Business Context and Reporting Period
Company: Duos Technologies Group, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: December 20, 2016
Event: Entry into a Material Definitive Agreement involving a Securities Purchase Agreement, Promissory Note, and Warrant with JMJ Financial.
Key Financial Metrics and Transaction Terms
- Debt Instrument: Promissory Note with an aggregate principal amount of up to $2,500,000.
- Initial Funding: $575,000 received on December 21, 2016 (Initial Advance).
- Original Issue Discount (OID): 5% (Note purchased for consideration of up to $2,350,000).
- Additional Funding: Up to $925,000 in tranches contingent on milestones; up to $1,000,000 in further advances by mutual agreement.
- Equity Compensation (Origination Shares): Issuance of shares equal to 30% of the principal sum of the Note, payable on the 5th trading day after the pricing of a Public Offering (no later than May 30, 2017).
- Warrant Terms: Warrant to purchase 4,035,086 shares of Common Stock. Exercise price is the lesser of 80% of the Public Offering price, $0.15 per share, or specific market-based pricing formulas.
- Maturity Date: Earlier of May 15, 2017, or the third business day after the closing of the Public Offering.
Material Changes and Obligations
The filing reports the creation of a direct financial obligation. The Company has entered a financing arrangement that includes:
- Conversion Rights: If the Company fails to repay the Note or issues a Variable Security prior to the Public Offering closing, JMJ Financial has the right to convert the Note into Common Stock.
- Default Provisions: Upon an event of default, all amounts become immediately due, and JMJ Financial may convert the outstanding principal and fees into Common Stock.
- Additional Warrants: For any Additional or Further Advances, the Company must issue additional warrants with an aggregate exercise amount equal to 100% of the principal sum of that advance.
Guidance, Risks, and Unusual Items
- Public Offering Dependency: Key terms, including the maturity date, exercise price of warrants, and issuance of Origination Shares, are contingent upon the pricing and closing of a contemplated Public Offering.
- Dilution Risk: The transaction involves significant potential dilution through the issuance of Origination Shares (30% of principal) and warrants covering over 4 million shares at a discounted exercise price.
- Liquidity Contingency: Future funding tranches ($925,000) are not guaranteed and depend on the achievement of specific milestones defined in the Note.
- Regulatory Status: The securities were issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933 and are not registered.
Investor Verification Checklist
- Verify the specific milestones required to trigger the $925,000 in Additional Advances.
- Confirm the status and expected timeline of the "Public Offering" referenced in the agreement.
- Review the full text of the Promissory Note (Exhibit 10.2) for detailed default definitions and conversion mechanics.
- Assess the potential dilution impact of the 30% Origination Shares and the 4,035,086 warrant shares on existing shareholders.
- Check for any subsequent filings regarding the closing of the Public Offering or the issuance of further advances.