DUOS TECHNOLOGIES GROUP, INC. - Quarter Report: 2019 March (Form 10-Q)

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, 2019

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)	(Zip Code)

Registrant’s telephone number, including area code: (904) 652-1616

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	None	None

As of May 10, 2019, Duos Technologies Group, Inc. had outstanding 24,075,958 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	18

Item 3.	Qualitative and Quantitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	24

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Mine Safety Disclosures	25

Item 5.	Other Information	25

Item 6.	Exhibits	26


SIGNATURES	27

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	March 31,		December 31,
	2019		2018
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	1,202,415	$	1,209,301
Accounts receivable, net		3,623,736		1,538,793
Contract assets		286,996		1,208,604
Prepaid expenses and other current assets		309,164		235,198
Total Current Assets		5,422,311		4,191,896

Property and equipment, net		257,946		204,226
Operating lease right of use asset		557,485		—

OTHER ASSETS:
Software Development Costs, net		35,000		40,000
Patents and trademarks, net		55,529		53,871
Total Other Assets		90,529		93,871

TOTAL ASSETS	$	6,328,271	$	4,489,993

(Continued)

See accompanying notes to the unaudited consolidated financial statements.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)


	March 31,			December 31,
	2019			2018
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Accounts payable	$	2,060,631		$	1,416,716
Accounts payable - related parties		13,473			13,473
Notes payable - financing agreements		149,899			48,330
Line of credit		30,280			31,201
Payroll taxes payable		160,730			317,573
Accrued expenses		248,593			222,328
Current portion-operating lease obligations		207,688			—
Contract liabilities		1,249,781			2,248,829
Deferred revenue		298,563			362,528
Total Current Liabilities		4,419,638			4,660,978

Operating lease obligations		363,557			—

Total Liabilities		4,783,195			4,660,978

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, 2019 and December 31, 2018, 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; 2,830 issued and outstanding at March 31, 2019 and December 31, 2018, convertible into common stock at $0.50 per share		2,830,000			2,830,000
Common stock: $0.001 par value; 500,000,000 shares authorized, 24,082,351 and 21,082,351 shares issued, 24,075,958 and 21,075,958 shares outstanding at March 31, 2019 and December 31, 2018, respectively		24,082			21,082
Additional paid-in capital		29,066,117			27,397,225
Total stock & paid-in-capital		31,920,199			30,248,307
Accumulated deficit		(30,225,664	)		(30,269,833	)
Sub-total		1,694,535			(21,526	)
Less: Treasury stock (6,393 and 3,280 shares of common stock at March 31, 2019 and December 31, 2018, respectively)		(149,459	)		(149,459	)
Total Stockholders' Equity (Deficit)		1,545,076			(170,985	)

Total Liabilities and Stockholders' Equity (Deficit)	$	6,328,271		$	4,489,993

See accompanying notes to the unaudited consolidated financial statements.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended
	March 31,
	2019			2018

REVENUES:
Project	$	3,918,438		$	844,714
Maintenance and technical support		321,474			257,447
IT asset management services		112,169			45,769

Total Revenues		4,352,081			1,147,930

COST OF REVENUES:
Project		2,092,994			547,799
Maintenance and technical support		105,324			103,323
IT asset management services		22,919			20,237

Total Cost of Revenues		2,221,237			671,359

GROSS PROFIT		2,130,844			476,571

OPERATING EXPENSES:
Selling and marketing expenses		109,616			41,221
Salaries, wages and contract labor		1,268,779			765,870
Research and development		112,694			135,280
Professional fees		127,919			63,865
General and administrative expenses		465,386			209,837

Total Operating Expenses		2,084,394			1,216,073

INCOME (LOSS) FROM OPERATIONS		46,450			(739,502	)

OTHER INCOME (EXPENSES):
Interest Expense		(2,621	)		(5,728	)
Gain on settlement of debt		—			—
Warrant derivative gain		—			—
Other income, net		340			2,126

Total Other Income (Expense)		(2,281	)		(3,602	)

NET INCOME (LOSS)		44,169			(743,104	)

Series A preferred stock dividends		—			—

Net income (loss) applicable to common stock	$	44,169		$	(743,104	)


Basic Net Income (Loss) Per Share	$	0.002		$	(0.04	)
Diluted Net Income(Loss) Per Share	$	0.001		$	(0.04	)

Weighted Average Shares-Basic		21,671,240			20,709,478
Weighted Average Shares-Diluted		48,802,471			20,709,478

See accompanying notes to the unaudited consolidated financial statements.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the Months Ended March 31, 2018 and 2019


									Additional
	Preferred Stock				Common Stock				Paid-in-		Accumulated			Treasury
	# of Shares		Amount		# of Shares		Amount		Capital		Deficit			Stock				Total

Balance December 31, 2017		2,830	$	2,830,000		20,657,850	$	20,658	$	26,608,823	$	(28,688,946	)	$	(148,000	)	$		622,535

Common stock issued for services		—		—		52,209		52		73,656		—			—				73,708

Net Loss for the three months ended March 31, 2018		—		—		—		—		—	$	(743,104)			—				(743,104)

Balance March 31, 2018		2,830	$	2,830,000		20,710,059	$	20,710	$	26,682,479	$	(29,432,050	)	$	(148,000	)		$	(46,861	)


									Additional
	Preferred Stock				Common Stock				Paid-in-		Accumulated			Treasury
	# of Shares		Amount		# of Shares		Amount		Capital		Deficit			Stock			Total

Balance December 31, 2018		2,830	$	2,830,000		21,082,351	$	21,082	$	27,397,225	$	(30,269,833	)	$	(149,459	)	$	(170,985	)

Commons stock issued for warrants exercised		—		—		3,000,000		3,000		1,647,000		—			—			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		24,082,351	$	24,082	$	29,066,117	$	(30,225,664	)	$	(149,459	)		1,545,076

See accompanying notes to the unaudited consolidated financial statements.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Three Months Ended
	March 31,
	2019			2018

Cash from operating activities:
Net income (loss)	$	44,169		$	(743,104	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		41,132			19,071
Stock option expense		21,892			—
Changes in assets and liabilities:
Accounts receivable		(2,084,943	)		(1,115,965	)
Contract assets		921,608			(184,494	)
Prepaid expenses and other current assets		91,898			53,029
Operating lease right of use asset		(557,485	)		—
Accounts payable		643,916			(22,436	)
Payroll taxes payable		(156,843	)		8,608
Accrued expenses		26,265			(69,837	)
Operating lease obligation		571,245			—
Contract liabilities		(999,048	)		522,172
Deferred revenue		(63,965	)		(94,957	)

Net cash used in operating activities		(1,500,159	)		(1,627,913	)

Cash flows from investing activities:
Software development costs		—			(60,000	)
Purchase of patents/trademarks		(3,000	)		(1,000	)
Purchase of fixed assets		(88,511	)		(63,113	)

Net cash used in investing activities		(91,511	)		(124,113	)

Cash flows from financing activities:
Repayments of line of credit		(921	)		(301	)
Repayments of related party notes		—			(48,215	)
Repayments of insurance and equipment financing		(64,295	)		(74,435	)
Proceeds from warrants exercised		1,650,000			—

Net cash provided (used in) by financing activities		1,584,784			(122,951	)

Net decrease in cash		(6,886	)		(1,874,977	)
Cash, beginning of period		1,209,301			1,941,818
Cash, end of period		1,202,415			66,841

Supplemental Disclosure of Cash Flow Information:
Interest paid	$	1,536		$	3,519

Supplemental Non-Cash Investing and Financing Activities:
Common stock issued for accrued BOD fees	$	—		$	73,709
Note issued for financing of insurance premiums	$	165,864		$	—

See accompanying notes to the unaudited consolidated financial statements.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

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

Nature of Operations

Duos Technologies Group, Inc. (the “Company”), through its operating subsidiary Duos Technologies, Inc. (“duostech”) 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, Inc., (“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 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, 2019 are not indicative of the results that may be expected for the year ending December 31, 2019 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, 2018 filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2019.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company including its wholly-owned subsidiaries, Duos Technologies, Inc. and TrueVue 360, Inc. All inter-company transactions and balances are eliminated in consolidation.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The most significant estimates in the accompanying consolidated financial statements include the allowance on accounts receivable, valuation of deferred tax assets, valuation of intangible and other long-lived assets, estimates of net contract revenues and the total estimated costs to determine progress towards contract completion, valuation of 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, 2019, balance in one financial institution exceeded federally insured limits by approximately $1,015,259.

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, 2019, two customers accounted for 78% and 11%. For the three months ended March 31, 2018, four customers accounted for 27%, 19%, 17% and 13% of revenues.

At March 31, 2019, two customers accounted for 70% and 16% of accounts receivable. At December 31, 2018, two customers accounted for 58% and 34% of accounts receivable.

Geographic Concentration

Approximately 80% 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).

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

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.

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, 2019, there was an aggregate of 22,538,551 outstanding warrants to purchase shares of common stock. At March 31, 2019, there was an aggregate of 2,362,000 shares of employee stock options to purchase shares of common stock of which 406,000 are currently unvested. At March 31, 2019, 5,660,000 common shares issuable upon conversion of Series B convertible preferred stock, were included in the computation of dilutive earnings per share and 21,471,231 warrants and options were included in the calculation of dilutive earnings per share at March 31, 2019. The balance of 3,429,320 were excluded because they were out of the money at March 31, 2019.

Revenue Recognition

As of January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-89, Revenue from Contracts with Customers (“ASC 606”), that affects the timing of when certain types of revenues will be recognized. The basic principles in ASC 606 include the following: a contract with a customer creates distinct unrecognized contract assets and performance obligations; satisfaction of a performance obligation creates revenue; and a performance obligation is satisfied upon transfer of control to a good or service to a customer.

Revenue is recognized 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:

Identify the contract with the customer;

Identify the performance obligations in the contract;

Determine the transaction price;

Allocate the transaction price to separate performance obligations; and

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

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

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

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

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.

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 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”).

In August 2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company will be evaluating the impact this standard will have on the Company’s financial statements.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

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 income of $44,169 for the three months ended March 31, 2019. During the same period, cash used in operating activities was $1,500,159. The positive working capital and accumulated deficit as of March 31, 2019 were $1,002,673 and $30,225,664, 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 the raise of approximately $11 million closed in late 2017. In addition, the Company was carrying significant debt obligations including a senior secured note with cash interest payments.

After the 2017 raise, management paid down all debt which eliminated monthly obligations for interest payments other than for normal course of business financing, secured sufficient working capital for ongoing operations and was successful in closing business and establishing a backlog such that we were breakeven or profitable in two of the last four quarters including the current quarter. The Company has been successful in increasing its working capital cushion with $1,650,000 in warrant executions during the current quarter and has secured another approximately $475,000 in further warrant conversions.

Management now believes that these actions have alleviated the substantial doubt for the Company to continue as a going concern and will continue to grow its business and achieve profitability without the requirement to raise additional capital for existing operations. Ultimately the continuation of the Company as a going concern is dependent upon the ability of the Company to execute the plan described above, generate sufficient revenue and to attain consistently profitable operations. Additionally, the Company expects that with the current financial plan, further warrant executions can be expected and in conjunction with this, a number of existing shareholders have requested the opportunity to invest further money to build shareholder equity by a further $3.5 million. Management will continue to evaluate these plans in future filings.

NOTE 3 – SOFTWARE DEVELOPMENT COSTS

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

Software development costs consisted of the following at March 31, 2019 and December 31, 2018:


	March 31, 2019			December 31, 2018
Software Development Costs	$	60,000		$	60,000
Less: Accumulated amortization		(25,000	)		(20,000	)
Total	$	35,000		$	40,000

Amortization expense of software development costs for the three months ended March 31, 2019 and 2018 was $5,000 and $5,000, respectively.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

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, 2019				December 31, 2018
Notes Payable	Principal		Interest		Principal		Interest
Third Party - Insurance Note 1	$	12,688	9.29	%	$	25,066	9.29	%
Third Party - Insurance Note 2			10.75	%		8,501	10.75	%
Third Party - Insurance Note 3		10,515	6.36	%		14,763	10.25	%
Third Party - Insurance Note 4		126,696	6.36	%		—	—
Total	$	149,899			$	48,330

The Company entered into an agreement on December 23, 2018 with its insurance provider by executing a $25,066 note payable (Insurance Note 1) issued to purchase an insurance policy, secured by that policy with an annual interest rate of 9.29% payable in monthly installments of principal and interest totaling $2,172 through October 23, 2019. The balance of Insurance Note 1 as of March 31, 2019 and December 31, 2018 was $12,688 and $25,066, respectively.

The Company entered into an agreement on September 15, 2018 renewing with its insurance provider by executing a $15,810 note payable (Insurance Note 2), secured by that policy, with an annual interest rate of 10.75% payable in monthly installments of principal and interest totaling $1,660 through July 15, 2019. At March 31, 2019 and December 31, 2018, the balance of Insurance Note 2 was zero and $8,501, respectively.

The Company entered into an agreement on April 15, 2018 with its insurance provider by executing a $49,000 note payable (Insurance Note 3) issued to purchase an insurance policy, secured by that policy with an annual interest rate of 10.25% payable in monthly installments of principal and interest totaling $4,378 through February 15, 2019. The policy renewed on April 15, 2019 in the amount of $51,940 with an annual interest rate of 6.36% payable in monthly installments of principal and interest totaling $5,326. At March 31, 2019 and December 31, 2018, the balance of Insurance Note 3 was $10,515 and $14,763, respectively.

The Company entered into an agreement on February 3, 2018 with its insurance provider by executing a $127,561 note payable (Insurance Note 4) issued to purchase an insurance policy, secured by that policy with an annual interest rate of 8.80% payable in monthly installments of principal and interest totaling $13,276 through November 3, 2018. The policy renewed 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. At March 31, 2019 and December 31, 2018, the balance of Insurance Note 4 was $126,696 and zero, respectively.

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, 2019 and December 31, 2018, was $30,280 and $31,201, respectively, including accrued interest. This line of credit has no maturity date. The annual interest rate is 12% at March 31, 2019. 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 payroll taxes in full and the Company had appealed the IRS penalty payments for a reduction which was under review. The IRS has since responded, and the Company will be required to repay the penalties in connection with the delinquent payroll taxes. At March 31, 2019, the payroll taxes payable balance of $160,730 includes accrued late fees in the amount of $78,572. The Company has started making monthly payments in the amount of $15,000 starting in July 2018 to pay down the accrued late fees.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

Licensing Agreement

The Company has entered into a new software license and configuration services agreement with a third-party vendor. The annual support and maintenance fees of approximately $300,000 include support and updates to the vendor’s Gateway software and customer access to their services (including web application, mobile application, and associated APIs) for gateway configuration, gateway monitoring and management, application configuration, application management, and automatic model updates.

The Company has also entered into a SaaS Agreement with the same vendor that is an Amazon AWS-hosted software service enabling the automation of visual observation tasks using deep convolutional neural networks and other computer vision techniques. It consists of a public API, web application, iPhone application, and associated backend services. The system supports the labeling of example image data, the automatic building of classification, detection, localization, measuring and counting applications based on the labeled example data, and the run-time deployment of the trained application models.

NOTE 7 – OPERATING LEASE OBLIGATIONS

The Company has two operating lease agreements for office and warehouse space of approximately 12,708 square feet located in Jacksonville, Florida. The current lease was amended on May 1, 2016 and ends 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 space on June 1, 2018 and ending May 31, 2021.

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 $597,103. The right of use asset balance at March 31, 2019 was $557,485, The operating lease liability – current portion was $207,688 and the operating lease liability – long term portion was $363,557. 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 consolidated statement of operations or our consolidated statements of cash flows. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and to recognize all lease payments for leases with a term greater than 12 months on a straight-line basis over the lease term in our consolidated statements of operations.

NOTE 8 – STOCKHOLDERS’ EQUITY

Common stock issued for exercise of warrants

During the first quarter of 2019, the Company entered into an agreement with two current shareholders who were also holders of warrants to purchase shares of common stock in the aggregate amount of 3,000,000 shares, to reduce the exercise price of these warrants to $0.55 from the original exercise price of $0.65 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, 2019, was $21,892 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, 2019, the total compensation cost for stock options not yet recognized was $88,784. This cost will be recognized over the remaining vesting term of the options of approximately 1 year.

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 120,000 stock options exercisable at $1.00 per share vesting one year from the date of grant.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

Employee Stock Options

A maximum of 2,500,000 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 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, 2019, and December 31, 2018, options to purchase 2,362,000 and zero shares of common stock were outstanding under the 2016 Plan, respectively.

The Company has no expired employee stock options under the 2016 Plan at March 31, 2019.


	March 31, 2019
			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at beginning of year		—	$	—
Granted		2,362,000	$	1.00
Exercised		—	$	—
Forfeited		—	$	—
Expired		—	$	—
Outstanding at March 31, 2019		2,362,000	$	1.00
Exercisable at March 31, 2019		1,956,000	$	1.00

Outstanding
Weighted average remaining contractual term				4.25
Aggregate intrinsic value			$	—
Weighted average grant date fair value (per share)			$	0.21

Exercisable
Weighted average remaining contractual term				4.25
Aggregate intrinsic value				—

Warrants

The following is a summary of activity for warrants to purchase common stock for the three months ended March 31, 2019:


	March 31, 2019
	Number of Warrants			Weighted Avg. Exercise Price		Remaining Contractual Life (Years)
Outstanding at the beginning of the year		25,538,551		$	.70		3.9
Warrants expired		—
Warrants issued		—
Warrants cancelled/exercised		(3,000,000	)
Outstanding at end of period		22,538,551			.63		3.6
Exercisable at end of period		22,538,551		$	.63		3.6

During the first quarter of 2019, the Company received $1,650,000 for the exercise of warrants for 3,000,000 shares of common stock.

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

NOTE 9 - REVENUE

Revenue Recognition and Contract Accounting

The Company generates revenue from three sources: (1) Project Revenue; (2) Maintenance and Technical Support and (3) IT Asset Management (consulting and auditing).

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

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 10 - NET INCOME (LOSS) PER SHARE

For the three months ended March 31, 2019, basic net income (loss) per common share applicable to common stockholders was computed based on the weighted average number of common shares outstanding during the period. Diluted net loss per common share applicable to common stockholders was computed based on the weighted average number of common shares and dilutive securities outstanding. Dilutive securities having an anti-dilutive effect on diluted net loss per common share were excluded from the calculation. There were 3,429,320 out-of-the-money stock options and warrants excluded from the computation of diluted earnings per share for the three months ended March 31, 2019.

Basic and diluted net income per share, for the three months ended March 31, 2019, were calculated as follows:


	Basic		Diluted
Numerator
Net income applicable to common stock	$	44,169	$	44,169
	$	44,169	$	44,169

Denominator
Weighted average common shares outstanding		21,671,240		21,671,240
Preferred Stock		—		5,660,000
Warrants and options		—		21,471,231
		21,671,240		48,802,471

Net income per share	$	.002	$	.001

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

NOTE 11 – 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, 2019 and December 31, 2018, contract assets on uncompleted contracts consisted of the following:


	March 31, 2019			December 31. 2018
Costs and estimated earnings recognized	$	3,176,717		$	4,273,057
Less: Billings or cash received		(2,889,721	)		(3,064,453	)
Contract assets	$	286,996		$	1,208,604

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, 2019 and December 31, 2018, contract liabilities on uncompleted contracts consisted of the following:


	March 31, 2019			December 31. 2018
Billings and/or cash receipts on uncompleted contracts	$	12,039,832		$	8,563,241
Less: Costs and estimated earnings recognized		(10,790,051	)		(6,314,412	)
Contract liabilities	$	1,249,781		$	2,248,829

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.

Maintenance and 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.

IT Asset Management Services (“ITAM”)

The Company’s ITAM 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).

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

For sales arrangements that do not involve performance obligations:


(1)	Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2)	For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer;
(3)	Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed; and
(4)	Maintenance/support is an optional product sold to our software license customers under one-year contracts. Accordingly, maintenance payments received upfront are deferred and recognized over the contract term.

Multiple Elements

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

Each element is accounted for separately when each element has value to the customer on a standalone basis and there is Company specific objective evidence of selling price of each deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling price is allocated, the revenue for each element is recognized using the applicable criteria under GAAP as discussed above for elements sold in non-multiple element arrangements. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting. The Company sells its various services and software and hardware products at established prices on a standalone basis which provides Company specific objective evidence of selling price for purposes of multiple element relative selling price allocation. The Company only sells maintenance services or spare parts based on its established rates after it has completed a system integration project for a customer. The customer is not required to purchase maintenance services. All elements in multiple element arrangements with Company customers qualify as separate units of account for revenue recognition purposes.

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:

We have three distinct revenue sources:

Turnkey, engineered projects;

Associated maintenance and support services; and

Professional services related to auditing of data center assets.

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

DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

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

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

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

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

Transfer of goods and services are over time.

Quantitative:

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

NOTE 12 – SUBSEQUENT EVENTS

On March 29, 2019, the Company entered into an agreement with a current shareholder to reduce the exercise price of warrants to purchase shares of common stock the shareholder held to $0.55 from the original exercise price of $0.65 based on the immediate exercise of these warrants to purchase 684,581 shares of common stock. The transaction was completed on April 1, 2019 for a total amount of $376,520.

On April 1, 2019, an employee resigned from the Company who had previously been granted 200,000 stock options. As a result of the resignation, all of the options were cancelled.

On April 3, 2019, the Company entered into an agreement with the surviving spouse of a shareholder to purchase 1,599 shares of common stock at fair the market value of $0.74 per share.

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

This Form 10-Q and other reports or schedules filed by the Company from time to time with the U.S. Securities and Exchange Commission (collectively, the “Filings”) contain or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. 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 “may,” “will,” “will likely result,” “project,” “continue,” “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to many uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based.

Any one or more of these uncertainties, risks, and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. Except as required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. 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.

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. was incorporated in Florida on May 31, 1994 (the “Company”) 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 50 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 truevue360™ through its subsidiary, TrueVue360, Inc., (“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 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.

Further, the Company is broadening its offerings in the IT asset management (“ITAM”) space for large data centers. During the quarter ended June 30, 2018, the Company announced its new dcVue software platform which is the basis for expanded offerings into this market area. The dcVue offering is a new software platform that replaces the Company’s On-Site Physical Inventory (OSPI) system that was commercially marketed from 2010 until 2015. OSPI was used by Duos’ ITAM auditing teams until early this year and has now been replaced by dcVue. dcVue is based upon the Company’s OSPI patent which was awarded in 2010. The Company will be making dcVue available for license to our customers later this year as a licensed software product. We intend to further develop our ITAM offerings for large data centers with the objective of offering existing Company technologies for data and video analytics. The Company implemented a new plan to expand and focus its sales efforts through the addition of strategic partners.

Prospects and Outlook

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

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

Notwithstanding the above, no assurance can be provided that our product offerings will generate the market acceptance and orders that we contemplate.

Results of 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, 2019 Compared to Three Months Ended March 31, 2018

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,
	2019			2018

Revenue	$	4,352,081		$	1,147,930
Cost of revenue		2,221,237			671,359
Gross profit		2,130,844			476,571
Operating expenses		2,084,394			1,216,073
Income (Loss) from operations		46,450			(739,502	)
Other income (expense)		(2,281	)		(3,602	)
Net income (loss)		44,169			(743,104	)
Net income (loss) applicable to common stock	$	44,169		$	(743,104	)

Revenues


	For the Three Months Ended
	March 31,
	2019		2018		% Change
Revenues:
Projects	$	3,918,438	$	844,714		364%
Maintenance and technical support		321,474		257,447		25%
IT asset management services		112,169		45,769		145%
Total revenue	$	4,352,081	$	1,147,930		279%

The significant increase in overall revenues is driven by the current strength of the projects portion of our business currently being undertaken. The Company’s stable capital structure enables us to more aggressively pursue large projects requiring the ability to deploy major resources. An additional effect of this is the ongoing investment by the Company in streamlining 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. The significant increase in project revenues was also accompanied by an increase in maintenance and technical support as the result of new maintenance contracts being established as well as renewals of existing contracts and a shift to the next generation of technology systems which are currently being installed. The 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 ITAM division recorded an increase in revenue in the first three months of 2019. The increase in ITAM revenues is due to the ITAM 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 2019.

Cost of Revenues


	For the Three Months Ended
	March 31,
	2019		2018		% Change
Cost of revenues:
Projects	$	2,092,994	$	547,799		282%
Maintenance and technical support		105,324		103,323		2%
IT asset management services		22,919		20,237		13%
Total cost of revenues	$	2,221,237	$	671,359		231%

Cost of revenues on projects increased in line with the large increase in revenues but with the overall growth in Costs in Revenues growing at a slower pace than Revenue. The overall gross margin was positively impacted during the period compared to the equivalent period in 2018 due to tighter cost controls on production of systems and the efficiencies gained through the implementation of projects at the Operations and Engineering Center prior to customer deployment. This positive trend is expected to continue as the Company continues its focus on reducing the costs of delivery and streamlining execution. Cost of Revenues increased slightly on maintenance and technical support but at a slower overall rate than the growth in Revenues as a result of the efficiencies previously described. ITAM costs of revenue were only slightly higher compared to a significant increase in revenue as the result of a larger proportion of the revenue from licensing. This effect is expected to continue through the year but with variances in the individual quarters reflective of the balance of license sales to professional services revenues.

Gross Profit


	For the Three Months Ended
	March 31,
	2019		2018		% Change

Revenues	$	4,352,081	$	1,147,930		279%
Cost of revenues		2,221,237		671,359		231%
Gross profit	$	2,130,844	$	476,571		347%

Gross Profit was $2,130,844 or 49% of revenues compared to $476,571 or 42% of revenues for the three months ended March 31, 2019 and 2018, respectively. The overall increase in gross profit of 347% was mainly the result of the increase in project revenues and the positive effect of revenue increases from new projects with a lower overall growth in associated costs. As previously discussed, the implementation of ASC 606 covering revenue from contracts with customers, had a temporary impact on overall gross margin during previous reporting periods as certain costs were recognized ahead of revenues. During the 2018 period, certain project revenue related to the management of construction requested by two customers were treated as a pass through and have between a 10% and a 25% gross margin. This had a negative overall effect on the typical project gross margin of at least 50% gross margin. Management anticipates the overall gross margins for the business to be close to historical norms for the 2019 period and the current period confirms this trend.

Operating Expenses


	For the Three Months Ended
	March 31,
	2019		2018		% Change
Operating expenses:
Selling and marketing expenses	$	109,616	$	41,221		166%
Salaries, wages and contract labor		1,268,779		765,870		66%
Research and development		112,694		135,280		-17%
Professional fees		127,919		63,865		100%
General and administration		465,386		209,837		122%
Total operating expense	$	2,084,394	$	1,216,073		71%

Operating expenses were higher by 71% for the equivalent period in 2018 reflecting the increase in resources related to the significant increase in revenues for the period. Selling and marketing expenses increased in line with the Company’s investment in resources to grow the business. The 66% increase in salaries, wages and contract labor is higher during the period due to an increase number of employees and additional contract expenses related to an overall significant increase in revenues. Research and development decrease was minimal for the period. Professional fees were higher due to an increase in expenses related to legal fees with certain onetime expenses for the recent warrant execution. Other G&A costs were in line with the additional staff expenses and the growth of the Company. It is anticipated that operating expenses will continue to grow at a slower rate than the revenue increases.

Income (Loss) Before Other Expense

The income from operations for the three months ended March 31, 2019 was $46,450 and the loss from operations for the same period in 2018 was $739,502. The 106% increase in income from operations was mostly due to the overall increase in revenue for the period along with an increase in gross margin and a lower overall rate of increase in operating expenses.

Interest Expense

Interest expense for the three months ended March 31, 2019 and 2018 was $2,621 and $5,728 respectively. The almost 54% decrease in interest expense in 2019 was mostly due to the repayment of a note during the same period in 2018.

Other Income

Other income for the three months ended March 31, 2019 and 2018 was $340 and $2,126, respectively. The decrease in other income is due to a lower balance in the money market banking account for the current three-month period in 2019.

Net Income (Loss)

The net income for the three months ended March 31, 2019 was $44,169 against a net loss for the same period in 2018 of $743,104. The $787,273 positive change in net income is primarily attributable to the increase in project revenue with smaller contributions from both maintenance and technical support, and the ITAM business. Net income (loss) per common share was $0.002 versus $(0.04) for the three months ended March 31, 2019 and 2018, respectively. The net income per common share was $0.001 on a dilutive basis.

Liquidity and Capital Resources

As of March 31, 2019, the Company has a working capital of $1,002,673. We generated a net income of $44,169 for the three months ended March 31, 2019.

Cash Flows

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


	March 31, 2019			March 31, 2018
Net cash used in operating activities	$	(1,500,159	)	$	(1,627,913	)
Net cash used in investing activities		(91,511	)		(124,113	)
Net cash provided/used in financing activities		1,584,784			(122,951	)
Net decrease in cash	$	(6,886	)	$	(1,874,977	)

Net cash used in operating activities for the three months ended March 31, 2019 was $1,500,159 and net cash used during the same period of 2018 was $1,627,913. The decrease in net cash used in operations for the three months ended March 31, 2019 was the result of improved operating results with a number of offsetting changes in assets and liabilities compared to the previous period. Notable changes were a large increase in account receivable and an increase in accrued expenses.

Net cash used in investing activities for the three months ended March 31, 2019 and 2018 were $91,511 and $124,113, respectively representing a decrease in investments in software development and lab equipment during the three months of 2019.

Net cash provided in financing activities for the three months ended March 31, 2019 was $1,584,784 and cash flows used in the same period 2018 was $122,951. Cash flows provided in financing activities during the first three-month period in 2019 were primarily attributable to warrants exercised by four shareholders. Cash flows used by financing activities during 2018 were primarily attributable to repayments of existing notes and short-term credit facilities.

Previously, we have funded our operations primarily through the sale of our equity (or equity linked) and debt securities. During 2019, we have funded our operations through revenues generated and cash received from ongoing project execution and associated maintenance revenues. As of May 10, 2019, we had cash on hand of approximately $2,025,000. 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 such expansion although we are dependent on timely payments by our customers for projects and work in process.

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. In as much as a major portion of our activities is the receipt of revenues from the sales of our products and services, our business operations may be adversely affected by our competitors and prolonged recession periods although these are not considered to be a factor at present.

Liquidity

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

After the 2017 raise, management eliminated all debt other than for normal course of business financing which reduced monthly obligations for interest payments, secured sufficient working capital for ongoing operations. The Company was also successful in closing business and establishing a backlog such that we were breakeven or profitable in two of the last four quarters including the current quarter. Most importantly, the Company has been successful in increasing its working capital cushion with $1,650,000 in warrant executions during the current quarter and has secured another approximately $475,000 in further warrant conversions.

Management now believes that these actions have alleviated the substantial doubt for the Company to continue as a going concern and will continue to grow its business and achieve profitability without the requirement to raise additional capital for existing operations. The Company expects that with the current financial plan, further warrant executions can be expected and in conjunction with this, a number of existing shareholders have requested the opportunity to invest further money to build shareholder equity by a further $3.5 million. Management will continue to evaluate these plans in future filings.

Off Balance Sheet Arrangements

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

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

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 assets acquired and liabilities assumed in business combinations, 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, valuation of stock-based awards and valuation of loss contingencies. 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.

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.

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, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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.

On July 12, 2018 the Company filed an action against one of the Company’s vendors (the “Vendor”). The Vendor supplied a component that was subsequently determined by the Company’s engineering staff to not meet the stated criteria for implementation and did not meet the Vendor’s own stated technical specifications. Attempts to resolve the situation with the Vendor directly were not successful. On January 15, 2019, the Company elected to not pursue the case further due to cost of legal proceedings versus the likely recovery. Both companies have dismissed the claims against each other, and the matter is now closed.

Other than the matter described above, to the best of management knowledge, there is no other action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, 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, 2019.

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

During the three months ended March 31, 2019, the Company issued 3,000,000 restricted shares of common stock upon the exercise of warrants to purchase 3,000,000 shares of common stock for aggregate gross proceeds to the Company of $1,650,000.

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.

There is no other information required to be disclosed under this item which was not previously disclosed.

Item 6. Exhibits.


Exhibit No.		Description

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

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, 2019	By:	/s/ Gianni B. Arcaini
		Gianni B. Arcaini Chairman and Chief Executive Officer

Date: May 15, 2019	By:	/s/ Adrian G. Goldfarb
		Adrian G. Goldfarb Chief Financial Officer