10-Q 1 duot_10q.htm QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number 000-55497

Duos Technologies Group, Inc.
(Exact name of registrant as specified in its charter)

Florida | 65-0493217
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.)
6622 Southpoint Drive South, Suite 310, Jacksonville, Florida, 32216 |
(Address of principal executive offices) |

(904) 652-1616

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, par value $0.001 |  | DUOT |  | The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ | Accelerated filer ¨
Non-accelerated filer þ | Smaller reporting company þ
| Emerging growth company ¨

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of May 11, 2020, Duos Technologies Group, Inc. had outstanding 3,524,514 shares of common stock, par value $0.001 per share.

TABLE OF CONTENTS

| PART I – FINANCIAL INFORMATION |
Item 1. | Financial Statements | 1
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22
Item 3. | Qualitative and Quantitative Disclosures about Market Risk | 28
Item 4. | Controls and Procedures | 28
| PART II – OTHER INFORMATION |
Item 1. | Legal Proceedings | 29
Item 1A. | Risk Factors | 29
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 29
Item 3. | Defaults Upon Senior Securities | 29
Item 4. | Mine Safety Disclosures | 29
Item 5. | Other Information | 29
Item 6. | Exhibits | 30

SIGNATURES | 31

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|  | March 31, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
|  |  | (Unaudited) |  |  |  |  |
ASSETS |  |  |  |  |  |  |  |
CURRENT ASSETS: |  |  |  |  |  |  |  |
Cash |  | $ | 6,552,888 |  |  | $ | 56,249 |
Accounts receivable, net |  |  | 645,536 |  |  |  | 2,611,608 |
Contract assets |  |  | 383,700 |  |  |  | 1,375,920 |
Prepaid expenses and other current assets |  |  | 887,035 |  |  |  | 716,598 |
Total Current Assets |  |  | 8,469,159 |  |  |  | 4,760,375 |
Property and equipment, net |  |  | 246,811 |  |  |  | 260,181 |
Operating lease right of use asset |  |  | 374,287 |  |  |  | 430,146 |
OTHER ASSETS: |  |  |  |  |  |  |  |
Software Development Costs, net |  |  | 15,000 |  |  |  | 20,000 |
Patents and trademarks, net |  |  | 67,566 |  |  |  | 61,598 |
Total Other Assets |  |  | 82,566 |  |  |  | 81,598 |
TOTAL ASSETS |  | $ | 9,172,823 |  |  | $ | 5,532,300 |

(Continued)

See accompanying notes to the unaudited consolidated financial statements.

1

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

|  | March 31, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
|  |  | (Unaudited) |  |  |  |  |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |  |  |  |  |  |  |  |
CURRENT LIABILITIES: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 663,746 |  |  | $ | 2,641,437 |
Accounts payable - related parties |  |  | 12,491 |  |  |  | 12,791 |
Notes payable - financing agreements |  |  | 184,580 |  |  |  | 42,299 |
Notes payable - related parties, net of discounts |  |  | 954,299 |  |  |  | 905,373 |
Line of credit |  |  | 65 |  |  |  | 27,615 |
Payroll taxes payable |  |  | 12,390 |  |  |  | 115,111 |
Accrued expenses |  |  | 150,969 |  |  |  | 393,272 |
Current portion - financing lease agreements |  |  | 46,520 |  |  |  | 45,072 |
Current portion-operating lease obligations |  |  | 248,985 |  |  |  | 239,688 |
Contract liabilities |  |  | 10,170 |  |  |  | 8,661 |
Deferred revenue |  |  | 681,673 |  |  |  | 936,428 |
Total Current Liabilities |  |  | 2,965,888 |  |  |  | 5,367,747 |
Finance lease payable |  |  | 76,876 |  |  |  | 89,026 |
Operating lease obligations |  |  | 137,535 |  |  |  | 202,797 |
Total Liabilities |  |  | 3,180,299 |  |  |  | 5,659,570 |
Commitments and Contingencies (Note 6) |  |  |  |  |  |  |  |
STOCKHOLDERS' EQUITY (DEFICIT): |  |  |  |  |  |  |  |
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,485,000 shares available to be designated |  |  |  |  |  |  |  |
Series A redeemable convertible cumulative preferred stock, $10 stated value per share, 500,000 shares designated; 0 issued and outstanding at March 31, 2020 and December 31, 2019, convertible into common stock at $6.30 per share |  |  | — |  |  |  | — |
Series B convertible cumulative preferred stock, $1,000 stated value per share, 15,000 shares designated; 1,705 and 1,705 issued and outstanding at March 31, 2020 and December 31, 2019, convertible into common stock at $7 per share |  |  | 1,705,000 |  |  |  | 1,705,000 |
Common stock: $0.001 par value; 500,000,000 shares authorized, 3,525,838 and 1,982,039 shares issued, 3,524,514 and 1,980,715 shares outstanding at March 31, 2020 and December 31, 2019, respectively |  |  | 3,526 |  |  |  | 1,982 |
Additional paid-in capital |  |  | 39,329,214 |  |  |  | 31,063,915 |
Total stock & paid-in-capital |  |  | 41,037,740 |  |  |  | 32,770,897 |
Accumulated deficit |  |  | (34,887,764 | ) |  |  | (32,740,715 | )
Sub-total |  |  | 6,149,976 |  |  |  | 30,182 |
Less: Treasury stock (1,324 shares of common stock at March 31, 2020 and December 31, 2019) |  |  | (157,452 | ) |  |  | (157,452 | )
Total Stockholders' Equity (Deficit) |  |  | 5,992,524 |  |  |  | (127,270 | )
Total Liabilities and Stockholders' Equity (Deficit) |  | $ | 9,172,823 |  |  | $ | 5,532,300 |

See accompanying notes to the unaudited consolidated financial statements.

2

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

|  | For the Months Ended March 31, |
|  | 2020 |  |  | 2019 |
REVENUES: |  |  |  |  |  |
Technology systems |  | $ | 513,674 |  |  | $ | 3,918,438 |
Technical support |  |  | 345,187 |  |  |  | 321,474 |
Consulting services |  |  | 132,084 |  |  |  | 112,169 |
Total Revenues |  |  | 990,945 |  |  |  | 4,352,081 |
COST OF REVENUES: |  |  |  |  |  |  |  |
Technology systems |  |  | 581,544 |  |  |  | 2,092,994 |
Technical support |  |  | 234,276 |  |  |  | 105,324 |
Consulting services |  |  | 72,260 |  |  |  | 22,919 |
Total Cost of Revenues |  |  | 888,080 |  |  |  | 2,221,237 |
GROSS PROFIT |  |  | 102,865 |  |  |  | 2,130,844 |
OPERATING EXPENSES: |  |  |  |  |  |  |  |
Sales and marketing |  |  | 139,852 |  |  |  | 250,425 |
Engineering |  |  | 312,428 |  |  |  | 465,907 |
Research and development |  |  | 406,392 |  |  |  | 383,421 |
Administration |  |  | 1,015,559 |  |  |  | 803,327 |
AI technologies |  |  | 316,549 |  |  |  | 181,314 |
Total Operating Expenses |  |  | 2,190,780 |  |  |  | 2,084,394 |
PROFIT (LOSS) FROM OPERATIONS |  |  | (2,087,915 | ) |  |  | 46,450 |
OTHER INCOME (EXPENSES): |  |  |  |  |  |  |  |
Interest Expense |  |  | (68,932 | ) |  |  | (2,621 | )
Other income, net |  |  | 9,798 |  |  |  | 340 |
Total Other Income (Expense) |  |  | (59,134 | ) |  |  | (2,281 | )
NET PROFIT (LOSS) |  | $ | (2,147,049 | ) |  | $ | 44,169 |
Basic Net Profit (Loss) Per Share |  | $ | (0.80 | ) |  | $ | 0.03 |
Diluted Net Profit (Loss) Per Share |  | $ | (0.80 | ) |  | $ | 0.01 |
Weighted Average Shares-Basic |  |  | 2,687,482 |  |  |  | 1,547,946 |
Weighted Average Shares-Diluted |  |  | 2,687,482 |  |  |  | 3,485,891 |

See accompanying notes to the unaudited consolidated financial statements.

3

DUOS TECHNOLOGIES GROUP, INC. SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the Three Months ended March 31, 2019

|  | Preferred Stock |  |  | Common Stock |  |  | Additional Paid-in- |  |  | Accumulated |  |  | Treasury |  |  |  |
|  | # of Shares |  |  | Amount |  |  | # of Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Stock |  |  | Total |
Balance December 31, 2018 |  |  | 2,830 |  |  | $ | 2,830,000 |  |  |  | 1,505,883 |  |  | $ | 1,505 |  |  | $ | 27,416,802 |  |  | $ | (30,269,833 | ) |  | $ | (149,459 | ) |  |  | (170,985 | )
Commons stock issued for warrants exercised |  |  | — |  |  |  | — |  |  |  | 214,286 |  |  |  | 214 |  |  |  | 1,649,786 |  |  |  | — |  |  |  | — |  |  |  | 1,650,000 |
Stock options granted to employees |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 21,892 |  |  |  | — |  |  |  | — |  |  |  | 21,892 |
Net Income for the three months ended March 31, 2019 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 44,169 |  |  |  | — |  |  |  | 44,169 |
Balance March 31, 2019 |  |  | 2,830 |  |  | $ | 2,830,000 |  |  |  | 1,720,169 |  |  | $ | 1,719 |  |  | $ | 29,088,480 |  |  | $ | (30,225,664 | ) |  | $ | (149,459 | ) |  |  | 1,545,076 |

See accompanying notes to the unaudited consolidated financial statements.

4

DUOS TECHNOLOGIES GROUP, INC. SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the Three Months ended March 31, 2020

|  | Preferred Stock |  |  | Common Stock |  |  | Additional Paid-in- |  |  | Accumulated |  |  | Treasury |  |  |  |
|  | # of Shares |  |  | Amount |  |  | # of Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Stock |  |  | Total |
Balance December 31, 2019 |  |  | 1,705 |  |  | $ | 1,705,000 |  |  |  | 1,982,039 |  |  | $ | 1,982 |  |  | $ | 31,063,915 |  |  | $ | (32,740,715 | ) |  | $ | (157,452 | ) |  | $ | (127,270 | )
Common stock issued |  |  | — |  |  |  | — |  |  |  | 1,542,188 |  |  |  | 1,542 |  |  |  | 9,251,586 |  |  |  | — |  |  |  | — |  |  |  | 9,253,128 |
Stock options granted to employees |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,100 |  |  |  | — |  |  |  | — |  |  |  | 8,100 |
Stock issuance cost |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1,001,885 | ) |  |  | — |  |  |  | — |  |  |  | (1,001,885 | )
Common stock issued for services |  |  | — |  |  |  | — |  |  |  | 1,611 |  |  |  | 2 |  |  |  | 7,498 |  |  |  | — |  |  |  | — |  |  |  | 7,500 |
Net Loss for the three months ended March 31, 2020 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (2,147,049 | ) |  |  | — |  |  |  | (2,147,049 | )
Balance March 31, 2020 |  |  | 1,705 |  |  | $ | 1,705,000 |  |  |  | 3,525,838 |  |  | $ | 3,526 |  |  | $ | 39,329,214 |  |  | $ | (34,887,764 | ) |  | $ | (157,452 | ) |  | $ | 5,992,524 |

See accompanying notes to the unaudited consolidated financial statements.

5

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|  | For the Three Months Ended |
|  | March 31, |
|  | 2020 |  |  | 2019 |
Cash from operating activities: |  |  |  |  |  |  |  |
Net profit (loss) |  | $ | (2,147,049 | ) |  | $ | 44,169 |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 48,647 |  |  |  | 41,132 |
Stock based compensation |  |  | 8,100 |  |  |  | 21,892 |
Interest expense related to debt discounts |  |  | 48,926 |  |  |  | — |
Changes in assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | 1,966,072 |  |  |  | (2,084,943 | )
Contract assets |  |  | 992,220 |  |  |  | 921,608 |
Prepaid expenses and other current assets |  |  | (5,062 | ) |  |  | 91,898 |
Operating lease right of use asset |  |  | 55,858 |  |  |  | (557,485 | )
Accounts payable |  |  | (1,970,190 | ) |  |  | 643,916 |
Related payable-related party |  |  | (300 | ) |  |  | — |
Payroll taxes payable |  |  | (102,721 | ) |  |  | (156,843 | )
Accrued expenses |  |  | (242,303 | ) |  |  | 26,265 |
Operating lease obligation |  |  | (55,965 | ) |  |  | 571,245 |
Contract liabilities |  |  | 1,509 |  |  |  | (999,048 | )
Deferred revenue |  |  | (254,755 | ) |  |  | (63,965 | )
Net cash used in operating activities |  |  | (1,657,013 | ) |  |  | (1,500,159 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchase of patents/trademarks |  |  | (7,310 | ) |  |  | (3,000 | )
Purchase of fixed assets |  |  | (28,935 | ) |  |  | (88,511 | )
Net cash used in investing activities |  |  | (36,245 | ) |  |  | (91,511 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Repayments of line of credit |  |  | (27,550 | ) |  |  | (921 | )
Repayments of insurance and equipment financing |  |  | (23,094 | ) |  |  | (64,295 | )
Payment of finance lease |  |  | (10,702 | ) |  |  | — |
Proceeds from common stock issued |  |  | 9,253,128 |  |  |  | — |
Issuance cost |  |  | (1,001,885 | ) |  |  | — |
Proceeds from warrants exercised |  |  | — |  |  |  | 1,650,000 |
Net cash provided by financing activities |  |  | 8,189,897 |  |  |  | 1,584,784 |
Net increase (decrease) in cash |  |  | 6,496,639 |  |  |  | (6,886 | )
Cash, beginning of period |  |  | 56,249 |  |  |  | 1,209,301 |
Cash, end of period |  |  | 6,552,888 |  |  |  | 1,202,415 |
Supplemental Disclosure of Cash Flow Information: |  |  |  |  |  |  |  |
Interest paid |  | $ | 6,643 |  |  | $ | 1,536 |
Supplemental Non-Cash Investing and Financing Activities: |  |  |  |  |  |  |  |
Common stock issued for accrued BOD fees |  | $ | 7,500 |  |  | $ | — |
Note issued for financing of insurance premiums |  | $ | 165,375 |  |  | $ | 165,864 |

See accompanying notes to the unaudited consolidated financial statements.

6

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Duos Technologies Group, Inc. (the “duostech Group”), through its operating subsidiaries, Duos Technologies, Inc. (“duostech”) and TrueVue360, Inc (“TrueVue360”, duostech Group and duostech, collectively the “Company”) is primarily engaged in the design and deployment of state-of-the-art, artificial intelligence driven intelligent technologies systems. duostech converges traditional security measures with information technologies to create “actionable intelligence.” duostech’s IP is built upon two of its core technology platforms (praesidium® and centraco®), both distributed as licensed software suites, and natively embedded within engineered turnkey systems. praesidium® is a modular suite of analytics applications which process and simultaneously analyze data streams from a virtually unlimited number of conventional sensors and/or data points. Native algorithms compare analyzed data against user-defined criteria and rules in real time and automatically report any exceptions, deviations and/or anomalies. This application suite also includes a broad range of conventional operational system components and sub-systems, including an embedded feature-rich video management engine and a proprietary Alarm Management Service (AMS). This unique service provides continuous monitoring of all connected devices, processes, equipment and sub-systems, and automatically communicates to the front end-user interface, if and when an issue, event or performance anomalies are detected. centraco® is a comprehensive user interface that includes the functionalities of a Physical Security Information Management (PSIM) system as well as those of an Enterprise Information System (EIS). This multi-layered interface can be securely installed as a stand-alone application suite inside a local area network or pushed outside a wide area network using the same browser-based interface. It leverages industry standards for data security, access, and encryption as appropriate. The platform also operates as a cloud-hosted solution.

The Company provides a broad range of sophisticated intelligent technology solutions with an emphasis on security, inspection and operations for critical infrastructure within a variety of industries including transportation, retail, law enforcement, oil, gas and utilities sectors. In January 2019, the Company launched a dedicated Artificial Intelligence software platform, truevue360™, through its subsidiary TrueVue360 with the objective of focusing the Company’s advanced intelligent technologies in the areas of Artificial Intelligent, Deep Machine Learning and Advance Algorithms to further support our business growth. Consequently, our business operations are now in three business units: intelligent technologies, AI/machine learning platforms and IT asset management.

The Company’s strategy includes expansion of its technology base through organic development efforts, strategic partnerships, and growth through accretive acquisitions. The Company provides its broad range of technology solutions with an emphasis on mission critical security, inspection and operations within the rail transportation, commercial, petrochemical, government, and banking sectors. The Company also offers professional and consulting services for large data centers.

Basis of Presentation

The accompanying unaudited condensed unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not indicative of the results that may be expected for the year ending December 31, 2020 or for any other future period. These unaudited consolidated financial statements and the unaudited condensed notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020.

Reverse Stock-Split

All share and per share amounts have been presented to give retroactive effect to a 1 for 14 reverse stock-split that occurred in January 2020.

7

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

Reclassifications

The Company reclassified certain operating expenses for the three months ended March 31, 2019 to conform to 2020 classification. There was no net effect on the total operating expenses of such reclassification.

The following table reflects the reclassification adjustment effect in the three months ended March 31, 2019:

|  | Before Reclassification |  |  |  |  | After Reclassification |
|  | For the Three Months Ended |  |  |  |  | For the Three Months Ended |
|  | March 31, |  |  |  |  | March 31, |
|  | 2019 |  |  |  |  | 2019 |
OPERATING EXPENSES: |  |  |  |  |  |  |  |
Selling and marketing expenses |  | $ | 109,616 |  |  | Sales and marketing |  | $ | 250,425 |
Salaries, wages and contract labor |  |  | 1,268,779 |  |  | Engineering |  |  | 465,907 |
Research and development |  |  | 112,694 |  |  | Research and development |  |  | 383,421 |
Professional fees |  |  | 127,919 |  |  | AI technologies |  |  | 181,314 |
General and administrative expenses |  |  | 465,386 |  |  | Administration |  |  | 803,327 |
Total Operating Expenses |  | $ | 2,084,394 |  |  |  |  | $ | 2,084,394 |

Principles of Consolidation

The unaudited consolidated financial statements include duostech Group 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 unaudited consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of derivatives, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible debt, and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Concentrations

Cash Concentrations

Cash is maintained at financial institutions and at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of March 31, 2020, balance in one financial institution exceeded federally insured limits by approximately $6,361,792.

8

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

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 three months ended March 31, 2020, three customers accounted for 44%, 13% and 13% of revenues, respectively. For the three months ended March 31, 2019, two customers accounted for 78%and 11% of revenues, respectively.

At March 31, 2020, three customers accounted for 28%, 21% and 18% of accounts receivable, respectively. At December 31, 2019, two customers accounted for 68% and 10% of accounts receivable, respectively.

Geographic Concentration

Approximately 54% of revenue is generated from two customers outside of the United States.

Fair Value of Financial Instruments and Fair Value Measurements

We measure our financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for notes payable, net of discount, and loans payable also approximate fair value because current interest rates available to us for debt with similar terms and maturities are substantially the same.

We follow accounting guidance for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).

The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs, other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

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.

9

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

Earnings (Loss) Per Share

Basic earnings per share (EPS) are computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options, stock warrants, convertible debt instruments, convertible preferred stock or other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. At March 31, 2020, there was an aggregate of 1,588,750 outstanding warrants to purchase shares of common stock. At March 31, 2020, there was an aggregate of 163,010 shares of employee stock options to purchase shares of common stock. Also, at March 31, 2020, 243,571 common shares were issuable upon conversion of Series B convertible preferred stock, all of which were excluded from the computation of dilutive earnings per share because their inclusion would have been anti-dilutive.

Revenue Recognition

As of January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, 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 for sales of systems and services over time using cost-based input methods, in which significant judgement is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.

Revenue is recognized by evaluating our revenue contracts with customers based on the five-step model under ASC 606:

1.

Identify the contract with the customer;

2.

Identify the performance obligations in the contract;

3.

Determine the transaction price;

4.

Allocate the transaction price to separate performance obligations; and

5.

Recognize revenue when (or as) each performance obligations are satisfied.

Accordingly, the Company now bases its revenue recognition on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured and revenue is recognized accordingly.

In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company has adopted the implementation guidance as set out in ASC-606-10-55-187 through 192. (see Note 9)

Segment Information

The Company operates in one reportable segment.

Stock Based Compensation

The Company accounts for employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.

10

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. Management implemented this standard on January 1, 2019.

Determining Fair Value Under ASC 718-10

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.

The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for employee stock options using the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.

Recent Accounting Pronouncements

From time to time, the FASB or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards Update (“ASU”).

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

NOTE 2 – LIQUIDITY

As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $2,147,049 for the three months ended March 31, 2020. During the same period, net cash used in operating activities was $1,657,013. The working capital surplus and accumulated deficit as of March 31, 2020 were $5,503,723 and $34,887,764 respectively. In previous financial reports, the Company had raised substantial doubt about continuing as a going concern. This was principally due to a lack of working capital prior to an underwritten offering which was completed during the quarter (the “2020 Offering”).

Upon completion of the 2020 Offering during this quarter, management raised sufficient working capital to meet its needs for the next 12-months without the need to raise further capital. The Company continues to be successful in attracting new business and establishing a backlog of projects. Most importantly, the Company’s success in increasing its working capital surplus after receiving proceeds from the 2020 Offering of more than $8.1 million after payment of banking fees and expenses in connection with an up listing to Nasdaq.

Management believes that we have eliminated the substantial doubt for the Company to continue as a going concern. We are executing the plan to grow our business and achieve profitability without the requirement to raise additional capital for existing operations. 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 sufficient revenue and to attain consistently profitable operations. Although the current Novel Coronavirus (Covid-19) issue has affected our operations, and this is not expected to be a long-term issue, the Company cannot currently quantify the uncertainty related to the recent pandemic and its effects on the business in the coming quarters. We have analyzed our cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand to maintain operations for at least 12 months from the date of this report.

11

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

NOTE 3 – SOFTWARE DEVELOPMENT COSTS

In 2018, the Company capitalized $60,000, relating to the development of new software products. These software products were developed by a third-party and had passed the preliminary project stage prior to capitalization. At March 31, 2020 and December 31, 2019, software development costs consisted of the following:

Software development costs consisted of the following at March 31, 2020 and December 31, 2019:

|  | March 31, 2020 |  |  | December 31, 2019 |
Software Development Costs |  | $ | 60,000 |  |  | $ | 60,000 |
Less: Accumulated amortization |  |  | (45,000 | ) |  |  | (40,000 | )
Total |  | $ | 15,000 |  |  | $ | 20,000 |

Amortization expense of software development costs for the three months ended March 31, 2020 and 2019, was $5,000 and $5,000, respectively.

NOTE 4 – DEBT

Notes Payable - Financing Agreements

The Company’s notes payable relating to financing agreements classified as current liabilities consist of the following as of:

|  | March 31, 2020 |  | December 31, 2019 |
Notes Payable |  | Principal |  |  |  | Interest |  | Principal |  |  |  | Interest |
Third Party - Insurance Note 1 |  | $ | 15,076 |  |  |  | 7.31 | % |  | $ | 28,500 |  |  |  | 7.31 | % |
Third Party - Insurance Note 2 |  |  | — |  |  |  | 6.36 | % |  |  | — |  |  |  | 6.36 | % |
Third Party - Insurance Note 3 |  |  | 4,129 |  |  |  | 10.75 | % |  |  | 13,799 |  |  |  | — |  |
Third Party - Insurance Note 4 |  |  | 165,375 |  |  |  | — |  |  |  | — |  |  |  | 6.36 | % |
Total |  | $ | 184,580 |  |  |  |  |  |  | $ | 42,299 |  |  |  |  |  |

The Company entered into an agreement on December 23, 2019 with its insurance provider by issuing a $28,500 note payable (Insurance Note 1) for the purchase of an insurance policy, secured by that policy with an annual interest rate of 7.31% payable in monthly installments of principal and interest totaling $2,218 through October 23, 2020. The balance of Insurance Note 1 as of March 31, 2020 and December 31, 2019 was $15,076 and $28,500, respectively.

The Company entered into an agreement on April 15, 2019 in the amount of $51,940 with an annual interest rate of 6.36% payable (Insurance Note 2) with monthly installments of principal and interest totaling $5,326 through December 15, 2019. At March 31, 2020 and December 31, 2019, the balance of Insurance Note 2 was zero.

The Company entered into an agreement on September 15, 2019 in the amount of $13,799 with its insurance provider by issuing a note payable (Insurance Note 3) for the purchase of an insurance policy, secured by 5 installment payments. At March 31, 2020 and December 31, 2019, the balance of Insurance Note 3 was $4,129 and $13,799, respectively.

The Company entered into an agreement on February 3, 2019 in the amount of $141,058 with an annual interest rate of 6.36% payable in monthly installments of principal and interest totaling $14,520 (Insurance Note 4) through December 3, 2019. The policy renewed on February 3, 2020 in the amount of $165,375 with seven monthly installments of $13,726. At March 31, 2020 and December 31, 2019, the balance of Insurance Note 4 was $165,375 and zero, respectively.

Finance Lease

The Company entered into an agreement on August 26, 2019 with an equipment leasing provider by issuing a $147,810 equipment finance lease payable, secured by a note, with an annual interest rate of 12.72% payable in monthly installments of principal and interest totaling $4,963 through August 1, 2022. At March 31, 2020 and December 31, 2019, the balance of the note was $123,396 and $134,098 and zero, respectively.

12

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

At March 31, 2020, future minimum lease payments due under Finance Lease is as follows:

As of March 31, | Amount |
2020 |  | $ | 44,668 |
2021 |  |  | 59,558 |
2022 |  |  | 39,705 |
Total minimum financial lease payments |  | $ | 143,931 |
Less: interest |  |  | (20,535 | )
Total lease liability at March 31, 2020 |  | $ | 123,396 |
Less: current portion of Finance Lease |  |  | (46,520 | )
Long Term portion of Finance Lease |  | $ | 76,876 |

Notes Payable – Related Parties

|  |  |  |  |  |  |  | March 31, 2020 |  |  | December 31, 2019 |
Payable To |  |  |  |  |  |  |  | Principal |  |  | Interest |  |  | Principal |  |  | Interest* |
Related party |  |  |  |  |  |  |  |  |  | $ | 267,000 |  |  |  | 3% |  |  | $ | 267,000 |  |  |  | 3% |
Related party |  |  |  |  |  |  |  |  |  |  | 733,000 |  |  |  | 3% |  |  |  | 733,000 |  |  |  | 3% |
Total |  |  |  |  |  |  |  |  |  |  | 1,000,000 |  |  |  |  |  |  |  | 1,000,000 |  |  |  |  |
Less unamortized discounts |  |  |  |  |  |  |  |  |  |  | (45,701 | ) |  |  |  |  |  |  | (94,627 | ) |  |  |  |
Total, net |  |  |  |  |  |  |  |  |  | $ | 954,299 |  |  |  |  |  |  | $ | 905,373 |  |  |  |  |

The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the aggregate principal amount of $267,000, pursuant to a note, repayable on June 25, 2020. The note carries an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 11,920 shares of the Company’s common stock at a price of $7.70 per share. The balance of this note as of March 31, 2020 was $267,000.

The Company entered into an agreement with a related party on September 25, 2019 whereby the related party loaned the Company the principal aggregate in the amount of $733,000, pursuant to a note, repayable on June 25, 2020. The note carries an annual interest rate of 3%. In addition, the Company issued warrants permitting the related party to purchase for cash 32,724 shares of the Company’s common stock at a price of $7.70 per share. The balance of this note as of March 31, 2020 was $733,000.

The Company determined the relative fair value between the notes and the warrants on the issue date utilizing the Bi-nominal Lattice Pricing Model for the warrants. As a result, the Company allocated $146,779 to the warrants and was recorded as a debt discount with an offset to additional paid in capital in the accompanying unaudited consolidated financial statements. The fair value pricing model used the following assumptions; stock price $7.00, warrant exercise price $7.70, expected term of 5 years, expected volatility of 86% and discount rate of 1.609%.

For the three months ended March 31, 2020, the Company recorded $48,926 for amortization of the debt discount discussed above to interest expense in the accompanying unaudited consolidated financial statements.

Notes Payable

The Company entered into an agreement on August 12, 2019 with a shareholder by executing a short-term $262,500 note repayable on November 11, 2019. This note was issued with a 5% original issue discount and the Company received a net amount of $250,000. No other consideration was given. On November 12, 2019, the Company repaid this short-term note in the amount of $262,500. The original issue discount of $12,500 was fully amortized in 2019.

13

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

NOTE 5 – LINE OF CREDIT

The Company assumed a line of credit with Wells Fargo Bank upon merger with ISA on April 1, 2015. The line of credit provided for borrowings up to $40,000 but is now closed to future borrowing. The balance as of March 31, 2020 and December 31, 2019, was $65 and $27,615, respectively, including accrued interest. This line of credit has no maturity date. The annual interest rate is 9.75% at March 31, 2020. The former CEO of ISA is the personal guarantor.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Delinquent Payroll Taxes Payable

As of the date hereof, the Company has paid its delinquent payroll taxes and late fees in full. At March 31, 2020 and December 31, 2019, the payroll taxes payable balance of $12,390 and $115,111 includes accrued late fees in the amount of zero and $37,210, respectively.

Operating Lease Obligations

The Company has an operating lease agreement for office space of approximately 8,308 square feet that was amended on May 1, 2016 and again on April 1, 2019, increasing the office space to approximately 10,203 square feet, with the lease ending on October 31, 2021. The rent is subject to an annual escalation of 3%, beginning May 1, 2017.

The Company entered a new lease agreement of office and warehouse combination space of approximately 4,400 square feet on June 1, 2018 and ending May 31, 2021. This additional space allows for resource growth and engineering efforts for operations before deploying to the field. The rent is subject to an annual escalation of 3%.

The Company now has a total of office and warehouse space of approximately 14,603 square feet.

At March 31, 2020, future minimum lease payments due under Operating Leases are as follows:

As of March 31, | Amount |
2020 |  | $ | 211,312 |
2021 |  |  | 213,568 |
Total minimum financial lease payments |  | $ | 424,880 |
Less: interest |  |  | (38,360 | )
Total lease liability at March 31, 2020 |  | $ | 386,520 |
Less: current portion of Operating lease obligations |  |  | (248,985 | )
Long Term portion of Operating lease obligations |  | $ | 137,535 |

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”), which requires all leases with a term greater than 12 months to be recognized on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance. We adopted ASU 2016-02 effective January 1, 2019, on a modified retrospective basis, without adjusting comparative periods presented. Effective January 1, 2019, the Company established a right-of-use model (ROU) asset and operating lease liability in the amount of $644,245. The right of use asset balance at March 31, 2020 was $374,287, the operating lease liability – current portion was $248,985 and the operating lease liability – long term portion was $137,535. This is the Company’s only lease whose term is greater than 12 months. The adoption of ASU 2016-02 did not materially affect our unaudited consolidated statement of operations or our unaudited consolidated statements of cash flows. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and to recognize all lease payments for leases with a term greater than 12 months on a straight-line basis over the lease term in our unaudited consolidated statements of operations.

14

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

NOTE 7 – STOCKHOLDERS’ EQUITY

Common stock issued

On February 12, 2020, Duos Technologies Group, Inc., a Florida corporation (the “Company”) entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity, a division of Fordham Financial Management, Inc. (“ThinkEquity”), as representative of the underwriters listed therein (the “Underwriters”), pursuant to which the Company agreed to sell to the Underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 1,350,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a public offering price of $6.00 per share. In addition, the Underwriters were granted an over-allotment option (the “Over-allotment Option”) for a period of 45 days to purchase up to an additional 202,500 shares of Common Stock. The Offering closed on February 18, 2020. The Common Stock began trading on the Nasdaq Capital Market under the symbol DUOT on February 13, 2020.

On February 20, 2020, pursuant to and in compliance with the terms and conditions of the aforementioned Underwriting Agreement and the Offering, the Underwriters provided notice that they would partially exercise the Over-allotment Option to purchase 192,188 shares of Common Stock at $6.00 per share (the “Over-Allotment Exercise”). The sale of the Over-Allotment Exercise to purchase 192,188 shares of Common Stock closed on February 21, 2020.

In total, the Company issued 1,542,188 shares of common stock in connection with these underwritten public offerings and up listing to the Nasdaq Capital Market national exchange. The securities were issued pursuant to a Registration Statement on Form S-1 (File No. 333- 235455), as amended, which was declared effective by the United States Securities and Exchange Commission on February 12, 2020 (the “Registration Statement”). The Company received gross proceeds of approximately $9.25 million for the Offering to date, including the exercise of the Over-Allotment Exercise, prior to deducting underwriting discounts and commissions and offering expenses payable by the Company.

Common stock issued for exercise of warrants

During the first quarter of 2019, the Company entered into an agreement with two shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 214,286 shares, to reduce the exercise price of these warrants to $7.70 from the original exercise price of $9.10 based on immediate exercise. Both shareholders exercised these warrants in March 2019 for proceeds to the Company of $1,650,000.

Stock-Based Compensation

Stock-based compensation expense recognized under ASC 718-10 for the three months ended March 31, 2020 and 2019, was $8,100 and $21,892, respectively, for stock options granted to employees and directors. This expense is included in selling, general and administrative expenses in the unaudited consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At March 31, 2020, the total compensation cost for stock options not yet recognized was $21,198. This cost will be recognized over the remaining vesting term of the options of approximately one year.

Employee Stock Options

A maximum of 178,572 shares were made available for grant under the 2016 Plan, as amended, and all outstanding options under the Plan provide a cashless exercise feature. The maximum number of shares was increased by shareholder approval to 321,429. The identification of individuals entitled to receive awards, the terms of the awards, and the number of shares subject to individual awards, are determined by our Board of Directors or the Compensation Committee, at their sole discretion. The aggregate number of shares with respect to which options or stock awards may be granted under the 2016 Plan and the purchase price per share, if applicable, shall be adjusted for any increase or decrease in the number of issued shares resulting from a stock dividend, stock split, reverse stock split, recapitalization or similar event. As of March 31, 2020, and December 31, 2019, options to purchase 163,010 shares of common stock and 163,010 shares of common stock were outstanding under the 2016 Plan, respectively.

15

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

The Company has no expired employee stock options under the 2016 Plan at March 31, 2020.

|  |  |  |  |  |  |  | Weighted |  |  |  |
|  |  |  |  | Weighted |  |  | Average |  |  |  |
|  |  |  |  | Average |  |  | Remaining |  |  | Aggregate |
|  |  |  |  | Exercise |  |  | Contractual |  |  | Intrinsic |
|  | Shares |  |  | Price |  |  | Term (Years) |  |  | Value |
Outstanding at December 31, 2018 |  |  | 160,152 |  |  | $ | 14.00 |  |  |  | 4.4 |  |  |  | — |
Granted |  |  | 17,144 |  |  | $ | 14.00 |  |  |  | 5.0 |  |  |  | — |
Forfeited |  |  | (14,286 | ) |  | $ | 14.00 |  |  |  | — |  |  |  | — |
Outstanding at December 31, 2019 |  |  | 163,010 |  |  | $ | 14.00 |  |  |  | 3.4 |  |  |  | — |
Exercisable at December 31, 2019 |  |  | 154,438 |  |  | $ | 14.00 |  |  |  | 3.4 |  |  |  | — |
Outstanding at December 31, 2019 |  |  | 163,010 |  |  | $ | 14.00 |  |  |  | 3.4 |  |  |  | — |
Granted |  |  | — |  |  | $ | 14.00 |  |  |  | — |  |  |  | — |
Outstanding at March 31, 2020 |  |  | 163,010 |  |  | $ | 14.00 |  |  |  | 3.1 |  |  |  | — |
Exercisable at March 31, 2020 |  |  | 158,724 |  |  | $ | 14.00 |  |  |  | 3.1 |  |  |  | — |

On January 29, 2019, the Board of Directors appointed a new independent director and Chairman of the Compensation Committee. As a result of the appointment, the new director was granted 8,572 stock options exercisable at $14.00 per share vesting one year from the date of grant. On March 31, 2019, the President and Chief Operating Officer of Duos Technologies Inc., resigned from her positions. Due to the resignation, the individual forfeited 14,286 stock options previously granted. On August 15, 2019, the Board of Directors appointed a new independent director and Chairman of the Audit Committee. As a result of the appointment, the new director was granted 8,572 stock options exercisable at $14.00 per share vesting one year from the date of grant. As of March 31, 2020, the remaining option expense is $29,298 of which $15,834 will be expensed during the remaining quarters of 2020 and the balance of $13,464 will be expensed in 2021.

Warrants

The following is a summary of activity for warrants to purchase common stock for the three months ended March 31, 2020:

|  |  |  |  |  |  |  | Weighted |  |  |  |
|  |  |  |  | Weighted |  |  | Average |  |  |  |
|  |  |  |  | Average |  |  | Remaining |  |  | Aggregate |
|  | Number of |  |  | Exercise |  |  | Contractual |  |  | Intrinsic |
|  | Warrants |  |  | Price |  |  | Term (Years) |  |  | Value |
Outstanding at December 31, 2018 |  |  | 1,815,181 |  |  | $ | 9.52 |  |  |  | 3.9 |  |  |  | — |
Warrants expired, forfeited, cancelled or exercised |  |  | (338,575 | ) |  |  |  |  |  |  |  |  |  |  |  |
Warrants issued |  |  | 44,644 |  |  | $ | 7.70 |  |  |  | 4.9 |  |  |  | — |
Outstanding at December 31, 2019 |  |  | 1,521,250 |  |  | $ | 8.78 |  |  |  | 2.8 |  |  |  | — |
Exercisable at December 31, 2019 |  |  | 1,521,250 |  |  | $ | 8.78 |  |  |  | 2.8 |  |  |  | — |
Outstanding at December 31, 2019 |  |  | 1,521,250 |  |  | $ | 8.78 |  |  |  | 3.0 |  |  |  | — |
Warrants expired, forfeited, cancelled or exercised |  |  | — |  |  |  |  |  |  |  |  |  |  |  |  |
Warrants issued |  |  | 67,500 |  |  | $ | 9.00 |  |  |  | 4.9 |  |  |  | — |
Outstanding at March 31, 2020 |  |  | 1,588,750 |  |  | $ | 8.79 |  |  |  | 2.7 |  |  |  | — |
Exercisable at March 31, 2020 |  |  | 1,588,750 |  |  | $ | 8.41 |  |  |  | 2.7 |  |  |  | — |

16

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

NOTE 8 - REVENUE

Revenue Recognition and Contract Accounting

The Company generates revenue from four sources: (1) Technology Systems; (2) Technical Support; (3) Consulting Services and (4) AI Technology.

The Company constructs intelligent technology systems consisting of materials and labor under customer contracts. Revenues and related costs on technology systems revenue are recognized based on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured and revenue is recognized accordingly.

In addition, the Company has adopted ASC 606-10-55-21 such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the cost of the goods to satisfy the performance obligation. 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.

NOTE 9 – CONTRACT ACCOUNTING

Contract Assets

Contract assets on uncompleted contracts represents costs and estimated earnings in excess of billings and/or cash received on uncompleted contracts accounted for under the input method, which recognizes revenue only to the extent of the cost incurred.

At March 31, 2020 and December 31, 2019, contract assets on uncompleted contracts consisted of the following:

|  | March 31, 2020 |  |  | December 31. 2019 |
Costs and estimated earnings recognized |  | $ | 2,650,012 |  |  | $ | 3,700,124 |
Less: Billings or cash received |  |  | (2,266,312 | ) |  |  | (2,324,204 | )
Contract assets |  | $ | 383,700 |  |  | $ | 1,375,920 |

Contract Liabilities

Contract liabilities on uncompleted contracts represents billings and/or cash received that exceed accumulated revenues recognized on uncompleted contracts accounted for under the input method, which recognizes revenue only to the extent of the cost incurred.

At March 31, 2020 and December 31, 2019, contract liabilities on uncompleted contracts consisted of the following:

|  | March 31, 2020 |  |  | December 31. 2019 |
Billings and/or cash receipts on uncompleted contracts |  | $ | 34,673 |  |  | $ | 35,665 |
Less: Costs and estimated earnings recognized |  |  | (24,503 | ) |  |  | (27,004 | )
Contract liabilities |  | $ | 10,170 |  |  | $ | 8,661 |

17

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

A contract is considered complete when all costs except insignificant items have been incurred and the installation is operating according to specifications or has been accepted by the customer.

The Company has contracts in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. Costs estimates are reviewed periodically on a contract-by-contract basis throughout the life of the contract such that adjustments to the profit resulting from revisions are made cumulative to the date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects, must be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional information becomes available.

Technical Support

Maintenance and technical support services are provided on both an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and technical support provided outside of a maintenance contract are on an as-requested basis, and revenue is recognized as the services are provided. Revenue for maintenance and technical support provided on an extended-term basis is recognized ratably over the term of the contract.

For sales arrangements that do not involve multiple elements such as professional services, which are of short-term duration, revenues are recognized when services are completed.

Consulting Services

The Company’s consulting services business generates revenues under contract with customers from three sources: (1) Professional Services (consulting and auditing); (2) Software licensing with optional hardware sales; and (3) Customer Service (training and maintenance support).

For sales arrangements that do not involve performance obligations:

(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.

Artificial Intelligence

Beginning in 2020, the Company will begin to derive revenue from applications that incorporate artificial intelligence (AI) in the form of predetermined algorithms to provide important operating information to the users of our systems. The revenue generated from these applications of AI consists of an annual application maintenance fee which will be recognized ratably over the year, plus fees for the design, development, testing and incorporation of new algorithms into the system which will be recognized upon completion of each deliverable.

Multiple Elements

Arrangements with customers may involve multiple elements including project revenue and maintenance services in our Intelligent Technology Systems business. Maintenance will occur after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business, multiple elements may include any of the above four sources. Training and maintenance on software products may occur after the software product sale while other services may occur before or after the software product sale and may not relate to the software product. Revenue recognition for multiple element arrangement is as follows:

18

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

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.

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 three distinct revenue sources:

a.

Turnkey, engineered projects;

b.

Associated maintenance and support services; and

c.

Licensing and professional services related to auditing of data center assets.

2.

We currently operate in North America including the USA, Mexico and Canada.

3.

Our customers include rail transportation, commercial, petrochemical, government, banking and IT suppliers.

4.

Our contracts are fixed price and fall into two duration types:

a.

Turnkey engineered projects and professional service contracts that are less than 1 year in duration and are typically three to three months in length; and

b.

Maintenance and support contracts ranging from one to five years in length.

5.

Transfer of goods and services are over time.

19

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

Quantitative:

For the Three Months Ended March 31, 2020

Segments |  | Rail |  |  | Commercial |  |  | Petrochemical |  |  | Government |  |  | Banking |  |  | IT Suppliers |  |  | Total |
Primary Geographical Markets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
North America |  | $ | 713,258 |  |  | $ | 74,335 |  |  | $ | — |  |  | $ | 27,149 |  |  | $ | 44,119 |  |  | $ | 132,084 |  |  | $ | 990,945 |
Major Goods and Service Lines |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Turnkey Projects |  | $ | 481,110 |  |  | $ | 8,622 |  |  | $ | — |  |  | $ | — |  |  | $ | 23,942 |  |  | $ | — |  |  | $ | 513,674 |
Maintenance & Support |  |  | 232,148 |  |  |  | 65,713 |  |  |  | — |  |  |  | 27,149 |  |  |  | 20,177 |  |  |  | — |  |  |  | 345,187 |
Data Center Auditing Services |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 129,699 |  |  |  | 129,699 |
Software License |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,385 |  |  |  | 2,385 |
|  | $ | 713,258 |  |  | $ | 74,335 |  |  | $ | — |  |  | $ | 27,149 |  |  | $ | 44,119 |  |  | $ | 132,084 |  |  | $ | 990,945 |
Timing of Revenue Recognition |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goods transferred over time |  | $ | 481,110 |  |  | $ | 8,622 |  |  | $ | — |  |  | $ | — |  |  | $ | 23,942 |  |  | $ | 132,084 |  |  | $ | 645,758 |
Services transferred over time |  |  | 232,148 |  |  |  | 65,713 |  |  |  | — |  |  |  | 27,149 |  |  |  | 20,177 |  |  |  | — |  |  |  | 345,187 |
|  | $ | 713,258 |  |  | $ | 74,335 |  |  | $ | — |  |  | $ | 27,149 |  |  | $ | 44,119 |  |  | $ | 132,084 |  |  | $ | 990,945 |

For the Three Months Ended March 31, 2019

Segments |  | Rail |  |  | Commercial |  |  | Petrochemical |  |  | Government |  |  | Banking |  |  | IT Suppliers |  |  | Total |
Primary Geographical Markets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
North America |  | $ | 3,671,797 |  |  | $ | 19,922 |  |  | $ | 34,353 |  |  | $ | 43,493 |  |  | $ | 470,347 |  |  | $ | 112,169 |  |  | $ | 4,352,081 |
Major Goods and Service Lines |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Turnkey Projects |  | $ | 3,389,656 |  |  | $ | (29,884) |  |  | $ | 26,547 |  |  | $ | 23,272 |  |  | $ | 461,237 |  |  | $ | — |  |  | $ | 3,870,828 |
Maintenance & Support |  |  | 282,141 |  |  |  | 49,806 |  |  |  | 7,806 |  |  |  | 20,221 |  |  |  | 9,110 |  |  |  | — |  |  |  | 369,084 |
Data Center Auditing Services |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 64,769 |  |  |  | 64,769 |
Software License |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 47,400 |  |  |  | 47,400 |
|  | $ | 3,671,797 |  |  | $ | 19,922 |  |  | $ | 34,353 |  |  | $ | 43,493 |  |  | $ | 470,347 |  |  | $ | 112,169 |  |  | $ | 4,352,081 |
Timing of Revenue Recognition |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goods transferred over time |  | $ | 3,389,656 |  |  | $ | (29,884) |  |  | $ | 26,547 |  |  | $ | 23,272 |  |  | $ | 461,237 |  |  | $ | 112,169 |  |  | $ | 3,982,997 |
Services transferred over time |  |  | 282,141 |  |  |  | 49,806 |  |  |  | 7,806 |  |  |  | 20,221 |  |  |  | 9,110 |  |  |  | — |  |  |  | 369,084 |
|  | $ | 3,671,797 |  |  | $ | 19,922 |  |  | $ | 34,353 |  |  | $ | 43,493 |  |  | $ | 470,347 |  |  | $ | 112,169 |  |  | $ | 4,352,081 |

20

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

NOTE 10 – SUBSEQUENT EVENTS

On April 1, 2020, the Company issued 149,424 new non-qualified options to certain Officers, Directors and staff members. The options have a strike price of $4.74 per share, have a term of 5-years and vest in two equal tranches on January 1, 2021 and 2022.

Also, on April 1, 2020, the Company issued 160,866 replacement options for an equal amount of options previously issued at a strike price of $6.00 per share, a 5-year term with immediate vesting.

On April 23, 2020, the Company entered into a promissory note (the “Note”) with BBVA USA, which provides for a loan in the amount of $1,410,270 (the “Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Loan has a two-year term and bears interest at a rate of 1.00% per annum (APR 1.014%). Monthly principal and interest payments are deferred for six months after the date of disbursement. The Loan may be prepaid at any time prior to maturity with no prepayment penalties.

21

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

This quarterly report on Form 10-Q and other reports filed by Duos Technologies Group, Inc. (the “duostech Group”), through its operating subsidiaries, Duos Technologies, Inc. (“duostech”) and TrueVue360, Inc (“TrueVue360”, duostech Group and duostech, collectively the “Company” “we”, “our”, and “us”) from time to time with the U.S. 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

Overview

Duos Technologies Group, Inc. (the “Company”) was incorporated in Florida on May 31, 1994 under the original name of Information Systems Associates, Inc. (“ISA”). Initially, our business operations consisted of consulting services for asset management of large corporate data centers and the development and licensing of information technology (“IT”) asset management software. In late 2014, ISA entered negotiations with Duos Technologies, Inc. (“duostech”), for the purposes of executing a reverse triangular merger. This transaction was completed on April 1, 2015, whereby duostech became a wholly owned subsidiary of the Company. duostech was incorporated under the laws of Florida on November 30, 1990 for design, development and deployment of proprietary technology applications and turn-key engineered systems. The Company, based in Jacksonville, Florida, employs approximately 65 people and is a technology and software applications company with a strong portfolio of intellectual property. The Company’s core competencies, including advanced intelligent technologies, are delivered through its proprietary integrated enterprise command and control platform, centraco®.

The Company provides a broad range of sophisticated intelligent technology solutions with an emphasis on security, inspection and operations for critical infrastructure within a variety of industries including transportation, retail, law enforcement, oil, gas and utilities sectors. In January 2019, the Company launched a dedicated Artificial Intelligence program through its wholly owned subsidiary TrueVue360, Inc., marketing its services and solutions under the brand name truevue360. The Company is committed to adding significant focus on the development, marketing and deployment of advanced convolutional neural network-based Artificial Intelligence (“AI”), Deep Machine Learning and Advanced Algorithms applications. While TrueVue360 will chiefly support DTI’s business growth, it will also develop and market its significant library of AI applications following a stand-alone business development strategy. Accordingly, our business is now operating in two equally important business units which complement each other and provide comprehensive turnkey, end-to-end, solutions to our customers.

22

The Company’s growth strategy includes expansion of its technology base through organic development efforts, strategic partnerships, and through strategic acquisitions. The Company provides its broad range of technology solutions with an emphasis on mission critical security, inspection and operations within the rail transportation, commercial, petrochemical, government, and banking sectors. The Company also offers professional and consulting services for large data centers.

Specifically, based upon the current and anticipated business growth, the Company is investing in resources to focus on execution within its target markets, including but not limited to rail, distribution centers and security. We continue to evaluate key requirements within those markets and add development resources to allow us to compete for additional projects to drive additional revenue growth.

In the Consulting Services area, the Company is now deploying its dcVue software which replaced OSPI.OSPI was used by Duos’ consulting auditing teams until last year. dcVue is based upon the Company’s OSPI patent which was awarded in 2010. The Company offers dcVue available for license to our customers later this year as a licensed software product.

Prospects and Outlook

Over the past several years, we have made substantial investments in product research and development and achieved significant milestones in the development of our technology and turnkey solutions. We have made significant progress in penetrating the market with our proprietary technology solutions, specifically in the rail industry which is currently undergoing a major shift in maintenance strategies. We believe that this shift will be a significant motivating factor for the industry’s use of our technologies.

Our business success in the immediate future will largely depend on the increased penetration into our target markets for our proprietary intelligent analytical technology solutions.

Notwithstanding the foregoing, no assurance can be provided that our product offerings will generate significant orders or maintain market acceptance.

Results of Operation

The following discussion should be read in conjunction with the unaudited financial statements included in this report.

Comparison for the Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

The following table sets forth a modified version of our unaudited Consolidated Statements of Operations that is used in the following discussions of our results of operations:

|  | For the Three Months Ended |
|  | March 31, |
|  | 2020 |  |  | 2019 |
Revenue |  | $ | 990,945 |  |  | $ | 4,352,081 |
Cost of revenue |  |  | 888,080 |  |  |  | 2,221,237 |
Gross profit |  |  | 102,865 |  |  |  | 2,130,844 |
Operating expenses |  |  | 2,190,780 |  |  |  | 2,084,394 |
Income (loss) from operations |  |  | (2,087,915 | ) |  |  | 46,450 |
Other income (expense) |  |  | (59,134 | ) |  |  | (2,281 | )
Net income (loss) |  | $ | (2,147,049 | ) |  | $ | 44,169 |

23

Revenues

|  | For the Three Months Ended |
|  | March 31, |
|  | 2020 |  |  | 2019 |  |  | % Change |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |
Technology systems |  | $ | 513,674 |  |  | $ | 3,918,438 |  |  |  | -87% |
Technical support |  |  | 345,187 |  |  |  | 321,474 |  |  |  | 7% |
Consulting services |  |  | 132,084 |  |  |  | 112,169 |  |  |  | 18% |
Total revenue |  | $ | 990,945 |  |  | $ | 4,352,081 |  |  |  | -77% |

The majority of the decrease in overall revenues for the quarter is due to slower than anticipated contract awards by two customers pending resolution of certain terms and conditions. One of these orders have now been received, however, some execution delays by one customer for customer acceptance in the projects portion of our business continue to have an impact. In addition, the current pandemic related to the Novel Coronavirus (COVID-19) has impacted both expected receipt of awards and delays in execution due to travel and other restrictions. These delays will impact the technology systems revenue portion of our business, but the impact for the full year is uncertain at this time. The Company continues to make improvements in our project build and delivery process largely as a result of the investment in the establishment of the Engineering and Operations center in 2018 which has shortened delivery times on major projects.

Technical support revenues were higher in the quarter as the result of higher than normal service support. The renewals of existing contracts have somewhat offset this impact and we believe that a shift to the next generation of technology systems which are currently being installed will have a positive impact going forward. The maintenance and technical support revenues are driven by successful completion on projects and represent services and support for those installations. The Company expects to continue the growth with new, long term recurring revenue from new customers which will be coming on-line in the next several months.

The Consulting services recorded an increase in revenue in the first three months of 2020. The increase in consulting revenues is due to the consulting services division release of a new version of its software which is anticipated to broaden market acceptance of its offerings and we anticipate a positive impact on revenues in 2020.

Cost of Revenues

|  |  | For the Three Months Ended |
|  |  | March 31, |
|  |  | 2020 |  |  | 2019 |  |  | % Change |
Cost of revenues: |  |  |  |  |  |  |  |  |  |  |  |  |
Technology systems |  |  | $ | 581,544 |  |  | $ | 2,092,994 |  |  |  | -72% |
Technical support |  |  |  | 234,276 |  |  |  | 105,324 |  |  |  | 122% |
Consulting services |  |  |  | 72,260 |  |  |  | 22,919 |  |  |  | 215% |
Total cost of revenues |  |  | $ | 888,080 |  |  | $ | 2,221,237 |  |  |  | -60% |

Cost of revenues on technology systems decreased in line with the decrease in revenues. The overall gross margin was much lower during the period compared to the equivalent period in 2019 but due to a continued focus on build costs and savings through efficiency the overall impact was mitigated. The previously reported significant increase in personnel in anticipation of increased execution and support requirements for the second half of 2020 which we saw in 2019 was a factor in the current quarter and management will continue to review pending orders to ensure appropriate staffing. Cost of Revenues increased on maintenance and technical support as a result of additional investments in staffing to support a greater number of current and anticipated installations.

24

Gross Profit

|  | For the Three Months Ended |
|  | March 31, |
|  | 2020 |  |  | 2019 |  |  | % Change |
Revenues |  | $ | 990,945 |  |  | $ | 4,352,081 |  |  |  | -77% |
Cost of revenues |  |  | 888,080 |  |  |  | 2,221,237 |  |  |  | -60% |
Gross profit |  | $ | 102,865 |  |  | $ | 2,130,844 |  |  |  | -95% |

Overall Gross Profit was $102,865 or 10% of revenues compared to $2,130,844 or 49% of revenues for the three months ended March 31, 2020 and 2019, respectively. The overall decrease in gross profit of 95% reflects the lower revenues for the quarter and costs for equipment related to project implementation which was not offset in the current quarter due to certain customer delays for project implementation. Although this has had a negative overall effect on the typical project gross margin of at least 50%, management anticipates the overall gross margins for the full year to be close to historical norms.

Operating Expenses

|  | For the Three Months Ended |
|  | March 31, |
|  | 2020 |  |  | 2019 |  |  | % Change |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |
Sales and marketing |  | $ | 139,852 |  |  | $ | 250,425 |  |  |  | -44% |
Engineering |  |  | 312,428 |  |  |  | 465,907 |  |  |  | -33% |
Research and development |  |  | 406,392 |  |  |  | 383,421 |  |  |  | 6% |
Administration |  |  | 1,015,559 |  |  |  | 803,327 |  |  |  | 26% |
AI technologies |  |  | 316,549 |  |  |  | 181,314 |  |  |  | 75% |
Total operating expense |  | $ | 2,190,780 |  |  | $ | 2,084,394 |  |  |  | 5% |

Operating expenses were higher by 5% than the equivalent period in 2019 reflecting the increase in resources related to the Company’s anticipated growth. Research and development expenses increased in line with the Company’s investment in resources to support that growth. The decrease in engineering during the period is a result of less outside engineering services and a reclass in personnel to administration expense. Sales and marketing expense decreased due to fluctuation in personnel. Administration expenses increased mostly due to reclassing senior management from the individual departments to administration and onetime expenses related to the fundraising and to the Company’s listing on the Nasdaq during the quarter. AI technologies costs were higher as the result of additional growth in this area.

Income (Loss) From Operations

The loss from operations for the three months ended March 31, 2020 was $2,087,915 versus a profit from operations for the same period in 2019 of $46,450. The increase in losses from operations are the result of significantly lower revenues and gross margins for the period together with an increase in operating expenses. The losses are expected to be temporary but with the uncertainty of the current Novel Coronavirus (Covid-19) crisis they are unlikely to be offset for the full year as the anticipated growth in business from new contracts is expected to be delayed by at least six months.

Other Income/Expense

Interest expense for the three months ended March 31, 2020 was $68,932 versus interest expense of $2,621 in the equivalent period in 2019. The increase is mainly due to the non-cash debt discount amortization. Interest income will be more significant during the year due to the large amount of cash on deposit as a result of the 2020 Offering. Interest expense is expected to be minimal and will be offset by earnings from cash on deposit in the amount of $9,798 at March 31, 2020 versus $340 in the same period of 2019.

25

Net Income (Loss)

The net loss for the three months ended March 31, 2020 was $2,147,049 against a net profit for the same period in 2019 of $44,169. The $2,191,218 negative change in net loss is primarily attributable to the significant decrease in technology systems revenue. Net loss per common share was $0.80 versus a profit of $0.03 per share for the three months ended March 31, 2020 and 2019, respectively.

Liquidity and Capital Resources

As of March 31, 2020, the Company has a working capital of $5,703,723. We generated a net loss of $2,147,049 for the three months ended March 31, 2020.

Cash Flows

The following table sets forth the major components of our statements of cash flows data for the periods presented:

|  | March 31, 2020 |  |  | March 31, 2019 |
Net cash used in operating activities |  | $ | (1,657,013 | ) |  | $ | (1,500,159 | )
Net cash used in investing activities |  |  | (36,245 | ) |  |  | (91,511 | )
Net cash provided by financing activities |  |  | 8,189,897 |  |  |  | 1,584,784 |
Net increase (decrease) in cash |  | $ | 6,496,639 |  |  | $ | (6,886) |

Net cash used in operating activities for the three months ended March 31, 2020 was $1,657,013 and net cash used during the same period of 2019 was $1,500,159. The increase in net cash used in operations for the three months ended March 31, 2020 was the result of higher expenditures related to current and future project execution in anticipation of new projects. In addition, there are a number of changes in assets and liabilities compared to the previous period that added to the use of cash in operations. Notable changes were a significant decrease in accounts payable and along with decrease in accrued expenses reflecting better availability of working capital as a result of the recent capital raise. In addition, cash is being used to further development activities within our TrueVue360 subsidiary where there are no current offsetting revenues during this period.

Net cash used in investing activities for the three months ended March 31, 2020 and 2019 were $36,245 and $91,511, respectively representing a decrease in investments in various fixed assets during the first three months of 2020.

Net cash provided in financing activities for the three months ended March 31, 2020 was $8,189,897 and for the same period of 2019 was $1,584,784. Cash flows provided in financing activities during the three-month period in 2020 were primarily attributable to a significant capital raise undertaken during the quarter in conjunction with listing on the Nasdaq Capital Market. Cash flows used by financing activities during 2019 were primarily attributable to support of operations and repayment of one short term note and short-term credit facilities offset by proceeds from a warrant exercise from which the Company derived cash proceeds.

Previously, we have funded our operations primarily through the sale of our equity (or equity linked) and debt securities. During 2020, we have funded our operations through revenues generated and cash received from ongoing project execution and associated maintenance revenues as well as funds from a recent capital raise. As of May 11, 2020, we had cash on hand of approximately $7,890,000. We have approximately $135,000 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 continuation and expansion of operations and receipt of revenues. Our current capital and revenues are sufficient to fund operations for at least the next 12 months. However, the Company cannot currently quantify the uncertainty related to the recent pandemic and its effects on the business in the coming quarters.

Demand for the products and services will be dependent on, among other things, continuing market acceptance of our products and services, the technology market in general, and general economic conditions, which are cyclical in nature and are currently impacted by the Novel Coronavirus (Covid-19). 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 this situation and potential for a prolonged recession period and are considered to be a factor at present.

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Liquidity

Under Accounting Standards Update, or ASU, 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.

As reflected in the accompanying unaudited consolidated financial statements, the Company had working capital of $5,703,723 and an accumulated deficit of $34,887,764 at March 31, 2020. During the same period in 2019, the Company had negative working capital of $607,372 and an accumulated deficit of $32,740,715.

Upon completion of the Company’s 2020 Offering, management raised sufficient working capital to meet its needs for the next 12-months without the need to raise further capital. The Company continues to be successful in attracting new business and establishing a backlog of projects. Most importantly, the Company’s was successful in increasing its working capital cushion substantially upon completion of the 2020 Offering, receiving proceeds of more than $8.1 million after payment of banking fees and expenses in connection with an up listing to Nasdaq.

Management believes that we have eliminated the substantial doubt for the Company to continue as a going concern. We are executing the plan to grow our business and achieve profitability without the requirement to raise additional capital for existing operations other than encouraging early conversions of cash warrants. 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 sufficient revenue and to attain consistently profitable operations. Although the current pandemic related to the Novel Coronavirus (Covid-19) has affected our operations, we have analyzed our cash flow under “stress test” conditions and have determined that we have sufficient liquid assets on hand to maintain operations for at least 12 months from the date of this report.

Off Balance Sheet Arrangements

We have no-off balance sheet contractual arrangements, as that term is defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies and Estimates

We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.

Accounts Receivable

Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers.

Share-Based Compensation

The Company accounts for employee 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.

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In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. Management implemented on January 1, 2019. The standard was applied in a retrospective approach for each period presented.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying unaudited consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of derivatives, valuation of warrants issued with debt, valuation of beneficial conversion features in convertible debt and valuation of stock-based awards. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. 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 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.

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 first quarter ended March 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A. Risk Factors.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, filed with the U.S Securities and Exchange Commission on April 15, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Company issued 1,611 shares of common stock for services to the members of the board during the first quarter of 2020.

The above securities were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act. These securities qualified for exemption under Section 4(a)(2) since the issuance by us did not involve a public offering. The offerings were not “public offerings” as defined in 4(a)(2) due to the insubstantial number of persons involved in the transactions, manner of the issuance and number of securities issued. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, the investors had the necessary investment intent as required by Section 4(a)(2) since they agreed to and received securities bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering”. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act for these transactions.

Item 3. Defaults Upon Senior Securities.

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

We are providing the following disclosure relating to Item 5.02(e) of Current Report on Form 8-K.

On April 1, 2020, the Company entered into revised Non-Qualified Stock Option Agreements (the “Revised Option Agreements”) with each of its directors and officers listed in the table below (each, an “Optionee” and together, the “Optionees”), pursuant to the Duos Technologies Group, Inc. 2016 Equity Incentive Plan (the “Incentive Plan”). The Revised Option Agreements were entered into in order to replace the previously entered into stock options agreements between the Company and the Optionees (the “Previous Option Agreements”). With the exception of the exercise price of the options previously granted, the terms of the Revised Option Agreements are substantially the same as the Previous Option Agreements. The exercise price of options was revised from $14.00 to $6.00 (the “Revised Options”) and may be exercised within five years from the date of grant of the Revised Options.

Additionally, on April 1, 2020, the Company entered into new Non-Qualified Stock Option Agreements (the “New Option Agreements”) with each of the Optionees, pursuant to the Incentive Plan, as amended. The options (the “April Options”) granted pursuant to the Optionees pursuant to the New Options Agreements are exercisable at $4.74 per share. The April Options will vest in accordance with the following schedule: (i)50% on January 1, 2021, and (ii) 50% shall vest on January 1, 2022.

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The table below sets forth the name and position of each Optionee and number of options granted to said Optionee pursuant to each of the Revised Option Agreements and the New Option Agreements.

Name of Optionee |  | Position |  | Number of Revised Options |  | Number of New Options
Gianni B. Arcaini |  | Chairman, Chief Executive Officer, President |  |  | 50,358 |  | 50,358
Adrian G. Goldfarb |  | Chief Financial Officer |  |  | 18,929 |  | 18,929
Connie L. Weeks |  | Chief Accounting Officer |  |  | 18,929 |  | 18,929
Ken Ehrman |  | Director |  |  | 8,572 |  | 8,572
Blair M. Fonda |  | Director |  |  | 8,572 |  | 8,572
Ned Mavrommatis |  | Director |  |  | 8,572 |  | 8,572

Item 6. Exhibits.

Exhibit No. |  | Description
10.1* |  | Form of Non-Qualified Stock Option Agreement
31.1* |  | Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
31.2* |  | Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
32.1** |  | Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2** |  | Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* |  | XBRL Instance Document
101.SCH* |  | XBRL Taxonomy Extension Schema Document
101.CAL* |  | XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* |  | XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* |  | XBRL Taxonomy Extension Label Linkbase Document
101.PRE* |  | XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

** Furnished herewith

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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, there unto duly authorized.

| DUOS TECHNOLOGIES GROUP, INC.
Date: May 15, 2020 | By: | /s/ Gianni B. Arcaini
| Gianni B. Arcaini Chairman and Chief Executive Officer
Date: May 15, 2020 | By: | /s/ Adrian G. Goldfarb
| Adrian G. Goldfarb Chief Financial Officer

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