 Equity Plan
On March 11, 2016, the Board adoptedWe maintained the 2016 Equity Incentive Plan (the “2016 Plan”) for employees, officers, directors and the shareholders approved theother entities and individuals whose efforts contribute to our success. The 2016 Plan during the annual shareholders meetingterminated pursuant to its terms on April 21, 2016. December 31, 2020, although all outstanding awards on such date continue in full force and effect.
2021 Equity Plan
On May 27, 2016,12, 2021, the Company filed a registration statement forBoard adopted, with shareholder approval as of July 15, 2021, the securities planned to be issued under the plan which became effective at that date.
The “20162021 Equity Incentive Plan (the “2021 Plan” provided) providing for the issuance of up to 16,327 shares of our common stock.Common Stock. The purpose of the 2021 Plan wasis 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 20162021 Plan to 178,572. On July 31, 2019, the shareholders approved an increase in the total maximum amount issuable under the 2016 Plan to 321,429.
On April 23, 2018, the Company issued a total of 160,152 incentive stock options to certain employees and directors under the 2016 Plan. In 2019, the Company issued an additional 17,144 options for two directors who joined the board and a former officer forfeited 14,286 options. On April 1, 2020, the Company cancelled and re-issued 160,866 existing non-qualified options to key staff members, officers and directors which had an exercise price of $14.00 per share with a reduced exercise price of $6.00 per share. In addition, a further 149,424 options were issued to key staff members, officers and directors with an exercise price of $4.74 per share and 536 options were forfeited. From September to December 2020, 140,000 options with strike prices ranging from $4.18 to $4.35 were issued the Company’s new CEO and two key staff members as an incentive to join the Company. At the end of 2020 there were 311,898 options issued under the 2016 Plan and 140,000 non-plan options. (see Note 14)
Administration
The 2016following is a summary of the material provisions of the 2021 Plan wasand 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 Committee hadhas 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 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.
F-28
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Grant of Awards,Awards; Shares Available for Awards
The 20162021 Plan providedprovides 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 321,429 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 twenty-five identified employees (including four executive officers and directors), three non-employee directors, and up to thirty other current or future staff members who would be entitled to receive stock options and/or shares of restricted stock under the 2016 Plan. Future new hires and additional non-employee directors and/or consultants would be eligible to participate in the 2016 Plan as well.
| F-26 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Stock Options
The 20162021 Plan providedprovides for either “incentive stock options” (“ISOs”), which are intended to meet the requirements for special federal income tax treatment under the Code, or “nonqualified stock options” (“NQSOs”). The stockholdersOn May 12, 2021, the 2021 Plan was approved by shareholders and adopted by the 2016 Plan at the annual meeting as previously described.board of directors. Stock options couldmay be granted on such terms and conditions as the Compensation Committee may determine,determine; provided, however, that the per share exercise price under a stock option couldmay 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 ownedowns (or wasis deemed to own) more than 10% of the total combined voting power of all classes of capital stock of ourthe Company or a parent or subsidiary of ourthe 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 couldmay 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,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,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 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 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.
F-29
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Unrestricted Stock Awards
An unrestricted stock award is a grant or sale of shares of our common 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 2021 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). 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.
| 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 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. The shares of Series B Convertible Preferred Stock are validly issued, fully paid and non-assessable.
Each share of Series B Convertible Preferred Stock is convertible at any time at the 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 1,705 zero and shares, respectively, of Series B Convertible Preferred Stock issued and outstanding (see below for 2019outstanding.
Series C Convertible Preferred Stock
On February 26, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing investors in the Company (the “Purchasers”). Pursuant to the Purchase Agreement, the Purchasers purchased shares of a newly authorized Series C Convertible Preferred Stock (the “Series C Convertible Preferred Stock”), and 2020 conversionsthe Company received proceeds of $4,500,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
Under the Purchase Agreement, the Company was required to hold a meeting of shareholders at the earliest practical date, 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 Series 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 order to issue shares of common stock underlying the Series C Convertible Preferred Stock at a price less than the greater of book or market value which equal 20% or more of the number of shares of common stock outstanding before the issuance. As described below, the terms of the Series C Convertible Preferred Stock limited its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval was obtained.
In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series C Convertible Preferred Stock are convertible. The 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 were 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 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.
Common stock issued for warrantsPrivate Placements, Preferred Stock Conversions, Services and Settlements
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 2019,129,091 and 325,455 shares of the Company’s common stock.
On February 3, 2022, the Company entered intoclosed an agreement with two shareholders who were also holdersoffering of warrants to purchase shares of common stock in the aggregate amount of 214,286 shares, to reduce the exercise price$5,300,000 or $ per share before certain underwriting fees and offering expenses with net proceeds 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$4,779,000.
On February 21, 2022, the Company closed on an “over-allotment” offering 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$795,000 or $ per share before certain underwriting fees and offering expenses with net proceeds of these warrants was also lowered$739,350. Both this and the previous offering were “takedowns” from a previously filed “shelf” registration statement for the offer of up to $7.70$50,000,000 in the aggregate of common stock, Preferred Stock, Debt Securities, Warrants, Rights or Units from the original exercise price of $9.10 based on immediate exercise for further proceedstime to the Company of $514,020. Further, during the second quarter of 2019,time in one or more offerings.
On March 31, 2022, the Company issued 9,878 shares of common stock upon the cashless exercise of 46,571 common stock warrants.
F-30
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Additionally, the Company also accepted warrant exercises in the third quarter of 2019 from two additional shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 19,643 shares of common stock for proceedspayment of board fees to the Companyfour directors in the amount of $151,250. $40,000 for services to the board which was expensed during the three months ended March 31, 2022.
TheOn June 30, 2022, the Company also accepted a warrant exercise in the fourth quarter of 2019 from one shareholder who was also a holder of warrants to purchase shares of common stock in the aggregate amount of 357issued shares of common stock for proceedspayment of board fees to the Companyfour directors in the amount of $2,750.
During the third quarter of 2020, 67,500 warrants previously issued as compensation$40,000 for banking fees relatedservices to the 2020 offering,board which was expensed during the three months ended June 30, 2022.
On August 25, 2022, common shares were released from a contractual “lock-up” pursuantissued 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 termsboard 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 raise lock-up. In addition, 1,197 warrants expired, and 9,450 warrants were cancelled and re-issued on the directionamount of the holder.
Common stock issued$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 settlements 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 2,484 shares of common stock on August 28, 20195, 2021 for payment of accrued board fees to twofour directors in the amount of $19,167$30,000 for services to the Board.
The Company issued 2,039 shares of common stock on September 30, 2021 for payment of accrued board fees to five directors in the amount of $45,000 for services to the Board.
The Company issued 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, 20192021 for payment of accrued board fees to threefour directors in the amount of $13,750$50,000 for services to the Board.
The Company issued 1,611 shares of common stock on March 31, 2020 for payment of accrued board fees to three directors in the amount of $7,500 for services to the Board.
The Company issued 1,632 shares of common stock on June 30, 2020 for payment of accrued board fees to three directors in the amount of $7,500 for services to the Board.
The Company issued 7,869 shares of common stock on September 30, 2020 for payment of accrued board fees to three directors in the amount of $37,500 for services to the Board.
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the year ended December 31, 20202022 and 2019,2021, was $454,770$ and $44,874,$, respectively, for stock options granted to employees and directors. This expense is included in selling, general and administrative expenses in the consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At December 31, 2020,2022, the total compensation cost for stock options that was not yet recognized was $264,256.$. This cost will be recognized over the remaining vesting term of the options of approximately one year. years.
Series B Convertible PreferredTreasury Stock
A holder of Series B Convertible Preferred Stock converted 750 shares into 107,142 shares of common stock, valued at $750,000 during the third quarter of 2019.
A holder of Series B Convertible Preferred Stock converted 375 shares into 53,571 shares of common stock, valued at $375,000 during the fourth quarter of 2019.
F-31
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Treasury Stock
In August 2016, the 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-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 shares 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 $10.08$ per shares and shares at $9.09$ per share. Accordingly, as of December 31, 2020,2022, and 2019,2021, the Company held shares of Company Series A stock at an aggregate value of $157,452.$157,452.
Options
20202022
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 2020, 160,8662022, 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 cancelledawarded as a one-time award as a hiring incentive and re-issued to key staff-members, officers, and directors. Of those options granted, 100% vested immediately. Thehave 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 re-issued options grantedamount 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 $102,800. In addition, 149,424 new options were grantedoffset by a credit of $1,270 for an over accrual recorded in the second quarter related to key staff-members, officers and directors. Of those options granted, 50% vested on January 1, 2021 and the other 50% will vest on January 1, 2022. The value of the new options is $370,312.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 2020, 100,0002021, the shareholders approved the issuance of up to one million shares or share equivalents in the form of stock options were issuedfor the purposes of share issuance for compensation to Board Members and grants to certain staff members for recruiting and retention. On July 14, 2021, the Company’s new CEO as a hiring incentive. Of these options 50% will vest on September 1, 2021 and the other 50% will vest on September 1, 2022. The value of these options is $193,388. In addition, as a part of the severance agreement agreedCompany filed an S-8 registration statement in concert with the former CEO, 50,358 unvested options were vested and the unamortized portion2021 Equity Incentive Plan which was deemed effective on August 5, 2021. The plan covers a period of those options were charged in the amount of $95,127.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 | — | ||||||||||||
During the fourth quarter of 2020, 40,000 options were granted to two new key employees. For 20,000 of those options, 50% of the options will vest on October 12, 2021 and the other 50% will vest on October 12, 2022. For the other 20,000 options, one-third will vest on November 23, 2021, the next third will vest on November 23, 2022 and the final third will vest on November 23, 2023. The value of these options is $91,574.
F-32
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The fair value of the incentive stock option grants for the years ended December 31, 20202022 and 20192021 were estimated using the following weighted- average assumptions:
| Schedule of Fair Value Assumptions | ||||||||
|
| For the Years Ended | For the Years Ended December 31, | |||||
|
| 2020 |
| 2019 | 2022 | 2021 | ||
Risk free interest rate |
| 0.18% - 0.26% |
| 1.44 - 2.44% | – % | % | ||
Expected term in years |
| 2.50 - 3.50 |
| 2.76 - 3.25 | - | |||
Dividend yield |
| — |
| — | — | — | ||
Volatility of common stock |
| 68.00% - 86.24% |
| 117.18% - 151.43% | -% | % | ||
Estimated annual forfeitures |
| — |
| — | ||||
Warrants
20202022
During the firstfourth quarter of 2020, 67,5002022, warrants were issued as compensation inheld by 63 holders representing shares expired. All of the form of bankersexpired warrants in connection with the 2020 Offering for whichcan no other warrants were issued. The warrants had a strike price of $9.00 and were locked up until the third quarter of 2020.longer be exercised.
2021
During the second quarter of 2020, 9,4502021, warrants previouslyrepresenting 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 as bankers warrants in the first quarter were cancelled and re-issued with no change in terms. In addition, 1,197 warrants previously issued, expired.
Duringduring the third quarter of 2020, 67,500 warrants issued in the first quarter became exercisable.
During theand fourth quarter of 2020, 12,469 previously issued warrants were cancelled2021.
| 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 re-issued with no change in terms as partthe Company may match a portion of a settlement between certain shareholders.
2019
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 quarter4% of 2019, 214,286 warrants were exercisedeligible employee compensation that was contributed to the 401(k) Plan. For the year ended December 31, 2022, the Company recognized expense for matching cash incontributions to the amount of $1,650,000 and 38 warrants expired.401(k) Plan totaling $155,766.
During the second quarter of 2019, a total of 113,328 warrants were exercised of which 66,756 were for cash in the amount of $137,500 and 46,572 were cashless in exchange for 9,878 shares of common stock. Total common stock issued was 76,634 shares.
During the third quarter of 2019, 44,644 warrants were issued in connection with a $1,000,000 working capital loan (see Note 7). Additionally, 19,643 warrants were exercised for cash in the amount of $151,250.
F-33
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
During the fourth quarter of 2019, 357 warrants were exercised for cash in the amount of $2,750.
|
|
|
|
|
|
|
| Weighted |
|
|
|
| ||||
|
|
|
|
| Weighted |
|
| Average |
|
|
|
| ||||
|
|
|
|
| Average |
|
| Remaining |
|
| Aggregate |
| ||||
|
| Number of |
|
| Exercise |
|
| Contractual |
|
| Intrinsic |
| ||||
|
| Warrants |
|
| Price |
|
| Term (Years) |
|
| Value |
| ||||
Outstanding at December 31, 2018 |
|
| 1,815,181 |
|
| $ | 9.52 |
|
|
| 3.9 |
|
|
| — |
|
Warrants expired, forfeited, cancelled or exercised |
|
| (338,575 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued |
|
| 44,644 |
|
| $ | 7.70 |
|
|
| 4.9 |
|
|
| — |
|
Outstanding at December 31, 2019 |
|
| 1,521,250 |
|
| $ | 8.78 |
|
|
| 3.9 |
|
|
| — |
|
Exercisable at December 31, 2019 |
|
| 1,521,250 |
|
| $ | 8.78 |
|
|
| 3.9 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019 |
|
| 1,521,250 |
|
| $ | 8.78 |
|
|
| 3.9 |
|
|
| — |
|
Warrants expired, forfeited, cancelled or exercised |
|
| (23,116 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued |
|
| 89,419 |
|
| $ | 9.02 |
|
|
| 2.2 |
|
|
| — |
|
Outstanding at December 31, 2020 |
|
| 1,587,333 |
|
| $ | 8.62 |
|
|
| 2.0 |
|
|
| — |
|
Exercisable at December 31, 2020 |
|
| 1,587,333 |
|
| $ | 8.69 |
|
|
| 2.0 |
|
|
| — |
|
NOTE 15 –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 Company received notice that the PPP Cares Act loan that was issued in 2020 in the amount of $1,421,395 including accrued interest, was forgiven by the Small Business Administration.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 February 26, 2021,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 acceptedsold to an offer from two existing, shareholders to invest $4,500,000accredited investor in the formCompany 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 Company received proceeds of $4,000,000. 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 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 CE Convertible Preferred Stock. Each share of the Series E Convertible Preferred Stock has a stated value of $1,000. The offer includesholder of the Series E Convertible Preferred Stock, the holder of the common stock and the 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 registration rights agreementvote 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).
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 voting limitations subject to shareholder approval.deadlines are missed.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| March 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (Unaudited) |
|
|
|
| ||
ASSETS |
|
|
|
|
|
| ||
CURRENT ASSETS: |
|
|
|
|
|
| ||
Cash |
| $ | 7,071,913 |
|
| $ | 3,969,100 |
|
Accounts receivable, net |
|
| 1,390,152 |
|
|
| 1,244,876 |
|
Contract assets |
|
| 37,566 |
|
|
| 102,458 |
|
Prepaid expenses and other current assets |
|
| 694,702 |
|
|
| 486,626 |
|
Total Current Assets |
|
| 9,194,333 |
|
|
| 5,803,060 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 321,143 |
|
|
| 342,180 |
|
Operating lease right of use asset |
|
| 154,023 |
|
|
| 196,144 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
Patents and trademarks, net |
|
| 70,508 |
|
|
| 64,415 |
|
Total Other Assets |
|
| 70,508 |
|
|
| 64,415 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 9,740,007 |
|
| $ | 6,405,799 |
|
(Continued)
| June 30, | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||
| (Unaudited) | |||||||||
| ASSETS | |||||||||
| CURRENT ASSETS: | |||||||||
| Cash | $ | 2,452,248 | $ | 1,121,092 | |||||
| Accounts receivable, net | 286,871 | 3,418,263 | |||||||
| Contract assets | 1,006,791 | 425,722 | |||||||
| Inventory | 1,544,755 | 1,428,360 | |||||||
| Prepaid expenses and other current assets | 496,545 | 441,320 | |||||||
| Total Current Assets | 5,787,210 | 6,834,757 | |||||||
| Property and equipment, net | 609,941 | 629,490 | |||||||
| Operating lease right of use asset | 4,534,593 | 4,689,931 | |||||||
| Security deposit | 550,000 | 600,000 | |||||||
| Convertible note receivable, net | 150,625 | — | |||||||
| Patents and trademarks, net | 92,603 | 69,733 | |||||||
| Software development costs, net | 579,655 | 265,208 | |||||||
| TOTAL ASSETS | $ | 12,304,627 | $ | 13,089,119 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| CURRENT LIABILITIES: | |||||||||
| Accounts payable | $ | 760,029 | $ | 2,290,390 | |||||
| Notes payable - financing agreements | 259,062 | 74,575 | |||||||
| Accrued expenses | 302,108 | 453,023 | |||||||
| Equipment financing payable-current portion | — | 22,851 | |||||||
| Operating lease obligations-current portion | 769,563 | 696,869 | |||||||
| Contract liabilities | 2,439,640 | 957,997 | |||||||
| Total Current Liabilities | 4,530,402 | 4,495,705 | |||||||
| Operating lease obligations, less current portion | 4,389,690 | 4,542,943 | |||||||
| Total Liabilities | 8,920,092 | 9,038,648 | |||||||
| Commitments and Contingencies (Note 4) | — | — | |||||||
| STOCKHOLDERS' EQUITY: | |||||||||
| Preferred stock: $ par value, authorized, shares available to be designated | |||||||||
| Series A redeemable convertible preferred stock, $stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $per share | — | — | |||||||
| Series B convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | — | — | |||||||
| Series C convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | — | — | |||||||
| Series D convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | 1 | 1 | |||||||
| Series E convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $ per share | 4 | — | |||||||
| Common stock: $ par value; shares authorized, and shares issued, and shares outstanding at June 30, 2023 and December 31, 2022, respectively | 7,240 | 7,156 | |||||||
| Additional paid-in-capital | 61,029,659 | 56,562,600 | |||||||
| Accumulated deficit | (57,494,917 | ) | (52,361,834 | ) | |||||
| Sub-total | 3,541,987 | 4,207,923 | |||||||
| Less: Treasury stock ( shares of common stock at June 30, 2023 and December 31, 2022) | (157,452 | ) | (157,452 | ) | |||||
| Total Stockholders' Equity | 3,384,535 | 4,050,471 | |||||||
| Total Liabilities and Stockholders' Equity | $ | 12,304,627 | $ | 13,089,119 | |||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
|
| March 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (Unaudited) |
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 689,649 |
|
| $ | 599,317 |
|
Accounts payable - related parties |
|
| 7,700 |
|
|
| 7,700 |
|
Notes payable - financing agreements |
|
| 237,390 |
|
|
| 42,942 |
|
Payroll taxes payable |
|
| 3,146 |
|
|
| 3,146 |
|
Accrued expenses |
|
| 984,174 |
|
|
| 1,038,092 |
|
Current portion - equipment financing agreements |
|
| 92,224 |
|
|
| 89,620 |
|
Current portion-operating lease obligations |
|
| 158,556 |
|
|
| 202,797 |
|
Current portion-SBA loan |
|
| — |
|
|
| 627,465 |
|
Contract liabilities |
|
| 166,033 |
|
|
| 709,553 |
|
Deferred revenue |
|
| 1,267,921 |
|
|
| 315,370 |
|
Total Current Liabilities |
|
| 3,606,793 |
|
|
| 3,636,002 |
|
|
|
|
|
|
|
|
|
|
Equipment financing payable, less current portion |
|
| 79,128 |
|
|
| 103,184 |
|
SBA loan, less current portion |
|
| — |
|
|
| 782,805 |
|
Total Liabilities |
|
| 3,685,921 |
|
|
| 4,521,991 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,480,000 shares available to be designated |
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at March 31, 2021 and December 31, 2020, convertible into common stock at $6.30 per share |
|
| — |
|
|
| — |
|
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 1,705 and 1,705 issued and outstanding at March 31, 2021 and December 31, 2020, convertible into common stock at $7 per share |
|
| 1,705,000 |
|
|
| 1,705,000 |
|
Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 4,500 issued and outstanding at March 31, 2021 and 0 issued and outstanding at December 31, 2020, convertible into common stock at $5.50 per share |
|
| 4,500,000 |
|
|
| — |
|
Common stock: $0.001 par value; 500,000,000 shares authorized, 3,535,339 shares issued, 3,534,015 shares outstanding at March 31, 2021 and December 31, 2020, respectively |
|
| 3,536 |
|
|
| 3,536 |
|
Additional paid-in capital |
|
| 39,897,175 |
|
|
| 39,820,874 |
|
Total stock & paid-in-capital |
|
| 46,105,711 |
|
|
| 41,529,410 |
|
Accumulated deficit |
|
| (39,894,173 | ) |
|
| (39,488,150 | ) |
Sub-total |
|
| 6,211,538 |
|
|
| 2,041,260 |
|
Less: Treasury stock (1,324 shares of common stock at March 31, 2021 and December 31, 2020) |
|
| (157,452 | ) |
|
| (157,452 | ) |
Total Stockholders' Equity |
|
| 6,054,086 |
|
|
| 1,883,808 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity |
| $ | 9,740,007 |
|
| $ | 6,405,799 |
|
See accompanying condensed notes to the unaudited consolidated financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
REVENUES: |
|
|
|
|
|
| ||
Technology systems |
| $ | 1,490,298 |
|
| $ | 513,674 |
|
Services and consulting |
|
| 664,456 |
|
|
| 477,271 |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
| 2,154,754 |
|
|
| 990,945 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
|
|
|
Technology systems |
|
| 1,895,485 |
|
|
| 1,092,058 |
|
Services and consulting |
|
| 331,384 |
|
|
| 293,954 |
|
Overhead |
|
| 503,593 |
|
|
| 260,421 |
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
| 2,730,462 |
|
|
| 1,646,433 |
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN |
|
| (575,708 | ) |
|
| (655,488 | ) |
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Sales & marketing |
|
| 311,801 |
|
|
| 139,852 |
|
Research & development |
|
| 61,033 |
|
|
| 40,639 |
|
Administration |
|
| 873,758 |
|
|
| 1,251,936 |
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 1,246,592 |
|
|
| 1,432,427 |
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
| (1,822,300 | ) |
|
| (2,087,915 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
Interest expense |
|
| (6,220 | ) |
|
| (68,932 | ) |
Other income, net |
|
| 1,422,497 |
|
|
| 9,798 |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
| 1,416,277 |
|
|
| (59,134 | ) |
|
|
|
|
|
|
|
|
|
NET LOSS |
| $ | (406,023 | ) |
| $ | (2,147,049 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted Net Loss Per Share |
| $ | (0.11 | ) |
| $ | (0.80 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares-Basic & Diluted |
|
| 3,535,339 |
|
|
| 2,687,482 |
|
| For the Three Months Ended | For the Three Months Ended | For the Six Months Ended | For the Six Months Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Technology systems | $ | 870,494 | $ | 2,780,045 | $ | 2,698,258 | $ | 3,563,314 | ||||||||
| Services and consulting | 899,565 | 837,097 | 1,716,089 | 1,493,144 | ||||||||||||
| Total Revenues | 1,770,059 | 3,617,142 | 4,414,347 | 5,056,458 | ||||||||||||
| COST OF REVENUES: | ||||||||||||||||
| Technology systems | 1,072,106 | 1,974,302 | 2,839,315 | 2,839,790 | ||||||||||||
| Services and consulting | 456,616 | 360,226 | 796,523 | 711,988 | ||||||||||||
| Total Cost of Revenues | 1,528,722 | 2,334,528 | 3,635,838 | 3,551,778 | ||||||||||||
| GROSS MARGIN | 241,337 | 1,282,614 | 778,509 | 1,504,680 | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Sales and marketing | 301,077 | 375,986 | 608,654 | 659,880 | ||||||||||||
| Research and development | 537,801 | 530,339 | 942,686 | 967,056 | ||||||||||||
| General and Administration | 2,550,709 | 1,770,764 | 4,522,217 | 3,913,837 | ||||||||||||
| Total Operating Expenses | 3,389,587 | 2,677,089 | 6,073,557 | 5,540,773 | ||||||||||||
| LOSS FROM OPERATIONS | (3,148,250 | ) | (1,394,475 | ) | (5,295,048 | ) | (4,036,093 | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest expense | (3,230 | ) | (2,706 | ) | (4,410 | ) | (5,886 | ) | ||||||||
| Other income, net | 162,080 | 54,509 | 166,375 | 54,691 | ||||||||||||
| Total Other Income (Expenses) | 158,850 | 51,803 | 161,965 | 48,805 | ||||||||||||
| NET LOSS | (2,989,400 | ) | (1,342,672 | ) | $ | (5,133,083 | ) | $ | (3,987,288 | ) | ||||||
| Basic and Diluted Net Loss Per Share | ) | ) | $ | ) | $ | ) | ||||||||||
| Weighted Average Shares-Basic and Diluted | ||||||||||||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three and Six Months Ended June 30, 2023 and 2022
(Unaudited)
Preferred Stock B | Preferred Stock C | Preferred Stock D | Preferred Stock E | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | # of Shares | Amount | # of Shares | Amount | # of Shares | Amount | Additional Paid-in-Capital | Accumulated Deficit | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2022 | — | $ | — | — | $ | — | 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 | |||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | — | — | — | — | — | 161,399 | — | — | 161,399 | ||||||||||||||||||||||||||||||||||||||||||
| Stock issuance cost | — | — | — | — | — | — | — | — | — | — | 281,500 | — | — | 281,500 | ||||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | — | — | — | — | 5,645 | 6 | 32,494 | — | — | 32,500 | ||||||||||||||||||||||||||||||||||||||||||
| Stock issued under the Employee Stock Purchase Plan for cash and compensation | — | — | — | — | — | — | — | — | 65,561 | $ | 66 | 183,199 | — | — | 183,265 | |||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2023 | — | — | — | — | — | — | — | — | — | — | — | (2,989,400 | ) | — | (2,989,400 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2023 | — | $ | — | — | $ | — | 1,299 | $ | 1 | 4,000 | $ | 4 | 7,240,545 | $ | 7,240 | $ | 61,029,659 | $ | (57,494,917 | ) | $ | (157,452 | ) | $ | 3,384,535 | |||||||||||||||||||||||||||||||
| 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 to common stock | — | — | (2,500 | ) | (2 | ) | — | — | — | — | 454,546 | 455 | (453 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||
| Stock options compensation | — | — | — | — | — | — | — | — | — | — | 188,232 | — | — | 188,232 | ||||||||||||||||||||||||||||||||||||||||||
| Stock issued for services | — | — | — | — | — | — | — | — | 10,668 | 10 | 39,990 | — | — | 40,000 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | — | — | — | — | — | — | — | — | — | — | — | (1,342,672 | ) | — | (1,342,672 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2022 | 851 | $ | 1 | — | $ | — | — | $ | — | — | $ | — | 6,107,209 | $ | 6,107 | $ | 52,467,039 | $ | (49,484,339 | ) | $ | (157,452 | ) | $ | 2,831,356 | |||||||||||||||||||||||||||||||
See accompanying condensed notes to the unaudited consolidated financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2021 and 2020CASH FLOWS
(Unaudited)
|
| Preferred Stock B |
|
| Preferred Stock C |
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| # of Shares |
|
| Amount |
|
| # of Shares |
|
| Amount |
|
| # of Shares |
|
| Amount |
|
| Additional Paid-in-Capital |
|
| Accumulated Deficit |
|
| Treasury Stock |
|
| Total |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance December 31, 2020 |
|
| 1,705 |
|
| $ | 1,705,000 |
|
|
| — |
|
| $ | — |
|
|
| 3,535,339 |
|
| $ | 3,536 |
|
| $ | 39,820,874 |
|
| $ | (39,488,150 | ) |
| $ | (157,452 | ) |
| $ | 1,883,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 76,301 |
|
|
| — |
|
|
| — |
|
|
| 76,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C preferred stock issued |
|
| — |
|
|
| — |
|
|
| 4,500 |
|
|
| 4,500,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended March 31, 2021 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (406,023 | ) |
|
| — |
|
|
| (406,023 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2021 |
|
| 1,705 |
|
| $ | 1,705,000 |
|
|
| 4,500 |
|
| $ | 4,500,000 |
|
|
| 3,535,339 |
|
| $ | 3,536 |
|
| $ | 39,897,175 |
|
| $ | (39,894,173 | ) |
| $ | (157,452 | ) |
| $ | 6,054,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2019 |
|
| 1,705 |
|
|
| 1,705,000 |
|
|
| — |
|
|
| — |
|
|
| 1,982,039 |
|
|
| 1,982 |
|
|
| 31,063,915 |
|
|
| (32,740,715 | ) |
|
| (157,452 | ) |
|
| (127,270 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,542,188 |
|
|
| 1,542 |
|
|
| 9,251,586 |
|
|
| — |
|
|
| — |
|
|
| 9,253,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted to employees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,100 |
|
|
| — |
|
|
| — |
|
|
| 8,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance cost |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,001,885 | ) |
|
| — |
|
|
| — |
|
|
| (1,001,885 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,611 |
|
|
| 2 |
|
|
| 7,498 |
|
|
| — |
|
|
| — |
|
|
| 7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss for the three months ended March 31, 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,147,049 | ) |
|
| — |
|
|
| (2,147,049 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2020 |
|
| 1,705 |
|
| $ | 1,705,000 |
|
|
| — |
|
|
| — |
|
|
| 3,525,838 |
|
| $ | 3,526 |
|
| $ | 39,329,214 |
|
| $ | (34,887,764 | ) |
| $ | (157,452 | ) |
| $ | 5,992,524 |
|
| For the Six Months Ended | ||||||||
| June 30 | ||||||||
| 2023 | 2022 | |||||||
| Cash from operating activities: | ||||||||
| Net loss | $ | (5,133,083 | ) | $ | (3,987,288 | ) | ||
| Depreciation and amortization | 230,592 | 145,627 | ||||||
| Stock based compensation | 302,743 | 438,809 | ||||||
| Stock issued for services | 65,000 | 80,000 | ||||||
| Amortization of operating lease right of use asset | 155,338 | 158,547 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 3,131,392 | 1,458,592 | ||||||
| Note receivable | (150,625 | ) | — | |||||
| Contract assets | (581,069 | ) | (698,923 | ) | ||||
| Inventory | (116,393 | ) | (481,880 | ) | ||||
| Security deposit | 50,000 | — | ||||||
| Prepaid expenses and other current assets | 403,225 | (218,198 | ) | |||||
| Accounts payable | (1,530,361 | ) | 268,425 | |||||
| Accrued expenses | (150,914 | ) | (108,550 | ) | ||||
| Operating lease obligation | (80,559 | ) | 46,485 | |||||
| Contract liabilities | 1,481,643 | 3,186,138 | ||||||
| Net cash (used in) provided by operating activities | (1,923,071 | ) | 287,784 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of patents/trademarks | (28,720 | ) | (13,660 | ) | ||||
| Purchase of software development | (360,437 | ) | (15,000 | ) | ||||
| Purchase of fixed assets | (159,203 | ) | (140,549 | ) | ||||
| Net cash used in investing activities | (548,360 | ) | (169,209 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayments of insurance and equipment financing | (273,965 | ) | (213,404 | ) | ||||
| Repayment of finance lease | (22,851 | ) | (48,812 | ) | ||||
| Proceeds from common stock issued | — | 6,095,000 | ||||||
| Issuance cost | (17,645 | ) | (576,650 | ) | ||||
| Proceeds from shares issued under Employee Stock Purchase Plan | 117,048 | — | ||||||
| Proceeds from preferred stock issued | 4,000,000 | — | ||||||
| Net cash provided by financing activities | 3,802,587 | 5,256,134 | ||||||
| Net increase in cash | 1,331,156 | 5,374,709 | ||||||
| Cash, beginning of period | 1,121,092 | 893,720 | ||||||
| Cash, end of period | $ | 2,452,248 | $ | 6,268,429 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Interest paid | $ | 4,410 | $ | 5,984 | ||||
| Taxes paid | $ | — | $ | 1,264 | ||||
| Supplemental Non-Cash Investing and Financing Activities: | ||||||||
| Notes issued for financing of insurance premiums | $ | 458,452 | $ | 327,586 | ||||
See accompanying condensed notes to the unaudited consolidated financial statements.
| F-38 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| For the Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (406,023 | ) |
| $ | (2,147,049 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 73,049 |
|
|
| 48,647 |
|
Stock based compensation |
|
| 76,301 |
|
|
| 8,100 |
|
PPP loan forgiveness including accrued interest |
|
| (1,421,577 | ) |
|
| — |
|
Interest expense related to debt discounts |
|
| — |
|
|
| 48,926 |
|
Amortization of operating lease right of use asset |
|
| 42,121 |
|
|
| 55,858 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (197,827 | ) |
|
| 1,966,072 |
|
Contract assets |
|
| 64,892 |
|
|
| 992,220 |
|
Prepaid expenses and other current assets |
|
| 7,579 |
|
|
| (5,062 | ) |
Accounts payable |
|
| 90,332 |
|
|
| (1,970,190 | ) |
Accounts payable-related party |
|
| — |
|
|
| (300 | ) |
Payroll taxes payable |
|
| — |
|
|
| (102,721 | ) |
Accrued expenses |
|
| (42,611 | ) |
|
| (242,303 | ) |
Lease obligation |
|
| (44,241 | ) |
|
| (55,965 | ) |
Contract liabilities |
|
| (490,970 | ) |
|
| 1,509 |
|
Deferred revenue |
|
| 952,551 |
|
|
| (254,755 | ) |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
| (1,296,424 | ) |
|
| (1,657,013 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of patents/trademarks |
|
| (7,435 | ) |
|
| (7,310 | ) |
Purchase of fixed assets |
|
| (50,670 | ) |
|
| (28,935 | ) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
| (58,105 | ) |
|
| (36,245 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayments of line of credit |
|
| — |
|
|
| (27,550 | ) |
Repayments of insurance and equipment financing |
|
| (21,206 | ) |
|
| (23,094 | ) |
Repayment of finance lease |
|
| (21,452 | ) |
|
| (10,702 | ) |
Proceeds from common stock issued |
|
| — |
|
|
| 9,253,128 |
|
Issuance cost |
|
| — |
|
|
| (1,001,885 | ) |
Proceeds from preferred stock issued |
|
| 4,500,000 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
| 4,457,342 |
|
|
| 8,189,897 |
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
| 3,102,813 |
|
|
| 6,496,639 |
|
Cash, beginning of period |
|
| 3,969,100 |
|
|
| 56,249 |
|
Cash, end of period |
| $ | 7,071,913 |
|
| $ | 6,552,888 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest paid |
| $ | 5,671 |
|
| $ | 6,643 |
|
|
|
|
|
|
|
|
|
|
Supplemental Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Common stock issued for accrued BOD fees |
| $ | — |
|
| $ | 7,500 |
|
Note issued for financing of insurance premiums |
| $ | 215,654 |
|
| $ | 165,375 |
|
See accompanying condensed notes to the unaudited consolidated financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021JUNE 30, 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, Inc. (“TrueVue360”) (collectively the “Company”), developsis a company that specializes in machine vision and deploys cutting-edge technologies that willartificial intelligence to analyze fast moving objects such as trains, trucks, automobiles, and aircraft. This technology can help to transform precision railroading, logisticsimprove safety, maintenance, and inter-modal transportation operations. Additionally, these unique patented solutions can be employed into many other industries.operating metrics.
The Company has developedis the inventor of the Railcar Inspection Portal (RIP) and is currently the rail industry leader for machine vision/camera wayside detection systems that provides both freightinclude the use of Artificial Intelligence at speeds up to 125 mph. The RIP inspects a train at full speed from the top, sides, and transit railroad customers and select government agencies the ability to conduct fully remote railcar inspections of trains while they are in transit.bottom looking at FRA/AAR mandated safety inspection points. The system which incorporates a variety of sophisticated optical technologies, illuminationalso detects illegal riders that assists law enforcement agencies. Each rail car is scanned with machine vision cameras and other sensors scans each passing railcar to create an extremely high-resolution image set from a variety of angles including the undercarriage. Thesetop, sides, and bottom and images are then processed through various methodsproduced within minutes of artificial intelligence algorithmspassing that can be used by the customer to identify specific defects and/or areas of interest on each railcar. This is all accomplished within seconds of a railcar passing through our portal. This solution has the potential to transform the railroad industry immediately increasing safety, improving efficiencyhelp prevent derailments, improve maintenance operations, and reducing costs.assist with security. The Company self-performs all aspects of hardware, software, IT, and Artificial Intelligence development and engineering and holds several patents and maintains significant intellectual property. The Company also has successfullya proprietary portfolio of over 40 Artificial Intelligence “Use Cases” that automatically flag defects. The Company has deployed this system with several Class 1 railroadand passenger customers and anticipates an increased demand in the future. Government agencies can conduct digital inspections combined with the incorporated AI to improvefuture from rail traffic flow across borders which also directly benefits the Class 1 railroads through increasing their velocity.operators, car owners, shippers, and law enforcement agencies.
The Company has also developed the Automated Logistics Information System (ALIS) which automates and reduces/removes personnel from gatehousesgatehouse operations where trucks enter and exit large logistics and intermodal facilities. This solution also incorporates sensors and data points as necessary for each operation and directly interconnects with backend logistics databases and processes to streamline operations and significantly improve operations and security and importantly dramatically improves the vehicle throughput on each lane on which the technology is deployed.
The Company has built a portfolio of IPwill deploy an upgraded Truck Inspection Portal (TIP) which uses the same technology and patented solutions that creates “actionable intelligence” using two core native platforms called centraco®lessons learned from the ALIS and praesidium®. All solutions provided include a variant of both applications. Centraco is designed primarily as the user interface to all our systems as well as the backend connection to third-party applications and databases through both Application Programming Interfaces (APIs) and Software Development Kits (SDKs). This interface is browser based and hosted within each one of our systems and solutions. It is typically also customized for each unique customer and application. Praesidium typically resides as middleware in our systems and manages the various image capture devices and some sensors for input into the centraco software.
The Company also developed a proprietary Artificial Intelligence (AI) software platform, truevue360™ with the objective of focusing the Company’s advanced intelligent technologies in the areas of AI, deep machine learning and advanced multi-layered algorithms to further support our solutions.
The Company also provides professional and consulting services for large data centers and has been developing a system for the automation of asset information marketed as dcVue™. The Company is now deploying its dcVue software. This software is used by Duos’ consulting auditing teams. dcVue is based upon the Company’s OSPI patent which was awarded in 2010. The Company offers dcVue available for license to our customers as a licensed software product.RIP systems.
The Company’s strategy is to deliverexpand our existing customer base in the Class 1, short line, and passenger space in North America; expand our subscription offering to car owners and shippers; and expand operations to meet the demand from international customers. The Company has prepared to respond and scale if necessary to respond to increased demand from potential regulations that may be imposed around wayside detection technology. In the near future the Company will put more emphasis on the trucking and intermodal sector with an updated Truck Inspection Portal solution. The Company continues to focus on operational and technical excellence, to our customers, expand our RIPcustomer satisfaction, and ALIS solutions into currentmaintaining a highly skilled and new customers focused in the Rail, Logistics and U.S. Government Sectors, offer both CAPEX and OPEX pricing models to customers that increases recurring revenue, backlog and improves profitability, responsibly grow the business both organically and through selective acquisitions, and promote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with the Company.force.
| F-39 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the threesix months ended March 31, 2021June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 20212023 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, 20202022 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021.31, 2023.
Reclassifications
The Company reclassified certain expenses for the three months ended March 31, 2020 to conform to 2021 classification. There was no net effect on the total expenses of such reclassification.
The following table reflects the reclassification adjustment effect in the three months ended March 31, 2020:
|
| Before Reclassification |
|
|
|
| After Reclassification |
| ||
|
| For the Three Months Ended |
|
|
|
| For the Three Months Ended |
| ||
|
| March 31, |
|
|
|
| March 31, |
| ||
|
| 2020 |
|
|
|
| 2020 |
| ||
|
|
|
|
|
|
|
|
| ||
REVENUES: |
|
|
|
| REVENUES: |
|
|
| ||
Technology systems |
| $ | 513,674 |
|
| Technology systems |
| $ | 513,674 |
|
Technical support |
|
| 345,187 |
|
| Services and Consulting |
|
| 477,271 |
|
Consulting |
|
| 132,084 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
| 990,945 |
|
| Total Revenue |
|
| 990,945 |
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
| COST OF REVENUES: |
|
|
|
|
Technology systems |
|
| 581,544 |
|
| Technology systems |
|
| 1,092,058 |
|
Technical support |
|
| 234,276 |
|
| Services and consulting |
|
| 293,954 |
|
Consulting services |
|
| 72,260 |
|
| Overhead |
|
| 260,421 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
| 888,080 |
|
| Total Cost of Revenues |
|
| 1,646,433 |
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN |
|
| 102,865 |
|
| GROSS MARGIN |
|
| (655,488 | ) |
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
| OPERATING EXPENSES: |
|
|
|
|
Sales and marketing |
|
| 139,852 |
|
| Sales and marketing |
|
| 139,852 |
|
Engineering |
|
| 312,428 |
|
| Research and development |
|
| 40,639 |
|
Research and development |
|
| 406,392 |
|
| Administration |
|
| 1,251,936 |
|
Administration |
|
| 1,015,559 |
|
| — |
|
| — |
|
AI technologies |
|
| 316,549 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
| 2,190,780 |
|
| Total Operating Expenses |
|
| 1,432,427 |
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
| $ | (2,087,915 | ) |
| LOSS FROM OPERATIONS |
| $ | (2,087,915 | ) |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Principles of Consolidation
The unaudited consolidated financial statements include duostechDuos Technologies Group, Inc. and its wholly owned subsidiaries, Duos Technologies, Inc.Inc and TrueVue360 Inc. All inter-company transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts receivable and notes receivable, valuation of common stock warrants received in exchange for an asset sale, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of derivatives, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible debt,inventory, estimates of the valuation of right of use assets and corresponding lease liabilities, valuation of warrants issued with debt and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of March 31, 2021,June 30, 2023, the balance in one financial institution exceeded federally insured limits by approximately $6,646,955.$1,954,132. 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 threesix months ended March 31, 2021, one customerJune 30, 2023, two customers accounted for 79% (“Customer 2”)61% and 25% of revenues. For the threesix months ended March 31, 2020, threeJune 30, 2022, four customers accounted for 44% (“Customer 1”)22%, 13% (“Customer 2”)26%, 24% and 13% (“Customer 3”)18% of revenues. In all cases, there isare no minimum contract valuevalues stated. Each contract covers an agreement to deliver a rail inspection portal which, once accepted, must be paid in full, with 30%30% or more being due and payable prior to delivery. The balances of the contracts are for service and maintenance which is paid annually in advance with revenues recorded ratably over the contract period. Each of the customers referenced has the following termination provisions:
|
|
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
|
|
|
|
At March 31, 2021, one customerJune 30, 2023, four customers accounted for 79%37%, 23%, 16% and 12% of accounts receivable. At December 31, 2020, two2022, four customers accounted for 56%34%, 31%, 19% and 30%10% of accounts receivable. Much of the credit risk is mitigated since all of the customers listed here are Class 1 railroads with a history of timely payments to us.
| F-40 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
Geographic Concentration
For the threesix months ended March 31, 2021,June 30, 2023, approximately 86%31% of revenue iswas generated from three customers outside of the United States. For the threesix months ended March 31, 2020,June 30, 2022, approximately 54%51% of revenue iswas generated from twothree 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
The Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
These inputs are prioritized below:
Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. |
Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. |
Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions that the market participants would use in the valuation of the asset or liability based on the best available information. |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The estimated fair value of certain financial instruments, including accounts receivable, prepaid expense, accounts payable, accrued expenses and notes payable are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
Accounts Receivable
On January 1, 2023, the Company adopted ASC 326, “Financial Instruments - Credit Losses”. In accordance with ASC 326, an allowance is maintained for estimated forward-looking losses resulting from the possible inability of customers to make required payments (current expected losses). The amount of the allowance is determined principally on the basis of past collection experience and known financial factors regarding specific customers.
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.
Inventory
Inventory consists primarily of spare parts and consumables and long lead time components to be used in the production of our technology systems or in connection with maintenance agreements with customers. Any inventory deemed to be obsolete is written off. 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 June 30, 2023 (Unaudited) |
Software Development Costs
Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features, and technical performance requirements. Software development costs incurred after establishing technological feasibility for software sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be Sold, Leased, or Marketed), are capitalized and amortized on a product-by-product basis when the product is available for general release to customers.
Earnings (Loss) Per ShareStock-Based Compensation
Basic earnings per share (EPS) are computed by dividing net loss applicableThe 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 commonemployees and directors including employee stock byoptions, restricted stock units, and employee stock purchases based on estimated fair values.
The Company estimates 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 exercisefair 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 warrants, convertible debt instruments, convertible preferredprice as well as assumptions regarding a number of highly subjective variables.
The Company estimates volatility based upon the historical stock or other common stock equivalents. Potentially dilutive securities are excluded fromprice of the computation if their effect is anti-dilutive. At March 31, 2021, there was an aggregate of 1,587,553 outstanding warrants to purchase shares of common stock. At March 31, 2021, there was an aggregate of 471,898 shares of employeeCompany and estimates the expected term for stock options to purchase sharesusing 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 common stock. Also, at March 31, 2021, 243,571 common shares were issuable upon conversion of Series B convertible preferred stock and 818,182 common shares were issuable upon conversion of Series C convertible preferred stock all of which were excluded from the computation of dilutive earnings per share because their inclusion would have been anti-dilutive.United States Treasury securities with similar maturities.
Revenue Recognition
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, satisfaction of a performance obligation creates revenue, and a performance obligation is satisfied upon transfer of control to a good or service to a customer.
Revenue is recognized by evaluating our revenue contracts with customers based on the five-step model under ASC 606:
| 1. |
| Identify the contract with the customer; |
2. | Identify the performance obligations in the contract; | |
3. | Determine the transaction price; | |
4. | Allocate the transaction price to separate performance obligations; and | |
5. | Recognize revenue when (or as) each performance obligation is satisfied. |
The Company generates revenue from four sources:
(1) Technology Systems
(2) AI Technologies
(3) Technical Support
(4) Consulting Services
Technology Systems
For revenues related to technology systems, the Company recognizes revenue over time using a cost-based input methodology in which significant judgment is required to estimatedestimate costs to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding amount of revenue to recognize.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Accordingly, the Company now bases its revenue recognition on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured and revenue is recognized accordingly.
In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company has adopted the implementation guidance as set out in ASC-606-10-55-187 through 192.
Under this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct labor, subcontract labor and other allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.
| F-42 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
AI Technologies
The Company has revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms which provide important operating information to the users of our systems. The revenue generated from these applications of AI consists of a fixed fee related to the design, development, testing and incorporation of new algorithms into the system, which is recognized as revenue at a point in time upon acceptance, as well as an annual application maintenance fee, which is recognized as revenue ratably over the contracted maintenance term.
Technical Support
Technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and technical support provided outside of a maintenance contract are on an “as-requested” basis, and revenue is recognized over time as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized over time ratably over the term of the contract.
Consulting Services
The Company’s consulting services business generates revenues under contracts with customers from four sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; (3) Customer service training and (4) Maintenance/support.
(1) Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2) For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer;
(3) Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
(4) Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term.
Segment InformationMultiple Performance Obligations and Allocation of Transaction Price
Arrangements with customers may involve multiple performance obligations including project revenue and maintenance services in our Technology Systems business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business, multiple performance obligations may include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each performance obligation is accounted for separately when each has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each performance obligation is recognized using the applicable criteria under GAAP as discussed above for performance obligations sold in single performance obligation arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company sells its various services and software and hardware products at established prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of performance obligations relative selling price allocation. The Company only sells maintenance services or spare parts based on its established rates after it has completed a system integration project for a customer. The customer is not required to purchase maintenance services. All elements in multiple performance obligations arrangements with Company customers qualify as separate units of account for revenue recognition purposes.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
Leases
The Company operatesfollows 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 one reportable segment.
Stock Based Compensationa contract in accordance with the revenue guidance in ASC 606.
The Company accountsmade 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 employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requiresreal estate leases that contain both lease and non-lease components as a single lease component.
At the measurementinception 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 recognition(3) whether we have the right to direct the use of compensation expensethe asset.
Operating ROU assets represent the right to use the leased asset for all share-based payment awards made to employeesthe lease term and directors including employee stock options, restricted stock units, and employee stock purchasesoperating lease liabilities are recognized based on estimated fair values.
Determining Fair Value Under ASC 718-10
The Company estimates the fairpresent value of stockminimum 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 granted usingwhere the Black-Scholes option-pricing formula. This fair valueCompany is then amortizedreasonably 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 requisite service periodslease term and is included in general and administration expenses in the consolidated statements of operations.
Basic earnings per share (EPS) are computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the awards, whichincremental 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 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.anti-dilutive.
The Company estimates volatility based upon the historicalAt June 30, 2023, there were (i) an aggregate of 80,091 outstanding warrants to purchase shares of common stock, price of the Company and estimates the expected term for(ii) employee stock options usingto 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 simplified method for employeescomputation of diluted net earnings per share because their inclusion would have been anti-dilutive.
At June 30, 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 directors and(iii) common shares issuable upon conversion of Series B Convertible Preferred Stock, all of which were excluded from the contractual term for non-employees. The risk-free rate is determined based upon the prevailing ratecomputation of United States Treasury securities with similar maturities.diluted net 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 Financial Accounting Standards Board (“FASB”)FASB issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. We plan to adopt2023. The Company early adopted this pronouncement for our fiscal year beginning January 1, 2022, and we doit did not expect it to have a material effect on our audited consolidated financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 is applied prospectively to all modifications that occur after the initial date of adoption. We adopted this pronouncement for our fiscal year beginning January 1, 2022, and it did not have a material effect on our audited consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 2 – LIQUIDITY
As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $406,023$5,133,083, for the threesix months ended March 31, 2021.June 30, 2023. During the same period, net cash used in operating activities was $1,296,424.$1,923,071. The working capital surplus and accumulated deficit as of March 31, 2021June 30, 2023, were $5,587,540$1,256,808 and $39,894,173,$57,494,917, 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 waswere completed during the second, third and fourth quarters of 2022 as well as the first quarterand third quarters of 2020 (the “2020 Offering”)2023. (see Note 10).
Upon completionThe Company was successful during 2022 in raising gross proceeds of the 2020 Offering, management raised sufficient working capital to meet its needs for the next 12 months without the need to raise further capital. Since the advent of the Covid-19 pandemic, the Company has experienced a significant slowdown in closing new projects due to cautious actions by current and potential clients. We continue to be successful in identifying new business opportunities and are focused on re-establishing a backlog of projects. Most importantly, the Company’s success in increasing its working capital surplus after receiving proceedsover $10,100,000 from the 2020 Offeringsale of more than $8,200,000both common shares and more recently,Series D Preferred Stock. Additionally, late in the first quarter of 2021, receiving net2023, the Company raised gross proceeds of $4,500,000$4,000,000 from the issuance of Series CE Preferred Stock to two large shareholders, continues to give us the capital required to fund the fundamental business changes that we undertook in the last quarter of 2020 and maintain our business strategy overall.Stock. In addition,August 2023, the Company was successful in securing a loanraising gross proceeds of $1,410,270$5,000,000 from the sale of Series F Convertible Preferred Stock. Additionally, during the second quarter of 20202023, the Company renewed its S-3 “shelf registration” statement allowing the Company to sell additional common shares. At the time of this filing, the Company estimates that it has available capacity on its shelf registration which it can utilize to bolster working capital and growth of the business. Although additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded operations based on an anticipated increase in business activity. In the long run, the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing its business plan, generate enough revenue, and attain consistently profitable operations. Although the lingering effects of the global pandemic related to the coronavirus (Covid-19) continue to affect our operations, particularly in our supply chain, we now believe that this is expected to be an ongoing issue and our working capital assumptions reflect this new reality. The Company cannot currently quantify the uncertainty related to the ongoing supply chain delays or inflationary increases and their effects on our customers in the coming quarters. We have analyzed our cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand or available via the capital markets to maintain operations for at least twelve months from the Small Business Administration via the PPP/CARES Act program which further bolstered the Company’s cash reserves. This loan was forgiven in the current quarter and leaves the Company essentially debt free. Managementdate of this report.
In addition, management has been taking and continues to take actions including, but not limited to, elimination of certain costs that diddo 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. DuringThe Company believes that, as described above, it will have sufficient sources of working capital to meet its obligations over the first quarter, managementfollowing twelve months. In the last twelve months the Company has taken further significant actions including reorganizing our engineeringseen growth in its contracted backlog as well as positive signs from new commercial engagements that indicate improvements in future commercial opportunities for both one-time capital and technical teams and selectively improving organizational efficiency to effectively grow the business as the expected order flow resumes in 2021.recurring services revenues.
Management believes that, at this time, wethe 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 alleviatedput 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.concern for a period of twelve months. We arecontinue 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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 without the requirementwith access to raise additional capital for existing operations. As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock. Although additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded operations based on this increase in business activity. In the long run,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 enoughsufficient revenue and to attain consistently profitable operations. Althoughoperations with less net cash used in operating activities in the current global pandemicnext 12 months. These consolidated financial statements do not include any adjustments related to the coronavirus (Covid-19) has affected our operations,recoverability and we do believe this is expected toclassification of recorded asset amounts and classification of liabilities that might be a long-term issue,necessary should the Company cannot currently quantify the uncertainty relatedbe unable to the recent pandemic and its effects on our customers in the coming quarters. We have analyzed our cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand to maintain operations for at least 12 months from the date of this report.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:of June 30, 2023 and December 31, 2022:
|
| March 31, 2021 |
|
| December 31, 2020 |
| ||||||||||
Notes Payable |
| Principal |
|
| Interest |
|
| Principal |
|
| Interest |
| ||||
Third Party - Insurance Note 1 |
| $ | 16,486 |
|
|
| 7.75 | % |
| $ | 23,327 |
|
|
| 7.75 | % |
Third Party - Insurance Note 2 |
|
| — |
|
|
| 5.26 | % |
|
| 10,457 |
|
|
| 5.26 | % |
Third Party - Insurance Note 3 |
|
| 5,250 |
|
|
| — |
|
|
| 9,158 |
|
|
| — |
|
Third Party - Insurance Note 4 |
|
| 215,654 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
| $ | 237,390 |
|
|
|
|
|
| $ | 42,942 |
|
|
|
|
|
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
| Schedule of Notes Payable - Financing Agreements | ||||||||||||||||
| June 30, 2023 | December 31, 2022 | |||||||||||||||
| Notes Payable | Principal | Interest | Principal | Interest | ||||||||||||
| Third Party - Insurance Note 1 | $ | 10,824 | 8.73 | % | $ | — | — | |||||||||
| Third Party - Insurance Note 2 | 117,552 | 8.00 | 17,753 | 6.24 | % | |||||||||||
| Third Party - Insurance Note 3 | 10,811 | — | 16,094 | — | ||||||||||||
| Third Party - Insurance Note 4 | 119,875 | — | 40,728 | — | ||||||||||||
| Total | $ | 259,062 | $ | 74,575 | ||||||||||||
The Company entered into an agreement on December 23, 20202022 with its insurance provider by issuing a $23,327 $26,484 note payable (Insurance Note 1) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 7.75%8.73% payable in monthly installments of principal and interest totaling $2,416 $2,755 through October 23, 2021.2023. The balance of Insurance Note 1 as of March 31, 2021June 30, 2023 and December 31, 20202022 was $16,486 $10,824 and $23,327,0 zero, respectively.
The Company entered into an agreement on April 15, 20202022 with its insurance provider by issuing a $51,379 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 5.26%6.24% and payable in 11 monthly installments of principal and interest totaling $5,263 through February$5,979. The Company entered into an agreement on April 15, 2021.2023 with its insurance provider by issuing a note payable (Insurance Note 2) for the purchase of an insurance policy in the amount of $142,734, secured by that policy with an annual interest rate of 8.00% and payable in 11 monthly installments of principal and interest totaling $13,501. At March 31, 2021June 30, 2023 and December 31, 2020,2022, the balance of Insurance Note 2 was zero$117,552 and $10,457,$17,753, respectively.
The Company entered into an agreement on September 15, 20202022 with its insurance provider by issuing a $13,796 note payable (Insurance Note 3) for the purchase of an insurance policy secured byin the amount of $24,140. The policy was renewed on February 3, 2023 and payable in 12 monthly installments.installments of $2,012. At March 31, 2021June 30, 2023 and December 31, 2020,2022, the balance of Insurance Note 3 was $5,250$10,811 and $9,158,$16,094, respectively.
The Company entered into an agreement on February 3, 20202022 with its insurance provider by issuing a $165,375 note payable (Insurance Note 4) with a down payment of $55,563 for the purchase of an insurance policy secured by eight monthly installments of $13,726 through December 3, 2020. The policy renewed on February 3, 2021 in the amount of $215,654$242,591 with a down payment paid in the amount of $37,000 on April 6, 2021$102,075 in the first quarter of 2022 and ten monthly installments of $17,899.$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 (Insurance Note 4) 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, 2021June 30, 2023 and December 31, 2020,2022, the balance of Insurance Note 4 was $215,654$119,875 and zero,$40,728, respectively.
Equipment Financing
The Company entered into an agreement on August 26, 2019May 22, 2020 with an equipment financing company by issuing a $147,810$121,637 secured note, with an annual interest rate of 12.72%9.90% and payable in monthly installments of principal and interest totaling $4,963 through August 1, 2022. The Company entered into an additional agreement on May 22, 2020 with the same equipment financing company by issuing a $121,637 secured note, with an annual interest rate of 9.90% and payable in monthly installments of principal and interest totaling $3,919$3,919 through June 1, 2023. At March 31, 2021June 30, 2023 and December 31, 2020,2022, the aggregate balance of these notesthis note was $171,3520 zero and $192,804,$22,851, respectively.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
NOTE 4 – COMMITMENTS AND CONTINGENCIES
At March 31, 2021, future minimum lease payments due under the equipment financing is as follows:
As of December 31, |
| Amount |
| |
2021 |
| $ | 79,941 |
|
2022 |
|
| 86,735 |
|
2023 |
|
| 23,515 |
|
Total minimum equipment financing payments |
| $ | 190,191 |
|
Less: interest |
|
| (18,839 | ) |
Total equipment financing at March 31, 2021 |
| $ | 171,352 |
|
Less: current portion of equipment financing |
|
| (92,224 | ) |
Long term portion of equipment financing |
| $ | 79,128 |
|
Notes Payable – SBA LoanOperating Lease Obligations
|
| March 31, 2021 |
| December 31, 2020 |
| ||||||||
Payable To |
| Principal |
| Interest |
| Principal |
|
| Interest |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
SBA loan |
| $ | — |
|
|
| $ | 1,410,270 |
|
|
| 1 | % |
Total |
|
| — |
|
|
|
| 1,410,270 |
|
|
|
|
|
Less current portion |
|
| — |
|
|
|
| (863,845 | ) |
|
|
|
|
Long term portion |
| $ | — |
|
|
| $ | 546,425 |
|
|
|
|
|
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
On April 23, 2020,July 26, 2021, the Company entered into a promissory note (the “Note”) with BBVA USA, which provided for a loan in the amount of $1,410,270 (the “Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Loan had a two-year term and accrued interest at a rate of 1.00% per annum (APR 1.014%). Monthly principal and interest payments were deferred for nine months after the date of disbursement. The Loan could be prepaid at any time prior to maturity with no prepayment penalties. The Company applied for the PPP loan forgiveness and was granted forgiveness on February 1, 2021. At March 31, 2021 and December 31, 2020, the loan balance was zero and $1,410,270, respectively.
NOTE 4 – LINE OF CREDIT
The Company assumed a line of credit with Wells Fargo Bank upon merger with ISA on April 1, 2015. The line of credit provided for borrowings up to $40,000 but is now closed. The balance as of March 31, 2021 and December 31, 2020, was zero and zero, respectively, including accrued interest. This line of credit has been paid in full as of May 5, 2020.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Delinquent Payroll Taxes Payable
The Company has paid its delinquent IRS payroll taxes and late fees in full. At March 31, 2021 and December 31, 2020, the state payroll taxes payable balance was $3,146 and $3,146, respectively. The remaining balance of $3,146 with the state of California will be remitted in 2021.
Operating Lease Obligations
The Company has annew operating lease agreement for office and warehouse combination space of 8,308 square feet that was amended on May 1, 2016 and again on April 1, 2019, increasing the office space to 10,20340,000 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 OctoberDecember 1, 2021 and end on May 31, 2021.2032. 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 3%2.5%, beginning MayNovember 1, 2017.
2023. The Company enteredmade a new lease agreement of office and warehouse combination space of 4,400 square feet on June 1, 2018 and ending May 31, 2021. The Company has extended this lease to coincide with the main office space lease that will be ending on October 31, 2021. This additional space allows for resource growth and engineering efforts for operations before deploying to the field. The rent is subject to an annual escalation of 3%.
The Company now has a total of office and warehouse space of approximately 14,603 square feet.
At March 31, 2021, future minimum lease payments due under operating leases are as follows:
As of March 31, 2021 |
| Amount |
| |
Total minimum financial lease payments |
| $ | 164,961 |
|
Less: interest |
|
| (6,405 | ) |
Total lease liability at March 31, 2021 |
| $ | 158,556 |
|
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”), which requires all leases with a term greater than 12 months to be recognized on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance. We adopted ASU 2016-02 effective January 1, 2019, on a modified retrospective basis, without adjusting comparative periods presented. Effective January 1, 2019, the Company established a right-of-use model (ROU) asset and operating lease liabilitysecurity deposit payment in the amount of $644,245. The Company extended$600,000 on July 26, 2021. Per the lease agreement of office and warehouse combination space to coincide withcontract, on the main office space and recorded a right-of-use model (ROU) to18th month, the asset and operating lease liability in the amount of $21,022.security deposit is reduced by $50,000. The right of use asset balance at March 31, 2021June 30, 2023, net of accumulated amortization, was $158,556. These are$4,534,593.
As of June 30, 2023, the office and warehouse lease is the Company’s only lease whosewith a term is greater than 12twelve months. The adoptionoffice and warehouse lease has a remaining term of ASU 2016-02 didapproximately 9.0 years and includes an option to extend for two renewal terms of five years each. The renewal options are not materially affect our unaudited consolidated statementreasonably certain to be exercised, and therefore, they are not included when determining the lease term used to establish the right of operations or our unaudited consolidated statements of cash flows. Weuse asset and lease liability. The Company also has several short-term leases, primarily related to equipment. The Company made an accounting policy election to keepnot recognize short-term leases with an initial termterms of 12twelve months or less offon the consolidated balance sheet and toinstead recognize allthe lease payments in expense as incurred. The Company has also elected to account for real estate leases withthat contain both lease and non-lease components (such as common area maintenance) as a term greater than 12 months on a straight-line basis over thesingle lease term in our unaudited consolidated statements of operations.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)component.
The following table shows supplemental information related to leases:
| Schedule of supplemental information related to leases | ||||||||
Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Lease cost: | ||||||||
| Operating lease cost | $ | 390,819 | $ | 389,813 | ||||
| Short-term lease cost | 46,717 | 17,922 | ||||||
| Other information: | ||||||||
| Operating cash outflow used for operating leases | 316,040 | 185,000 | ||||||
| Weighted average discount rate | 9.0 | % | 9.0 | % | ||||
| Weighted average remaining lease term | 9.0 years | 9.9 years | ||||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
As of June 30, 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 | $ | 380,829 | ||
| 2024 | 779,087 | |||
| 2025 | 798,556 | |||
| 2026 | 818,518 | |||
| 2027 | 838,984 | |||
| Thereafter | 4,043,427 | |||
| Total undiscounted future minimum lease payments | 7,659,401 | |||
| Less: Impact of discounting | (2,500,148 | ) | ||
| Total present value of operating lease obligations | 5,159,253 | |||
| Current portion | (769,563 | |||
| Operating lease obligations, less current portion | $ | 4,389,690 | ||
Executive Severance Agreement
On July 10, 2020, the Company announced thatPursuant to a separation agreement with Gianni Arcaini, would retire from the positions ofour former Chief Executive Officer and Chairman of the Board effective as of September 1, 2020 (the “CEO Transition”). In order to facilitate a transition of his duties, the Company and Mr. Arcaini entered into a separation agreement which became effective as of July 10, 2020 (the “Separation Agreement”). Pursuant to the Separation Agreement,, Mr. Arcaini’s employment with the Company ended on September 1, 2020 and(“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$75,000 as well as certain limited health and life insurance benefits. The Separation Agreement also contains confidentiality, non-disparagement and non-solicitation covenants and a release of claims by Mr. Arcaini who continued to serve as Chairman of the Board of Directors of the Company. The Corporate Governance and Nominating Committee did not submit Mr. Arcaini for re-election as a director and on November 19, 2020 at the Annual Shareholders meeting a new non-Executive Chairman was appointed.Arcaini.
In accordance with the Separation Agreement, the Company will pay to Mr. Arcaini the total sum of $747,788. Notwithstanding the foregoing, the status of Mr. Arcaini as a “Specified Employee” as defined in Internal Revenue Code Section 409A has the effect of delaying any payments to Mr. Arcaini under the Separation Agreement for six months after the Separation Date.$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,$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 $45,710 as of June 30, 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$1,200 per month and provide and pay for his health insurance for 36 months following the Separation Date of approximately $450$400 per month. Unvested optionsmonth, which are also included in the amount of 50,358 became exercisable and vested in their entirety on the Separation Date valued at $95,127. The Company made payment of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation Agreement of approximately $17,000.accrued expenses as described above.
NOTE 65 – STOCKHOLDERS’ EQUITY
Common stock issuedSeries B Convertible Preferred Stock
On February 12, 2020, the Company entered into an underwriting agreementThe following summary of certain terms and provisions of our Series B Convertible Preferred Stock (the “Underwriting Agreement”“Series B Convertible Preferred Stock”) with ThinkEquity, a division of Fordham Financial Management, Inc. (“ThinkEquity”), as representative of the underwriters listed therein (the “Underwriters”), pursuant to which the Company agreed to sell to the Underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 1,350,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a public offering price of $6.00 per share. In addition, the Underwriters were granted an over-allotment option (the “Over-allotment Option”) for a period of 45 days to purchase up to an additional 202,500 shares of Common Stock. The Offering closed on February 18, 2020. The Common Stock began trading on the Nasdaq Capital Market under the symbol DUOT on February 13, 2020.
On February 20, 2020, pursuantis subject to, and qualified in compliance withits entirety by reference to, the terms and conditionsprovisions 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 aforementioned Underwriting Agreementshares of each of those series and the Offering,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 Underwriters partially exercised the Over-allotment Option to purchase 192,188 authorized shares of Commonpreferred stock as Series B Convertible Preferred Stock at $6.00with a stated value of $ per share (the “Over-Allotment Exercise”).share. The sale of the Over-Allotment Exercise to purchase 192,188 shares of CommonSeries B Convertible Preferred Stock closed on February 21, 2020.
In total, the Companywere validly issued, 1,542,188 shares of Common Stock in connection with the underwritten public offeringfully paid and up listing to the Nasdaq Capital Market national exchange. The securities were issued pursuant to a Registration Statement on Form S-1 (File No. 333- 235455), as amended, which was declared effective by the Securities and Exchange Commission on February 12, 2020. The Company received gross proceeds of approximately $9.25 million for the Offering, including the exercise of the Over-Allotment Exercise, prior to deducting underwriting discounts and commissions and offering expenses payable by the Company.non-assessable.
| F-48 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 June 30, 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
On February 26, 2021,The Company’s Board of Directors designated shares as the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing investors in the Company (the “Purchasers”). Pursuant to the Purchase Agreement, the Purchasers purchased 4,500 shares of a newly authorized Series C Convertible Preferred Stock (the “Series C Convertible Preferred Stock”), and the Company received proceeds of $4,500,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
Under the Purchase Agreement, the Company is required to hold a meeting of shareholders at the earliest practical date, but in no event later than June 25, 2021 (or July 26, 2021 in the event of a review of the proxy statement by the Securities and Exchange Commission (the “SEC”)). Nasdaq Marketplace Rule 5635(d) limits the number of shares of common stock (or securities that are convertible into common stock) without shareholder approval. The Company is required to obtain shareholder approval (the “Stockholder Approval”) in order to issue shares of common stock underlying the Series C Convertible Preferred Stock at a price less than the greater of book or market value which equal 20% or more of the number of shares of common stock outstanding before the issuance. As described below, the terms of the Series C Convertible Preferred Stock limit its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval is obtained. If the Company does not obtain the Stockholder Approval at the first meeting, it is required to hold shareholder meetings every four months until the Stockholder Approval is obtained.
In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company shall file with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series C Convertible Preferred Stock are convertible. The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
The Company’s Board of Directors has designated 5,000 shares as the Series C Convertible Preferred Stock. Each share of the Series C Convertible Preferred Stock has a stated value of $1,000.$. The holders of the Series C Convertible Preferred Stock, the holders of the common stock and the holders of any other class or series of shares entitled to vote with the common stock shall vote together as one class on all matters submitted to a vote of shareholders of the Company. Each share of Series C Convertible Preferred Stock has 172 votes (subject to adjustment); provided that in no event may a holder of Series C Convertible Preferred Stock be entitled to vote a number of shares in excess of such holder’s Beneficial Ownership Limitation (as defined in the Certificate of Designation and as described below). Each share of Series C Convertible Preferred Stock is convertible, at any time and from time to time, at the option of the holder, into that number of shares of common stock (subject to the Beneficial Ownership Limitation) determined by dividing the stated value of such share ($1,000) by the conversion price, which is $5.50$ (subject to adjustment).
The Company shall not effect any conversion of the Series C Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Series C Convertible Preferred Stock, to the extent that after giving effect to the conversion sought by the holder such holder (together with such holder’s Attribution Parties (as defined in the Certificate of Designation)) would beneficially own more than 4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon such conversion (the “Beneficial Ownership Limitation”). Notwithstanding anythingAll holders of the Series C Preferred Stock 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 contrary inPurchase Agreement, the CertificatePurchasers purchased 4,500 shares of Designation, until the Company has obtained Stockholder Approval, the Company may not issue upon the conversion of any share ofa newly authorized Series C Convertible Preferred Stock, a numberand the Company received proceeds of shares$4,500,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of common stock which, when aggregated with any shares of common stock issued upon conversion of any otherthe parties. In January 2022, the 2,500 outstanding shares of Series C Convertible Preferred Stock would exceed 706,620were converted into shares of common stock. As of June 30, 2023 and December 31, 2022, respectively, there were zero and zero shares of Series C Convertible Preferred Stock issued and outstanding.
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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
Series D Convertible Preferred Stock
On September 28, 2022, the Company amended its articles of incorporation to designate 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 $. 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, 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 elected the 19.99% Beneficial Ownership Limitation. The Company shall, 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 Purchaser 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 such Purchase Agreements, 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 June 30, 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 shares as the Series E Convertible Preferred Stock, (the Series E Convertible Preferred Stock). Each share of the Series E Convertible Preferred Stock has a stated value of $. 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. Each share of Series E Convertible Preferred Stock is convertible, (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”). All holders of the Series E Convertible Preferred Stock elected the 19.99% 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, 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.
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.
In connection with the Series E Preferred Stock issuances, the Company accrued estimated costs and charged additional paid-in capital of $299,145 during the quarter ended March 31, 2023. The actual costs were only $17,645, hence the excess of $ was reversed during the three months ended June 30, 2023.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
Common stock issued
Six Months Ended June 30, 2022
During the six months ended June 30, 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 $5.50 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.
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.
Six Months Ended June 30, 2023
During the three months ended March 31, 2023, the Company issued shares of common stock for payment of board fees to three directors for a value of $32,500 for services to the board which was expensed during the three months ended March 31, 2023. The value of the shares is based on the March 31, 2023 grant date quoted trading price $.
During the three months ended June 30, 2023, the Company issued shares of common stock for payment of board fees to three directors for a value of $32,500 for services to the board which was expensed during the three months ended June 30, 2023. The value of the shares is based on the June 30, 2023 grant date quoted trading price of $.
On June 30, 2023, the Company issued shares of common stock to employees participating in the Company’s Employee Stock Purchase Plan at the end of a six-month offering period. The employee contributions totaled $117,048 for the six months ended June 30, 2023 and represented a purchase price of $ per share. The purchase price for one share of Common Stock under the ESPP is 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 (see below).
Employee Stock Purchase Plan
In the fourth quarter of 2022, the board of directors adopted an Employee Stock Purchase Plan (“ESPP”) which, was effective as of January 1, 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. 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 quarters 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, (look-back feature). Although not required by the ESPP, all payroll deductions received or held by the Company under the ESPP, are segregated and deemed as “restricted cash” until the completion of the offering period and redemption of the applicable shares and those withheld amounts are recorded as liabilities. The maximum aggregate number of shares of the Common Stock that may be issued under the ESPP is shares.
Under ASC 718-50 “Employee Share Purchase Plans” the plan is considered a compensatory plan and the compensation for each six-month offering period is computed based upon the grant date fair value of the estimated shares to be purchased based on the estimated payroll deduction withholdings. The grant date fair value was computed as the sum of (a) % purchase discount off of the grant date quoted trading price of the Company’s common stock (b) the fair value of the look-back feature of the Company’s common stock on the grant date which consists of a call option on % of a share of common stock and a put option on % of a share of common stock.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
The Company computed the fair value of the look-back feature call and put options for January 1, 2023 to June 30, 2023 using a Black Scholes option pricing model using the following assumptions:
| Schedule of black scholes option pricing model | ||||
June 30, 2023 | ||||
| Grant date share price | $ | 2.10 | ||
| Grant date exercise price | $ | 1.79 | ||
| Expected term | years | |||
| Expected volatility | % | |||
| Risk-free rate | % | |||
| Expected dividend rate | % | |||
During the offer period, the Company records stock-based compensation pro rata as expense and a credit to additional paid-in capital. The Company issued common shares on the option exercise date of June 30, 2023 as follows:
| Schedule of stock-based compensation | ||||
| For the six months ended | ||||
June 30, 2023 | ||||
| Cash payment received from employee withholdings | $ | 117,048 | ||
| Stock based compensation expense | 66,217 | |||
| Total charges related to the Employee Stock Purchase Plan | 183,265 | |||
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the threesix months ended March 31, 2021June 30, 2023 and 2020,2022, was $76,301$ and $8,100,$, respectively, for stock options granted to employees and directors.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 isare ultimately expected to vest during the period. At March 31, 2021,June 30, 2023, the total compensation cost for stock options not yet recognized was $284,784.$759,331. This cost will be recognized over the remaining vesting term of the options ranging from onesix months to threetwo- and one-half years.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31,On May 12, 2021,
(Unaudited)
Employee Stock Options
A maximum of 178,572 shares were made available for grant under the 2016Board adopted, with shareholder approval, the 2021 Equity Incentive Plan as amended (the “2016“2021 Plan”), and all outstanding options under providing for the Plan provide a cashless exercise feature.issuance of up to shares of our common stock. The maximum number of shares was increased by shareholder approval to 321,429. The identification of individuals entitled to receive awards, the termspurpose of the awards,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 number of shares subject to individual awards, are determined by our Board of Directors or the Compensation Committee, at their sole discretion. The aggregate number of shares with respect to which options or stock awards may be granted under the 2016 Plan and the purchase price per share, if applicable, shall be adjusted for any increase or decrease in the number of issued shares resulting from a stock dividend, stock split, reverse stock split, recapitalization, or similar event. As of March 31, 2021, and December 31, 2020, options to purchase 311,898 shares of common stock and 311,898 shares of common stock were outstanding under the 2016 Plan, respectively. On April 1, 2020, the Board of Directors cancelled 161,402 options previously granted to existing employees and granted 310,290 options, of which 160,866 were replaced with new options carrying a $6.00 exercise price and a further 149,424 options were issued to existing employees, officers and directors carrying a $4.74 strike price with a vesting period ranging from 9 months to 21 months. On April 1, 2020 the new stock options issued had a fair value of $370,312. The options that were cancelled and replaced were accounted for by valuing the original options on the day before they were cancelled and valuing the new options on the day of issuance. The inputs used were a stock price of $4.74 on the day of cancellation and $4.70 on the day of issuance, expected term of 2.5 years, expected volatility of 81%, no anticipated dividend and an interest rate of 0.255%. The difference between the valuations were recorded as one-time option expense given that options cancelled were already vested and the replacement options were immediately vested. The one-time expense for this cancellation and issuance was $102,800. The strike price of the cancelled options was $14.00.
In addition to the 140,000 non-plan stock options issued during 2020 as an incentive hiring bonus, during the firstthird quarter of 2021, the shareholders approved the issuance of up to one million shares or share equivalents pursuant to the 2021 Plan. 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 Directors$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%.
On April 1, 2023, the Board granted 20,000 non-planto certain key employees an aggregate of non-qualified stock options with a strike price of $4.32 per share to its new VP$4.22, a term of Product Innovation. These5-years and 3-year vesting period. The options were awarded asgranted prior to the certificates being issued subject to a one-time award aspending modification of specific language contained within the option agreement pertaining to certain rights of the holder in the event of a hiring incentivemerger 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 haveforfeited unvested options leading to a fair valuenet issuance during the quarter of $52,758 non-qualified stock options. The Company expects to take a charge of $ during the vesting period.
As of June 30, 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 June 30, 2023, 581,325 options were exercisable. Of the total options issued, and options were outstanding under the 2016 Equity Incentive Plan, and were outstanding under the 2021 Plan and a further and non-plan options to purchase common stock were outstanding as of January 4, 2021.June 30, 2023 and December 31, 2022, respectively. The issuance of thesenon-plan options generated stock option compensation expense this quarterwere granted to four executives as hiring incentives, including the Company’s CEO in the amountfourth quarter of $7,685 and a balance of unamortized stock option compensation expense of $45,073, that will be expensed over the next 2.75 years. 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 | 353,117 | $ | 4.22 | $ | — | |||||||||||||
| Exercised/Forfeited/Expired | (61,608 | ) | $ | 4.48 | — | $ | — | |||||||||||
| Outstanding at June 30, 2023 | 1,217,775 | $ | 5.37 | $ | — | |||||||||||||
| Exercisable at June 30, 2023 | 581,325 | $ | 5.38 | $ | — | |||||||||||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 June 30, 2023 | 80,091 | $ | 8.53 | — | ||||||||||||
| Exercisable at June 30, 2023 | 80,091 | $ | 8.53 | — | ||||||||||||
NOTE 6 - REVENUE AND CONTRACT ACCOUNTING
Warrants
No warrants have been issued during the first quarter of 2021.
NOTE 7 - REVENUE
Revenue Recognition and Contract Accounting
The Company generates revenue from four sources: (1) Technology Systems; (2) AI Technology;Technology which is included in the consolidated statements of operations line-item Technology Systems; (3) Technical Support; and (4) Consulting Services.Services which is included in the consolidated statements of operations line-item Services and Consulting.
The Company constructs intelligent technology systems consisting of materialsContract assets and labor under customer contracts. Revenues and related costscontract liabilities on technology systems revenue areuncompleted contracts for revenues 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 instantaneouslyare as the goods are manufactured and revenue is recognized accordingly.
In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company has adopted the implementation guidance as set out in ASC 606-10-55-187 through 192.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Under this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct labor, subcontract labor and other allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.follows:
Contract Assets
Contract assets on uncompleted contracts represent costs and estimated earningscumulative 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 onlybased on the ratio of cost incurred to the extent of the cost incurred.total estimated costs.
At March 31, 2021June 30, 2023 and December 31, 2020,2022, contract assets on uncompleted contracts consisted of the following:
| Schedule Of Contract Assets On Uncompleted Contracts | ||||||||||||||||
June 30, 2023 | December 31, 2022 | |||||||||||||||
|
| March 31, 2021 |
|
| December 31. 2020 |
| ||||||||||
Costs and estimated earnings recognized |
| $ | 1,679,930 |
| $ | 4,152,850 |
| |||||||||
| Cumulative revenues recognized | $ | 8,278,099 | $ | 5,934,205 | ||||||||||||
Less: Billings or cash received |
|
| (1,642,364 | ) |
|
| (4,050,392 | ) | (7,271,308 | ) | (5,508,483 | ) | ||||
Contract assets |
| $ | 37,566 |
|
| $ | 102,458 |
| $ | 1,006,791 | $ | 425,722 | ||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
Contract Liabilities
Contract liabilities on uncompleted contracts represent billings and/or cash received that exceed accumulatedcumulative revenues recognized on uncompleted contracts accounted for under the cost-to-cost input method, which recognizes revenue only torevenues based on the extentratio of the cost incurred.incurred to total estimated costs.
At March 31, 2021 and December 31, 2020, contractContract liabilities on uncompleted contracts consisted of the following:
|
| March 31, 2021 |
|
| December 31. 2020 |
| ||
Billings and/or cash receipts on uncompleted contracts |
| $ | 2,530,216 |
|
| $ | 2,978,007 |
|
Less: Costs and estimated earnings recognized |
|
| (2,364,183 | ) |
|
| (2,268,454 | ) |
Contract liabilities |
| $ | 166,033 |
|
| $ | 709,553 |
|
A contract is considered complete when all costs except insignificant items have been incurred and the installation is operating according to specifications or has been accepted by the customer.
The Company has contracts in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. Costs estimates are reviewed periodically on a contract-by-contract basis throughout the life of the contract such that adjustments to the profit resulting from revisions are made cumulative to the date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects, must be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional information becomes available.
Artificial Intelligence
The Company has begun to derive revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms to provide important operating information to the users of our systems. The revenue generated from these applications of AI consists of an annual application maintenance fee which will be recognized ratably over the year, plus fees for the design, development, testing and incorporation of new algorithms into the system which will be recognized upon completion of each deliverable.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Technical Support
Maintenance and technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and technical support provided outside of a maintenance contract are on an as-requested basis, and revenue is recognized as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized ratably over the term of the contract.
For sales arrangements that do not involve multiple elements such as professional services, which are of short-term duration, revenues are recognized when services are completed.
Consulting Services
The Company’s consulting services business generates revenues under contract with customers from three sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; and (3) Customer Service (training and maintenance support).
For sales arrangements that do not involve performance obligations:
|
|
|
|
|
|
|
|
Multiple Elements
Arrangements with customers may involve multiple elements including project revenue and maintenance services in our Intelligent Technology Systems business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business, multiple elements may include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for multiple element arrangement is as follows:
Each element is accounted for separately when each element has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each element is recognized using the applicable criteria under GAAP as discussed above for elements sold in non-multiple element arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company sells its various services and software and hardware products at established prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of multiple element relative selling price allocation. The Company only sells maintenance services or spare parts based on its established rates after it has completed a system integration project for a customer. The customer is not required to purchase maintenance services. All elements in multiple element arrangements with Company customers qualify as separate units of account for revenue recognition purposes.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Deferred Revenue
Deferredconsulting 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.
At June 30, 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 | ||||||||
June 30, 2023 | December 31, 2022 | |||||||
| Billings and/or cash receipts on uncompleted contracts | $ | 972,900 | $ | 4,355,470 | ||||
| Less: Cumulative revenues recognized | — | (4,144,018 | ) | |||||
| Contract liabilities, technology systems | 972,900 | 211,452 | ||||||
| Contract liabilities, services and consulting | 1,466,740 | 746,545 | ||||||
| Total contract liabilities | $ | 2,439,640 | $ | 957,997 | ||||
Contract liabilities at December 31, 2022 were $957,997; of which $211,452 for technology systems and $456,080 in services and consulting has been recognized as of June 30, 2023
The Company expects to recognize all contract liabilities within 12 months from the respective 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: |
| a. |
|
|
| b. |
|
|
| c. |
|
|
| d. |
|
|
| 2. |
| We currently operate in North America including the USA, Mexico and Canada. |
| 3. |
| Our customers include rail transportation, commercial, |
| 4. |
| 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 |
| b. |
| Maintenance and support contracts ranging from one to five years in |
|
|
| F-54 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
Quantitative:
Quantitative:
For the Three Months Ended March 31, 2021June 30, 2023
| Schedule of Disaggregation of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||
Segments |
| Rail |
| Commercial |
| Government |
| Banking |
| IT Suppliers |
| Artificial Intelligence |
| Total |
| Rail | Commercial | Government | Artificial Intelligence | Total | ||||||||||||||||||||||||||||
Primary Geographical Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
North America |
| $ | 1,757,446 |
| $ | 55,842 |
| $ | 28,560 |
| $ | 22,829 |
| $ | 132,977 |
| $ | 157,100 |
| $ | 2,154,754 |
| $ | 1,537,286 | $ | 42,381 | $ | — | $ | 190,392 | $ | 1,770,059 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Major Goods and Service Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Turnkey Projects |
| $ | 1,323,322 |
| $ | — |
| $ | 8,339 |
| $ | 1,537 |
| $ | — |
| $ | — |
| $ | 1,333,198 |
| $ | 856,942 | $ | 13,552 | $ | — | $ | — | $ | 870,494 | ||||||||||||||||
Maintenance & Support |
|
| 434,124 |
|
| 55,842 |
|
| 20,221 |
|
| 21,292 |
|
| — |
|
| — |
|
| 531,479 |
| ||||||||||||||||||||||||||
Data Center Auditing Services |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 130,592 |
|
| — |
|
| 130,592 |
| ||||||||||||||||||||||||||
Software License |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,385 |
|
| — |
|
| 2,385 |
| ||||||||||||||||||||||||||
| Maintenance and Support | 680,344 | 28,829 | — | — | 709,173 | |||||||||||||||||||||||||||||||||||||||||||
Algorithms |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 157,100 |
|
| 157,100 |
| — | — | — | 190,392 | 190,392 | |||||||||||||||||||||
|
| $ | 1,757,446 |
| $ | 55,842 |
| $ | 28,560 |
| $ | 22,829 |
| $ | 132,977 |
| $ | 157,100 |
| $ | 2,154,754 |
| $ | 1,537,286 | $ | 42,381 | $ | — | $ | 190,392 | $ | 1,770,059 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Timing of Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Goods transferred over time |
| $ | 1,323,322 |
| $ | — |
| $ | 8,339 |
| $ | 1,537 |
| $ | 132,977 |
| $ | 157,100 |
| $ | 1,623,275 |
| $ | 856,942 | $ | 13,552 | $ | — | $ | — | $ | 870,494 | ||||||||||||||||
Services transferred over time |
|
| 434,124 |
|
| 55,842 |
|
| 20,221 |
|
| 21,292 |
|
| — |
|
| — |
|
| 531,479 |
| 680,344 | 28,829 | — | 190,392 | 899,565 | |||||||||||||||||||||
|
| $ | 1,757,446 |
| $ | 55,842 |
| $ | 28,560 |
| $ | 22,829 |
| $ | 132,977 |
| $ | 157,100 |
| $ | 2,154,754 |
| $ | 1,537,286 | $ | 42,381 | $ | — | $ | 190,392 | $ | 1,770,059 | ||||||||||||||||
For the Three Months Ended March 31, 2020June 30, 2022
| Segments | Rail | Commercial | Government | Artificial Intelligence | Total | |||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||
| North America | $ | 3,315,171 | $ | 26,697 | $ | 38,737 | $ | 236,537 | $ | 3,617,142 | ||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||
| Turnkey Projects | $ | 2,675,426 | $ | — | $ | 18,517 | $ | — | $ | 2,693,943 | ||||||||||
| Maintenance and Support | 639,745 | 26,697 | 20,220 | 150,435 | 837,097 | |||||||||||||||
| Algorithms | — | — | — | 86,102 | 86,102 | |||||||||||||||
| $ | 3,315,171 | $ | 26,697 | $ | 38,737 | $ | 236,537 | $ | 3,617,142 | |||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Goods transferred over time | $ | 2,675,426 | $ | — | $ | 18,517 | $ | — | $ | 2,693,943 | ||||||||||
| Goods delivered at point in time | — | — | — | 86,102 | 86,102 | |||||||||||||||
| Services transferred over time | 639,745 | 26,697 | 20,220 | 150,435 | 837,097 | |||||||||||||||
| $ | 3,315,171 | $ | 26,697 | $ | 38,737 | $ | 236,537 | $ | 3,617,142 | |||||||||||
| F-55 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
For the Six Months Ended June 30, 2023
| Segments | Rail | Commercial | Government | Artificial Intelligence | Total | |||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||
| North America | $ | 3,913,735 | $ | 71,212 | $ | 11,353 | $ | 418,047 | $ | 4,414,347 | ||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||
| Turnkey Projects | $ | 2,684,706 | $ | 13,552 | $ | — | $ | — | $ | 2,698,258 | ||||||||||
| Maintenance and Support | 1,229,029 | 57,660 | 11,353 | — | 1,298,042 | |||||||||||||||
| Algorithms | — | — | — | 418,047 | 418,047 | |||||||||||||||
| $ | 3,913,735 | $ | 71,212 | $ | 11,353 | $ | 418,047 | $ | 4,414,347 | |||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Goods transferred over time | $ | 2,684,706 | $ | 13,552 | $ | — | $ | — | $ | 2,698,258 | ||||||||||
| Services transferred over time | 1,229,029 | 57,660 | 11,353 | 418,047 | 1,716,089 | |||||||||||||||
| $ | 3,913,735 | $ | 71,212 | $ | 11,353 | $ | 418,047 | $ | 4,414,347 | |||||||||||
For the Six Months Ended June 30, 2022
Segments |
| Rail |
| Commercial |
| Government |
| Banking |
| IT Suppliers |
| Total |
| Rail | Commercial | Government | Artificial Intelligence | Total | ||||||||||||||||||||||||||
Primary Geographical Markets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
North America |
| $ | 713,258 |
| $ | 74,335 |
| $ | 27,149 |
| $ | 44,119 |
| $ | 132,084 |
| $ | 990,945 |
| $ | 4,322,444 | $ | 43,997 | $ | 190,879 | $ | 499,138 | $ | 5,056,458 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Major Goods and Service Lines |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Turnkey Projects |
| $ | 481,110 |
| $ | 8,622 |
| $ | — |
| $ | 23,942 |
| $ | — |
| $ | 513,674 |
| $ | 3,196,081 | $ | (498 | ) | $ | 150,438 | $ | — | $ | 3,346,021 | ||||||||||||||
Maintenance & Support |
| 232,148 |
| 65,713 |
| 27,149 |
| 20,177 |
| — |
| 345,187 |
| |||||||||||||||||||||||||||||||
Data Center Auditing Services |
| — |
| — |
| — |
| — |
| 129,699 |
| 129,699 |
| |||||||||||||||||||||||||||||||
Software License |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,385 |
|
| 2,385 |
| |||||||||||||||||||||||||
| Maintenance and Support | 1,126,363 | 44,495 | 40,441 | 281,847 | 1,493,146 | |||||||||||||||||||||||||||||||||||||||
| Algorithms | — | — | — | 217,291 | 217,291 | |||||||||||||||||||||||||||||||||||||||
|
| $ | 713,258 |
| $ | 74,335 |
| $ | 27,149 |
| $ | 44,119 |
| $ | 132,084 |
| $ | 990,945 |
| $ | 4,322,444 | $ | 43,997 | $ | 190,879 | $ | 499,138 | $ | 5,056,458 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Timing of Revenue Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Goods transferred over time |
| $ | 481,110 |
| $ | 8,622 |
| $ | — |
| $ | 23,942 |
| $ | 132,084 |
| $ | 645,758 |
| $ | 3,196,081 | $ | (498 | ) | $ | 150,438 | $ | — | $ | 3,346,021 | ||||||||||||||
| Goods delivered at point in time | — | — | — | 217,291 | 217,291 | |||||||||||||||||||||||||||||||||||||||
Services transferred over time |
|
| 232,148 |
|
| 65,713 |
|
| 27,149 |
|
| 20,177 |
|
| — |
|
| 345,187 |
| 1,126,363 | 44,495 | 40,441 | 281,847 | 1,493,146 | ||||||||||||||||||||
|
| $ | 713,258 |
| $ | 74,335 |
| $ | 27,149 |
| $ | 44,119 |
| $ | 132,084 |
| $ | 990,945 |
| $ | 4,322,444 | $ | 43,997 | $ | 190,879 | $ | 499,138 | $ | 5,056,458 | |||||||||||||||
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 7 – 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 three months ended June 30, 2023, the Company matched 100% of the first 4% of eligible employee compensation that was contributed to the 401(k) Plan. For the three and six months ended June 30, 2023, the Company recognized expense for matching cash contributions to the 401(k) Plan totaling $57,104 and $99,345, respectively.
NOTE 8 – RELATED PARTY TRANSACTIONS
There were no related party transactions for the periods reflected in this report.
| F-56 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
NOTE 9 – SALE OF ASSETS
On June 29, 2023, the Company completed a transaction whereby it sold assets related to its Integrated Correctional Automation System (iCAS) business with a single customer. In the fourth quarter of 2022, the Company elected to not renew a support contract due to the limited nature of the business. The transaction was completed with a third-party buyer of which the Company’s former Chief Financial Officer is a director. Said director did not participate in the transaction on behalf of the Company.
The assets of the iCAS business were sold for a non-interest bearing convertible promissory note with a principal amount of $165,000 with a 10% original issue discount as well as common stock purchase warrants. The note matures in 2 years from the date of sale and is convertible immediately through the later of the maturity date or payment by the borrower of the default amount, as defined in the note, into shares of the buyer’s common stock at a conversion price of $0.003 or shares. The conversion of the note carries restrictions which include limiting conversion to the extent it would exceed 4.99% of the common stock outstanding of the buyer. The convertible promissory note is subject to standard anti-dilution provisions.
The Common stock purchase warrants are for a total of 55,000,000 common shares of the buyer at an exercise price of $0.01 per share. The warrants are subject to standard anti-dilution provisions. The warrant purchase agreement provides that the Company may not exercise its right to purchase stock until on or after six months from the issuance date and no later than on or before the third anniversary of the issuance date. The Company may cashless exercise this warrant at any time after the six-month anniversary of the issuance date if there is no effective registration statement covering the resale of the Warrant Shares at prevailing market prices by the holder. The exercise of these warrants is subject to beneficial ownership limits of 4.99% which may be increased by the holder up to 9.99% as defined in the warrant contract. Given the shares carry no intrinsic value at the time of the transaction and that the overall fair value is de minimis, the Company has not recorded the warrants associated with the transaction.
The Company recognized a gain on sale of assets of $150,000, which is included in other income.
The discount is being accrued into interest income over the term of the note.
The note receivable was recorded as follows on June 30, 2023:
| Schedule of note receivable | ||||
June 30, 2023 | ||||
| Convertible note receivable | $ | 165,000 | ||
| Unamortized discount | (14,375 | ) | ||
| Convertible note receivable, net | $ | 150,625 | ||
| F-57 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (Unaudited) |
NOTE 10 – SUBSEQUENT EVENTS
Stock Options Granted
On July 1, 2023, the Company awarded an employee non-qualified stock options which The exercise price of these non-qualified stock options was based on the closing price of the common stock on the last trading day prior to grant.
Securities Purchase Agreement
On August 1, 2012,2, 2023, the Company entered into an independent contractor master services agreementa Securities Purchase Agreement (the “Services“Purchase Agreement”) with Luceon, LLC, a Florida limited liability company, owned by our Chief Technology Officer, David Ponevac. The Services Agreement provides that Luceon will provide support services including management, coordination or software development services and related services to duostech. In January 2019, additional services were contracted with Luceon for TrueVue360 primarily for software development throughan existing, accredited investor in the provision of 7 additional full-time contractors located in Slovakia at a cost of $16,250 for January initially, rising to $25,583 after fully staffed, per month starting February 2019. This is in additionCompany (the “Purchaser”). Pursuant to the existing contractPurchase Agreement, the Purchaser purchased 5,000 shares of $7,480 per month for duostech for 4 full-time contractors which increased to $8,231 per month in June of 2019. During 2020 efforts in reducing cost, Luceon reduced its staff for the TrueVue360 software development team from a staff of 7 to 3 full-time employees at a cost of $11,666 per month starting June 1, 2020. As of January 1, 2021,newly authorized Series F Convertible Preferred Stock (the “Series F Convertible Preferred Stock”), and the Company no longer records activities in TrueVue360received proceeds of $5,000,000. The Purchase Agreement contains customary representations, warranties, agreements and has combined billings for a totalindemnification rights and obligations of $20,986 per month. For the three months ended March 31, 2021 and 2020, the total amount expensed is $62,958 and $104,709, respectively. The Company has a payable balance at March 31, 2021 in the amount of $20,986 which is included in accounts payable in the accompanying unaudited consolidated financial statements.parties.
NOTE 9 – SUBSEQUENT EVENTS
On April 7, 2021, one shareholder electedIn connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to exercise 3,429 warrants using the cashless exercise feature. A totalRegistration Rights Agreement, the Company shall file with the SEC a registration statement covering the resale by the Purchasers of 1,054the shares of common stock were issuedinto which the shares of Series F 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 warrant was cancelled.parties.
On April 9, 2021, one shareholder electedIn July 2023, the Company's Board of Directors designated shares as the Series F Convertible Preferred Stock. Each share of the Series F Convertible Preferred Stock has a stated value of $. Each share of Series F Convertible Preferred Stock is convertible, at any time and from time to exercise 1,429 warrants usingtime, at the cashless exercise feature. A totaloption of 442the holder, into that number of shares of common stock were issued(subject to the Beneficial Ownership Limitation) determined by dividing the stated value of such share ($1,000) by the conversion price, which is $6.20 (subject to standard anti-dilution provisions ). The Company shall not affect any conversion of the Series F Convertible Preferred Stock, and the warrant was cancelled.
On April 28, 2021, one shareholder electedholder shall not have the right to exercise 14,286 warrants usingconvert any portion of the cashless exercise feature. A totalSeries F 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 2,711Designation)) would beneficially own more than 4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock were issued andoutstanding immediately after giving effect to the warrant was cancelled.
On May 3, 2021, one shareholder elected to exercise 3,572 warrants using the cashless exercise feature. A totalissuance of 599 shares of common stock were issuedissuable upon such conversion (the “Beneficial Ownership Limitation”). Each Purchaser elected the 19.99% Beneficial Ownership Limitation.
The holder of the Series F Convertible Preferred Stock, the holders of the common stock and the warrant was cancelled.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 F Convertible Preferred Stock has 161 votes (subject to adjustment); provided that in no event may a holder of Series F Convertible Preferred Stock be entitled to vote a number of shares in excess of such holder’s Beneficial Ownership Limitation.
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 F Convertible 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.
818,182806,452 Shares of Common Stock issuable upon Conversion of Series CF Convertible Preferred Stock
![[duot_s1029.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1029.gif){kind=small}
——————————
PROSPECTUS
——————————
____________, 2021
_____________, 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, all of which we will pay in connection with the issuance and distribution of the securities being registered. All amounts other than the SEC registration fees are estimates.
SEC Registration Fee |
| $ | 491 |
| $ | 738 | ||
Printing Fees and Expenses |
| $ | 500 |
| $ | - | ||
Accounting Fees and Expenses |
| $ | 5,000 |
| $ | - | ||
Legal Fees and Expenses |
| $ | 15,000 |
| $ | - | ||
Transfer Agent and Registrar Fees |
| $ | 2,500 |
| $ | - | ||
Miscellaneous Fees and Expenses |
| $ | 2,009 |
| $ | - | ||
Total |
| $ | 25,500 |
| $ | - | ||
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 the 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.
Our Amended and Restated Articles of Incorporation provide that we shall indemnify our officers and directors (and other employees and agents if approved in writing by the Board of Directors) to the fullest extent authorized or permitted by law, as it existed when the Amended and Restated 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 (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, we shall not be obligated to indemnify any such 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 or consented to by our Board of Directors.
II-1
| II-1 |
The Amended and Restated Articles of Incorporation also provide that such right of indemnification shall be a contract right and shall include the right to be paid by us the expenses incurred in defending or otherwise participating in any proceeding in advance of its final disposition only upon our receipt of an undertaking, by or on behalf of such director or officer, to repay such amounts if it should be ultimately determined that he or she is not entitled to be indemnified by us as authorized by the 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 Florida 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 unenforceable.
Item 15. Recent Sales of Unregistered Securities
During the third quarter of 2019, the Company issued warrants to purchase 44,644 shares of common stock. The warrants were not registered under the Securities Act of 1933, as amended (the "Securities Act"“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 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 4,80650,588 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 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.
II-2On March 27, 2023, the Company issued 4,000 shares of Series E Convertible Preferred Stock to the Selling Stockholders. 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 August 2, 2023, the Company issued 5,000 shares of Series F 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 Rule 506 of Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering.
| II-2 |
Item 16. Exhibits and Financial Statement Schedules
Exhibit No. | Exhibit Description | |
2.1 | First Amendment to Merger | |
2.2 | Merger Agreement and Plan of Merger, | |
3.1 | Amendment to Amended and Restated Articles of Incorporation | |
3.2 | Amended and Restated Articles of Incorporation | |
3.3 | Amended and Restated Bylaws, | |
3.4 | Articles of Amendment to Articles of Incorporation | |
3.5 | Articles of Amendment to Articles of Incorporation Designation Series B Convertible Preferred Stock | |
3.6 | Certificate of Amendment to Articles of Incorporation | |
3.7 | Articles of Amendment to Articles of Incorporation Designation of Series C Convertible Preferred Stock | |
| 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 | |
|
| |
| Common Stock Purchase Warrant | |
| Form of Purchaser Warrant | |
| Form of Placement Agent Warrant | |
| Form of Representative’s Warrant | |
5.1* | ||
| Employment Agreement, | |
10.2 | Securities Purchase Agreement, | |
10.3 | Security and Pledge Agreement, | |
10.4 | Guaranty, | |
10.5 | Warrant, | |
| 2016 Equity Incentive Plan | |
10.7 | Securities Purchase Agreement, |
|
| 10.8 | Promissory Note, | |
10.9 | Form of Securities Purchase Agreement | |
10.10 | Form of Registration Rights Agreement |
II-3
10.11 | Amendment #1 to the Securities Purchase Agreement and to the Note, | |
10.12 | Amendment #2 to the Securities Purchase Agreement and to the Note, | |
10.13 | Amendment #3 to the Securities Purchase Agreement and to the Note, | |
10.14 | Amendment #4 to the Securities Purchase Agreement and Note, | |
10.15 | Amendment #5 to the Securities Purchase Agreement and Note, | |
10.16 | Amendment #6 to the Securities Purchase Agreement and Note, | |
10.17 | Forbearance Agreement, | |
10.18 | Form of Note Holder Letter Agreement, | |
| Form of Arcaini Letter Agreement, | |
| Form of Goldfarb Letter Agreement, | |
10.21 | GPB Debt Holdings II, LLC Letter Agreement, | |
10.22 | Form of Conversion Letter | |
10.23 | Form of Redemption Letter | |
10.24 | Form of Pay-off Letter | |
| Amendment to 2016 Equity Incentive Plan | |
| Amendment to 2016 Equity Incentive Plan | |
|
| |
| 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, between | |
| Employment Agreement, dated April 1, 2018, between | |
| Form of | |
|
| |
|
| |
| Form of Securities Purchase Agreement | |
| Form of Registration Rights Agreement |
II-4
|
| |
|
| |
| 10.41 | Form of | |
| 10.42 | Form of Registration Rights Agreement 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 August 3, 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 15, 2019) | |
| ||
| ||
|
| |
|
| |
|
| |
|
| |
|
| |
101.INS * | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
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 |
*
| # | Management contract or compensatory plan |
filed herewith
| II-5 |
#
Management contract or compensatory plan
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 section 10(a)(3) of the Securities Act of 1933; |
| (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 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; |
II-5
| (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 |
(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. |
(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 |
| 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. |
II-6
(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) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(7) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus 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-7 |
(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-7
| 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, Florida, on May 28, 2021.October 5, 2023.
Duos Technologies Group, Inc. | |||
By: | /s/ Charles P. Ferry | ||
Name: Charles P. Ferry | |||
POWER OF ATTORNEY: KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Charles Ferry, his true and lawful attorney-in-fact and agent 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 attorney-in-fact and 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 attorney-in-fact and 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:
| Signature | Title | Date | ||||
|
|
| ||||
/s/ Charles P. Ferry | Chief Executive Officer and Director |
| ||||
|
| October 5, 2023 | ||||
| Charles P. Ferry | ||||||
| ||||||
| /s/ Andrew W. Murphy | Chief Financial Officer (Principal Financial Officer) |
| ||||
| ||||||
/s/ |
|
| ||||
| ||||||
| Director |
| ||||
| ||||||
| Director |
| ||||
| ||||||
| Director |
| ||||
| ||||||
|
|
| ||||
| ||||||
|
| |||||
| ||||||
| ||||||
| II-9 |
II-8
![[duot_s1005.jpg]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1005.jpg)
![[duot_s1006.jpg]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1006.jpg)
![[duot_s1007.jpg]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1007.jpg)
![[duot_s1015.gif]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1015.gif)
![[duot_s1018.jpg]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1018.jpg)
![[duot_s1019.jpg]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1019.jpg)
![[duot_s1020.jpg]](https://capedge.com/proxy/S-1A/0001553350-21-000485/duot_s1020.jpg)