UNITED STATES
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DUOS TECHNOLOGIES GROUP INC.
2021 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
| PAGE | ||
| PART I | ||
| Item 1. | Business | 1 |
| Item 1A. | Risk Factors | 8 |
| Item 1B. | Unresolved Staff Comments | 15 |
| Item 2. | Properties | 15 |
| Item 3. | Legal Proceedings | 15 |
| Item 4. | Mine Safety Disclosures | 15 |
| PART II | ||
| Item 5. | Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 16 |
| Item 6. | [Reserved] | 17 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 18 |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 26 |
| Item 8. | Financial Statements and Supplementary Data | 27 |
| Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure | 27 |
| Item 9A. | Controls and Procedures | 27 |
| Item 9B. | Other Information | 27 |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 27 |
| PART III | ||
| Item 10. | Directors, Executive Officers and Corporate Governance | 28 |
| Item 11. | Executive Compensation | 35 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 38 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 43 |
| Item 14. | Principal Accountant Fees and Services | 44 |
| PART IV | ||
| Item 15. | Exhibits and Financial Statement Schedules | 45 |
| Item 16. | Form 10-K Summary | 47 |
| SIGNATURES | 48 | |
| i |
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 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, except as may be required by law.
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PART I
Item 1. Business.
Our Corporate History
Information Systems Associates, Inc. (“ISA”). was incorporated in Florida on May 31, 1994. Our original business operations consisted of consulting services for asset management of large corporate data centers and the development and licensing of information technology (“IT”) asset management software. In late 2014, ISA entered negotiations with Duos Technologies, Inc. (“duostech™”) for the purposes of executing a merger between the two organizations (also known as a “reverse triangular merger”). Incorporated under the laws of Florida on November 30, 1990, duostech™ operated in various industry segments, specializing in the design, development and deployment of proprietary technology applications and turn-key engineered systems. This transaction was completed on April 1, 2015, whereby duostech™ became a wholly owned subsidiary of ISA. After the merger was completed, ISA changed its corporate name to Duos Technologies Group, Inc (together with its subsidiaries, “Duos,” “we,” “us” or the “Company”). The Company, based in Jacksonville, Florida, oversees its wholly owned subsidiary, duostech™ which employs approximately 68 people and is a technology company which designs, develops, deploys and operates intelligent technology solutions with a focus on software applications and artificial intelligence (“AI”). The company has a strong portfolio of intellectual property. The Company’s headquarters are located at 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 32256 and main telephone number is (904) 296-2807.
Overview
The Company, operating under its brand name duostech, designs, develops, deploys and operates intelligent technology solutions for inspecting and evaluating moving objects. Its technology focus is within the Vision Technology market sector and, more specifically, the Machine Vision subsector. Machine Vision companies provide imaging-based automatic inspection and analysis for process control for industry with potential expansion into other markets. Duos has developed key technologies over the past several years in software, industry specific hardware and artificial intelligence and has demonstrated industrial strength usability of its systems supporting rail, logistics and intermodal businesses that streamline operations, improve safety and reduce costs. Our employee team include engineering subject matter expertise in hardware, software, and information technology as well as industry specific applications of artificial intelligence also referred to as Expert Artificial Intelligence.
Duos is currently developing industry solutions for its target markets which will address rail, trucking, aviation and other vehicle-based processes. Duos initial offering, the Railcar Inspection Portal (RIP), provides both freight and transit railroad customers and select government agencies the ability to conduct fully 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. The algorithms are developed in conjunction with industrial application experts, in this case Railcar Mechanical Engineers, to provide specific guidance in the analysis (“human in the loop”). Within minutes of the railcar passing through the RIP, a detailed report is sent to the customer where they are able to action identified issues. This solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The Company has already deployed this system with several Class 1 railroads and anticipates an increased demand from transit and other railroad customers along with selected government agencies that operate and/or manage rail traffic. The Company has deployed RIPs in Canada, Mexico and the United States and anticipates expanding this solution into Europe 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. The Company is evaluating other solutions for moving vehicles including aircraft, which could provide similar benefits in terms of safety and efficiency for required inspections as part of an operations process.
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We have developed two proprietary solutions that operate our software and artificial intelligence. centraco® is an Enterprise Information Management Software platform that consolidates data and events from multiple sources into a unified and distributive user interface. Customized to the end user’s Concept of Operations (CONOPS), it provides improved situational awareness and data visualization for operational objectives compared to traditional manual inspections. truevue360™ is our fully integrated platform that we utilize to develop and deploy Artificial Intelligence (AI) algorithms, including Machine Learning, Computer Vision, Object Detection and Deep Neural Network-based processing for real-time applications. As an adjunct to these two platforms, the Company also has developed two other concepts which integrate with:
| 1. | Bespoke hardware that is used to enhance the results achieved by the installed systems including certain enhanced vision and lighting technology to improve image capture and speed normalization to provide consistent image quality which is critical for artificial intelligence algorithms to operate with a high level of accuracy. |
| 2. | Integrated specific application expertise necessary to increase the level of precision in terms of anomaly detection resulting in lower levels of “false positives” in any specific detection situation. |
These two concepts have been developed and enhanced over the last 12-months and are expected to open up other opportunities for the Company to provide revenue producing products and solutions with potentially high market acceptance.
During the year the Company ended support of its IT Asset Management (ITAM) solution which cataloged results for data center asset inventory and audit services. We are currently evaluating using our current operations experience within “edge data centers” (as deployed for our Railcar Inspection Portal) to drive additional revenues within other markets requiring this type of solution although no specific offering has been developed at this time.
The year 2021 brought significant challenges, changes and opportunities for our business that will be discussed in greater detail later in this report. They include:
| · | 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 first quarter 2022. |
| · | Overhauling the Engineering, Software, and Information Technology units including the appointment of Jeffrey Necciai as the Company’s Chief Technology Officer (“CTO”). |
| · | Addition of Mr. Edmond Harris, former COO of CSX and CN, to our Board of Directors in fourth quarter, 2020 and the addition of Mr. Craig Nixon to the Board of Directors in July of 2021 |
duostech™
Over the past 10 years, the Company has developed a series of industry specific technologies some of which are described below.
Railcar Inspection Portal (rip®)
Federal regulations require each railcar/train to be inspected for mechanical defects prior to leaving a rail yard. Founded in 1934, the Association of American Railroads (AAR) is responsible for setting the standards for the safety and productivity of the U.S./North American freight rail industry, and by extension, has established the inspection parameters for the rail industry’s rolling stock. Also known as the “Why Made” codes, the AAR established approximately 110 inspection points under its guidelines for mechanical inspections.
Under current practice, inspections are conducted manually, a very labor intensive and inefficient process that only covers a select number of inspection points and can take several hours per train. We believe our Railcar Inspection Portal has the potential to reduce this inspection to minutes while the train is moving at speed improving safety, reducing dwell time and optimizing maintenance.
| 2 |
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 starting to use our rip® technology with one of those railroads broadly deploying the technology across its network. The ultimate objective is to change inspection regulations that would allow replacement of the current manual inspection (in the yard) with our fully automated process.
The following examples of automated detections are the result of the combination of our image capture technologies. Some of these mechanical defects, if unattended, could cause a derailment. Other examples of our AI-based detection applications include inspections at rail border crossings in support of the Customs and Border Protection Agency.
Samples of Automated Detections
The Company continues to expand its detection capabilities through the development and integration of additional sensor technologies to include laser, infrared, thermal, sound and x-ray to process AI-based analytics of inspection points.
Vehicle Undercarriage Examiner (vue®)
A system that inspects the undercarriage of railcars (both freight and transit rail) traveling at speeds of up to 70 mph. We are currently developing an expanded version for higher speeds with additional sensor technologies. We are developing additional algorithms for an increasing number of automated detection of anomalies, which we believe once completed and successfully tested, may have a significant impact on our revenues.
| 3 |
Thermal Undercarriage Examiner (t-vue™)
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 (centraco®)
This intelligent user interface is at the core of all our systems and enables end users to connect to an unlimited number of operational sites from one central interface, the centraco® Enterprise Command and Control Suite. A multi-layered command and control interface, it is designed to function as the central point and aggregator for information consolidation, connectivity and communications. The platform is browser based and agnostic to the interconnected sub-systems. It provides full integration for seamless user credentialing and performs the following major functions:
| · | Collection: Device management independently collects data from any number of disparate devices or sub-systems. |
| · | Analysis: Correlates and analyzes data, events and alarms to identify real-time situations and their priorities for response measures and end-user’s Concept of Operations (“CONOPS”). |
| · | Verification: The contextual layer represents relevant information in a quick and easily interpreted format which provides operators optimal situational awareness. |
| · | Resolution: Event-specific presentation of user-defined Standard Operating Procedures (“SOPs”), that includes step-by-step instructions on how to resolve situations. |
| · | Reporting: Tracking of data and events for statistical, pattern and/or forensic analysis. Features include mathematical, statistical and comparative data reporting as well as interoperability with third-party databases. Reports are customized to the end user’s data formats and infrastructure. |
| · | Auditing: Device-level drill down that records each operator’s login interaction with the system and tracks manual changes including calculations of operator alertness and reaction time for each event. |
| · | AutoCheck: The system pings each device connected to its wide area network and performs periodic functionality audits. A variable alert feature sends out error messages to an unlimited number of user-definable stakeholders in case any device does not perform to specifications. |
| 4 |
Automated Logistics Information Systems (alis™)
We have developed and deployed a proprietary intelligent system to automate security gate operations at nine distribution centers owned and operated by a national retail chain. Using similar technology that is used in our Rail Inspection Portal, this solution automates the process of entering and exiting a large logistics or intermodal yard. This automates the logistics transaction, improves throughput and can also be used to automate security and maintenance screening/detection if desired by the customer.
Automated Gate Operation alis™ deployed at nine Kohl’s distribution centers
Markets
We believe 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 we believe would be time consuming and expensive for a new competitor to replicate. Furthermore, we believe we have the ability to upgrade and scale our solutions with additional technologies in the future. We believe that the current market for our technologies is substantial. At the same time, we recognize that the technology life cycle is fast and evolving. Potential competitors could move into this sector, and it is possible that some Class 1 railroads could develop their own solutions that limit our total addressable market.
Another market we are pursuing as our second priority is using our Automated Logistics and Information Systems solution (alis™). Potential customers include commercial retail logistics and intermodal operators, Class 1 rail intermodal operators that are moving large amounts of automobiles, and U.S. Government agencies such as the Department of Defense and the Department of Homeland Security. Today, we currently have 20 production systems in use, but we believe the greenfield opportunity here to be substantial. We have identified over 900 lanes of traffic within nearly 300 facilities as potential business opportunities in the near-term.
Currently, we are focused on the North American market, but plan to expand globally in the future.
Patents and Trademarks
The Company holds a number of patents and trademarks for our technology solutions. We protect our intellectual property rights by relying on federal, state, and common law rights, as well as contractual restrictions. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with all of our employees and contractors, and confidentiality agreements with third parties. We also actively engage in monitoring activities with respect to infringing uses of our intellectual property by third parties.
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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 believe that we are the most advanced technology currently focused on 360-degree inspections of railcars and have limited 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. We are not aware of any other company, that creates images of the entire car from multiple perspectives and with many different inspection points. Other companies that participate in the visual and optical (laser) based railcar inspection systems market include Trimble Rail Solutions/Beena Vision and KLD Labs, both primarily focused on wheel and brake inspections and the Class 1 railroads themselves developing “in-house” solutions.
Our Automated Logistics Information System (ALIS) also represents an opportunity to expand into a mature market that we believe has a significant technology gap. While most facilities, such as distribution centers, that process commercial trucks in and out have sophisticated software management applications for logistics control, they have most often not implemented an advanced gatehouse automation solution. Historically, this category was referred to as “Automated Gate Systems” or AGS. The purpose of AGS technology is to streamline entry in to and exit out of facilities. The marketplace for this was mostly seaports and intermodal transfer facilities and was relatively expensive technology to deploy. 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 competition includes Nascent with a primary focus on seaports and intermodal transfer facilities.
Our Growth Strategy
Vision
The Company designs, develops, deploys and operates intelligent technology solutions for inspecting and evaluating moving objects. Its technology focus is within the Machine Vision market which offers imaging-based automatic inspection and analysis for process control for industry with potential expansion into other markets.
Objectives
| · | Improve our operational and technical execution, customer satisfaction and implementation speed. |
| · | Expand Rail Inspection Portal and Automated Logistics Information System with current and future customers in Rail, Logistics and U.S. Government sectors. |
| · | Offer both CAPEX and OPEX pricing models that seek to increase recurring revenue and improve profitability. |
| · | Form strategic partnerships that improve market access and credibility. |
| · | Improve policy, processes, and toolsets to become a viable platform for internal growth and for mergers and acquisitions. |
| · | Thoughtfully execute mergers and acquisitions 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. |
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Organic Growth
Our organic growth strategy is to continue our focus and prioritization in the rail, logistics and intermodal market space. In this regard, the Company has made significant changes in the senior management team to include a new Chief Executive Officer who 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 2022, the Company’s primary customers have indicated readiness to order more equipment and services based upon the Company’s current performance.
Additionally, the 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.
For 2022 and possibly beyond, we expect to face significant challenges with macro-economic impacts, specifically inflation and supply chain disruption. Although these started to be identified in late 2021, we believe they are manifesting themselves in ways that could hinder our business growth in the future. Specifically, the ability to source key components and certain implementation services will dictate just how quickly the Company can meet desired installation deadlines. In the industries in which we operate, the time from concept to contract can be substantial. Although we are now adapting to these challenges, previous bids that have been submitted could be challenging to execute within the financial framework and execution times originally envisaged. We continue to have dialogue with our customers regarding potential price increases and implementation delays, but we may suffer some economic impacts as a result of this. Revenue recognition could be delayed as result of these factors and profitability could be impacted due to higher costs for materials and other services. The Company will continue to monitor the situation and update shareholders as the situation unfolds.
Research and Development
The Company’s R&D and software development teams design and develop all systems and software applications with a combination of full-time in-house software engineers and outside contractors. Internal development allows us to maintain technical control over the design and development of our products. Rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology, and changing customer requirements characterize the markets in which we compete. We plan to continue to dedicate significant resources to research and development efforts, including software development, to maintain and improve our current product and services offerings.
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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.
The Company’s primary customers are all governed by regulations related to the safe and effective transportation of goods, primarily by rail, but in future scenarios by Air, Road and Sea. While changes in the regulatory environment could impact the Company in future years, we review potential changes in the regulatory environment and maintain contact with key personnel at certain agencies including the Federal Railroad Administration (FRA), Transportation Safety Agency (TSA) as well as the DHS previously mentioned. We expect to develop similar relationships with governmental agencies in target market both in the US and internationally. At this time, we believe our offerings are complementary with the current and evolving standards and that we will adapt to any new regulations as they are promulgated.
Employees
We have a current staff of 68 employees of which 60 are full-time, the majority of which work in the Jacksonville area, none of which are subject to a collective bargaining agreement. We have not experienced any work stoppages and we consider our relationship with our employees to be good.
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.
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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.
We may be adversely affected by the effects of inflation and supply chain disruption
Our business operates in an environment of long bid to contract award cycles. Our customer’s bid requirements are such that firm pricing is expected on much or all of our proposal and as such we must commit to certain commercial terms and conditions such as pricing. In addition, the Company hires employees and contractors to perform most (if not all) of the work required to complete a contract. We are beginning to experience the impacts of inflation upon previously forecasted costs including employees that require higher salaries, contractors demanding higher prices for jobs and higher costs for materials necessary to complete contracts. While we endeavor to charge additional costs to our customers, in some cases this may not be possible contractually and as a result our profitability may suffer as a result. Although we anticipate these effects to be mitigated in the long term, we cannot be assured that this will be possible in all or any instances and as such our revenue, profitability and growth prospects may suffer as a result of this.
Current supply chain issues are extending deadlines for shipment of key components used in our technology systems. The effect of this may be to delay revenue recognition. We have also experienced and may in the future experience disruptions to our business operations resulting from lack of materials availability, delays in securing key components such as video cameras requiring certain computer chips, and other material and personnel shortages that may impact our ability to implement our products and services in a timely manner or meet required milestones or customer commitments. In addition, higher costs for travel may adversely impact our business, financial condition, operating results and cash flows.
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.
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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 $45 million as of December 31, 2021. Our operating losses may continue as we continue to expend resources to further develop and enhance our technology offering, to complete prototyping for proof-of-concept, obtain regulatory clearances or approvals as required, expand our business development activities and finance capabilities and conduct further research and development. We also expect to experience negative cash flow in the short-term until our revenues and margins increase at a rate greater than our expenses, which may not occur.
We may be unable to protect our intellectual property, which could impair our competitive advantage, reduce our revenue, and increase our costs.
Our success and ability to compete depend in part on our ability to maintain the proprietary aspects of our technologies and products. We rely on a combination of trade secrets, patents, copyrights, trademarks, confidentiality agreements, and other contractual provisions to protect our intellectual property, but these measures may provide only limited protection. We customarily enter into written confidentiality and non-disclosure agreements with our employees, consultants, customers, manufacturers, and other recipients of information about our technologies and products and assignment of invention agreements with our employees and consultants. We may not always be able to enforce these agreements and may fail to enter into any such agreement in every instance when appropriate. We license from third-parties certain technology used in and for our products. These third-party licenses are granted with restrictions; therefore, such third-party technology may not remain available to us on terms beneficial to us. Our failure to enforce and protect our intellectual property rights or obtain from third parties the right to use necessary technology could have a material adverse effect on our business, operating results, and financial condition. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States.
Patents may not be issued from the patent applications that we have filed or may file in the future. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. We have registered certain of our trademarks in the United States and other countries. We cannot assure you that we will obtain registrations of principal or other trademarks in key markets in the future. Failure to obtain registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenge from third parties to our use of our trademarks and brands.
| 10 |
We may be required to incur substantial expenses and divert management attention and resources in defending intellectual property litigation against us.
We cannot be certain that our technologies and products do not and will not infringe on issued patents or other proprietary rights of others. While we are not currently subject to any infringement claim, any future claim, with or without merit, could result in significant litigation costs and diversion of resources, including the attention of management, and could require us to enter into royalty and licensing agreements, any of which could have a material adverse effect on our business. We may not be able to obtain such licenses on commercially reasonable terms, if at all, or the terms of any offered licenses may be unacceptable to us. If forced to cease using such technology, we may be unable to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding, or failure to obtain necessary licenses, could prevent us from manufacturing, using, or selling certain of our products, which could have a material adverse effect on our business, operating results, and financial condition.
Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief, which could effectively block our ability to make, use, or sell our products in the United States or abroad. Such a judgment could have a material adverse effect on our business, operating results, and financial condition. In addition, we are obligated under certain agreements to indemnify the other party in connection with infringement by us of the proprietary rights of third parties. In the event that we are required to indemnify parties under these agreements, it could have a material adverse effect on our business, financial condition, and results of operations.
We may incur substantial expenses and divert management resources in prosecuting others for their unauthorized use of our intellectual property rights.
Other companies, including our competitors, may develop technologies that are similar or superior to our technologies, duplicate our technologies, or design around our patents, and may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Although we do not have operations outside North America at this time, we may compete for contracts in other countries in the future. Effective intellectual property protection may be unavailable, or limited, in some foreign countries in which we may do business, such as China. Unauthorized parties may attempt to copy or otherwise use aspects of our technologies and products that we regard as proprietary. Our means of protecting our proprietary rights in the United States or abroad may not be adequate or competitors may independently develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for our technologies and products.
Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions, because our business would be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome is favorable, this proceeding could result in substantial cost to us and disrupt our business.
In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition, and results of operations.
| 11 |
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.
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.
| 12 |
Due to our dependence on a limited number of customers, we are subject to a concentration of credit risk.
For the year ended December 31, 2021 one customer accounted for 83% of revenues. For the year ended December 31, 2020, two customers accounted for 45% and 23% 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. |
As of December 31, 2021, two customers accounted for 91% 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 largest customer accounted for approximately 83% of our total revenues for the year ended December 31, 2021. 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.
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; and | |
| · | Announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments. |
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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 |
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We are subject to the Florida anti-takeover provisions, which may prevent you from exercising a vote on business combinations, mergers or otherwise.
As a Florida corporation, we are subject to certain anti-takeover provisions that apply to public corporations under Florida law. Pursuant to Section 607.0901 of the Florida Business Corporation Act, or the Florida Act, a publicly held Florida corporation, under certain circumstances, may not engage in a broad range of business combinations or other extraordinary corporate transactions with an interested shareholder without the approval of the holders of two-thirds of the voting shares of the corporation (excluding shares held by the interested shareholder).
An interested shareholder is defined as a person who together with affiliates and associates beneficially owns more than 15% of a corporation’s outstanding voting shares. We have not made an election in our amended Articles of Incorporation to opt out of Section 607.0901.
In addition, we are subject to Section 607.0902 of the Florida Act which prohibits the voting of shares in a publicly held Florida corporation that are acquired in a control-share acquisition unless (i) our board of directors approved such acquisition prior to its consummation or (ii) after such acquisition, in lieu of prior approval by our board of directors, the holders of a majority of the corporation’s voting shares, exclusive of shares owned by officers of the corporation, employee directors or the acquiring party, approve the granting of voting rights as to the shares acquired in the control-share acquisition. A control-share acquisition is defined as an acquisition that immediately thereafter entitles the acquiring party to 20% or more of the total voting power in an election of directors.
Item 1b. Unresolved Staff Comments.
None.
Item 2. Properties.
On July 26, 2021, the Company entered a new operating lease agreement of office and warehouse combination space of 40,000 square feet with the lease commencing on November 1, 2021 and ending May 31, 2032 This additional space allows for resource growth and engineering efforts for operations before deploying to the field. The rent for the first twelve months of the term will be calculated as rentable base space on 30,000 square feet. The rent is subject to an annual escalation of 2.5%, beginning December 1, 2022. The Company made a security deposit payment in the amount of $600,000 on July 26, 2021. The Company has applied the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”) in the fourth quarter of 2021.
The Company now has a total of office and warehouse space of 40,000 square feet.
Rental expense for the office lease during 2021 and 2020 was $414,085 and $279,975, respectively.
Item 3. Legal Proceedings.
From time to time, we may be involved in claims that arise during the ordinary course of business. Regardless of the outcome, litigation can be costly and time consuming, and it can divert management’s attention from important business matters and initiatives, negatively impacting our overall operations. we do not currently have any pending litigation to which we are a party or to which our property is subject that we believe to be material. Regardless of the outcome, litigation can be costly and time consuming, and it can divert management’s attention from important business matters and initiatives, negatively impacting our overall operations.
Item 4. Mine Safety Disclosures.
Not Applicable.
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PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
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 Redeemable 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, 2021, 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, 2021 and 2020, respectively, there are 851 and 1,705 shares of Series B Convertible Preferred Stock issued and outstanding, respectively.
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. As of December 31, 2021, there are 2,500 shares of Series C Convertible Preferred Stock issued and outstanding.
Under the Purchase Agreement, the Company was required to hold a meeting of shareholders at the earliest practical date, and such meeting occurred on July 15, 2021. Nasdaq Marketplace Rule 5635(d) limits the number of shares of common stock (or securities that are convertible into common stock) without shareholder approval and the terms of the Series C Convertible Preferred Stock limit its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval is obtained. The Company obtained shareholder approval (the “Stockholder Approval”) in order to issue shares of common stock underlying the Series C Convertible Preferred Stock at a price less than the greater of book or market value which equal 20% or more of the number of shares of common stock outstanding before the issuance.
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In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series C Convertible Preferred Stock are convertible. The Company caused the registration statement to be declared effective on June 3, 2021. The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
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).
Approximate Number of Equity Security Holders
As of March 28, 2022, there were approximately 286 holders of record of our common stock, and the last reported sale price of our common stock on the Nasdaq Capital Market on March 28, 2022 was $5.85 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 2021 that were not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.
Item 6.
Reserved
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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, the Company does not intend to update any of the forward-looking statements.
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.
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 the Vision Technology market sector and, more specifically, the Machine Vision subsector. Machine Vision companies provide imaging-based automatic inspection and analysis for process control for industry with potential expansion into other markets. Duos is currently developing industry solutions for its target markets which will address rail, trucking, aviation and other vehicle-based processes. Duos initial offering, the Railcar Inspection Portal (RIP), provides both freight and transit railroad customers and select government agencies the ability to conduct fully automated railcar inspections of trains while they are moving at full speed.
Specifically, based upon the current and anticipated business growth, the Company is investing in resources to focus on execution within its target markets. 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.
| 18 |
Prospects and Outlook
The Company made significant changes to its senior management team in 2020 and further changes in 2021 to improve operational effectiveness. In addition to new “C” level personnel, the Company replaced its software and AI team with stronger talent including promoting one of the senior leaders to the position of Chief Technology Officer. The Company’s Board of Directors was strengthened with the addition of two very experienced leaders. The first is a retired Chief Operating Officer for a Class 1 railroad with more than 50 years of experience in the rail industry. The second is a retired Army General Officer and former CEO of a large, global security and training company contracting with multiple U.S. Government Agencies.
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 our product set into existing customers and to expand and diversify our current customer base. The issues surrounding COVID-19 are expected to diminish over the course of 2022 and the Company’s primary customers have indicated readiness to order more equipment and services should the Company execute as expected on key deliverables over the next few months.
Additionally, the new CEO has directed that the Company make engineering and software upgrades to the RIP to meet anticipated Federal Railroad Association (FRA), Transport Canada and Association of American Railroad (AAR) standards. The Company is expanding its focus in the rail industry to encompass passenger transportation and is currently in the last stages of a bid for a large, multi-year contract with a national rail carrier. If successful, the Company is expected to deliver at least two RIP solutions along with a long-term services agreement in late 2022 or early 2023.
In addition, the Company is currently investigating other possible market expansion including Aviation, Trucking and Edge Data Centers.
Although the Company’s prospects and outlook are anticipated to be favorable for 2022, investing in our securities involves risk and careful consideration should be made before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control and unexpected macro events can have a severe impact on the business.
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, 2021 compared to December 31, 2020
The following table sets forth a summary of our Consolidated Statements of Operations that is used in the following discussions of our results of operations:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | 8,259,917 | $ | 8,039,448 | ||||
| Cost of revenue | 10,819,087 | 7,803,612 | ||||||
| Gross margin | (2,559,170 | ) | 235,836 | |||||
| Operating expenses | 4,897,781 | 6,870,264 | ||||||
| Loss from operations | (7,456,951 | ) | (6,634,428 | ) | ||||
| Other income (expense) | 1,448,050 | (113,007 | ) | |||||
| Net loss | (6,008,901 | ) | (6,747,435 | ) | ||||
| Net loss applicable to common stock | $ | (6,008,901 | ) | $ | (6,747,435 | ) | ||
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Revenues
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2021 | 2020 | % Change | ||||||||||
| Revenues: | ||||||||||||
| Technology systems | $ | 5,871,666 | $ | 5,964,801 | -2 | % | ||||||
| Services and consulting | 2,388,251 | 2,074,647 | 15 | % | ||||||||
| Total revenue | $ | 8,259,917 | $ | 8,039,448 | 3 | % | ||||||
For the full year 2021, there was a 3% overall increase in revenues compared to 2020. The increase was driven by new revenues being recorded after lengthy delays in receiving “notices to proceed” for anticipated new contracts earlier in the year pushed delivery dates into the second half of this year and into 2022. There was a slight decrease in revenue from systems which was more than offset by a 15% increase in services revenue, most of which is recurring in nature. The Company is focusing on increasing its business from services and the increase is the result of new contracts for existing and new systems. This trend is expected to continue into 2022. While anticipated orders continue to be delayed, we are encouraged by the breadth and scope of recent bids in which we have participated, indicating an expected increase in orders in the early months of 2022. As previously discussed, management cautions that because of the delays in anticipated start dates, certain installations may produce revenues towards the end of 2022, some of which may ultimately be recorded in 2023. Additionally, although the industries in which we operate are showing early signs of recovery from the delays as a result of the Covid-19 pandemic, other macro-economic effects are anticipated to impact us, including inflation and the current supply chain issues which are extending deadlines for shipment of key components used in our technology systems. The effect of this will be to push some revenue recognition later in the year or into 2023 as previously mentioned. The effects if inflation are not quantifiable at the current time but are beginning to be evident in increased costs for materials and labor and may result in higher costs for project implementation that cannot be wholly or even partially passed on to our customers and thus resulting in delaying our progress towards profitability.
The Company’s capital structure continues to allow us to weather the unexpected delays without significant operational impact and enables us to pursue large projects requiring the ability to deploy major resources. It should be noted that the Company recently increased its working capital to account for an increase in pre-contract procurement activities to avoid a slowdown in revenues caused by delays in receiving certain components. The Company undertook a major review of operations during 2021 and made significant changes in staffing including additional engineering staff and revamping its software development and Artificial Intelligence staffing. Although in early 2021 the Company implemented a “rapid development” initiative which was intended to be able to respond to market driven demand more quickly, this effort has been somewhat negated by ongoing supply chain issues. Where this effort has shortened delivery times on major projects and was expected to result in significant revenue growth in the last six months of the year and beyond, the previously discussed supply chain issues have not allowed the anticipated benefits to be realized at this time. The Company is monitoring the situation and is continuing to procure materials ahead of contract award.
The Company also expects to continue the growth with new revenue from other existing customers which we expect to be coming on-line in the next several months. As previously noted, the slight decrease in technology systems revenues was offset by an increase in services revenue as the result of new maintenance contracts being established as well as renewals of existing contracts and a shift to the next generation of technology systems which are currently being installed. The services portion of revenues are driven by successful completion on projects and represent services and support for those installations. The Company expects to continue the growth with new, long term recurring revenue from existing customers which will be coming on-line in the next several months.
Cost of Revenues
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2021 | 2020 | % Change | ||||||||||
| Cost of revenues: | ||||||||||||
| Technology systems | $ | 7,151,276 | $ | 5,642,880 | 27 | % | ||||||
| Services and consulting | 1,369,985 | 1,139,357 | 20 | % | ||||||||
| Overhead | 2,297,826 | 1,021,375 | 125 | % | ||||||||
| Total cost of revenues | $ | 10,819,087 | $ | 7,803,612 | 39 | % | ||||||
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Cost of revenues largely comprises equipment, labor and overhead necessary to support the implementation of new systems and support and maintenance of existing systems. Cost of revenues on technology systems increased during the period compared to the equivalent period in 2020 by a greater amount than the increase in revenues. The main reason for the continuing high level of cost is the result of additional work being necessary on certain of the Company’s installations to resolve newly identified quality issues which are now mostly resolved as well as higher costs of materials due to supply chain disruptions. There was also a significant increase in cost related to the new deployment of an undercarriage technology. Many of these costs were not envisioned by the original scope of work. However, the costs are expected to be much lower going forward as a percentage of the overall system price. As previously noted, the Company’s organization and related cost structure was realigned to give the capability to manufacture, install and support multiple production systems simultaneously. Prior to this realignment, the Company’s organization was focused on primarily research and development with implementation resources being allocated as necessary. In accordance with this shift in structure, certain staff were re-assigned or replaced, and new staff added in key areas, particularly software engineering, IT and AI.
In conjunction with this change, increased costs are now being recognized against project and support revenues with a similar reduction in costs previously recognized for research and development, engineering development and internal support. In concert with this, there is a continued focus on construction costs and savings through efficiency, but the Company has elected to expand its key employees in anticipation of expected sales growth in technology systems and services in 2022. As previously discussed in the first quarter of 2021, certain expenses related to installed equipment upgrades were greater than anticipated for a variety of reasons including cost overruns on the first installation of new technologies and certain implementation inefficiencies related to Covid-19 restrictions such as extended quarantines and additional contract staff necessary to complete projects on time. These changes had a negative impact on the gross margin (see below), but this is expected to be a short-term impact, offset by increases in revenue later in 2022. It is also expected to have positive long-term impact as the Company is prepared to deliver a higher number of systems in a given period, with a shorter time of implementation and with better quality and reliability as the operations become standardized in anticipation of expected higher demand for systems, particularly in the rail industry.
Cost of revenues increased on services and consulting versus the increase in revenues on services and consulting. The overall positive trend on service and consulting revenue is expected to continue as more of the Company’s business is from recurring revenue. Costs of service are expected to increase in future years but at a slower rate than revenue growth. The Company focused on streamlining support operations in 2021 and despite the additional resources allocated to these activities in anticipation of higher recurring revenue in 2022 and beyond we expect higher gross margins as the Company grows. As discussed previously, the impact of inflation may negatively affect the costs of revenues such that we may experience higher costs for materials and labor, including higher employee and sub-contractor costs that cannot be passed along in all cases. Management is continuing to monitor this situation and expects to take actions as the full impact of these cost increases is understood. This may take the form of higher prices and continued evaluation of costs to attempt to reduce the overall costs of a system to offset the additional expenses, although this is not assured.
Gross Margin
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2021 | 2020 | % Change | ||||||||||
| Revenues | $ | 8,259,917 | $ | 8,039,448 | 3 | % | ||||||
| Cost of revenues | 10,819,087 | 7,803,612 | 39 | % | ||||||||
| Gross margin | $ | (2,559,170 | ) | $ | 235,836 | -1,185 | % | |||||
As previously discussed, the Company has revamped its operations to support an anticipated increase in the number of new systems going forward. The resultant additional cost of revenues, while somewhat offset by decreases in G&A expenses, was not covered by a comparable increase in revenues as of the third quarter 2021. However, there was an improvement in the fourth quarter of 2021 which is part of an overall improving trend in this area. The overall negative gross margin was $2,559,170 versus 2020 which was a positive $235,836. The small increase in year over year revenues, more than 50% of which came in the fourth quarter is a positive trend. The main reason for the continuing high level of cost is the result of additional development work being necessary on certain of the Company’s more complex installations as well as higher costs of materials due to supply chain disruptions. There was also a significant increase in cost related to the new deployment of an undercarriage technology. Many of these costs were not envisioned by the original scope of work. These higher costs are anticipated to be offset in by higher revenues in 2022 with the net result being a move to a positive gross margin as the business expands. In addition, we anticipate an improvement in the overall gross margin for the full year reporting in 2022, with much of the improvement coming in the second half of the year. As previously discussed, certain macro-economic factors including the current supply chain issues could delay that improvement into 2023.
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Operating Expenses
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2021 | 2020 | % Change | ||||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | $ | 1,233,851 | $ | 717,809 | 72 | % | ||||||
| Research and development | 251,563 | 102,219 | 146 | % | ||||||||
| Administration | 3,412,367 | 6,050,236 | -44 | % | ||||||||
| Total operating expense | $ | 4,897,781 | $ | 6,870,264 | -29 | % | ||||||
Overall operating expenses were lower by 29% in 2021 offsetting some of the increased costs previously discussed. A 72% increase in sales and marketing costs was more than offset by a 44% decrease in overall administration costs. This decrease was partially due to the recording of the ex-CEO’s separation agreement during the same period in 2020 and other overall reductions in cost as part of the restructuring of the business. Additionally, certain costs to support the organization as it operated at that time were eliminated as an offset to the increases in operations staff as described previously.
Loss From Operations
The losses from operations for the years ended, December 31, 2021 and 2020 were $7,456,951 and $6,634,428, respectively. The increase in losses from operations during the year was the result of mostly flat revenues, higher cost of sales related to the recent organizational changes and certain cost overruns on the initial deployment of some newly developed systems. The combination of these resulted in negative gross margin for the year, partially offset by lower total operating expenses. The Company previously expected to achieve profitability in the fourth quarter through improvements in gross margin from higher revenues and lower operating costs although the Company did not achieve breakeven as the result of unanticipated additional costs for implementations for certain new complex technologies being installed for the first time. Due to contract and manufacturing delays earlier in 2021, implementation was delayed until late in the year and took place in locations with harsh weather conditions requiring additional staffing. The Company is expecting improvements in operating margins in 2022 although it does not expect to breakeven on an operating basis until 2023 or thereafter depending upon the impacts of supply chain and inflation.
Interest Expense
Interest expense for the years ended December 31, 2021 and 2020 was $20,268 and $150,137, respectively. The reduction in interest expense was primarily due to the Company’s equity financing actions in 2020 reducing or eliminating debt. 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, 2021 and 2020 was $1,468,318 and $37,130, respectively. The increase is mainly due to the PPP loan forgiveness recorded in the first quarter of 2021.
Net Loss
The net loss for the years ended December 31, 2021 and 2020 was $ 6,008,901 and $6,747,435, respectively. The decrease in net loss is primarily attributable to the effect of the PPP loan forgiveness offset by the increases in project expenses as previously described. Net loss per common share was $1.63 and $2.03 for the years ended December 31, 2021 and 2020, respectively.
Liquidity and Capital Resources
As of December 31, 2021, the Company has a cash balance of $893,720.
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Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (6,579,378 | ) | $ | (4,231,439 | ) | ||
| Net cash used in investing activities | (552,940 | ) | (287,331 | ) | ||||
| Net cash provided in financing activities | 4,056,938 | 8,431,621 | ||||||
| Net increase (decrease) in cash | $ | (3,075,380 | ) | $ | 3,912,851 | |||
Net cash used in operating activities for the years ended December 31, 2021 and 2020 was $6,579,378 and $4,231,439, respectively. The increase in net cash used in operations for the year ended December 31, 2021 was the result of higher expenditures related to current projects as previously discussed as well as expenditures related to future project execution in anticipation of new projects starting in the fourth quarter of 2021. In addition, there are several changes in assets and liabilities that increased the use of cash in operations including charges related to the new building that the company now occupies including a $600,000 security deposit. Notable changes are an increase in deferred revenue as the result of an increase in pre-paid service contracts offset by decreases in contract liabilities. Additionally, $1,410,270 in funding from the CARES Act PPP loan program plus deferred interest was forgiven. The Company accrued interest in the amount of $648 during 2021 and $10,577 during 2020. The effects of other changes were largely neutral.
Net cash used in investing activities for the years ended December 31, 2021 and 2020 was $552,940 and $287,331, respectively. The Company continues to invest in computing and lab equipment as reflected in the increase in 2021.
Net cash provided in financing activities for the years ended December 31, 2021 and 2020 was $4,056,938 and $8,431,621, respectively. Cash flows provided by financing activities during 2021 were primarily attributable to proceeds from the issuance of preferred stock to two shareholders in the amount of $4,500,000.
During 2021, we funded our operations through the sale of our equity (or equity linked) securities, and through revenues generated and cash received from ongoing project execution, services and associated maintenance revenues. As of March 28, 2022, we have cash on hand of approximately $5,700,000. We have approximately $165,500 in monthly lease and other mandatory payments, not including payroll and ordinary expenses which are due monthly.
On a long-term basis, our liquidity is dependent on the continuation and expansion of operations and receipt of revenues. Our current capital and revenues are sufficient to fund such expansion although we are now less dependent on timely payments by our customers for projects and work in process, however we expect such timely payments to continue. Material cash requirements will be satisfied within the normal course of business including substantial upfront payments from our customers prior to starting projects. In some limited cases, the Company may elect to purchase materials and supplies in advance of contract award but where there is a high probability of that award. Most, if not all, high value items that are pre-purchased, can be re-purposed if necessary. The maximum amount of material cash requirements not currently supported by up-front customer deposits is expected to be less than $1million.
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.
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As reflected in the accompanying consolidated financial statements, the Company had a negative working capital of $651,381 and an accumulated deficit of $45,497,051 at December 31, 2021. During the same period in 2020, the Company had a positive working capital of $2,167,058 and an accumulated deficit of $39,488,150. In a previous financial report, 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 2022 (the “2022 Offering”).
As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock. Although additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded operations based on an anticipated increase in business activity. In the long run, the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing the plan described above, generate enough revenue, and attain consistently profitable operations. Although the current global pandemic related to the coronavirus (Covid-19) has affected our operations, particularly in supply chain, we now believe that this is expected to be an ongoing issue and our working capital assumptions reflect this new reality. The Company cannot currently quantify the uncertainty related to the 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 twelve months from the date of this report. A notable recent success is the approval of the Company for “bonding” in the amount of approximately$8 million for an upcoming major project.
The Company was successful in securing a loan of $1,410,270 during the second quarter of 2020 from the Small Business Administration via the PPP/CARES Act program which further bolstered the Company’s cash reserves. This loan was forgiven in the first quarter of 2021 and leaves the Company essentially debt free. The Company has also been successful in increasing its working capital surplus after receiving proceeds from the 2021 Offering of $4,500,000 and more recently, in the first quarter of 2022, receiving net proceeds of approximately $5,500,000 from the successful takedown of the Company’s “shelf registration” S3. This gives us the capital required to fund the fundamental business changes that we undertook in the last quarter of 2020, further changes throughout 2021 and maintenance of our business strategy overall. In addition, management has been taking and continues to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning both management and staffing with a focus on improving certain skill sets necessary to build growth and profitability and focusing product strategy on opportunities that are likely to bear results in the relatively short term. During 2021, management took further significant actions including reorganizing our engineering and technical teams and selectively improving organizational efficiency to effectively grow the business as the expected order flow resumes in 2022. Upon completion of the 2022 Offering, management has 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.
Management believes that, at this time, the conditions in our market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding contract and the additional time needed to execute on new contracts previously reported have put a strain on our cash reserves. However, recent events including a $5.5M injection of funds from a sale of securities, significant recent orders and the overall stabilization of the business indicate that there is no longer substantial doubt for the Company to continue as a going concern for a period of twelve months from the issuance of this report. We continue executing the plan to grow our business and achieve profitability without the requirement to raise additional capital for existing operations for 2022 although we may do so to fund selective opportunities that may arise. Management has extensively evaluated our requirements for the next 12 months and has determined that the Company currently has sufficient cash to operate for at least that period.
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.
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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.
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.
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).
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For sales arrangements that do not involve performance obligations:
| (1) | Revenues for professional services, which are of short-term duration, are recognized when services are completed; |
| (2) | For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer; |
| (3) | Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and |
| (4) | Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term. |
Multiple 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.
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 Risk
Not applicable.
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Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements are contained in pages F-1 through F-35 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, 2021.
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.
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, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9b. Other Information.
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following is a list of our executive officers and directors. All directors serve one-year terms or until their successors are duly qualified and elected or his earlier resignation, removal or disqualification. The officers of the Company are elected by the Board.
| Name | Age | Position | ||
| Charles P. Ferry | 56 | Chief Executive Officer, Director | ||
| Adrian G. Goldfarb | 64 | Chief Financial Officer | ||
| Connie L. Weeks | 64 | Chief Accounting Officer | ||
| Kenneth Ehrman(1) | 51 | Chairman | ||
| Edmond L. Harris(2) | 72 | Director | ||
| Ned Mavrommatis(3) | 51 | Director | ||
| James Craig Nixon (4) | 62 | Director |
———————
| (1) | Chairman of the Board, member of the Compensation Committee, Corporate Governance and Nominating Committee and Audit Committee. |
| (2) | Chairman of the Corporate Governance and Nominating Committee, member of the Audit Committee. |
| (3) | Chairman of the Audit Committee, member of the Compensation Committee. |
| (4) | Chairman of the Compensation Committee, member of the Corporate Governance and Nominating Committee. |
Charles P. Ferry, Chief Executive Officer, Director
Mr. Ferry was appointed Chief Executive Officer, effective September 1, 2020. Mr. Ferry was 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.
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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.
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.
Kenneth Ehrman, Chairman
Mr. Ehrman joined the Board on January 31, 2019. He was elected as Chairman of the Board in November 2020 and is a member of the Audit, 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. Mr. Ehrman resigned from I.D. Systems in November 2016. He also served on the Board of Financial Services, Inc. from 2012 to 2016 before it was successfully sold to a large financial software company.
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.
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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 Audit Committee and a member of the Compensation Committee.. 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.
James Craig Nixon, Director
Mr. Nixon joined the Board on July 15, 2021 and serves as Chairman of the Compensation Committee and a member of the Corporate Governance and Nominating Committees. Brigadier General Craig Nixon (Ret.) is a combat decorated, special operations soldier. Over a 29 - year Army career, Brigadier General Nixon served in a wide range of assignments including seven tours in special operations units including assignments as the Commander, 75th Ranger Regiment and Director of Operations for Joint Special Operations Command (JSOC) and US Special Operations Command. He is a combat decorated soldier whose awards include the Distinguished Service Medal, Silver Star, three Bronze Stars, and the Purple Heart.
After retiring from the Army in 2011, he was an original Partner at McChrystal Group, helped create a highly successful leadership consulting company and led their engagements with a number of technology focused Fortune 500 companies. In 2013 he became the CEO for ACADEMI and over three years through a combination of organic growth and acquisitions built Constellis Group, a global leader in security and training with over 10,000 employees in 30 countries. During his tenure Constellis tripled in revenue to over $1 billion annually and saw a fivefold increase in EBITDA. Mr. Nixon is founder and CEO of Nixon Six Solutions from January 2016 until present, a consulting firm focusing on growth and market entry strategy, leadership, and mergers & acquisitions. He is on a number of government and technology boards and is also a frequent speaker on geopolitics, leadership, and veterans’ challenges.
Brigadier General Nixon is a graduate of Auburn University and has earned master’s degrees from the Command and Staff College and the Air War College. He is a decorated retired General Officer, successful entrepreneur, and passionate supporter of veteran non-profit organizations. He was selected for the Ranger Hall of Fame and Auburn University at Montgomery Top Fifty Alumni in 2017.
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The Board believes that Mr. Nixon’s extensive military and management experience and familiarity with technology industries make him ideally suited to help lead the Company towards excellence in operations and strategic planning.
Key Employees
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 Duos’ 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.
Jeff Necciai, Chief Technology Officer, Operating Subsidiary Duos Technologies, Inc.
Mr. Necciai brings over 25 years of experience in designing, developing, and delivering value-driven technology solutions across a wide range of industries to Duos. Prior joining Duos in January 2021, Jeff served as the Chief Technology Officer of NASCENT Technology, where he cultivated and led high-performing cross-functional product teams to develop and deliver comprehensive gate automation solutions to rail and maritime terminal customers. Jeff was responsible for the solution design and software architecture for many of the company's innovations, including an advanced OCR and imaging solution, proprietary point-to-point VoIP technology, an automated work queue management system, a line of integrated "smart" outdoor IP-based callboxes, and a comprehensive human-assisted security and surveillance platform. In 2001, Jeff co-founded and served as Lead Systems Architect for Solution Dynamics, which developed remote digital video surveillance products for institutional customers. Jeff is listed on several technology-based patents and has contributed articles for publications such as American Shipper, World Cargo News, and the Journal of Commerce. Jeff holds a Bachelor of Science Degree in Business Administration from Clarion University of Pennsylvania.
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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, 2021, were made on a timely basis.
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. Kenneth Ehrman, Mr. Charles P. Ferry, Mr. Edmond Harris, Mr. Ned Mavrommatis, add in Mr. James Craig Nixon. The directors will serve until our next annual meeting and until their successors are duly elected and qualified. The Company defines “independent” as that term is defined in 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. Harris, Mr. Mavrommatis and Mr. Nixon 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 Ned Mavrommatis, James Craig Nixon 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.
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Audit Committee
The Audit Committee oversees our accounting and financial reporting processes and oversees the audit of our financial statements and the effectiveness of our internal control over financial reporting. The specific functions of this Committee include, but are not limited to:
| · | appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm; | |
| · | overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm; | |
| · | reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures; | |
| · | monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics; | |
| · | discussing our risk management policies; | |
| · | establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns; | |
| · | meeting independently with our independent registered public accounting firm and management; | |
| · | reviewing and approving or ratifying any related person transactions; and | |
| · | preparing the audit committee report required by SEC rules. |
Our board has determined that Mr. Mavrommatis is currently qualified as an “audit committee financial expert”, as such term is defined in Item 407(d)(5) of Regulation S-K. Mr. Mavrommatis serves as the Chairman of the Audit Committee.
Compensation Committee
The Committee’s compensation-related responsibilities include, but are not limited to:
| · | reviewing and approving on an annual basis the corporate goals and objectives with respect to compensation for our Chief Executive Officer; | |
| · | reviewing, approving and recommending to our board of directors on an annual basis the evaluation process and compensation structure for our other executive officers; | |
| · | determining the need for and the appropriateness of employment agreements and change in control agreements for each of our executive officers and any other officers recommended by 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. Nixon serves as the Chairman of the Compensation Committee.
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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; | |
| · | 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.
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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 | Year | Salary ($) |
Bonus ($) |
Options ($) |
Other Comp. |
Total ($) |
|||||||||||||||||
| Charles P. Ferry, Chief Executive Officer (PEO) | 2021 | 250,000 | — | — | — | 250,000 | |||||||||||||||||
| 2020 | 83,333 | 50,217 | (1) | 36,293 | (2) | — | 169,843 | ||||||||||||||||
| Adrian G. Goldfarb, | 2021 | 205,250 | — | 2,500 | (3) | 207,750 | |||||||||||||||||
| Chief Financial Officer, Former Director (PFO) | 2020 | 197,750 | 849 | 45,632 | (4) | 7,500 | (3) | 251,731 | |||||||||||||||
| Connie L. Weeks, | 2021 | 150,000 | — | — | — | 150,000 | |||||||||||||||||
| Chief Accounting Officer | 2020 | 150,000 | 6,667 | (5) | 45,632 | (6) | — | 202,299 | |||||||||||||||
———————
| (1) | Represents $50,000 objectives bonus and $217 additional cash bonus. |
| (2 | 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. |
| For the Years Ended December 31, | ||||
| 2021 | 2020 | |||
| Risk free interest rate | — | 0.18% - 0.26% | ||
| Expected term in years | — | 2.50 – 3.50 | ||
| Dividend yield | — | — | ||
| Volatility of common stock | — | 68.00% - 86.24% | ||
| Estimated annual forfeitures | — | — | ||
| (3) | Comprised of $2,500 annual car allowance in 2021 and $7,500 annual car allowance in 2020 |
| (4) | 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 2 above for valuation methodology |
| (5) | Represents bonus award for long service to the Company. |
| (6) | 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. |
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Outstanding Equity Awards at December 31, 2021
| Name | Number of shares underlying unexercised options exercisable |
Equity Incentive Plan Awards; Number of shares underlying unexercised unearned options |
Option exercise price |
Option Expiration date |
Number of shares or units of stock that have not vested |
Market value of shares or units of stock that have not vested $ |
Equity Incentive Plan Awards: Number of unearned shares, units or other rights that have not vested |
Equity Incentive Plan Awards: Market or payout value of unearned shares, units or other rights that have not vested $ |
||||||||||||||||||||||||
| Charles P. Ferry | — | 100,000 | $ | 4.18 | 08/31/2025 | — | — | — | — | |||||||||||||||||||||||
| Adrian G. Goldfarb | 18,929 | — | $ | 6.00 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||
| Adrian G. Goldfarb | 9,465 | 9,465 | $ | 4.74 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||
| Connie L. Weeks | 18,929 | — | $ | 6.00 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||
| Connie L. Weeks | 9,465 | 9,465 | $ | 4.74 | 03/31/2025 | — | — | — | — | |||||||||||||||||||||||
Employment Agreements
Charles P. Ferry
On September 1, 2020, the Company entered into an employment agreement (the “Ferry Employment Agreement”) with Charles P. Ferry pursuant to which Mr. Ferry serves as Chief Executive Officer of the Company. The Ferry Employment Agreement is for a term of one year (the “Initial Term”) and shall be automatically extended for additional terms of successive one-year periods (the “Additional Term”) unless the Company or Mr. Ferry gives at least 60 days written notice of non-renewal prior to the expiration of the Initial Term or an Additional Term. 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 $50,217 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% vested on September 1, 2021 and the balance which will vest on September 1, 2022. The Ferry Employment Agreement can be terminated with or without cause at any time during the Initial Term or during an Additional Term. As a full-time employee of the Company, Mr. Ferry is eligible to participate in all of the Company’s benefit programs.
Potential Payments upon Change of Control or Termination following a Change of Control and Severance
The Ferry Employment Agreement contains certain provisions for early termination, which may result in a severance payment equal to up to six months of base salary then in effect. Generally, we do not provide any severance specifically upon a change in control, nor do we provide for accelerated vesting upon a change in control.
Adrian G. Goldfarb
On April 1, 2018, the Company entered into an employment agreement (the “Goldfarb Employment Agreement”) with Adrian G. Goldfarb, pursuant to which Mr. Goldfarb 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. In 2021, Mr. Goldfarb’s salary was increased to $207,750 and the car allowance cancelled. 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, 2023. 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.
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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 2021, 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, 2023. 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.
Director Compensation
Starting in 2021, the Compensation Committee determined that directors will receive $40,000 for serving as a member of a committee and $10,000 for serving as Chairman of a committee. The $10,000 fee is also inclusive of any services rendered as a member of one or more committees. The board compensation will be paid 40% in cash and 60% in shares of restricted common stock or options to purchase shares of common stock, as elected by the board member. Each board member may further elect to receive up to 100% of compensation in restricted stock.
The following table summarizes data concerning the compensation of our non-employee directors for the year ended December 31, 2021.
|
Fees Earned or Paid ($) |
Stock Awards ($)(6) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($) |
Non-Qualified Deferred Compensation Earnings ($) |
All Other Compensation ($) |
Total ($) |
||||||||||||||||||||||
| Kenneth Ehrman (1) | 17,500 | 32,500 | 0 | 0 | 0 | 0 | 50,000 | |||||||||||||||||||||
| Blair M. Fonda (2) | 17,500 | 23,750 | 0 | 0 | 0 | 0 | 41,250 | |||||||||||||||||||||
| Edmond L. Harris (3) | 17,500 | 32,500 | 0 | 0 | 0 | 0 | 50,000 | |||||||||||||||||||||
| Ned Mavrommatis (4) | 17,500 | 32,500 | 0 | 0 | 0 | 0 | 50,000 | |||||||||||||||||||||
| James Craig Nixon (5) | 0 | 22,917 | 0 | 0 | 0 | 0 | 22,917 | |||||||||||||||||||||
———————
| (1) | Kenneth Ehrman was appointed to the board in January 2019. Through November 19, 2020, he served as Chairman of the Compensation Committee and as of that date he was named Chairman of the Board. He serves as a member of the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee. |
| (2) | Blair Fonda served as a Board Member and Chairman of the Audit Committee through June 30, 2021. He did not stand for re-election at the 2021 Annual Shareholders Meeting. |
| (3) | Edmond L. Harris was appointed to the board on November 19, 2020. Since his appointment, he has served as Chairman of the Corporate Governance and Nominating Committee and member of the Audit Committee. |
| (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 sole Chairman of the Audit Committee and member of the Compensation Committee. |
| (5) | James Craig Nixon was appointed to the board on July 15, 2021. Since his appointment, he has served as Chairman of the Compensation Committee and a member of the Corporate Governance and Nominating Committee. |
| (6) | Reflects the aggregate grant date fair value of stock awards computed in accordance with FASB ASC Topic 718. In determining the grant date fair value of stock awards, the Company used the closing price of the Company’s common stock on the grant date. |
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
As of March 28, 2022, our authorized capitalization was 500,000,000 shares of common stock $0.001 par value per share,500,000 shares of Series A Redeemable Convertible Preferred Stock, 15,000 shares of Series B Convertible Preferred Stock (“Preferred B”) and 5,000 shares of Series C Convertible Preferred Stock (“Preferred C”). As of the same date, there are 6,089,343 shares of our common stock issued, 851 shares of Preferred B and 0 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.
The following table sets forth, as of March 28, 2022, the number of shares of our common stock beneficially owned by (i) each person who is known by us to own of record or beneficially five percent or more of our outstanding shares, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our common stock beneficially owned. The address of our directors and executive officers is c/o Duos Technologies Group, Inc., at 7660 Centurion Parkway, Suite 100, Jacksonville, Florida 32256.
| Name and Address of Beneficial Owner(1) | Common Stock | Percentage of Ownership of Common | ||||||
| 5% Beneficial Shareholders(3) | ||||||||
| Bleichroeder LP 1345 Avenue of the Americas, 47th Floor New York, NY 10105 (4) | 1,327,806 | 21.07 | % | |||||
| Justin W. Keener 3960 Howard Hughes Parkway Las Vegas, NV 89169 (5) | 444,037 | 6.80 | % | |||||
| Pessin Family Holdings 500 Fifth Avenue, Suite 2240 New York, NY 10110 (6) | 1,285,040 | 21.10 | % | |||||
| 5% Beneficial Shareholders as a Group | 3,012,239 | 48.97 | % | |||||
Executive Officers and Directors | ||||||||
| Charles P. Ferry(7) | 53,000 | * | % | |||||
| Adrian G. Goldfarb(8) | 58,285 | * | % | |||||
| Connie L. Weeks(9) | 37,858 | * | % | |||||
| Kenneth Ehrman(10) | 34,101 | * | % | |||||
| Edmond L. Harris(11) | 9,474 | * | % | |||||
| Ned Mavrommatis(12) | 26,984 | * | % | |||||
| James C. Nixon(13) | 4,203 | * | % | |||||
| Executive Officers and Directors as a Group (7 persons) | 223,905 | 3.60 | % | |||||
———————
*Denotes less than 1%
| (1) | 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. |
| (2) | 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. 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. |
| (3) | 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. |
| (4) | Bleichroeder LP (“Bleichroeder”) is an investment advisor registered under Section 203 of the Investment Advisers Act of 1940 is deemed to be the beneficial owner of 1,283,162 shares of common stock, as a result of acting as investment advisor to various clients. 21 April Fund, Ltd., a Cayman Islands company and 21 April LP both for which Bleichroeder acts as an investment advisor, own warrants in the amount of 32,724 and 11,920 respectively which are not currently exercisable due to a 9.99% beneficial ownership limitation. |
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| (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. |
| (6) | Represents shares of Common Stock beneficially owned by Norman H. Pessin (57,972 shares of Common Stock), Sandra F. Pessin (766,157 shares of Common Stock) and Brian L. Pessin (160,911 shares of Common Stock). The ownership number for Sandra Pessin excludes 121,571 shares of Common Stock underlying the 851 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. |
| (7) | Mr. Ferry owns 3,000 shares of Common Stock, 200,000 options that are exercisable into 200,000 shares of common stock of which 100,000 are exercisable at $4.18 per share and 100,000 are exercisable at $6.41, of which 25% vested on September 1, 2021, 25% will vest on September 1, 2022. Of the balance of 100,000 options, 1/3 will vest on January 1, 2023, 1/3 will vest on January 1, 2024 and the remaining balance which will vest on January 1, 2025. |
| (8) | Mr. Goldfarb owns 5,198 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, 18,929 options to purchase Common Stock which are currently exercisable at $4.74 per share and 75,000 options that are exercisable into 75,000 shares of common stock which are all exercisable at $6.41 per share and which will vest 1/3 on January 1, 2023, 1/3 will vest on January 1, 2024 and the remaining balance which will vest on January 1, 2025. |
| (9) | Ms. Weeks owns 18,929 options to purchase shares of Common Stock with an exercise price of $4.74 and 18,929 options to purchase shares of Common Stock with an exercise price of $6.00 all of which are currently exercisable and a further 40,000 options to purchase Common Stock which are all exercisable at $6.41 per share and which will vest 1/3 on January 1, 2023, 1/3 will vest on January 1, 2024 and the remaining balance which will vest on January 1, 2025. |
| (10) | Mr. Ehrman is Chairman of the Board. He owns 16,957 shares of Common Stock and was granted 8,572 options to purchase Common Stock at $4.74 per share which are fully vested and 8,572 options to purchase Common Stock at $6.00 per share which are also fully vested. |
| (11) | Mr. Harris is a director and serves as Corporate Governance and Nominating Committee Chairman. Includes 9,474 shares of Common Stock. |
| (12) | Mr. Mavrommatis is a director and serves as Audit Committee Chairman. He owns 9,840 shares of Common Stock and was granted 8,572 options to purchase Common Stock at $4.74 per share which are fully vested and 8,572 options to purchase Common Stock at $6.00 per share which are fully vested. |
| (13) | Mr. Nixon is a director and serves as Compensation Committee Chairman. Includes 4,203 shares of Common Stock. |
Equity Compensation Plan Information
2021 Equity Plan
On May 12, 2021, the Board adopted, with shareholder approval, the 2021 Equity Incentive Plan (the “2021 Plan”) providing for the issuance of up to 1,000,000 shares of our Common Stock. The purpose of the 2021 Plan is to assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals to align their interests with those of our shareholders.
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General Description of the 2021 Plan
The following is a summary of the material provisions of the 2021 Plan and is qualified in its entirety by reference to the complete text of the 2021 Plan, which you are encouraged to read in full.
Administration
The 2021 Plan is administered by the Compensation Committee of the Board, which consists of three members of the Board, each of whom is a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act and an “outside director” within the meaning of Code Section 162(m). Among other things, the Compensation Committee has complete discretion, subject to the express limits of the 2021 Plan, to determine the directors, employees and nonemployee consultants to be granted an award, the type of award to be granted, the terms and conditions of the award, the form of payment to be made and/or the number of shares of Common Stock subject to each award, the exercise price of each option and base price of each stock appreciation right (“SAR”), the term of each award, the vesting schedule for an award, whether to accelerate vesting, the value of the Common Stock underlying the award, and the required withholding, if any. The Compensation Committee may amend, modify or terminate any outstanding award, provided that the participant’s consent to such action is required if the action would impair the participant’s rights or entitlements with respect to that award. The Compensation Committee is also authorized to construe the award agreements and may prescribe rules relating to the 2021 Plan. Notwithstanding the foregoing, the Compensation Committee does not have any authority to grant or modify an award under the 2021 Plan with terms or conditions that would cause the grant, vesting or exercise thereof to be considered nonqualified “deferred compensation” subject to Code Section 409A.
Grant of Awards; Shares Available for Awards
The 2021 Plan provides for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees and nonemployee consultants of the Company or its affiliates. We have reserved a total of 1,000,000 shares of Common Stock for issuance as or under awards to be made under the 2021 Plan. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2021 Plan.
Currently, there are 52 identified employees (including three executive officers, of which one is a director), four non-employee directors, and up to 50 other current or future staff members who would be eligible to receive stock options and/or shares of restricted stock under the 2021 Plan. Future new hires and additional non-employee directors and/or consultants would be eligible to participate in the 2021 Plan as well.
Stock Options
The 2021 Plan provides for either “incentive stock options” (“ISOs”), which are intended to meet the requirements for special federal income tax treatment under the Code, or “nonqualified stock options” (“NQSOs”); provided, however, that ISOs may only be issued if our shareholders approve the 2021 Plan at the Annual Meeting. Stock options may be granted on such terms and conditions as the Compensation Committee may determine; provided, however, that the per share exercise price under a stock option may not be less than the fair market value of a share of the Company’s Common Stock on the date of grant and the term of the stock option may not exceed 10 years (110% of such value and five years in the case of an ISO granted to an employee who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of capital stock of the Company or a parent or subsidiary of the Company). ISOs may only be granted to employees. In addition, the aggregate fair market value of our Common Stock covered by one or more ISOs (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Any excess is treated as a NQSO.
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Stock Appreciation Rights
An SAR entitles the participant, upon exercise, to receive an amount, in cash or stock or a combination thereof, equal to the increase in the fair market value of the underlying Common Stock between the date of grant and the date of exercise. SARs may be granted in tandem with, or independently of, stock options granted under the 2021 Plan. An SAR granted in tandem with a stock option (i) is exercisable only at such times, and to the extent, that the related stock option is exercisable in accordance with the procedure for exercise of the related stock option; (ii) terminates upon termination or exercise of the related stock option (likewise, the Common Stock option granted in tandem with a SAR terminates upon exercise of the SAR); (iii) is transferable only with the related stock option; and (iv) if the related stock option is an ISO, may be exercised only when the value of the stock subject to the stock option exceeds the exercise price of the stock option. An SAR that is not granted in tandem with a stock option is exercisable at such times as the Compensation Committee may specify.
Performance Share and Performance Unit Awards
Performance share and performance unit awards entitle the participant to receive cash or shares of our Common Stock upon the attainment of specified performance goals. In the case of performance units, the right to acquire the units is denominated in cash values.
Restricted Stock Awards and Restricted Stock Unit Awards
A restricted stock award is a grant or sale of Common Stock to the participant, subject to our right to repurchase all or part of the shares at their purchase price (or to require forfeiture of such shares if issued to the participant at no cost) in the event that conditions specified by the Compensation Committee in the award are not satisfied prior to the end of the time period during which the shares subject to the award may be repurchased by or forfeited to us. Our restricted stock unit entitles the participant to receive a cash payment equal to the fair market value of a share of Common Stock for each restricted stock unit subject to such restricted stock unit award, if the participant satisfies the applicable vesting requirement.
Unrestricted Stock Awards
An unrestricted stock award is a grant or sale of shares of our Common Stock to the participant that is not subject to transfer, forfeiture or other restrictions, in consideration for past services rendered to the Company or an affiliate or for other valid consideration.
Amendment and Termination
The Compensation Committee may adopt, amend and rescind rules relating to the administration of the 2021 Plan, and amend, suspend or terminate the 2021 Plan, but no such amendment, rescission, suspension or termination will be made that materially and adversely impairs the rights of any participant with respect to any award received thereby under the 2021 Plan without the participant’s consent, other than amendments that are necessary to permit the granting of awards in compliance with applicable laws.
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2016 and 2021 Equity Plans
We maintained the 2016 Equity Incentive Plan (the “2016 Plan”) for employees, officers, directors and other entities and individuals whose efforts contribute to our success. The 2016 Plan terminated pursuant to its terms on December 31, 2020, although all outstanding awards on such date continue in full force and effect, and was replaced by the 2021 Plan. The table below sets forth certain information as of the year ended December 31, 2021 regarding the shares of our common stock available for grant or granted under the 2016 Plan and the 2021 Plan.
The following table provides equity compensation plan information as of December 31, 2021:
| Plan Category | 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 | |||||||||
| Equity compensation plans approved by security holders | 1,321,429 | (1) (2) | $ | 4.98 | (3) | 9,531 | ||||||
| Equity compensation plans not approved by security holders | 160,000 | $ | 4.98 | (3) | N/A | |||||||
| 1. | 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 of which 311,898 had been issued. 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. |
| 2. | On April 12, 2021, the Board adopted, subject to the receipt of stockholder approval, which was received on July 15, 2021, the 2021 Plan providing for the issuance of up to 1,000,000 shares of our common stock none of which had been issued as of December 31, 2021. The purpose of the 2021 Plan was to replace the 2016 Plan which had expired and continue 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. |
| 3. | Represents the aggregate Weighted Average Exercise Price of 431,266 outstanding options as of December 31, 2021. |
Administration
Both the 2016 and 2021 Plans are 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 2021 Plan. Notwithstanding the foregoing, the Compensation Committee does not have any authority to modify an award under the 2021Plan with terms or conditions that would cause the grant, vesting or exercise thereof to be considered nonqualified “deferred compensation” subject to Code Section 409A.
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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 no longer available for grant under the 2016 Plan.
The 2021 Plan provides for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees and nonemployee consultants of the Company or its affiliates. The Company had reserved a total of 1,000,000 shares of common stock for issuance as or under awards to be made under the 2021 Plan. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is no longer available for grant under the 2021Plan.
Stock Options
The 2016 and 2021 Plans provide 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.
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.
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 former Chief Technology Officer, David Ponevac. The Services Agreement provided that Luceon would provide support services including management, coordination or software development services and related services to duos. In January 2019, additional services were contracted with Luceon for TrueVue360™ primarily for software development through the provision of 7 additional full-time contractors located in Slovakia at a cost of $16,250 for January initially, rising to $25,583 after fully staffed, per month starting February 2019. This was in addition to the existing contract of $7,480 per month for duos for 4 full-time contractors which increased to $8,231 per month in June of 2019. During 2020 efforts in reducing cost, Luceon reduced its staff for the TrueVue360 software development team from a staff of 7 to 3 full-time employees at a cost of $11,666 per month starting June 1, 2020. As of January 1, 2021, the Company no longer records activities in TrueVue360 and has combined billings for a total of $20,986 per month. For the years ended December 31, 2021 and 2020, the total amount expensed is $93,422 and $335,334, respectively. The Company had no open accounts payable with Luceon at December 31, 2021. On May 14, 2021, the Company formally ended its relationship with Luceon in concert with the resignation of our Chief Technology Officer and as such there is no longer a related party relationship.
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.
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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.
| 2021 | 2020 | |||||||
| Audit Fees (1) | $ | 101,800 | $ | 94,956 | ||||
| Audit-Related Fees (2) | 18,500 | 6,311 | ||||||
| Tax Fees (3) | — | — | ||||||
| All Other Fees (4) | — | — | ||||||
| Total Accounting fees and Services | $ | 120,300 | $ | 101,267 | ||||
———————
| (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. |
| (2) | 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. |
| (3) | Tax Fees. These are fees for professional services rendered by the principal accountant with respect to tax compliance, tax advice, and tax planning. |
| (4) | All Other Fees. These are fees for products and services provided by the principal accountant, other than the services reported above. |
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed or furnished as part of this Annual Report on Form 10-K:
1. Financial Statements
Reference is made to the Index to Financial Statements under page F-1 hereof.
2. Financial Statement Schedules
The Financial Statement Schedules have been omitted because they are not applicable, not required, or the information is shown in the financial statements or related notes.
3. Exhibits
| Exhibit No. | Exhibit Description | |
| 2.1 | First Amendment to Merger and Plan of Merger, dated March 15, 2015 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 2.1 on March 19, 2015) | |
| 2.2 | Merger Agreement and Plan of Merger, dated February 6, 2015 (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 2.1 on February 9, 2015) | |
| 3.1 | Amendment to Amended and Restated Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 on July 13, 2015) | |
| 3.2 | Amended and Restated Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 on April 7, 2015) | |
| 3.3 | Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.3 of the Company’s Form S-1/A filed on May 28, 2021) | |
| 3.4 | Articles of Amendment to Articles of Incorporation (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 3.1 with the U.S. Securities and Exchange Commission on April 28, 2017) | |
| 3.5 | 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) | |
| 3.6 | Certificate of Amendment to Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2020) | |
| 3.7 | Articles of Amendment to Articles of Incorporation Designation of Series C Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2021) | |
| 3.8 | Amendments to Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.8 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2021) | |
| 4.1 | Common Stock Purchase Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.1 on December 23, 2016) | |
| 4.2 | Form of Purchaser Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.1 on November 29, 2017) | |
| 4.3 | Form of Placement Agent Warrant (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 4.2 on November 29, 2017) | |
| 4.4* | Description of the Company's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 | |
| 10.1+ | Employment Agreement, dated September 1, 2020, between the Company and Charles P. Ferry (incorporated by reference to the Annual Report on Form 10-K filed as Exhibit 10.32 on March 30, 2021) | |
| 10.2 | Securities Purchase Agreement, dated March 31, 2016, by and between Duos Technologies Group, Inc. and the Schedule of Buyers attached thereto (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 on April 6, 2016) | |
| 10.3 | Security and Pledge Agreement, dated April 1, 2016, by and among Duos Technologies Group, Inc., each of the Company’s Subsidiaries named therein and GPB Debt Holdings II, LLC (in its capacity as collateral agent) (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.2 on April 6, 2016) | |
| 10.4 | Guaranty, dated April 1, 2016, by and among each of Duos Technologies Group, Inc.’s Subsidiaries named therein and GPB Debt Holdings II, LLC (in its capacity as collateral agent) (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.3 on April 6, 2016) |
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| 10.5 | Warrant, dated April 1, 2016, issued by Duos Technologies Group, Inc. (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.4 on April 6, 2016) | |
| 10.6 | 2016 Equity Incentive Plan (incorporated herein by reference to the Proxy Statement on Schedule 14A filed on April 1, 2016) | |
| 10.7 | Securities Purchase Agreement, dated December 20, 2016, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 on December 23, 2016) | |
| 10.8 | Promissory Note, dated December 20, 2016, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.2 on December 23, 2016) | |
| 10.9 | Form of Securities Purchase Agreement (incorporated herein by reference to the Current Report on Form 8-K filed as Exhibit 10.1 on November 29, 2017) | |
| 10.10 | 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) | |
| 10.12 | 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) | |
| 10.13 | 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) | |
| 10.14 | 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) | |
| 10.15 | Amendment #4 to the Securities Purchase Agreement and Note, dated November 14, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.8 on November 20, 2017) | |
| 10.16 | Amendment #5 to the Securities Purchase Agreement and Note, dated November 16, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.9 on November 20, 2017) | |
| 10.17 | Amendment #6 to the Securities Purchase Agreement and Note, dated November 20, 2017, by and between Duos Technologies Group, Inc. and JMJ Financial (incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.10 on November 20, 2017) | |
| 10.18 | Forbearance Agreement, dated May 12, 2017, by and among Duos Technologies Group, Inc. and GPB Debt Holdings II, LLC incorporated herein by reference to the Quarterly Report on Form 10-Q filed as Exhibit 10.13 on November 20, 2017) | |
| 10.19 | 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) | |
| 10.20 | 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) | |
| 10.21 | 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) | |
| 10.22 | 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) | |
| 10.23 | 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) | |
| 10.24 | 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) | |
| 10.25 | 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) | |
| 10.26 | 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). | |
| 10.27 | Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2020) | |
| 10.28 | Paycheck Protection Program Note, dated April 23, 2020 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2020) |
| 46 |
| 10.29 | Separation Agreement, dated July 10, 2020, by and between Duos Technologies Group, Inc. and Gianni B. Arcaini (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2020) | |
| 10.30 | Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2021) | |
| 10.31 | Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2021) | |
| 10.32 | 2021 Equity Incentive Plan (incorporated herein by reference to the Proxy Statement on Schedule 14A filed on June 23, 2021) | |
| 10.33+ | Employment Agreement, dated April 1, 2018, between the Company and Adrian G. Goldfarb (incorporated herein by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 11, 2019) | |
| 10.34+ | Employment Agreement, dated April 1, 2018, between the Company and Connie L. Weeks (incorporated herein by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 11, 2019) | |
| 14.1 | Code of Ethics (incorporated by reference to the Company’s Form 10-K filed on April 15, 2019) | |
| 21 | List of Subsidiaries (incorporated by reference to Exhibit 21 of the Company’s Form S-1/A filed on May 28, 2021) | |
| 31.1 * | 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. | |
| 31.2 * | 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. | |
| 32.1 ** | 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. | |
| 32.2 ** | 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. | |
| 99.1 | Audit Committee Charter (incorporated by reference to the Company’s Form 10-K filed on April 15, 2019) | |
| 99.2 | Compensation Committee Charter (incorporated by reference to the Company’s Form 10-K filed on April 15, 2019) | |
| 99.3 | Corporate Governance and Nominating Committee Charter (incorporated by reference to the Company’s Form 10-K filed on April 15, 2019) | |
| 101.INS * | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH * | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL * | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF * | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB * | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE * | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
———————
| * | filed herewith |
| ** | furnished herewith |
| + | indicates management contract or compensatory plan |
Item 16. Form 10-K Summary
Not applicable
| 47 |
SIGNATURES
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.
| DUOS TECHNOLOGIES GROUP, INC. | ||
| Date: March 31, 2022 | By: | /s/ Charles P. Ferry |
|
Charles P. Ferry Chief Executive Officer | ||
| Date: March 31, 2022 | 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 | Date | ||
| /s/ Charles P. Ferry | Chief Executive Officer and Director | March 31, 2022 | ||
| Charles P. Ferry | (Principal Executive Officer) | |||
| /s/ Adrian G. Goldfarb | Chief Financial Officer | March 31, 2022 | ||
| Adrian G. Goldfarb | (Principal Financial Officer) | |||
| /s/ Kenneth Ehrman | Chairman | March 31, 2022 | ||
| Kenneth Ehrman | ||||
| /s/ Edmond L Harris | Director | March 31, 2022 | ||
|
Edmond L. Harris
|
||||
| /s/ Ned Mavrommatis | Director | March 31, 2022 | ||
| Ned Mavrommatis |
| /s/ James Craig Nixon | Director | March 31, 2022 | ||
| James Craig Nixon |
| 48 |
INDEX TO FINANCIAL STATEMENTS
| Report of Independent Registered Public
Accounting Firm (PCAOB ID # |
F-2 | |||
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | F-4 | |||
| Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 | F-6 | |||
| Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2021 and 2020 | F-7 | |||
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 | F-8 | |||
| Notes to Consolidated Financial Statements | F-9 |
| 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, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2021 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, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Percentage of Completion Revenue Recognition & Related Contract Assets and Contract Liabilities
As described in footnote 1, “Revenue Recognition – Technology Systems” and footnote 9, “Contract Accounting” to the consolidated financial statements, the Company recognizes revenue over time using a cost-based input methodology in which significant judgement is required to estimated costs to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding amount of revenue to recognize. In addition, contract assets on uncompleted contracts represent 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.
| F-2 |
We identified this percentage of completion revenue recognition as a critical audit matter. Auditing management’s estimates and judgments regarding forecasts of total estimated costs to complete projects is especially challenging and complex.
The primary procedures we performed to address this critical audit matter included (a) evaluated the reasonableness of management’s cost estimates to complete projects by comparing them to historical information, year to date current information 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 when applicable on a sample of technology systems revenues.
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 $5.5 million in the first quarter of 2022 created a cash balance and positive working capital that 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, 2021 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.
/s/ Salberg & Company, P.A.
We have served as the Company’s auditor since 2013
March 31, 2022
| F-3 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contract assets | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right of use asset | ||||||||
| Security deposit | ||||||||
| OTHER ASSETS: | ||||||||
| Patents and trademarks, net | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
| F-4 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related parties | ||||||||
| Notes payable - financing agreements | ||||||||
| Payroll taxes payable | ||||||||
| Accrued expenses | ||||||||
| Equipment financing agreements-current portion | ||||||||
| Operating lease obligations-current portion | ||||||||
| PPP loan-current portion | ||||||||
| Contract liabilities | ||||||||
| Deferred revenue | ||||||||
| Total Current Liabilities | ||||||||
| Equipment financing payable, less current portion | ||||||||
| Lease obligations, less current portion | ||||||||
| PPP loan, less current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 11) | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock: $ par value, authorized, shares available to be designated | ||||||||
| Series A redeemable convertible preferred stock, $ stated value per share, shares designated; issued and outstanding at December 31, 2021 and December 31, 2020, convertible into common stock at $ per share | ||||||||
| Series B convertible preferred stock, $ stated value per share, shares designated; and issued and outstanding at December 31, 2021 and and issued and outstanding at December 31, 2020, convertible into common stock at $ per share | ||||||||
| Series C convertible preferred stock, $ stated value per share, shares designated; issued and outstanding at December 31, 2021 and issued and outstanding at December 31, 2021, convertible into common stock at $ per share | ||||||||
| Common stock: $ par value; shares authorized, and shares issued, and shares outstanding at December 31, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Total stock & paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Sub-total | ||||||||
| Less: Treasury stock ( shares of common stock at December 31, 2021 and December 31, 2020) | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
| F-5 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| REVENUES: | ||||||||
| Technology systems | $ | $ | ||||||
| Services and consulting | ||||||||
| Total Revenues | ||||||||
| COST OF REVENUES: | ||||||||
| Technology systems | ||||||||
| Services and consulting | ||||||||
| Overhead | ||||||||
| Total Cost of Revenues | ||||||||
| GROSS MARGIN | ( | ) | ||||||
| OPERATING EXPENSES: | ||||||||
| Sales & marketing | ||||||||
| Research & development | ||||||||
| Administration | ||||||||
| 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 | ||||||||
See accompanying notes to the consolidated financial statements.
| F-6 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
| Preferred Stock B | Preferred Stock C | Common Stock | Additional | |||||||||||||||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | # of Shares | Amount | Paid-in- Capital | Accumulated Deficit | Treasury Stock | Total | |||||||||||||||||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Stock options granted to employees | — | — | — | |||||||||||||||||||||||||||||||||||||
| Series C preferred stock issued | — | — | ||||||||||||||||||||||||||||||||||||||
| Series B preferred converted to common stock | ( | ) | ( | ) | — | |||||||||||||||||||||||||||||||||||
| Series C preferred converted to common stock | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Common stock issued for cashless warrants exercised | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for cashless employee stock options exercised | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Rounding-split in 2020 | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss for the year ended December 31, 2021 | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Balance December 31, 2019 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Common stock issued | — | — | ||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
| F-7 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| 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 | ||||||||
| Loss on disposal of assets | ||||||||
| Stock based compensation | ||||||||
| Modification of employee stock options | ||||||||
| Stock issued for services | ||||||||
| PPP loan forgiveness including accrued interest | ( | ) | ||||||
| Interest expense related to debt discounts | ||||||||
| Amortization of operating lease right of use asset | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Contract assets | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Security deposit | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accounts 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: | ||||||||
| Repayments of line of credit | ( | ) | ||||||
| Repayments of insurance and equipment financing | ( | ) | ( | ) | ||||
| Repayment of finance lease | ( | ) | ( | ) | ||||
| Repayment of notes payable | ( | ) | ||||||
| Proceeds from PPP loan | ||||||||
| Proceeds from equipment financing | ||||||||
| Proceeds from common stock issued | ||||||||
| Issuance cost | ( | ) | ||||||
| Proceeds from preferred stock issued | ||||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Notes issued for financing of insurance premiums | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
| F-8 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Duos Technologies Group, Inc. (the “Company”), through its operating subsidiaries, Duos Technologies, Inc. (“Duos”) and TrueVue360, Inc. (“TrueVue360”) (collectively the “Company”), develops and deploys vision based analytical technology solutions that will help to transform precision railroading, logistics and inter-modal transportation operations. Additionally, these unique patented solutions can be employed into many other industries.
The Company has developed the Railcar Inspection Portal (RIP) that provides both freight and transit railroad customers and select government agencies the ability to conduct fully automated inspections of trains while they are in transit. The system, which incorporates a variety of sophisticated optical technologies, illumination and other sensors, scans each passing railcar to create an extremely high-resolution image set from a variety of angles including the undercarriage. These images are then processed through various methods of artificial intelligence (“AI”) algorithms to identify specific defects and/or areas of interest on each railcar. This is all accomplished within minutes of a railcar passing through our portal. This solution has the potential to transform the railroad industry by increasing safety, improving efficiency and reducing costs. The Company has successfully deployed this system with several Class 1 railroad customers and anticipates an increased demand in the future. Government agencies can conduct digital inspections combined with the incorporated AI to improve rail traffic flow across borders which also directly benefits the Class 1 railroads through increasing their velocity.
The Company has also developed the Automated Logistics Information System (ALIS) which automates and reduces/removes personnel from gatehouses where trucks enter and exit large logistics and intermodal facilities. This solution also incorporates sensors and data points as necessary for each operation and directly interconnects with backend logistics databases and processes to streamline operations and significantly improve operations and security and importantly dramatically improves the vehicle throughput on each lane on which the technology is deployed.
The Company has built a portfolio of IP and patented solutions that creates “actionable intelligence” using two core native platforms called Centraco® and Praesidium™. All solutions provided include a variant of both applications. Centraco is designed primarily as the user interface to all our systems as well as the backend connection to third-party applications and databases through both Application Programming Interfaces (APIs) and Software Development Kits (SDKs). This interface is browser based and hosted within each one of our systems and solutions. It is typically also customized for each unique customer and application. Praesidium typically resides as middleware in our systems and manages the various image capture devices and some sensors for input into the Centraco software.
The Company also developed a proprietary Artificial Intelligence (AI) software platform, Truevue360™ with the objective of focusing the Company’s advanced intelligent technologies in the areas of AI, deep machine learning and advanced multi-layered algorithms to further support our solutions.
Through September 30, 2021, the Company also provided professional and consulting services for large data centers and had developed a system for the automation of asset information marketed as DcVue™. The Company had deployed its DcVue software at one beta site. This software was used by Duos’ consulting auditing teams. DcVue was based upon the Company’s OSPI patent which was awarded in 2010. The Company offered DcVue available for license to our customers as a licensed software product.
The Company’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, grows backlog and improves profitability, responsibly grow the business both organically and through selective acquisitions, and promote a performance-based work force where employees enjoy their work and are incentivized to excel and remain with the Company.
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-9 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Reverse Stock Split
All share and per share amounts have been presented
to give retroactive effect to a
Reclassifications
The Company reclassified certain operating expenses for the year ended December 31, 2020 to conform to 2021 classification. There was no net effect on the total expenses of such reclassification.
The following table reflects the reclassification adjustment effect for the year ended December 31, 2020:
| Before Reclassification | After Reclassification | |||||||||
| For the Year Ended | For the Year Ended | |||||||||
| December 31, | December 31, | |||||||||
| 2020 | 2020 | |||||||||
| REVENUES: | REVENUES: | |||||||||
| Technology systems | $ | Technology systems | $ | |||||||
| Technical support | Services and consulting | |||||||||
| Consulting services | — | — | ||||||||
| AI technologies | — | — | ||||||||
| Total Revenue | Total Revenue | |||||||||
| COST OF REVENUES: | COST OF REVENUES: | |||||||||
| Technology systems | Technology systems | |||||||||
| Technical support | Services and consulting | |||||||||
| Consulting services | Overhead | |||||||||
| AI technologies | — | — | ||||||||
| Total Cost of Revenues | Total Cost of Revenues | |||||||||
| GROSS MARGIN | GROSS MARGIN | |||||||||
| OPERATING EXPENSES: | OPERATING EXPENSES: | |||||||||
| Sales and marketing | Sales and marketing | |||||||||
| Engineering | Research and development | |||||||||
| Research and development | Administration | |||||||||
| Administration | — | — | ||||||||
| AI technologies | — | — | ||||||||
| Total Operating Expenses | Total Operating Expenses | |||||||||
| LOSS FROM OPERATIONS | $ | ( |
) | LOSS FROM OPERATIONS | $ | ( |
) |
The Company reclassified inventory on the consolidated balance sheet for the year ended December 31, 2020 to conform to 2021 classification. During the year ended December 31, 2020, inventory had been presented on the consolidated balance sheet within “Prepaid expenses and other current assets.” There was no net effect on total current assets.
| F-10 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
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, valuation of warrants issued with debt and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Concentrations
Cash Concentrations
Cash is maintained at financial institutions and at
times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of December 31,
2021, balance in one financial institution exceeded federally insured limits by approximately $
Significant Customers and Concentration of Credit Risk
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:
For the year ended December 31, 2021 one customer
accounted for
| · | 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. |
| F-11 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
At December 31, 2021, two customers accounted for
Geographic Concentration
Approximately
Significant Vendors and Concentration of Credit Risk
At December 31, 2021, one vendor accounted for
Two suppliers accounted for approximately
Fair Value of Financial Instruments and Fair Value Measurements
The Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
These inputs are prioritized below:
| Level 1: |
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
|
| Level 2: |
Observable market-based inputs or unobservable inputs that are corroborated by market data
|
| Level 3: |
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions that the market participants would use in the asset or liability based on the best available information.
|
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The estimated fair value of certain financial instruments, including accounts receivable, prepaid 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.
| F-12 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on accounts, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.
Inventory
Inventory consists primarily of spare parts and consumables to be used in the production of our technology systems or in connection with maintenance agreements with customers. Inventory is stated at the lower of cost or net realizable value. Inventory cost is primarily determined using the weighted average cost method.
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
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.
| F-13 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Product Warranties
The Company has a
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. | Identify the contract with the customer; |
| 2. | Identify the performance obligations in the contract; |
| 3. | Determine the transaction price; |
| 4. | Allocate the transaction price to separate performance obligations; and |
| 5. | Recognize revenue when (or as) each performance obligation is satisfied. |
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.
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)
| F-14 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
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 |
| (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.
| F-15 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
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.
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, 2021 and 2020, the balance of deferred revenue was $
Disaggregation of Revenue
The Company is following the guidance of ASC 606-10-55-296 and 297 for disaggregation of revenue. Accordingly, revenue has been disaggregated according to the nature, amount, timing and uncertainty of revenue and cash flows. We are providing qualitative and quantitative disclosures.
Qualitative:
| 1. | We have four distinct revenue sources: |
| a. | Turnkey, engineered projects; |
| b. | Associated maintenance and support services; |
| c. | Licensing and professional services related to auditing of data center assets; |
| d. | Predetermined algorithms to provide important operating information to the users of our systems. |
| 2. | We currently operate in North America including the United States, Mexico and Canada. |
| 3. | Our customers include rail transportation, commercial, petrochemical, government, banking and IT suppliers. |
| 4. | Our contracts are fixed price and fall into two duration types: |
| a. | Turnkey engineered projects and professional service contracts that are less than one year in duration and are typically two to three months in length; and |
| b. | Maintenance and support contracts ranging from one to five years in length. |
| 5. | Our goods and services are transferred over time. |
| F-16 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Quantitative:
For the Year Ended December 31, 2021
| Segments | Rail | Commercial | Petrochemical | Government | Banking/Other | IT Suppliers |
Artificial Intelligence |
Total | ||||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||||||
| North America | $ | $ | $ | ( |
) | $ | $ | $ | |
$ | $ | |||||||||||||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||||||||||||||
| Turnkey Projects | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Maintenance & Support |
( |
) | ||||||||||||||||||||||||||||||
| Data Center Auditing Services | ||||||||||||||||||||||||||||||||
| Software License | ||||||||||||||||||||||||||||||||
| Algorithms | ||||||||||||||||||||||||||||||||
| $ | $ | $ | ( |
) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||||||||||||||
| Goods transferred over time | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Services transferred over time | ( |
) | ||||||||||||||||||||||||||||||
| $ | $ | $ | ( |
) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| F-17 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Quantitative:
For the Year Ended December 31, 2020
| Segments | Rail | Commercial | Petrochemical | Government | Banking | IT Suppliers |
Artificial Intelligence |
Total | ||||||||||||||||||||||||
| Primary Geographical Markets | ||||||||||||||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Major Goods and Service Lines | ||||||||||||||||||||||||||||||||
| Turnkey Projects | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Maintenance & Support |
( |
) | ||||||||||||||||||||||||||||||
| Data Center Auditing Services | ||||||||||||||||||||||||||||||||
| Software License | ||||||||||||||||||||||||||||||||
| Algorithms | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| 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, 2021 and 2020, there were
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.
| F-18 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for employee stock options using the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
Income Taxes
The Company accounts for income taxes in accordance with the Financial Accounting Standards Board FASB Accounting Standards Codification (“ASC”) 740, Income Taxes, which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company evaluates all significant tax positions as required by ASC 740. As of December 31, 2021, 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 2018, 2019 and 2020 remain open for potential audit.
Basic earnings per share (EPS) are computed by dividing
net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is
computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period
and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares
issuable upon the exercise of stock options, stock warrants, convertible debt instruments, convertible preferred stock or other common
stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. At December 31,
2021, there was an aggregate of
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018.
The Company adopted this guidance effective January 1, 2019, using the modified retrospective method, whereby a cumulative effect adjustment was made as of the date of initial application. The Company also applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and (ii) initial direct costs for any existing leases. The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on the balance sheet and instead recognize the lease payments in expense as incurred. The Company has also elected to account for real estate leases that contain both lease and non-lease components as a single lease component.
| F-19 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
The adoption of ASU 2016-02 did not materially affect our consolidated statement of operations or our consolidated statement of cash flows.
For contracts entered into on or after the effective date, at the inception of a contract the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset.
Operating ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the lease commencement date to determine the present value of future payments. The lease term includes all periods covered by renewal and termination options where the Company is reasonably certain to exercise the renewal options or not to exercise the termination options. Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
Recent Accounting Pronouncements
From time to time, the FASB or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards Update (“ASU”).
In August 2020, the FASB issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023. 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.
In May 2021, the FASB issued an accounting pronouncement (ASU 2021-04) related to modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. The pronouncement states that an entity should treat the modification as an exchange of the original instrument for a new instrument, and the effect of the modification should be calculated as the difference between the fair value of the modified instrument and the fair value of that instrument immediately before modification. An entity should then recognize the effect of the modification on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. The pronouncement will be applied prospectively to all modifications that occur after the initial date of adoption. We 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 $
As previously noted, the Company raised $4,500,000 from existing shareholders through the issuance of Series C Convertible Preferred Stock. Although additional investment is not assured, the Company is comfortable that it would be able to raise sufficient capital to support expanded operations based on an anticipated increase in business activity. In the long run, the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing the plan described above, generate enough revenue, and attain consistently profitable operations. Although the current global pandemic related to the coronavirus (Covid-19) has affected our operations, particularly in supply chain, we now believe that this is expected to be an ongoing issue and our working capital assumptions reflect this new reality. The Company cannot currently quantify the uncertainty related to the 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 twelve months from the date of this report. A notable recent success is the approval of the Company for “bonding” in the amount of approximately $8 million for an upcoming major project.
The Company was successful in securing a loan of $
| F-20 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Management believes that, at this time, the conditions in our market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding contract and the additional time needed to execute on new contracts previously reported have put a strain on our cash reserves. However, recent events including a $5.5M injection of funds from a sale of securities, significant recent orders and the overall stabilization of the business indicate that there is no longer substantial doubt for the Company to continue as a going concern for a period of twelve months from the issuance of this report. We continue executing the plan to grow our business and achieve profitability without the requirement to raise additional capital for existing operations for 2022 although we may do so to fund selective opportunities that may arise. Management has extensively evaluated our requirements for the next 12 months and has determined that the Company currently has sufficient cash to operate for at least that period.
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable were as follows at December 31, 2021 and 2020:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accounts receivable | $ | $ | ||||||
| Allowance for doubtful accounts | ||||||||
| Accounts Receivable, Net | $ | $ | ||||||
There was bad debt expense related to accounts receivable
of $
NOTE 4 – PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follow at December 31, 2021 and 2020:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Furniture, fixtures and equipment | $ | $ | ||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Furniture, fixtures and equipment, Net | $ | $ | ||||||
Depreciation expense
in 2021 and 2020 was $
NOTE 5 – PATENTS AND TRADEMARKS
| 2021 | 2020 | |||||||
| Patents and trademarks | $ | $ | ||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||
| Patents and trademarks, Net | $ | $ | ||||||
Amortization expense in 2021 and 2020 was $
| F-21 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
NOTE 6 – SOFTWARE DEVELOPMENT COSTS
In 2018, the Company capitalized $
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Software development costs | $ | $ | ||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||
| Software Development Costs, net | $ | $ | ||||||
Amortization of software development costs in 2021
and 2020 was zero and $
NOTE 7 – DEBT
Notes Payable – Insurance Premium Financing Agreements
The Company’s notes payable relating to financing agreements classified as current liabilities consist of the following as of:
| December 31, 2021 | December 31, 2020 | |||||||||||||||
| Notes Payable | Principal | Interest | Principal | Interest | ||||||||||||
| Third Party - Insurance Note 1 | $ | % | $ | % | ||||||||||||
| Third Party - Insurance Note 2 | % | % | ||||||||||||||
| Third Party - Insurance Note 3 | — | — | ||||||||||||||
| Third Party - Insurance Note 4 | — | — | ||||||||||||||
| Total | $ | $ | ||||||||||||||
The Company entered into an agreement on December
23, 2020 with its insurance provider by issuing a $
The Company entered into an agreement on April 15,
2020 with its insurance provider by issuing a $
The Company entered into an agreement on September
15, 2020 with its insurance provider by issuing a $
The Company entered into an agreement on February
3, 2020 with its insurance provider by issuing a $
| F-22 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Equipment Financing
The Company entered into an agreement on August 26,
2019 with an equipment financing company by issuing a $
At December 31, 2021, future minimum note payments due under the equipment financing agreements are as follows:
| As of December 31, | Amount | |||
| 2022 | ||||
| 2023 | ||||
| Total minimum equipment financing payments | $ | |||
| Less: interest | ( | ) | ||
| Total equipment financing at December 31, 2021 | $ | |||
| Less: current portion of equipment financing | ( | ) | ||
| Long-term portion of equipment financing | $ | |||
Notes Payable – PPP Loan
| December 31, 2021 | December 31, 2020 | |||||||||||||||
| Payable To | Principal | Interest | Principal | Interest | ||||||||||||
| PPP loan | $ | $ | % | |||||||||||||
| Total | ||||||||||||||||
| Less current portion | ( | ) | ||||||||||||||
| Long-term portion | $ | $ | ||||||||||||||
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 $
NOTE 8 – LINE OF CREDIT
The Company assumed a line of credit with Wells
Fargo Bank upon the merger with ISA on April 1, 2015. The line of credit provided for borrowings up to $
| F-23 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
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, 2021 and 2020, contract assets on uncompleted contracts consisted of the following:
| 2021 | 2020 | |||||||
| Costs and estimated earnings recognized | $ | $ | ||||||
| Less: Billings or cash received | ( | ) | ( | ) | ||||
| Contract Assets | $ | $ | ||||||
Contract Liabilities
Contract liabilities on uncompleted contracts represent billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under the percentage of completion contract method.
At December 31, 2021 and 2020, contract liabilities on uncompleted contracts consisted of the following:
| 2021 | 2020 | |||||||
| Billings and/or cash receipts on uncompleted contracts | $ | $ | ||||||
| Less: Costs and estimated earnings recognized | ( | ) | ( | ) | ||||
| Contract Liabilities | $ | $ | ||||||
NOTE 10 – DEFERRED COMPENSATION
As of December 31, 2021, and 2020, the Company has
accrued $
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Delinquent Payroll Taxes Payable
The Company has paid its delinquent IRS payroll taxes,
late fees and outstanding state of California payroll taxes in full. At December 31, 2021 and December 31, 2020, the state payroll taxes
payable balance was zero and $
Operating Lease Obligations
The Company had an operating lease agreement for office
space of approximately
| F-24 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
The Company entered a separate operating lease agreement
of office and warehouse combination space of
The Company had approximately
On July 26, 2021, the Company entered a new operating
lease agreement of office and warehouse combination space of
On November 1, 2021, the Company extended the leases of office space and warehouse space at its two prior facilities for a period of 30 days to accommodate delays moving to its new headquarters. The move was completed during 2021.
The Company had approximately
As of December 31, 2021, the office and warehouse
lease is the Company’s only lease with a term greater than twelve months. The office and warehouse lease has a remaining term of
approximately
The following table shows supplemental information related to leases:
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Lease cost: | ||||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Other information: | ||||||||
| Operating cash outflow used for operating leases | ||||||||
| Weighted average discount rate | % | % | ||||||
| Weighted average remaining lease term | ||||||||
At December 31, 2021, future minimum lease payments due under operating leases are as follows:
|
As of December 31, 2021 |
||||
| Fiscal year: | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted future minimum lease payments | ||||
| Less: Impact of discounting | ( |
) | ||
| Total present value of operating lease liabilities | ||||
| Current portion | ( |
) | ||
| Operating lease liability, less current portion | $ | |||
| F-25 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Executive Severance Agreement
On April 1, 2018, the Company entered into an employment
agreement (the “Arcaini Employment Agreement”) with Gianni B. Arcaini, pursuant to which Mr. Arcaini served as Chief Executive
Officer and Chairman of the Board of Directors of the Company. Under the Arcaini Employment Agreement, Mr. Arcaini was paid an annual
salary of $
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 $
In accordance with the Separation
Agreement, the Company will pay to Mr. Arcaini the total sum of $
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, 2021 and 2020 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, 2021 and 2020 were as follows:
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| 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 | $ | $ | ||||||
| F-26 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
The Company’s approximate net deferred tax assets as of December 31, 2021 and 2020 were as follows:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Deferred Tax Assets: | ||||||||
| Net operating loss carryforward | $ | $ | ||||||
| Intangible assets | ||||||||
| Allowance for bad debt | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
The gross operating loss carryforward was approximately
$
The potential tax benefit arising from the net
operating loss carryforward of $
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 2020, 2019 and 2018 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE 13 – STOCKHOLDERS’ EQUITY
2016 Equity Plan
We maintained the 2016 Equity Incentive Plan (the “2016 Plan”) for employees, officers, directors and other entities and individuals whose efforts contribute to our success. The 2016 Plan terminated pursuant to its terms on December 31, 2020, although all outstanding awards on such date continue in full force and effect.
2021 Equity Plan
On May 12, 2021, the Board adopted, with shareholder approval as of July 15, 2021. The 2021 Equity Incentive Plan (the “2021 Plan”) providing for the issuance of up to shares of our Common Stock. The purpose of the 2021 Plan is to assist the Company in attracting and retaining key employees, directors and consultants and to provide incentives to such individuals to align their interests with those of our shareholders.
General Description of the 2021 Plan
The following is a summary of the material provisions of the 2021 Plan and is qualified in its entirety by reference to the complete text of the 2021 Plan, which you are encouraged to read in full.
Administration
The 2021 Plan is administered by the Compensation Committee of the Board, which consists of three members of the Board, each of whom is a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act and an “outside director” within the meaning of Code Section 162(m). Among other things, the Compensation Committee has complete discretion, subject to the express limits of the 2021 Plan, to determine the directors, employees and nonemployee consultants to be granted an award, the type of award to be granted, the terms and conditions of the award, the form of payment to be made and/or the number of shares of Common Stock subject to each award, the exercise price of each option and base price of each stock appreciation right (“SAR”), the term of each award, the vesting schedule for an award, whether to accelerate vesting, the value of the Common Stock underlying the award, and the required withholding, if any. The Compensation Committee may amend, modify or terminate any outstanding award, provided that the participant’s consent to such action is required if the action would impair the participant’s rights or entitlements with respect to that award. The Compensation Committee is also authorized to construe the award agreements and may prescribe rules relating to the 2021 Plan. Notwithstanding the foregoing, the Compensation Committee does not have any authority to grant or modify an award under the 2021 Plan with terms or conditions that would cause the grant, vesting or exercise thereof to be considered nonqualified “deferred compensation” subject to Code Section 409A.
| F-27 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Grant of Awards; Shares Available for Awards
The 2021 Plan provides for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees and nonemployee consultants of the Company or its affiliates. We have reserved a total of shares of Common Stock for issuance as or under awards to be made under the 2021 Plan. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2021 Plan.
Currently, there are 52 identified employees (including three executive officers, of which one is a director), four non-employee directors, and up to 50 other current or future staff members who would be eligible to receive stock options and/or shares of restricted stock under the 2021 Plan. Future new hires and additional non-employee directors and/or consultants would be eligible to participate in the 2021 Plan as well.
Stock Options
The 2021 Plan provides for either “incentive
stock options” (“ISOs”), which are intended to meet the requirements for special federal income tax treatment under
the Code, or “nonqualified stock options” (“NQSOs”); provided, however, that ISOs may only be issued if our shareholders
approve the 2021 Plan at the Annual Meeting. Stock options may be granted on such terms and conditions as the Compensation Committee may
determine; provided, however, that the per share exercise price under a stock option may not be less than the fair market value of a share
of the Company’s Common Stock on the date of grant and the term of the stock option may (110% of such value
and five years in the case of an ISO granted to an employee who owns (or is deemed to own)
Stock Appreciation Rights
An SAR entitles the participant, upon exercise, to receive an amount, in cash or stock or a combination thereof, equal to the increase in the fair market value of the underlying Common Stock between the date of grant and the date of exercise. SARs may be granted in tandem with, or independently of, stock options granted under the 2021 Plan. An SAR granted in tandem with a stock option (i) is exercisable only at such times, and to the extent, that the related stock option is exercisable in accordance with the procedure for exercise of the related stock option; (ii) terminates upon termination or exercise of the related stock option (likewise, the Common Stock option granted in tandem with a SAR terminates upon exercise of the SAR); (iii) is transferable only with the related stock option; and (iv) if the related stock option is an ISO, may be exercised only when the value of the stock subject to the stock option exceeds the exercise price of the stock option. An SAR that is not granted in tandem with a stock option is exercisable at such times as the Compensation Committee may specify.
Performance Share and Performance Unit Awards
Performance share and performance unit awards entitle the participant to receive cash or shares of our Common Stock upon the attainment of specified performance goals. In the case of performance units, the right to acquire the units is denominated in cash values.
Restricted Stock Awards and Restricted Stock Unit Awards
A restricted stock award is a grant or sale of Common Stock to the participant, subject to our right to repurchase all or part of the shares at their purchase price (or to require forfeiture of such shares if issued to the participant at no cost) in the event that conditions specified by the Compensation Committee in the award are not satisfied prior to the end of the time period during which the shares subject to the award may be repurchased by or forfeited to us. Our restricted stock unit entitles the participant to receive a cash payment equal to the fair market value of a share of Common Stock for each restricted stock unit subject to such restricted stock unit award, if the participant satisfies the applicable vesting requirement.
| F-28 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Unrestricted Stock Awards
An unrestricted stock award is a grant or sale of shares of our Common Stock to the participant that is not subject to transfer, forfeiture or other restrictions, in consideration for past services rendered to the Company or an affiliate or for other valid consideration.
Amendment and Termination
The Compensation Committee may adopt, amend and rescind rules relating to the administration of the 2021 Plan, and amend, suspend or terminate the 2021 Plan, but no such amendment, rescission, suspension or termination will be made that materially and adversely impairs the rights of any participant with respect to any award received thereby under the 2021 Plan without the participant’s consent, other than amendments that are necessary to permit the granting of awards in compliance with applicable laws.
Certain Federal Income Tax Consequences of the 2021 Plan
The following is a general summary of the federal income tax consequences under current U.S. tax law to the Company and to participants in the 2021 Plan who are individual citizens or residents of the United States for federal income tax purposes (“U.S. Participants”) of stock options, stock appreciation rights, restricted stock, performance shares, performance units, restricted stock units, distribution equivalent rights and unrestricted stock. It does not purport to cover all of the special rules including special rules relating to limitations on the ability of the Company to deduct the amounts for federal income tax purposes of certain compensation, special rules relating to deferred compensation, golden parachutes, participants subject to Section 16(b) of the Exchange Act or the exercise of a stock option with previously acquired shares of the Company’s Common Stock. For purposes of this summary, it is assumed that U.S. Participants will hold their shares of the Company’s Common Stock received under the 2021 Plan as capital assets within the meaning of Section 1221 of the Code. In addition, this summary does not address the non-U.S. state or local income or other tax consequences, or any U.S. federal non-income tax consequences, inherent in the acquisition, ownership, vesting, exercise, termination or disposition of an award under the 2021 Plan or shares of the Company’s Common Stock issued pursuant thereto. All participants are urged to consult with their own tax advisors concerning the tax consequences to them of an award under the 2021 Plan or shares of the Company’s Common Stock issued thereto pursuant to the 2021 Plan.
A U.S. Participant does not recognize taxable income upon the grant of a NQSO or an ISO. Upon the exercise of a NQSO, the U.S. Participant recognizes ordinary income in an amount equal to the excess, if any, of the fair market value of the shares acquired on the date of exercise over the exercise price paid therefor under the NQSO, and the Company will generally be entitled to a deduction for such amount at that time. If the U.S. Participant later sells shares acquired pursuant to the exercise of a NQSO, the U.S. Participant recognizes long-term or short-term capital gain or loss, depending on the period for which the shares were held. Long-term capital gain is generally subject to more favorable tax treatment than ordinary income or short-term capital gain. Upon the exercise of an ISO, the U.S. Participant does not recognize taxable income. If the U.S. Participant disposes of the shares acquired pursuant to the exercise of an ISO more than two years after the date of grant and more than one year after the transfer of the shares to the U.S. Participant, the U.S. Participant recognizes long-term capital gain or loss, and the Company will not be entitled to a deduction. However, if the U.S. Participant disposes of such shares prior to the end of the required holding period, all or a portion of the gain is treated as ordinary income and the Company is generally entitled to deduct such amount. In addition to the tax consequences described above, a U.S. Participant may be subject to the alternative minimum tax, which is payable to the extent it exceeds the U.S. Participant’s regular tax. For this purpose, upon the exercise of an ISO, the excess of the fair market value of the shares over the exercise price paid therefor under the ISO is a preference item for alternative minimum taxable income determination purposes. In addition, the U.S. Participant’s basis in such shares is increased by such excess for purposes of computing the gain or loss on the disposition of the shares for alternative minimum tax purposes.
A U.S. Participant does not recognize taxable income upon the grant of an SAR. The U.S. Participant has ordinary compensation income upon exercise of the SAR equal to the increase in the value of the underlying shares, and the Company will generally be entitled to a deduction for such amount.
| F-29 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
A U.S. Participant does not recognize taxable income upon the receipt of a performance share award until the shares are received. At such time, the U.S. Participant recognizes ordinary compensation income equal to the excess, if any, of the fair market value of the shares over any amount thereby paid for the shares, and the Company will generally be entitled to deduct such amount at such time.
A U.S. Participant does not recognize taxable income upon the receipt of a performance unit award, restricted stock unit award or dividend equivalent right award until a cash payment is received. At such time, the U.S. Participant recognizes ordinary compensation income equal to the amount of cash received, and the Company will generally be entitled to deduct such amount at such time.
A U.S. Participant who receives a grant of restricted stock generally recognizes ordinary compensation income equal to the excess, if any, of the fair market value of such shares of stock at the time the restriction lapses over any amount paid timely for the shares. Alternatively, the U.S. Participant may elect to be taxed on the fair market value of such shares at the time of grant. The Company thereby will generally be entitled to a deduction at the same time and in the same amount as the income required to be included by the U.S. Participant.
A U.S. Participant recognizes ordinary compensation income upon receipt of the shares under an unrestricted stock award equal to the excess, if any, of the fair market value of the shares over any amount paid thereby for the shares, and the Company will generally be entitled to deduct such amount at such time.
Series B Convertible Preferred Stock
The following summary of certain terms and provisions of our Series B Convertible Preferred Stock (the “Series B Convertible Preferred Stock”) is subject to, and qualified in its entirety by reference to, the terms and provisions set forth in our certificate of designation of preferences, rights and limitations of Series B Convertible Preferred Stock (the “Series B Convertible Preferred Certificate of Designation”) as previously filed. Subject to the limitations prescribed by our articles of incorporation, our board of directors is authorized to establish the number of shares constituting each series of preferred stock and to fix the designations, powers, preferences, and rights of the shares of each of those series and the qualifications, limitations and restrictions of each of those series, all without any further vote or action by our stockholders. Our board of directors has designated of the authorized shares of preferred stock as Series B Convertible Preferred Stock. The shares of Series B Convertible Preferred Stock are validly issued, fully paid and non-assessable.
Each share of Series B Convertible Preferred
Stock is convertible at any time at the holder’s option into a number of shares of common stock equal to $
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 $
| F-30 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Under the Purchase Agreement, the Company was required to hold a meeting of shareholders at the earliest practical date, and such meeting occurred on July 15, 2021. Nasdaq Marketplace Rule 5635(d) limits the number of shares of common stock (or securities that are convertible into common stock) without shareholder approval and the terms of the Series C Convertible Preferred Stock limit its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval is obtained. The Company obtained shareholder approval (the “Stockholder Approval”) in order to issue shares of common stock underlying the Series C Convertible Preferred Stock at a price less than the greater of book or market value which equal 20% or more of the number of shares of common stock outstanding before the issuance. As described below, the terms of the Series C Convertible Preferred Stock limited its convertibility to a number of shares less than the 20% limit, until the Stockholder Approval was obtained.
In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed with the SEC a registration statement covering the resale by the Purchasers of the shares of common stock into which the shares of Series C Convertible Preferred Stock are convertible. The Company caused the registration statement to be declared effective on June 3, 2021. The Registration Rights Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
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”). All holders of the Series C Preferred Stock have elected the 19.99% Beneficial Ownership Limitation.
Common stock issued for warrants
During the third quarter of 2020, 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, warrants expired, and warrants were cancelled and re-issued on the direction of the holder.
During the second quarter of 2021, warrants representing 205,574 shares were exercised by seven holders. All the exercises were cashless exercises with exercise prices of $7.70 and stock prices ranging from $9.25 to $11.14 resulting in a total of 50,588 common shares. No new warrants were issued during the third and fourth quarter of 2021.
Common stock issued for services and settlements
The Company issued shares of common stock
on March 31, 2020 for payment of accrued board fees to three directors in the amount of $
The Company issued shares of common stock
on June 30, 2020 for payment of accrued board fees to three directors in the amount of $
The Company issued shares of common stock
on September 30, 2020 for payment of accrued board fees to three directors in the amount of $
The Company issued shares of common stock
on August 5, 2021 for payment of accrued board fees to four directors in the amount of $
The Company issued shares of common stock
on September 30, 2021 for payment of accrued board fees to five directors in the amount of $
The Company issued shares of common stock
on November 5, 2021 for payment of accrued board fees to four directors in the amount of $
The Company issued shares of common stock
on December 31, 2021 for payment of accrued board fees to four directors in the amount of $
| F-31 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the year ended December 31, 2021 and 2020, was $ and $, 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, 2021, the total compensation cost for stock options not yet recognized was $. This cost will be recognized over the remaining vesting term of the options of approximately years.
Series B Convertible Preferred Stock
A holder of Series B Convertible Preferred Stock converted
shares into shares of common stock, valued at $
Series C Convertible Preferred Stock
A holder of Series C Convertible Preferred Stock converted
shares into shares of common stock, valued at $
A holder of Series C Convertible Preferred Stock converted
shares into shares of common stock, valued at $
Treasury Stock
In August 2016, the Company’s Board of
Directors approved a new class of Preferred Stock, “Series A”. For shareholders who invested in previous private placements,
the Company was offering on a case-by-case basis, the ability to convert the existing amount invested into an equivalent amount in the
Series A on the condition that they invest an equivalent additional amount in the Series A. In December of 2017, the Company redeemed
all of the Series A and continues to hold shares purchased for $
Options
2021
During the first quarter of 2021, the Company’s
Board of Directors granted new stock options with a strike price of $
During the second quarter of 2021, five former staff
members and one contractor exercised 31,710 and forfeited non-qualified stock options. These transactions were ultimately consummated
in the third quarter. Accordingly, in the third quarter the Company recorded a charge of $
During the third quarter of 2021, the shareholders approved the issuance of up to one million shares or share equivalents in the form of stock options for the purposes of share issuance for compensation to Board Members and grants to certain staff members for recruiting and retention. On July 14, 2021, the Company filed an S-8 registration statement in concert with the 2021 Equity Incentive Plan which was deemed effective on August 5, 2021. The plan covers a period of ten years.
| F-32 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
2020
During the second quarter of 2020, options were cancelled and re-issued to key staff-members, officers, and directors. Of those options granted, % vested immediately. The value of the re-issued options granted was $. In addition, new options were granted to key staff-members, officers and directors. Of those options granted, % vested on January 1, 2021 and the other % will vest on January 1, 2022. The value of the new options is $.
During the third quarter of 2020, options
were issued to the Company’s new CEO as a hiring incentive. Of these options % will vest on September 1, 2021 and the other %
will vest on September 1, 2022. The value of these options is $. In addition, as a part of the severance agreement agreed with
the former CEO, unvested options were vested and the unamortized portion of those options were charged in the amount of $
During the fourth quarter of 2020, options were granted to two new key employees. The value of these options is $.
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Term (Years) | Value | |||||||||||||
| Outstanding at December 31, 2019 | $ | — | ||||||||||||||
| Granted | $ | — | ||||||||||||||
| Forfeited | ( |
) | $ | — | — | |||||||||||
| Outstanding at December 31, 2020 | $ | |||||||||||||||
| Exercisable at December 31, 2020 | $ | |||||||||||||||
| Outstanding at December 31, 2020 | $ | — | ||||||||||||||
| Granted | $ | — | ||||||||||||||
| Exercised/Forfeited | ( |
) | $ | — | — | |||||||||||
| Outstanding at December 31, 2021 | $ | $ |
||||||||||||||
| Exercisable at December 31, 2021 | $ | |||||||||||||||
The fair value of the incentive stock option grants for the years ended December 31, 2021 and 2020 were estimated using the following weighted- average assumptions:
| For the Years Ended December 31, | ||||
| 2021 | 2020 | |||
| Risk free interest rate | % | % - % | ||
| Expected term in years | - | |||
| Dividend yield | ||||
| Volatility of common stock | % | % - % | ||
| Estimated annual forfeitures | ||||
Warrants
2021
During the second quarter of 2021, warrants representing
| F-33 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020
|
2020
During the first quarter of 2020,
During the second quarter of 2020,
During the third quarter of 2020,
During the fourth quarter of 2020, previously issued warrants were cancelled and re-issued with no change in terms as part of a settlement between certain shareholders.
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Warrants | Price | Term (Years) | Value | |||||||||||||
| Outstanding at December 31, 2019 | $ | |||||||||||||||
| Warrants expired, forfeited, cancelled or exercised | ( |
) | ||||||||||||||
| Warrants issued | $ | — | ||||||||||||||
| Outstanding at December 31, 2020 | $ | — | ||||||||||||||
| Exercisable at December 31, 2020 | $ | |||||||||||||||
| Outstanding at December 31, 2020 | $ | |||||||||||||||
| Warrants expired, forfeited, cancelled or exercised | ( |
) | ||||||||||||||
| Warrants issued | $ | — | ||||||||||||||
| Outstanding at December 31, 2021 | $ | — | ||||||||||||||
| Exercisable at December 31, 2021 | $ | |||||||||||||||
NOTE 15 – DEFINED CONTRIBUTION PLAN
The Company has a 401(k)-retirement savings plan (the
“401(k) Plan”) covering all eligible employees. The 401(k) Plan allows employees to defer a portion of their annual compensation,
and the Company may match a portion of the employees’ contributions generally after the first six months of service. During the
twelve months ended December 31, 2021, the Company matched 100% of the first 4% of eligible employee compensation that was contributed
to the 401(k) Plan. For the twelve months ended December 31, 2021, the Company recognized expense for matching cash contributions to the
401(k) Plan totaling $
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DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
NOTE 16 – RELATED PARTY TRANSACTIONS
On August 1, 2012, the Company entered into an independent
contractor master services agreement (the “Services Agreement”) with Luceon, LLC, a Florida limited liability company, owned
by our former Chief Technology Officer, David Ponevac. The Services Agreement provided that Luceon would provide support services
including management, coordination or software development services and related services to duos. In January 2019, additional services
were contracted with Luceon for TrueVue360™ primarily for software development through the provision of 7 additional full-time
contractors located in Slovakia at a cost of $
NOTE 17 – SUBSEQUENT EVENTS
On January 1, 2022, the Company awarded certain
senior management and key employees non-qualified stock options under the 2021 Equity Incentive Plan previously approved by the
shareholders. A total of
options were awarded by the Company’s Compensation Committee and approved by the Board, with a strike price of $
On January 11, 2022, a shareholder exercised a conversion
of andshares of Series C Convertible Preferred stock collectively valued at $
On February 3, 2022, the Company closed an offering
of shares of common stock in the amount of $
On February 21, 2022, the
F-35