UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2020
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________ to _____________
Commission file number: 000-55497
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DUOS TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in its charter)
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Florida
(State or Other Jurisdiction of Incorporation)
65-0493217
(I.R.S. Employer Identification No.)
6622 Southpoint Drive South, Suite 310
Jacksonville, Florida 32216
(Address of Principal Executive Offices)
(904) 296-2807
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol(s)
DUOT
Name of each exchange on which registered
The NASDAQ Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act . Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 Regulation S-T ( §232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer , smaller reporting company , an emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Non-accelerated filer þ
Emerging growth company o
Accelerated filer o
Smaller reporting company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting from that prepared or issued its audit report: o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such
common equity on June 30, 2020, was $14,244,100. As of March 26, 2021, the registrant has one class of common equity, and the number of shares outstanding of such
common equity is 3,534,015.
Documents Incorporated by Reference: None.
DUOS TECHNOLOGIES GROUP INC.
2020 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
SIGNATURES
PART IV
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FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial statements and related notes contained elsewhere in this Form 10-K. Certain statements made in this
discussion are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expects”,
“intends”, “anticipates”, “believes”, “estimates”, “predicts”, or “continue” or the negative of these terms or other comparable terminology and include, without limitation,
statements below regarding our ability to continue as a going concern, our business plans, the ability to raise working capital and expectations as to market acceptance of our
products. Forward-looking statements involve risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or
implied by these forward-looking statements. These factors include, but are not limited to, our ability to continue as a going concern, our ability to generate sufficient cash to
continue and expand operations, the competitive environment generally and in our specific market areas, changes in technology, the availability of and the terms of financing,
changes in costs and availability of goods and services, economic conditions in general and in our specific market areas, changes in federal, state and/or local government laws
and regulations potentially affecting the use of our technology, changes in operating strategy or development plans and the ability to attract and retain qualified personnel.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Indeed, it is
likely that some of our assumptions may prove to be incorrect. Our actual results and financial position may vary from those projected or implied in the forward-looking
statements and the variances may be material. Moreover, we do not assume responsibility for the accuracy and completeness of these forward-looking statements. The Company
is under no duty to update any forward-looking statements after the date of this report to conform such statements to actual results , except as may be required by law.
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Item 1. Business.
Our Corporate History
PART I
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™ which employs approximately 59 people and is a technology integrator, software applications and artificial intelligence (“AI”) company with a
strong portfolio of intellectual property. The Company’s headquarters are located at 6622 Southpoint Drive South, Suite 310, Jacksonville, Florida 32216 and main telephone
number is (904) 296-2807.
Overview
The Company, operating under its brand name duostech, designs, develops, deploys and operates intelligent technology solutions supporting rail, logistics and intermodal
businesses that streamline operations, improve safety and reduce costs. Our employee team include engineering subject matter expertise in hardware, software, artificial
intelligence and information technology.
Our main offering, the Railcar Inspection Portal (RIP), provides both freight and transit railroad customers and select government agencies the ability to conduct fully automated
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. Within minutes of the railcar passing through the RIP, a detailed report is sent to the customer where they are able to action
items immediately. This solution has the potential to transform the railroad industry increasing safety, improving efficiency and reducing costs. The Company has already
deployed this system with several Class 1 railroads and anticipates an increased demand from transit and short line railroad customers along with selected government agencies
that operate and/or manage rail traffic. The Company currently operates with our RIP in Canada, Mexico and the United States and anticipates expanding this solution into
Europe and Australia 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.
To support the RIP and ALIS, the Company has developed two proprietary solutions that operate our software and artificial intelligence. centraco® is an Enterprise
Information Management Software platform that consolidates data and events from multiple sources into a unified and distributive user interface. Customized to the end user’s
Concept of Operations (CONOPS), it provides improved situational awareness and data visualization for operational objectives. centraco® supports the integration of data
from existing systems, including cameras and other sensor-based systems, within the same user interface. With centraco®, authorized personnel can simultaneously view,
monitor and analyze data and other events from multiple geographic locations. truevue360™ is our fully integrated platform that we utilize to develop and deploy Artificial
Intelligence (AI) algorithms, including Machine Learning, Computer Vision, Object Detection and Deep Neural Network-based processing for real-time applications. We
develop and deploy turn-key intelligent applications that provide highly accurate results to automate and optimize our customer’s operations.
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Another offering is our IT Asset Management (ITAM) solution which utilizes dcVue® to help data center operators more effectively manage mission critical assets. This
proprietary enterprise system utilizes intelligent bar code scanning technology, which quickly and seamlessly provides accurate, cataloged results for data center asset inventory
and audit services. We have over 15 years of experience physically reviewing data center equipment and documenting customer defined attributes associated to each piece of
equipment such as location, make, model, asset tag, serial number, number of blades, and power connectivity. Our team of trained professionals will quickly and efficiently
gather the required data without disruption to your data center’s operation. All of the solutions can be offered as service or through licensing, the end-user can perform the
service internally.
The year 2020 brought significant challenges, changes and opportunities for our business that will be discussed in greater detail later in this report. They include:
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The up listing onto a national exchange (Nasdaq) in first quarter, 2020.
Responding to the COVID-19 pandemic beginning in first quarter, 2020 and which continues as of this report.
The delay of new orders from existing customers beginning in first quarter, 2020 with a restart being expected in second quarter 2021.
The retirement of Gianni Arcaini as Chairman and CEO, and the hiring of new CEO and Director Charles Ferry in third quarter, 2020.
Restructuring of the organization by establishing a CCO (Scott Carns) and hiring a new COO (Ben Eiser) in third quarter, 2020.
Addition of Mr. Edmond Harris, former COO of CSX and CN, to our Board of Directors in fourth quarter, 2020.
duostech™
Over the past 10 years, duostech™ has developed a series of industry specific technologies some of which are described below.
Railcar Inspection Portal (rriipp®)
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. Our Railcar Inspection Portal can reduce this inspection to minutes while the train is moving at speed improving safety, reducing dwell time and
optimizing maintenance.
Our system combines high-definition image and data capture technologies with our AI-based analytics applications that are typically installed on active tracks located between
two rail yards. We inspect railcars traveling through our inspection portal at speeds of up to 70 mph and report mechanical anomalies detected by our system to the inbound
train yard, well ahead of the train entering the yard.
Currently, three Class 1 railroads are operating our rip® technology with the ultimate objective to change inspection regulations that would allow replacement of the current
manual inspection (in the yard) with our fully automated process.
Rail Inspection Portal rip® - Canadian Location
Operator Interface - centraco®
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The following examples of automated detections are the result of the combination of our image capture technologies. Some of these mechanical defects, if unattended, could
cause a derailment. Other examples of our AI-based detection applications include inspections at rail border crossings in support of the Customs and Border Protection Agency.
The Company continues to expand its detection capabilities through the development and integration of additional sensor technologies to include laser, infrared, thermal, sound
and x-ray to process AI-based analytics of inspection points.
The following proprietary capture and sensor technologies are sold as stand-alone systems as well as sub-systems of the modular Railcar Inspection Portal system:
Samples of Automated Detections
Vehicle Undercarriage Examiner (vvuuee®)
A system that inspects the undercarriage of railcars (both freight and transit rail) traveling at speeds of up to 70 mph. We are currently developing an expanded version for
higher speeds with additional sensor technologies. We are developing additional algorithms for an increasing number of automated detection of anomalies, which we believe
once completed and successfully tested, may have a significant impact on our revenues.
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Thermal Undercarriage Examiner (t-vt-vuuee™)
The Company has developed and deployed a new thermal undercarriage examiner. The system uses high-speed thermal imaging technology to inspect the thermal signature of
undercarriage components. Thermal monitoring of component heat signatures while underway will provide indications of the overall operating health of the railcars that are not
possible to observe during static yard inspections.
Enterprise Command and Control Suite (cencenttraco
raco®)
This intelligent user interface is at the core of all our systems and enables end users to connect to an unlimited number of operational sites from one central interface, the
centraco® Enterprise Command and Control Suite. A multi-layered command and control interface, it is designed to function as the central point and aggregator for
information consolidation, connectivity and communications. The platform is browser based and agnostic to the interconnected sub-systems. It provides full integration for
seamless user credentialing and performs the following major functions:
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Collection: Device management independently collects data from any number of disparate devices or sub-systems.
Analysis: Correlates and analyzes data, events and alarms to identify real-time situations and their priorities for response measures and end-user’s Concept of Operations
(“CONOPS”).
Verification: The contextual layer represents relevant information in a quick and easily interpreted format which provides operators optimal situational awareness.
Resolution: Event-specific presentation of user-defined Standard Operating Procedures (“SOPs”), that includes step-by-step instructions on how to resolve situations.
Reporting: Tracking of data and events for statistical, pattern and/or forensic analysis. Features include mathematical, statistical and comparative data reporting as well
as interoperability with third-party databases. Reports are customized to the end user’s data formats and infrastructure.
Auditing: Device-level drill down that records each operator’s login interaction with the system and tracks manual changes including calculations of operator alertness
and reaction time for each event.
AutoCheck: The system pings each device connected to its wide area network and performs periodic functionality audits. A variable alert feature sends out error
messages to an unlimited number of user-definable stakeholders in case any device does not perform to specifications.
centraco® User Interface
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Automated Logistics Information Systems (aallisis™™)
We have developed and deployed a proprietary intelligent system to automate security gate operations at nine distribution centers owned and operated by a national retail chain.
Using similar technology that is used in our Rail Inspection Portal, this solution automates the process of entering and exiting a large logistics or intermodal yard. This
automates the logistics transaction, improves throughput and can also be used to automate security and maintenance screening/detection if desired by the customer.
Markets
Automated Gate Operation alis™™
deployed at nine Kohl’s distribution centers
The opportunity for our Rail Inspection Portal business is substantial and our number one priority at this time. We are currently providing this solution to three of seven Class 1
railroad operators with 10 systems already deployed. Because of our early leadership position, we have been able to accumulate experience and intellectual property that would
be time consuming and expensive for a new competitor to replicate. Furthermore, we have given ourselves the ability to upgrade and scale our solutions with additional
technologies in the future. Recently, the new CEO directed our operations and technical teams to improve our current design to meet anticipated Federal Railroad
Administration, or FRA and Association of American Railroads regulatory guidelines. We currently estimate the total Class 1 railroads addressable market at 156 systems in
North America alone. Between initial RIP installations, upgrades and long-term service agreements, we believe this equates to $800 million, which is realistically attainable in
the coming years. 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.
Another market we are pursuing as our second priority is using our Automated Logistics and Information Systems solution (alis™™). Potential customers include commercial
retail logistics and intermodal operators, Class 1 rail intermodal operators that are moving large amounts of automobiles, and U.S. Government agencies such as the Department
of Defense and the Department of Homeland Security. Today, we currently have 20 production systems in use, but we believe the greenfield opportunity here to be substantial.
We have identified over 900 lanes of traffic within nearly 300 facilities as potential business opportunities in the near-term. The addressable market equates to well over $100
million.
Currently, we are focused on the North American market, but plan to expand globally in the future.
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 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.
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Specific Areas of Competition
One of our primary commercial goals is to develop innovative technology solutions and target potential “greenfield” market spaces in order to maximize our business footprint
and give us the ability to help define the market parameters for the future.
With regards to our Railcar Inspection Portal (RIP), we currently have no direct competition domestically or globally. There are several companies that do provide visual and
optical (laser) based imaging systems, but they are specifically designed to focus on a single aspect of a railcar whereas our latest RIP will identify 50+ inspection points on
each car. This is not to be confused with track inspection technologies, where we do not compete with. We are the only company, to our best knowledge, that creates images of
the entire car from multiple perspectives and with many inspection points. Other companies that participate in the visual and optical (laser) based railcar inspection systems
market include:
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Trimble Rail Solutions/Beena Vision – Atlanta, GA – Trimble Rail Solutions is a conglomerate of companies focused on various aspects of the maintenance and
construction of rail infrastructure or management of rail transportation assets. In 2017, they acquired Beena Vision which focuses on wayside inspection systems to
analyze specific aspects of a railcar such as wheels and brakes among other critical points. All their systems are currently designed to focus on a singular aspect of a
railcar. While they do advertise a full-scale train imaging and inspection portal, it is generally not comparable to our offering nor, to our knowledge, has it been widely
adopted by North American Class 1 railroads for automated wayside inspection purposes.
KLD Labs – Hauppauge, NY – KLD Labs develops and deploys wayside measurement and inspection systems for railcar inspection. Like most others, their products
are focused on singular aspects of a railcar such as wheels and brakes. They have also developed some technologies for rail track assessment and measurement.
Class 1 Railroads – Some of the Class 1 railroads, such as Union Pacific, have worked to develop their own “in-house” solutions but are also specifically focusing on
singular aspects of a railcar.
Our Automated Logistics Information System (ALIS) also represents an opportunity to expand into a very mature market with a major technology gap. While most facilities,
such as distribution centers, that process commercial trucks in and out have sophisticated software management applications for logistics control, they have most often not
implemented an advanced gatehouse automation solution. Historically, this category was referred to as “Automated Gate Systems” or AGS. The purpose of AGS technology is
to streamline entry in to and exit out of facilities. The marketplace for this was mostly seaports and intermodal transfer facilities and was relatively expensive technology to
deploy. We identified a market gap with regards to distribution facilities that all currently utilize manual processes and heavy staffing to accomplish commercial truck entry and
exit. The barrier to entry for distribution centers was predominately “cost”, as well as the requirement for a different set of logistics management software and tools. The
current defined competition is as follows:
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Nascent – Charlotte, NC – Their primary market focus has been on seaports and intermodal transfer facilities.
Potential End Users/Customers – In communications with potential customers, many have identified the desire to add this technology but have faced difficulties in
finding companies offering a solution that meets their specific needs.
Due to the nature of our innovations, our current customer base, which is predominately in the railroad industry, constantly challenges us to develop new systems that do not yet
exist in the marketplace. Each of these opportunities for new product development is evaluated from both a business and technical perspective. We evaluate the following: “can
it technically be accomplished?”; “Does it leverage our core technology competencies”; and ultimately, “Is there a market for this product?” Recently, we were asked to
develop a variant of our Railcar Inspection Portal to assess for damaged automobiles being transported by the railroads. This is a perfect example of being able to leverage our
experience with imaging, system development and field deployment combined with an addressable market into penetrating a new greenfield.
Our Growth Strategy
Vision
Duos develops, deploys and operates cutting-edge technologies that help to transform precision railroading, logistics and intermodal transportation solutions.
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Objectives
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Improve our operational and technical execution, customer satisfaction and speed.
Expand Rail Inspection Portal and Automated Logistics Information System with current and future customers in Rail, Logistics and U.S. Government sectors.
Offer both CAPEX and OPEX pricing models that increase recurring revenue and improve profitability.
Form strategic partnerships that improve market access and credibility.
Improve policy, processes, and toolsets to become a viable platform for internal growth and for mergers and acquisitions.
Thoughtfully execute mergers and acquisitions once the business is more mature and profitable to expand offerings and/or capabilities.
Promote a performance-based work force where employees enjoy their work and are incentivized to excel and innovate.
Organic Growth
Our organic growth strategy is to continue our focus and prioritization in the rail, logistics and intermodal market space. To ensure our success, the Company has made
significant changes in the senior management team to include a new Chief Executive Officer who has years of experience successfully leading start-up and turn-around
companies. In addition, the former divisional COO who has 20 years of experience with the Company delivering technology into rail, logistics, intermodal, and other industries,
has been promoted to Chief Commercial Officer (CCO) of our wholly owned subsidiary, duostech. We have also hired a divisional Chief Operating Officer (COO) with a
strong background in operations in multiple former assignments. The Company’s CFO will continue in the same role providing continuity and multiple years of public company
experience. The Company’s Board of Directors is being strengthened with the addition of a retired Chief Operating Officer for a Class 1 railroad with more than 50 years of
experience in the rail industry. The shareholders also approved the appointment of our CEO to the Board of Directors.
The new leadership team’s focus is to improve operational and technical execution which will in turn enable the commercial side of the business to expand RIP and ALIS
delivery into existing customers. Even though the COVID-19 pandemic is expected to still be an issue during 2021, the Company’s primary customers have indicated readiness
to order more equipment and services based upon the Company’s current performance.
Additionally, the new CEO has directed that the Company make 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.
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.
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.
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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.
Employees
We have a current staff of 59 employees of which 57 are full-time, the majority of which work in the Jacksonville area, none of which are subject to a collective bargaining
agreement. We also have seven contract staff based in Europe who are primarily focused on our AI software development. We have not experienced any work stoppages and we
consider our relationship with our employees to be good.
Item 1A. Risk Factors.
Risks Related to Our Company and Business
The nature of the technology management platforms utilized by us are complex and highly integrated, and if we fail to successfully manage releases or integrate new
solutions, it could harm our revenues, operating income, and reputation.
The technology platforms developed and designed by us accommodate integrated applications that include our own developed technology and third-party technology, thereby
substantially increasing their functionality.
Due to this complexity and the condensed development cycles under which we operate, we may experience errors in our software, corruption or loss of our data, or unexpected
performance issues from time to time. For example, our solutions may face interoperability difficulties with software operating systems or programs being used by our
customers, or new releases, upgrades, fixes or the integration of acquired technologies may have unanticipated consequences on the operation and performance of our other
solutions. If we encounter integration challenges or discover errors in our solutions late in our development cycle, it may cause us to delay our launch dates. Any major
integration or interoperability issues or launch delays could have a material adverse effect on our revenues, operating income and reputation.
We face risks related to the coronavirus (COVID-19 pandemic) which could significantly disrupt our research and development, operations, sales, and financial results.
Our business has been adversely impacted by the effects of the COVID-19 pandemic. In addition to global macroeconomic effects, the COVID-19 pandemic and related
adverse public health developments have caused disruption and/or delays to our operations and sales activities. Our third-party manufacturers and our customers have been
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 could 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 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 movement and restrictions on the ability of our employees to perform their jobs that may impact our ability to develop and
design our products and services in a timely manner or meet required milestones or customer commitments.
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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.
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 $39 million as of December 31, 2020. 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.
9
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.
10
We may incur substantial expenses and divert management resources in prosecuting others for their unauthorized use of our intellectual property rights.
Other companies, including our competitors, may develop technologies that are similar or superior to our technologies, duplicate our technologies, or design around our patents,
and may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Although we do not have
operations outside North America at this time, we may compete for contracts in other countries in the future. Effective intellectual property protection may be unavailable, or
limited, in some foreign countries in which we may do business, such as China. Unauthorized parties may attempt to copy or otherwise use aspects of our technologies and
products that we regard as proprietary. Our means of protecting our proprietary rights in the United States or abroad may not be adequate or competitors may independently
develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market
for our technologies and products.
Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to
determine the right to a patent for these inventions, because our business would be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome
is favorable, this proceeding could result in substantial cost to us and disrupt our business.
In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary
rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on
our business, financial condition, and results of operations.
If we are unable to apply technology effectively in driving value for our clients through technology-based solutions or gain internal efficiencies and effective internal
controls through the application of technology and related tools, our operating results, client relationships, growth and compliance programs could be adversely affected.
Our future success depends, in part, on our ability to anticipate and respond effectively to the threat and opportunity presented by new technology disruption and developments.
These may include new software applications or related services based on artificial intelligence, machine learning, or robotics. We may be exposed to competitive risks related
to the adoption and application of new technologies by established market participants or new entrants, start-up companies and others. These new entrants are focused on using
technology and innovation, including artificial intelligence to simplify and improve the client experience, increase efficiencies, alter business models and effect other potentially
disruptive changes in the industries in which we operate. We must also develop and implement technology solutions and technical expertise among our employees that
anticipate and keep pace with rapid and continuing changes in technology, industry standards, client preferences and internal control standards. We may not be successful in
anticipating or responding to these developments on a timely and cost-effective basis and our ideas may not be accepted in the marketplace. Additionally, the effort to gain
technological expertise and develop new technologies in our business requires us to incur significant expenses. If we cannot offer new technologies as quickly as our
competitors, or if our competitors develop more cost-effective technologies or product offerings, we could experience a material adverse effect on our operating results, client
relationships, growth and compliance programs.
We are dependent on information technology networks and systems to securely process, transmit and store electronic information and to communicate among our locations
around the world 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.
11
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.
As of December 31, 2020, two customers accounted for 86% of our accounts receivable. In the case of insolvency by one of our significant customers, accounts receivable with
respect to that customer might not be collectible, might not be fully collectible, or might be collectible over longer than normal terms, each of which could adversely affect our
financial position. Additionally, our two largest customers accounted for approximately 68% of our total revenues for the year ended December 31, 2020. This concentration of
credit risk makes us more vulnerable economically. The loss of any of these customers could materially reduce our revenues and net income, which could have a material
adverse effect on our business.
The Company owed the IRS penalty payments in connection with the delinquent payment of payroll taxes.
The Company has subsequently paid its delinquent IRS payroll taxes and late fees. At December 31, 2020 and December 31, 2019, the payroll taxes payable balance of $3,146
and $115,111 includes accrued late fees in the amount of zero and $37,210, respectively. The remaining balance of $3,146 with the state of California will be remitted in 2021.
Risks Related to Our Common Stock
There is currently not an active liquid trading market for the Company’s common stock.
Our common stock is quoted on the Nasdaq Capital Market tier under the symbol “DUOT”. However, there is currently limited active trading in our common stock. Although
there are periodic volume spikes from time to time, we cannot give an assurance that a consistent, active trading market will develop. If an active market for our common stock
develops, there is a significant risk that our stock price may fluctuate in the future in response to any of the following factors, some of which are beyond our control:
·
·
·
·
·
Variations in our quarterly operating results
Announcements that our revenue or income are below analysts’ expectations
General economic downturns
Sales of large blocks of our common stock
Announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments.
12
You may experience dilution of your ownership interest due to future issuance 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 shareholder 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, we may have
trouble raising additional funds which could affect our ability to expand our business operations.
Our operating results are likely to fluctuate from period to period.
We anticipate that there may be fluctuations in our future operating results. Potential causes of future fluctuations in our operating results may include:
·
·
·
·
·
·
·
·
Period-to-period fluctuations in financial results
Issues in manufacturing products
Unanticipated potential product liability claims
The introduction of technological innovations or new commercial products by competitors
The entry into, or termination of, key agreements, including key strategic alliance agreements
The initiation of litigation to enforce or defend any of our intellectual property rights
Regulatory changes
Failure of any of our products to achieve commercial success
We are subject to the Florida anti-takeover provisions, which may prevent you from exercising a vote on business combinations, mergers or otherwise.
As a Florida corporation, we are subject to certain anti-takeover provisions that apply to public corporations under Florida law. Pursuant to Section 607.0901 of the Florida
Business Corporation Act, or the Florida Act, a publicly held Florida corporation, under certain circumstances, may not engage in a broad range of business combinations or
other extraordinary corporate transactions with an interested shareholder without the approval of the holders of two-thirds of the voting shares of the corporation (excluding
shares held by the interested shareholder).
An interested shareholder is defined as a person who together with affiliates and associates beneficially owns more than 15% of a corporation’s outstanding voting shares. We
have not made an election in our amended Articles of Incorporation to opt out of Section 607.0901.
13
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.
Item 1b. Unresolved Staff Comments.
None.
Item 2. Properties.
The Company has an operating lease agreement for office space of approximately 8,308 square feet that was amended on May 1, 2016 and again on April 1, 2019, increasing
the office space to approximately 10,203 square feet, with the lease ending on October 31, 2021. The rent is subject to an annual escalation of 3%, beginning May 1, 2017.
The Company entered a new lease agreement of office and warehouse combination space of approximately 4,400 square feet on June 1, 2018 and ending May 31, 2021. On
December 21, 2020, this lease was extended to October 31, 2021. This additional space allows for resource growth and engineering efforts for operations before deploying to
the field. The rent is subject to an annual escalation of 3%.
The Company now has a total of office and warehouse space of approximately 14,603 square feet.
Rental expense for the office lease during 2020 and 2019 was $279,975 and $262,710, respectively.
The Company is currently considering whether to extend our current leases or move to a new location and consolidate the Company into a single operating location in
Jacksonville, FL.
Item 3. Legal Proceedings.
We are not currently 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, or
proceeding 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 our
subsidiary, threatened against or affecting our Company, our common stock, our subsidiary or our Company’s or our subsidiary’s officers or directors in their capacities as
such, in which an adverse decision could have a material adverse effect.
Item 4. Mine Safety Disclosures.
Not Applicable.
14
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
PART II
Our common stock is quoted on the Nasdaq Capital Market (“Nasdaq”) under the trading symbol “DUOT”. Our common stock was initially quoted on the OTCQB in 2008
under the symbol “IOSA”.
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.
Series A Convertible Preferred Stock
Our board of directors has designated 500,000 of the 10,000,000 authorized shares of preferred stock as Series A Convertible Preferred Stock. As of December 31, 2020, we
have no shares of Series A Convertible Preferred Stock issued and outstanding.
Series B Convertible Preferred Stock
Our board of directors has designated 15,000 of the 10,000,000 authorized shares of preferred stock as Series B Convertible Preferred Stock.
Each share of 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. Holders of Series B Convertible Preferred Stock will
vote on an as converted basis on all matters on which the holders of common stock are entitled to vote, subject to beneficial ownership limitations. As of December 31, 2020,
there are 1,705 shares 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 is required to hold a meeting of shareholders at the earliest practical date, but in no event later than June 25, 2021 (or July 26,
2021 in the event of a review of the proxy statement by the Securities and Exchange Commission (the “SEC”)). Nasdaq Marketplace Rule 5635(d) limits the number of shares
of common stock (or securities that are convertible into common stock) without shareholder approval. The Company is required to obtain shareholder approval (the
“Stockholder Approval”) in order to issue shares of common stock underlying the Series C Convertible Preferred Stock at a price less than the greater of book or market value
which equal 20% or more of the number of shares of common stock outstanding before the issuance. As described below, the terms of the Series C Convertible Preferred Stock
limit its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval is obtained. If the Company does not obtain the Stockholder Approval at
the first meeting, it is required to hold shareholder meetings every four months until the Stockholder Approval is obtained.
15
In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights
Agreement, the Company shall file with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series C
Convertible Preferred Stock are convertible. Subject to certain conditions, the Company must cause the registration statement to be declared effective by May 27, 2021 (or in
the event of a full review by the SEC, by June 25, 2021). The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification
rights and obligations of the parties.
The Company’s Board of Directors has designated 5,000 shares as the Series C Convertible Preferred Stock. Each share of the Series C Convertible Preferred Stock has a
stated value of $1,000. The holders of the Series C Convertible Preferred Stock, the holders of the common stock and the holders of any other class or series of shares entitled
to vote with the common stock shall vote together as one class on all matters submitted to a vote of shareholders of the Company. Each share of Series C Convertible Preferred
Stock has 172 votes (subject to adjustment); provided that in no event may a holder of Series C Convertible Preferred Stock be entitled to vote a number of shares in excess of
such holder’s Beneficial Ownership Limitation (as defined in the Certificate of Designation and as described below). Each share of Series C Convertible Preferred Stock is
convertible, at any time and from time to time, at the option of the holder, into that number of shares of common stock (subject to the Beneficial Ownership Limitation)
determined by dividing the stated value of such share ($1,000) by the conversion price, which is $5.50 (subject to adjustment).
The Company shall not effect any conversion of the Series C Convertible Preferred Stock, and a holder shall not have the right to convert any portion of the Series C
Convertible Preferred Stock, to the extent that after giving effect to the conversion sought by the holder such holder (together with such holder’s Attribution Parties (as defined
in the Certificate of Designation)) would beneficially own more than 4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock outstanding
immediately after giving effect to the issuance of shares of common stock issuable upon such conversion (the “Beneficial Ownership Limitation”). Notwithstanding anything to
the contrary in the Certificate of Designation, until the Company has obtained Stockholder Approval, the Company may not issue upon the conversion of any share of Series C
Convertible Preferred Stock a number of shares of common stock which, when aggregated with any shares of common stock issued upon conversion of any other shares of
Series C Convertible Preferred Stock, would exceed 706,620 (subject to adjustment).
Approximate Number of Equity Security Holders
As of March 26, 2021, there were approximately 56 holders of record of our common stock, and the last reported sale price of our common stock on the Nasdaq Capital Market
on March 26, 2021 was $10.45 per share.
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.
Unregistered Sales of Equity Securities
There were no unregistered sales of the Company’s equity securities during 2020 that were not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report
on Form 8-K.
Transfer Agent
The transfer agent and registrar for our Common Stock is Continental Stock Transfer & Trust located at 1 State Street, 30th Floor, New York, NY 10004-1561.
Item 6. Selected Financial Data.
Not applicable.
16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Form 10-K and other reports filed by the Company from time to time with the Securities and Exchange Commission (the “SEC”) 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 contained in the “Risk Factors” section of this Annual Report on Form 10-K,
relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. 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 consolidated 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 consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our
consolidated 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
consolidated financial statements and notes thereto appearing elsewhere in this report.
Overview
We intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and
the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.
Our Company
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™ which employs approximately 59 people and is a technology integrator, software applications and artificial intelligence (“AI”) company with a
strong portfolio of intellectual property. The Company’s headquarters are located at 6622 Southpoint Drive South, Suite 310, Jacksonville, Florida 32216 and main telephone
number is (904) 296-2807.
17
Plan of Operation
The Company’s growth strategy includes expansion of its technology base through organic development efforts, strategic partnerships, and strategic acquisitions where
appropriate. The Company provides its broad range of technology solutions with an emphasis on mission critical security, mechanical inspection and operations within the rail
transportation sector including both freight and passenger modes. The Company is also enhancing its offerings for automating gatehouse operations for commercial clients and
offers professional and consulting services for large data centers.
Specifically, based upon the current and anticipated business growth, the Company is investing in resources to focus on execution within its target markets, including but not
limited to rail, distribution centers and data center operations. We continue to evaluate key requirements within those markets and add development resources to allow us to
compete for additional projects to drive additional revenue growth.
Prospects and Outlook
Over the past several years, we have made substantial investments in product research and development and achieved significant milestones in the development of our
technology and turnkey solutions. We have made significant progress in penetrating the market with our proprietary technology solutions, specifically in the rail industry which
is currently undergoing a major shift in maintenance strategies. We believe that this shift will be a significant motivating factor for the industry’s use of our technologies.
Our business success in the immediate future will largely depend on the increased penetration into our target markets for our proprietary intelligent analytical technology
solutions.
Notwithstanding the above, no assurance can be provided that our product offerings will generate the market acceptance and orders that we contemplate.
Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements included in this report.
For the year ended December 31, 2020 compared to December 31, 2019
The following table sets forth a modified version of our Consolidated Statements of Operations that is used in the following discussions of our results of operations:
Revenues
Cost of revenue
Gross profit
Operating expenses
Loss from operations
Other income (expense)
Net loss
Net loss applicable to common stock
Revenues
Revenues:
Technology systems
Technical support
Consulting services
AI technologies
Total revenue
For the Years Ended
December 31,
2020
2019
$
8,039,448 $ 13,641,315
7,159,877
5,253,055
6,481,438
2,786,393
8,887,960
9,420,821
(2,406,522)
(6,634,428)
(113,007 )
(64,360)
(2,470,882)
(6,747,435)
$ (6,747,435) $ (2,470,882)
For the Years Ended
December 31,
2020
2019
% Change
$
4,956,130 $ 11,963,438
1,377,459
1,801,043
273,604
300,418
1,008,671
—
-59%
31%
-9%
$
8,039,448 $ 13,641,315
-41%
18
Revenues were substantially lower in 2020, largely as the result of significant delays in receiving expected new orders due to the Covid-19 pandemic, which became a factor
late in the first quarter. The effect of this was to postpone planned implementations that were originally anticipated during the year as well as impacting installations that were
underway due to travel and other constraints. Importantly, the Company received no cancellations of current contracts or expected orders and the order flow began to recover in
the fourth quarter where revenues were substantially better than in the prior quarters. Management focused its efforts during the slowdown to working on technology
innovations and improvements in quality and execution, the results of which are expected to manifest themselves in 2021 and beyond. Management believes this was an
anomaly in the otherwise steady increase in overall revenues experienced in prior years driven by the strength of the technology systems portion of our business. The
Company’s stable capital structure since the raise in early 2020 as well as certain organizational changes, enables us to more aggressively pursue large projects requiring the
ability to deploy major resources. The temporary decrease in systems deployments was offset by an increase in technical support revenues which are recurring in nature. This
revenue source has been in transition for the past year as older legacy systems are replaced by the next generation of technology systems which are currently being installed.
There is typically a lag of approximately 6 months from installation of a new system until the recurring revenue is recognized. The Company continues to replace the declining
revenues from one customer with new, long term recurring revenue from new customers which will be coming on-line in the next several months. The maintenance and
technical support revenues are driven by successful completion on projects and represent services and support for those installations. The expectation is that revenues from this
area will continue to grow based on the success of multiple installations anticipated in 2021.
Our consulting services business is focused into the area of data center asset management. It experienced a decrease in revenues for 2020 due to the effects of the pandemic
where two going projects were delayed significantly. The Company released a new version of its dcVue™ software which is anticipated to broaden market acceptance of its
offerings. The software was beta tested at a financial institution with the objective of ultimately rolling out to additional locations and was deployed at a number of locations in
2020. The division continues to execute consulting services engagements through its partners.
The AI technologies recorded their first quarter of revenue during the second quarter of 2020 and recorded additional revenues for the rest of the year. The Company received a
large (over $2 million) contract for AI related development from a large client which is expected to add revenues in the following quarters in 2021. The Company expects to
continue the growth with new revenue from other existing customers which also will be coming on-line in the next several months.
Cost of Revenues
Cost of revenues:
Technology systems
Technical support
Consulting services
AI technologies
Total cost of revenues
For the Years Ended
December 31,
2020
2019
% Change
$
$
3,665,493 $ 6,510,658
528,966
1,109,741
120,253
117,004
—
360,817
5,253,055 $ 7,159,877
-44%
110%
-3%
—
-27%
Cost of revenues on technology systems decreased during the year compared to 2019, although at a slower rate than the decline in revenues. This is due to higher staffing costs
related to project implementation which were put in place early in the year, prior to the impact from COVID-19. There is a continued focus on build costs and savings through
efficiency, but the Company has elected to maintain key employees in anticipation of expected sales of such systems in 2021. Cost of revenues overall increased on technical
support at a higher rate than the increase in revenue for technical support which is a negative trend for the year albeit the rate of increase was lower for the last half of the year
and this trend is expected to continue with the re-organization in operations and focus on costs. Going forward the expectation is that more of the Company’s revenue will come
from this recurring revenue business.
The consulting services recorded a small decrease in cost of revenues for the year reflecting the improvements in execution efficiency put in place from the Company’s new
dcVue™ software. This trend is expected to continue as additional revenue from expected license sales of this software are recognized in 2021. The current pandemic related to
COVID-19 has impacted both expected receipt of awards and delays in execution due to travel and other restrictions. These delays will continue to impact the consulting
services revenue portion of our business at this time.
19
The AI technologies recorded costs during the last three quarters of 2020. The Company expects to continue the growth with new revenue from existing customers which will be
coming on-line in the next several months.
Gross Profit
Revenues
Cost of revenues
Gross profit
For the Years Ended
December 31,
2019
% Change
2020
$
$
8,039,448 $ 13,641,315
7,159,877
5,253,055
2,786,393 $ 6,481,438
-41%
-27%
-57%
Gross profit was $2,786,393 or 35% of revenues compared to $6,481,438 or 48% of revenues for the years ended December 31, 2020 and 2019, respectively. The decrease in
gross profit of 57% was mainly the result of the significant slowdowns in project revenues due to the delay in new orders as previously discussed. This was offset by continued
growth in our technical support and the positive effect of new revenues from the deployment of AI applications. It should be noted that the accounting treatment was changed to
the ASC 606 reporting standard for 2019 and that the results compared with the previous year are now comparable. As previously discussed, the implementation of ASC 606
covering revenue from contracts with customers, has a temporary impact on overall gross margin as certain costs are recognized ahead of revenues. The Company recorded an
overall increase in gross margin for the year compared to the prior year fourth quarter which is a positive trend highlighting that the business is starting a recovery from the
pandemic delays in implementation. Management anticipates the overall gross margins for the business to continue to improve in the coming year driven by higher sales from
both existing and new customers and certain “economies of scale” from larger projects. In late September 2020, the Company began several initiatives to improve margins
from projects by focusing on costs of materials, implementation efficiencies and a better understanding of our overall costs for completing projects. We also expect that the
increase in recurring technical support revenues will continue to positively impact overall revenues with an expected increase in gross margin.
Operating Expenses
Operating expenses:
Sales and marketing
Engineering
Research and development
Administration
AI technologies
Total operating expense
For the Years Ended
December 31,
2020
2019
% Change
$
$
950,962
717,809 $
1,254,235
1,358,925
1,479,334
1,022,188
3,987,941
5,011,913
1,309,986
1,215,488
9,420,821 $ 8,887,960
-25%
8%
-31%
26%
8%
6%
Operating expenses were higher by 6% than in 2019 largely as the result of a one-time charge for severance payment due to the retirement of the Company’s former CEO in the
amount of approximately $885,000. Excluding this amount, expenses for continuing operations would have decreased overall by 4%. The Company implemented some staff
cuts during the year but maintained key personnel reflecting necessary resources related to the Company’s anticipated growth in 2021. Research and development and AI
development expenses, as an aggregate, decreased due to the completion of the TrueVue360 platform and a focus shift to executing machine learning algorithms for current
contracts that are expected to be complete by year end. The increase in engineering expenses is largely due to increased staffing for unfilled positions that were identified earlier
in the year as necessary for implementing new projects in 2021. Sales and marketing expense also decreased due to fluctuations in staffing and limited travel expense as a result
of the pandemic. Administration expenses increased significantly as discussed above relating largely to a one-time charge for severance costs and increased legal and hiring
costs for the new CEO. These costs were offset by lower overall expenses in the other functional areas.
20
Loss From Operations
The losses from operations for the years ended, December 31, 2020 and 2019 were $6,634,428 and $2,406,522, respectively. The losses for 2020 were considerably higher than
originally anticipated largely as the result of delayed revenues and one-time costs related to senior management severance as previously discussed. The delayed revenues had a
significant impact in that given the anticipated increase in business post-pandemic, and although certain staffing cuts were made, the Company elected to maintain key
operations and technical staff to allow for a faster rebound. These extra costs were financed through a CARES Act PPP loan in the amount of $1,410,270, the expectation being
that because of the staff levels that were maintained, much or all of the loan would be forgiven in accordance with its terms (see Note 15). The Company continues to focus on
measures to move toward breakeven and profitability through a strategic plan that is being implemented in 2021.
Interest Expense
Interest expense for the years ended December 31, 2020 and 2019 were $150,137 and $69,322, respectively. The increase in interest expense was primarily due to the
Company’s financing actions to fund certain staffing during the slowdowns experienced in the second and third quarters. This was partially offset by interest earned from
substantial additional capital held in reserve (see Other Income).
Other Income
Other income for the years ended December 31, 2020 and 2019 was $ 37,130 and $4,962, respectively. The increase is money earned on deposits and which offsets some of the
interest cost of short-term borrowings as previously discussed.
Net Loss
The net loss for the years ended December 31, 2020 and 2019 was $6,747,435 and $2,470,882, respectively. The large increase in net loss is primarily attributable to the
decrease in revenues as previously discussed as well as certain one-time charges related to the former CEO severance. Net loss applicable to Common Stock was $6,747,435 in
2020 versus $2,470,882 in 2019, an increase of $4,276,553. Net loss per common share was $2.03 and $1.39 for the years ended December 31, 2020 and 2019, respectively.
Liquidity and Capital Resources
As of December 31, 2020, the Company has a cash balance of $3,969,100.
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided in financing activities
Net increase (decrease) in cash
For the Years Ended
December 31,
2020
2019
$ (4,231,439) $ (4,019,560)
(219,575 )
(287,331 )
8,431,621
3,086,083
3,912,851 $ (1,153,052)
$
Net cash used in operating activities for the years ended December 31, 2020 and 2019 was $4,231,439 and $4,019,560, respectively. The slight increase in net cash used in
operations for the year ended December 31, 2020 was due to higher operating costs which was offset by cash generated from our AI and technical support, the majority of which
is recurring in nature.
Net cash used in investing activities for the years ended December 31, 2020 and 2019 was $287,331 and $219,575, respectively, representing continuing investments in
computing and lab equipment during 2020 related to supporting the machine learning activities of TrueVue360.
21
Net cash provided in financing activities for the years ended December 31, 2020 and 2019 was $8,431,621 and $3,086,083, respectively. Cash flows provided by financing
activities during 2020 were primarily attributable to proceeds from the issuance of common stock as a result of our registered direct offering in conjunction with up-listing to a
national exchange. We also received $1,410,270 in funding from the CARES Act PPP loan program. This loan, including the deferred interest was forgiven. The Company
accrued interest in the amount of $10,577 during 2020.
During 2020, we funded our operations through a combination of the sale of our equity (or equity linked) securities, non-equity based debt and through revenues generated and
cash received from ongoing project execution, services and associated maintenance revenues. As of March 26, 2021, we have cash on hand of approximately $7,435,000. We
have approximately $140,500 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 revenues are sufficient to fund
such expansion although we are now less dependent on timely payments by our customers for projects and work in process, however we expect such timely payments to
continue.
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.
Liquidity
Under Accounting Standards Update, or ASU, 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the
responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year
after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of
plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in
accordance with the requirement of ASC 205-40.
As reflected in the accompanying consolidated financial statements, the Company had a positive working capital of $2,167,058 and an accumulated deficit of $39,488,150 at
December 31, 2020. During the same period in 2019, the Company had a negative working capital of $607,372 and an accumulated deficit of $32,740,715. In previous
financial reports, the Company had raised substantial doubt about continuing as a going concern. This was principally due to a lack of working capital prior to an underwritten
offering which was completed during the first quarter of 2020 (the “2020 Offering”).
Upon completion of the 2020 Offering of approximately $ 8,200,000 after payment of expenses and fees, management has secured sufficient working capital to fund the
Company for at least 12 months. Although the Company continues to be successful in attracting new business and establishing a backlog of projects, the effects of business
delays to starting and implementing identified projects manifested themselves during the year. The Company was able to maintain operations due to this additional working
capital which was further bolstered with the CARES Act loan previously discussed. This extra working capital allowed the Company to maintain key staffing and put us in a
good position to move forward once the restrictions were lifted. Most importantly, the Company has been successful in maintaining a sufficient working capital cushion despite
the setbacks that were encountered during the year.
Management now believes that these actions allow the Company to continue as a going concern for the following 12 months and will continue to grow its business and achieve
profitability without the absolute requirement to raise additional capital for existing operations. Management will continue to evaluate these plans in future filings.
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.
22
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance
with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our
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 toward contract completion, 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.
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
Revenue Recognition and Contract Accounting
The Company generates revenue from four sources: (1) Technology Systems; (2) Technical Support; (3) Consulting Services and (4) AI Technologies.
Technology Systems
The Company constructs intelligent technology systems consisting of materials and labor under customer contracts. Revenues and related costs on project revenue are
recognized based on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance completed to date including a profit margin or reasonable return on capital. Control is deemed to pass
to the customer instantaneously as the goods are manufactured and revenue is recognized accordingly.
In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust
the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to
satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company has adopted the implementation guidance as set out in
ASC 606-10-55-187 through 192.
Under this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct
labor, subcontract labor and other allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as
incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized
revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is
determined.
Technical Support
Maintenance and technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and
technical support provided outside of a maintenance contract are on an as-requested basis, and revenue is recognized as the services are provided. Revenue for maintenance and
technical support provided on an extended-term basis is recognized ratably over the term of the contract.
For sales arrangements that do not involve multiple elements such as professional services, which are of short-term duration, revenues are recognized when services are
completed.
Consulting Services
The Company’s consulting services business generates revenues under contract with customers from three sources: (1) Professional Services (consulting and auditing); (2)
Software licensing with optional hardware sales; and (3) Customer Service (training and maintenance support).
For sales arrangements that do not involve performance obligations:
23
(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;
Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
(3)
(4) Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront
are deferred and recognized over the contract term.
AI Technologies
The Company has begun to derive revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms to provide important operating
information to the users of our systems. The revenue generated from these applications of AI consists of an annual application maintenance fee which will be recognized
ratably over the year, plus fees for the design, development, testing and incorporation of new algorithms into the system which will be recognized upon completion of each
deliverable.
Multiple Elements
Arrangements with customers may involve multiple elements including project revenue and maintenance services in our Intelligent Technology Systems business. Maintenance
will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business, multiple elements may
include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after
the software product sale and may not relate to the software product. Revenue recognition for a multiple element arrangement is as follows:
Each element is accounted for separately when each element has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of
each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their
relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each element is recognized using the
applicable criteria under GAAP as discussed above for elements sold in non-multiple element arrangements. A delivered item or items that do not qualify as a separate unit of
accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the
recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company sells its various services and software and hardware
products at established prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of multiple element relative selling price
allocation. The Company only sells maintenance services or spare parts based on its established rates after it has completed a system integration project for a customer. The
customer is not required to purchase maintenance services. All elements in multiple element arrangements with Company customers qualify as separate units of account for
revenue recognition purposes.
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.
24
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements are contained in pages F-1 through F-34 which appear at the end of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
There are no reportable events under this item for the year ended December 31, 2020.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
With the participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, we have evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period
covered by this Report. Based upon such evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that, as of the end of
such period, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our
management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required
disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our
management, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness
of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used the criteria set forth in the
framework contained in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on that evaluation, our management concluded that our internal control over financial reporting was effective as of the end of the period covered by this report based on those
criteria.
25
Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance
with generally accepted accounting principles, or GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of
our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may
deteriorate.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the year ended
December 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9b. Other Information.
None
26
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The following is a list of our executive officers and directors. All directors serve one-year terms or until their successors are duly qualified and elected or his earlier resignation,
removal or disqualification. The officers of the Company are elected by the Board.
Name
Charles P. Ferry
Adrian G. Goldfarb
Connie L. Weeks
Kenneth Ehrman(1)
Blair M. Fonda(2)
Edmond L. Harris(3)
Ned Mavrommatis(4)
Age
55
63
63
50
55
71
50
Position
Chief Executive Officer, Director
Chief Financial Officer
Chief Accounting Officer
Chairman
Director
Director
Director
———————
(1) Chairman of the Board, member of the Compensation Committee and Corporate Governance and Nominating Committee
(2) Chairman of the Audit Committee, member of the Compensation Committee
(3) Chairman of the Corporate Governance and Nominating Committee, member of the Audit Committee
(4) Chairman of the Compensation Committee, member of the Audit Committee and 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 further appointed a Director on November 19, 2020 by a vote of the
shareholders. Mr. Ferry combines over three years of experience in the energy industry and seven years in the defense contracting industry following 26 years of active-duty
service in the United States Army. Previously, Mr. Ferry had been involved in two companies in the defense industry holding positions including Director, Business
Development and Operations, Vice President of Operations, and General Manager. From 2018 through 2020, Mr. Ferry was the Chief Executive Officer for APR Energy, a
global fast-track power company. Prior to this, Mr. Ferry was the President and Chief Operating Officer of APR Energy from 2016 to 2018. From 2014 to 2016, Mr. Ferry was
the General Manager for ARMA Global Corporation, a wholly owned subsidiary of General Dynamics, a defense contracting company that delivered Information Technology
engineering, services, and logistics. Mr. Ferry was the Vice President of ARMA Global Corporation from 2010 to 2014 before being acquired by General Dynamics. From 2009
to 2010, Mr. Ferry was the Director, Business Development and Operations at Lockheed-Martin. His leadership assignments in the U.S. Army include: Director, NORAD-
NORTHCOM Current Operations, Infantry Battalion Task Force Commander, Joint Special Operations Task Force Commander, Regimental and Battalion Operations Officer,
and Airborne Rifle Company Commander. His military leadership assignments include 48 months of combat in Somalia, Afghanistan and Iraq.
Mr. Ferry has an undergraduate degree from Brigham Young University.
The Board 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.
27
Adrian G. Goldfarb, Chief Financial Officer
Mr. Goldfarb served as a Director from April 2010 to November 2020. Effective July 1, 2012, he was appointed as President and Chief Financial Officer of Information
Systems Associates, Inc., which merged with Duos Technologies, Inc in April 2015 upon which he agreed to continue serving the merged company, Duos Technologies Group,
Inc., as Chief Financial Officer and Director. Mr. Goldfarb managed the Company’s listing on the Nasdaq Capital Market in 2020. Prior to joining Duos, Mr. Goldfarb served as
CFO for Ecosphere Technologies, overseeing growth from $0 to $24 million and profitability. Mr. Goldfarb was also Managing Director of WSI Europe, a division of the
Weather Channel from 1998 until 2002. From 2002 to 2007, Mr. Goldfarb served as interim-CFO for MOWIS GmbH, a Weather Technology Media start-up company which
was successfully sold to a large European media group. Mr. Goldfarb’s extensive business and financial experience includes10-years at a subsidiary of Fujitsu where he served
as Director of Operations for a new software venture. Mr. Goldfarb started his formal career at IBM and was given responsibility for an account team focused on Latin America
and Southeast Asia.
Mr. Goldfarb also currently serves as non-Executive Chairman of GelStat Corporation, a public company engaged in the development and marketing of homeopathic and natural
supplements. Mr. Goldfarb is a 35-year technology industry veteran including more than 25 years in information technology.
The Board believes Mr. Goldfarb’s significant experience in financial stewardship of small public companies will be of great value to the Company as it grows. Mr. Goldfarb
has over 40 years of business experience in technology companies including more than 12-years as CFO of public companies. Mr. Goldfarb did his initial accounting training
in London and graduated “cum laude” with a business degree specializing in Finance from Rutgers University, Newark, NJ. Mr. Goldfarb also has more than 20 years’
experience in financial derivatives including model development for valuation of complex financial instruments and has served as a consultant for small companies dealing with
restructuring issues.
Connie L. Weeks, Chief Accounting Officer
Ms. Weeks has been a key member of the Company for 35 years and now serves as Chief Accounting Officer with responsibility for all aspects of financial reporting, internal
controls, and cash management.
Ms. Weeks has over 40 years of operational accounting experience and is responsible for overseeing and managing the day-to-day accounting and financial reporting, internal
controls, and cash management. She has been a key member of the Duos team progressing from an assistant to the staff accountant and subsequently being promoted to roles
with increasingly more responsibility including serving as Vice President of Finance and Corporate Controller. In 2015, when the Company became public, Ms. Weeks
continued to serve as VP of Finance, overseeing the Audit process and interfacing with PCAOB auditors, managing the audit process. As the Company’s most senior female
executive, Ms. Weeks is actively engaged with management and provides guidance on diversity matters and has also taken courses in Human Resources. Ms. Weeks attended
Florida State College of Jacksonville where she majored in Accounting.
The Board believes that Ms. Weeks’s long service with the Company and her expertise in the areas of project accounting is of considerable value to the Company.
Kenneth Ehrman, Director
Mr. Ehrman joined the Board on January 31, 2019. He was elected as Chairman of the Board in November 2020 and is a member of the Compensation and Corporate
Governance and Nominating Committees. He currently serves as an independent consultant to several high-technology companies in supply chain/logistics and transportation.
Mr. Ehrman advises technology companies focused on solutions for these industries and joins the Company with a strong background in technology. As an innovator in
intelligent machine-to-machine (“M2M”) wireless technology and industrial applications of the Internet of Things (“IoT”), Mr. Ehrman has been awarded more than 20 patents
in wireless communications, mobile data, asset tracking, power management, cargo and impact sensing, and connected car technology. Mr. Ehrman previously served as Chief
Executive Officer of I.D. Systems, Inc. (“IDS”), a company he founded in 1993 as a Stanford University engineering student, pioneering the commercial use of radio frequency
identification (“RFID”) technology for industrial asset management. Under Mr. Ehrman’s leadership, IDS began trading on the NASDAQ in 1999 and was named one of North
America’s fastest growing technology companies by Deloitte in 2005, 2006, and 2012. During his tenure at IDS, Mr. Ehrman received multiple awards, including Deloitte
Entrepreneur of the Year and Ground Support Worldwide Engineer/Innovator Leader. He also served on the Board of Financial Services, Inc. from 2012 to2016 before it was
successfully sold to a large financial software company.
28
The Board believes that Mr. Ehrman’s management experience, engineering expertise and long history and familiarity with industries the Company currently operates in, makes
him ideally qualified to help lead the Company towards continued growth.
Blair M. Fonda, Director
Mr. Fonda was appointed as a Director on May 3, 2017 and serves as Chairman of the Audit Committee and a member of the Compensation Committee. Since 2013, Mr. Fonda
has served as the Chief Financial Officer of Emergent Financial Partners (“EFP”). EFP is an accounting and consulting services firm which offers financial consulting services
to businesses and organizations throughout the United States and the Caribbean Islands. From 2013 to 2016, Mr. Fonda was contracted through EFP to serve as the outside
Chief Financial Officer of Mountainstar Capital Engagement, a private equity and commercial real estate company. From 2007 to 2013, Mr. Fonda served as the Vice President
and Controller of the Hospitality Division of Gate Petroleum, an owner and operator of convenience stores, resorts, construction and real estate operations throughout the
United States. Mr. Fonda has previously served as Controller for Enterprise Rent-a-Car. Mr. Fonda is a Certified Public Accountant (CPA).
The Board believes that Mr. Fonda’s education and background qualify him as a financial expert. He has extensive and directly applicable accounting experience qualifying him
to serve as Chairman of the Audit Committee.
Edmond L. Harris, Director
Mr. Harris was appointed as a Director on November 19, 2020 and serves as Chairman of the Corporate Governance and Nominating Committee and serves as a member of the
Audit Committee. From April 2010 until his retirement in April 2011, Mr. Harris served as Executive VP of Operations at Canadian Pacific Railway. In December of 2011 he
was appointed to CP’s Board, where he served until May of 2012. He also served as Omnitrax’s Chairman of the Board (a privately held regional railroad company in Denver,
CO). He served as Executive Vice President of Operations at Canadian National Railway Company (“CN”) from March 2005 to January 2007, as its Senior Vice President of
Operations from July 2003 to March 2005, and as Chief Transportation Officer from January 2001 to June 2003. Mr. Harris also held various key operating positions at Illinois
Central Railroad prior to its acquisition by CN. At Illinois Central Railroad and CN, Mr. Harris worked closely with E. Hunter Harrison, the company’s former President and
Chief Executive Officer, to implement the Precision Scheduled Railroad model. Mr. Harris has also served as an independent rail operations consultant providing advice to
various rail shippers and railroads, including CSX, from June 2007 to March 2010, and again following his retirement for Canadian Pacific Limited and Canadian Pacific
Railway Company in April 2011. Mr. Harris has a B.S. in Business Management from the University of Illinois and served in the US Marine Corps from 1969-1973.
The Board believes that Mr. Harris’ extensive background in the railroad industry and as a large company executive serving in many roles makes him a significant addition to
the Company’s Board and will provide leadership and direction to the Company’s management team.
Ned Mavrommatis, Director
Mr. Mavrommatis joined the Board on August 13, 2018 and serves as Chairman of the Compensation Committee and a member of the Audit and Corporate Governance and
Nominating Committees. Mr. Mavrommatis has served as Chief Financial Officer of PowerFleet, Inc. ("PowerFleet") since October 2019. PowerFleet is a global leader and
provider of subscription-based wireless IoT and M2M solutions for securing, controlling, tracking, and managing high-value enterprise assets such as industrial trucks, tractor
trailers, containers, cargo, and vehicles and truck fleets. From August 1999 until October 2019, he served as Chief Financial Officer of IDS. Mr. Mavrommatis serves on the
Board of PowerFleets' wholly owned subsidiary PowerFleet Israel and is also the Managing Director of PowerFleets’ wholly owned subsidiaries, PowerFleet GmbH and
PowerFleet Systems Ltd.
Mr. Mavrommatis received a Master of Business Administration in finance from New York University’s Leonard Stern School of Business and a Bachelor of Business
Administration in accounting from Bernard M. Baruch College, The City University of New York. Mr. Mavrommatis is also a Certified Public Accountant.
The Board believes that Mr. Mavrommatis’ management experience, accounting expertise and long history and familiarity with industries the Company currently operates in,
makes him ideally qualified to help lead the Company towards continued growth.
29
Key Employees
Wm. Scott Carns, Chief Commercial Officer, Operating Subsidiary Duos Technologies, Inc.
Mr. Carns is Chief Commercial Officer for the operating subsidiary, Duos Technologies Inc., and is responsible for overseeing and managing day to day commercial operations.
He is also directly responsible for account management of Duos’ major accounts. Mr. Carns is an original founding employee of Duos Technologies and has spent over 20
years with the organization in a variety of roles. In this current position, he is responsible for the development and execution of Duos’ growth strategy and expansion. His
management and capabilities provide leadership and direction to the entire organization. Mr. Carns has extensive experience in the information technology industry. He works
with Duostech’s major clients to develop and create solutions to meet their operational challenges. He is a co-inventor of the Company’s Train Rider Detection System
developed for U.S. Customs and Border Protection which is the predecessor of the Railcar Inspection Portal (RIP) and in use at many Class 1 freight railroads today. Prior to
joining Duostech, Mr. Carns worked as the Information Technologies Coordinator for Environmental Capital Holdings, Inc. and was the owner and President of Software
Solutions Group, Inc. He served in the United States Army as a Military Police Officer and attended Kansas State University.
Ben Eiser, Chief Operating Officer, Operating Subsidiary Duos Technologies, Inc.
Mr. Eiser was newly appointed to the operating subsidiary in late 2020. He has over 27 years of active-duty military service and private-sector leadership, Project and IT
Management experience. Prior to joining Duos Technologies, he was the Vice President for Global Projects for APR Energy from 2016 to 2020 leading a Project Management
Team for global fast-track power, responsible for the installation and demobilization of temporary power plants, synchronization and coordination for the deployment of
personnel and materials, ensuring that all projects were completed on-time and under budget. The APR PMO Team was able to deliver 17 power plants faster than ever
completed in the company’s history while becoming profitable and implementing process and procedures to ensure mission success. Mr. Eiser was the Director of Projects for
ARMA Global where he was the operations officer for a large, complex IT program in US Special Operations Command. He supervised hiring over 300 people across six
different locations in just 60 days. He then provided the leadership and management to deliver more than 50 complex projects with a very demanding customer. He served 21
years on active duty in the U.S. Army leading Infantry (Light, Airborne and Mechanized), and Ranger Units for over 48 months that includes four combat tours in Afghanistan,
and three combat tours in Iraq. Mr. Eiser has an undergraduate degree from Illinois State University in Industrial Technology Construction and earned his MBA while still
serving his Country.
David Ponevac, Chief Technology Officer, Operating Subsidiary Duos Technologies, Inc.
Mr. Ponevac serves as the CTO of the operating subsidiary focusing on computer vision, high speed imaging, high speed data processing, edge and low-power computing and
Internet-of-Things. Mr. Ponevac is a technology enthusiast with over 24 years of experience in software engineering and software architecture. He has considerable expertise in
Objective-C, Java, C#, PHP and many other scripting languages. He is also driving the Company’s Artificial Intelligence efforts including platform development. Previously, he
was CTO of Luceon LLC and worked with a wide range of domestic and international clients operating in the public and private sectors. He has worked on high profile projects
for Fortune 500 companies including FedEx, HBO, Time Warner, and Aetna as well as government agencies including Bundeswehr, the New York City Department of
Transportation, and the Slovak Ministry of Education. Mr. Ponevac holds a Bachelor of Science in Electrical Engineering and a Masters in Computer Science, both from
University of Texas, El Paso.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s executive officers and directors, and persons who own more than 10% of the Company’s common stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC.
Based solely on the Company’s review of the copies of such Forms and written representations from certain reporting persons, the Company believes that all filings required to
be made by the Company’s Section 16(a) reporting persons during the Company’s fiscal year ended December 31, 2020 were made on a timely basis.
30
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 the address appearing on the front page of this Annual Report on
Form 10-K.
Board Composition and Director Independence
Our board of directors currently consists of five members: Mr. Charles P. Ferry, Mr. Edmond Harris, Mr. Ned Mavrommatis, Mr. Blair M. Fonda and Mr. Kenneth Ehrman. 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 Rule
5605(a)(2) of the NASDAQ listing standards.
In making the determination of whether a member of the board is independent, our board considers, among other things, transactions and relationships between each director
and his immediate family and the Company, including those reported under the caption “Related Party Transactions”. The purpose of this review is to determine whether any
such relationships or transactions are material and, therefore, inconsistent with a determination that the directors are independent. Based on such review and its understanding of
such relationships and transactions, our board affirmatively determined that Mr. Ehrman, Mr. Fonda, Mr. Harris and Mr. Mavrommatis 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.
The Chairman of each committee are Blair M. Fonda, Ned Mavrommatis and Edmond L. Harris, respectively, all of whom are independent directors within the meaning of the
Nasdaq Stock Market rules. Each of the independent Board members also serves on one or more committees as previously disclosed.
Audit Committee
The Audit Committee oversees our accounting and financial reporting processes and oversees the audit of our financial statements and the effectiveness of our internal control
over financial reporting. The specific functions of this Committee include, but are not limited to:
·
·
·
·
·
·
·
·
·
appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;
overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm;
reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related
disclosures;
monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;
discussing our risk management policies;
establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and retention of accounting
related complaints and concerns;
meeting independently with our independent registered public accounting firm and management;
reviewing and approving or ratifying any related person transactions; and
preparing the audit committee report required by SEC rules.
Our board has determined that both Mr. Fonda and Mr. Mavrommatis are currently qualified as an “audit committee financial expert”, as such term is defined in Item 407(d)(5)
of Regulation S-K. Mr. Fonda serves as the Chairman of the Audit Committee.
31
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 the Chief Executive Officer or 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. Mavrommatis 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 the board of director’s nominees for election as directors at any meeting of stockholders and nominees to fill vacancies on the board;
considering candidates proposed by stockholders 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 the 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 the 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. Harris serves as the 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;
32
·
·
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.
Item 11. 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
Gianni B. Arcaini,
Former Chairman of the Board, Chief Executive Officer, President,
Director (PEO)
Charles P. Ferry, Chief Executive Officer (PEO)
Adrian G. Goldfarb,
Chief Financial Officer, Former Director (PFO)
Connie L. Weeks,
Chief Accounting Officer
Salary
($)
Bonus
($)
Stock
($)
Options
($)
Other
Comp.
($)
Total
($)
913,961(1) 114,423(2)
143,411(2)
249,260
83,333
50,217 (5)
197,750
180,250
849
—
150,000
150,000
6,667(9)
—
—
—
—
—
—
—
—
157,070(3)
—
16,921 (4) 1,202,375
25,382 (4) 418,053
36,293 (6)
—
169,843
45,632 (7)
—
7,500(8) 251,731
7,500(8) 187,750
45,632 (10)
—
—
—
202,299
150,000
Year
2020
2019
2020
2020
2019
2020
2019
———————
(1)
Represents $166,173 base salary from January 1, 2020 to August 31, 2020 plus $747,788 in severance compensation to be deferred and paid over a 36-month period (see
“Executive Severance Agreement” below).
Represents 1% of annual revenues equal to $143,411 in 2019 and $39,423 in 2020 to which Mr. Arcaini is entitled under the terms of his employment plus $75,000 in
bonus severance compensation to be deferred and paid over a 36-month period (see “Executive Severance Agreement” below) in 2020.
(2)
33
(3) Represents the full expense for option grants to Mr. Arcaini during 2020. During the second quarter of 2020, 160,152 incentive stock options previously issued to staff and
Directors under the 2016 Equity Incentive plan were cancelled. 310,290 new 5-year options were issued replacing those cancelled and the balance as new grants. The
reissued options have a $6.00 strike price and the new options have a strike price of $4.74. Mr. Arcaini was awarded both 50,358 re-issued options and 50,358 additional
new options. Option compensation is the fair market value of 50,358 options re-issued to Mr. Arcaini which were fully vested and the fair market value of the additional
50,358 options that were granted. As part of the severance package negotiated with Mr. Arcaini, all unvested options were immediately vested in September 2020 with all
unamortized option expense realized at that time. The fair value of the incentive stock option grants for the year ended December 31, 2020 was estimated using the
following weighted- average assumptions:
Risk free interest rate
Expected term in years
Dividend yield
Volatility of common stock
Estimated annual forfeitures
For the Years Ended
December 31,
2020
0.18% - 0.26%
2.50 – 3.50
—
68.00% - 86.24%
—
2019
1.40% - 2.44%
2.76 – 3.25
—
117.18% - 151.43%
—
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula with expected volatility derived from a binomial lattice
model. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s
determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for employee stock options using the simplified
method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury
securities with similar maturities defined by the Federal Reserve Statistical Release, 3-year treasury bond.
(4) Comprised of $12,000 and $18,000 car allowance, and $4,921 and $7,382 in Company paid membership dues and subscriptions, respectively.
(5) Represents $50,000 objectives bonus and $217 additional cash bonus.
(6) Option compensation is the fair market value of 100,000 stock, 5-year options with a strike price of $4.18 and two-year vesting granted to Mr. Ferry as an incentive to join
the Company. See note 3 above for valuation methodology.
(7) Represents the full expense for option grants to Mr. Goldfarb during 2020. During the second quarter of 2020, 160,152 incentive stock options previously issued to staff
and Directors under the 2016 Equity Incentive plan were cancelled. 310,290 new 5-year options were issued replacing those cancelled and the balance as new grants. The
reissued options have a $6.00 strike price and the new options have a strike price of $4.74. Mr. Goldfarb was awarded both 18,929 re-issued options and 18,929 additional
new options. Option compensation is the fair market value of 18,929 options re-issued to Mr. Goldfarb which were fully vested and the fair market value of the additional
18,929 options that were granted. See note 3 above for valuation methodology
(8) Comprised of $7,500 annual car allowance in 2020 and $7,500 annual car allowance in 2019.
(9) Represents bonus award for long service to the Company.
(10) Represents the full expense for option grants to Ms. Weeks during 2020. During the second quarter of 2020, 160,152 incentive stock options previously issued to staff and
Directors under the 2016 Equity Incentive plan were cancelled. 310,290 new 5-year options were issued replacing those cancelled and the balance as new grants. The
reissued options have a $6.00 strike price and the new options have a strike price of $4.74. Ms. Weeks was awarded both 18,929 re-issued options and 18,929 additional
new options. Option compensation is the fair market value of 18,929 options re-issued to Ms. Weeks which were fully vested and the fair market value of the additional
18,929 options that were granted. See note 3 above for valuation methodology.
34
Outstanding Equity Awards at December 31, 2020
Name
Charles P. Ferry
Adrian G. Goldfarb
Adrian G. Goldfarb
Connie L. Weeks
Connie L. Weeks
Gianni B. Arcaini
Gianni B. Arcaini
Executive Severance Agreement
Gianni B. Arcaini
Equity
Incentive
Plan
Awards;
Number of
shares
underlying
unexercised
unearned
options
100,000 $
— $
9,465 $
— $
9,465 $
— $
— $
Number of
shares
underlying
unexercised
options
Number of
shares
underlying
unexercised
options
exercisable
—
18,929
9,465
18,929
9,465
50,358
50,358
unexercisable
—
—
—
—
—
—
—
Option
exercise
price
Option
Expiration
date
4.18 08/31/2025
6.00 03/31/2025
4.74 03/31/2025
6.00 03/31/2025
4.74 03/31/2025
6.00 03/31/2025
4.74 03/31/2025
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 $
Number of
shares or
units of
stock that
have not
vested
Market
value of
shares or
units of
stock that
have not
vested $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
On April 1, 2018, the Company entered into an employment agreement (the “Arcaini Employment Agreement”) with Gianni B. Arcaini, pursuant to which Mr. Arcaini served as
Chief Executive Officer and Chairman of the Board of Directors of the Company. Under the Arcaini Employment Agreement, Mr. Arcaini was paid an annual salary of
$249,260 and an annual car allowance of $18,000. In addition, as incentive-based compensation, Mr. Arcaini was entitled to 1% of annual gross revenues of the Company and
its subsidiaries. The Arcaini Employment Agreement had an initial term through March 31, 2020, subject to renewal for successive one-year terms unless either party gave
notice of that party’s election to not renew to the other at least 60 days prior to the expiration of the then-current term. The Arcaini Employment Agreement was approved by the
Compensation Committee.
As previously disclosed, on July 10, 2020, the Company announced that Mr. Arcaini would retire from these positions, effective as of September 1, 2020 (the “CEO
Transition”). In order to facilitate a transition of his duties, the Company and Mr. Arcaini entered into a separation agreement which became effective as of July 10, 2020 (the
“Separation Agreement”). Pursuant to the Separation Agreement, Mr.Arcaini’s employment with the Company ended on September 1, 2020 and he will receive separation
payments over a 36-month period equal to his base salary plus $75,000 as well as certain limited health and life insurance benefits. The Separation Agreement also contains
confidentiality, non-disparagement and non-solicitation covenants and a release of claims by Mr. Arcaini who continued to serve as Chairman of the Board of Directors of the
Company. The Corporate Governance and Nominating Committee did not submit Mr. Arcaini for re-election as a director and on November 19, 2020 at the Annual
Shareholders meeting a new non-Executive Chairman was appointed.
In accordance with the Separation Agreement the Company will pay to Mr. Arcaini the total sum of $747,788. Notwithstanding the foregoing, the status of Mr. Arcaini as a
“Specified Employee” as defined in Internal Revenue Code Section 409A has the effect of delaying any payments to Mr. Arcaini under the Separation Agreement for six
months after the Separation Date. On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments , or $124,631 , owed to
Mr. Arcaini and the Company will continue to pay him in bi-weekly installments for 30 months thereafter, as contemplated in the Arcaini Employment Agreement. In
addition, the Company will pay one-half of Mr. Arcaini’s current life insurance premiums for 36 months of approximately $1,200 and provide and pay for his health insurance
for 18 months following the Separation Date of approximately $1,700. Unvested options in the amount of 50,358 became exercisable and vested in their entirety on the
Separation Date valued at $95,127. The Company made payment of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation Agreement
of approximately $17,000.
35
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. Mr. Ferry is to receive a base salary at an annual rate of $250,000. Mr. Ferry received a one-time cash incentive bonus in the amount of up
to $50,000 in accordance with criteria determined by the Board and based on the review and recommendation of the Compensation Committee. Mr. Ferry is also 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 received 100,000 options that are exercisable into 100,000 shares of common stock at an exercise price of $4.18, of which 50% will vest on September
1, 2021 and the balance which will vest on September 1, 2022. The Ferry Employment Agreement can be terminated with or without case at any time during the Initial Term or
during an Additional Term. As a full-time employee of the Company, Mr. Ferry is eligible to participate in all of the Company’s benefit programs.
Potential Payments upon Change of Control or Termination following a Change of Control and Severance
The Ferry Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to up to six months of base salary then in
effect. Generally, we do not provide any severance specifically upon a change in control, nor do we provide for accelerated vesting upon a change in control.
Adrian G. Goldfarb
On April 1, 2018, the Company entered into an employment agreement (the “Goldfarb Employment Agreement”) with Adrian G. Goldfarb, pursuant to which Mr. Goldfarb
serves as Chief Financial Officer of the Company. During 2020, Mr. Goldfarb was paid an annual salary of $197,750 and an annual car allowance of $7,500. The Goldfarb
Employment Agreement had an initial term through March 31, 2019, subject to renewal for successive one-year terms unless either party gives the other notice of that party’s
election to not renew at least 60 days prior to the expiration of the then-current term. The Goldfarb Employment Agreement remains in effect through March 31, 2021. The
Goldfarb Employment Agreement was approved by the Compensation Committee and it is anticipated that Mr. Goldfarb’s compensation terms will be revisited in the future by
the Compensation Committee of the Company’s Board.
Potential Payments upon Change of Control or Termination following a Change of Control 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 serves as
Chief Accounting Officer of the Company. During 2020, Ms. Weeks was paid an annual salary of $150,000. The Weeks Employment Agreement had an initial term that
extended through March 31, 2019, subject to renewal for successive one-year terms unless either party gives notice of that party’s election to not renew to the other party at least
60 days prior to the expiration of the then-current term. The Weeks Employment Agreement remains in effect through March 31, 2021. The Weeks Employment Agreement
was approved by the Compensation Committee and it is anticipated that Ms. Weeks’s compensation terms will be revisited in the future by the Compensation Committee of the
Company’s Board.
Potential Payments upon Change of Control or Termination following a Change of Control and Severance
The Weeks Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to two years of base salary then in effect.
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.
36
Director Compensation
Each independent director was entitled to receive $15,000 annually for service on our Board in 2020. In addition, Chairmen of committees were awarded an additional $5,000
annually in compensation in connection with their service in such capacity. The Company can elect to pay up to 50% of awarded compensation in restricted common stock.
Starting in 2021, the Compensation Committee has determined that directors will receive $40,000 for serving as a member of a committee and $10,000 for serving as Chairman
of a committee . The board compensation will be paid 40% in cash and 60% in shares of common stock or options to purchase shares of common stock, as elected by the board
member.
The following table summarizes data concerning the compensation of our non-employee directors for the year ended December 31, 2020.
Fees Earned
or Paid
in Cash
($)
12,500
2,500
12,500
12,500
Stock
Awards
($)(5)
Option
Awards
($)(6)
Non-Equity
Incentive Plan
Compensation
($)
Non-Qualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)(7)
Total
($)
50,662
2,500
50,662
50,662
Blair M. Fonda (1)
Edmond L. Harris (2)
Kenneth Ehrman (3)
Ned Mavrommatis (4)
———————
(1) Blair Fonda was appointed to the board on May 3, 2017 . Through November 19, 2020, he served as Co-Chairman of the Audit Committee and since then he has been the
10,000
—
10,000
10,000
20,662
—
20,662
20,662
7,500
—
7,500
7,500
—
—
—
—
—
—
—
—
Chairman of the Audit Committee.
(2)
Edmond Harris was appointed to the board on November 19, 2020 and since then has served as Chairman of the Corporate Governance and Nominating Committee .
(3) 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 the Board.
(4) 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 Chairman of the Compensation Committee.
(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,
(6)
the Company used the closing price of the Company’s common stock on the grant date.
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis
over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is
affected by the stock price as well as assumptions regarding the number of highly subjective variables. The Company estimates volatility based upon the historical stock
price of the Company and estimates the expected term for 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.
(7) Messrs. Ehrman, Fonda and Mavrommatis each were awarded $10,000 in restricted common stock as an additional payment compensating for significant time spent on
the CEO and Chairman transition which took place between July 2020 and November 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
As of March 26, 2021, our authorized capitalization was 500,000,000 shares of common stock $0.001 par value per share,500,000 shares of Series A Redeemable Preferred
Stock, 15,000 shares of Series B Convertible Preferred Stock and 5,000 shares of Series C Convertible Preferred Stock. As of the same date, there are 3,534,015 shares of our
common stock issued and outstanding, 1,705 shares of Preferred B and 4,500 shares of Preferred C outstanding, respectively. Our common stock entitles its holder to one vote
on each matter submitted to the stockholders. Our Series B Convertible Preferred allows its holder one of vote for each common stock equivalent, subject to a maximum
represented by 9.99% of total Common Stock outstanding plus that number of Preferred B as represented as common stock equivalent. Our Series C Convertible Preferred
allows its holder one of vote for each common stock equivalent, subject to a maximum represented by 19.99% of total Common Stock outstanding plus that number of
Preferred C as represented as common stock equivalent.
37
The following table sets forth, as of March 26, 2021, the number of shares of our common stock beneficially owned by (i) each person who is known by us to own of record or
beneficially five percent or more of our outstanding shares, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our directors and executive officers as a
group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our common stock beneficially owned.
The address of our directors and executive officers is c/o Duos Technologies Group, Inc., at 6622 Southpoint Drive S., Suite 310, Jacksonville, Florida 32216.
Name and Address of Beneficial Owner(1)
5% Beneficial Shareholders(2)
Bleichroeder LP
1345 Avenue of the Americas, 47th Floor
New York, NY 10105 (4)
Justin W. Keener
3960 Howard Hughes Parkway
Las Vegas, NV 89169 (5)
Bard Associates, Inc.
135 S. Lasalle Street, Suite 3700
Chicago IL 60603 (6)
Laurence W. Lytton
467 Central Park West
New York, NY 10025
Pessin Family Holdings
500 Fifth Avenue, Suite 2240
New York, NY 10110 (7)
5% Beneficial Shareholders as a Group
Executive Officers and Directors
Charles P. Ferry(8)
Adrian G. Goldfarb(9)
Kenneth Ehrman(10)
Blair M. Fonda(11)
Edmond L. Harris
Ned Mavrommatis(12)
Connie L. Weeks(13)
Executive Officers and Directors as a Group (7 persons)
———————
*Denotes less than 1%
Percentage of
Ownership of
Common
Stock(3)
Common
Stock
765,293
19.99%
353,048
9.99 %
242,570
6.90 %
215,700
6.10 %
249,404
1,826,015
7.06 %
43.49%
—
48,650
19,955
20,375
—
12,838
28,394
130,212
* %
1.36 %
* %
* %
* %
* %
* %
3.60 %
(1)
(2)
(3)
Beneficial ownership is determined in accordance with Rule 13D-3(a) of the Exchange Act and generally includes voting or investment power with respect to securities.
The information set forth in the table regarding the 5% Beneficial Shareholders is based on Schedule 13D and Schedule 13G filings made by the individual investors.
The percentages in the table have been calculated based on treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all
shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that
date which are exercisable within 60 days of that date.
38
(4)
Bleichroeder LP (“Bleichroeder”) is an investment advisor registered under the Investment Advisers Act of 1940. The 765,293 shares of Common Stock beneficially
owned by Bleichroeder include 453,616 shares of Common Stock and 311,677 shares of Common Stock issuable upon conversion of 2,500 shares of Series C
Convertible Preferred Stock. Pursuant to its terms, the conversion of the Series C Convertible Preferred Stock is subject to a beneficial ownership limitation of 19.9%. If
there were no 19.9% limit on conversion, Bleichroeder would be deemed to be the beneficial owner of 908,162 shares of Common Stock, representing 22.8% of the
outstanding Common Stock. 21 April Fund, Ltd., a Cayman Island company for which Bleichroeder acts as investment adviser, holds 344,970 shares of Common Stock
and 1,790 shares of Series C Convertible Preferred Stock, which equates to 17.4% of the Common Stock (upon conversion of such shares of Series C Convertible
Preferred Stock). 21 April Fund, LP, a Delaware limited partnership for which Bleichroeder acts as investment adviser, holds 108,646 shares of Common Stock and 710
shares of Series C Convertible Preferred Stock, which equates to 6.5% of the Common Stock (upon conversion of such shares of Series C Convertible Preferred Stock).
Clients of Bleichroeder have the right to receive and the ultimate power to direct the receipt of dividends from, or the proceeds of the sale of, such securities.
Notwithstanding the foregoing, until the Company receives Stockholder Approval (as described above), Bleichroeder’s 2,500 shares of Series C Convertible Preferred
Stock are convertible into a maximum of an aggregate of 392,566 shares of Common Stock. 21 April Fund, Ltd. and 21 April Fund, LP also own warrants to purchase
32,724 shares of Common Stock and 11,920 shares of Common Stock, respectively, which are not currently exercisable due to a 9.99% beneficial ownership limitation.
(6)
(7)
(5) Mr. Justin Keener owns warrants to purchase 444,037 shares of Common Stock. However, the aggregate number of shares of Common Stock into which the warrants are
exercisable and which Mr. Keener has the right to acquire beneficial ownership, is limited to the number of shares of Common Stock that, together with all other shares of
Common Stock beneficially owned by Mr. Keener, does not exceed 9.99% of the total outstanding shares of Common Stock, currently 353,048.
Bard Associates, Inc. has sole dispositive power with regard to the 242,570 shares of Common Stock it beneficially owns and has no voting power as to such shares.
Represents shares of Common Stock beneficially owned by Norman H. Pessin (102,972 shares of Common Stock), Sandra F. Pessin (71,430 shares of Common Stock)
and Brian L. Pessin (75,002 shares of Common Stock). The ownership number for Sandra Pessin excludes (i) 243,572 shares of Common Stock underlying the 1,705
shares of Series B Convertible Preferred Stock owned by her that are not currently convertible due to a 4.99% (which may be increased to 9.99%) beneficial ownership
limitation with respect to Common Stock owned by Ms. Pessin, her affiliates, or members of a group with Ms. Pessin, and (ii) 272,727 shares of Common Stock
underlying the 1,500 shares of Series C Convertible Preferred Stock owned by her that are not currently convertible due to a 4.99% (which may be increased to 19.99%)
beneficial ownership limitation with respect to Common Stock owned by Ms. Pessin, her affiliates, or members of a group with Ms. Pessin. Notwithstanding the
foregoing, until the Company receives Stockholder Approval, Ms. Pessin’s 1,500 shares of Series C Convertible Preferred Stock are convertible into a maximum of
235,540 shares of Common Stock. The ownership member for Brian Pessin excludes 90,909 shares of Common Stock underlying the 500 shares of Series C Convertible
Preferred Stock owned by him that are not currently convertible due to a 4.99% (which may be increased to 19.99%) beneficial ownership limitation with respect to
Common Stock owned by Mr. Pessin, his affiliates, or members of a group with Mr. Pessin. Notwithstanding the foregoing, until the Company receives Stockholder
Approval, Mr. Pessin’s 500 shares of Series C Convertible Preferred Stock are convertible into a maximum of 75,513 shares of Common Stock.
(8) Mr. Ferry holds 100,000 options that are exercisable into 100,000 shares of common stock at an exercise price of $4.18, of which 50% will vest on September 1, 2021
and the balance which will vest on September 1, 2022.
(9) Mr. Goldfarb owns 5,027 shares of Common Stock, 12,799 warrants to purchase shares of Common Stock with an exercise price of $9.10, and 2,430 warrants to
purchase shares of Common Stock with an exercise price of $14.00 per share all of which are currently exercisable, 18,929 options to purchase Common Stock which are
currently exercisable at $6.00 per share, and 18,929 options to purchase Common Stock with an exercise price of $4.74 per share of which 9,465 will fully vest on
January 1, 2022 and 9,465 which are currently exercisable.
(10) Kenneth Ehrman is Chairman of the Board. He owns 11,383 shares of Common Stock and was granted 8,572 options to purchase Common Stock at $4.74 per share
which will fully vest on January 1, 2022 and 8,572 options to purchase Common Stock at $6.00 per share which are fully vested.
(11) Blair Fonda is a Director and serves as Audit Committee Chairman. Includes 11,803 shares of Common Stock and was granted 8,572 options to purchase Common Stock
at $4.74 per share which will fully vest on January 1, 2022 and 8,572 options to purchase Common Stock at $6.00 per share which are fully vested.
(12) Ned Mavrommatis is a Director and serves as Compensation Committee Chairman. He owns 4,266 shares of Common Stock and was granted 8,572 options to purchase
Common Stock at $4.74 per share which will fully vest on January 1, 2022 and 8,572 options to purchase Common Stock at $6.00 per share which are fully vested.
39
(13)
Includes 18,929 options to purchase shares of Common Stock with an exercise price of $6.00 granted to Ms. Weeks which are currently exercisable and a further 18,929
options to purchase Common Stock with an exercise price of $4.74 per share of which 9,465 will fully vest on January 1, 2022 and 9,465 which are currently exercisable.
Equity Compensation Plan Information
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 table below sets forth certain information as of the year ended December 31, 2020 regarding the shares of our common stock available for grant or granted under the 2016
Plan. 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.
The following table provides equity compensation plan information as of December 31, 2020:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
311,898 $
5.44
9,531
140,000 $
4.20
N/A
On March 11, 2016, the Board adopted, subject to the receipt of stockholder approval, which was received on April 21, 2016, the 2016 Plan providing for the issuance of up to
16,327 shares of our common stock. The 2016 Plan was subsequently modified with stockholder approval twice: on January 18, 2018 to increase the total maximum number of
shares issuable under the 2016 Plan to 178,572 and on July 31, 2019 to increase the total maximum number of shares issuable under the 2016 Plan to 321,429. The purpose of
the 2016 Plan was to assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals to align their interests
with those of our stockholders.
Administration
The 2016 Plan is administered by the Compensation Committee of the Board, which currently consists of two 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 had complete discretion, subject to the express limits of the 2016 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 2016 Plan. Notwithstanding the foregoing, the
Compensation Committee does not have any authority to modify an award under the 2016 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 2016 Plan provided 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. The
Company had reserved a total of 321,429 shares of common stock for issuance as or under awards to be made under the 2016 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 2016 Plan.
40
Currently, there are twenty five identified employees (including four executive officers and directors), three non-employee directors, and up to thirty other current or future staff
members who would be entitled to receive stock options and/or shares of restricted stock under the 2016 Plan. Future new hires and additional non-employee directors and/or
consultants would be eligible to participate in the 2016 Plan as well.
Stock Options
The 2016 Plan provided 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”). Stock options could be granted on such terms and conditions as the Compensation Committee determined, provided, however, that the
per share exercise price under a stock option could 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 could not exceed 10 years (110% of such value and five years in the case of an ISO granted to an employee who owned (or was deemed to own) more than 10% of
the total combined voting power of all classes of capital stock of our Company or a parent or subsidiary of our Company. ISOs could 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 could not exceed $100,000. Any excess would have been treated as a NQSO.
Stock Appreciation Rights
A 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 could be granted in tandem with, or independently of, stock options granted under the 2016 Plan. A
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. A SAR that was not granted in tandem with a stock option is exercisable at such
times as the Compensation Committee may have specified.
Performance Shares 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.
41
Item 13. Certain Relationships and Related Transactions, and Director Independence.
On August 1, 2012 the Company entered into an independent contractor master services agreement (the “Services Agreement”) with Luceon, LLC, a Florida limited liability
company, owned by our Chief Technology Officer, David Ponevac. The Services Agreement provides that Luceon will provide support services including management,
coordination or software development services and related services to 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 is in addition to the existing contract of $7,480 per month for Duos Technologies, Inc 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. The total amount expensed to Luceon for 2020 is $335,334.
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.
Item 14. Principal Accountant Fees and Services.
Fees Billed for Audit and Non-Audit Services
The following table presents for each of the last two fiscal years the aggregate fees billed in connection with the audits of our financial statements and other professional
services rendered by our independent registered public accounting firm Salberg & Company, P.A.
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total Accounting fees and Services
———————
(1)
Audit Fees. These are fees for professional services for the audit of our annual financial statements, and for the review of the financial statements included in our filings on Form 10-K
and Form 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements.
Audit-Related Fees. These are fees for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the registrant’s
financial statements.
Tax Fees. These are fees for professional services rendered by the principal accountant with respect to tax compliance, tax advice, and tax planning.
All Other Fees. These are fees for products and services provided by the principal accountant, other than the services reported above.
(2)
(3)
(4)
2020
2019
$
$
94,956 $
6,311
—
—
101,267 $
94,906
27,412
—
—
122,318
42
Item 15. Exhibits, Financial Statement Schedules.
PART IV
Exhibit No.
2.1
Exhibit Description
First Amendment to Merger and Plan of Merger, dated March 15, 2015 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 2.1
2.2
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
4.3
4.4
4.5*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
on March 19, 2015)
Merger Agreement and Plan of Merger, dated February 6, 2015 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 2.1 on
February 9, 2015)
Amendment to Amended and Restated Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 on
July 13, 2015)
Amended and Restated Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 on April 7, 2015)
Amended and Restated Bylaws (incorporated herein by reference to the Registration of Securities on Form 8-A/12G/A filed on August 14, 2015)
Articles of Amendment to Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 with the U.S.
Securities and Exchange Commission on April 28, 2017)
Articles of Amendment to Articles of Incorporation Designation Series B Convertible Preferred Stock (incorporated herein by reference to the Current Report
on Form 8-K filed as Exhibit 3.1 with the U.S. Securities and Exchange Commission on November 29, 2017)
Certificate of Amendment to Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 15, 2020)
Articles of Amendment to Articles of Incorporation Designation of Series C Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2021)
Senior Secured Note, dated April 1, 2016, issued by Duos Technologies Group, Inc. (incorporated herein by reference to the Current Report on Form 8-K filed
as Exhibit 4.1 on April 6, 2016)
Common Stock Purchase Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.1 on December 23, 2016)
Form of Purchaser Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.1 on November 29, 2017)
Form of Placement Agent Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.2 on November 29, 2017)
Description of the Company's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
Employment Agreement, dated May 1, 2003, with Chief Executive Officer (incorporated herein by reference to the Annual Report on Form 10-K filed as
Exhibit 10.1 on April 17, 2015)
Securities Purchase Agreement, dated March 31, 2016, by and between Duos Technologies Group, Inc. and the Schedule of Buyers attached thereto
(incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 on April 6, 2016)
Security and Pledge Agreement, dated April 1, 2016, by and among Duos Technologies Group, Inc., each of the Company’s Subsidiaries named therein and
GPB Debt Holdings II, LLC (in its capacity as collateral agent) (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.2 on
April 6, 2016)
Guaranty, dated April 1, 2016, by and among each of Duos Technologies Group, Inc.’s Subsidiaries named therein and GPB Debt Holdings II, LLC (in its
capacity as collateral agent) (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.3 on April 6, 2016)
Warrant, dated April 1, 2016, issued by Duos Technologies Group, Inc. (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit
10.4 on April 6, 2016)
2016 Equity Incentive Plan (incorporated herein by reference to the Proxy Statement on Schedule 14A filed on April 1, 2016)
Securities Purchase Agreement, dated December 20, 2016, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by
reference to the Current Report on Form 8-K filed as Exhibit 10.1 on December 23, 2016)
Promissory Note, dated December 20, 2016, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the
Current Report on Form 8-K filed as Exhibit 10.2 on December 23, 2016)
10.9
10.10
Form of Securities Purchase Agreement (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 on November 29, 2017)
Form of Registration Rights Agreement (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.2 on November 29, 2017)
43
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Amendment #1 to the Securities Purchase Agreement and to the Note, dated May 22, 2017 (incorporated herein by reference to the Quarterly Report on Form
10-Q filed as Exhibit 10.5 with the U.S. Securities and Exchange Commission on August 15, 2017)
Amendment #2 to the Securities Purchase Agreement and to the Note, dated July 12, 2017 (incorporated herein by reference to the Quarterly Report on Form
10-Q filed as Exhibit 10.6 with the U.S. Securities and Exchange Commission on August 15, 2017)
Amendment #3 to the Securities Purchase Agreement and to the Note, dated August 14, 2017 (incorporated herein by reference to the Quarterly Report on Form
10-Q filed as Exhibit 10.7 with the U.S. Securities and Exchange Commission on August 15, 2017)
Amendment #4 to the Securities Purchase Agreement and Note, dated November 14, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial
(incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.8 on November 20, 2017)
Amendment #5 to the Securities Purchase Agreement and Note, dated November 16, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial
(incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.9 on November 20, 2017)
Amendment #6 to the Securities Purchase Agreement and Note, dated November 20, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial
(incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.10 on November 20, 2017)
Forbearance Agreement, dated May 12, 2017, by and among Duos Technologies Group, Inc. and GPB Debt Holdings II, LLC incorporated herein by reference
to the Quarterly Report on Form 10-Q filed as Exhibit 10.13 on November 20, 2017)
Form of Note Holder Letter Agreement, dated June 9, 2017 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 with the
U.S. Securities and Exchange Commission on June 15, 2017)
Form of Arcaini Letter Agreement, dated June 9, 2017 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.2 with the U.S.
Securities and Exchange Commission on June 15, 2017)
Form of Goldfarb Letter Agreement, dated June 9, 2017 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.3 with the U.S.
Securities and Exchange Commission on June 15, 2017)
GPB Debt Holdings II, LLC Letter Agreement, dated August 1, 2017 (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit
10.4 with the U.S. Securities and Exchange Commission on August 15, 2017)
Form of Conversion Letter (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.5 with the U.S. Securities and Exchange
Commission on November 29, 2017)
Form of Redemption Letter (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.4 with the U.S. Securities and Exchange
Commission on November 29, 2017)
Form of Pay-off Letter (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.3 with the U.S. Securities and Exchange
Commission on November 29, 2017)
2016 Equity Incentive Plan (incorporated by reference to Appendix B of the Proxy Statement on Schedule 14A filed with the Securities and Exchange
Commission on December 22, 2017).
Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 15, 2020)
Paycheck Protection Program Note, dated April 23, 2020 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on August 14, 2020)
Separation Agreement, dated July 10, 2020, by and between Duos Technologies Group, Inc. and Gianni B. Arcaini (incorporated herein by reference to Exhibit
10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2020)
Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 1, 2021)
Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 1, 2021)
10.32*
14.1
21
31.1 *
31.2 *
Employment Agreement, dated as of September 1, 2020, between Duos Technologies Group, Inc. and Charles P. Ferry.
Code of Ethics (incorporated by reference to the Company’s Form 10-K filed on April 15, 2019)
List of Subsidiaries (incorporated by reference to the Company’s Form 10-K filed on April 1, 2016)
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
44
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Audit Committee Charter (incorporated by reference to the Company’s Form 10-K filed on April 15, 2019)
Compensation Committee Charter (incorporated by reference to the Company’s Form 10-K filed on April 15, 2019)
Corporate Governance and Nominating Committee Charter (incorporated by reference to the Company’s Form 10-K filed on April 15, 2019)
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
32.1 **
32.2 **
99.1
99.2
99.3
101.INS *
101.SCH *
101.CAL *
101.DEF *
101.LAB *
101.PRE *
———————
*
**
filed herewith
furnished herewith
Item 16.
Form 10-K Summary
Not applicable
45
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
Date: March 30, 2021
Date: March 30, 2021
DUOS TECHNOLOGIES GROUP, INC.
By:
/s/ Charles P. Ferry
Charles P. Ferry
Chief Executive Officer
By:
/s/ Adrian G. Goldfarb
Adrian G. Goldfarb
Chief Financial Officer
Pursuant to requirements with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
Title
/s/ Charles P. Ferry
Charles P. Ferry
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Adrian G. Goldfarb
Adrian G. Goldfarb
Chief Financial Officer
(Principal Financial Officer)
/s/ Kenneth Ehrman
Kenneth Ehrman
/s/ Blair M. Fonda
Blair M. Fonda
/s/ Edmond L Harris
Edmond L. Harris
/s/ Ned Mavrommatis
Ned Mavrommatis
Chairman
Director
Director
Director
46
Date
March 30, 2021
March 30, 2021
March 30, 2021
March 30, 2021
March 30, 2021
March 30, 2021
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
F-2
F-4
F-6
F-7
F-8
F-10
F-1
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, 2020 and 2019, the
related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2020 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, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the two years in
the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to
be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which
they relate.
2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431
Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920
www.salbergco.com • info@salbergco.com
Member National Association of Certified Valuation Analysts • Registered with the PCAOB
Member CPAConnect with Affiliated Offices Worldwide • Member Center for Public Company Audit Firms
F-2
Going Concern
Analysis of Liquidity and Going Concern
As summarized in Footnote 2 “Liquidity” to the consolidated financial statements, the Company has a history of net losses and net cash used in operating activities and believes
such conditions will continue for a period of time into the future. These are considered adverse conditions or events that lead management to consider whether there is
substantial doubt about the ability of the entity to continue as a going concern for a reasonable period of time.
However, management believes that cash raises through an underwritten offering for $8.1 million in 2020 and the issuance of Series C Convertible Preferred Stock for $4.5
million in the 1st quarter of 2021, created a cash balance and positive working capital alleviates the substantial doubt related to going concern and the need for a going concern
risk disclosure.
We identified the going concern risk analysis as a critical audit matter. Auditing management’s going concern analysis including their process to develop the analysis and the
projections of future cash flows, operating trends, and assessments of internal and external matters that may affect the Company’s future operations and cash flows involved a
high degree of subjectivity. Additionally, auditing management’s plans to address the going concern risk involved highly subjective auditor judgment.
The primary procedures we performed to address this critical audit matter included (a) Assessed the reasonableness of management’s process for developing their assessment of
whether a going concern risk exists, (b) Assessed the reasonableness of assumptions management used in their future cash flow projections including comparison to prior year
results, consideration of positive and negative evidence impacting management’s forecasts, and consideration of the Company’s financing arrangements in place as of the report
date, (c) Developed our own independent calculation of expected source and use of funds and 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, 2020 with the banks and tested management’s bank reconciliations, (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 and our report of an independent registered public accounting firm. We agreed with management’s
assessment that the going concern risk is alleviated and a liquidity footnote would be sufficient.
Percentage of Completion Revenue Recognition & Related Contract Assets and Contract Liabilities
As described in footnote 1, “Revenue Recognition – Technology Systems” and footnote 9, “Contract Accounting” to the consolidated financial statements, the Company
recognizes revenue over time using a cost-based input methodology in which significant judgment is required to estimated costs to complete projects. These estimated costs are
then used to determine the progress towards contract completion and the corresponding amount of revenue to recognize. In addition, contract assets on uncompleted contracts
represent costs and estimated earnings in excess of billings and/or cash received on uncompleted contracts accounted for under the percentage of completion contract method.
Contract liabilities on uncompleted contracts represent billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under
the percentage of completion contract method.
We identified this percentage of completion revenue recognition as a critical audit matter. Auditing management’s judgments regarding forecasts of total estimated costs to
complete projects involves a high degree of subjectivity.
The primary procedures we performed to address this critical audit matter included (a) evaluated the reasonableness of management’s cost estimates to complete projects by
comparing them to historical information, year to date current information and other supporting contracts or information, (b) agreed cost details to supporting documents, (c)
confirmed billings with customers and/or tracing cash receipts to bank statements, (d) computed the revenue earned and recognized, (e) computed the contract asset or liability
and (f) performed ratio analysis and gross margin comparisons on a sample of technology systems revenues.
/s/ Salberg & Company, P.A.
SALBERG & COMPANY, P.A.
We have served as the Company’s auditor since 2013
Boca Raton, Florida
March 30, 2021
F-3
CURRENT ASSETS:
Cash
Accounts receivable, net
Contract assets
Prepaid expenses and other current assets
Total Current Assets
Property and equipment, net
Operating lease right of use asset
OTHER ASSETS:
Software Development Costs, net
Patents and trademarks, net
Total Other Assets
TOTAL ASSETS
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
See accompanying notes to the consolidated financial statements.
F-4
December 31,
2020
December 31,
2019
$
3,969,100 $
1,244,876
102,458
486,626
56,249
2,611,608
1,375,920
716,598
5,803,060
4,760,375
342,180
196,144
260,181
430,146
—
64,415
64,415
20,000
61,598
81,598
$
6,405,799 $
5,532,300
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable
Accounts payable - related parties
Notes payable - financing agreements
Notes payable - related parties, net of discounts
Line of credit
Payroll taxes payable
Accrued expenses
Current portion-equipment financing agreements
Current portion-operating lease obligations
Current portion-SBA loan
Contract liabilities
Deferred revenue
Total Current Liabilities
Equipment financing payable, less current portion
Operating lease obligations, less current portion
SBA loan, less current portion
Total Liabilities
Commitments and Contingencies (Note 11)
STOCKHOLDERS' EQUITY (DEFICIT):
December 31,
2020
December 31,
2019
$
599,317 $
7,700
42,942
—
—
3,146
1,038,092
89,620
202,797
627,465
709,553
315,370
2,641,437
12,791
42,299
905,373
27,615
115,111
393,272
45,072
239,688
—
8,661
936,428
3,636,002
5,367,747
103,184
—
782,805
89,026
202,797
—
4,521,991
5,659,570
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,485,000 shares available to be designated
Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at
December 31, 2020 and December 31, 2019, convertible into common stock at $6.30 per share
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 1,705 and 1,705 issued and outstanding at
December 31, 2020 and December 31, 2019, convertible into common stock at $7 per share
Common stock: $0.001 par value; 500,000,000 shares authorized, 3,535,339 and 1,982,039 shares issued, 3,534,015 and 1,980,715 shares
—
—
1,705,000
1,705,000
outstanding at December 31, 2020 and December 31, 2019, respectively
Additional paid-in capital
Total stock & paid-in-capital
Accumulated deficit
Sub-total
Less: Treasury stock (1,324 shares of common stock at December 31, 2020 and December 31, 2019)
3,536
1,982
39,820,874 31,063,915
41,529,410 32,770,897
(39,488,150) (32,740,715)
30,182
(157,452 )
2,041,260
(157,452 )
Total Stockholders' Equity (Deficit)
Total Liabilities and Stockholders' Equity (Deficit)
1,883,808
(127,270 )
$
6,405,799 $
5,532,300
See accompanying notes to the consolidated financial statements.
F-5
REVENUES:
Technology systems
Technical support
Consulting services
AI technologies
Total Revenues
COST OF REVENUES:
Technology systems
Technical support
Consulting services
AI technologies
Total Cost of Revenues
GROSS PROFIT
OPERATING EXPENSES:
Sales & marketing
Engineering
Research and development
Administration
AI technologies
Total Operating Expenses
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSES):
Interest Expense
Other income, net
Total Other Income (Expenses)
NET LOSS
Basic & Diluted Net Loss Per Share
Weighted Average Shares-Basic & Diluted
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to the consolidated financial statements.
F-6
For the Years Ended
December 31,
2020
2019
$
4,956,130 $
1,801,043
273,604
1,008,671
11,963,438
1,377,459
300,418
—
8,039,448
13,641,315
3,665,493
1,109,741
117,004
360,817
6,510,658
528,966
120,253
—
5,253,055
7,159,877
2,786,393
6,481,438
717,809
1,358,925
1,022,188
5,011,913
1,309,986
950,962
1,254,235
1,479,334
3,987,941
1,215,488
9,420,821
8,887,960
(6,634,428)
(2,406,522)
(150,137 )
37,130
(69,322)
4,962
(113,007 )
(64,360)
$
$
(6,747,435) $
(2,470,882)
(2.03) $
(1.39)
3,320,193
1,781,704
DUOS TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2020 and 2019
Preferred Stock
Common Stock
# of Shares
Amount
# of Shares
Amount
Additional
Paid-in-Capital
Accumulated
Deficit
Treasury
Stock
Total
Balance December 31, 2019
Common stock issued for cash and warrants
Modification of employee stock options
Stock options granted to employees
Stock issuance cost
Common stock issued for services
Net loss for the year ended December 31, 2020
Balance December 31, 2020
1,705 $ 1,705,000 1,982,039 $
1,542,188
—
—
—
11,112
—
3,535,339 $
—
—
—
—
—
—
1,705 $ 1,705,000
—
—
—
—
—
—
1,982 $ 31,063,915 $(32,740,715) $
—
1,542
9,251,586
—
—
102,800
—
—
351,970
—
—
(1,001,885)
—
12
52,488
(6,747,435)
—
—
3,536 $ 39,820,874 $(39,488,150) $
(157,452) $
—
—
—
—
—
—
(127,270)
9,253,128
102,800
351,970
(1,001,885)
52,500
(6,747,435)
(157,452) $ 1,883,808
Balance December 31, 2018
Common stock issued for warrants exercised
Common stock issued for cash less warrants exercised
Stock options granted to employees
Stock repurchase
Stock issuance cost
Series B convertible preferred converted to common stock
Common stock issued for services
Debt discount from warrants issued with promissory note
Net loss for the year ended December 31, 2019
Balance December 31, 2019
—
—
—
—
—
(1,125)
—
—
—
2,830 $ 2,830,000
—
—
—
—
—
(1,125,000)
—
—
—
1,705 $ 1,705,000
1,505,883 $
301,042
9,878
—
—
—
160,713
4,523
—
—
1,982,039 $
1,505 $ 27,416,802 $(30,269,833) $
—
2,317,718
—
(10)
—
44,874
—
—
—
(20,000)
—
1,124,839
—
32,913
—
146,779
(2,470,882)
—
1,982 $ 31,063,915 $(32,740,715) $
302
10
—
—
—
161
4
—
—
(149,459) $
—
—
—
(7,993)
—
—
—
—
—
(157,452) $
(170,985)
2,318,020
—
44,874
(7,993)
(20,000)
—
32,917
146,779
(2,470,882)
(127,270)
See accompanying notes to the consolidated financial statements.
F-7
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense (recovery)
Depreciation and amortization
Stock based compensation
Modification of employee stock options
Interest expense related to debt discounts
Amortization of operating lease right of use asset
Changes in assets and liabilities:
Accounts receivable
Contract assets
Prepaid expenses and other current assets
Accounts payable
Related payable-related party
Payroll taxes payable
Accrued expenses
Operating lease obligation
Contract liabilities
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities:
Purchase of patents/trademarks
Purchase of fixed assets
Net cash used in investing activities
Cash flows from financing activities:
Repurchase of common stock
Repayments of line of credit
Repayments of related party notes
Stock issuance costs
Repayments of notes payable
Repayments of insurance and equipment financing
Repayment of finance lease
Proceeds from SBA loan
Proceeds from notes payable-related parties
Proceeds from notes payable
Proceeds from equipment leasing
Proceeds from common stock issued
Proceeds from warrants exercised
Net cash provided by financing activities
Net increase (decrease) in cash
Cash, beginning of period
Cash, end of period
See accompanying notes to the consolidated financial statements.
F-8
For the Years Ended
December 31,
2020
2019
$ (6,747,435) $ (2,470,882)
(3,217 )
222,514
351,970
102,800
94,627
234,001
220,405
184,620
44,874
—
64,652
214,100
1,369,949
1,273,462
491,598
(2,042,118)
(5,091 )
(111,965 )
697,320
(239,688 )
700,892
(621,058 )
(1,293,219)
(167,316 )
(174,202 )
1,224,720
(682)
(202,462 )
203,861
(201,761 )
(2,240,168)
573,900
(4,231,439)
(4,019,560)
(8,185 )
(279,146 )
(13,095)
(206,480 )
(287,331 )
(219,575 )
—
(27,615)
—
(1,001,885)
(1,000,000)
(260,983 )
(62,931)
1,410,270
—
—
121,637
9,253,128
—
(7,993 )
(3,586 )
(80,000)
(20,000)
(262,500 )
(266,134 )
(24,652)
—
1,080,000
250,000
102,928
—
2,318,020
8,431,621
3,086,083
3,912,851
56,249
3,969,100 $
(1,153,052)
1,209,301
56,249
$
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental Disclosure of Cash Flow Information:
Interest paid
Supplemental Non-Cash Investing and Financing Activities:
Common stock issued for accrued BOD fees
Lease right of use asset and liability
Note issued for financing of insurance premiums
Debt discount on Notes issued
Note issued for equipment financing lease
Relative fair value of warrant recorded as debt discount
See accompanying notes to the consolidated financial statements.
F-9
For the Years Ended
December 31,
2020
2019
$
33,698 $
6,320
$
$
$
$
$
$
52,500 $
— $
261,626 $
— $
— $
— $
32,917
644,245
260,103
12,500
55,822
146,779
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Duos Technologies Group, Inc. (the “duostech Group”), through its operating subsidiaries, Duos Technologies, Inc. (“duostech”) and TrueVue360, Inc. (“TrueVue360”),
collectively the (“Company”) develops and deploys cutting-edge technologies that will help to transform precision railroading, logistics and inter-modal transportation
operations. Additionally, these unique patented solutions can be employed into many other industries.
The Company has developed the Railcar Inspection Portal (RIP) that provides both freight and transit railroad customers and select government agencies the ability to conduct
fully remote railcar inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies, illumination and other sensors,
scans each passing railcar to create an extremely high-resolution image set from a variety of angles including the undercarriage. These images are then processed through
various methods of artificial intelligence algorithms to identify specific defects and/or areas of interest on each railcar. This is all accomplished within seconds of a railcar
passing through our portal. This solution has the potential to transform the railroad industry immediately increasing safety, improving efficiency and reducing costs. The
Company has successfully deployed this system with several Class 1 railroad customers and anticipates an increased demand in the future. Government agencies can conduct
digital inspections combined with the incorporated AI to improve rail traffic flow across borders which also directly benefits the Class 1 railroads through increasing their
velocity.
The Company has also developed the Automated Logistics Information System (ALIS) which automates and reduces/removes personnel from gatehouses where trucks enter
and exit large logistics and intermodal facilities. This solution also incorporates sensors and data points as necessary for each operation and directly interconnects with backend
logistics databases and processes to streamline operations, significantly improve operations, and security and importantly dramatically improves the vehicle throughput on each
lane the technology is deployed.
The Company has built a portfolio of IP and patented solutions that creates “actionable intelligence” using two core native platforms called centraco® and praesidium®. All
solutions provided include a variant of both applications. Centraco is designed primarily as the user interface to all our systems as well as the backend connection to third-party
applications and databases through both Application Programming Interfaces (APIs) and Software Development Kits (SDKs). This interface is browser based and hosted
within each one of our systems and solutions. It is typically also customized for each unique customer and application. Praesidium typically resides as middleware in our
systems and manages the various image capture devices and some sensors for input into the Centraco software.
The Company also developed a proprietary Artificial Intelligence (AI) software platform, truevue360™ with the objective of focusing the Company’s advanced intelligent
technologies in the areas of AI, deep machine learning and advanced multi-layered algorithms to further support our solutions.
The Company also provides professional and consulting services for large data centers and has been developing a system for the automation of asset information marketed as
dcVue™. The Company is now deploying its dcVue software. This software is used by Duos’ consulting auditing teams. dcVue is based upon the Company’s OSPI patent
which was awarded in 2010. The Company offers dcVue available for license to our customers as a licensed software product.
The Company’s strategy is to deliver operational and technical excellence to our customers, expand our RIP and ALIS solutions into current and new customers focused in the
Rail, Logistics and U.S. Government Sectors, offer both CAPEX and OPEX pricing models to customers that increases recurring revenue, backlog and improves profitability,
responsibly grow the business both organically and through selective acquisitions, and finally promote a performance-based work force where employees enjoy their work and
are incentivized to excel and remain with the Company.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”).
F-10
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Reverse Stock Split
All share and per share amounts have been presented to give retroactive effect to a 1-for-14 reverse-stock split that occurred in January 2020.
Reclassifications
The Company reclassified certain operating expenses for the year ended December 31, 2019 to conform to 2020 classification. There was no net effect on the total operating
expenses of such reclassification.
The following table reflects the reclassification adjustment effect for the year ended December 31, 2019:
Before
Reclassification
For the Year Ended
December 31,
2019
OPERATING EXPENSES:
Selling and marketing expenses
Salaries, wages and contract labor
Research and development
Professional fees
General and administrative expenses
$
421,535
5,570,140
431,425
252,825
2,212,035
Sales and marketing
Engineering
Research and development
AI technologies
Administration
After
Reclassification
For the Year Ended
December 31,
2019
$
950,962
1,254,235
1,479,334
1,215,488
3,987,941
Total Operating Expenses
$
8,887,960
$
8,887,960
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, estimates of the valuation of right of use assets and corresponding lease liabilities and
valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates.
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of
December 31, 2020, balance in one financial institution exceeded federally insured limits by approximately $3,490,000.
F-11
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Significant Customers and Concentration of Credit Risk
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually
represented 10% or more of the Company’s total accounts receivable, as follows:
For the year ended December 31, 2020 two customers accounted for 45% and 23% of revenues. For the year ended December 31, 2019, three customers accounted for 48%,
13% and 10% of revenues. In all cases, there are no minimum contract values stated. Each contract covers an agreement to deliver a rail inspection portal which, once accepted,
must be paid in full, with 30% or more being due and payable prior to delivery. The balances of the contracts are for service and maintenance which is paid annually in advance
with revenues recorded ratably over the contract period. Each of the customers referenced has the following termination provisions:
·
·
For Customer 1, termination can be made, prior to delivery of products or services, in the case where either party breach any of its obligations under the agreement with
the Company. The other party may terminate the agreement effective fifteen (15) Business Days following notice from the non-defaulting party, if the non-performance
has not been cured within such period, and without prejudice to damages that could be claimed by the non-defaulting party. Either party may terminate the agreement if
the other party becomes unable to pay its debts in the ordinary course of business; goes into liquidation (other than for the purpose of a genuine amalgamation or
restructuring); has a receiver appointed over all or part of its assets; enters into a composition or voluntary arrangement with its creditors; or any similar event occurs in
any jurisdiction, all to the extent permitted by law.
For Customer 2, prior to delivery of products or services, either party may terminate the agreement with the Company upon the other party’s material breach of a
representation, warranty, term, covenant or undertaking in the agreement if, within thirty (30) days following the delivery of a written notice to the defaulting party
setting forth in reasonable detail the basis of such default, the defaulting party has not rectified such default to the reasonable satisfaction of the non-defaulting party.
Failure to perform due to a force majeure condition shall not be considered a material default under the agreement.
At December 31, 2020, two customers accounted for 56% and 30% of accounts receivable. At December 31, 2019, two customers accounted for 68% 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 51% and 59% of revenue in 2020 and 2019, respectively, is generated from customers outside of the United States.
Significant Vendors and Concentration of Credit Risk
At December 31, 2020, one vendor accounted for 36% of accounts payable. At December 31, 2019, three vendors accounted for 15%, 13% and 12% of accounts payable.
One supplier accounted for approximately 11% of total purchases for the year ended December 31, 2020. One supplier accounted for approximately 28% of total purchases for
the year ended December 31, 2019.
Fair Value of Financial Instruments and Fair Value Measurements
The Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair
value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that requires the use of fair
value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
F-12
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
These inputs are prioritized below:
Level 1:
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3:
Unobservable inputs for which there is little or no market data, which require the use of the
reporting entity’s own assumptions that the market participants would use in the asset or liability based on the best available information.
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard for
such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement.
The estimated fair value of certain financial instruments, including accounts receivable, prepaid expense, 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.
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 to five 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.
F-13
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Long-Lived Assets
The Company evaluates the recoverability of its property, equipment, and other long-lived assets in accordance with FASB ASC 360-10-35-15 “Impairment or Disposal of
Long-Lived Assets”, which requires recognition of impairment of long-lived assets in the event the net book 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.
Product Warranties
The Company has a 90 day warranty period for materials and labor after final acceptance of all projects. If any parts are defective they are replaced under our vendor warranty
which is usually 12 to36 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, 2020 and 2019, the warranty costs have
been de-minimis, therefore no accrual of warranty liability has been made.
Loan Costs
Loan costs paid to lenders or third parties are recorded as debt discounts to the related loans and amortized to interest expense over the loan term.
Sales Returns
Our systems are sold as integrated systems and there are no sales returns allowed.
Revenue Recognition
Technology Systems
As of January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-89, Revenue from Contracts with Customers (“ASC 606”), that affects the timing of
when certain types of revenues will be recognized. The basic principles in ASC 606 include the following: a contract with a customer creates distinct unrecognized contract
assets and performance obligations, satisfaction of a performance obligation creates revenue, and a performance obligation is satisfied upon transfer of control to a good or
service to a customer.
Revenue is recognized by evaluating our revenue contracts with customers based on the five-step model under ASC 606:
1.
2.
3.
4.
5.
Identify the contract with the customer;
Identify the performance obligations in the contract;
Determine the transaction price;
Allocate the transaction price to separate performance obligations; and
Recognize revenue when (or as) each performance obligation is satisfied.
For revenues related to technology systems, the Company recognizes revenue over time using a cost-based input methodology in which significant judgment is required to
estimated costs to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding amount of revenue to
recognize.
F-14
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Accordingly, the Company now bases its revenue recognition on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not
create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a profit margin or reasonable
return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured and revenue is recognized accordingly.
In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust
the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to
satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company has adopted the implementation guidance as set out in
ASC-606-10-55-187 through 192. (see Note 9)
Under this method, contract revenues are recognized over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct
labor, subcontract labor and other allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are also charged to the periods as
incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract assets”. Any billings of customers more than recognized
revenues are recorded as a liability in “contract liabilities”. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is
determined.
Technical Support
Maintenance and technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and
technical support provided outside of a maintenance contract are on an as-requested basis, and revenue is recognized as the services are provided. Revenue for maintenance and
technical support provided on an extended-term basis is recognized ratably over the term of the contract.
For sales arrangements that do not involve multiple elements such as professional services, which are of short-term duration, revenues are recognized when services are
completed.
Consulting Services
The Company recognizes revenue from its IT asset management business in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 985-605-25 which addresses revenue recognition for the software industry. The general criteria for revenue recognition under ASC 985-605 for our
Company, which sells software licenses, which do not require any significant modification or customization, is that revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.
The Company’s IT asset management business generates revenues from three sources: (1) Professional Services (consulting and auditing), (2) Software licensing with optional
hardware sales and (3) Customer Service (training and maintenance support).
For sales arrangements that do not involve multiple elements:
(1)
Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2)
For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the
option to purchase third party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of
the software and delivery of the hardware, as applicable, to the customer;
(3)
Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
F-15
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
(4)
Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are
deferred and recognized over the contract term.
AI Technologies
The Company has begun to derive revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms to provide important operating
information to the users of our systems. The revenue generated from these applications of AI consists of an annual application maintenance fee which will be recognized
ratably over the year, plus fees for the design, development, testing and incorporation of new algorithms into the system which will be recognized upon completion of each
deliverable.
Deferred Revenue
Deferred revenues represent billings or cash received in excess of revenue recognizable on service agreements that are not accounted for under the percentage of completion
method. At December 31, 2020 and 2019, the balance of deferred revenue was $315,370 and $936,428, respectively. The amounts will be recorded to revenue over the next 12
months.
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:
Turnkey, engineered projects;
Associated maintenance and support services;
Licensing and professional services related to auditing of data center assets;
Predetermined algorithms to provide important operating information to the users of our systems.
a.
b.
c.
d.
2.
3.
4.
We currently operate in North America including the United States, Mexico and Canada.
Our customers include rail transportation, commercial, petrochemical, government, banking and IT suppliers.
Our contracts are fixed price and fall into two duration types:
a.
b.
Turnkey engineered projects and professional service contracts that are less than one year in duration and are typically two to three months in length; and
Maintenance and support contracts ranging from one to five years in length.
5.
Our goods and services are transferred over time.
F-16
Quantitative:
Segments
Primary Geographical Markets
North America
Major Goods and Service Lines
Turnkey Projects
Technical Support
Data Center Auditing Services
Software License
Algorithms
Timing of Revenue Recognition
Goods transferred over time
Services transferred over time
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
For the Year Ended December 31, 2020
Rail
Commercial Petrochemical Government Banking
IT
Suppliers
Artificial
Intelligence
Total
$ 5,558,405 $
298,705 $
23,951 $
687,293 $
188,819 $
273,604 $ 1,008,671 $ 8,039,448
$ 4,131,155 $
1,427,250
—
—
—
$ 5,558,405 $
59,616 $
239,089
—
—
—
298,705 $
33,363 $
(9,412)
—
—
—
23,951 $
599,481 $
87,812
—
—
—
687,293 $
132,515 $
56,304
—
—
—
188,819 $
— $
—
266,449
7,155
—
— $ 4,956,130
— 1,801,043
266,449
—
7,155
—
1,008,671 1.008,671
273,604 $ 1,008,671 $ 8,039,448
$ 4,131,155 $
1,427,250
$ 5,558,405 $
59,616 $
239,089
298,705 $
33,363 $
(9,412)
23,951 $
599,481 $
87,812
687,293 $
132,515 $
56,304
188,819 $
273,604 $ 1,008,671 $ 6,238,405
— 1,801,043
273,604 $ 1,008,671 $ 8,039,448
—
F-17
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
For the Year Ended December 31, 2019
Rail
Commercial Petrochemical Government
Banking
IT Suppliers
Total
$ 11,201,794 $
465,782 $
99,841 $
201,659 $
1,371,821 $
300,418 $ 13,641,315
$ 10,020,318 $
1,181,476
—
—
$ 11,201,794 $
422,230 $
43,552
—
—
465,782 $
70,545 $
29,296
—
—
99,841 $
88,723 $
112,936
—
—
201,659 $
1,361,622 $
10,199
—
—
1,371,821 $
— $ 11,963,438
1,377,459
—
246,658
246,658
53,760
53,760
300,418 $ 13,641,315
$ 10,020,318 $
1,181,476
$ 11,201,794 $
422,230 $
43,552
465,782 $
70,545 $
29,296
99,841 $
88,723 $
112,936
201,659 $
1,361,622 $
10,199
1,371,821 $
300,418 $ 12,263,856
1,377,459
300,418 $ 13,641,315
—
Segments
Primary Geographical Markets
North America
Major Goods and Service Lines
Turnkey Projects
Maintenance & Support
Data Center Auditing Services
Software License
Timing of Revenue Recognition
Goods transferred over time
Services transferred over time
Advertising
The Company expenses the cost of advertising. During the years ended December 31, 2020 and 2019, there were no advertising costs.
Stock Based Compensation
The Company accounts for employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock
purchases based on estimated fair values.
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the
requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock
price as well as assumptions regarding the number of highly subjective variables.
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for employee stock options using the simplified method
for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with
similar maturities.
Income Taxes
The Company accounts for income taxes in accordance with the Financial Accounting Standards Board FASB Accounting Standards Codification (“ASC”) 740, Income Taxes,
which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The deferred
tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered
or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
F-18
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The Company evaluates all significant tax positions as required by ASC 740. As of December 31, 2020, the Company does not believe that it has taken any positions that
would require the recording of any additional tax liability nor does it believe that there are any unrealized tax benefits that would either increase or decrease within the next
year.
Any penalties and interest assessed by income taxing authorities are included in operating expenses.
The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed. Tax
years 2017, 2018 and 2019 remain open for potential audit.
Earnings (Loss) Per Share
Basic earnings per share (EPS) are computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss
per common share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period and, if
dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock
options, stock warrants, convertible debt instruments, convertible preferred stock or other common stock equivalents. Potentially dilutive securities are excluded from the
computation if their effect is anti-dilutive. At December 31, 2020, there was an aggregate of 1,587,553 outstanding warrants to purchase shares of common stock. At December
31, 2020, there was an aggregate of 451,898 employee stock options to purchase shares of common stock. Also, at December 31, 2020, 243,571 common shares were issuable
upon conversion of Series B Convertible Preferred Stock, all of which were excluded from the computation of dilutive earnings per share because their inclusion would have
been anti-dilutive.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease
assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance
with the new revenue guidance in ASC 606. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this
guidance effective January 1, 2019.
On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the
Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases, and (ii) initial direct costs for any existing leases. For contracts
entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is based
on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset
throughout the period, and (3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component based
on its relative stand-alone price to determine the lease payments.
Operating lease right of use assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of future
minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on
the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line
basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
Recent Accounting Pronouncements
From time to time, the FASB or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an
Accounting Standards Update (“ASU”).
F-19
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
In August 2020, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure
requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and
measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. This pronouncement is effective for fiscal years, and for interim
periods within those fiscal years, beginning after December 15, 2021. We plan to adopt this pronouncement for our fiscal year beginning January 1, 2022, and we do not expect
it to have a material effect on our consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying
financial statements.
NOTE 2 – LIQUIDITY
As reflected in the accompanying consolidated financial statements, the Company had a net loss of $6,747,435 for the year ended December 31, 2020. During the same period,
cash used in operating activities was $4,231,439. The working capital surplus and accumulated deficit as of December 31, 2020 were $2,167,058 and $39,488,150, respectively.
In previous financial reports, the Company had raised substantial doubt about continuing as a going concern. This was principally due to a lack of working capital prior to an
underwritten offering which was completed during the first quarter of 2020 (the “2020 Offering”).
Upon completion of the 2020 Offering, management raised sufficient working capital to meet its needs for the next 12-months without the need to raise further capital. Since
the advent of the Covid-19 pandemic, the Company has experienced a significant slowdown in closing new projects due to cautious actions by current and potential clients. We
continue to be successful in identifying new business opportunities and are focused on re-establishing a backlog of projects. Most importantly, the Company’s success in
increasing its working capital surplus after receiving proceeds from the 2020 Offering of more than $8.1 million has given us the runway required to maintain our business
strategy overall. In addition, the Company was successful in securing a loan of $1.4 million during the second quarter from the Small Business Administration via the
PPP/CARES Act program which further bolstered the Company’s cash reserves. Management has been and continues to take actions including, but not limited to, elimination
of certain costs that did not contribute to short term revenue, re-aligning management with a focus on improving certain skill sets necessary to build growth and profitability and
focusing product strategy on opportunities that are likely to bear results in the relatively short term. During February 2021, management has taken further significant actions
including reorganizing senior management and selectively improving organizational efficiency to effectively grow the business as the expected order flow resumes in 2021. (see
Note 15)
Management believes that, at this time, we have alleviated the substantial doubt for the Company to continue as a going concern. We are executing the plan to grow our
business and achieve profitability without the requirement to raise additional capital for existing operations. However, if we experience a significant increase in business in 2021
beyond current forecasts, we may require an increase in working capital in that year. In the first quarter of 2021, the Company raised $4,500,000 from existing shareholders
through the issuance of Series C Convertible Preferred Stock (see Note 15). Although additional investment is not assured, the Company is comfortable that it would be able to
raise sufficient capital to support expanded operations based on this increase in business activity. In the long run, the continuation of the Company as a going concern is
dependent upon the ability of the Company to continue executing the plan described above, generate enough revenue and to attain consistently profitable operations. Although
the current global pandemic related to the coronavirus (Covid-19) has affected our operations, and we do believe this is expected to be a long-term issue, the Company cannot
currently quantify the uncertainty related to the recent pandemic and its effects on our customers in the coming quarters. We have analyzed our cash flow under “stress test”
conditions and have determined that we have sufficient liquid assets on hand to maintain operations for at least 12 months from the date of this report.
F-20
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable were as follows at December 31, 2020 and 2019:
Accounts receivable
Allowance for doubtful accounts
There was bad debt (recovery) expense related to accounts receivable of (3,217) and $220,405 in 2020 and 2019, respectively.
NOTE 4 – PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follow at December 31, 2020 and 2019:
Furniture, fixtures and equipment
Less: Accumulated depreciation
Depreciation expense in 2020 and 2019 was $197,146 and $159,252, respectively.
NOTE 5 – PATENTS AND TRADEMARKS
Patents and trademarks
Less: Accumulated amortization
Amortization expense in 2020 and 2019 was $5,368 and $5,368, respectively.
NOTE 6 – SOFTWARE DEVELOPMENT COSTS
December 31,
$
December 31,
2020
1,244,876 $
—
1,244,876 $
$
2019
2,757,013
(145,405 )
2,611,608
December 31,
December 31,
2020
$
1,569,328
(1,227,148)
$
342,180
$
$
2019
1,290,183
(1,030,002)
260,181
2020
301,770 $
(237,355 )
64,415 $
2019
293,585
(231,987 )
61,598
$
$
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.
Software development costs
Less: Accumulated amortization
Amortization of software development costs in 2020 and 2019 was $20,000 and $20,000, respectively.
F-21
December 31,
2020
December 31,
2019
$
$
60,000 $
(60,000)
— $
60,000
(40,000)
20,000
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 7 – DEBT
Notes Payable – Insurance Premium Financing Agreements
The Company’s notes payable relating to financing agreements classified as current liabilities consist of the following as of:
Notes Payable
Third Party - Insurance Note 1
Third Party - Insurance Note 2
Third Party - Insurance Note 3
Third Party - Insurance Note 4
Total
December 31, 2020
December 31, 2019
Principal
Interest
Principal
Interest
$
$
23,327
10,457
9,158
—
42,942
7.75 % $
5.26 %
—
—
$
28,500
—
13,799
—
42,299
7.31 %
6.36 %
—
—
The Company entered into an agreement on December 23, 2019 with its insurance provider by issuing a $28,500 note payable (Insurance Note 1) for the purchase of an
insurance policy, secured by that policy with an annual interest rate of 7.31% payable in monthly installments of principal and interest totaling $2,218 through October 23,
2020. The policy renewed on December 23, 2020 in the amount of $30,994 with an annual interest rate of 7.75% payable in monthly installments of principal and interest
totaling $2,416 through October 23, 2021. The balance of Insurance Note 1 as of December 31, 2020 and December 31, 2019 was $23,327 and $28,500, respectively.
The Company entered into an agreement on April 15, 2019 in the amount of $51,940 with an annual interest rate of 6.36% payable (Insurance Note 2) with monthly
installments of principal and interest totaling $5,326 through December 15, 2019 and the Company renewed the policy on April 15, 2020 in the amount of $51,379 with an
annual interest rate of 5.26% payable in monthly installments of principal and interest totaling $5,263 through February 15, 2021. At December 31, 2020 and December 31,
2019, the balance of Insurance Note 2 was $10,457 and zero, respectively.
The Company entered into an agreement on September 15, 2019 in the amount of $13,799 with its insurance provider by issuing a note payable (Insurance Note 3) for the
purchase of an insurance policy, secured by 5 installment payments. The Company renewed the policy on September 15, 2020, secured by 12 monthly installments. At
December 31, 2020 and December 31, 2019, the balance of Insurance Note 3 was $9,158 and $13,799, respectively.
The Company entered into an agreement on February 3, 2019 in the amount of $141,058 with an annual interest rate of 6.36% payable in monthly installments of principal and
interest totaling $14,520 (Insurance Note 4) through December 3, 2019. The policy renewed on February 3, 2020 in the amount of $109,812 with eight monthly installments of
$13,726. At December 31, 2020 and December 31, 2019, the balance of Insurance Note 4 was zero and zero, respectively.
Equipment Financing
The Company entered into an agreement on August 26, 2019 with an equipment financing company by issuing a $147,810 secured note, with an annual interest rate of 12.72%
and payable in monthly installments of principal and interest totaling $4,963 through August 1, 2022. The Company entered into an additional agreement on May 22, 2020 with
the same equipment financing company by issuing a $121,637 secured note, with an annual interest rate of 9.90% and payable in monthly installments of principal and interest
totaling $3,919 through June 1, 2023. At December 31, 2020 and 2019, the balance of these notes was $192,804 and $134,098 respectively.
F-22
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
At December 31, 2020, future minimum note payments due under the equipment financing agreements are as follows:
As of December 31,
2021
2022
2023
Total minimum equipment financing payments
Less: interest
Total equipment financing at December 31, 2020
Less: current portion of equipment financing
Long-term portion of equipment financing
Amount
106,588
86,735
23,515
216,838
(24,034)
192,804
(89,620)
103,184
$
$
$
$
Notes Payable – Related Parties
Payable To
Related party
Related party
Total
Less unamortized discounts
Total, net
December 31, 2020
December 31, 2019
Principal
Interest
Principal
Interest
$
$
—
—
—
—
—
3%
3%
$
$
267,000
733,000
1,000,000
(94,627)
905,373
The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the aggregate principal amount of $267,000,
pursuant to a note, repayable on June 25, 2020. The note carried an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase
for cash 11,920 shares of the Company’s common stock at a price of $7.70 per share. On June 22, 2020, the Company repaid this short-term note in the amount of $267,000.
The balance of this note as of December 31, 2020 and 2019 was zero and $267,000, respectively.
The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the aggregate principal amount of $733,000,
pursuant to a note, repayable on June 25, 2020. The note carried an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase
for cash 32,724 shares of the Company’s common stock at a price of $7.70 per share. On June 22, 2020, the Company repaid this short-term note in the amount of $733,000.
The balance of this note as of December 31, 2020 and 2019 was zero and $733,000, respectively.
The Company determined the relative fair value between the notes and the warrants on the issue date utilizing the Bi-nominal Lattice Pricing Model for the warrants. As a
result, the Company allocated $146,779 to the warrants, which was recorded as a debt discount with an offset to additional paid in capital in the accompanying consolidated
financial statements. The fair value pricing model used the following assumptions: stock price $7.00, warrant exercise price $7.70, expected term of 5 years, expected volatility
of 86% and discount rate of 1.609%.
For the year ended December 31, 2020, the Company recorded $94,627 for amortization of the debt discount discussed above to interest expense in the accompanying
consolidated financial statements.
Notes Payable
The Company entered into an agreement on August 12, 2019 with a shareholder by executing a short-term $262,500 note repayable on November 11, 2019. The note was
issued with a 5% original issue discount and the Company received a net amount of $250,000. No other consideration was given. On November 12, 2019, the Company repaid
the short-term note in the amount of $262,500. The original issue discount of $12,500 was fully amortized in 2019.
F-23
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Notes Payable – SBA Loan
Payable To
SBA loan
Total
Less current portion
Long-term portion
December 31, 2020
December 31, 2019
Principal
Interest
Principal
Interest
$ 1,410,270
1% $
1,410,270
(627,465 )
782,805
$
$
—
—
—
—
On April 23, 2020, the Company entered into a promissory note (the “Note”) with BBVA USA, which provides for a loan in the amount of $1,410,270 (the “Loan”) pursuant to
the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Loan has a two-year term and bears
interest at a rate of 1.00% per annum (APR 1.014%). Monthly principal and interest payments are deferred for seven months after the date of disbursement and was extended
additional six months from the date of disbursement. The Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Company applied for the PPP
loan forgiveness and was granted forgiveness on February 1, 2021. (see Note 15)
NOTE 8 – LINE OF CREDIT
The Company assumed a line of credit with Wells Fargo Bank upon merger with ISA on April 1, 2015. The line of credit provided for borrowings up to $40,000 but is now
closed. This line of credit has been paid in full as of May 5, 2020.The balance as of December 31, 2020 and December 31, 2019, was zero and $27,615, respectively, including
accrued interest.
NOTE 9 – CONTRACT ACCOUNTING
Contract Assets
Contract assets on uncompleted contracts represent costs and estimated earnings in excess of billings and/or cash received on uncompleted contracts accounted for under the
percentage of completion contract method.
At December 31, 2020 and 2019, contract assets on uncompleted contracts consisted of the following:
Costs and estimated earnings recognized
Less: Billings or cash received
Contract Assets
Contract Liabilities
2020
2019
$ 4,152,850 $ 3,700,124
(4,050,392) (2,324,204)
102,458 $ 1,375,920
$
Contract liabilities on uncompleted contracts represent billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under
the percentage of completion contract method.
At December 31, 2020 and 2019, contract liabilities on uncompleted contracts consisted of the following:
Billings and/or cash receipts on uncompleted contracts
Less: Costs and estimated earnings recognized
Contract Liabilities
2020
2019
$ 2,978,007 $
(2,268,454)
709,553 $
$
35,665
(27,004)
8,661
F-24
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 10 – DEFERRED COMPENSATION
As of December 31, 2020, and 2019, the Company has accrued $797,042 and $277,850, respectively, of deferred compensation relating to individual agreements with former
CEO and sales staff, which are included in the accompanying consolidated balance sheet in accrued expenses.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Delinquent Payroll Taxes Payable
The Company has subsequently paid its delinquent IRS payroll taxes and late fees. At December 31, 2020 and December 31, 2019, the payroll taxes payable balance of $3,146
and $115,111 included accrued late fees in the amount of zero and $37,210, respectively. The remaining balance of $3,146 with the state of California will be remitted in 2021.
Licensing Agreement
In 2018, the Company had entered into a software license and configuration services agreement with a third-party vendor. The support and maintenance fees of approximately
$300,000 included support and updates to the vendor’s Gateway software and customer access to their services (including web application, mobile application, and associated
APIs) for gateway configuration, gateway monitoring and management, application configuration, application management, and automatic model updates.
Simultaneously, the Company had also entered into a SaaS agreement with the same vendor that was an Amazon AWS-hosted software service supporting the creation and
deployment of Artificial Intelligence. It consisted of a public API, web application, iPhone application, and associated back-end services.
Consistent with the provisions of the agreements, the Company sent formal notice of termination and non-renewal of both agreements to the vendor. The vendor confirmed the
end-of-service date effective December 31, 2019 (the “Termination Date”). No further obligations from either party are in effect beyond the Termination Date.
Effective December 1, 2019, all Artificial Intelligence development and deployment were seamlessly transitioned to the Company’s truevue360 platform.
Operating Lease Obligations
The Company has an operating lease agreement for office space of approximately 8,308 square feet that was amended on May 1, 2016 and again on April 1, 2019, increasing
the office space to approximately 10,203 square feet, with the lease ending on October 31, 2021. The rent is subject to an annual escalation of 3%, beginning May 1, 2017.
The Company entered a new lease agreement of office and warehouse combination space of approximately 4,400 square feet on June 1, 2018 and ending May 31, 2021. On
December 21, 2020, this lease was extended to October 31, 2021. This additional space allows for resource growth and engineering efforts for operations before deploying to
the field. The rent is subject to an annual escalation of 3%.
The Company now has a total of office and warehouse space of approximately 14,603 square feet.
At December 31, 2020, future minimum lease payments due under Operating Leases are as follows:
As of December 31,
2021
Total minimum operating lease payments
Less: interest
Total lease liability at December 31, 2020
Amount
213,568
213,568
(10,771)
202,797
$
$
F-25
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”), which requires all leases with a term greater than 12 months to be recognized on
the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance. We adopted ASU
2016-02 effective January 1, 2019, on a modified retrospective basis, without adjusting comparative periods presented. Effective January 1, 2019, the Company established a
right-of-use model (ROU) asset and operating lease liability in the amount of $644,245. The right of use asset balance at December 31, 2020 was $202,797. These are the
Company’s only operating leases whose term is greater than 12 months. The adoption of ASU 2016-02 did not materially affect our consolidated statement of operations or our
consolidated statements of cash flows. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and to recognize all
lease payments for leases with a term greater than 12 months on a straight-line basis over the lease term in our unaudited consolidated statements of operations.
The current monthly lease payment is $25,098. Rental expense for the office lease during 2020 and 2019 was $279,975 and $262,710, respectively.
Operating Leases
The Company has several non-cancelable operating leases, primarily for equipment, that expire over the next year. Minimum rent payments under operating leases are
recognized on a straight-line basis over the term of the lease. Rental expense for operating leases during 2020 and 2019 was $21,341 and $12,104, respectively.
FP Mailing
Brewsmart Beverage/A. Antique Coffee Services
New Lane
Canon
Apple Financial Services
Ring Power
Ascentium Leasing
NFS Leasing
Total rent expense
Executive Severance Agreement
Year Ended December 31,
2020
2019
$
$
375 $
320
1,800
10,144
5,018
1,688
1,060
936
21,341 $
372
235
500
10,997
—
—
—
—
12,104
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.
F-26
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
In accordance with the Separation Agreement the Company will pay to Mr. Arcaini the total sum of $747,788. Notwithstanding the foregoing, the status of Mr. Arcaini as a
“Specified Employee” as defined in Internal Revenue Code Section 409A has the effect of delaying any payments to Mr. Arcaini under the Separation Agreement for six
months after the Separation Date. On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631, owed to Mr.
Arcaini and the Company will continue to pay him in bi-weekly installments for 30 months thereafter, as contemplated in the Arcaini Employment Agreement. In addition, the
Company will pay one-half of Mr. Arcaini’s current life insurance premiums for 36 months of approximately $1,200 and provide and pay for his health insurance for 18 months
following the Separation Date of approximately $1,700. Unvested options in the amount of 50,358 became exercisable and vested in their entirety on the Separation Date valued
at $95,127. The Company made payment of his attorneys’ fees for legal work associated with the negotiation and drafting of the Separation Agreement of approximately
$17,000.
NOTE 12 – 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 at December 31, 2020 and 2019 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, 2020 and 2019
were as follows:
Income tax benefit at U.S. statutory rate of 21%
State income taxes
Non-deductible expenses
Change in valuation allowance
Total provision for income tax
The Company’s approximate net deferred tax assets as of December 31, 2020 and 2019 were as follows:
Deferred Tax Assets:
Net operating loss carryforward
Intangible assets
Allowance for bad debt
Valuation allowance
Net deferred tax assets
Years Ended December 31,
2020
$ (1,416,961) $
(242,908 )
135,152
1,524,717
— $
$
2019
(518,885 )
(88,952)
26,943
580,894
—
December 31,
2020
2019
$
$
6,807,482 $
31,841
—
6,839,323
(6,839,323)
— $
5,224,941
53,995
35,670
5,314,606
(5,314,606)
—
The gross operating loss carryforward was approximately $27,672,692 and $21,403,666 at December 31, 2020 and 2019, respectively. The Company provided a valuation
allowance equal to the deferred income tax assets for the years ended December 31, 2020 and 2019 because it was not known whether future taxable income will be sufficient to
utilize the loss carryforward and other deferred tax assets. The increase in the valuation allowance was $1,524,717 in 2020.
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 $2,409,245 from the period following the Act’s effective date can be carried forward indefinitely within the annual usage
limitations.
F-27
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual limitation as a result of ownership or business
changes that may occur in the future. The Company has not conducted a study to determine the limitations on the utilization of these net operating loss carryforwards. If
necessary, the deferred tax assets will be reduced by any carryforward that may not be utilized or expires prior to utilization as a result of such limitations, with a corresponding
reduction of the valuation allowance.
The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2019, 2018 and 2017 Corporate Income Tax Returns
are subject to Internal Revenue Service examination.
NOTE 13 – STOCKHOLDERS’ EQUITY (DEFICIT)
2016 Equity Plan
On March 11, 2016, the Board adopted the 2016 Equity Incentive Plan (the “2016 Plan”) and the shareholders approved the 2016 Plan during the annual shareholders meeting
on April 21, 2016. On May 27, 2016, the Company filed a registration statement for the securities planned to be issued under the plan which became effective at that date.
The “2016 Plan” provided for the issuance of up to 16,327 shares of our common stock. The purpose of the Plan was to assist the Company in attracting and retaining key
employees, directors and consultants and to provide incentives to such individuals to align their interests with those of our stockholders. In March 2018, the Board of Directors
approved an increase in the total amount of shares or share equivalents that could be issued under the 2016 Plan to 178,572. On July 31, 2019, the shareholders approved an
increase in the total maximum amount issuable under the 2016 Plan to 321,429.
On April 23, 2018, the Company issued a total of 160,152 incentive stock options to certain employees and directors under the 2016 Plan. In 2019, the Company issued an
additional 17,144 options for two directors who joined the board and a former officer forfeited 14,286 options. On April 1, 2020, the Company cancelled and re-issued 160,866
existing non-qualified options to key staff members, officers and directors which had an exercise price of $14.00 per share with a reduced exercise price of $6.00 per share. In
addition, a further 149,424 options were issued to key staff members, officers and directors with an exercise price of $4.74 per share and 536 options were forfeited From
September to December 2020, 140,000 options with strike prices ranging from $4.18 to $4.35 were issued the Company’s new CEO and two key staff members as an incentive
to join the Company. The total options issued under the 2016 Plan are 451,898 at the end of 2020. (see Note 14)
Administration
The 2016 Plan was administered by the Compensation Committee of the Board, which currently consists of two 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 had complete discretion, subject to the express limits of the 2016 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 2016 Plan. Notwithstanding the foregoing, the
Compensation Committee does not have any authority to modify an award under the 2016 Plan with terms or conditions that would cause the grant, vesting or exercise thereof
to be considered nonqualified “deferred compensation” subject to Code Section 409A.
F-28
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Grant of Awards, Shares Available for Awards
The 2016 Plan provided 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
reserved a total of 321,429 shares of common stock for issuance as or under awards made under the 2016 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 2016 Plan.
Currently, there are twenty five identified employees (including four executive officers and directors), three non-employee directors, and up to thirty other current or future staff
members who would be entitled to receive stock options and/or shares of restricted stock under the 2016 Plan. Future new hires and additional non-employee directors and/or
consultants would be eligible to participate in the 2016 Plan as well.
Stock Options
The 2016 Plan provided for either “incentive stock options” (“ISOs”), which are intended to meet the requirements for special federal income tax treatment under the Code, or
“nonqualified stock options” (“NQSOs”). The stockholders approved the 2016 Plan at the annual meeting as previously described. Stock options could 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 could 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 owned (or was deemed to own) more than 10% of the total combined voting power of all classes of capital stock of our Company or
a parent or subsidiary of our 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
A 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 could be granted in tandem with, or independently of, stock options granted under the 2016 Plan. A
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. A SAR that is not granted in tandem with a stock option is exercisable at such times
as the Compensation Committee may specify.
Performance Shares 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.
F-29
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Unrestricted Stock Awards
An unrestricted stock award is a grant or sale of shares of our common 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 2016 Plan, but no such amendment or termination will be made that
materially and adversely impairs the rights of any participant with respect to any award received thereby under the 2016 Plan without the participant’s consent, other than
amendments that are necessary to permit the granting of awards in compliance with applicable laws. We have attempted to structure the 2016 Plan so that remuneration
attributable to stock options and other awards will not be subject to the deduction limitation contained in Code Section 162(m). The 2016 Plan terminated pursuant to its terms
on December 31, 2020, although all outstanding awards on such date continue in full force and effect.
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. As of the date hereof, there are 1,705 shares of Series B Convertible Preferred Stock issued and outstanding (see below for 2019 and 2020 conversions to common stock).
Common stock issued for warrants
During the first quarter of 2019, the Company entered into an agreement with two shareholders who were also holders of warrants to purchase shares of common stock in the
aggregate amount of 214,286 shares, to reduce the exercise price of these warrants to $7.70 from the original exercise price of $9.10 based on immediate exercise. Both
shareholders exercised these warrants in March 2019 for proceeds to the Company of $1,650,000.
The Company also accepted warrant exercises in the second quarter of 2019 from three additional shareholders who were also holders of warrants to purchase shares of
common stock in the aggregate amount of 66,756 shares. The exercise price of these warrants was also lowered to $7.70 from the original exercise price of $9.10 based on
immediate exercise for further proceeds to the Company of $514,020. Further, during the second quarter of 2019, the Company issued 9,878 shares of common stock upon the
cashless exercise of 46,571 common stock warrants.
F-30
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Additionally, the Company also accepted warrant exercises in the third quarter of 2019 from two additional shareholders who were also holders of warrants to purchase shares
of common stock in the aggregate amount of 19,643 shares of common stock for proceeds to the Company in the amount of $151,250.
The Company also accepted a warrant exercise in the fourth quarter of 2019 from one shareholder who was also a holder of warrants to purchase shares of common stock in the
aggregate amount of 357 shares of common stock for proceeds to the Company in the amount of $2,750.
During the third quarter of 2020, 67,500 warrants previously issued as compensation for banking fees related to the 2020 offering, were released from a contractual “lock-up”
pursuant to the terms of the raise lock-up. In addition, 1,197 warrants expired, and 9,450 warrants were cancelled and re-issued on the direction of the holder.
Common stock issued for services and settlements
The Company issued 2,484 shares of common stock on August 28, 2019 for payment of accrued board fees to two directors in the amount of $19,167 for services to the Board.
The Company issued 2,039 shares of common stock on December 31, 2019 for payment of accrued board fees to three directors in the amount of $13,750 for services to the
Board.
The Company issued 1,611 shares of common stock on March 31, 2020 for payment of accrued board fees to three directors in the amount of $7,500 for services to the Board.
The Company issued 1,632 shares of common stock on June 30, 2020 for payment of accrued board fees to three directors in the amount of $7,500 for services to the Board.
The Company issued 7,869 shares of common stock on September 30, 2020 for payment of accrued board fees to three directors in the amount of $37,500 for services to the
Board.
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the year ended December 31, 2020 and 2019, was $454,770 and $44,874, respectively, for stock options
granted to employees and directors. This expense is included in selling, general and administrative expenses in the consolidated statements of operations. Stock-based
compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At
December 31, 2020, the total compensation cost for stock options not yet recognized was $264,256. This cost will be recognized over the remaining vesting term of the options
of approximately one year.
Series B Convertible Preferred Stock
A holder of Series B Convertible Preferred Stock converted 750 shares into 107,142 shares of common stock, valued at $750,000 during the third quarter of 2019.
A holder of Series B Convertible Preferred Stock converted 375 shares into 53,571 shares of common stock, valued at $375,000 during the fourth quarter of 2019.
F-31
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Treasury Stock
In August 2016, the Company’s Board of Directors approved a new class of Preferred Stock, “Series A”. For shareholders who invested in previous private placements, the
Company was offering on a case-by-case basis, the ability to convert the existing amount invested into an equivalent amount in the Series A on the condition that they invest an
equivalent additional amount in the Series A. In December of 2017, the Company redeemed all of the Series A and continues to hold 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, 2020, and 2019,
the Company held 1,324 shares of Company Series A stock at an aggregate value of $157,452.
NOTE 14 – COMMON STOCK OPTIONS AND WARRANTS
Options
2020
During the second quarter of 2020, 160,866 options were cancelled and re-issued to key staff-members, officers, and directors. Of those options granted, 100% vested
immediately. The value of the re-issued options granted was $102,800. In addition, 149,424 new options were granted to key staff-members, officers and directors. Of those
options granted, 50% vested on January 1, 2021 and the other 50% will vest on January 1, 2022. The value of the new options is $370,312.
During the third quarter of 2020, 100,000 options were issued to the Company’s new CEO as a hiring incentive. Of these options 50% will vest on September 1, 2021 and the
other 50% will vest on September 1, 2022. The value of these options is $193,388. In addition, as a part of the severance agreement agreed with the former CEO, 50,358
unvested options were vested and the unamortized portion of those options were charged in the amount of $95,127.
During the fourth quarter of 2020, 40,000 options were granted to two new key employees. For 20,000 of those options, 50% of the options will vest on October 12, 2021 and
the other 50% will vest on October 12, 2022. For the other 20,000 options, one-third will vest on November 23, 2021, the next third will vest on November 23, 2022 and the
final third will vest on November 23, 2023. The value of these options is $91,574.
Outstanding at December 31, 2018
Granted
Forfeited
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Outstanding at December 31, 2019
Granted
Cancelled/Forfeited
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
14.00
14.00
14.00
14.00
14.00
14.00
5.06
14.00
5.06
5.76
4.3
5.0
—
3.4
3.4
3.4
4.4
—
4.4
4.2
—
—
—
—
—
—
—
—
$7,200
—
Shares
160,152 $
17,144 $
(14,286)
163,010 $
154,438 $
163,010 $
450,290 $
(161,402 ) $
451,898 $
212,832 $
F-32
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The fair value of the incentive stock option grants for the years ended December 31, 2020 and 2019 were estimated using the following weighted- average assumptions:
Risk free interest rate
Expected term in years
Dividend yield
Volatility of common stock
Estimated annual forfeitures
Warrants
2020
For the Years Ended
December 31,
2020
0.18% - 0.26%
2.50 - 3.50
—
68.00% - 86.24%
—
2019
1.44 - 2.44%
2.76 - 3.25
—
117.18% - 151.43%
—
During the first quarter of 2020, 67,500 warrants were issued as compensation in the form of bankers warrants in connection with the 2020 Offering for which no other warrants
were issued. The warrants had a strike price of $9.00 and were locked up until the third quarter of 2020.
During the second quarter of 2020, 9,450 warrants previously issued as bankers warrants in the first quarter were cancelled and re-issued with no change in terms. In addition,
1,197 warrants previously issued, expired.
During the third quarter of 2020, 67,500 warrants issued in the first quarter became exercisable.
During the fourth quarter of 2020, 12,469 previously issued warrants were cancelled and re-issued with no change in terms as part of a settlement between certain shareholders.
2019
During the first quarter of 2019, 214,286 warrants were exercised for cash in the amount of $1,650,000 and 38 warrants expired.
During the second quarter of 2019, a total of 113,328 warrants were exercised of which 66,756 were for cash in the amount of $137,500 and 46,572 were cashless in exchange
for 9,878 shares of common stock. Total common stock issued was 76,634 shares.
During the third quarter of 2019, 44,644 warrants were issued in connection with a $1,000,000 working capital loan (see Note 7). Additionally, 19,643 warrants were exercised
for cash in the amount of $151,250.
F-33
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
During the fourth quarter of 2019, 357 warrants were exercised for cash in the amount of $2,750.
Outstanding at December 31, 2018
Warrants expired, forfeited, cancelled or exercised
Warrants issued
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Outstanding at December 31, 2019
Warrants expired, forfeited, cancelled or exercised
Warrants issued
Outstanding at December 31, 2020
Exercisable at December 31, 2020
NOTE 15 – SUBSEQUENT EVENTS
Number of
Warrants
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
1,815,181 $
(338,575 )
44,644 $
1,521,250 $
1,521,250 $
1,521,250 $
(23,116)
89,419 $
1,587,333 $
1,587,333 $
9.52
7.70
8.78
8.78
8.78
9.02
8.62
8.69
3.9
4.9
3.9
3.9
3.9
2.2
2.0
2.0
—
—
—
—
—
—
—
—
On February 1, 2021, the Company received notice that the PPP Cares Act loan that was issued in 2020 in the amount of $1,421,395 including accrued interest, was forgiven by
the Small Business Administration.
On February 26, 2021, as previously disclosed, the Company accepted an offer from two existing shareholders to invest $4,500,000 in the form of a newly designated Series C
Convertible Preferred Stock. The offer includes a registration rights agreement and contains certain voting limitations subject to shareholder approval.
F-34
EXHIBIT 4.5
The following is a summary of the terms of each class of securities of Duos Technologies Group, Inc. (the “Company”) that is
registered under Section 12 of the Securities Exchange Act of 1934, as amended.
Description of Duos Technologies Group, Inc.’s Securities
Common Stock
The following summary of the terms of the Company’s common stock, par value $0.001 per share (the “ Common Stock”), is not
complete and is subject to and qualified in its entirety by reference to the relevant provisions of the laws of the State of Florida, the Company’s
Amended and Restated Articles of Incorporation, as amended (the “Articles of Incorporation”), and its Amended and Restated Bylaws (the
“Bylaws”). Copies of the Articles of Incorporation and Bylaws have been filed as exhibits with the Securities and Exchange Commission.
General
The total number of shares which the Company is authorized to issue is 510,000,000 shares, consisting of 500,00,000 shares of
Common Stock and 10,000,000 shares of preferred stock, par value $0.001 per share (the “Preferred Stock”). As of March 23, 2021, we had
3,534,869 shares of Common Stock issued and outstanding and an aggregate of 6,205 shares of Preferred Stock of various series issued and
outstanding.
The Common Stock is traded on the NASDAQ Capital Market under the symbol “DUOT.” The transfer agent for the Common Stock
is Continental Stock Transfer & Trust.
Voting and Other Rights
Each holder of Common Stock shall be entitled to one vote for each share of Common Stock held of record by such holder on all
matters on which shareholders generally are entitled to vote, except as may be otherwise provided in the Articles of Incorporation (including
any Certificate filed with the Secretary of State of the State of Florida establishing the terms of a series of Preferred Stock) or by the Florida
Business Corporation Act (the “Act”). The holders of Common Stock do not have any cumulative voting rights. Subject to the Act and the
rights (if any) of the holders of any outstanding series of Preferred Stock, dividends may be declared and paid on the Common Stock at such
time and in such manner as the Board of Directors, in its discretion, shall determine. The Common Stock has no preemptive rights, conversion
rights or other subscription rights, or redemption or sinking fund provisions. Upon the dissolution, liquidation or winding up of the Company,
subject to the rights (if any) of the holders of any outstanding shares of Preferred Stock, the holders of Common Stock shall be entitled to
receive the assets of the Company available for distribution to shareholders ratably in proportion to the number of shares held by them.
Anti-Takeover Effects of Florida Law and our Articles of Incorporation and Bylaws
Certain provisions of Florida law, our Articles of Incorporation and our Bylaws contain provisions that could have the effect of
delaying, deferring, or discouraging another party from acquiring control of us. These provisions, which are summarized below, may have the
effect of discouraging coercive takeover practices and inadequate takeover bids. The provisions are also designed, in part, to encourage
persons seeking to acquire control of us to first negotiate with our Board of Directors. We believe that the benefits of increased protection of
our potential ability to negotiate with any unfriendly or unsolicited acquiror outweighs the disadvantage of discouraging a proposal to acquire
us because negotiation of these proposals could result in an improvement of their terms.
Board Composition and Filling Vacancies
Our Bylaws provide that, at a meeting of the shareholders called expressly for that purpose, any director or the entire Board of
Directors may be removed, with or without cause, by a vote of the holders of a majority of the shares of each class or series of voting stock
present in person or by proxy then entitled to vote at an election of directors. Board vacancies and newly-created directorships resulting from
(i) an increase in the authorized number of directors, (ii) death, (iii) resignation, (iv) retirement, (v) disqualification, or (vi) removal from
office, may be filled by a majority vote of the remaining directors then in office, although less than a quorum, or by the sole remaining
director, and each director so chosen shall hold office until the next annual meeting of shareholders and until such director’s successor shall
have been duly elected and qualified.
Shareholder Meetings and Advance Notice Requirements
Our Bylaws establish advance notice procedures with regard to a shareholder’s ability to call a special meeting as well to shareholder
proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our shareholders.
These procedures provide that notice of shareholder proposals must be timely given in writing to our corporate secretary prior to the meeting
at which the action is to be taken. Generally, for a shareholder proposal to be timely, notice must be received at our principal executive offices
not less than 120 days nor more than 150 days prior to the first anniversary of the date the Company released its proxy materials to its
shareholders for the prior year’s annual meeting of shareholders or any longer period provided by applicable law. Our Bylaws specify the
requirements as to form and content of all shareholders’ notices. These requirements may preclude shareholders from bringing matters before
the shareholders at an annual or special meeting.
Sections 607.0901 and 607.0902 of the Act
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 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 Articles of Incorporation to opt out of Section 607.0901.
In addition, we are subject to Section 607.0902 of the 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.
Authorized Blank Check Preferred
The Board of Directors is authorized to provide, out of the unissued shares of Preferred Stock, a series of Preferred Stock and, with respect to
each such series, to fix the number of shares constituting such series, and the designation of such series, the voting and other powers (if any) of
the shares of such series, and the preferences and any relative, participating, optional or other special rights and any qualifications, limitations
or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of such
series of Preferred Stock, and the qualifications, limitations or restrictions thereof, may differ from those of any and all other series of preferred
Stock at any time outstanding. The powers and rights of any series of Preferred Stock may be superior to, or otherwise limit, the rights and
powers of the Common Stock.
EXHIBIT 10.32
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Charles P. Ferry, certify that:
1. I have reviewed this annual report on Form 10-K of Duos Technologies Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly for the period in
which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent function):
a)
b)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and
report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial
reporting.
Date: March 30, 2021
By: /s/ Charles P. Ferry
Charles P. Ferry
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Adrian G. Goldfarb, certify that:
1. I have reviewed this annual report on Form 10-K of Duos Technologies Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly for the period in
which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent function):
a)
b)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and
report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial
reporting.
Date: March 30, 2021
By: /s/ Adrian G. Goldfarb
Adrian G. Goldfarb
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with this Annual Report of Duos Technologies Group, Inc. (the “Company”), on Form 10-K for the year ended December 31, 2020, as filed with the U.S.
Securities and Exchange Commission on the date hereof, I, Charles P. Ferry, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18
U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) Such Annual Report on Form 10-K for the year ended December 31, 2019, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in such Annual Report on Form 10-K for the year ended December 31, 2019, fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: March 30, 2021
By:/s/ Charles P. Ferry
Charles P. Ferry
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with this Annual Report of Duos Technologies Group, Inc. (the “Company”), on Form 10-K for the year ended December 31, 2020, as filed with the U.S.
Securities and Exchange Commission on the date hereof, I, Adrian G. Goldfarb, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18
U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) Such Annual Report on Form 10-K for the year ended December 31, 2019, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in such Annual Report on Form 10-K for the year ended December 31, 2019, fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: March 30, 2021
By:/s/ Adrian G. Goldfarb
Adrian G. Goldfarb
Chief Financial Officer