Filed Pursuant to Rule 424(b)(3)
Registration No. 333-276327
DUOS TECHNOLOGIES GROUP, INC.
2,500,000 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 2,500,000 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 a total of 7,500 shares of
Series E Convertible Preferred Stock, par value $0.001 per share (the “Series E Preferred Stock”). We sold 2,500 shares of
Series E Preferred Stock to the Selling Stockholders in a private placement on November 10, 2023. In connection with the private placement,
the Company entered into Exchange Agreements with the Selling Stockholders, as the holders of 5,000 shares of Series F Convertible Preferred
Stock, par value $0.001 per share (the “Series F Preferred Stock”), and issued 5,000 shares of Series E Preferred Stock in
exchange for their shares of Series F Preferred Stock.
The Selling Stockholders may from time to time sell,
transfer, or otherwise dispose of any or all of the securities in a number of different ways and at varying prices. See “Plan of Distribution” beginning on page 27 of this prospectus for more information.
We are 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 February 13, 2024, the closing price as reported on the Nasdaq Capital Market
was $3.95 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” beginning on page 16 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 February 14, 2024
TABLE OF CONTENTS
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 More 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.
PROSPECTUS SUMMARY
This summary highlights selected information appearing
elsewhere in this prospectus. While this summary highlights what we consider to be important information about us, you should carefully
read this entire prospectus before investing in our common stock, especially the risks and other information we discuss under the headings
“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of 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, 2021 and 2022 are sometimes referred to herein as fiscal years
2021 and 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 subsidiary, Duos Technologies, 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.
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™ and employs approximately 71 people and
is a technology company which designs, develops, deploys and operates intelligent technology solutions with a focus on software applications
and artificial intelligence (“AI”). The Company has a strong portfolio of intellectual property. The Company’s headquarters
are located at 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 32256 and main telephone number is (904) 296-2807.
Overview
The
Company, operating under its brand name duostech,
develops and deploys technology systems with focus on inspecting and evaluating moving vehicles. Its technology focus 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 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 as consultants.
Duos is currently developing industry solutions for
its target markets which will address rail, trucking, aviation and other vehicle-based processes. Duos’ initial offering, the Railcar
Inspection Portal (RIP), provides both freight and transit railroad customers and select government agencies the ability to conduct fully
remote railcar inspections of trains while they are moving at full speed. The RIP utilizes a variety of sophisticated optical, laser and
speed sensors to scan each passing railcar to create a high-resolution image-set of the top, sides and undercarriage. These images are
then processed with our edge data center using artificial intelligence (AI) algorithms to identify safety and security defects on each
railcar. The algorithms are developed in conjunction with industrial application experts, in this case resident Railcar Mechanical Engineers,
to provide specific guidance in the analysis (“human in the loop”). Within seconds of the railcar passing through the RIP,
a detailed report is sent to the customer where they are able to take action 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 other railroad customers along with selected
government agencies that operate and/or manage rail traffic. The Company has deployed RIPs in Canada, Mexico and the United States and
anticipates expanding this solution into Europe, Asia and the Middle East in coming years.
The Company has also developed the Automated Logistics
Information System (ALIS) which automates gatehouse operations where transport trucks enter and exit large logistics and intermodal facilities.
This solution incorporates a similar set of 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.
We have developed two proprietary solutions that operate
our software and artificial intelligence. centraco®
is an Enterprise Information Management Software platform that consolidates data and events from multiple sources into a unified
and distributive user interface. Customized to the end user’s Concept of Operations (CONOPS), it provides improved situational awareness
and data visualization for operational objectives compared to traditional manual inspections. truevue360™
is our fully integrated platform that we utilize to develop and deploy Artificial Intelligence (AI) algorithms, including Machine
Learning, Computer Vision, Object Detection and Deep Neural Network-based processing for real-time applications.
These same Artificial Intelligence applications have
begun to open up other opportunities for the Company to provide revenue producing solutions with potentially high market adoption.
In 2021, the Company ended support of its IT Asset
Management (ITAM) solution which cataloged results for data center asset inventory and audit services. We are currently evaluating using
our current operations experience within “edge data centers” (as deployed for our Railcar Inspection Portal) to drive additional
revenues within other markets requiring this type of solution although no specific offering has been developed at this time.
In the last quarter of 2022, the Company elected not
to renew a support contract for its Integrated Correctional Automation System (iCAS) for one customer. The Company subsequently sold its
iCAS assets to a buyer during the second quarter of 2023 for $165,000 via a convertible note.
The year 2022 ushered in a new phase in the Company’s
development. Although we continue to see an extension of challenges faced in 2021, we also see positive changes and opportunities for
our business that will be discussed in greater detail herein. They include:
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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. |
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Owning and operating a network of RIPs with multiple subscribers outside of the Company’s traditional customer base. |
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Selling customized RIPs to Class 1, short-line and other industrial companies where specialized applications or routes demand a bespoke solution. |
duostech™
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. We believe our Railcar Inspection Portal has 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 use our rip® technology with one of those railroads broadly deploying the 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. Currently the Company has a 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 overall safety of their railcar fleet and networks.
Markets
We believe the opportunity for our Railcar Inspection
Portal business is substantial and continues to be our number one priority. We are currently engaged with the RIP solution with three
of seven Class 1 railroad operators with 13 systems already deployed across the North American rail network. Because of our early leadership
position, we have been able to accumulate experience and intellectual property that we believe would be time-consuming and expensive for
a new competitor to replicate. Furthermore, we believe we have the ability to upgrade and scale our solutions with additional technologies
in the future. We believe that the current market for our technologies is substantial. At the same time, we recognize that the technology
life cycle is fast and evolving. Potential competitors could move into this sector, and it is possible that some Class 1 railroads could
develop their own solutions that limit our total addressable market.
In late 2022, the Company announced it will pursue
a subscription platform for the RIPs. Under this new model, the Company will build, own and operate its RIP product and offer the data
access for each portal to potential customers. This expansion of the RIP offering would potentially open up the addressable market to
other railroads, railcar owners, and car lessors. This shift increases the pool of potential customers by 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.
Currently, we are focused on the North American market,
but plan to expand globally in the future with interest from Europe, Asia and the Middle East.
Patents and Trademarks
The Company holds a number of patents and trademarks
for our technology solutions. We protect our intellectual property rights by relying on federal, state, and common law rights, as well
as contractual restrictions. We control access to our proprietary technology by entering into confidentiality and invention assignment
agreements with all of our employees and contractors, and confidentiality agreements with third parties. We also actively engage in monitoring
activities with respect to infringing uses of our intellectual property by third parties.
Specific Areas of Competition
One of our primary commercial goals is to develop
innovative technology solutions and target potential “greenfield” market spaces in order to maximize our business footprint
and give us the ability to help define the market parameters for the future.
Other companies that participate in the visual and
optical (laser) based railcar inspection systems market include Wabtec (Beena Vision), KLD Labs, WID, IEM, and Camlin Rail. Some Class
1 railroads have stated that they are developing “in-house” solutions. We believe that Duos has a significant competitive
advantage in that we have multiple years of deployment experience, have access to millions of images where our RIP has performed scans
with AI analysis and in-house industry expertise to train our systems and make identification of common problems more automated.
Our Automated Logistics Information System (ALIS)
also represents an opportunity to expand into a mature market that we believe has a significant technology gap. While most facilities,
such as distribution centers, that process commercial trucks in and out have sophisticated software management applications for logistics
control, they have most often not implemented an advanced gatehouse automation solution. Historically, this category was referred to as
“Automated Gate Systems” or AGS. The 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.
Our Growth Strategy
Vision
The Company designs, develops, deploys and operates
intelligent technology solutions for inspecting and evaluating moving objects. Its technology application focus is within the rail and
intermodal markets which offers imaging-based automatic inspection and analysis for process control for industry with potential expansion
into other markets.
Objectives
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Improve our operational and technical execution, customer satisfaction and implementation speed. |
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Expand Rail Inspection Portal and Automated Logistics Information System with current and future customers in Rail, Logistics and U.S. Government sectors. |
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Offer both CAPEX (one-time sale) and Subscription pricing models that seek to increase recurring revenue and improve profitability. |
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Form strategic partnerships that improve market access and credibility. |
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Improve policy, processes, and toolsets to become a viable platform for internal growth and for mergers and acquisitions. |
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Thoughtfully execute mergers and acquisitions to expand offerings and/or capabilities. |
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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. 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 team during late 2022 to support continued revenue growth of the business bringing significant sales experience focused around the
rail market. In the third quarter of 2023, the Company also brought on a new Chief Commercial Officer bringing significant experience
from the sales and operations aspects of the intermodal and power industries. In 2021, the Company also hired a new Chief Technology Officer
bringing 25 years of experience in designing and delivering value driven technologies. Our new CTO has already led the team through instrumental
changes to its approach to software and artificial intelligence development. The team also saw a change in CFO in late 2022 with the new
CFO bringing significant experience in growth for asset-intensive businesses which aligns with the subscription format the Company will
expand into.
The new leadership team’s
focus is to improve operational and technical execution which will in turn enable the commercial side of the business to expand RIP and
ALIS delivery into existing and new customers. Even though supply chain issues are expected to continue into 2024, the Company’s
primary customers have indicated readiness to order more equipment and services based upon the Company’s current performance and
the new subscription offerings expands the universe of potential customers.
Additionally, the CEO has
directed that the Company make continual engineering and software upgrades to the RIP to meet anticipated Federal Railroad Association
(FRA) and Association of American Railroad (AAR) standards.
Manufacturing and Assembly
The Company designs and develops technology solutions
using a combination of in-house fabrication, commercial off-the-shelf technology, and outsourced manufacturing. On-site installations
are performed using a combination of in-house project managers and engineers and using third-party sub-contractors as needed. Throughout
the process of design, develop, deploy and operate, the Company maintains responsibility for all aspects. Our internal manufacturing operations
consist primarily of materials procurement, assembly, testing and quality control by our engineers. If not manufactured internally, we
use third-party manufacturing partners to produce our hardware related components and hardware products and we most often complete final
assembly, testing and quality control processes for these components and products. Our manufacturing processes are based on standardization
of components across product types, centralization of assembly and distribution centers, and a “build-to-order” methodology
in which products generally are built only after customers have placed firm orders. For most of our hardware products, we have existing
alternate sources of supply.
For 2024 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 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 71 employees, of which
65 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” section of this prospectus immediately following this prospectus summary. These risks include, but are not limited
to, the following:
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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. |
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Our products and services may fail to keep pace with rapidly changing technology and evolving industry standards. |
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The market opportunity for our products and services may not develop in the ways that we anticipate. |
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Our revenues are dependent on general economic conditions and the willingness of enterprises to invest in technology. |
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Some of our competitors are larger and have greater financial and other resources than we do. |
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We have a history of losses and our growth plans may lead to additional losses and negative operating cash flows in the future. |
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We may be unable to protect our intellectual property, which could impair our competitive advantage, reduce our revenue, and increase our costs. |
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We may be required to incur substantial expenses and divert management attention and resources in defending intellectual property litigation against us. |
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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, 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 price per share on 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, that received final board approval in November 2023, 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, that received final board approval in November 2023, 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.
On November 30, 2023, the Company awarded 50,000 non-qualified stock
options to a consultant, that received final board approval in November 2023, which have a 5-year term and a 3-year vesting period.
On
December 29, 2023, the Company issued an aggregate of 12,231 shares of common stock for payment of board fees to four directors in
the amount of $37,500 for services to the board which was expensed during the three months ended December 31, 2023.
On
December 29, 2023, the Company issued 45,977 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 $113,352 for the six months ended December
31, 2023 and represented a purchase price of $2.47 per share based upon 85% of the lower price per share on either the first
trading date of the offering period or the purchase date.
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.
THE OFFERING
This prospectus relates to the offer and sale from
time to time of up to 2,500,000 shares of our Common Stock by the Selling Stockholders that may be issued upon conversion of the Series
E Preferred Stock. See “Selling Stockholders”.
Securities offered by the Selling Stockholders |
2,500,000 shares of our Common Stock. |
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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 “Plan of Distribution”. |
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Use of proceeds |
We will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. All of the net proceeds from the sale of our Common Stock will go to the Selling Stockholders as described below in the sections entitled “Selling Stockholders” and “Plan of Distribution”. We have agreed to bear the expenses relating to the registration of the Common Stock for the Selling Stockholders. |
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Risk factors |
Investing in our securities is highly speculative and involves a high degree of risk. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 16 before deciding to invest in our securities. |
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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 7,247,131 shares of our common stock outstanding as of
September 30, 2023 and excludes the following:
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44,644 shares of common stock issuable upon exercise of warrants to purchase shares of common stock outstanding as of November 30, 2023, with a weighted average exercise price of $7.70 per share; |
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1,387,775 shares of common
stock issuable upon the exercise of options to purchase shares of common stock outstanding as of November 30, 2023, with a
weighted average exercise price of $5.21 per share; |
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117,364 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan; |
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433,000 shares of common stock issuable upon conversion of Series D Convertible Preferred Stock; and |
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3,833,334 shares of common stock issuable upon conversion of Series E Convertible Preferred Stock |
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated statement of operations
data for the fiscal years ended December 31, 2022 and 2021 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 nine months ended September 30, 2023 and 2022 and the summary consolidated balance sheet data as
of September 30, 2023 have been 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, 2023 or any other
period. You should read the summary consolidated financial data in conjunction with those financial statements and the accompanying notes
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our consolidated financial
statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our unaudited
consolidated financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments,
consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results
of operations as of and for such periods.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
| | |
| |
| |
For the Years Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
REVENUES: | |
| | |
| |
Technology systems | |
$ | 11,190,292 | | |
$ | 5,871,666 | |
Services and consulting | |
| 3,822,074 | | |
| 2,388,251 | |
| |
| | | |
| | |
Total Revenues | |
| 15,012,366 | | |
| 8,259,917 | |
| |
| | | |
| | |
COST OF REVENUES: | |
| | | |
| | |
Technology systems | |
| 8,376,649 | | |
| 4,728,197 | |
Services and consulting | |
| 1,887,614 | | |
| 1,492,176 | |
| |
| | | |
| | |
Total Cost of Revenues | |
| 10,264,263 | | |
| 6,220,373 | |
| |
| | | |
| | |
GROSS MARGIN | |
| 4,748,103 | | |
| 2,039,544 | |
| |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | |
Sales & marketing | |
| 1,337,186 | | |
| 1,233,851 | |
Research & development | |
| 1,651,064 | | |
| 2,515,630 | |
General & administration | |
| 8,625,002 | | |
| 5,747,014 | |
| |
| | | |
| | |
Total Operating Expenses | |
| 11,613,252 | | |
| 9,496,495 | |
| |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (6,865,149 | ) | |
| (7,456,951 | ) |
| |
| | | |
| | |
OTHER INCOME (EXPENSES): | |
| | | |
| | |
Interest expense | |
| (9,191 | ) | |
| (20,268 | ) |
Other income, net | |
| 9,557 | | |
| 1,468,318 | |
| |
| | | |
| | |
Total Other Income | |
| 366 | | |
| 1,448,050 | |
| |
| | | |
| | |
NET LOSS | |
$ | (6,864,783 | ) | |
$ | (6,008,901 | ) |
| |
| | | |
| | |
Net Loss Per Share - Basic | |
$ | (1.11 | ) | |
$ | (1.63 | ) |
Net Loss Per Share - Diluted | |
$ | (1.11 | ) | |
$ | (1.63 | ) |
| |
| | | |
| | |
Weighted Average Shares - Basic | |
| 6,175,193 | | |
| 3,694,293 | |
Weighted Average Shares - Diluted | |
| 6,175,193 | | |
| 3,694,293 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
| | |
| |
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 1,121,092 | | |
$ | 893,720 | |
Accounts receivable, net | |
| 3,418,263 | | |
| 1,738,543 | |
Contract assets | |
| 425,722 | | |
| 3,449 | |
Inventory | |
| 1,428,360 | | |
| 298,338 | |
Prepaid expenses and other current assets | |
| 441,320 | | |
| 354,613 | |
| |
| | | |
| | |
Total Current Assets | |
| 6,834,757 | | |
| 3,288,663 | |
| |
| | | |
| | |
Property and equipment, net | |
| 629,490 | | |
| 603,253 | |
Operating lease right of use asset | |
| 4,689,931 | | |
| 4,925,765 | |
Security deposit | |
| 600,000 | | |
| 600,000 | |
Software development costs, net | |
| 265,208 | | |
| — | |
Patents and trademarks, net | |
| 69,733 | | |
| 66,482 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 13,089,119 | | |
$ | 9,484,163 | |
(Continued)
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 2,290,390 | | |
$ | 1,044,500 | |
Notes payable - financing agreements | |
| 74,575 | | |
| 52,503 | |
Accrued expenses | |
| 453,023 | | |
| 618,093 | |
Equipment financing agreements-current portion | |
| 22,851 | | |
| 80,335 | |
Operating lease obligation-current portion | |
| 696,869 | | |
| 315,302 | |
Contract liabilities | |
| 957,997 | | |
| 1,829,311 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 4,495,705 | | |
| 3,940,044 | |
| |
| | | |
| | |
Equipment financing agreement, less current portion | |
| — | | |
| 22,851 | |
Operating lease obligation, less current portion | |
| 4,542,943 | | |
| 4,739,783 | |
| |
| | | |
| | |
Total Liabilities | |
| 9,038,648 | | |
| 8,702,678 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 10) | |
| — | | |
| — | |
| |
| | | |
| | |
STOCKHOLDERS’ EQUITY: | |
| | | |
| | |
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,476,000 shares available to be designated | |
| | | |
| | |
Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $6.30 per share | |
| — | | |
| — | |
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 0 and 851 issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $7 per share | |
| — | | |
| 1 | |
Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 0 and 2,500 issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $5.50 per share | |
| — | | |
| 2 | |
Series D convertible preferred stock, $1,000 stated value per share, 4,000 shares designated; 1,299 and 0 issued and outstanding at December 31, 2022 and 2021, respectively, convertible into common stock at $3 per share | |
| 1 | | |
| — | |
Common stock: $0.001 par value; 500,000,000 shares authorized, 7,156,876 and 4,111,047 shares issued, 7,155,552 and 4,109,723 shares outstanding at December 31, 2022 and 2021, respectively | |
| 7,156 | | |
| 4,111 | |
Additional paid-in-capital | |
| 56,562,600 | | |
| 46,431,874 | |
Accumulated deficit | |
| (52,361,834 | ) | |
| (45,497,051 | ) |
Sub-total | |
| 4,207,923 | | |
| 938,937 | |
Less: Treasury stock (1,324 shares of common stock at December 31, 2022 and 2021) | |
| (157,452 | ) | |
| (157,452 | ) |
Total Stockholders’ Equity | |
| 4,050,471 | | |
| 781,485 | |
| |
| | | |
| | |
Total Liabilities and Stockholders’ Equity | |
$ | 13,089,119 | | |
$ | 9,484,163 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
For the Three Months Ended September 30, 2023 | | |
For the Three Months Ended September 30, 2023 | | |
For the Nine Months Ended September 30 2023 | | |
For the Nine Months Ended September 30 2022 | |
| |
| | |
| | |
| | |
| |
REVENUES: | |
| | | |
| | | |
| | | |
| | |
Technology systems | |
$ | 705,849 | | |
$ | 2,709,899 | | |
$ | 3,404,107 | | |
$ | 6,273,213 | |
Services and consulting | |
| 825,074 | | |
| 1,312,339 | | |
| 2,541,163 | | |
| 2,805,483 | |
| |
| | | |
| | | |
| | | |
| | |
Total Revenues | |
| 1,530,923 | | |
| 4,022,238 | | |
| 5,945,270 | | |
| 9,078,696 | |
| |
| | | |
| | | |
| | | |
| | |
COST OF REVENUES: | |
| | | |
| | | |
| | | |
| | |
Technology systems | |
| 883,836 | | |
| 2,176,761 | | |
| 3,723,151 | | |
| 5,016,551 | |
Services and consulting | |
| 420,499 | | |
| 745,925 | | |
| 1,217,022 | | |
| 1,457,913 | |
| |
| | | |
| | | |
| | | |
| | |
Total Cost of Revenues | |
| 1,304,335 | | |
| 2,922,686 | | |
| 4,940,173 | | |
| 6,474,464 | |
| |
| | | |
| | | |
| | | |
| | |
GROSS MARGIN | |
| 226,588 | | |
| 1,099,552 | | |
| 1,005,097 | | |
| 2,604,232 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Sales and marketing | |
| 353,386 | | |
| 297,057 | | |
| 962,040 | | |
| 956,937 | |
Research and development | |
| 450,006 | | |
| 329,424 | | |
| 1,392,692 | | |
| 1,296,480 | |
General and administration | |
| 2,394,173 | | |
| 2,342,089 | | |
| 6,916,390 | | |
| 6,255,926 | |
| |
| | | |
| | | |
| | | |
| | |
Total Operating Expenses | |
| 3,197,565 | | |
| 2,968,570 | | |
| 9,271,122 | | |
| 8,509,343 | |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (2,970,977 | ) | |
| (1,869,018 | ) | |
| (8,266,025 | ) | |
| (5,905,111 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSES): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (1,406 | ) | |
| (2,057 | ) | |
| (5,816 | ) | |
| (7,943 | ) |
Other income, net | |
| 24,647 | | |
| (53,993 | ) | |
| 191,022 | | |
| 698 | |
| |
| | | |
| | | |
| | | |
| | |
Total Other Income (Expenses) | |
| 23,241 | | |
| (56,050 | ) | |
| 185,206 | | |
| (7,245 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (2,947,736 | ) | |
$ | (1,925,068 | ) | |
$ | (8,080,819 | ) | |
$ | (5,912,356 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Basic and Diluted Net Loss Per Share | |
$ | (0.41 | ) | |
$ | (0.30 | ) | |
$ | (1.12 | ) | |
$ | (1.01 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares-Basic and Diluted | |
| 7,240,632 | | |
| 6,450,180 | | |
| 7,189,256 | | |
| 5,859,375 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
September 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
| |
| (Unaudited) | | |
| | |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 3,266,916 | | |
$ | 1,121,092 | |
Accounts receivable, net | |
| 258,874 | | |
| 3,418,263 | |
Contract assets | |
| 1,346,731 | | |
| 425,722 | |
Inventory | |
| 1,525,913 | | |
| 1,428,360 | |
Prepaid expenses and other current assets | |
| 355,978 | | |
| 441,320 | |
| |
| | | |
| | |
Total Current Assets | |
| 6,754,412 | | |
| 6,834,757 | |
| |
| | | |
| | |
Property and equipment, net | |
| 555,485 | | |
| 629,490 | |
Operating lease right of use asset | |
| 4,454,714 | | |
| 4,689,931 | |
Security deposit | |
| 550,000 | | |
| 600,000 | |
Note receivable, net | |
| 151,875 | | |
| — | |
Patents and trademarks, net | |
| 121,051 | | |
| 69,733 | |
Software development costs, net | |
| 793,618 | | |
| 265,208 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 13,381,155 | | |
$ | 13,089,119 | |
(Continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 619,765 | | |
$ | 2,290,390 | |
Notes payable - financing agreements | |
| 137,816 | | |
| 74,575 | |
Accrued expenses | |
| 275,277 | | |
| 453,023 | |
Equipment financing payable-current portion | |
| — | | |
| 22,851 | |
Operating lease obligations-current portion | |
| 774,306 | | |
| 696,869 | |
Contract liabilities | |
| 1,588,928 | | |
| 957,997 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 3,396,092 | | |
| 4,495,705 | |
| |
| | | |
| | |
Operating lease obligations, less current portion | |
| 4,310,853 | | |
| 4,542,943 | |
| |
| | | |
| | |
Total Liabilities | |
| 7,706,945 | | |
| 9,038,648 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 4) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS’ EQUITY: | |
| | | |
| | |
Preferred stock: $0.001 par value, 10,000,000 shares authorized, 9,441,000 shares available to be designated | |
| | | |
| | |
Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 and 0 issued and outstanding at September 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 and 0 issued and outstanding at September 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 and 0 issued and outstanding at September 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 September 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 September 30, 2023 and December 31, 2022, respectively, convertible into common stock at $3 per share | |
| 4 | | |
| — | |
Series F convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 5,000 and 0 issued and outstanding at September 30, 2023 and December 31, 2022, respectively, convertible into common stock at $6.20 per share | |
| 5 | | |
| — | |
Common stock: $0.001 par value; 500,000,000 shares authorized, 7,248,455 and 7,156,876 shares issued, 7,247,131 and 7,155,552 shares outstanding at September 30, 2023 and December 31, 2022, respectively | |
| 7,248 | | |
| 7,156 | |
Additional paid-in-capital | |
| 66,267,057 | | |
| 56,562,600 | |
Accumulated deficit | |
| (60,442,653 | ) | |
| (52,361,834 | ) |
Sub-total | |
| 5,831,662 | | |
| 4,207,923 | |
Less: Treasury stock (1,324 shares of common stock at September 30, 2023 and December 31, 2022) | |
| (157,452 | ) | |
| (157,452 | ) |
Total Stockholders’ Equity | |
| 5,674,210 | | |
| 4,050,471 | |
| |
| | | |
| | |
Total Liabilities and Stockholders’ Equity | |
$ | 13,381,155 | | |
$ | 13,089,119 | |
RISK FACTORS
Investing in our securities involves a great deal
of risk. Careful consideration should be made of the following factors as well as other information included in this prospectus before
deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond
our control. Our business, financial condition or operating results could be materially harmed by any of these risks. This could cause
the trading price of our securities to decline, and you may lose all or part of your investment. Additional risks that we do not yet know
of or that we currently think are immaterial may also affect our business and results of operations.
Risks Related to Our Company and Business
The nature of the technology management platforms
utilized by us are complex and highly integrated, and if we fail to successfully manage releases or integrate new solutions, it could
harm our revenues, operating income, and reputation.
The technology platforms developed and designed by
us accommodate integrated applications that include our own developed technology and third-party technology, thereby substantially increasing
their functionality.
Due to this complexity and the condensed development
cycles under which we operate, we may experience errors in our software, corruption or loss of our data, or unexpected performance issues
from time to time. For example, our solutions may face interoperability difficulties with software operating systems or programs being
used by our customers, or new releases, upgrades, fixes or the integration of acquired technologies may have unanticipated consequences
on the operation and performance of our other solutions. If we encounter integration challenges or discover errors in our solutions late
in our development cycle, it may cause us to delay our launch dates. Any major integration or interoperability issues or launch delays
could have a material adverse effect on our revenues, operating income and reputation.
We face risks as a result of the coronavirus
(COVID-19 pandemic) lingering effects which could significantly disrupt our research and development, operations, sales, and financial
results.
Our business has been adversely impacted by the effects
of the COVID-19 pandemic. In addition to global macroeconomic effects, the COVID-19 pandemic and related adverse public health developments
caused disruption and/or delays to our operations and sales activities. Our third-party manufacturers and our customers were disrupted
by worker absenteeism, quarantines and restrictions on employees’ ability to work, office and factory closures, disruptions to ports
and other shipping infrastructure, border closures, or other travel or health-related restrictions. Depending on the magnitude of such
effects on our activities or the operations of our third-party manufacturers and third-party distributors, the supply of our products,
in some cases, continue to be delayed, which could continue to adversely affect our business, operations and customer relationships. In
addition, the pandemic or other disease outbreak have had and may continue to have over the longer term a material adverse effect on the
economies and financial markets of many countries, resulting in an economic downturn that will affect demand for our products and services
and impact our operating results. There can be no assurance that any decrease in sales resulting from the pandemic slowdown will be offset
by increased sales in subsequent periods. Although the magnitude of the impact of the COVID-19 outbreak on our business and operations
remains uncertain, the continued spread of COVID-19 and the related public health measures and travel and business restrictions may adversely
impact our business, financial condition, operating results and cash flows. In addition, we have experienced
and may in the future experience disruptions to our business operations resulting from quarantines, self-isolations, or other restrictions
on the ability of our employees to perform their jobs that may impact our ability to develop and design our products and services in a
timely manner or meet required milestones or customer commitments.
We may be adversely affected
by the effects of inflation and supply chain disruption
Our business operates in an environment
of long bid to contract award cycles. Our customer’s bid requirements are such that firm pricing is expected on much or all of our
proposals and as such we must commit to certain commercial terms and conditions such as pricing. In addition, the Company hires employees
and contractors to perform most (if not all) of the work required to complete a contract. We are beginning to experience the impacts of
inflation upon previously forecasted costs including employees that require higher salaries, contractors demanding higher prices for jobs
and higher costs for materials necessary to complete contracts. While we endeavor to charge additional costs to our customers, in some
cases this may not be possible contractually and as a result our profitability may suffer as a result. Although we anticipate these effects
to be mitigated in the long term, we cannot be assured that this will be possible in all or any instances and as such our revenue, profitability
and growth prospects may suffer as a result of this.
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 $60 million
and $52 million as of September 30, 2023 and December 31, 2022, respectively. Our operating losses may continue as we continue to expend
resources to further develop and enhance our technology offering, to complete prototyping for proof-of-concept, obtain regulatory
clearances or approvals as required, expand our business development activities and finance capabilities and conduct further research
and development. We also expect to experience negative cash flow in the short-term until our revenues and margins increase at a rate greater
than our expenses, which may not occur.
We may be unable to protect our intellectual
property, which could impair our competitive advantage, reduce our revenue, and increase our costs.
Our success and ability to compete depend in part
on our ability to maintain the proprietary aspects of our technologies and products. We rely on a combination of trade secrets, patents,
copyrights, trademarks, confidentiality agreements, and other contractual provisions to protect our intellectual property, but these measures
may provide only limited protection. We customarily enter into written confidentiality and non-disclosure agreements with our employees,
consultants, customers, manufacturers, and other recipients of information about our technologies and products and assignment of invention
agreements with our employees and consultants. We may not always be able to enforce these agreements and may fail to enter into any such
agreement in every instance when appropriate. We license from third-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.
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 North 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.
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.
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, 2022, four
customers accounted for 42%, 18%, 14% and 14% of revenues. For the year ended December 31, 2021, a single customer accounted for 83% of
revenues. For the nine months ended September 30, 2023, two customers accounted for 55% and 29% of revenues. For the nine months ended
September 30, 2022, four customers accounted for 25%, 21%, 19% and 19% 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. 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.
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.
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 September 30,
2023, three customers accounted for 52%, 25%, and 14% 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.
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:
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Variations in our quarterly operating results; |
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Announcements that our revenue or income are below analysts’ expectations; |
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General economic downturns; |
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Sales of large blocks of our common stock; and |
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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 issuances of our securities.
We are in a capital-intensive business, and we may
not have sufficient funds to finance the growth of our business or to support our projected capital expenditures. As a result, we may
require additional funds from future equity or debt financings, including potential sales of preferred shares or convertible debt, to
complete the development of new projects and pay the general and administrative costs of our business. We may in the future issue our
previously authorized and unissued securities, resulting in the dilution of the ownership interests of holders of our common stock. We
are currently authorized to issue 500,000,000 shares of common stock and 10,000,000 shares of preferred stock. We may also issue additional
shares of common stock or other securities that are convertible into or exercisable for common stock in future public offerings or private
placements for capital raising purposes or for other business purposes. The future issuance of a substantial number of shares of common
stock into the public market, or the perception that such issuance could occur, could adversely affect the prevailing market price of
our common shares. A decline in the price of our common stock could make it more difficult to raise funds through future offerings of
our common stock or securities convertible into common stock.
Our Board of Directors may issue and fix the
terms of shares of our Preferred Stock without stockholder approval, which could adversely affect the voting power of holders of our Common
Stock or any change in control of our Company.
Our Articles of Incorporation authorize the issuance
of up to 10,000,000 shares of "blank check" preferred stock, with such designations rights and preferences as may be determined
from time to time by the Board of Directors. Our Board of Directors is empowered, without stockholder 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, our common stock may be less attractive, which may cause us to have trouble raising additional
funds which could affect our ability to expand our business operations.
Our operating results are likely to fluctuate from period to period.
We anticipate that there may be fluctuations in our future operating results.
Potential causes of future fluctuations in our operating results may include:
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Period-to-period fluctuations in financial results |
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Issues in manufacturing products |
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Unanticipated potential product liability claims |
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The introduction of technological innovations or new commercial products by competitors |
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The entry into, or termination of, key agreements, including key strategic alliance agreements |
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The initiation of litigation to enforce or defend any of our intellectual property rights |
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Regulatory changes |
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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:
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changes in the market acceptance of our products; |
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increased levels of competition; |
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changes in political, economic or regulatory conditions generally and in the markets in which we operate; |
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our relationships with our key customers; |
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our ability to retain and attract senior management and other key employees; |
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our ability to quickly and effectively respond to new technological developments; |
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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 |
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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.
USE OF PROCEEDS
We will not
receive any proceeds from the sale of common stock by the Selling Stockholders. All of the net proceeds from the sale of our common stock
will go to the Selling Stockholders as described below in the sections entitled “Selling Stockholders”
and “Plan of Distribution”. We have agreed to bear the expenses relating to the registration of the
common stock for the Selling Stockholders.
SELLING STOCKHOLDERS
On November 10, 2023, the Company entered into a Securities
Purchase Agreement (the “Purchase Agreement”) with certain existing investors in the Company (the “Selling Stockholders”).
Pursuant to the Purchase Agreement, the Selling Stockholders purchased an aggregate of 2,500 shares of Series E Preferred Stock, at a
price of $1,000 per share, and the Company received proceeds of $2,500,000.
In connection with the Purchase Agreement, the Company
entered into Exchange Agreements with the Selling Stockholders, as the holders of 5,000 shares of Series F Preferred Stock, and issued
5,000 shares of Series E Preferred Stock in exchange for their shares of Series F Preferred Stock. The purchase agreement relating to
the shares of Series F Preferred Stock, which were issued on August 2, 2023, required the consent of the holders in the event the Company
were to issue common stock or rights to acquire common stock prior to December 31, 2023 at an effective price per share less than the
then conversion price of the Series F Preferred Stock, which was $6.20 per share. The Series E Preferred Stock is convertible into Common
Stock at $3.00 per share. As a result, the Company and the Selling Stockholders entered into the Exchange Agreements. Under the Purchase
Agreement and the Exchange Agreements, the Company issued a total of 7,500 shares of Series E Preferred Stock to the Selling Stockholders
and the shares of Series F Preferred Stock were cancelled. If all 7,500 shares of Series E Preferred Stock held by the Selling Stockholders
are converted in full, the Company would issue 2,500,000 shares of Common Stock. The terms of the Series E Preferred Stock, however, provide
that, without shareholder approval, the Company may not issue upon the conversion of any shares of Series E Preferred Stock a number of
shares of common stock which, when aggregated with any shares of common stock issued upon conversion of any other shares of Series E Preferred
Stock, would exceed 1,430,484 (subject to adjustment). Such number represents 19.99% of the number of shares of common stock issued and
outstanding as of the filing date of the Series E Preferred Stock Certificate of Designation.
The shares of common stock being offered by the Selling
Stockholders are those issuable to the Selling Stockholders, upon conversion of the Series E Preferred Stock. We are registering the shares
of common stock in order to permit the Selling Stockholders to offer the shares for resale from time to time. Due to the ownership of
the shares of Series E Preferred Stock, as well as ownership of common stock, Series D Preferred Stock and warrants, the Selling Stockholders
collectively have had a material relationship with us within the past three years and hold the largest percentage ownership of the Company
subject to certain limitations as described 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 December 29, 2023, assuming conversion of the Series E Preferred Stock, as well as conversion of other convertible preferred stock
and exercise of any warrants held by the Selling Stockholders on that date. The third column lists the shares of Common Stock being offered
by this prospectus by the Selling Stockholders.
In accordance with the terms of a registration rights
agreement with the Selling Stockholders, this prospectus generally covers the resale of the maximum number of shares of common stock issuable
upon conversion of the Series E Preferred Stock, determined as if the outstanding shares of Series E Preferred Stock were converted in
full as of the trading day immediately preceding the applicable date of determination and subject to adjustment as provided in the registration
rights agreement, without regard to any limitations on the conversion of the Series E Preferred Stock. The fourth column assumes the sale
of all of the shares offered by the Selling Stockholders pursuant to this prospectus.
Under the terms of the Series D Preferred Certificate
of Designation and the Series E Preferred Certificate of Designation, a Selling Stockholder may not convert the Series D Preferred Stock
or the Series E Preferred Stock to the extent such 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 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 numbers of shares in the second
column does not reflect these limitations. The Selling Stockholders may sell all, some, or none of their shares in this offering. See
“Plan of Distribution.”
Name of Selling Stockholder | |
Number of shares of Common Stock Owned Prior to Offering (1) | | |
% of shares of Common Stock Owned Prior to Offering | | |
Maximum Number of Shares of Common Stock to be Sold Pursuant to this Prospectus(1) | | |
Number of shares of Common Stock Owned After Offering | | |
% of shares of Common Stock Owned After Offering | |
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21 April Fund Ltd(2) | |
| 3,757,580 | | |
| 32.62 | % | |
| 1,625,000 | | |
| 2,132,580 | | |
| 18.52 | % |
21 April Fund LP(2) | |
| 1,736,560 | | |
| 15.08 | % | |
| 875,000 | | |
| 861,560 | | |
| 7.48 | % |
Total of Bleichroeder LP holdings | |
| 5,494,140 | | |
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| 2,500,000 | | |
| 2,994,140 | | |
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(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. |
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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 (21 April Fund, Ltd. held 929,522 shares and 21 April Fund, LP held 353,640 shares) as a result of acting as investment advisor to various clients. Bleichroeder also owns warrants to purchase shares of our Common Stock held of record by 21 April Fund, Ltd. in the amount of 32,724 and warrants to purchase shares of our Common Stock held of record by 21 April Fund LP (together with 21 April Fund, Ltd., the “21 April Entities”) in the amount of 11,920, which are subject to a 9.99% beneficial ownership limitation included in such warrants. The 21 April Entities also purchased 999 shares of Series D Preferred Stock on September 30, 2022, which are convertible into 333,000 shares of Common Stock (21 April Fund, Ltd. holds 237,000 common equivalent shares and 21 April Fund, LP holds 96,000 common equivalent shares). The 21 April Entities also purchased 4,000 shares of Series E Preferred Stock on March 27, 2023, which are convertible into 1,333,334 shares of Common Stock (21 April Fund, Ltd. holds 933,334 common equivalent shares and 21 April Fund, LP holds 400,000 common equivalent shares). The 21 April Entities also purchased an additional 2,500 shares of Series E Preferred Stock on November 10, 2023, which are convertible into 833,333 shares of Common Stock (21 April Fund, Ltd. holds 508,333 common equivalent shares and 21 April Fund, LP holds 325,000 common equivalent shares). The 21 April Entities exchanged 5,000 shares of Series F Preferred Stock that were acquired in connection with the Purchase Agreement of Series F Convertible Preferred Stock, completed on August 2, 2023. The 5,000 shares of Series F Preferred Stock, originally convertible into 806,452 common shares, were exchanged for 5,000 shares of Series E Convertible Preferred Stock on November 10, 2023, which are convertible into 1,666,667 shares of Common Stock, representing an additional 860,215 common share equivalents (21 April Fund, Ltd. now holds 1,116,667 common equivalent shares and 21 April Fund, LP now holds 550,000 common equivalent shares). Conversion of the Series D Preferred Stock and the Series E Preferred Stock owned by the 21 April Entities is subject to a 19.99% beneficial ownership limitation. |
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PLAN OF DISTRIBUTION
Each Selling Stockholder of the securities and any
of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their securities covered hereby on
the principal Trading Market or any other stock exchange, market or trading facility on which the securities are traded or in private
transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods
when selling securities:
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ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
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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; |
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purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
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an exchange distribution in accordance with the rules of the applicable exchange; |
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privately negotiated transactions; |
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through one or more underwritten offerings on a firm commitment or best efforts basis; |
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settlement of short sales that are not in violation of Regulation SHO; |
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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; |
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through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; |
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through the distribution of securities by any Selling Stockholder to its parents, members or security holders; |
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a combination of any such methods of sale; or |
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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 February 13, 2024, there were approximately
246 holders of record of our common stock, and the closing price of our common stock as reported on the Nasdaq Capital Market on February
13, 2024 was $3.95 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
The Company was incorporated in Florida on May 31,
1994 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, the Company entered negotiations with Duos Technologies, Inc. (“Duos”), for the purposes
of executing a reverse triangular merger. This transaction was completed on April 1, 2015, whereby Duos became a wholly owned subsidiary
of the Company. Duos was incorporated under the laws of Florida on November 30, 1990 for design, development and deployment of proprietary
technology applications and turn-key engineered systems. The Company, based in Jacksonville, Florida, has a current staff of 71 people
of which 65 are full-time, and is a technology and software applications company with a strong portfolio of intellectual property. The
Company’s core competencies, including advanced intelligent technologies, are delivered through its proprietary integrated enterprise
command and control platform, Centraco®.
The Company has developed the Rail Inspection Portal
(“RIP”) which provides both freight and transit railroad customers and select government agencies the ability to conduct fully
remote railcar inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies,
illumination and other sensors, scans each passing railcar to create a high-resolution image set from a variety of angles including the
undercarriage. These images are then processed through various methods of artificial intelligence algorithms to identify specific defects
and/or areas of interest on each railcar. This is all accomplished within seconds of a railcar passing through our portal. We believe
this solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The
Company has deployed this system with several Class 1 railroad customers and anticipates increased demand in the future from transit and
other railroad customers along with selected government agencies that operate and/or manage rail traffic. 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 directly benefits the Class 1 railroads through increasing their velocity. The
Company’s new 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 as discussed below.
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 each operation and directly interconnects
with backend logistics databases and processes to significantly improve operations and security by accelerating the vehicle throughput
on each lane on which the technology is deployed. In the future, the Company expects to deploy this offering into a Truck Inspection Portal
(TIP) leveraging the same technologies and lessons learned from the implementation of the RIP and ALIS solutions.
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 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 new 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 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.
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 supply
chain 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. With the Company working toward
a subscription platform approach, this will also open up additional commercial avenues to the Company. Historically, the Company has been
focused on large, one-time sales with the subscription opportunities representing an expanded addressable market.
Additionally, the Company
is making engineering and software upgrades to the RIP to meet anticipated Federal Railroad Association (FRA) and Association of American
Railroad (AAR) standards. Similar upgrades are also being developed to improve the ALIS system. These upgrades will continue to be released
throughout 2023 and are expected to drive revenue growth this year and beyond.
The Company is expanding
its focus in the rail industry to encompass passenger transportation and was awarded a large, multi-year contract with a national rail
carrier. The Company anticipates that it will install a two-RIP solution for the carrier in 2024, with a long-term services agreement
commencing upon delivery of the system.
Although the Company’s prospects for future
revenue growth are anticipated to be favorable, investing in our securities involves risk and careful consideration should be made 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 and unexpected macro events can have a severe impact on the business. Please see the risk factors identified in “Item
1A – Risk Factors” of our Annual Report on Form 10-K filed with the SEC on March 31, 2023.
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 September
30, 2023 Compared to Three Months Ended September 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 Three Months Ended | |
| |
September 30, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Revenues | |
$ | 1,530,923 | | |
$ | 4,022,238 | |
Cost of revenues | |
| 1,304,335 | | |
| 2,922,686 | |
Gross margin | |
| 226,588 | | |
| 1,099,552 | |
Operating expenses | |
| 3,197,565 | | |
| 2,968,570 | |
Loss from operations | |
| (2,970,977 | ) | |
| (1,869,018 | ) |
Other income (expense) | |
| 23,241 | | |
| (56,050 | ) |
Net loss | |
$ | (2,947,736 | ) | |
$ | (1,925,068 | ) |
Revenues
| |
For the Three Months Ended | |
| |
September 30, | |
| |
2023 | | |
2022 | | |
% Change | |
Revenues: | |
| | |
| | |
| |
Technology systems | |
$ | 705,849 | | |
$ | 2,709,899 | | |
| -74 | % |
Services and consulting | |
| 825,074 | | |
| 1,312,339 | | |
| -37 | % |
Total revenues | |
$ | 1,530,923 | | |
$ | 4,022,238 | | |
| -62 | % |
The decrease in overall revenues for the quarter ended
September 30, 2023, compared to the quarter ended September 30, 2022, is primarily attributed to a combination of factors. Those factors
include delays outside of the Company’s control with ongoing production of our two high-speed Railcar Inspection Portals and timing
differences with two freight RIPs under construction during the third quarter of 2022, which are recorded in the technology systems portion
of our business. During the third quarter of 2022, when these same two high-speed Railcar Inspection Portals were in the early procurement
and design phase, we were also in the advanced stages of manufacturing and installing two additional Railcar Inspection Portals for freight
railroad customers – these timing differences ultimately contributing to the year-over-year variance along with one-time services
occurring in the third quarter of 2022. Those services occurring in 2022 for major site improvements contributed to the shortfall in services
and consulting revenues on a year-over-year basis. Additionally, the Company sees opportunities to continue to expand its programs with
existing customers. In spite of the timing delays impacting the quarterly results, management remains confident in the long-term potential
of the RIP product.
Cost of Revenues
| |
For
the Three Months Ended September 30, | |
| |
2023 | | |
2022 | | |
% Change | |
Cost of revenues: | |
| | | |
| | | |
| | |
Technology systems | |
$ | 883,836 | | |
$ | 2,176,761 | | |
| -59 | % |
Services and consulting | |
| 420,499 | | |
| 745,925 | | |
| -44 | % |
Total cost of revenues | |
$ | 1,304,335 | | |
$ | 2,922,686 | | |
| -55 | % |
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 September 30, 2023, the cost of revenues on technology systems decreased compared to the equivalent period in 2022,
at a slower rate than 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 Railcar Inspection Portals and two freight RIPs for Class 1 railroads being installed in the third quarter
of 2022 that was not present in the Company’s results in the third quarter of 2023. During the third quarter of 2022, the Company
was incurring costs related to the manufacturing and installation of additional Railcar Inspection Portals for two other Class 1 customers.
During the third quarter of 2023, the Company did not have the same ongoing freight-oriented RIP installations thereby contributing to
the decrease in cost of revenues year-over-year. Additionally, the Company records certain fixed, operating and servicing costs for both
technology systems and services and consulting. These fixed costs, in part, contribute to the cost of revenues declining at a slower rate
than that of revenue. The Company 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 decreased
in the three months ended September 30, 2023 compared to the prior year period. The decrease in cost can be attributed to primarily significant,
one-time site improvements completed for a customer during the third quarter of 2022, as opposed to the corresponding period in 2023.
Gross Margin
| |
For the Three Months Ended | |
| |
September 30, | |
| |
2023 | | |
2022 | | |
% Change | |
| |
| | |
| | |
| |
Revenues | |
$ | 1,530,923 | | |
$ | 4,022,238 | | |
| -62 | % |
Cost of revenues | |
| 1,304,335 | | |
| 2,922,686 | | |
| -55 | % |
Gross margin | |
$ | 226,588 | | |
$ | 1,099,552 | | |
| -79 | % |
Gross margin decreased for the third quarter of 2023
as compared to the same period in 2022 largely in line with the same decline in revenue. As noted above, the decrease in margin was a
direct result of the timing of business activity related to the manufacturing of two high-speed, transit-focused Railcar Inspection Portals
and the year-over-year timing differences related to the delivery of two freight-oriented portals. The two freight-oriented portals were
nearing the end of their delivery cycle during the third quarter of 2022 and thus contributed improved gross margins. Those same, project
revenues and subsequent margin contributions were not present during the third quarter of 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 September 30, | |
| |
2023 | | |
2022 | | |
% Change | |
Operating expenses: | |
| | | |
| | | |
| | |
Sales and marketing | |
$ | 353,386 | | |
$ | 297,057 | | |
| 19 | % |
Research and development | |
| 450,006 | | |
| 329,424 | | |
| 37 | % |
General and administration | |
| 2,394,173 | | |
| 2,342,089 | | |
| 2 | % |
Total operating expenses | |
$ | 3,197,565 | | |
$ | 2,968,570 | | |
| 8 | % |
During the three months ended September 30, 2023,
the Company experienced a slight increase in overall operating expenses compared to the same period in 2022. Sales and marketing costs
saw a marginal increase primarily as a result of increased staffing within the team, while research and development expenses increased
by 37% for increased personnel and prospective technologies testing. 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
September 30, 2023 and 2022 was $2,970,977 and $1,869,018, 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 RIPs for a passenger transit
client in addition to the year-over-year timing related to the delivery of two Railcar Inspection Portals for two Class 1 customers for
the same period ended 2022.
Other Income/Expense
Other income for the three months ended September
30, 2023 was $24,647 as a result of interest earned on cash held in a money market account and negative $53,993 for the comparative period
in 2022. Interest expense for the three months ended September 30, 2023 was $1,406 and $2,057 for the comparative period in 2022.
Net Loss
The net loss for the three months ended September
30, 2023 and 2022 was $2,947,736 and $1,925,068, respectively. The 53% 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 $0.41 and $0.30 for the three months
ended September 30, 2023 and 2022, respectively.
Comparison for the Nine Months Ended September
30, 2023 Compared to Nine Months Ended September 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 Nine Months Ended | |
| |
September 30, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Revenues | |
$ | 5,945,270 | | |
$ | 9,078,696 | |
Cost of revenues | |
| 4,940,173 | | |
| 6,474,464 | |
Gross margin | |
| 1,005,097 | | |
| 2,604,232 | |
Operating expenses | |
| 9,271,122 | | |
| 8,509,343 | |
Loss from operations | |
| (8,266,025 | ) | |
| (5,905,111 | ) |
Other income (expense) | |
| 185,206 | | |
| (7,245 | ) |
Net loss | |
$ | (8,080,819 | ) | |
$ | (5,912,356 | ) |
Revenues
| |
For the Nine Months Ended | |
| |
September 30, | |
| |
2023 | | |
2022 | | |
% Change | |
Revenues: | |
| | |
| | |
| |
Technology systems | |
$ | 3,404,107 | | |
$ | 6,273,213 | | |
| -46 | % |
Services and consulting | |
| 2,541,163 | | |
| 2,805,483 | | |
| -9 | % |
Total revenues | |
$ | 5,945,270 | | |
$ | 9,078,696 | | |
| -35 | % |
The decrease in overall revenues for the nine months
ended September 30, 2023 compared to the nine months ended September 30, 2022, is primarily attributed to delays outside of the Company’s
control with ongoing production and manufacturing of our two high-speed Railcar Inspection Portals for a passenger transit client, which
are recorded in the technology systems portion of our business. During the third quarter of 2022, these same two high-speed Railcar Inspection
Portals were in the early procurement and design phase, and we were also in the advanced stages of manufacturing and installing two additional
Railcar Inspection Portals. Additionally, the services and consulting revenues decreased slightly year-over-year as a result of one-time
site improvements completed during the third quarter of 2022. 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 through its growing artificial intelligence catalog and improved services and maintenance.
That said, in spite of a positive outlook, a longer commercial cycle paired with still protracted supply chain timelines may result in
revenue recognition pushing into 2024. The Company remains focused on revenue and margin performance impacts from inflation and continued
supply chain challenges and proactively works to address these issues via customer pricing.
Cost of Revenues
| |
For the Nine Months Ended | |
| |
September 30, | |
| |
2023 | | |
2022 | | |
% Change | |
Cost of revenues: | |
| | |
| | |
| |
Technology systems | |
$ | 3,723,151 | | |
$ | 5,016,551 | | |
| -26 | % |
Services and consulting | |
| 1,217,022 | | |
| 1,457,913 | | |
| -17 | % |
Total cost of revenues | |
$ | 4,940,173 | | |
$ | 6,474,464 | | |
| -24 | % |
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 decreased during
the nine months ended September 30, 2023 over the equivalent period in 2022. During the second quarter of 2022, the Company was awarded
two high-speed Railcar Inspection Portals for its passenger transit client and by the third quarter of 2023 has phased into the manufacture
of these two more expensive and more robust transit-oriented RIPs. During the same period of 2022, the Company was also in the advanced
stages of manufacturing and installing two additional freight-oriented RIPS, thereby resulting in lower year-over-year cost of revenues
when compared to the cost of revenues during the first nine months of 2023. Cost of revenues for the nine months ended September 30, 2023
declined at a slower rate than revenues for the same period when compared to 2022 performance. This is largely a result of certain fixed
departmental costs within technology systems and services and consulting costs that are recorded in the cost of revenue and thus do not
change proportionately with shifts in revenue. 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 decreased in the nine months ended September
30, 2023 compared to the prior year period. The marginal decrease in cost can be attributed to timing of one-time projects completed in
the third quarter of 2022, partially offset by certain fixed, 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 Nine Months Ended | |
| |
September 30, | |
| |
2023 | | |
2022 | | |
% Change | |
| |
| | |
| | |
| |
Revenues | |
$ | 5,945,270 | | |
$ | 9,078,696 | | |
| -35 | % |
Cost of revenues | |
| 4,940,173 | | |
| 6,474,464 | | |
| -24 | % |
Gross margin | |
$ | 1,005,097 | | |
$ | 2,604,232 | | |
| -61 | % |
Gross margin decreased for the nine months ended September
30, 2023 as compared to the same period in 2022. As noted above, the decrease in margin was a direct result of the timing effects of business
activity for the first nine months of 2022 related to the manufacturing of two high-speed, transit-focused Railcar Inspection Portals
and delivery of two freight RIPs. During the third quarter of 2022, these same two high-speed Railcar Inspection Portals had just been
awarded and were in the early procurement and design phase, and we were also in the advanced stages of manufacturing and installing two
additional freight-oriented Railcar 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 Nine Months Ended | |
| |
September 30, | |
| |
2023 | | |
2022 | | |
% Change | |
Operating expenses: | |
| | | |
| | | |
| | |
Sales and marketing | |
$ | 962,040 | | |
$ | 956,937 | | |
| 1 | % |
Research and development | |
| 1,392,692 | | |
| 1,296,480 | | |
| 7 | % |
General and administration | |
| 6,916,390 | | |
| 6,255,926 | | |
| 11 | % |
Total operating expenses | |
$ | 9,271,122 | | |
$ | 8,509,343 | | |
| 9 | % |
During the nine months ended September 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 a combination of the timing of personnel incentives awarded in 2023 compared to the
same period in 2022 and increased amortization charges stemming from increased investment in artificial intelligence algorithms. 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 nine months ended
September 30, 2023 and 2022 was $8,266,025 and $5,905,111, respectively. The increase in loss from operations was primarily the result
of lower revenues recorded in the nine months as a consequence of delays in going to field for the two high-speed Railcar Inspection Portals
for a passenger transit client and year-over-year timing of two freight-oriented portals.
Other Income/Expense
Other income for the nine months ended September 30,
2023 was $185,206 and negative $7,245 for the comparative period in 2022. The improvement in other income on a year-over-year basis largely
stems from a one-time sale of a legacy security business for $150,000 during the second quarter of 2023. Interest expense for the nine
months ended September 30, 2023 was $5,816 and $7,943 for the comparative period in 2022.
Net Loss
The net loss for the nine months ended September 30,
2023 and 2022 was $8,080,819 and $5,912,356, respectively. The 37% 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 $1.12 and $1.01 for the nine months ended September 30,
2023 and 2022, respectively.
Liquidity and Capital Resources
As of September 30, 2023, the Company has a working
capital surplus of $3,358,320 and the Company had a net loss of $8,080,819 for the nine months ended September 30, 2023.
Cash Flows
The following table sets forth the major components
of our statements of cash flows data for the periods presented:
| |
For the Nine Months Ended September 30, | |
| |
2023 | | |
2022 | |
Net cash (used in) provided by operating activities | |
$ | (5,637,072 | ) | |
$ | (3,850,455 | ) |
Net cash used in investing activities | |
| (898,435 | ) | |
| (416,517 | ) |
Net cash provided by financing activities | |
| 8,681,331 | | |
| 8,338,718 | |
Net increase in cash | |
$ | 2,145,824 | | |
$ | 4,071,746 | |
Net cash used in operating activities for
the nine months ended September 30, 2023 and 2022 was $5,637,072 and $3,850,455, respectively. The increase in net cash used in operating
activities for the nine months ended September 30, 2023 was the result of cash outflows to procure necessary materials and overall sales
and marketing, general and administration 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 nine
months ended September 30, 2023 and 2022 was $898,435 and $416,517, respectively, representing an increase in the purchase of various
fixed assets for computer equipment and product and software development and disbursements for patent costs.
Net cash provided by financing activities for the
nine months ended September 30, 2023 and 2022 was $8,681,331 and $8,338,718, respectively. Cash flows provided by financing activities
during the first nine months of 2023 were primarily attributable to net proceeds of approximately $9,000,000 from issuances of Series
E and Series F Convertible Preferred Stock. Cash flows from financing activities during the first nine months of 2022 were primarily attributable
to the issuance of common stock for $8,550,000 of gross proceeds and $999,000 from the issuance of Series D Convertible Preferred shares.
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 $8,080,819 for the nine months ended September 30, 2023. During the same period, cash used in
operating activities was $5,637,072. The working capital surplus and accumulated deficit as of September 30, 2023, were $3,358,320 and
$60,442,653, 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 underwritten offerings 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. The Company
was also successful in raising a further $2,500,000 from the sale of additional Series E Convertible Preferred Stock during November 2023.
During the second quarter of 2023, the Company renewed its S-3 “shelf registration” statement allowing the Company to sell
multiple forms of securities in addition to 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. Additionally, the Company has capacity
on Series D and Series E to bolster liquidity, if needed, via private placements. 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.
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, proactive
management of our existing contracts, recent 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
from the date of this prospectus. 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 twelve 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 twelve 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.
Revenue Recognition
The Company follows Accounting Standards Codification
606, Revenue from Contracts with Customers (“ASC 606”), that affects the timing of when certain types of revenues will be
recognized. The basic principles in ASC 606 include the following: a contract with a customer creates distinct contract assets and performance
obligations, satisfaction of a performance obligation creates revenue, and a performance obligation is satisfied upon transfer of control
to a good or service to a customer.
Revenue is recognized by evaluating our revenue contracts
with customers based on the five-step model under ASC 606:
|
1. |
Identify the contract with the customer; |
|
2. |
Identify the performance obligations in the contract; |
|
3. |
Determine the transaction price; |
|
4. |
Allocate the transaction price to separate performance obligations; and |
|
5. |
Recognize revenue when (or as) each performance obligation is satisfied. |
The Company generates revenue from four sources: (1)
Technology Systems; (2) AI Technologies; (3) Technical Support 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,
and notes receivable, valuation of common stock warrants received in exchange for an asset sale, valuation of deferred tax assets, valuation
of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards
contract completion, valuation of inventory, estimates of the valuation of right of use assets and corresponding lease liabilities, valuation
of warrants issued with debt, and valuation of stock-based awards. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Results of Operations
The following discussion should be read in conjunction
with the consolidated financial statements included in this prospectus.
For the year ended December 31, 2022 compared
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 Years Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Revenues | |
$ | 15,012,366 | | |
$ | 8,259,917 | |
Cost of revenue | |
| 10,264,263 | | |
| 6,220,373 | |
Gross margin | |
| 4,748,103 | | |
| 2,039,544 | |
Operating expenses | |
| 11,613,252 | | |
| 9,496,495 | |
Loss from operations | |
| (6,865,149 | ) | |
| (7,456,951 | ) |
Other income | |
| 366 | | |
| 1,448,050 | |
Net loss | |
$ | (6,864,783 | ) | |
$ | (6,008,901 | ) |
Revenues
| |
For the Years Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | | |
% Change | |
Revenues: | |
| | |
| | |
| |
Technology systems | |
$ | 11,190,292 | | |
$ | 5,871,666 | | |
| 91 | % |
Services and consulting | |
| 3,822,074 | | |
| 2,388,251 | | |
| 60 | % |
| |
| | | |
| | | |
| | |
Total revenues | |
$ | 15,012,366 | | |
$ | 8,259,917 | | |
| 82 | % |
For the full year 2022, there was an 82% overall increase
in revenues compared to 2021. The increase was driven by new revenues being recorded after lengthy delays in receiving “notices
to proceed” for anticipated new contracts earlier in the year that pushed delivery dates into the second half of 2022 and into 2023.
There was a significant increase in revenue from systems with a slightly lower increase in service revenues of 60% year-over-year. The
increase in revenues stems directly from the delivery of two RIP projects across 2022 in addition to the onset of a new high-speed RIP
project which the Company will continue to recognize well into 2023. Additionally, the growth in services and consulting stems from the
Company’s success in deploying artificial intelligence as well as change orders to existing services agreements during the year.
The Company is focusing on increasing its business from services and the increase is the result of new contracts for existing and new
systems which the Company anticipates will continue growing throughout 2023 and beyond. As previously discussed, management cautions that
because of the delays in anticipated start dates, certain installations may produce revenues towards the end of 2023. Additionally, although
the industries in which we operate have improved after the Covid-19 pandemic, other macro-economic effects are anticipated to impact us,
including inflation and the current supply chain issues which are extending deadlines for shipment of key components used in our technology
systems. The effect of this deferred some revenue recognition into 2023 as previously mentioned. These deferrals resulted in a slightly
lower revenue growth performance than originally anticipated. However, the bulk of these deferred revenues are expected to be reported
in 2023. The effects of inflation are not fully quantifiable at the current time but are beginning to be evident in increased costs for
materials and labor and may result in higher costs for project implementation that cannot be wholly or even partially passed on to our
customers and thus resulting in delaying our progress towards profitability.
The Company’s capital structure continues to
allow us to weather the unexpected delays without significant operational impact and enables us to pursue large projects where the ability
to deploy major resources is required. It should be noted that the Company recently increased its working capital to account for an increase
in pre-contract procurement activities to avoid a slowdown in revenues caused by delays in receiving certain components as had been the
case in previous years. The Company undertook a major review of operations during 2021 and made significant changes in staffing including
additional engineering staff and revamping its software development and Artificial Intelligence staffing. These efforts have begun to
yield benefits in 2022 as reflected in the improved systems revenues. This effort has improved delivery times on major projects and helps
to offset some of the continued supply chain lags the Company has faced post-Covid-19. The Company continues to monitor the situation
and procures materials ahead of contract award where feasible.
The Company also expects to continue the growth with
new revenue from other existing customers which we expect to be coming on-line in the next several months. In aggregate during 2022, the
Company has been successful in the expansion of project and services contracts to account for new work. The services portion of revenues
are driven by successful completion on projects and represents 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.
Cost of Revenues
| |
For the Years Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | | |
% Change | |
Cost of revenues: | |
| | |
| | |
| |
Technology systems | |
$ | 8,376,649 | | |
$ | 4,728,197 | | |
| 77 | % |
Services and consulting | |
| 1,887,614 | | |
| 1,492,176 | | |
| 27 | % |
Total cost of revenues | |
$ | 10,264,263 | | |
$ | 6,220,373 | | |
| 65 | % |
Cost of revenues largely comprises equipment, labor
and overhead necessary to support the implementation of new systems and support and maintenance of existing systems. Cost of revenues
on technology systems increased during the period compared to the equivalent period in 2021 by a slightly 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 special-purpose, high
value Railcar Inspection Portal which it anticipates completing during 2023. The Company’s costs are composed of materials, subcontractor
costs and labor consisting of the Company’s engineering, project management and software team’s efforts to deliver on the
aforementioned Railcar Inspection Portals. The cost of sales grew at a slower pace than revenues primarily because the Company neared
completion of two of its portals and thus recognized additional profits on these projects as it satisfied its project-related obligations.
Additionally, the Company saw improved revenue growth related to higher margin services and artificial intelligence during the year which
contributed to revenue growth outpacing the change in cost of sales.
These internal costs are being recognized against
project and support revenues with a similar reduction in costs previously recognized for research and development, engineering development
and internal support. In concert with this, there is a continued focus on construction costs and savings through efficiency, but the Company
has elected to expand its key employees in anticipation of expected sales growth in technology systems and services in 2023 and beyond.
Cost of revenues increased on services and consulting
year-over-year albeit at a slower pace than the 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 from consulting and services increase outpaced the increase
in costs which is a positive trend. The Company put into service additional artificial intelligence algorithms and maintenance and support
services which are high margin and represent only marginal increases in the requisite costs to deliver these services.
Gross Margin
| |
For the Years Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | | |
% Change | |
| |
| | |
| | |
| |
Revenues | |
$ | 15,012,366 | | |
$ | 8,259,917 | | |
| 82 | % |
Cost of revenues | |
| 10,264,263 | | |
| 6,220,373 | | |
| 65 | % |
Gross margin | |
$ | 4,748,103 | | |
$ | 2,039,544 | | |
| 133 | % |
Gross margin showed a significant improvement for
the year ended December 31, 2022 as compared to the same period in 2021. As noted above, the improvement in margin was a direct result
of increased business activity the Company recognized in the latter half of 2022. The increased business activity was related to the manufacturing
and near completion of installation of two Rail Inspection Portals, a number of one-time service events and significant progress made
on a special-purpose, high-value RIP. The Company began to recognize revenue and profit on those activities in accord with its revenue
recognition policy. The recognition of the revenue and subsequent profit from these major projects, as well as underlying services and
maintenance revenues from existing projects, resulted in a 32% gross margin. By comparison for the full-year 2021, the Company had limited
business activity from a handful of projects primarily related to customer site upgrades as well as lower underlying service revenues.
This was as a result of project timing and delayed A.I. related services, which yielded a 25% gross margin. While the margins are not
significantly different year-over-year, the Company’s 82% increase in revenue from additional projects and services drove an overall
higher gross margin-dollar amount.
Operating Expenses
| |
For the Years Ended | |
| |
December 31, | |
| |
2022 | | |
2021 | | |
% Change | |
Operating expenses: | |
| | | |
| | | |
| | |
Sales and marketing | |
$ | 1,337,186 | | |
$ | 1,233,851 | | |
| 8 | % |
Research and development | |
| 1,651,064 | | |
| 2,515,630 | | |
| -34 | % |
General and Administration | |
| 8,625,002 | | |
| 5,747,014 | | |
| 50 | % |
Total operating expense | |
$ | 11,613,252 | | |
$ | 9,496,495 | | |
| 22 | % |
Overall operating expenses were higher by 22% in 2022
as compared to the full-year 2021. There was a marginal 8% increase in sales and marketing related to increased investment into the overall
capability of the commercial team. Specifically, 2022 saw the Company bring in additional talent with direct experience from the technology
and rail spaces. Research and development costs declined 34% during the year. This was the result of some of the technical resources from
the IT and Engineering teams being consumed as part of the significant increase in project and service revenues and led to the Company
performing additional project and one-time services work year-over-year. The offset of these charges reside in the cost of sales services
and consulting. Additionally, general and administration costs increased approximately 50% because of a focus on employee retention and
increased headcount to support the growth in its operating plan. Specifically, in 2022 the Company had charges related to staff retention
via a discretionary performance program; this was a new initiative for the entire organization to drive higher performance and attract
and retain better quality resources in a tight labor market as well as the related implementation and increased subsequent non-cash charges
of an employee stock option plan. The Company still faces some pressure on existing staff compensation as a result of inflation during
2022 but remains focused to manage and stabilize administrative costs without interruption to customer service.
Loss From Operations
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 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 fourth quarter of 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.
Interest Expense
Interest expense for the years 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 2021.
Net Loss
The net loss for the years ended December 31, 2022
and 2021 was $6,864,783 and $6,008,901, respectively. The increase in net loss is primarily attributable to the one-time effect of the
PPP 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 $1.11 and $1.63 for the years ended December 31, 2022 and 2021, respectively.
Liquidity and Capital Resources
As of December 31, 2022, the Company has a cash balance
of $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 | |
| |
| | |
| |
Net cash used in operating activities | |
$ | (7,873,307 | ) | |
$ | (6,579,378 | ) |
Net cash used in investing activities | |
| (644,888 | ) | |
| (552,940 | ) |
Net cash provided in financing activities | |
| 8,745,567 | | |
| 4,056,938 | |
Net increase (decrease) in cash | |
$ | 227,372 | | |
$ | (3,075,380 | ) |
Net cash used in operating activities for the years
ended December 31, 2022 and 2021 was $7,873,307 and $6,579,378, respectively. The increase in net cash used in operations for the year
ended December 31, 2022 was the result of higher expenditures related to current 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 forgiven during the first quarter
of 2021.
Net cash used in investing activities for the years
ended December 31, 2022 and 2021 was $644,888 and $552,940, respectively. The Company continues to invest in computing, lab equipment
and software and artificial development as reflected in the increase in 2022.
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 gross proceeds from the issuance of common and preferred stock to shareholders in the amount of $10,100,004,
offset by $942,946 in issuance costs. 2022 marked an increase from 2021 financing activities $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 $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 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
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 as 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 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 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 coronavirus (Covid-19) continue to affect our operations, particularly in our supply chain, we now believe that
this is expected to be an ongoing issue and our working capital assumptions reflect this new reality. The Company cannot currently quantify
the uncertainty related to the ongoing supply chain issues and its effects on our customers in the coming quarters. We have analyzed our
cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand or available via
the capital markets to maintain operations for at least 12 months from the date of this prospectus.
In addition, management has been taking and continues
to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning
both management and staffing 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.
Off Balance Sheet Arrangements
We have no-off balance sheet contractual arrangements,
as that term is defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates
We have identified the accounting policies below as
critical to our business operations and the understanding of our results of operations.
Revenue Recognition and Contract Accounting
The Company 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 revenue is recognized 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 at a point in time upon delivery of the software and delivery of the hardware, as applicable, to the customer; |
|
(3) |
Training sales are one-time upfront short-term training sessions and are recognized at a point in time after the service has been performed; and |
|
(4) |
Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over time ratably over the contract term. |
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.
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 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.
BUSINESS
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™ and employs approximately 71 people and
is a technology company which designs, develops, deploys and operates intelligent technology solutions with a focus on software applications
and AI. The Company has a strong portfolio of intellectual property. The Company’s headquarters are located at 7660 Centurion Parkway,
Suite 100, Jacksonville, Florida 32256 and main telephone number is (904) 296-2807.
Overview
The Company, operating under its brand name
duostech®, designs, develops and deploys technology with focus on inspecting and
evaluating moving vehicles. Its technology focus 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 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 as consultants.
Duos is currently developing industry solutions
for its target markets which will address rail, trucking, aviation and other vehicle-based processes. Duos’ initial offering, the
Railcar Inspection Portal (RIP), provides both freight and transit railroad customers and select government agencies the ability to conduct
fully remote railcar inspections of trains while they are moving at full speed. The RIP utilizes a variety of sophisticated optical, laser
and speed sensors to scan each passing railcar to create a high-resolution image-set of the top, sides and undercarriage. These images
are then processed with our edge data center using AI algorithms to identify safety and security defects on each railcar. The algorithms
are developed in conjunction with industrial application experts, in this case resident Railcar Mechanical Engineers, to provide specific
guidance in the analysis (“human in the loop”). Within seconds of the railcar passing through the RIP, a detailed report is
sent to the customer where they are able to take action 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 other railroad customers along with selected government agencies that
operate and/or manage rail traffic. The Company has deployed RIPs in Canada, Mexico and the United States and anticipates expanding this
solution into Europe, Asia and the Middle East in coming years.
The Company has also developed the Automated
Logistics Information System (ALIS) which automates gatehouse operations where transport trucks enter and exit large logistics and intermodal
facilities. This solution incorporates a similar set of 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.
We have developed two proprietary solutions
that operate our software and artificial intelligence. centraco®
is an Enterprise Information Management Software platform that consolidates data and events from multiple sources into a unified and distributive
user interface. Customized to the end user’s Concept of Operations (CONOPS), it provides improved situational awareness and data
visualization for operational objectives compared to traditional manual inspections. truevue360™
is our fully integrated platform that we utilize to develop and deploy AI algorithms, including Machine Learning, Computer Vision, Object
Detection and Deep Neural Network-based processing for real-time applications.
These same Artificial Intelligence applications
have begun to open up other opportunities for the Company to provide revenue producing solutions with potentially high market adoption.
In 2021, the Company ended support of its IT
Asset Management (ITAM) solution which cataloged results for data center asset inventory and audit services. We are currently evaluating
using our current operations experience within “edge data centers” (as deployed for our Railcar Inspection Portal) to drive
additional revenues within other markets requiring this type of solution although no specific offering has been developed at this time.
In the last quarter of 2022, the Company elected
not to renew a support contract for its Integrated Correctional Automation System (iCAS) for one customer. The Company subsequently sold
its iCAS assets to a buyer during the second quarter of 2023 for $165,000 via a convertible note.
The year 2022 ushered in a new phase in the
Company’s development. Although we continue to see an extension of challenges faced in 2021, we also see positive changes and opportunities
for our business that will be discussed in greater detail later herein. They include:
|
· |
Introducing a new “subscription” based offering for access to data and images by a much broader target market including Class 1 railroads, railcar owners and lessors, short line railroads. |
|
· |
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®
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. We believe our Railcar Inspection Portal has 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 using our rip® technology with one of those railroads broadly deploying the 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. Currently, the Company has a high-reliability catalog of over 35 artificial
intelligence algorithms which can be integrated into the RIP to enhance mechanical anomalies detections. These detections support railroads
in the active maintenance and overall safety of their railcar fleet and networks.
Markets
We believe the opportunity for our Railcar
Inspection Portal business is substantial and continues to be our number one priority. We are currently engaged with the RIP solution
with three of seven Class 1 railroad operators with 13 systems already deployed. Because of our early leadership position, we have been
able to accumulate experience and intellectual property that we believe would be time-consuming and expensive for a new competitor to
replicate. Furthermore, we believe we have the ability to upgrade and scale our solutions with additional technologies in the future.
We believe that the current market for our technologies is substantial. At the same time, we recognize that the technology life cycle
is fast and evolving. Potential competitors could move into this sector, and it is possible that some Class 1 railroads could develop
their own solutions that limit our total addressable market.
In late 2022, the Company announced it will
pursue a subscription platform for the RIPs. Under this new model, the Company will build, own and operate its RIP product and offer the
data access for each portal to potential customers. This expansion of the RIP offering would potentially open up the addressable market
to other railroads, railcar owners, and car lessors. This shift increases the pool of potential customers by 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.
Currently, we are focused on the North American
market, but plan to expand globally in the future with interest from Europe, Asia and the Middle East.
Patents and Trademarks
The Company holds a number of patents and trademarks
for our technology solutions. We protect our intellectual property rights by relying on federal, state, and common law rights, as well
as contractual restrictions. We control access to our proprietary technology by entering into confidentiality and invention assignment
agreements with all of our employees and contractors, and confidentiality agreements with third parties. We also actively engage in monitoring
activities with respect to infringing uses of our intellectual property by third parties.
Specific Areas of Competition
One of our primary commercial goals is to develop
innovative technology solutions and target potential “greenfield” market spaces in order to maximize our business footprint
and give us the ability to help define the market parameters for the future.
Other companies that participate in the visual
and optical (laser) based railcar inspection systems market include Wabtec (Beena Vision), KLD Labs, WID, IEM, and Camlin Rail. Some Class
1 railroads have stated that they are developing “in-house” solutions. We believe that Duos has a significant competitive
advantage in that we have multiple years of deployment experience, have access to millions of images where our RIP has performed scans
with AI analysis and have in-house industry expertise to train our systems and make identification of common problems more automated.
Our Automated Logistics Information System
(ALIS) also represents an opportunity to expand into a mature market that we believe has a significant technology gap. While most
facilities, such as distribution centers, that process commercial trucks in and out have sophisticated software management applications
for logistics control, they have most often not implemented 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 into and exit
out of facilities. The marketplace for this was mostly seaports and intermodal transfer facilities and was relatively expensive
technology to deploy.
Our Growth Strategy
Vision
The Company designs, develops, deploys and
operates intelligent technology solutions for inspecting and evaluating moving objects. Its technology application focus is within the
rail and intermodal markets which offers imaging-based automatic inspection and analysis for process control for industry with potential
expansion into other markets.
Objectives
|
• |
Improve our operational and technical execution, customer satisfaction and implementation speed. |
|
• |
Expand Rail Inspection Portal and Automated Logistics Information System with current and future customers in Rail, Logistics and U.S. Government sectors. |
|
• |
Offer both CAPEX (one-time sale) and Subscription pricing models that seek to increase recurring revenue and improve profitability. |
|
• |
Form strategic partnerships that improve market access and credibility. |
|
• |
Improve policy, processes, and toolsets to become a viable platform for internal growth and for mergers and acquisitions. |
|
• |
Thoughtfully execute mergers and acquisitions to expand offerings and/or capabilities. |
|
• |
Promote a performance-based work force where employees enjoy their work and are incentivized to excel and innovate. |
Organic Growth
Our organic growth strategy is to continue
our focus and prioritization in the rail, logistics and intermodal market space. 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 executive
team during late 2022 as the Senior Vice President of Sales & Marketing to support the continued revenue growth of the business and
brings with him over 20 years of sales experience focused in the rail market. In 2021, the Company also hired a new Chief Technology Officer
bringing 25 years of experience in designing and delivering on value driven technologies. Our new CTO has already led the team through
instrumental changes to its approach to software and artificial intelligence development. The team also saw a change in CFO in late 2022
who brings significant experience in growth for asset-intensive businesses which aligns with the subscription format the Company will
expand into.
The new leadership team’s focus is
to improve operational and technical execution which will in turn enable the commercial side of the business to expand RIP and ALIS delivery
into existing customers. Even though supply chain issues are expected to continue into 2024, the Company’s primary customers have
indicated readiness to order more equipment and services based upon the Company’s current performance and the new subscription
offerings expands the universe of potential customers.
Additionally, the CEO has directed that the
Company make continual engineering and software upgrades to the RIP to meet anticipated Federal Railroad Association (FRA) and Association
of American Railroad (AAR) standards.
Manufacturing and Assembly
The Company designs
and develops technology solutions using a combination of in-house fabrication, commercial off-the-shelf technology, and outsourced manufacturing.
On-site installations are performed using a combination of in-house project managers and engineers and using third-party sub-contractors
as needed. Throughout the process of design, develop, deploy and operate, the Company maintains responsibility for all aspects. Our internal
manufacturing operations consist primarily of materials procurement, assembly, testing and quality control by our engineers. If not manufactured
internally, we use third-party manufacturing partners to produce our hardware related components and hardware products and we most often
complete final assembly, testing and quality control processes for these components and products. Our manufacturing processes are based
on standardization of components across product types, centralization of assembly and distribution centers, and a “build-to-order”
methodology in which products generally are built only after customers have placed firm orders. For most of our hardware products, we
have existing alternate sources of supply.
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-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 71 employees of
which 65 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 our Board of Directors.
Name |
|
Age |
|
Position |
Charles P. Ferry |
|
57 |
|
Chief Executive Officer, Director |
Andrew W. Murphy |
|
40 |
|
Chief Financial Officer |
Kenneth Ehrman(1) |
|
52 |
|
Chairman |
Frank A. Lonegro (2) |
|
54 |
|
Director |
Ned Mavrommatis(3) |
|
52 |
|
Director |
James Craig Nixon (4) |
|
63 |
|
Director |
———————
(1) |
Chairman of our Board of Directors, member of the Compensation Committee and Audit Committee, Chairman of the Corporate Governance and Nominating Committee. |
(2) |
Mr. Lonegro has not been appointed to any Board committees as of the date of this prospectus. |
(3) |
Chairman of the Audit Committee, member of the Compensation Committee and Corporate Governance and Nominating Committee. |
(4) |
Chairman of the Compensation Committee, member of the Audit Committee and the Corporate Governance and Nominating Committee. |
Charles P. Ferry, Chief Executive Officer, Director
Mr. Ferry was appointed Chief Executive Officer, effective
September 1, 2020. Mr. Ferry was then elected as a member of our Board of Directors on November 19, 2020 by our shareholders. Mr. Ferry
combines over three years of experience in the energy industry and seven years in the defense contracting industry following 26 years
of active-duty service in the United States Army. 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.
Our Board of Directors believes Mr. Ferry brings significant
commercial and operational experience to the Company and has shown demonstrable leadership skills as both a Military officer with a distinguished
service record and in leading companies to profitable growth.
Andrew W. Murphy, Chief Financial Officer
Mr. Murphy has over 16 years of progressive business
experience in accounting and finance including nearly five years of public company experience for a London Stock Exchange-based company.
He joined Duos Technologies, Inc. in 2020 where he served on the Commercial team to support new project bids while also building out the
Finance function. Prior to joining Duos, from 2011 to 2020 Mr. Murphy held progressive senior Finance roles within APR Energy, a global
fast-track power and asset management company formerly listed on the London Stock Exchange (LSE). In these roles Mr. Murphy oversaw the
pricing & risk management efforts for more than $800 million in new business and asset transactions across the globe. Additionally,
he was also responsible for managing the FP&A function as well as supporting M&A activity and the investor relations function
during APR Energy’s time on the LSE. Prior to his time with APR, Mr. Murphy served in corporate accounting roles within a Fortune
500 company as well as time working in public accounting with a focus on tax and business services.
Mr. Murphy graduated from Jacksonville University
“cum laude” with a business degree in Accounting and later received his Master’s degree in Business Administration with
a focus in Finance.
Kenneth Ehrman, Chairman
Mr. Ehrman joined the Board on January 31, 2019.
He was elected as Chairman of the Board in November 2020. As an innovator in intelligent machine to machine (MtoM) wireless technology
and industrial 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 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.
Prior to joining our Board, Mr. Ehrman served
as Chief Executive Officer of I.D. Systems, Inc., a company he founded in 1993 as a Stanford University engineering student. During his
tenure at I.D. Systems, he pioneered the commercial use of radio frequency identification technology for industrial asset management and
took the company public on the Nasdaq in 1999. Under his leadership, I.D. Systems was named one of North America’s fastest growing
technology companies by Deloitte in 2005, 2006, and 2012. 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.
Mr. Ehrman is also the Chairman of the Corporate
Governance and Nominating Committee as well as a 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, make
him ideally qualified to help lead the Company towards continued growth.
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. Mavrommatis has served as the Chief Financial
Officer of Halo Collar since May 2022. The Halo Collar is the newest smart safety system for dogs. Co-founded by Cesar Millan, this patented
system utilizes proprietary technology & dog psychology to provide a wireless smart fence, smart training, GPS tracker and activity
tracker combined into one easy-to-use smart collar. Prior to Halo Collar Mr. Mavrommatis served as the Chief Financial Officer of PowerFleet,
Inc. (NASDAQ: PWFL) from October 2019 to May 2022 and I.D Systems, Inc. (NASDAQ: IDSY) from August 1999 to October 2019. Mr. Mavrommatis
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.
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 Audit and 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. Nixon’s
extensive military and management experience and familiarity with technology industries make him ideally suited to help lead the Company
towards excellence in operations and strategic planning.
Key Employees
Jeff Necciai, Chief Technology Officer, Operating Subsidiary Duos Technologies,
Inc.
Mr. Necciai brings over 25 years of experience in
designing, developing, and delivering value-driven technology solutions across a wide range of industries to Duos. Prior to joining Duos
in January 2021, Jeff served as the Chief Technology Officer of NASCENT Technology, where he cultivated and led high-performing cross-functional
product teams to develop and deliver comprehensive gate automation solutions to rail and maritime terminal customers. Jeff was responsible
for the solution design and software architecture for many of the company's innovations, including an advanced OCR and imaging solution,
proprietary point-to-point VoIP technology, an automated work queue management system, a line of integrated “smart” outdoor
IP-based callboxes, and a comprehensive human-assisted security and surveillance platform. In 2001, Jeff co-founded and served as Lead
Systems Architect for Solution Dynamics, which developed remote digital video surveillance products for institutional customers. Jeff
is listed on several technology-based patents and has contributed articles for publications such as American Shipper, World Cargo News,
and the Journal of Commerce. Jeff holds a Bachelor of Science Degree in Business Administration from Clarion University of Pennsylvania.
Chris King, Chief Commercial Officer, Operating Subsidiary Duos Technologies,
Inc.
Mr. King joins Duos with over 20 years of operational
and commercial leadership experience within the energy and supply chain sectors. Prior to joining Duos, he served in a series of progressive
management roles within APR Energy (“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 his time at APR, Mr. King held several
operational leadership roles at CEVA Logistics, including a role as Lean Six Sigma Leader in charge of designing and executing continuous
improvement projects for CEVA operations across the 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 our review of certain reports filed
with the SEC pursuant to Section 16(a) of the Exchange Act, the reports required to be filed with respect to transactions in our Common
Stock during the fiscal year ended December 31, 2022, were filed timely, except for one Form 4 for each of the directors reflecting issuance
of director compensation shares were not filed timely.
Code of Ethics
The Company has adopted
a Code of Ethics for adherence by its Chief Executive Officer and Chief Financial Officer, to ensure honest and ethical conduct, full,
fair and proper disclosure of financial information in the Company’s periodic reports filed pursuant to the Securities Exchange
Act of 1934, and compliance with applicable laws, rules, and regulations. Any person may obtain a copy of our Code of Ethics by mailing
a request to the Company at 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 33256.
Board Composition and Director Independence
Our Board of Directors currently consists of five
members: Mr. Kenneth Ehrman, Mr. Charles P. Ferry, Mr. Ned Mavrommatis, Mr. James Craig Nixon, and Mr. 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).
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 “Certain Relationships and 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. Mavrommatis, Mr. Nixon, and Mr. Lonegro 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 Board of Directors 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.
Mr. Mavrommatis, Mr. Nixon and Mr. Ehrman,
all of whom are independent directors within the meaning of the Nasdaq’s listing rules, are the Chairman of the Audit Committee,
the Compensation Committee and the Corporate Governance and Nominating Committee, respectively. Except for Mr. Lonegro, each of the independent
members of our Board of Directors also serves on one or more committees as previously disclosed.
Audit Committee
The Audit Committee oversees our accounting
and financial reporting processes and 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 Mr. Mavrommatis
is currently qualified as an “audit committee financial expert”, as such term is defined in Item 407(d)(5) of Regulation S-K.
Mr. Mavrommatis 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 Board of Directors on an annual basis the evaluation process and compensation structure for our other executive officers; |
|
• |
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 our Chief Executive Officer or our Board of Directors; |
|
• |
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 Board of Directors as needed, and exercising all the authority of our Board of Directors with respect to the administration of such plans; |
|
• |
reviewing and recommending to our Board of Directors the compensation of independent directors, including incentive and equity-based compensation; and |
|
• |
selecting, retaining and terminating such compensation consultants, outside counsel or other advisors as it deems necessary or appropriate. |
Mr. Nixon 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 our Board of Directors nominees for election as directors at any meeting of shareholders and nominees to fill vacancies on the board; |
|
• |
considering candidates proposed by shareholders in accordance with the requirements in the Committee charter; |
|
• |
overseeing the administration of the Company’s Code of Ethics; |
|
• |
reviewing with the entire Board of Directors, on an annual basis, the requisite skills and criteria for board candidates and the composition of the board as a whole; |
|
• |
the authority to retain search firms to assist in identifying board candidates, approve the terms of the search firm’s engagement, and cause the Company to pay the engaged search firm’s engagement fee; |
|
• |
recommending to our Board of Directors on an annual basis the directors to be appointed to each committee of the Board of Directors; |
|
• |
overseeing an annual self-evaluation of our Board of Directors and its committees to determine whether it and its committees are functioning effectively; and |
|
• |
developing and recommending to the board a set of corporate governance guidelines applicable to the Company. |
Mr. Ehrman serves as Chairman of the Corporate
Governance and Nominating Committee.
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.
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
($) |
|
|
Options
($) |
|
|
Other
Comp.
($) |
|
|
Total
($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles P. Ferry, |
|
2023 |
|
|
|
260,625 |
|
|
|
125,000 |
(1) |
|
|
73,365 |
(2) |
|
|
— |
|
|
|
458,990 |
|
Chief Executive Officer (CEO) |
|
2022 |
|
|
|
250,000 |
|
|
|
150,000 |
(3) |
|
|
235,144 |
(4) |
|
|
— |
|
|
|
635,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew W. Murphy, |
|
2023 |
|
|
|
221,010 |
|
|
|
57,240 |
(6) |
|
|
58,692 |
(7) |
|
|
— |
|
|
|
336,942 |
|
Chief Financial Officer (CFO)(5) |
|
2022 |
|
|
|
206,500 |
|
|
|
60,000 |
(8) |
|
|
188,115 |
(9) |
|
|
— |
|
|
|
454,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adrian G. Goldfarb, |
|
2023 |
|
|
|
224,675 |
|
|
|
31,000 |
(11) |
|
|
55,024 |
(12) |
|
|
— |
|
|
|
310,699 |
|
Former Chief Financial Officer,(10) Former
Director |
|
2022 |
|
|
|
214,385 |
|
|
|
50,000 |
(13) |
|
|
176,358 |
(14) |
|
|
— |
|
|
|
440,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connie L. Weeks, |
|
2023 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Former Chief Accounting Officer(15) |
|
2022 |
|
|
|
167,030 |
|
|
|
20,000 |
(16) |
|
|
94,058 |
(17) |
|
|
— |
|
|
|
281,088 |
|
———————
(1) |
Represents $125,000
objectives bonus. |
(2) |
Option compensation
is the fair market value of 37,889 share, five-year options with a strike price of $4.22 and three-year vesting granted to Mr. Ferry
as a retention incentive. See table below for valuation methodology. |
(3) |
Represents $150,000
objectives bonus. |
(4) |
Option compensation
is the fair market value of 100,000 share, five-year options with a strike price of $6.41 and three-year vesting granted to Mr. Ferry
as a retention incentive. See table below for valuation methodology. |
(5) |
Mr. Murphy became Chief
Financial Officer effective November 15, 2022. |
(6) |
Represents $57,240 objectives
bonus. |
(7) |
Option compensation
is the fair market value of 30,311 share, five-year options with a strike price of $4.22 and three-year vesting granted to Mr. Murphy
as a retention incentive. See table below for valuation methodology. |
(8) |
Represents $60,000 objectives
bonus. |
(9) |
Option compensation
is the fair market value of 80,000 share, five-year options with a strike price of $6.41 and three-year vesting granted to Mr. Murphy
as a retention incentive. See table below for valuation methodology. |
(10) |
Mr. Goldfarb retired
as Chief Financial Officer effective November 15, 2022. |
(11) |
Represents $31,000 objectives
bonus. |
(12) |
Option compensation
is the fair market value of 28,417 share, five-year options with a strike price of $4.22 and three-year vesting granted to Mr. Goldfarb
as a retention incentive. See table below for valuation methodology. |
(13) |
Represents $50,000 objectives
bonus. |
(14) |
Option compensation
is the fair market value of 75,000 share, five-year options with a strike price of $6.41 and three-year vesting granted to Mr. Goldfarb
as a retention incentive. See table below for valuation methodology. |
(15) |
On December 31, 2022
Ms. Weeks retired from the Company. |
(16) |
Represents bonus award
for long service to the Company. |
(17) |
Option compensation
is the fair market value of 40,000 share, five-year options with a strike price of $6.41 and initial three-year vesting granted to
Ms. Weeks as a retention incentive. Ms. Weeks' options become fully vested upon her retirement on December 31, 2022 as
an accommodation for long service to the Company. See table below for valuation methodology. |
|
|
For
the Years Ended
December 31, |
|
|
|
2023 |
|
|
2022 |
|
Risk free
interest rate |
|
|
3.73% |
|
|
|
0.97% |
|
Expected term in years |
|
|
3.50 |
|
|
|
3.50 |
|
Dividend yield |
|
|
— |
|
|
|
— |
|
Volatility of common
stock |
|
|
115% |
|
|
|
72% |
|
Estimated annual forfeitures |
|
|
— |
|
|
|
— |
|
Outstanding Equity Awards at December 31, 2023
Name |
|
Number
of
shares
underlying
unexercised
options
exercisable |
|
|
Equity
Incentive
Plan
Awards;
Number of
shares
underlying
unexercised
unearned
options |
|
|
Option
exercise
price |
|
|
Option
Expiration
date |
|
|
Number
of
shares or
units of
stock that
have not
vested |
|
|
Market
value of
shares or
units of
stock that
have not
vested $ |
|
|
Equity
Incentive
Plan
Awards:
Number of
unearned
shares, units
or other
rights that
have not vested |
|
|
Equity
Incentive
Plan
Awards:
Market or
payout value
of unearned
shares, units
or other
rights that
have not
vested $ |
|
Charles P. Ferry |
|
— |
|
|
37,889 |
|
|
$ |
|
4.22 |
|
|
03/31/2028 |
|
|
— |
|
|
— |
|
|
37,889 |
|
|
$0 |
|
Charles P.
Ferry |
|
|
33,333 |
|
|
|
66,667 |
|
|
$ |
6.41 |
|
|
12/31/2026 |
|
|
|
— |
|
|
|
— |
|
|
|
66,667 |
|
|
|
$0 |
|
Charles P. Ferry |
|
|
100,000 |
|
|
|
— |
|
|
$ |
4.18 |
|
|
08/31/2025 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Andrew W. Murphy |
|
|
— |
|
|
|
30,311 |
|
|
$ |
4.22 |
|
|
03/31/2028 |
|
|
|
— |
|
|
|
— |
|
|
|
30,311 |
|
|
|
$0 |
|
Andrew W. Murphy |
|
|
26,667 |
|
|
|
53,333 |
|
|
$ |
6.41 |
|
|
12/31/2026 |
|
|
|
— |
|
|
|
— |
|
|
|
53,333 |
|
|
|
$0 |
|
Andrew W. Murphy |
|
|
20,000 |
|
|
|
— |
|
|
$ |
4.35 |
|
|
11/22/2025 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Adrian G. Goldfarb |
|
|
— |
|
|
|
28,417 |
|
|
$ |
4.22 |
|
|
03/31/2028 |
|
|
|
— |
|
|
|
— |
|
|
|
28,417 |
|
|
|
$0 |
|
Adrian G. Goldfarb |
|
|
25,000 |
|
|
|
50,000 |
|
|
$ |
6.41 |
|
|
12/31/2026 |
|
|
|
— |
|
|
|
— |
|
|
|
50,000 |
|
|
|
$0 |
|
Adrian G. Goldfarb |
|
|
18,929 |
|
|
|
— |
|
|
$ |
6.00 |
|
|
03/31/2025 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Adrian G. Goldfarb |
|
|
18,929 |
|
|
|
— |
|
|
$ |
4.74 |
|
|
03/31/2025 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Connie L. Weeks |
|
|
40,000 |
|
|
|
— |
|
|
$ |
6.41 |
|
|
12/31/2026 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Connie L. Weeks |
|
|
18,929 |
|
|
|
— |
|
|
$ |
6.00 |
|
|
03/31/2025 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Connie L. Weeks |
|
|
18,929 |
|
|
|
— |
|
|
$ |
4.74 |
|
|
03/31/2025 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Employment
Agreements
Charles
P. Ferry
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 2022 Mr. Ferry received a base salary at an annual rate of $250,000 and also received a bonus in the amount of $150,000 during
2022 for achievement of certain objectives in 2022 in accordance with criteria determined by our Board of Directors and based on the
review and recommendation of the Compensation Committee. In 2023, M. Ferry’s annual salary was increased to $265,000 and he was
paid a bonus of $125,000 based on criteria determined by our Board of Directors and based on the review and recommendation of the Compensation
Committee. Mr. Ferry continues 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 100%
were vested as of September 1, 2022. He received a further grant in January 2022 in the amount of 100,000 non-qualified options with
a term of five years and a exercise price of $6.41. The options have a three-year vesting period. Additionally, he received a further
grant in April 2023 in the amount of 37,889 non-qualified options with a term of five years and a exercise price of $4.22. The options
have a three-year vesting period. The Ferry Employment Agreement can be terminated with or without cause at any time during the Initial
Term or during an Additional Term. As a full-time employee of the Company, Mr. Ferry is eligible to participate in all of the Company’s
benefit programs.
Potential
Payments upon Change of Control or Termination following a Change of Control and Severance
The
Ferry Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to up to
six months of base salary then in effect. Generally, we do not provide any severance specifically upon a change in control, nor do we
provide for accelerated vesting upon a change in control.
Andrew
W. Murphy
On December 1, 2023, the Company entered into
an employment agreement (the “Murphy Employment Agreement”) with Andrew W. Murphy, pursuant to which Mr. Murphy serves as
Chief Financial Officer of the Company. The Murphy Employment Agreement is for a term through March 31, 2025 (the “Initial Term”)
and shall be automatically extended for additional terms of successive one-year periods (the “Additional Term”) unless the
Company or Mr. Murphy gives at least 60 days written notice of non-renewal prior to the expiration of the Initial Term or each Additional
Term. Mr. Murphy is to receive a base salary at the annual rate of $224,720. Mr. Murphy is also eligible for an annual performance bonus
in an amount up to $70,000 in accordance with criteria, including but not limited to, revenue targets, profitability and other key performance
indicators, as recommended, by the Chief Executive Officer and accepted by the Board of Directors. Additionally, Mr. Murphy initially
received 20,000 non-qualified stock options at an exercise price of $4.35 with a term of five years and have a three-year vesting period.
He received a further grant in January 2022 in the amount of 80,000 non-qualified options with a term of five years and a strike price
of $6.41. The options have a three-year vesting period. Additionally, he received a further grant in April 2023 in the amount of 30,311
non-qualified options with a term of five years and an exercise price of $4.22. The options have a three-year vesting period. The Murphy
Employment Agreement may be terminated with or without cause and by Mr. Murphy for good reason. As a full-time employee of the Company,
Mr. Murphy will be 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
Murphy Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to up to
six months of base salary then in effect. Generally, we do not provide any severance specifically upon a change in control, nor do we
provide for accelerated vesting upon a change in control.
Adrian
G. Goldfarb
On April 1, 2018, the Company entered into an
employment agreement (the “Goldfarb Employment Agreement”) with Adrian G. Goldfarb, pursuant to which Mr. Goldfarb served
as Chief Financial Officer of the Company through November 15, 2022 and subsequently, assumed a new role as Strategic Advisor to the
CEO. During 2023, Mr. Goldfarb was paid an annual salary of $220,000 and he was paid a bonus of $31,000. In 2022, Mr. Goldfarb’s
annual salary was increased to $226,600 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, 2024 at which point the agreement will be terminated. The Goldfarb Employment Agreement was approved by the Compensation 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 served as Chief Accounting Officer of the Company. During 2022, Ms. Weeks was paid an annual salary of $152,260
as well as a $20,000 performance bonus and $14,770 in 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 gave notice of that party’s
election to not renew to the other party at least 60 days prior to the expiration of the then-current term. Ms. Weeks gave notice to
the Company that she would be retiring effective December 31, 2022. As a consequence, the Weeks Employment Agreement terminated effective
December 31, 2022. The Weeks Employment Agreement was approved by the Compensation Committee.
Potential
Payments upon Change of Control or Termination following a Change of Control and Severance
The
Weeks Employment Agreement contained certain provisions for early termination, which may have resulted in a severance payment equal to
two years of base salary then in effect. This provision is no longer in effect and Ms. Weeks will not receive any further compensation
following her retirement.
Director
Compensation
Starting
in 2021, the Compensation Committee determined that directors will receive $40,000 for serving as a member of a committee and $10,000
for serving as Chairman of a committee. The $10,000 fee is also inclusive of any services rendered as a member of one or more committees.
The board compensation will be paid 40% in cash and 60% in shares of restricted common stock or options to purchase shares of our common
stock, as elected by the board member. Each board member may further elect to receive up to 100% of compensation in restricted stock.
The following table summarizes data concerning
the compensation of our non-employee directors for the year ended December 31, 2023.
| |
Fees
Earned or
Paid in Cash ($) | | |
Stock Awards ($)(5) | | |
Option Awards ($) | | |
Non-Equity Incentive
Plan Compensation ($) | | |
Non-Qualified Deferred Compensation Earnings ($) | | |
All
Other Compensation ($) | | |
Total ($) | |
Kenneth
Ehrman (1) | |
| 5,000 | | |
| 45,000 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 50,000 | |
Frank
A. Lonegro (2) | |
| 0 | | |
| 18,065 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 18,065 | |
Ned
Mavrommatis (3) | |
| 20,000 | | |
| 30,000 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 50,000 | |
James
Craig Nixon (4) | |
| 0 | | |
| 50,000 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 50,000 | |
———————
(1) |
Kenneth
Ehrman was appointed to the board in January 2019. Through November 19, 2020, he served as Chairman of the Compensation
Committee and as of that date he was named Chairman of our Board of Directors. He serves as a member of the Audit Committee and the
Compensation Committee and is Chairman of the Corporate Governance and Nominating Committee. |
(2) |
Frank A. Lonegro was
appointed to the board on July 19, 2023. Mr. Lonegro does not serve on any committees as of the date of this prospectus.
Mr. Lonegro elected to receive all of his compensation in stock. |
(3) |
Ned Mavrommatis was appointed to the board on August 13, 2019. Through November 19, 2020, he served as Co-Chairman of the Audit Committee and since then he has been the sole Chairman of the Audit Committee and he is a member of the Compensation and Corporate Governance and Nominating Committees. |
(4) |
James Craig Nixon was
appointed to the board on July 15, 2021. Since his appointment, he has served as Chairman of the Compensation Committee
and he is a member of the Audit and Corporate Governance and Nominating Committees. Mr. Nixon elected to receive all of his compensation
in stock. |
(5) |
Reflects the aggregate grant date fair value of stock awards computed in accordance with FASB ASC Topic 718. In determining the grant date fair value of stock awards, the Company used the closing price of the Company’s common stock on the grant date. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As
of December 29, 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
(“Preferred B”), 5,000 shares of Series C Convertible Preferred 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 were 0 shares of Preferred
A, 0 shares of Preferred B, 0 shares of Preferred C, 1,299 shares of Preferred D, 11,500 shares of Preferred E, and 0 shares of Preferred
F outstanding, respectively, and 7,306,663 shares of our common stock issued. Additionally, our common stock entitles its holder to one
vote on each matter submitted to the stockholders.
The
following table sets forth, as of December 29, 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 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 32256.
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) |
|
|
1,460,601 |
|
|
|
19.99 |
% |
Pessin Family Holdings
500 Fifth Avenue, Suite 2240
New York, NY 10110 (2) |
|
|
1,459,945 |
|
|
|
20.00 |
% |
Bard
Associates, Inc.
135 South
LaSalle Street, Suite 3700
Chicago,
Illinois 60603(3) |
|
|
418,283 |
|
|
|
5.72 |
% |
Laurence
W. Lytton
467 Central
Park West
New York,
New York 10025(4) |
|
|
634,025 |
|
|
|
8.68 |
% |
Directors and Executive Officers |
|
|
|
|
|
|
|
|
Charles P. Ferry(5) |
|
|
140,409 |
|
|
|
1.89 |
% |
Andrew W. Murphy(6) |
|
|
49,866 |
|
|
|
* |
|
Kenneth Ehrman(7) |
|
|
74,528 |
|
|
|
* |
|
Ned Mavrommatis(8) |
|
|
43,519 |
|
|
|
* |
|
James C. Nixon |
|
|
37,759 |
|
|
|
* |
|
Frank A. Lonegro |
|
|
4,835 |
|
|
|
* |
|
Executive Officers and Directors as a Group (6 persons) |
|
|
350,916 |
|
|
|
4.67 |
% |
———————
*Denotes less
than 1%
(1) |
|
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 (21 April Fund, Ltd. held 929,522 shares and 21 April Fund, LP held 353,640 shares) as a result of acting as investment
advisor to various clients. Bleichroeder also owns warrants to purchase shares of our Common Stock held of record
by 21 April Fund, Ltd. in the amount of 32,724 and warrants to purchase shares of our Common Stock held of record by 21 April Fund
LP (together with 21 April Fund, Ltd., the “21 April Entities”) in the amount of 11,920, which are subject to a 9.99%
beneficial ownership limitation included in such warrants. The 21 April Entities also purchased 999 shares of Series D
Preferred Stock on September 30, 2022, which are convertible into 333,000 shares of Common Stock (21 April Fund, Ltd. holds 237,000
common equivalent shares and 21 April Fund, LP holds 96,000 common equivalent shares). The 21 April Entities also purchased 4,000
shares of Series E Preferred Stock on March 27, 2023, which are convertible into 1,333,334 shares of Common Stock (21 April Fund,
Ltd. holds 933,334 common equivalent shares and 21 April Fund, LP holds 400,000 common equivalent shares). The 21 April Entities
also purchased an additional 2,500 shares of Series E Preferred Stock on November 10, 2023, which are convertible into 833,333 shares
of Common Stock (21 April Fund, Ltd. holds 508,333 common equivalent shares and 21 April Fund, LP holds 325,000 common equivalent
shares). The 21 April Entities exchanged 5,000 shares of Series F Preferred Stock that were acquired in connection with the Purchase
Agreement of Series F Convertible Preferred Stock, completed on August 2, 2023. The 5,000 shares of Series F Preferred Stock, originally
convertible into 806,452 common shares, were exchanged for 5,000 shares of Series E Convertible Preferred Stock on November 10, 2023,
which are convertible into 1,666,667 shares of Common Stock, representing an additional 860,215 common share equivalents (21 April
Fund, Ltd. now holds 1,116,667 common equivalent shares and 21 April Fund, LP now holds 550,000 common equivalent shares). Conversion
of the Series D Preferred Stock and the Series E Preferred Stock owned by the 21 April Entities is subject to a 19.99% beneficial
ownership limitation. Due to the beneficial ownership limitations, included in the above number of shares of Common Stock beneficially
owned are 1,283,162 shares of Common Stock and an aggregate of 177,439 shares of Common Stock issuable upon conversion of the Series
D Preferred Stock and/or the Series E Preferred Stock. All other shares are excluded. If there were no beneficial ownership limitations,
Bleichroeder would be deemed to beneficially own 5,494,140 shares of Common Stock, representing 47.70% of the outstanding shares
of Common Stock. |
(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 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/A
filed by Bard Associates, Inc. (“Bard”) with the SEC on January 4, 2024, disclosing that Bard has sole voting and dispositive
power as to 10,000 shares of Common Stock and shared dispositive power as to 408,283 shares of Common Stock. |
(4) |
|
Based on Amendment No.
3 to Schedule 13G/A filed by Mr. Lytton with the SEC on February 13, 2023. Mr. Lytton also purchased 300 shares of Series
D Preferred Stock on October 29, 2022, which are convertible into 100,000 shares of Common Stock. These shares are excluded from
the above as conversion of the Series D Preferred Stock owned by Mr. Lytton is subject to a 4.99% beneficial ownership limitation.
If there were no beneficial ownership limitation, Mr. Lytton would be deemed to beneficially own 734,025 shares of Common Stock,
representing 9.91% of the outstanding shares of Common Stock. |
(5) |
|
Includes 100,000 shares
of our Common Stock underlying the vested and exercisable portion of options to purchase our Common Stock at an exercise price of
$4.18 per share and 33,334 shares of our Common Stock underlying the vested and exercisable portion of options to purchase our Common
Stock at an exercise price of $6.41 per share. Also includes 1,075 shares of Common Stock owned by Mr. Ferry and 6,000 shares of
Common Stock beneficially owned by Mr. Ferry in a joint account with his spouse. 66,666 shares of our Common Stock underlying the
unvested and currently non-exercisable portion of options to purchase our Common Stock at an exercise price of $6.41 per share and
37,889 shares of our Common Stock underlying the unvested and currently non-exercisable portion of option to purchase our Common
Stock at an exercise price of $4.22 were excluded. |
(6) |
|
Includes (i) options to
purchase 20,000 shares of our Common Stock at $4.35 per share, all of which are fully vested and exercisable; (ii) options to purchase
26,667 shares of our Common Stock at $6.41 per share, all of which are fully vested and exercisable; and (iii) 3,199 shares of our
Common Stock. 53,334 shares of our Common Stock underlying the unvested and currently non-exercisable portion of options to purchase
our Common Stock at an exercise price of $6.41 per share and 30,311 shares of our Common Stock underlying the unvested and currently
non-exercisable portion of options to purchase our Common Stock at an exercise price of $4.22 were excluded. |
(7) |
|
Includes (i) options to
purchase 8,572 shares of our Common Stock at $4.74 per share, all of which are fully vested and currently exercisable, and (ii) options
to purchase 8,572 shares of our Common Stock at $6.00 per share, all of which are fully vested and currently exercisable. |
(8) |
|
Includes (i) options to
purchase 8,572 shares of our Common Stock at $4.74 per share, all of which are fully vested and currently exercisable, and (ii) options
to purchase 8,572 shares of our Common Stock at $6.00 per share, all of which are fully vested and currently exercisable. |
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On
August 1, 2012, the Company entered into an independent contractor master services agreement (the “Services Agreement”) with
Luceon, LLC, a Florida limited liability company, owned by our former Chief Technology Officer, David Ponevac. 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 ceased recording activities in TrueVue360 nor its combined billings for a total of $20,986
per month. For the years ended December 31, 2022 and 2021, the total amount expensed was $0 and $93,422, respectively. The Company had
no open accounts payable with Luceon at December 31, 2022 or 2021. On May 14, 2021, the Company formally ended its relationship with
Luceon in concert with the resignation of our Chief Technology Officer and as such there is no longer a related party 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.
DESCRIPTION
OF CAPITAL STOCK
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. Six series of preferred stock have been authorized
to date. As of November 1, 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. On November 10, 2023, the Company issued an additional 7,500 shares of Series E Preferred Stock
and cancelled the 5,000 shares of Series F Preferred Stock.
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.
There
are 0 shares of Series A Convertible Preferred Stock 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 was convertible into 143 shares of common stock. Holders of Series B Preferred Stock voted 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 was convertible into 182 shares of common stock. Holders of Series C Preferred Stock had 172 votes
(subject to the applicable beneficial ownership limitation) for each share of Series C Preferred Stock and voted 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 D 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 $3.00 per share. Notwithstanding the foregoing, we shall not effect any conversion
of Series D Convertible Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion,
the holder of shares of Series D 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 D Convertible Preferred will vote on all matters on which the holders of common stock are entitled
to vote and will have 333 votes per share, subject to beneficial ownership limitations.
As
of February 9, 2024, there are 1,299 shares of Series D 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.
Each
share of Series E 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 $3.00 per share. Notwithstanding the foregoing, we shall not effect any conversion
of Series E Convertible Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion,
the holder of shares of Series E Convertible Preferred Stock (together with such holder’s affiliates, and any persons acting as
a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares of our common stock
in excess of 4.99% (or, at the election of the purchaser, 19.99%) of the shares of our common stock then outstanding after giving effect
to such exercise. Holders of Series E Convertible Preferred will vote on all matters on which the holders of common stock are entitled
to vote and will have 333 votes per share, subject to beneficial ownership limitations. 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
E 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 E Preferred Stock without the consent of the holders. Without shareholder
approval, the Company may not issue upon the conversion of any shares of Series E Preferred Stock a number of shares of common stock
which, when aggregated with any shares of common stock issued upon conversion of any other shares of Series E Preferred Stock, would
exceed 1,430,484 (subject to adjustment). Such number represents 19.99% of the number of shares of common stock issued and outstanding
as of the Series E Preferred Stock Certificate of Designation.
As
of February 9, 2024, there were 11,500 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 was 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 was
$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 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 had 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 would 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 entitled 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. As a result of that agreement, upon the issuance of 2,500 shares of Series E Preferred Stock (which have a conversion
price of $3.00 per share) on November 10, 2023, the holders exchanged their 5,000 shares of Series F Preferred Stock for 5,000 shares
of Series E Preferred Stock.
All
of the shares of Series F Preferred Stock thereupon were cancelled with 0 shares now outstanding.
Options
and Warrants
As
of November 30, 2023, there are 1,387,775 outstanding options to purchase shares of our common stock. The weighted average exercise price
of these options is $5.21, the average term when issued was five years and the average term remaining is three years.
As
of November 30, 2023, there are warrants outstanding to purchase 44,644 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 $7.70.
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, 2022 and 2021, and the related consolidated statements of operations, changes in stockholders’
equity, and cash flows for each of the two years in the period ended December 31, 2022 have been audited by Salberg & Company, P.A.,
an independent registered public accounting firm, as set forth in its report appearing herein and are included in reliance upon such
report given on the authority of such firm as experts in accounting and auditing.
The
validity of the Common Stock offered by this prospectus will be passed upon for us by Shutts & Bowen LLP.
WHERE
YOU CAN FIND MORE INFORMATION
We
are a reporting company and file annual, quarterly and special reports, and other information with the Securities and Exchange Commission.
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 Reports on Form 8-K, filed with the SEC
on January
3, 2023, March
29, 2023, May
19, 2023, June
28, 2023, July
20, 2023, August
3, 2023 and December
7, 2023; and |
|
• |
The description of our Common Stock contained in Exhibit
4.4 to our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the
SEC on March 31, 2022, and any amendment or report filed with the SEC for the purpose of updating the description. |
All
documents that we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of the initial registration
statement and prior to the effectiveness of the registration statement as well as on or after the date of this prospectus and prior to
the termination of this offering are also incorporated herein by reference and will automatically update and supersede information contained
or incorporated by reference in this prospectus and previously filed documents that are incorporated by reference in this prospectus.
However, anything herein to the contrary notwithstanding, no document, exhibit or information or portion thereof that we have “furnished”
or may in the future “furnish” to (rather than “file” with) the SEC, including, without limitation, any document,
exhibit or information filed pursuant to Item 2.02, Item 7.01 and certain exhibits furnished pursuant to Item 9.01 of our Current Reports
on Form 8-K, shall be incorporated by reference into this prospectus.
We
will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the reports or
documents that have been incorporated by reference into this prospectus but not delivered with this prospectus. We will provide these
reports upon written or oral request at no cost to the requester. Please direct your request, either in writing or by telephone, to the
Secretary, Duos Technologies Group, Inc., 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 32256, telephone number (904) 652-6616.
We maintain a website at http://www.duostechnologies.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished
to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference in, and is not
part of, this prospectus.
INDEX
TO FINANCIAL STATEMENTS
Audited
Consolidated Financial Statements
Unaudited
Consolidated Financial Statements
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, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ equity and cash flows
for each of the two years in the period ended December 31, 2022 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, 2022 and 2021, and the consolidated results of its operations and its cash flows
for each of the two years in the period ended December 31, 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.
Percentage
of Completion Revenue Recognition & Related Contract Assets and Contract Liabilities
As
described in footnote 1, “Revenue Recognition – Technology Systems” and footnote 8, “Revenues and Contract Accounting”
to the consolidated financial statements, the Company recognizes revenue over time using a cost-based input methodology in which significant
judgement is required to estimated costs to complete projects. These estimated costs are then used to determine the progress towards
contract completion and the corresponding amount of revenue to recognize. In addition, contract assets on uncompleted contracts represent
cumulative revenues in excess of billings on uncompleted contracts accounted for under the percentage of completion contract method.
Contract liabilities on uncompleted contracts represent billings that exceed cumulative revenues recognized on uncompleted contracts
accounted for under the percentage of completion contract method.
We
identified this percentage of completion revenue recognition as a critical audit matter. Auditing management’s estimates and judgments
regarding forecasts of total estimated costs to complete projects is especially challenging and complex.
The
primary procedures we performed to address this critical audit matter included (a) evaluated the reasonableness of management’s
cost estimates to complete projects by comparing them to historical information, year-to-date current information, information available
on projects subsequent to year end, and other supporting information, (b) performed ratio analysis and gross margin comparisons when
applicable on a sample of technology systems revenues (c) agreed cost details to supporting documents, (d) confirmed billings with customers
and/or traced cash receipts to bank statements, (e) recomputed the revenue earned and recognized, and (f) recomputed the contract asset
or liability
Analysis
of Liquidity and Going Concern
As
summarized in Footnote 2 “Liquidity” to the consolidated financial statements, the Company has a history of net losses and
net cash used in operating activities and believes such conditions will continue for a period of time into the future. These are considered
adverse conditions or events that lead management to consider whether there is substantial doubt about the ability of the Company to
continue as a going concern for a reasonable period of time or whether such concerns are alleviated with management’s plans.
We
identified the going concern risk analysis as a critical audit matter. Auditing management’s going concern analysis including their
process to develop the analysis and the projections of future cash flows, operating trends, and assessments of internal and external
matters that may affect the Company’s future operations and cash flows involved a high degree of subjectivity. Additionally, auditing
management’s plans to address the going concern risk involved highly subjective auditor judgment.
The
primary procedures we performed to address this critical audit matter included (a) Assessed the reasonableness of management’s
process for developing their assessment of whether a going concern risk exists, (b) Assessed the reasonableness of assumptions management
used in their future cash flow projections including comparison to prior year results, consideration of positive and negative evidence
impacting management’s forecasts, and consideration of the Company’s financing arrangements in place as of the report date,
(c) Developed our own independent calculation of expected source and use of funds, and cash flows and needs of the Company over the one
year period from the date of issuance of the consolidated financial statements, (d) Confirmed cash balances as of December 31, 2022 with
the banks and tested management’s bank reconciliations and inspected the bank balances in March 2023 after the $4,000,000 capital
raise, (e) Identified management’s plans for dealing with the adverse conditions and events discussed above and assessed the reasonableness
of the assumptions of such plans, (f) Assessed whether it is probable that management’s plans, when implemented, will mitigate
the adverse effects of the conditions and events discussed above, (g) Concluded whether substantial doubt exists as to whether the Company
can continue as a going concern for a period of one year after the consolidated financial statements are issued and (h) considered the
effect of such conclusion on the consolidated financial statement disclosures.
/s/
Salberg & Company, P.A.
SALBERG
& COMPANY, P.A.
We
have served as the Company’s auditor since 2013
Boca
Raton, Florida
March
31, 2023
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
| |
| | |
| |
| |
December
31, | | |
December
31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 1,121,092 | | |
$ | 893,720 | |
Accounts
receivable, net | |
| 3,418,263 | | |
| 1,738,543 | |
Contract
assets | |
| 425,722 | | |
| 3,449 | |
Inventory | |
| 1,428,360 | | |
| 298,338 | |
Prepaid
expenses and other current assets | |
| 441,320 | | |
| 354,613 | |
| |
| | | |
| | |
Total
Current Assets | |
| 6,834,757 | | |
| 3,288,663 | |
| |
| | | |
| | |
Property
and equipment, net | |
| 629,490 | | |
| 603,253 | |
Operating
lease right of use asset | |
| 4,689,931 | | |
| 4,925,765 | |
Security
deposit | |
| 600,000 | | |
| 600,000 | |
Software
development costs, net | |
| 265,208 | | |
| — | |
Patents
and trademarks, net | |
| 69,733 | | |
| 66,482 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 13,089,119 | | |
$ | 9,484,163 | |
See
accompanying notes to the consolidated financial statements.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
| |
December
31, | | |
December
31, | |
| |
2022 | | |
2021 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts
payable | |
$ | 2,290,390 | | |
$ | 1,044,500 | |
Notes
payable - financing agreements | |
| 74,575 | | |
| 52,503 | |
Accrued
expenses | |
| 453,023 | | |
| 618,093 | |
Equipment
financing agreements-current portion | |
| 22,851 | | |
| 80,335 | |
Operating
lease obligation-current portion | |
| 696,869 | | |
| 315,302 | |
Contract
liabilities | |
| 957,997 | | |
| 1,829,311 | |
| |
| | | |
| | |
Total
Current Liabilities | |
| 4,495,705 | | |
| 3,940,044 | |
| |
| | | |
| | |
Equipment
financing agreement, less current portion | |
| — | | |
| 22,851 | |
Operating
lease obligation, less current portion | |
| 4,542,943 | | |
| 4,739,783 | |
| |
| | | |
| | |
Total
Liabilities | |
| 9,038,648 | | |
| 8,702,678 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 10) | |
| — | | |
| — | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY: | |
| | | |
| | |
Preferred
stock: $0.001 par
value, 10,000,000 authorized,
9,476,000 shares
available to be designated | |
| — | | |
| — | |
Series
A redeemable convertible preferred stock, $10
stated value per share, 500,000
shares designated; 0
issued and outstanding at December 31, 2022 and 2021, respectively,
convertible into common stock at $6.30
per share | |
| — | | |
| — | |
Series
B convertible preferred stock, $1,000
stated value per share, 15,000
shares designated; 0
and 851
issued and outstanding at December 31, 2022 and 2021, respectively,
convertible into common stock at $7
per share | |
| — | | |
| 1 | |
Series
C convertible preferred stock, $1,000
stated value per share, 5,000
shares designated; 0
and 2,500
issued and outstanding at December 31, 2022 and 2021, respectively,
convertible into common stock at $5.50
per share | |
| — | | |
| 2 | |
Series
D convertible preferred stock, $1,000
stated value per share, 4,000
shares designated; 1,299
and 0
issued and outstanding at December 31, 2022 and 2021, respectively,
convertible into common stock at $3
per share | |
| 1 | | |
| — | |
Common
stock: $0.001 par
value; 500,000,000 shares
authorized, 7,156,876 and 4,111,047 shares
issued, 7,155,552 and
4,109,723 shares
outstanding at December 31, 2022 and 2021, respectively | |
| 7,156 | | |
| 4,111 | |
Additional
paid-in-capital | |
| 56,562,600 | | |
| 46,431,874 | |
Accumulated
deficit | |
| (52,361,834 | ) | |
| (45,497,051 | ) |
Sub-total | |
| 4,207,923 | | |
| 938,937 | |
Less:
Treasury stock (1,324 shares
of common stock at December 31, 2022 and 2021) | |
| (157,452 | ) | |
| (157,452 | ) |
Total
Stockholders' Equity | |
| 4,050,471 | | |
| 781,485 | |
| |
| | | |
| | |
Total Liabilities and
Stockholders' Equity | |
$ | 13,089,119 | | |
$ | 9,484,163 | |
See
accompanying notes to the consolidated financial statements.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
| | |
| |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2022 | | |
2021 | |
REVENUES: | |
| | | |
| | |
Technology
systems | |
$ | 11,190,292 | | |
$ | 5,871,666 | |
Services
and consulting | |
| 3,822,074 | | |
| 2,388,251 | |
| |
| | | |
| | |
Total
Revenues | |
| 15,012,366 | | |
| 8,259,917 | |
| |
| | | |
| | |
COST OF REVENUES: | |
| | | |
| | |
Technology
systems | |
| 8,376,649 | | |
| 4,728,197 | |
Services
and consulting | |
| 1,887,614 | | |
| 1,492,176 | |
| |
| | | |
| | |
Total
Cost of Revenues | |
| 10,264,263 | | |
| 6,220,373 | |
| |
| | | |
| | |
GROSS MARGIN | |
| 4,748,103 | | |
| 2,039,544 | |
| |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | |
Sales
& marketing | |
| 1,337,186 | | |
| 1,233,851 | |
Research
& development | |
| 1,651,064 | | |
| 2,515,630 | |
General
& administration | |
| 8,625,002 | | |
| 5,747,014 | |
| |
| | | |
| | |
Total
Operating Expenses | |
| 11,613,252 | | |
| 9,496,495 | |
| |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (6,865,149 | ) | |
| (7,456,951 | ) |
| |
| | | |
| | |
OTHER INCOME (EXPENSES): | |
| | | |
| | |
Interest
expense | |
| (9,191 | ) | |
| (20,268 | ) |
Other
income, net | |
| 9,557 | | |
| 1,468,318 | |
| |
| | | |
| | |
Total
Other Income | |
| 366 | | |
| 1,448,050 | |
| |
| | | |
| | |
NET LOSS | |
$ | (6,864,783 | ) | |
$ | (6,008,901 | ) |
| |
| | | |
| | |
Net Loss Per Share - Basic | |
$ | (1.11 | ) | |
$ | (1.63 | ) |
Net Loss Per Share - Diluted | |
$ | (1.11 | ) | |
$ | (1.63 | ) |
| |
| | | |
| | |
Weighted Average Shares - Basic | |
| 6,175,193 | | |
| 3,694,293 | |
Weighted Average Shares - Diluted | |
| 6,175,193 | | |
| 3,694,293 | |
See
accompanying notes to the consolidated financial statements.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER
31, 2022 AND 2021
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
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.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
| | |
| |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Cash from operating activities: | |
| | | |
| | |
Net
loss | |
$ | (6,864,783 | ) | |
$ | (6,008,901 | ) |
Adjustments
to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Bad
debt expense | |
| — | | |
| 76,046 | |
Depreciation
and amortization | |
| 350,192 | | |
| 275,346 | |
Loss
on disposal of assets | |
| — | | |
| 14,454 | |
Stock
based compensation | |
| 819,191 | | |
| 262,411 | |
Stock
issued for services | |
| 157,500 | | |
| 144,167 | |
PPP
loan forgiveness including accrued interest | |
| — | | |
| (1,421,577 | ) |
Amortization
of operating lease right of use asset | |
| 235,834 | | |
| 250,482 | |
Changes
in assets and liabilities: | |
| | | |
| | |
Accounts
receivable | |
| (1,679,720 | ) | |
| (611,023 | ) |
Contract
assets | |
| (422,273 | ) | |
| 99,009 | |
Inventory | |
| (1,130,022 | ) | |
| (185,915 | ) |
Prepaid
expenses and other current assets | |
| 266,539 | | |
| 423,905 | |
Security
deposit | |
| — | | |
| (600,000 | ) |
Accounts
payable | |
| 1,245,890 | | |
| 445,184 | |
Accounts
payable-related party | |
| — | | |
| (7,700 | ) |
Payroll
taxes payable | |
| — | | |
| (3,146 | ) |
Accrued
expenses | |
| (165,069 | ) | |
| (408,692 | ) |
Operating
lease obligation | |
| 184,728 | | |
| (127,816 | ) |
Contract
liabilities | |
| (871,314 | ) | |
| 804,388 | |
Net cash used in operating
activities | |
| (7,873,307 | ) | |
| (6,579,378 | ) |
| |
| | | |
| | |
Cash flows from investing
activities: | |
| | | |
| | |
Purchase of patents/trademarks | |
| (18,190 | ) | |
| (7,435 | ) |
Purchase
of software development | |
| (281,783 | ) | |
| — | |
Purchase
of fixed assets | |
| (344,915 | ) | |
| (545,505 | ) |
Net cash used in investing
activities | |
| (644,888 | ) | |
| (552,940 | ) |
| |
| | | |
| | |
Cash flows from financing
activities: | |
| | | |
| | |
Repayments
of insurance and equipment financing | |
| (331,175 | ) | |
| (353,444 | ) |
Repayment
of finance lease | |
| (80,335 | ) | |
| (89,618 | ) |
Proceeds
from common stock issued | |
| 8,801,003 | | |
| — | |
Issuance
cost | |
| (942,926 | ) | |
| — | |
Proceeds
from preferred stock issued | |
| 1,299,000 | | |
| 4,500,000 | |
Net cash provided by financing
activities | |
| 8,745,567 | | |
| 4,056,938 | |
| |
| | | |
| | |
Net increase (decrease)
in cash | |
| 227,372 | | |
| (3,075,380 | ) |
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.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
NOTE
1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations
Duos
Technologies Group, Inc. (the “Company”), through its operating subsidiaries, Duos Technologies, Inc. (“Duos”)
and TrueVue360, Inc. (“TrueVue360”) (collectively the “Company”), develops and deploys vision based analytical
technology solutions that will help to transform precision railroading, logistics and inter-modal transportation operations. Additionally,
these unique patented solutions can be employed into many other industries.
The
Company has developed the Railcar Inspection Portal (RIP) that provides both freight and transit railroad customers and select government
agencies the ability to conduct fully automated inspections of trains while they are in transit. The system, which incorporates a variety
of sophisticated optical technologies, illumination and other sensors, scans each passing railcar to create an extremely high-resolution
image set from a variety of angles including the undercarriage. These images are then processed through various methods of artificial
intelligence (“AI”) algorithms to identify specific defects and/or areas of interest on each railcar. This is all accomplished
within minutes of a railcar passing through our portal. This solution has the potential to transform the railroad industry by increasing
safety, improving efficiency and reducing costs. The Company has successfully deployed this system with several Class 1 railroad customers
and anticipates an increased demand in the future. Government agencies can conduct digital inspections combined with the incorporated
AI to improve rail traffic flow across borders which also directly benefits the Class 1 railroads through increasing their velocity.
The
Company has also developed the Automated Logistics Information System (ALIS) which automates and reduces/removes personnel from gatehouses
where trucks enter and exit large logistics and intermodal facilities. This solution also incorporates sensors and data points as necessary
for each operation and directly interconnects with backend logistics databases and processes to streamline operations and significantly
improve operations and security and importantly dramatically improves the vehicle throughput on each lane on which the technology is
deployed.
The
Company has built a portfolio of IP and patented solutions that creates “actionable intelligence” using two core native platforms
called Centraco® and Praesidium™. All solutions provided include a variant of both applications. Centraco is designed primarily
as the user interface to all our systems as well as the backend connection to third-party applications and databases through both Application
Programming Interfaces (APIs) and Software Development Kits (SDKs). This interface is browser based and hosted within each one of our
systems and solutions. It is typically also customized for each unique customer and application. Praesidium typically resides as middleware
in our systems and manages the various image capture devices and some sensors for input into the Centraco software.
The
Company also developed a proprietary Artificial Intelligence (AI) software platform, Truevue360™ with the objective of focusing
the Company’s advanced intelligent technologies in the areas of AI, deep machine learning and advanced multi-layered algorithms
to further support our solutions.
Through
September 30, 2021, the Company also provided professional and consulting services for large data centers and had developed a system
for the automation of asset information marketed as DcVue™. The Company had deployed its DcVue software at one beta site. This
software was used by Duos’ consulting auditing teams. DcVue was based upon the Company’s OSPI patent which was awarded in
2010. The Company offered DcVue available for 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 one-time equipment sales and capital
lease pricing models, and longer-term offer subscription pricing, to customers that increases recurring revenue, grows backlog and improves
profitability, responsibly grow the business both organically and through selective acquisitions, and promote a performance-based work
force where employees enjoy their work and are incentivized to excel and remain with the Company.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Reclassifications
The
Company reclassified $850,999
of Series B Convertible Preferred Stock and $2,499,998
of Series C Convertible Preferred Stock as previously presented
on the December 31, 2021 Consolidated Balance Sheet to additional paid-in capital to conform to the presentation at December 31, 2022
of new Series D Preferred Stock at par value rather than at stated value. There was no net effect on the total shareholders’ equity
of such reclassification.
The
Company reclassified certain operating expenses for the year ended December 31, 2021 to conform to 2022 classification. There was no
net effect on the total expenses of such reclassification.
The
following table reflects the reclassification adjustment effect for the year ended December 31, 2021:
Schedule of reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Reclassification |
|
|
|
|
|
After Reclassification |
|
|
|
|
For the Year Ended |
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
December 31, |
|
|
|
|
2021 |
|
|
|
|
|
2021 |
|
REVENUES: |
|
|
|
|
|
REVENUES: |
|
|
|
|
Technology systems |
|
$ |
5,871,666 |
|
|
Technology systems |
|
$ |
5,871,666 |
|
Technical support |
|
|
2,388,251 |
|
|
Services and consulting |
|
|
2,388,251 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
8,259,917 |
|
|
Total Revenue |
|
|
8,259,917 |
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
|
COST OF REVENUES: |
|
|
|
|
Technology systems |
|
|
7,151,276 |
|
|
Technology systems |
|
|
4,728,197 |
|
Technical support |
|
|
1,369,985 |
|
|
Services and consulting |
|
|
1,492,176 |
|
Overhead |
|
|
2,297,826 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues |
|
|
10,819,087 |
|
|
Total Cost of Revenues |
|
|
6,220,373 |
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN |
|
|
(2,559,170) |
|
|
GROSS MARGIN |
|
|
2,039,544 |
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
Sales and marketing |
|
|
1,233,851 |
|
|
Sales and marketing |
|
|
1,233,851 |
|
Research and development |
|
|
251,563 |
|
|
Research and development |
|
|
2,515,630 |
|
General and administration |
|
|
3,412,367 |
|
|
General and administration |
|
|
5,747,014 |
|
Total Operating Expenses |
|
|
4,897,781 |
|
|
Total Operating Expenses |
|
|
9,496,495 |
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
$ |
(7,456,951 |
) |
|
LOSS FROM OPERATIONS |
|
$ |
(7,456,951 |
) |
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.
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, 2022, the Company had balances in a financial institution which combined exceeded federally
insured limits by approximately $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.
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, 2022, four customers accounted for 42%,18%,
14%
and 14%
of revenues. For the year ended December 31, 2021, a single customer accounted for 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.
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. 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
41%
and 86%
of revenue in 2022 and 2021, respectively, is generated from customers outside of the United States.
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 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 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 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.
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 3
to five 5
years). When assets are sold or retired, their costs and accumulated
depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the statement of operations.
Leasehold improvements are expensed over the shorter of the term of our lease or their useful lives.
Software
Development Costs
Software
development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development
costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding,
and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features,
and technical performance requirements. Software development costs incurred after establishing technological feasibility for software
sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be Sold, Leased, or Marketed) are capitalized
and amortized on a product-by-product basis when the product is available for general release to customers.
Patents
and Trademarks
Patents
and trademarks which are stated at amortized cost, relate to the development of video surveillance security system technology and are
being amortized over 17
years.
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 values of such assets exceed the estimated future undiscounted cash flows attributable to such assets or the business to
which such intangible assets relate. This guidance requires that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Product
Warranties
The
Company has a 90-day
warranty period for materials and labor after final acceptance of a project. If any parts are defective they are replaced under our vendor
warranty which is usually 12
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, 2022 and 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
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.
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. |
The
Company generates revenue from four sources:
(1)
Technology Systems
(2)
AI Technologies
(3)
Technical Support
(4)
Consulting Services
Technology
Systems
For
revenues related to technology systems, the Company recognizes revenue over time using a cost-based input methodology in which significant
judgment is required to estimate costs to complete projects. These estimated costs are then used to determine the progress towards contract
completion and the corresponding amount of revenue to recognize.
Accordingly,
the Company 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.
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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Consulting
Services
The
Company’s consulting services business generates revenues under contracts with customers from four sources: (1) Professional Services
(consulting and auditing); (2) Software licensing with optional hardware sales; (3) Customer service training and (4) Maintenance support.
(1)
Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2)
For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software
product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software
license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer;
(3)
Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
(4)
Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance
payments received upfront are deferred and recognized over the contract term.
Multiple
Performance Obligations and Allocation of Transaction Price
Arrangements
with customers may involve multiple performance obligations including project revenue and maintenance services in our Technology Systems
business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis.
In our consulting services business, multiple performance obligations may include any of the above four sources. Training and maintenance
on software products may occur after the software product sale while other services may occur before or after the software product sale
and may not relate to the software product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each
performance obligation is accounted for separately when each has value to the customer on a standalone basis and there is Company specific
objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the
total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the
items when sold separately. Once the selling price is allocated, the revenue for each performance 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.
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 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 2019, 2020 and 2021 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, 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 926,266
employee stock options to purchase shares of common stock. At
December 31, 2022, 433,000
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 431,266
employee stock options to purchase shares of common stock. At
December 31, 2021, 121,571
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. Also, at December 31, 2021, 454,546
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.
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.
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.
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 0
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.
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.
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 REVENUE AND CONTRACT ACCOUNTING
The
Company generates revenue from four sources: (1) Technology Systems; (2) AI Technology which is included in the consolidated statements
of operations line-item Technology Systems; (3) Technical Support; and (4) Consulting Services which is included in the consolidated
statements of operations line-item Services and Consulting.
Contract
assets and contract liabilities on uncompleted contracts for revenues recognized over time are as follows:
Contract
Assets
Contract
assets on uncompleted contracts represent cumulative revenues recognized in excess of billings and/or cash received on uncompleted contracts
accounted for under the cost-to-cost input method which recognizes revenue based on the ratio of costs incurred to total estimated costs.
At
December 31, 2022 and 2021, contract assets on uncompleted contracts consisted of the following:
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 on uncompleted
contracts accounted for under the cost-to-cost input method.
Contract
liabilities on services and consulting revenues represent billings and/or cash received in excess of revenue recognized on service agreements
that are not accounted for under the cost-to-cost input method.
The
Company expects to recognize all contract liabilities within 12 months from the consolidated balance sheet date.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
At
December 31, 2022 and 2021, contract liabilities on uncompleted contracts consisted of the 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:
1. We have four
distinct revenue sources:
a. Technology
Systems (Turnkey, engineered projects);
b. AI
Technology (Associated maintenance and support services);
c. Technical
Support (Licensing and professional services related to auditing of data center assets); and
d. Consulting
Services (Predetermined algorithms to provide important operating information to the users of our systems).
2. We currently
operate in North America including the USA, Mexico and Canada.
3. Our customers
include rail transportation, commercial, government, banking and IT suppliers.
4. Our technology
systems and equipment projects fall into two types:
a. Transfer
of goods and services are over time.
b. Goods
delivered at point in time.
5. Our services
& maintenance contracts are fixed price and fall into two duration types:
a. Turnkey
engineered projects and professional service contracts that are less than one year in duration and are typically one to two quarters
in length; and
b. Maintenance
and support contracts ranging from one to five years in length.
Quantitative:
For
the Year Ended December 31, 2022
Schedule of Disaggregation of Revenue | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Segments | |
Rail | | |
Commercial | | |
Petrochemical | | |
Government | | |
Banking/Other | | |
IT
Suppliers | | |
Artificial
Intelligence | | |
Total | |
Primary
Geographical Markets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
North
America | |
$ | 13,710,777 | | |
$ | 115,443 | | |
$ | — | | |
$ | 237,414 | | |
$ | — | | |
$ | — | | |
$ | 948,732 | | |
$ | 15,012,366 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Major
Goods and Service Lines | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Turnkey Projects | |
$ | 10,789,693 | | |
$ | 9,297 | | |
$ | — | | |
$ | 156,530 | | |
$ | — | | |
$ | — | | |
$ | 234,772 | | |
$ | 11,190,292 | |
Maintenance
& Support | |
| 2,921,084 | | |
| 106,146 | | |
| — | | |
| 80,884 | | |
| — | | |
| — | | |
| — | | |
| 3,108,114 | |
Data Center Auditing Services | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Software License | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Algorithms | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 713,960 | | |
| 713,960 | |
| |
$ | 13,710,777 | | |
$ | 115,443 | | |
$ | — | | |
$ | 237,414 | | |
$ | — | | |
$ | — | | |
$ | 948,732 | | |
$ | 15,012,366 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Timing
of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Goods transferred over time | |
$ | 10,789,693 | | |
$ | 9,297 | | |
$ | — | | |
$ | 156,530 | | |
$ | — | | |
$ | — | | |
$ | 234,772 | | |
$ | 11,190,292 | |
Services
transferred over time | |
| 2,921,084 | | |
| 106,146 | | |
| — | | |
| 80,884 | | |
| — | | |
| — | | |
| 713,960 | | |
| 3,822,074 | |
| |
$ | 13,710,777 | | |
$ | 115,443 | | |
$ | — | | |
$ | 237,414 | | |
$ | — | | |
$ | — | | |
$ | 948,732 | | |
$ | 15,012,366 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Quantitative:
For
the Year Ended December 31, 2021
Segments | |
Rail | | |
Commercial | | |
Petrochemical | | |
Government | | |
Banking | | |
IT
Suppliers | | |
Artificial
Intelligence | | |
Total | |
Primary
Geographical Markets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
North
America | |
$ | 6,883,670 | | |
$ | 213,517 | | |
$ | (867 | ) | |
$ | 314,030 | | |
$ | 23,340 | | |
$ | 134,717 | | |
$ | 691,510 | | |
$ | 8,259,917 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Major
Goods and Service Lines | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Turnkey Projects | |
$ | 5,255,491 | | |
$ | 27,831 | | |
$ | — | | |
$ | 233,145 | | |
$ | 1,537 | | |
$ | — | | |
$ | — | | |
$ | 5,518,004 | |
Maintenance
& Support | |
| 1,628,179 | | |
| 185,686 | | |
| (867 | ) | |
| 80,885 | | |
| 21,803 | | |
| — | | |
| 341,915 | | |
| 2,257,601 | |
Data Center Auditing Services | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 131,537 | | |
| — | | |
| 131,537 | |
Software License | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,180 | | |
| — | | |
| 3,180 | |
Algorithms | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 349,595 | | |
| 349,595 | |
| |
$ | 6,883,670 | | |
$ | 213,517 | | |
$ | (867 | ) | |
$ | 314,030 | | |
$ | 23,340 | | |
$ | 134,717 | | |
$ | 691,510 | | |
$ | 8,259,917 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Timing
of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Goods transferred over time | |
$ | 5,255,491 | | |
$ | 27,831 | | |
$ | — | | |
$ | 233,145 | | |
$ | 1,537 | | |
$ | 131,537 | | |
$ | 349,595 | | |
$ | 5,999,136 | |
Services
transferred over time | |
| 1,628,179 | | |
| 185,686 | | |
| (867 | ) | |
| 80,885 | | |
| 21,803 | | |
| 3,180 | | |
| 341,915 | | |
| 2,260,781 | |
| |
$ | 6,883,670 | | |
$ | 213,517 | | |
$ | (867 | ) | |
$ | 314,030 | | |
$ | 23,340 | | |
$ | 134,717 | | |
$ | 691,510 | | |
$ | 8,259,917 | |
Segment
Information
The
Company operates in one reportable segment.
NOTE
9 – DEFERRED COMPENSATION
As
of December 31, 2022, and 2021, the Company has accrued $297,620
and $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
10 – COMMITMENTS AND CONTINGENCIES
Operating
Lease Obligations
On
July 26, 2021, the Company entered a new operating lease agreement for office and warehouse combination space of 40,000
square feet, with the lease commencing on November 1, 2021, and
ending April 30, 2032. This new space combines the Company’s two separate work locations into one facility, which allows for greater
collaboration and also accommodates a larger anticipated workforce and manufacturing facility. On November 24, 2021, the lease was amended
to commence on December 1, 2021, and end on May 31, 2032. The Company recognized a ROU asset and operating lease liability in the amount
of $4,980,104 at
lease commencement. Rent for the first eleven months of the term was calculated based on 30,000
rentable square feet. The rent is subject to an annual escalation
of 2.5%, beginning November 1, 2023. The Company made a security deposit payment in the amount of $600,000
on July 26, 2021. The right of use asset balance at December 31,
2022, net of amortization, was $4,689,931.
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 lease with a term greater than twelve months. The office
and warehouse lease has a remaining term of approximately 9.5 years and includes an option to extend for two renewal terms of five years
each. The renewal options are not reasonably certain to be exercised, and therefore, they are not included when determining the lease
term used to establish the right-of use asset and lease liability. The Company also has several short-term leases, primarily related
to equipment. The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on
the consolidated balance sheet and instead recognize the lease payments in expense as incurred. The Company has also elected to account
for real estate leases that contain both lease and non-lease components (such as common area maintenance) as a single lease component.
The
following table shows supplemental information related to leases:
| |
| | |
| |
| |
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 lease are as follows:
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
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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
In
accordance with the Separation Agreement, the Company will pay to Mr. Arcaini the total sum of $747,788.
Notwithstanding the foregoing, the status of Mr. Arcaini as a “Specified Employee” as defined in Internal Revenue Code Section
409A has the effect of delaying any payments to Mr. Arcaini under the Separation Agreement for six months after the Separation Date.
On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631,
owed to Mr. Arcaini and the Company will continue to pay him in semi-monthly installments for 30 months thereafter, as contemplated in
Mr. Arcaini’s Separation Agreement. The remaining balance of approximately $228,673
as of December 31, 2022 is included in accrued expenses in the
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
per month and provide and pay for his health insurance for 36
months following the Separation Date of approximately $450 per month. Unvested options in the amount of 50,358
became exercisable and vested in their entirety on the Separation
Date valued at $95,127.
The Company made payment of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation Agreement
of approximately $17,000.
NOTE
11 – 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, 2022 and 2021 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, 2022 and 2021 were as follows:
Schedule of difference between income taxes
at effective statutory rate and provision for income taxes | |
| | |
| |
| |
Years
Ended December 31, | |
| |
2022 | | |
2021 | |
Income tax benefit at U.S. statutory
rate of 21% | |
$ | (1,441,624 | ) | |
$ | (1,261,869 | ) |
State income taxes | |
| (247,135 | ) | |
| (216,321 | ) |
Non-deductible expenses | |
| 201,521 | | |
| 64,553 | |
Change in valuation
allowance | |
| 1,487,238 | | |
| 1,413,637 | |
Total provision for
income tax | |
$ | — | | |
$ | — | |
The
Company’s approximate net deferred tax assets as of December 31, 2022 and 2021 were as follows:
Schedule of net deferred tax assets | |
| | |
| |
| |
December
31, | |
| |
2022 | | |
2021 | |
Deferred Tax
Asset (Liability): | |
| | | |
| | |
Net operating loss carryforward | |
$ | 9,772,854 | | |
$ | 8,247,427 | |
Intangible assets | |
| (32,656 | ) | |
| 5,553 | |
| |
| 9,740,198 | | |
| 8,252,960 | |
Valuation allowance | |
| (9,740,198 | ) | |
| (8,252,960 | ) |
Net deferred tax
assets | |
$ | — | | |
$ | — | |
The
gross operating loss carryforward was approximately $39,727,050
and $33,522,769
at December 31, 2022 and 2021, respectively. The Company provided
a valuation allowance equal to the net deferred income tax assets for the years ended December 31, 2022, and 2021 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 $1,487,238
in 2022.
The
potential tax benefit arising from the net operating loss carryforward of $4,357,876
from the period prior to January 1, 2018, will expire in 2037.
The potential tax benefit arising from the net operating loss carryforward of $5,382,322
generated after January 1, 2018 can be carried forward indefinitely
within the annual usage limitations.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Additionally,
the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual 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 2021, 2020
and 2019 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE
12 – STOCKHOLDERS’ EQUITY
Schedule
of black scholes option pricing model |
2016
Equity Plan
We
maintained the 2016 Equity Incentive Plan (the “2016 Plan”) for employees, officers, directors and other entities and individuals
whose efforts contribute to our success. The 2016 Plan terminated pursuant to its terms on December 31, 2020, although all outstanding
awards on such date continue in full force and effect.
2021
Equity Plan
On
May 12, 2021, the Board adopted, with shareholder approval as of July 15, 2021, the 2021 Equity Incentive Plan (the “2021 Plan”)
providing for the issuance of up to 1,000,000
shares of our Common Stock. The purpose of the 2021 Plan is to
assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals
to align their interests with those of our shareholders.
General
Description of the 2021 Plan
The
following is a summary of the material provisions of the 2021 Plan and is qualified in its entirety by reference to the complete text
of the 2021 Plan, which you are encouraged to read in full.
Administration
The
2021 Plan is administered by the Compensation Committee of the Board, which consists of three 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 has complete discretion, subject to the express
limits of the 2021 Plan, to determine the directors, employees and nonemployee consultants to be granted an award, the type of award
to be granted, the terms and conditions of the award, the form of payment to be made and/or the number of shares of Common Stock subject
to each award, the exercise price of each option and base price of each stock appreciation right (“SAR”), the term of each
award, the vesting schedule for an award, whether to accelerate vesting, the value of the Common Stock underlying the award, and the
required withholding, if any. The Compensation Committee may amend, modify or terminate any outstanding award, provided that the 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 2021 Plan. Notwithstanding
the foregoing, the Compensation Committee does not have any authority to grant or modify an award under the 2021 Plan with terms or conditions
that would cause the grant, vesting or exercise thereof to be considered nonqualified “deferred compensation” subject to
Code Section 409A.
Grant
of Awards; Shares Available for Awards
The
2021 Plan provides for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right
awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees
and nonemployee consultants of the Company or its affiliates. We have reserved a total of 1,000,000
shares of Common Stock for issuance as or under awards to be made
under the 2021 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 2021 Plan.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
Stock
Options
The
2021 Plan provides for either “incentive stock options” (“ISOs”), which are intended to meet the requirements
for special federal income tax treatment under the Code, or “nonqualified stock options” (“NQSOs”). On May 12,
2021, the 2021 Plan was approved by shareholders and adopted by the board of directors. Stock options may be granted on such terms and
conditions as the Compensation Committee may determine; provided, however, that the per share exercise price under a stock option may
not be less than the fair market value of a share of the Company’s Common Stock on the date of grant and the term of the stock
option may not
exceed 10 years (110% of such value and five years in the case
of an ISO granted to an employee who owns (or is deemed to own) more
than 10% of the total combined voting power of all classes of capital stock of
the Company or a parent or subsidiary of the Company). ISOs may only be granted to employees. In addition, the aggregate fair market
value of our Common Stock covered by one or more ISOs (determined at the time of grant) which are exercisable for the first time by an
employee during any calendar year may not exceed $100,000.
Any excess is treated as a NQSO.
Stock
Appreciation Rights
An
SAR entitles the participant, upon exercise, to receive an amount, in cash or stock or a combination thereof, equal to the increase in
the fair market value of the underlying Common Stock between the date of grant and the date of exercise. SARs may be granted in tandem
with, or independently of, stock options granted under the 2021 Plan. An SAR granted in tandem with a stock option (i) is exercisable
only at such times, and to the extent, that the related stock option is exercisable in accordance with the procedure for exercise of
the related stock option; (ii) terminates upon termination or exercise of the related stock option (likewise, the Common Stock option
granted in tandem with a SAR terminates upon exercise of the SAR); (iii) is transferable only with the related stock option; and (iv)
if the related stock option is an ISO, may be exercised only when the value of the stock subject to the stock option exceeds the exercise
price of the stock option. An SAR that is not granted in tandem with a stock option is exercisable at such times as the Compensation
Committee may specify.
Performance
Share and Performance Unit Awards
Performance
share and performance unit awards entitle the participant to receive cash or shares of our Common Stock upon the attainment of specified
performance goals. In the case of performance units, the right to acquire the units is denominated in cash values.
Restricted
Stock Awards and Restricted Stock Unit Awards
A
restricted stock award is a grant or sale of Common Stock to the participant, subject to our right to repurchase all or part of the shares
at their purchase price (or to require forfeiture of such shares if issued to the participant at no cost) in the event that conditions
specified by the Compensation Committee in the award are not satisfied prior to the end of the time period during which the shares subject
to the award may be repurchased by or forfeited to us. Our restricted stock unit entitles the participant to receive a cash payment equal
to the fair market value of a share of Common Stock for each restricted stock unit subject to such restricted stock unit award, if the
participant satisfies the applicable vesting requirement.
Unrestricted
Stock Awards
An
unrestricted stock award is a grant or sale of shares of our Common Stock to the participant that is not subject to transfer, forfeiture
or other restrictions, in consideration for past services rendered to the Company or an affiliate or for other valid consideration.
Amendment
and Termination
The
Compensation Committee may adopt, amend and rescind rules relating to the administration of the 2021 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 2021 Plan without the participant’s consent, other than
amendments that are necessary to permit the granting of awards in compliance with applicable laws.
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 15,000
of the 10,000,000
authorized shares of preferred stock as Series B Convertible Preferred
Stock. The shares of Series B Convertible Preferred Stock are validly issued, fully paid and non-assessable.
Each
share of Series B Convertible Preferred Stock is convertible at any time at the 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. Effective November 24, 2017 (the “Effective Date”), the Company entered into a Securities
Purchase Agreement (the “Securities Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights
Agreement”) which included the issuance of 2,830
shares of Series B Convertible Preferred Stock worth $2,830,000
(including the conversion of liabilities at a price of $1,000
per Class B Unit). During 2021, 854
Series B shares were converted into 122,000
common shares. During the third quarter of 2022, 851
shares of Series B Convertible Stock were converted into 121,572
shares of common stock. As of December 31, 2022 and December 31,
2021, there are zero 0
and 851
shares, respectively, of Series B Convertible Preferred Stock
issued and outstanding.
Series
C Convertible Preferred Stock
On
February 26, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing
investors in the Company (the “Purchasers”). Pursuant to the Purchase Agreement, the Purchasers purchased 4,500
shares of a newly authorized Series C Convertible Preferred Stock
(the “Series C Convertible Preferred Stock”), and the Company received proceeds of $4,500,000.
The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
Under
the Purchase Agreement, the Company 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.
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, 2,000
Series C shares were converted into 363,636
common shares. In January 2022, the 2,500
outstanding shares of Series C Convertible Preferred Stock were
converted into 454,546
shares of common stock. As of December 31, 2022 and December 2021,
respectively, there were zero 0
and 2,500
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 999
shares of the newly authorized Series D Convertible Preferred
Stock (the “Series D Convertible Preferred Stock”), and 818,355
shares of common stock and the Company received gross proceeds
of $3,454,003
with $999,000
related to the Series D sale at $1,000
per share. The Purchase Agreement contains customary representations,
warranties, agreements and indemnification rights and obligations of the parties.
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 $3.00
a share and 300
shares of Series D Convertible Preferred Stock at a price of $1,000
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 Private Placements, Preferred Stock Conversions, Services and Settlements
2022
Transactions
On
January 11, 2022, shareholders converted 710 and
1,790
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 issuance of 129,091 and 325,455
shares of the Company’s common stock.
On
February 3, 2022, the Company closed an offering of 1,325,000
shares of common stock in the amount of $5,300,000
or $4
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 198,750
shares of common stock in the amount of $795,000
or $4
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 7,198
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 10,668
shares of common stock for payment of board fees to four directors
in the amount of $40,000
for services to the board which was expensed during the three
months ended June 30, 2022.
On
August 25, 2022, 121,572 common
shares were issued upon conversion of 851
shares of Series B Preferred Stock.
On
September 30, 2022, the Company issued 9,758
shares of common stock for payment of board fees to four directors
in the amount of $40,000,
or $4.09 per share based on the daily trading price, for services to the board which was expensed during the three months ended September
30, 2022.
On
December 30, 2022, the Company issued 16,335
shares of common stock for payment of board fees to four directors
in the amount of $37,500
for services to the board which was expensed during the three
months ended December 31, 2022.
On
September 30, 2022, we sold to certain existing investors in the Company in a private placement 818,335
shares of common stock at a price of $3.00
a share and 999
shares of Series D Preferred Stock at a price of $1,000
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 $3.00
a share and 300
shares of Series D Preferred Stock at a price of $1,000
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 4,032
shares of common stock on August 5, 2021 for payment of accrued
board fees to four directors in the amount of $30,000
for services to the Board.
The
Company issued 7,223
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 3,726
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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
The
Company issued 9,560
shares of common stock on December 31, 2021 for payment of accrued
board fees to four directors in the amount of $50,000
for services to the Board.
Stock-Based
Compensation
Stock-based
compensation expense recognized under ASC 718-10 for the year ended December 31, 2022 and 2021, was $819,191
and $262,411,
respectively, for stock options granted to employees and directors. This expense is included in general and administrative expenses in
the consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during the period. At December 31, 2022, the total compensation
cost for stock options that was not yet recognized was $426,004.
This cost will be recognized over the remaining vesting term of the options of approximately 3.3
years.
Treasury
Stock
In
August 2016, the Company’s Board of Directors approved a new class of Preferred Stock, “Series A”. For shareholders
who invested in previous private placements, the Company was offering on a case-by-case basis, the ability to convert the existing amount
invested into an equivalent amount in the Series A on the condition that they invest an equivalent additional amount in the Series A.
In December of 2017, the Company redeemed all of the Series A and continues to hold 235
shares purchased for $148,000
as a part of the original transaction. In December 2018, the Company
entered into an agreement with two shareholders to purchase shares from them at fair market value. The Company purchased 84
shares at $7.00
per shares and 140
shares at $6.30
per share. In 2019, the Company entered into an agreement with
two shareholders to purchase shares from them at fair market value. The Company purchased 115
shares at $10.08
per shares and 753
shares at $9.09
per share. Accordingly, as of December 31, 2022, and 2021, the
Company held 1,324 shares
of Company Series A stock at an aggregate value of $157,452.
NOTE
13 – COMMON STOCK OPTIONS AND WARRANTS
Options
2022
During
the first quarter of 2022, the Company’s Board of Directors granted 665,000
new stock options and in the third quarter granted a further 20,000
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 $819,191
and a balance of unamortized stock option compensation expense
of $426,004,
that is being expensed over the following 2.0
years.
During
the second quarter of 2022, three former staff members forfeited 110,000
non-qualified stock options. Additionally, during the third quarter
of 2022, two employees forfeited 80,000
non-qualified stock options.
2021
During
the first quarter of 2021, the Company’s Board of Directors granted 20,000
new stock options with a strike price of $4.32
per share to its new VP of Product Innovation. These options were
awarded as a one-time award as a hiring incentive and have a fair value of $52,758
as of January 4, 2021. The issuance of these options generated
stock option compensation expense in that quarter in the amount of $7,685
and a balance of unamortized stock option compensation expense
of $45,073,
that is being expensed over the following 2.75
years.
During
the second quarter of 2021, five former staff members and one contractor exercised 31,710 and forfeited 8,922
non-qualified stock options. These transactions were ultimately
consummated in the third quarter. Accordingly, in the third quarter the Company recorded a charge of $63,860
for the remaining unvested option which was offset by a credit
of $1,270 for an over accrual recorded in the second quarter related to the forfeited options.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
During
the third quarter of 2021, the shareholders approved the issuance of up to one million shares or share equivalents in the form of stock
options for the purposes of share issuance for compensation to Board Members and grants to certain staff members for recruiting and retention.
On July 14, 2021, the Company filed an S-8 registration statement in concert with the 2021 Equity Incentive Plan which was deemed effective
on August 5, 2021. The plan covers a period of ten years.
Schedule of options activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term
(Years) |
|
|
Value |
|
Outstanding at December 31,
2020 |
|
|
451,898 |
|
|
$ |
5.06 |
|
|
|
4.2 |
|
|
|
— |
|
Granted |
|
|
20,000 |
|
|
$ |
4.32 |
|
|
|
4.0 |
|
|
|
— |
|
Forfeited |
|
|
(40,632 |
) |
|
$ |
14.00 |
|
|
|
— |
|
|
|
— |
|
Outstanding at December 31, 2021 |
|
|
431,266 |
|
|
$ |
4.98 |
|
|
|
3.4 |
|
|
$ |
197,506 |
|
Exercisable at December 31, 2021 |
|
|
312,310 |
|
|
$ |
5.25 |
|
|
|
3.4 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021 |
|
|
431,266 |
|
|
$ |
4.98 |
|
|
|
3.4 |
|
|
$ |
197,506 |
|
Granted |
|
|
685,000 |
|
|
$ |
6.41 |
|
|
|
4.0 |
|
|
|
— |
|
Exercised/Forfeited |
|
|
(190,000 |
) |
|
$ |
6.41 |
|
|
|
— |
|
|
|
— |
|
Outstanding at December 31, 2022 |
|
|
926,266 |
|
|
$ |
5.74 |
|
|
|
3.3 |
|
|
$ |
0 |
|
Exercisable at December 31, 2022 |
|
|
404,599 |
|
|
$ |
5.02 |
|
|
|
3.3 |
|
|
|
— |
|
The
fair value of the incentive stock option grants for the years ended December 31, 2022 and 2021 were estimated using the following weighted-
average assumptions:
Schedule of fair value assumptions |
|
|
|
|
|
|
For
the Years Ended
December 31, |
|
|
2022 |
|
2021 |
Risk
free interest rate |
|
0.97
– 3.15% |
|
0.18% |
Expected
term in years |
|
3.25
- 3.50 |
|
3.50 |
Dividend
yield |
|
— |
|
— |
Volatility
of common stock |
|
72-80% |
|
91.6% |
Warrants
2022
During
the fourth quarter of 2022, warrants held by 63 holders representing 1,228,875
shares expired. All of the expired warrants can no longer be exercised.
2021
During
the second quarter of 2021, warrants representing 205,574
shares were exercised by seven holders. All the exercises were
cashless exercises with exercise prices of $7.70
and stock prices ranging from $9.25
to $11.14
resulting in a total of 50,588
common shares. No new warrants were issued during the third and
fourth quarter of 2021.
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 |
|
|
|
2.0 |
|
|
|
— |
|
Warrants expired, forfeited,
cancelled or exercised |
|
|
(232,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued |
|
|
21,430 |
|
|
$ |
7.70 |
|
|
|
1.9 |
|
|
|
— |
|
Outstanding at December
31, 2021 |
|
|
1,376,466 |
|
|
$ |
8.18 |
|
|
|
1.9 |
|
|
|
— |
|
Exercisable at December
31, 2021 |
|
|
1,376,466 |
|
|
$ |
8.18 |
|
|
|
1.9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December
31, 2021 |
|
|
1,376,466 |
|
|
$ |
8.18 |
|
|
|
1.9 |
|
|
|
— |
|
Warrants expired, forfeited,
cancelled or exercised |
|
|
(1,228,875 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
Warrants issued |
|
|
0 |
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
Outstanding at December
31, 2022 |
|
|
147,591 |
|
|
$ |
8.63 |
|
|
|
0.8 |
|
|
|
— |
|
Exercisable at December
31, 2022 |
|
|
147,591 |
|
|
$ |
8.63 |
|
|
|
0.8 |
|
|
|
— |
|
NOTE
14 – DEFINED CONTRIBUTION PLAN
The
Company has a 401(k)-retirement savings plan (the “401(k) Plan”) covering all eligible employees. The 401(k) Plan allows
employees to defer a portion of their annual compensation, and the Company may match a portion of the employees’ contributions
generally after the first six months of service. During the year ended December 31, 2022, the Company matched 100% of the first 4% of
eligible employee compensation that was contributed to the 401(k) Plan. For the year ended December 31, 2022, the Company recognized
expense for matching cash contributions to the 401(k) Plan totaling $155,766.
NOTE
15 – RELATED PARTY TRANSACTIONS
On
August 1, 2012, the Company entered into an independent contractor master services agreement (the “Services Agreement”) with
Luceon, LLC, a Florida limited liability company, owned by our former Chief Technology Officer, David Ponevac. The Services Agreement
provided that Luceon would provide support services including management, coordination or software development services and related services
to duos. In January 2019, additional services were contracted with Luceon for TrueVue360™ primarily for software development through
the provision of 7 additional full-time contractors located in Slovakia at a cost of $16,250
for January initially, rising to $25,583
after fully staffed, per month starting February 2019. This was
in addition to the existing contract of $7,480
per month for Duos for 4 full-time contractors which increased
to $8,231 per month in June of 2019. During 2020 efforts in reducing cost, Luceon reduced its staff for the TrueVue360 software development
team from a staff of 7 to 3 full-time employees at a cost of $11,666 per month starting June 1, 2020. As of January 1, 2021, the Company
no longer records activities in TrueVue360 and has combined billings for a total of $20,986
per month. For the twelve months ended December 31, 2021 and 2020,
the total amount expensed was $93,422
and $335,334,
respectively. The Company had no open accounts payable with Luceon at December 31, 2021. On May 14, 2021, the Company formally ended
its relationship with Luceon in concert with the resignation of our Chief Technology Officer and as such there is no longer a related
party relationship.
NOTE
16 – SUBSEQUENT EVENTS
On
February 1, 2023, the board of directors authorized management to reserve an additional 150,000
shares of common stock for issuance under the 2021 Equity Incentive
Plan at a strike price of $4.22.
The purpose of the additional shares is to serve as a retention tool for staff.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 AND 2021 |
On
November 9, 2022 the board of directors adopted, subject to shareholder approval, the Employee Stock Purchase Plan (“ESPP”)
which would become effective as of January 1, 2023. The ESPP provisions for the issuance of up to 1,000,000
common shares for eligible employees to purchase shares during
designated offering periods under Section 423 of the Internal Revenue Code of 1986. Eligible employees are permitted to purchase shares
equivalent of up to 15% of their eligible compensation with offering periods occurring twice per year whereby shares are purchased at
85% of the lower of the fair market value of common shares on the first trading date of the offering period or on the last trading day
of the purchase period.
On March 27,
2023, as previously disclosed, the Company sold to an existing, accredited investor in the Company in a private placement 4,000 shares
of Series E Preferred Stock at a price of $1,000 a share, resulting in gross proceeds of $4,000,000 to the Company. The issuance of the
Series E Preferred Stock was accompanied with a stock purchase agreement containing certain rights pertaining to the accredited investor
and a registration rights agreement.
The
Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an existing investor in the Company
(the “Purchaser”). Pursuant
to the Purchase Agreement, the Purchaser purchased 4,000 shares of a newly authorized Series E Convertible Preferred Stock (the “Series
E Convertible Preferred Stock”), and the 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 E Convertible Preferred Stock. Each share of the Series
E Convertible Preferred Stock has a stated value of $1,000. The holder of the Series E Convertible Preferred Stock, the holder of the
common stock and the holder of any other class or series of shares entitled to vote with the common stock shall vote as one class on
all matters submitted to a vote of shareholders of the Company. Each share of Series E Convertible Preferred Stock is convertible, at
any time and from time to time, at the option of the holder, into that number of shares of common stock (subject to the Beneficial Ownership
Limitation) determined by dividing the stated value of such share ($1,000) by the conversion price, which is $3.00 (subject to standard
anti-dilution other than provisions described below in the Purchase Agreement). The Company shall not effect any conversion of the Series
E Convertible Preferred Stock, and the holder shall not have the right to convert any portion of the Series E Convertible Preferred Stock,
to the extent that after giving effect to the conversion sought by the holder such holder (together with such holder’s Attribution
Parties (as defined in the Certificate of Designation)) would beneficially own more than 4.99% (or upon election by a holder, 19.99%)
of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable
upon such conversion (the “Beneficial Ownership Limitation”).
The
holder of the Series E Preferred Stock, the holders of the common stock and the holders of any other class or series of shares entitled
to vote with the common stock shall vote together as one class on all matters submitted to a vote of shareholders of the Company. Each
share of Series E Preferred Stock has 333 votes (subject to adjustment); provided that in no event may a holder of Series E Preferred
Stock be entitled to vote a number of shares in excess of such holder’s Beneficial Ownership Limitation (as defined in the Certificate
of Designation).
The
Purchase Agreement also provides that the Company will not, with certain exceptions, sell or issue common stock or Common Stock Equivalents
(as defined in the Purchase Agreement) on or prior to December 31, 2023 that entitles any person to acquire shares of common stock at
an effective price per share less than the then conversion price of the Series E Preferred Stock without the consent of the Purchaser.
The
Registration Rights Agreement contains provisions for liquidated damages equal to 1% multiplied by the aggregate subscription amount
paid, paid each month, in the event certain deadlines are missed.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
| |
| | | |
| | |
| |
September
30, | | |
December
31, | |
| |
2023 | | |
2022 | |
| |
| (Unaudited) | | |
| | |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 3,266,916 | | |
$ | 1,121,092 | |
Accounts receivable,
net | |
| 258,874 | | |
| 3,418,263 | |
Contract assets | |
| 1,346,731 | | |
| 425,722 | |
Inventory | |
| 1,525,913 | | |
| 1,428,360 | |
Prepaid
expenses and other current assets | |
| 355,978 | | |
| 441,320 | |
| |
| | | |
| | |
Total
Current Assets | |
| 6,754,412 | | |
| 6,834,757 | |
| |
| | | |
| | |
Property and equipment,
net | |
| 555,485 | | |
| 629,490 | |
Operating lease right
of use asset | |
| 4,454,714 | | |
| 4,689,931 | |
Security deposit | |
| 550,000 | | |
| 600,000 | |
| |
| | | |
| | |
OTHER ASSETS: | |
| | | |
| | |
Note receivable,
net | |
| 151,875 | | |
| — | |
Patents and trademarks,
net | |
| 121,051 | | |
| 69,733 | |
Software
development costs, net | |
| 793,618 | | |
| 265,208 | |
Total
Other Assets | |
| 1,066,544 | | |
| 334,941 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 13,381,155 | | |
$ | 13,089,119 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 619,765 | | |
$ | 2,290,390 | |
Notes payable - financing
agreements | |
| 137,816 | | |
| 74,575 | |
Accrued expenses | |
| 275,277 | | |
| 453,023 | |
Equipment financing
payable-current portion | |
| — | | |
| 22,851 | |
Operating lease obligations-current
portion | |
| 774,306 | | |
| 696,869 | |
Contract
liabilities | |
| 1,588,928 | | |
| 957,997 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 3,396,092 | | |
| 4,495,705 | |
| |
| | | |
| | |
Operating
lease obligations, less current portion | |
| 4,310,853 | | |
| 4,542,943 | |
| |
| | | |
| | |
Total
Liabilities | |
| 7,706,945 | | |
| 9,038,648 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 4) | |
| — | | |
| — | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY: | |
| | | |
| | |
Preferred
stock: $0.001 par
value, 10,000,000 authorized,
9,441,000 shares
available to be designated | |
| — | | |
| — | |
Series
A redeemable convertible preferred stock, $10
stated value per share, 500,000
shares designated; 0
and 0
issued and outstanding at September 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
and 0
issued and outstanding at September 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
and 0
issued and outstanding at September 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 September 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 September 30, 2023 and December
31, 2022, respectively, convertible into common stock at $3
per share | |
| 4 | | |
| — | |
Series
F convertible preferred stock, $1,000
stated value per share, 5,000
shares designated; 5,000
and 0
issued and outstanding at September 30, 2023 and December
31, 2022, respectively, convertible into common stock at $6.20
per share | |
| 5 | | |
| — | |
Common
stock: $0.001 par
value; 500,000,000 shares
authorized, 7,248,455 and
7,156,856 shares
issued, 7,247,131 and
7,155,552 shares
outstanding at September 30, 2023 and December 31, 2022, respectively | |
| 7,248 | | |
| 7,156 | |
Additional paid-in-capital | |
| 66,267,057 | | |
| 56,562,600 | |
Accumulated
deficit | |
| (60,442,653 | ) | |
| (52,361,834 | ) |
Sub-total | |
| 5,831,662 | | |
| 4,207,923 | |
Less: Treasury
stock (1,324 shares
of common stock at September 30, 2023 and December 31, 2022) | |
| (157,452 | ) | |
| (157,452 | ) |
Total Stockholders'
Equity | |
| 5,674,210 | | |
| 4,050,471 | |
| |
| | | |
| | |
Total Liabilities
and Stockholders' Equity | |
$ | 13,381,155 | | |
$ | 13,089,119 | |
See
accompanying condensed notes to the unaudited consolidated financial statements.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
| |
| | | |
| | | |
| | | |
| | |
| |
For
the Three Months Ended | | |
For
the Three Months Ended | | |
For
the Nine Months Ended | | |
For
the Nine Months Ended | |
| |
September
30, | | |
September
30, | | |
September
30, | | |
September
30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
| | |
| | |
| |
REVENUES: | |
| | | |
| | | |
| | | |
| | |
Technology
systems | |
$ | 705,849 | | |
$ | 2,709,899 | | |
$ | 3,404,107 | | |
$ | 6,273,213 | |
Services
and consulting | |
| 825,074 | | |
| 1,312,339 | | |
| 2,541,163 | | |
| 2,805,483 | |
| |
| | | |
| | | |
| | | |
| | |
Total
Revenues | |
| 1,530,923 | | |
| 4,022,238 | | |
| 5,945,270 | | |
| 9,078,696 | |
| |
| | | |
| | | |
| | | |
| | |
COST OF REVENUES: | |
| | | |
| | | |
| | | |
| | |
Technology systems | |
| 883,836 | | |
| 2,176,761 | | |
| 3,723,151 | | |
| 5,016,551 | |
Services
and consulting | |
| 420,499 | | |
| 745,925 | | |
| 1,217,022 | | |
| 1,457,913 | |
| |
| | | |
| | | |
| | | |
| | |
Total
Cost of Revenues | |
| 1,304,335 | | |
| 2,922,686 | | |
| 4,940,173 | | |
| 6,474,464 | |
| |
| | | |
| | | |
| | | |
| | |
GROSS MARGIN | |
| 226,588 | | |
| 1,099,552 | | |
| 1,005,097 | | |
| 2,604,232 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Sales and marketing | |
| 353,386 | | |
| 297,057 | | |
| 962,040 | | |
| 956,937 | |
Research and development | |
| 450,006 | | |
| 329,424 | | |
| 1,392,692 | | |
| 1,296,480 | |
General
and administration | |
| 2,394,173 | | |
| 2,342,089 | | |
| 6,916,390 | | |
| 6,255,926 | |
| |
| | | |
| | | |
| | | |
| | |
Total
Operating Expenses | |
| 3,197,565 | | |
| 2,968,570 | | |
| 9,271,122 | | |
| 8,509,343 | |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (2,970,977 | ) | |
| (1,869,018 | ) | |
| (8,266,025 | ) | |
| (5,905,111 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSES): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (1,406 | ) | |
| (2,057 | ) | |
| (5,816 | ) | |
| (7,943 | ) |
Other
income, net | |
| 24,647 | | |
| (53,993 | ) | |
| 191,022 | | |
| 698 | |
| |
| | | |
| | | |
| | | |
| | |
Total
Other Income (Expenses) | |
| 23,241 | | |
| (56,050 | ) | |
| 185,206 | | |
| (7,245 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (2,947,736 | ) | |
$ | (1,925,068 | ) | |
$ | (8,080,819 | ) | |
$ | (5,912,356 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Basic and Diluted
Net Loss Per Share | |
$ | (0.41 | ) | |
$ | (0.30 | ) | |
$ | (1.12 | ) | |
$ | (1.01 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares-Basic and
Diluted | |
| 7,240,632 | | |
| 6,450,180 | | |
| 7,189,256 | | |
| 5,859,375 | |
See
accompanying condensed notes to the unaudited consolidated financial statements.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
For
the Three and Nine Months Ended September 30, 2023 and 2022
(Unaudited)
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Preferred
Stock B | | |
Preferred
Stock C | | |
Preferred
Stock D | | |
Preferred
Stock E | | |
Preferred
Stock F | | |
Common
Stock | | |
Additional
Paid-in- | | |
Accumulated | | |
Treasury | | |
| |
| |
#
of Shares | | |
Amount | | |
#
of Shares | | |
Amount | | |
#
of Shares | | |
Amount | | |
#
of Shares | | |
Amount | | |
#
of Shares | | |
Amount | | |
#
of Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Stock | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance December 31, 2022 | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
| 1,299 | | |
$ | 1 | | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
| 7,156,876 | | |
$ | 7,156 | | |
$ | 56,562,600 | | |
$ | (52,361,834 | ) | |
$ | (157,452 | ) | |
$ | 4,050,471 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Series E preferred stock issued | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 4,000 | | |
| 4 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,999,996 | | |
| — | | |
| — | | |
| 4,000,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock options compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 75,128 | | |
| — | | |
| — | | |
| 75,128 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock issuance cost | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (299,145 | ) | |
| — | | |
| — | | |
| (299,145 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock issued for services | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 12,463 | | |
| 12 | | |
| 32,488 | | |
| — | | |
| — | | |
| 32,500 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended March
31, 2023 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,143,683 | ) | |
| — | | |
| (2,143,683 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance March 31, 2023 | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
| 1,299 | | |
$ | 1 | | |
| 4,000 | | |
$ | 4 | | |
| — | | |
$ | — | | |
| 7,169,339 | | |
$ | 7,168 | | |
$ | 60,371,067 | | |
$ | (54,505,517 | ) | |
$ | (157,452 | ) | |
$ | 5,715,271 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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 | | |
$ | 1.00 | | |
| 4,000 | | |
$ | 4.00 | | |
| — | | |
$ | — | | |
| 7,240,545 | | |
$ | 7,240 | | |
$ | 61,029,659 | | |
$ | (57,494,917 | ) | |
$ | (157,452 | ) | |
$ | 3,384,535 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Series F preferred stock issued | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,000 | | |
| 5 | | |
| — | | |
| — | | |
| 4,999,995 | | |
| — | | |
| — | | |
| 5,000,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock options compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 164,118 | | |
| — | | |
| — | | |
| 164,118 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock issued for services | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 7,910 | | |
| 8 | | |
| 40,557 | | |
| — | | |
| — | | |
| 40,565 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock compensation under ESPP | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 32,728 | | |
| — | | |
| — | | |
| 32,728 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended September
30, 2023 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,947,736 | ) | |
| — | | |
| (2,947,736 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance September 30, 2023 | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
| 1,299 | | |
$ | 1 | | |
| 4,000 | | |
$ | 4 | | |
| 5,000 | | |
$ | 5 | | |
| 7,248,455 | | |
$ | 7,248 | | |
$ | 66,267,057 | | |
$ | (60,442,653 | ) | |
$ | (157,452 | ) | |
$ | 5,674,210 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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 for cash | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 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 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock options compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| | | |
| 153,367 | | |
| — | | |
| — | | |
| 153,367 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for cash | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 818,335 | | |
| 818 | | |
| 2,454,185 | | |
| — | | |
| — | | |
| 2,455,003 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Series B preferred stock converted to common
stock | |
| (851 | ) | |
| (1 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 121,572 | | |
| 122 | | |
| (121 | ) | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Series D preferred stock issued for cash | |
| — | | |
| — | | |
| — | | |
| — | | |
| 999 | | |
| 1 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 998,999 | | |
| — | | |
| — | | |
| 999,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock issuance cost | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (260,816 | ) | |
| — | | |
| — | | |
| (260,816 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock issued for services | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 9,758 | | |
| 10 | | |
| 39,990 | | |
| — | | |
| — | | |
| 40,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended September
30, 2022 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,925,068 | ) | |
| — | | |
| (1,925,068 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance September 30, 2022 | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
| 999 | | |
$ | 1 | | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
| 7,056,874 | | |
$ | 7,057 | | |
$ | 55,852,643 | | |
$ | (51,409,407 | ) | |
$ | (157,452 | ) | |
$ | 4,292,842 | |
See
accompanying condensed notes to the unaudited consolidated financial statements.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
| |
| | | |
| | |
| |
For
the Nine Months Ended | |
| |
September
30, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Cash from operating activities: | |
| | | |
| | |
Net loss | |
$ | (8,080,819 | ) | |
$ | (5,912,356 | ) |
Adjustments to reconcile net loss to net cash
used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 393,057 | | |
| 225,825 | |
Stock based compensation | |
| 499,590 | | |
| 592,177 | |
Stock issued for services | |
| 105,565 | | |
| 120,000 | |
Amortization of operating lease right of use
asset | |
| 235,217 | | |
| 198,790 | |
Changes in assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 3,159,389 | | |
| (454,431 | ) |
Note receivable | |
| (151,875 | ) | |
| — | |
Contract assets | |
| (921,009 | ) | |
| (820,938 | ) |
Inventory | |
| (97,552 | ) | |
| (395,787 | ) |
Security deposit | |
| 50,000 | | |
| — | |
Prepaid expenses and other
current assets | |
| 543,793 | | |
| 15,539 | |
Accounts payable | |
| (1,670,625 | ) | |
| 605,129 | |
Accrued expenses | |
| (178,081 | ) | |
| (136,180 | ) |
Operating lease obligation | |
| (154,653 | ) | |
| 60,668 | |
Contract
liabilities | |
| 630,931 | | |
| 2,051,109 | |
| |
| | | |
| | |
Net cash used in operating
activities | |
| (5,637,072 | ) | |
| (3,850,455 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of patents/trademarks | |
| (58,208 | ) | |
| (17,490 | ) |
Purchase of software
development | |
| (640,609 | ) | |
| (87,700 | ) |
Purchase
of fixed assets | |
| (199,618 | ) | |
| (311,327 | ) |
| |
| | | |
| | |
Net cash used in investing
activities | |
| (898,435 | ) | |
| (416,517 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Repayments of insurance and
equipment financing | |
| (395,221 | ) | |
| (303,492 | ) |
Repayment of finance lease | |
| (22,851 | ) | |
| (69,325 | ) |
Proceeds from common stock
issued | |
| — | | |
| 8,550,002 | |
Stock issuance cost | |
| (17,645 | ) | |
| (837,467 | ) |
Proceeds from shares issued
under Employee Stock Purchase Plan | |
| 117,048 | | |
| — | |
Proceeds
from preferred stock issued | |
| 9,000,000 | | |
| 999,000 | |
| |
| | | |
| | |
Net cash provided by financing
activities | |
| 8,681,331 | | |
| 8,338,718 | |
| |
| | | |
| | |
Net increase in cash | |
| 2,145,824 | | |
| 4,071,746 | |
Cash,
beginning of period | |
| 1,121,092 | | |
| 893,720 | |
Cash,
end of period | |
$ | 3,266,916 | | |
$ | 4,965,466 | |
| |
| | | |
| | |
Supplemental
Disclosure of Cash Flow Information: | |
| | | |
| | |
Interest paid | |
$ | 5,816 | | |
$ | 8,045 | |
Taxes paid | |
$ | — | | |
$ | 1,264 | |
| |
| | | |
| | |
Supplemental
Non-Cash Investing and Financing Activities: | |
| | | |
| | |
Notes issued for financing
of insurance premiums | |
$ | 458,452 | | |
$ | 353,244 | |
See
accompanying condensed notes to the unaudited consolidated financial statements.
DUOS
TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2023
(Unaudited)
|
NOTE
1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations
Duos
Technologies Group, Inc. (the “Company”), through its operating subsidiaries, Duos Technologies, Inc. (“Duos”)
and TrueVue360, Inc. (“TrueVue360”) (collectively the “Company”), is a company that specializes in machine vision
and artificial intelligence to analyze fast moving objects such as trains, trucks, automobiles, and aircraft. This technology can help
improve safety, maintenance, and operating metrics.
The
Company is the inventor of the Railcar Inspection Portal (RIP) and is currently the rail industry leader for machine vision/camera wayside
detection systems that include the use of Artificial Intelligence at speeds up to 125 mph. The RIP inspects a train at full speed from
the top, sides, and bottom looking at FRA/AAR mandated safety inspection points. The system also detects illegal riders that assists
law enforcement agencies. Each rail car is scanned with machine vision cameras and other sensors from the top, sides, and bottom and
images are produced within seconds of passing that can be used by the customer to help prevent derailments, improve maintenance operations,
and assist with security. The Company self-performs all aspects of hardware, software, IT, and Artificial Intelligence development and
engineering and holds several patents and maintains significant intellectual property. The Company also has a proprietary portfolio of
over 40 Artificial Intelligence “Use Cases” that automatically flag defects. The Company has deployed this system with several
Class 1 and passenger customers and anticipates an increased demand in the future from rail operators, car owners, shippers, and law
enforcement agencies.
The
Company has also developed the Automated Logistics Information System (ALIS) which automates gatehouse operations where trucks enter
and exit large logistics and intermodal facilities. This solution also incorporates sensors and data points as necessary for each operation
and directly interconnects with backend logistics databases and processes to streamline operations and significantly improve operations
and security and, importantly, dramatically improves throughput on each lane on which the technology is deployed. The Company expects
to deploy an upgraded Truck Inspection Portal (TIP) which uses the same technology and lessons learned from the ALIS and RIP systems.
The
Company’s strategy is to expand our existing customer base in the Class 1, short line, and passenger space in North America; expand
our subscription offering to car owners and shippers; and expand operations to meet the demand from international customers. The Company
has prepared to respond and scale if necessary to react to increased demand from potential regulations that may be imposed around wayside
detection technology. In the future the Company may put more emphasis on the trucking and intermodal sector with an updated Truck Inspection
Portal solution. The Company continues to focus on operational and technical excellence, customer satisfaction, and maintaining a highly
skilled and performance-based work force.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 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 nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2023 or for any other future period. These unaudited consolidated financial statements and the unaudited condensed
notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”)
on March 31, 2023.
Principles
of Consolidation
The
unaudited consolidated financial statements include Duos Technologies Group, Inc. and its wholly owned subsidiaries, Duos Technologies,
Inc. and TrueVue360 Inc. All inter-company transactions and balances are eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying unaudited consolidated
financial statements include the allowance on accounts receivable and notes receivable, valuation of common stock warrants received in
exchange for an asset sale, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract
revenues and the total estimated costs to determine progress towards contract completion, valuation of inventory, estimates of the valuation
of right of use assets and corresponding lease liabilities, valuation of warrants issued with debt and valuation of stock-based awards.
We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates.
Concentrations
Cash Concentrations
Cash
is maintained at financial institutions and at times, balances may exceed federally insured limits. We have not experienced any losses
related to these balances. As of September 30, 2023, the balance in one financial institution exceeded federally insured limits by approximately
$2,768,466.
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 nine months ended September 30, 2023, two customers accounted for 55%
and 29%
of revenues. For the nine months ended September 30, 2022, four customers accounted for 25%,
21%,
19%
and 19%
of revenues. In all cases, there are no minimum contract values stated. Each contract covers an agreement to deliver a Railcar 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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
At
September 30, 2023, three customers accounted for 52%,
25%,
and 14%
of accounts receivable. At December 31, 2022, four customers accounted for 34%,
31%,
19%
and 10%
of accounts receivable. Much of the credit risk is mitigated since all the customers listed here are Class 1 railroads with a history
of timely payments to us.
Geographic
Concentration
For
the nine months ended September 30, 2023, approximately 37%
of revenue was generated from three customers outside of the United States. For the nine months ended September 30, 2022, approximately
54%
of revenue was generated from four customers outside of the United States. These customers are Canadian and Mexican, and, for the nine
months ended September 30, 2023, 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. |
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 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
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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
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.
Software
Development Costs
Software
development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development
costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding,
and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features,
and technical performance requirements. Software development costs incurred after establishing technological feasibility for software
sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be Sold, Leased, or Marketed), are capitalized
and amortized on a product-by-product basis when the product is available for general release to customers.
Stock-Based
Compensation
The
Company accounts for employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which
requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including
employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.
The
Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized
on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s
determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding a number of
highly subjective variables.
The
Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for stock options using
the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based
upon the prevailing rate of United States Treasury securities with similar maturities.
Revenue
Recognition
The
Company follows Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), that affects the
timing of when certain types of revenues will be recognized. The basic principles in ASC 606 include the following: a contract with a
customer creates distinct contract assets and performance obligations, satisfaction of a performance obligation creates revenue, and
a performance obligation is satisfied upon transfer of control to a good or service to a customer.
Revenue
is recognized by evaluating our revenue contracts with customers based on the five-step model under ASC 606:
|
1. |
Identify the contract with
the customer; |
|
2. |
Identify the performance
obligations in the contract; |
|
3. |
Determine the transaction
price; |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
|
4. |
Allocate the transaction
price to separate performance obligations; and |
|
5. |
Recognize revenue when
(or as) each performance obligation is satisfied. |
The
Company generates revenue from four sources:
(1)
Technology Systems
(2)
AI Technologies
(3)
Technical Support
(4)
Consulting Services
Technology
Systems
For
revenues related to technology systems, the Company recognizes revenue over time using a cost-based input methodology in which significant
judgment is required to estimate costs to complete projects. These estimated costs are then used to determine the progress towards contract
completion and the corresponding amount of revenue to recognize.
Accordingly,
the Company bases its revenue recognition on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s
performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance
completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously
as the goods are manufactured and revenue is recognized accordingly.
In
addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying
the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company
will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. To accurately reflect revenue
recognition based on the input method, the Company has adopted the implementation guidance as set out in ASC-606-10-55-187 through 192.
Under
this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred.
Costs include direct material, direct labor, subcontract labor and other allocable indirect costs. All un-allocable indirect costs and
corporate general and administrative costs are also charged to the periods as incurred. Any recognized revenues that have not been billed
to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized revenues are
recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will
recognize the loss when such loss is determined to be both probable and reasonably estimable.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
AI
Technologies
The
Company has revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms which provide
important operating information to the users of our systems. The revenue generated from these applications of AI consists of a fixed
fee related to the design, development, testing and incorporation of new algorithms into the system, which is recognized as revenue at
a point in time upon acceptance, as well as an annual application maintenance fee, which is recognized as revenue ratably over the contracted
maintenance term.
Technical
Support
Technical
support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance
and technical support provided outside of a maintenance contract are on an “as-requested” basis, and revenue is recognized
over time as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized
over time ratably over the term of the contract.
Consulting
Services
The
Company’s consulting services business generates revenues under contracts with customers from four sources: (1) Professional Services
(consulting and auditing); (2) Software licensing with optional hardware sales; (3) Customer service training and (4) Maintenance/support.
(1)
Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2)
For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software
product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software
license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer;
(3)
Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
(4)
Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance
payments received upfront are deferred and recognized over the contract term.
Multiple
Performance Obligations and Allocation of Transaction Price
Arrangements
with customers may involve multiple performance obligations including project revenue and maintenance services in our Technology Systems
business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis.
In our consulting services business, multiple performance obligations may include any of the above four sources. Training and maintenance
on software products may occur after the software product sale while other services may occur before or after the software product sale
and may not relate to the software product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each
performance obligation is accounted for separately when each has value to the customer on a standalone basis and there is Company specific
objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the
total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the
items when sold separately. Once the selling price is allocated, the revenue for each performance obligation is recognized using the
applicable criteria under GAAP as discussed above for performance obligations sold in single performance obligation arrangements. A delivered
item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered
items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those
combined deliverables as a single unit of accounting. The Company sells its various services and software and hardware products at established
prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of performance obligations
relative selling price allocation. The Company only sells maintenance services or spare parts based on its established rates after it
has completed a system integration project for a customer. The customer is not required to purchase maintenance services. All elements
in multiple performance obligations arrangements with Company customers qualify as separate units of account for revenue recognition
purposes.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
Leases
The
Company follows ASC 842 “Leases”. This guidance requires lessees to recognize right-of-use (“ROU”) assets and
lease liabilities for most operating leases. In addition, this guidance requires that lessors separate lease and non-lease components
in a contract in accordance with the revenue guidance in ASC 606.
The
Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on the balance sheet
and instead recognize the lease payments in expense as incurred. The Company has also elected to account for real estate leases that
contain both lease and non-lease components as a single lease component.
At
the inception of a contract the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based
on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the
economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset.
Operating
ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the
present value of minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the
Company uses an incremental borrowing rate based on the information available at the lease commencement date to determine the present
value of future payments. The lease term includes all periods covered by renewal and termination options where the Company is reasonably
certain to exercise the renewal options or not to exercise the termination options. Operating lease expense is recognized on a straight-line
basis over the lease term and is included in general and administration expenses in the consolidated statements of operations.
Earnings
(Loss) Per Share
Basic
earnings per share (EPS) are computed by dividing the net loss applicable to common stock by the weighted average number of common shares
outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stock by the weighted average
number of common shares outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potential
common shares consist of the incremental common shares issuable upon the exercise or conversion of stock options, stock warrants, convertible
debt instruments, convertible preferred stock or other common stock equivalents. Potentially dilutive securities are excluded from the
computation if their effect is anti-dilutive.
At
September 30, 2023, there were (i) an aggregate of 80,091
outstanding warrants to purchase shares of common stock, (ii)
employee stock options to purchase an aggregate of 1,217,775
shares of common stock, (iii) 433,000
common shares issuable upon conversion of Series D Convertible
Preferred Stock, (iv) 1,333,334
common shares issuable upon conversion of Series E Convertible
Preferred Stock, and (v) 806,452
common shares issuable upon conversion of Series F Convertible
Preferred Stock, all of which were excluded from the computation of diluted net earnings per share because their inclusion would have
been anti-dilutive.
At
September 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 926,266
shares of common stock and (iii) 333,000
common shares issuable upon conversion of Series D Convertible
Preferred Stock, all of which were excluded from the computation of diluted net earnings per share because their inclusion would have
been anti-dilutive.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
Recent
Accounting Pronouncements
From
time to time, the FASB or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated
through issuance of an Accounting Standards Update (“ASU”).
In
August 2020, the FASB issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible
instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting
and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. This pronouncement
is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023. The Company early
adopted this pronouncement for our fiscal year beginning January 1, 2022, and it did not have a material effect on our audited consolidated
financial statements.
In
May 2021, the FASB issued an accounting pronouncement (ASU 2021-04) related to modifications or exchanges of freestanding equity-classified
written call options (such as warrants) that remain equity classified after modification or exchange. The pronouncement states that an
entity should treat the modification as an exchange of the original instrument for a new instrument, and the effect of the modification
should be calculated as the difference between the fair value of the modified instrument and the fair value of that instrument immediately
before modification. An entity should then recognize the effect of the modification on the basis of the substance of the transaction,
in the same manner as if cash had been paid as consideration. This pronouncement is effective for fiscal years, and for interim periods
within those fiscal years, beginning after December 15, 2021. The pronouncement is applied prospectively to all modifications that occur
after the initial date of adoption. We adopted this pronouncement for our fiscal year beginning January 1, 2022, and it did not have
a material effect on our audited consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect
on the accompanying financial statements.
NOTE
2 – LIQUIDITY
As
reflected in the accompanying consolidated financial statements, the Company had a net loss of $8,080,819
for the nine months ended September 30, 2023. During the same
period, cash used in operating activities was $5,637,072.
The working capital surplus and accumulated deficit as of September 30, 2023, were $3,358,320
and $60,442,653,
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 underwritten offerings 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. The Company was also successful in raising a further $2,500,000 from the sale of additional Series E Convertible Preferred
Stock during November 2023. During the second quarter of 2023, the Company renewed its S-3 “shelf registration” statement
allowing the Company to sell multiple forms of securities in addition to 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.
Additionally, the Company has capacity on Series D and Series E to bolster liquidity, if needed, via private placements. 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, forthcoming with ongoing business or available via the capital markets
to maintain operations for at least twelve months from the date of this report.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
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, proactive management of our existing contracts, recent stock offerings and private placements as
well as the availability to raise capital via our shelf registration indicate there is no substantial doubt for the Company to continue
as a going concern for a period of twelve months from the issuance date of this report. 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 twelve 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 approximately the next twelve 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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
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 September
30, 2023 and December 31, 2022:
Schedule of notes payable | |
| | |
| | |
| | |
| |
| |
September
30, 2023 | | |
December
31, 2022 | |
Notes
Payable | |
Principal | | |
Interest | | |
Principal | | |
Interest | |
Third
Party - Insurance Note 1 | |
$ | 2,736 | | |
| 8.73 | % | |
$ | — | | |
| — | |
Third
Party - Insurance Note 2 | |
| 79,146 | | |
| 8.00 | % | |
| 17,753 | | |
| 6.24 | % |
Third
Party - Insurance Note 3 | |
| 8,045 | | |
| — | | |
| 16,094 | | |
| — | |
Third
Party - Insurance Note 4 | |
| 47,889 | | |
| — | | |
| 40,728 | | |
| — | |
Total | |
$ | 137,816 | | |
| | | |
$ | 74,575 | | |
| | |
The
Company entered into an agreement on December 23, 2022 with its insurance provider by issuing a $26,484
note payable (Insurance Note 1) for the purchase of an insurance
policy, secured by that policy with an annual interest rate of 8.73%
payable in monthly installments of principal and interest totaling $2,755
through October 23, 2023. The balance of Insurance Note 1 as of
September 30, 2023 and December 31, 2022 was $2,736
and 0
zero, respectively.
The
Company entered into an agreement on April 15, 2022 with its insurance provider by issuing a note payable (Insurance Note 2) for the
purchase of an insurance policy in the amount of $63,766,
secured by that policy with an annual interest rate of 6.24%
and payable in 11 monthly installments of principal and interest totaling $5,979.
The Company entered into an agreement on April 15, 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 September 30, 2023 and December 31, 2022, the balance of Insurance Note 2 was $79,146
and $17,753,
respectively.
The
Company entered into an agreement on September 15, 2022 with its insurance provider by issuing a note payable (Insurance Note 3) for
the purchase of an insurance policy in the amount of $24,140.
The policy was renewed on February 3, 2023 and is payable in 12 monthly installments of $2,012.
At September 30, 2023 and December 31, 2022, the balance of Insurance Note 3 was $8,045
and $16,094,
respectively.
The
Company entered into an agreement on February 3, 2022 with its insurance provider by issuing a note payable for the purchase of an insurance
policy in the amount of $242,591
with a down payment paid in the amount of $102,075
in the first quarter of 2022 and ten monthly installments of $20,073.
The Company received a refund on September 30, 2022 as a 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 September 30, 2023 and December 31, 2022, the balance of Insurance Note 4 was $47,889
and $40,728,
respectively.
Equipment
Financing
The
Company entered into an agreement on May 22, 2020 with an equipment financing company by issuing a $121,637
secured note, with an annual interest rate of 9.90%
and payable in monthly installments of principal and interest totaling $3,919
through June 1, 2023. At September 30, 2023 and December 31, 2022,
the aggregate balance of this note was 0
zero and $22,851,
respectively.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
NOTE
4 – COMMITMENTS AND CONTINGENCIES
Operating
Lease Obligations
On
July 26, 2021, the Company entered into a new operating lease agreement for office and warehouse combination space of 40,000
square feet, with the lease commencing on November
1, 2021 and ending April 30, 2032. This new space combines the Company’s two separate work locations into one facility, which allows
for greater collaboration and also accommodates a larger anticipated workforce and manufacturing facility. On November 24, 2021, the
lease was amended to commence on December 1, 2021 and end on May 31, 2032. The Company recognized a ROU asset and operating lease liability
in the amount of $4,980,104
at
lease commencement. Rent for the first eleven months of the term was calculated based on 30,000
rentable square feet. The rent is subject to
an annual escalation of 2.5%, beginning November 1, 2023. The Company made a security deposit payment in the amount of $600,000
on July 26, 2021. Per the contract, on the 18th
month, the security deposit was reduced by $50,000.
The right of use asset balance at September 30, 2023, net of accumulated amortization, was $4,454,714.
As
of September 30, 2023, the office and warehouse lease is the Company’s only lease with a term greater than twelve months. The office
and warehouse lease has a remaining term of approximately 8.8 years and includes an option to extend for two renewal terms of five years
each. The renewal options are not reasonably certain to be exercised, and therefore, they are not included when determining the lease
term used to establish the right of use asset and lease liability. The Company also has several short-term leases, primarily related
to equipment. The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on
the consolidated balance sheet and instead recognize the lease payments in expense as incurred. The Company has also elected to account
for real estate leases that contain both lease and non-lease components (such as common area maintenance) as a single lease component.
The
following table shows supplemental information related to leases:
Schedule of supplemental information related
to leases | |
| | |
| |
| |
Nine
Months Ended September
30, | |
| |
2023 | | |
2022 | |
Lease
cost: | |
| | | |
| | |
Operating
lease cost | |
$ | 586,228 | | |
$ | 582,989 | |
Short-term
lease cost | |
$ | 56,052 | | |
$ | 26,127 | |
| |
| | | |
| | |
Other
information: | |
| | | |
| | |
Operating
cash outflow used for operating leases | |
$ | 505,664 | | |
$ | 323,750 | |
Weighted
average discount rate | |
| 9.0 | % | |
| 9.0 | % |
Weighted
average remaining lease term | |
| 8.6
years | | |
| 9.6
years | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
As
of September 30, 2023, future minimum lease payments due under our operating leases are as follows:
Schedule of future minimum lease payments |
|
|
|
|
|
Amount |
|
Calendar year: |
|
|
|
|
2023 |
|
$ |
191,205 |
|
2024 |
|
|
779,087 |
|
2025 |
|
|
798,556 |
|
2026 |
|
|
818,518 |
|
2027 |
|
|
838,984 |
|
Thereafter |
|
|
4,043,427 |
|
Total undiscounted future minimum lease payments |
|
|
7,469,777 |
|
Less: Impact of discounting |
|
|
(2,384,618 |
) |
Total present value of
operating lease obligations |
|
|
5,085,159 |
|
Current portion |
|
|
(774,306) |
|
Operating lease obligations,
less current portion |
|
$ |
4,310,853 |
|
Executive
Severance Agreement
Pursuant
to a separation agreement with Gianni Arcaini, our former Chief Executive Officer and Chairman of the Board (the “Separation Agreement”),
Mr. Arcaini’s employment with the Company ended on September 1, 2020 (“Separation Date”). The Separation Agreement
provided that he would 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 contained confidentiality, non-disparagement and non-solicitation covenants and a release of claims by
Mr. Arcaini.
In
accordance with the Separation Agreement, the Company paid to Mr. Arcaini the total sum of $747,788.
On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631,
owed to Mr. Arcaini and the Company continued to pay him in semi-monthly installments for 30 months thereafter, as contemplated in Mr.
Arcaini’s Separation Agreement. The remaining balance included in accrued expenses in the accompanying unaudited consolidated balance
sheet is zero as of September 30, 2023.
NOTE
5 – STOCKHOLDERS’ EQUITY
Series
B Convertible Preferred Stock
The
following summary of certain terms and provisions of our Series B Convertible Preferred Stock (the “Series B Convertible Preferred
Stock”) is subject to, and qualified in its entirety by reference to, the terms and provisions set forth in our certificate of
designation of preferences, rights and limitations of Series B Convertible Preferred Stock (the “Series B Convertible Preferred
Certificate of Designation”) as previously filed. Subject to the limitations prescribed by our articles of incorporation, our board
of directors is authorized to establish the number of shares constituting each series of preferred stock and to fix the designations,
powers, preferences, and rights of the shares of each of those series and the qualifications, limitations and restrictions of each of
those series, all without any further vote or action by our stockholders. Our board of directors designated 15,000
of the 10,000,000
authorized shares of preferred stock as Series B Convertible Preferred
Stock with a stated value of $1,000
per share. The shares of Series B Convertible Preferred Stock
were validly issued, fully paid and non-assessable.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 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 September
30, 2023 and December 31, 2022, respectively, there are zero 0
and zero 0
shares of Series B Convertible Preferred Stock issued and outstanding.
Series
C Convertible Preferred Stock
The
Company’s Board of Directors designated 5,000
shares as the Series C Convertible Preferred Stock (the “Series
C Convertible Preferred Stock”). Each share of the Series C Convertible Preferred Stock has a stated value of $1,000.
The holders of the Series C Convertible Preferred Stock, the holders of the common stock and the holders of any other class or series
of shares entitled to vote with the common stock shall vote together as one class on all matters submitted to a vote of shareholders
of the Company. Each
share of Series C Convertible Preferred Stock has 172 votes (subject
to adjustment); provided that in no event may a holder of Series C Convertible Preferred Stock be entitled to vote a number of shares
in excess of such holder’s Beneficial Ownership Limitation (as defined in the Certificate of Designation and as described below).
Each share of Series C Convertible Preferred Stock is convertible, at any time and from time to time, at the option of the holder, into
that number of shares of common stock (subject to the Beneficial Ownership Limitation) determined by dividing the stated value of such
share ($1,000) by the conversion price, which is $5.50
(subject to adjustment). The Company shall not effect any conversion
of the Series C Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Series C Convertible
Preferred Stock, to the extent that after giving effect to the conversion sought by the holder such holder (together with such holder’s
Attribution Parties (as defined in the Certificate of Designation)) would beneficially own more than 4.99% (or upon election by a holder,
19.99%) of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock
issuable upon such conversion (the “Beneficial Ownership Limitation”). All holders of the Series C Preferred Stock elected
the 19.99% Beneficial Ownership Limitation.
On
February 26, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing
investors in the Company (the “Purchasers”). Pursuant to the Purchase Agreement, the Purchasers purchased 4,500 shares of
a newly authorized Series C Convertible Preferred Stock, and the Company received proceeds of $4,500,000.
The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
In January 2022, the 2,500 outstanding shares of Series C Convertible Preferred Stock were converted into 454,546
shares of common stock. As of September 30, 2023 and December
31, 2022, respectively, there were zero 0
and zero 0
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 September 30, 2023 (Unaudited) |
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, 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 999
shares of the newly authorized 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 300
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 September 30, 2023 and December 31, 2022, respectively, there were 1,299
and 1,299
shares of Series D Convertible Preferred Stock issued and outstanding.
Series
E Convertible Preferred Stock
The
Company’s Board of Directors has designated 30,000
shares as the Series E Convertible Preferred Stock (the “Series
E Convertible Preferred Stock”). Each share of the Series E Convertible Preferred Stock has a stated value of $1,000.
The holders of the Series E Convertible Preferred Stock, the holders of the common stock and the holders of any other class or series
of shares entitled to vote with the common stock shall vote as one class on all matters submitted to a vote of shareholders of the Company.
Each
share of Series E Preferred Stock has 333 votes (subject to adjustment);
provided that in no event may a holder of Series E Preferred Stock be entitled to vote a number of shares in excess of such holder’s
Beneficial Ownership Limitation. Each share of Series E Convertible Preferred Stock is convertible, subject to shareholder approval (which
has not yet been granted); at any time and from time to time, at the option of the holder, into that number of shares of common stock
(subject to the Beneficial Ownership Limitation) determined by dividing the stated value of such share ($1,000) by the conversion price,
which is $3.00 (subject to adjustment). 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.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
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 4,000
shares of a newly authorized Series E Convertible Preferred Stock
at a price of $1,000
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 investor’s 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 Convertible Preferred Stock
without the consent of the Purchaser.
As
of September 30, 2023 and December 31, 2022, respectively, there were 4,000
and 0
shares of Series E Convertible Preferred Stock issued and outstanding.
In
connection with the Series E Convertible Preferred Stock issuance, 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 $281,500
was reversed during the quarter ended June 30, 2023.
Series
F Convertible Preferred Stock
On
August 2, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an existing, accredited
investor in the Company (the “Purchaser”). Pursuant to the Purchase Agreement, the Purchaser purchased 5,000
shares of a newly authorized Series F Convertible Preferred Stock
(the “Series F Convertible Preferred Stock”), and the Company received proceeds of $5,000,000.
The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
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 adjustment). 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.
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. 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.
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.
As
of September 30, 2023 and December 31, 2022, respectively, there were 5,000
and 0
shares of Series F Convertible Preferred Stock issued and outstanding.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
Common
stock issued
Nine
Months Ended September 30, 2022
On
January 11, 2022, shareholders converted 710 and
1,790
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 1,325,000
shares of common stock in the amount of $5,300,000
or $4
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 198,750
shares of common stock in the amount of $795,000
or $4
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 7,198
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 10,668
shares of common stock for payment of board fees to four directors
in the amount of $40,000
for services to the board which was expensed during the three
months ended June 30, 2022.
On
August 25, 2022, 121,572 common
shares were issued upon conversion of 851
shares of Series B Preferred Stock.
On
September 30, 2022, the Company issued 9,758
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 September 30, 2022.
On
September 30, 2022, the Company closed an offering of 818,335
shares of common stock in the amount of $2,455,003
or $3
per share before certain placement agent fees and offering expenses
with net proceeds of $2,194,187.
Nine
Months Ended September 30, 2023
On
March 31, 2023, the Company issued 12,463
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 of $2.61.
On
June 30, 2023, the Company issued 5,645
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 $5.76.
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 contributions totaled $117,048
for the six months ended June 30, 2023 and represented a purchase
price of $1.79
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). For the three months ended September 30, 2023, the Company has an accrued liability
of $72,801 of
employee contributions for the ESPP which may convert to shares of common stock upon the close of the offering period open from July
1, 2023 to December 31, 2023.
The
Company issued 7,910
shares of common stock for payment of board fees to four directors
for a value of $40,565
for services to the board which was expensed during the three
months ended September 30, 2023. The value of the shares is based on the September 29, 2023 grant date quoted trading price of $5.13.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
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 $25,000
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 ESPP employee contribution for the three months ended September 30,
2023 is 2% of total cash and is not deemed material, therefore it is not presented separately on the Balance Sheet as “restricted
cash”. The maximum aggregate number of shares of the Common Stock that may be issued under the ESPP is 1,000,000
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) 15%
purchase discount off of the grant date quoted trading price of the Company’s common stock and (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 85%
of a share of common stock and a put option on 15%
of a share of common stock.
As
of the three months ended September 30, 2023, the Company has an accrued liability of $72,801
of employee contributions for the ESPP which may convert to shares
of common stock upon the close of the offering period open from July 1, 2023 to December 31, 2023. The liability is offset by restricted
cash held by the Company in the same amount for employee contributions which the Company expects to convert to common stock upon closure
of the offering period at December 31, 2023. Additionally, the Company recorded a stock-based expense associated with the ESPP for the
three and nine months ended September 30, 2023 of $32,728
and $98,945,
respectively.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
The
Company computed the fair value of the look-back feature call and put options for January 1, 2023 to September 30, 2023 using a Black
Scholes option pricing model using the following assumptions:
Schedule of black scholes option pricing model | |
| |
| |
At
September
30, 2023 | |
Grant
date share price | |
| $2.10
-
$5.13 | |
Grant
date exercise price | |
| $1.79
-
$4.36 | |
Expected
term | |
| 0.25
years -
0.5
years | |
Expected
volatility | |
| 89.7%
- 103.4% | |
Risk-free
rate | |
| 4.76%
- 5.53% | |
Expected
dividend rate | |
| 0 | % |
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 65,561 common shares on the option exercise date of June 30, 2023. The following table discloses relevant information for the
ESPP at September 30, 2023 and for nine months then ended.
Schedule of stock-based compensation | |
| |
| |
At
September 30, 2023 | |
Cash
payment received from employee withholdings | |
$ | 189,849 | |
Cash
from employee withholdings used to purchase shares under ESPP | |
| (117,048 | ) |
Cash
and ESPP employee withholding liability | |
$ | 72,801 | |
| |
| |
| |
For
the Nine Months ended | |
| |
September
30, 2023 | |
Cash
from employee withholdings used to purchase ESPP shares | |
$ | 117,048 | |
Stock
based compensation expense | |
| 98,945 | |
Total
increase to equity for nine months ended September 30, 2023 | |
$ | 215,993 | |
Stock-Based
Compensation
Stock-based
compensation expense recognized under ASC 718-10 for the nine months ended September 30, 2023 and 2022, was $400,645
and $592,177,
respectively, for stock options granted to employees. This expense is included in selling, general and administrative expenses in the
unaudited consolidated statements of operations. Stock-based compensation expense recognized during the periods is based on the grant-date
fair value of the portion of share-based payment awards that are ultimately expected to vest during the period. At September 30, 2023,
the total compensation cost for stock options not yet recognized was $592,927.
This cost will be recognized over the remaining vesting term of the options ranging from nine months to two and one-half years.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
On
May 12, 2021, the Board adopted, with shareholder approval, the 2021 Equity Incentive Plan (the “2021 Plan”) providing for
the issuance of up to 1,000,000
shares of our common stock. The purpose of the 2021 Plan is to
assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals
to align their interests with those of our shareholders. During the third quarter of 2021, the shareholders approved the issuance of
up to one million shares or share equivalents pursuant to the 2021 Plan. 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 665,000
options were awarded by the Company’s Compensation Committee
and approved by the Board, with a strike price of $6.41
per share, a five-year term and vesting equally over a three-year
period. The options serve as a retention tool and contain key provisions that the holder must remain in good standing with the
Company. The options were valued on the grant date at $1,596,804
using a Black-Scholes model with the following assumptions: (1)
expected term of 3.0
years using the simplified method, (2) expected volatility rate
of 72%
based on historical volatility, (3) dividend yield of zero, and (4) a discount rate of 0.97%.
On
April 1, 2023, the Board granted to certain key employees an aggregate of 353,117
non-qualified stock options with a strike price of $4.22,
a term of 5-years and 3-year vesting period. The options were granted prior to the certificates being issued subject to a pending modification
of specific language contained within the option agreement pertaining to certain rights of the holder in the event of a merger or acquisition.
The specific language was approved by the shareholders on May 17, 2023 after which the option certificates were issued with the modified
language. The specific language had no bearing on the grant date nor on the valuation. Following the approval by the shareholders but
prior to issuance of the certificates, one holder resigned from the Company and forfeited 60,000
unvested options leading to a net issuance during the quarter
of 293,117
non-qualified stock options. The Company expects to take a charge
of $567,569
during the vesting period.
On
July 1, 2023, the Company awarded 50,000
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
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.
As
of September 30, 2023, and December 31, 2022, options to purchase a total of 1,217,775
(net of forfeitures discussed below) shares of common stock and
926,266
shares of common stock were outstanding, respectively. At September
30, 2023, 581,325
options were exercisable. Of the total options issued, 269,658
and 271,266
options were outstanding under the 2016 Equity Incentive Plan,
882,636
and 495,000
were outstanding under the 2021 Plan and a further 160,000
and 160,000
non-plan options to purchase common stock were outstanding as
of September 30, 2023 and December 31, 2022, respectively. The non-plan options were granted to four executives as hiring incentives,
including the Company’s CEO in the fourth quarter of 2020.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
Schedule
of stock option issuance of shares | | |
| | | |
| | | |
| | | |
| | |
| | |
| | |
Weighted | | |
Average | | |
| |
| | |
| | |
Average | | |
Remaining | | |
Aggregate | |
| | |
Number
of | | |
Exercise | | |
Contractual | | |
Intrinsic | |
| | |
Options | | |
Price | | |
Term
(Years) | | |
Value | |
Outstanding
at December 31, 2021 | | |
| 431,266 | | |
$ | 4.98 | | |
| 3.4 | | |
$ | — | |
Granted | | |
| 685,000 | | |
$ | 6.41 | | |
| 4.0 | | |
$ | — | |
Forfeited | | |
| (190,000 | ) | |
$ | 6.41 | | |
| — | | |
$ | — | |
Outstanding
at December 31, 2022 | | |
| 926,266 | | |
$ | 5.74 | | |
| 3.3 | | |
$ | — | |
Exercisable
at December 31, 2022 | | |
| 404,599 | | |
$ | 5.02 | | |
| 3.3 | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | |
Outstanding
at December 31, 2022 | | |
| 926,266 | | |
$ | 5.74 | | |
| 3.3 | | |
$ | — | |
Granted | | |
| 353,117 | | |
$ | 4.22 | | |
| 4.5 | | |
$ | — | |
Exercised/Forfeited/Expired | | |
| (61,608 | ) | |
$ | 4.48 | | |
| — | | |
$ | — | |
Outstanding
at September 30, 2023 | | |
| 1,217,775 | | |
$ | 5.37 | | |
| 3.0 | | |
$ | — | |
Exercisable
at September 30, 2023 | | |
| 581,325 | | |
$ | 5.38 | | |
| 2.1 | | |
$ | — | |
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 | | |
| 1.9 | | |
| — | |
Warrants
expired, forfeited, cancelled or exercised | |
| (1,228,875 | ) | |
| — | | |
| — | | |
| — | |
Warrants
issued | |
| — | | |
| — | | |
| — | | |
| — | |
Outstanding
at December 31, 2022 | |
| 147,591 | | |
$ | 8.63 | | |
| 0.8 | | |
| — | |
Exercisable
at December 31, 2022 | |
| 147,591 | | |
$ | 8.63 | | |
| 0.8 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at December
31, 2022 | |
| 147,591 | | |
$ | 8.63 | | |
| 0.8 | | |
| — | |
Warrants
expired, forfeited, cancelled or exercised | |
| (67,500 | ) | |
| — | | |
| — | | |
| — | |
Warrants
issued | |
| — | | |
| — | | |
| — | | |
| — | |
Outstanding
at September 30, 2023 | |
| 80,091 | | |
$ | 8.53 | | |
| 0.6 | | |
| — | |
Exercisable
at September 30, 2023 | |
| 80,091 | | |
$ | 8.53 | | |
| 0.6 | | |
| — | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
NOTE
6 - REVENUE AND CONTRACT ACCOUNTING
Revenue
Recognition and Contract Accounting
The
Company generates revenue from four sources: (1) Technology Systems; (2) AI Technology which is included in the consolidated statements
of operations line-item Technology Systems; (3) Technical Support; and (4) Consulting Services which is included in the consolidated
statements of operations line-item Services and Consulting.
Contract
assets and contract liabilities on uncompleted contracts for revenues recognized over time are as follows:
Contract
Assets
Contract
assets on uncompleted contracts represent cumulative revenues recognized in excess of billings and/or cash received on uncompleted contracts
accounted for under the cost-to-cost input method, which recognizes revenue based on the ratio of cost incurred to total estimated costs.
At
September 30, 2023 and December 31, 2022, contract assets on uncompleted contracts consisted of the following:
Schedule of contract assets on uncompleted
contracts | |
| | |
| |
| |
September
30, 2023 | | |
December
31, 2022 | |
Cumulative
revenues recognized | |
$ | 8,594,322 | | |
$ | 5,934,205 | |
Less:
Billings or cash received | |
| (7,247,591 | ) | |
| (5,508,483 | ) |
Contract
assets | |
$ | 1,346,731 | | |
$ | 425,722 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
Contract
Liabilities
Contract
liabilities on uncompleted contracts represent billings and/or cash received that exceed cumulative revenues recognized on uncompleted
contracts accounted for under the cost-to-cost input method, which recognizes revenues based on the ratio of the cost incurred to total
estimated costs.
Contract
liabilities on services and consulting revenues represent billings and/or cash received in excess of revenue recognized on service agreements
that are not accounted for under the cost-to-cost input method.
At
September 30, 2023 and December 31, 2022, contract liabilities on uncompleted contracts and contract liabilities on services and consulting
consisted of the following:
Schedule of contract liabilities on uncompleted
contracts | |
| | |
| |
| |
September
30, 2023 | | |
December
31, 2022 | |
Billings
and/or cash receipts on uncompleted contracts | |
$ | 972,908 | | |
$ | 4,355,470 | |
Less:
Cumulative revenues recognized | |
| (199,976 | ) | |
| (4,144,018 | ) |
Contract
liabilities, technology systems | |
| 772,932 | | |
| 211,452 | |
Contract
liabilities, services and consulting | |
| 815,996 | | |
| 746,545 | |
Total
contract liabilities | |
$ | 1,588,928 | | |
$ | 957,997 | |
Contract
liabilities at December 31, 2022 were $957,997;
of which $211,452 for
technology systems and $636,822
in services and consulting have been recognized as of September 30, 2023.
The
Company expects to recognize all contract liabilities within 12 months from the respective consolidated balance sheet date.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
Disaggregation
of Revenue
The
Company is following the guidance of ASC 606-10-55-296 and 297 for disaggregation of revenue. Accordingly, revenue has been disaggregated
according to the nature, amount, timing and uncertainty of revenue and cash flows. We are providing qualitative and quantitative disclosures.
Qualitative:
|
1. |
We have four distinct revenue
sources: |
|
a. |
Technology Systems (Turnkey, engineered projects); |
|
b. |
AI Technology (Associated maintenance and support services); |
|
c. |
Technical Support (Licensing and professional services
related to auditing of data center assets); and |
|
d. |
Consulting Services (Predetermined algorithms to provide
important operating information to the users of our systems). |
|
2. |
We currently operate in
North America including the USA, Mexico and Canada. |
|
3. |
Our customers include rail
transportation, commercial, government, banking and IT suppliers. |
|
4. |
Our services & maintenance
contracts are fixed price and fall into two duration types: |
|
a. |
Turnkey engineered projects and professional service
contracts that are less than one year in duration and are typically one to two quarters in length; and |
|
b. |
Maintenance and support contracts ranging from one
to five years in length. |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
Quantitative:
For
the Three Months Ended September 30, 2023
Schedule of disaggregation of revenue | |
| | |
| | |
| | |
| | |
| |
Segments | |
Rail | | |
Commercial | | |
Government | | |
Artificial
Intelligence | | |
Total | |
Primary
Geographical Markets | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| |
North
America | |
$ | 1,333,556 | | |
$ | 19,220 | | |
$ | — | | |
$ | 178,147 | | |
$ | 1,530,923 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Major
Goods and Service Lines | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Turnkey
Projects | |
$ | 705,849 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 705,849 | |
Maintenance
and Support | |
| 627,707 | | |
| 19,220 | | |
| — | | |
| — | | |
| 646,927 | |
Algorithms | |
| — | | |
| — | | |
| — | | |
| 178,147 | | |
| 178,147 | |
| |
$ | 1,333,556 | | |
$ | 19,220 | | |
$ | — | | |
$ | 178,147 | | |
$ | 1,530,923 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Timing
of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Goods
transferred over time | |
$ | 705,849 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 705,849 | |
Services
transferred over time | |
| 627,707 | | |
| 19,220 | | |
| — | | |
| 178,147 | | |
| 825,074 | |
| |
$ | 1,333,556 | | |
$ | 19,220 | | |
$ | — | | |
$ | 178,147 | | |
$ | 1,530,923 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
For
the Three Months Ended September 30, 2022
| |
| | |
| | |
| | |
| | |
| |
Segments | |
Rail | | |
Commercial | | |
Government | | |
Artificial
Intelligence | | |
Total | |
Primary
Geographical Markets | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| |
North
America | |
$ | 3,765,312 | | |
$ | 32,821 | | |
$ | 23,245 | | |
$ | 200,860 | | |
$ | 4,022,238 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Major
Goods and Service Lines | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Turnkey
Projects | |
$ | 2,689,393 | | |
$ | — | | |
$ | 3,024 | | |
$ | — | | |
$ | 2,692,417 | |
Maintenance
and Support | |
| 1,075,919 | | |
| 32,821 | | |
| 20,221 | | |
| 183,378 | | |
| 1,312,339 | |
Algorithms | |
| — | | |
| — | | |
| — | | |
| 17,482 | | |
| 17,482 | |
| |
$ | 3,765,312 | | |
$ | 32,821 | | |
$ | 23,245 | | |
$ | 200,860 | | |
$ | 4,022,238 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Timing
of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Goods
transferred over time | |
$ | 2,689,393 | | |
$ | — | | |
$ | 3,024 | | |
$ | — | | |
$ | 2,692,417 | |
Goods
delivered at point in time | |
| — | | |
| — | | |
| — | | |
| 17,482 | | |
| 17,482 | |
Services
transferred over time | |
| 532,250 | | |
| 32,821 | | |
| 20,221 | | |
| 183,378 | | |
| 768,670 | |
Services
delivered at point in time | |
| 543,669 | | |
| — | | |
| — | | |
| — | | |
| 543,669 | |
| |
$ | 3,765,312 | | |
$ | 32,821 | | |
$ | 23,245 | | |
$ | 200,860 | | |
$ | 4,022,238 | |
For
the Nine Months Ended September 30, 2023
| |
| | |
| | |
| | |
| | |
| |
Segments | |
Rail | | |
Commercial | | |
Government | | |
Artificial
Intelligence | | |
Total | |
Primary
Geographical Markets | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| |
North
America | |
$ | 5,247,291 | | |
$ | 90,432 | | |
$ | 11,353 | | |
$ | 596,194 | | |
$ | 5,945,270 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Major
Goods and Service Lines | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Turnkey
Projects | |
$ | 3,390,555 | | |
$ | 13,552 | | |
$ | — | | |
$ | — | | |
$ | 3,404,107 | |
Maintenance
and Support | |
| 1,856,736 | | |
| 76,880 | | |
| 11,353 | | |
| — | | |
| 1,944,969 | |
Algorithms | |
| — | | |
| — | | |
| — | | |
| 596,194 | | |
| 596,194 | |
| |
$ | 5,247,291 | | |
$ | 90,432 | | |
$ | 11,353 | | |
$ | 596,194 | | |
$ | 5,945,270 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Timing
of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Goods
transferred over time | |
$ | 3,390,555 | | |
$ | 13,552 | | |
$ | — | | |
$ | — | | |
$ | 3,404,107 | |
Services
transferred over time | |
| 1,856,736 | | |
| 76,880 | | |
| 11,353 | | |
| 596,194 | | |
| 2,541,163 | |
| |
$ | 5,247,291 | | |
$ | 90,432 | | |
$ | 11,353 | | |
$ | 596,194 | | |
$ | 5,945,270 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
For
the Nine Months Ended September 30, 2022
Segments | |
Rail | | |
Commercial | | |
Government | | |
Artificial
Intelligence | | |
Total | |
Primary
Geographical Markets | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| |
North
America | |
$ | 8,087,759 | | |
$ | 76,818 | | |
$ | 214,124 | | |
$ | 699,995 | | |
$ | 9,078,696 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Major
Goods and Service Lines | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Turnkey
Projects | |
$ | 5,885,477 | | |
$ | (498 | ) | |
$ | 153,462 | | |
$ | — | | |
$ | 6,038,441 | |
Maintenance
and Support | |
| 2,202,282 | | |
| 77,316 | | |
| 60,662 | | |
| 465,223 | | |
| 2,805,483 | |
Algorithms | |
| — | | |
| — | | |
| — | | |
| 234,772 | | |
| 234,772 | |
| |
$ | 8,087,759 | | |
$ | 76,818 | | |
$ | 214,124 | | |
$ | 699,995 | | |
$ | 9,078,696 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Timing
of Revenue Recognition | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Goods
transferred over time | |
$ | 5,885,477 | | |
$ | (498 | ) | |
$ | 153,462 | | |
$ | — | | |
$ | 6,038,441 | |
Goods
delivered at point in time | |
| — | | |
| — | | |
| — | | |
| 234,772 | | |
| 234,772 | |
Services
transferred over time | |
| 1,545,578 | | |
| 77,316 | | |
| 60,662 | | |
| 465,223 | | |
| 2,148,779 | |
Services
delivered at point in time | |
| 656,704 | | |
| — | | |
| — | | |
| — | | |
| 656,704 | |
| |
$ | 8,087,759 | | |
$ | 76,818 | | |
$ | 214,124 | | |
$ | 699,995 | | |
$ | 9,078,696 | |
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 nine months of service. During the three months ended September 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 nine months ended September 30, 2023,
the Company recognized expense for matching cash contributions to the 401(k) Plan totaling $59,508
and $158,852,
respectively.
NOTE
8 – RELATED PARTY TRANSACTIONS
There
were no related party transactions for the periods reflected in this report.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 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 former officer did not participate in the transaction on behalf of the Company.
The
assets of the iCAS business were sold for a 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 55,000,000
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 warrants are not exercisable 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 exercise the warrants at any time after the six-month anniversary of the issuance date
on a cashless basis 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 . Given that the shares carried 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
original issue discount is being accrued into interest income over the term of the note.
The
note receivable was recorded as follows on September 30, 2023:
Schedule of note receivable | |
| |
| |
September
30, 2023 | |
Convertible
note receivable | |
$ | 165,000 | |
Unamortized
discount | |
| (13,125 | ) |
Convertible
note receivable, net | |
$ | 151,875 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 (Unaudited) |
NOTE
10 – SUBSEQUENT EVENTS
On
November 9, 2023, 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 2,500
shares of authorized Series E Convertible Preferred Stock (the
“Series E Convertible Preferred Stock”), at a price of $1,000
per share, and the Company received proceeds of $2,500,000.
The
November 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 November Purchase Agreement) on or prior to June 30, 2024 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 Purchasers. The conversion price of the Series E Preferred Stock currently is $3.00
per share (subject to adjustment).
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.
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 provisions). The Company shall
not affect 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”). Each Purchaser
elected the 19.99% Beneficial Ownership Limitation.
The
terms of the Series E Preferred Stock provide that, without shareholder approval (the "Stockholder Approval"), the Company may
not issue upon the conversion of any shares of Series E Preferred Stock a number of shares of common stock which, when aggregated with
any shares of common stock issued upon conversion of any other shares of Series E Preferred Stock, would exceed 1,430,484
(subject to adjustment). Such number represents 20% of the number
of shares of common stock issued and outstanding upon the filing of the Series E Preferred Stock Certificate of Designation.
To
obtain the stockholder approval, 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”)) to seek approval for the conversion of Series E Preferred Stock into common stock above the allowed amount.
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.
In
connection with the Purchase Agreement of Series F Convertible Preferred Stock, completed on August 2, 2023, certain protections existed
for the investor if the Company completed a share offering with an equivalent common stock price of less than the $6.20
on or before December 31, 2023. In such an event, the investor
of Series F Convertible Preferred Stock shall exchange the Series F shares for an equivalent to the lower common stock equivalent price
for any transactions completed prior to December 31, 2023. In connection with the November 9, 2023 Series E Convertible Preferred Stock
offering, the Company entered into an Exchange Agreement with the investor and issued an additional 5,000
shares of Series E Convertible Preferred Stock at $1,000
per share with $3.00
per common share equivalent in exchange for 5,000
outstanding and issued shares of Series F Convertible Preferred
Stock. All shares of Series F Convertible Preferred Stock were held by a single shareholder.
F-66
2,500,000
Shares of Common Stock issuable upon Conversion of Series E Convertible Preferred Stock
——————————
PROSPECTUS
——————————
February
14, 2024
Grafico Azioni Duos Technologies (NASDAQ:DUOT)
Storico
Da Ago 2024 a Set 2024
Grafico Azioni Duos Technologies (NASDAQ:DUOT)
Storico
Da Set 2023 a Set 2024