NOTE 5 – NOTE PAYABLE, CONVERTIBLE OID – Related Party and/or Shareholder

In June 2012, a related party who is an affiliate of the CFO, made a non interest bearing short-term loan to the Company in the amount of $60,000. On August 15, 2012, this loan was exchanged for a one year original issue discount convertible note with detachable warrants. The face value of the note is $66,000. The $6,000 original issue discount was expensed as interest over the term of the note which matured in August 2013. The convertible note payable is convertible into 19,800 shares of the Company’s Common Stock at a conversion rate of $3.34 per share. The Company valued the beneficial conversion feature attached to the note using the intrinsic value method at a relative fair value of $28,571. The five-year warrants to purchase 19,800 shares of the Company’s common stock at an exercise price of $6.60 were valued at a relative fair value of $31,429 based on using the Black-Scholes pricing model assuming a dividend yield of 0%, an expected volatility of 462.61%, and a risk free interest rate of .102%. The beneficial conversion feature and the relative fair value of the warrants were recorded as an increase to additional paid in capital and a discount to the note to be amortized to interest expense over the term of the note. The Company was technically in default though no written notice has been received from the related party.  On February 18, 2015, the related party agreed to $92,933 as settlement of the outstanding note including accrued interest and penalties where they accepted an offer to convert $73,825 of that amount into 87,125 shares of Common Stock with the balance of the note reduced to $19,108. The Company recorded a loss on conversion of $30,725 based on the $1.20 per share exercise price at the date of conversion. The convertible note holder also agreed to exchange 19,800 warrants to purchase Common Stock for 8,929 fully paid and non-assessable shares of Common Stock. No modification expense was recorded as the warrant values exceeded the value of shares received. This exchange was executed pursuant to a closing condition of the Duos Technologies reverse merger whereby all warrants and options would be converted prior to closing. The net carrying value of the note at March 31, 2015 and December 31, 2014 was $19,108 and $66,000 respectively.

On March 16, 2015, the Company entered into a convertible note with a shareholder and service provider in the amount of $50,000 with interest accruing at the rate of 12% per annum not compounded. The note is convertible into the Company’s stock at a 50% discount of the average closing bid prices for the 5 days immediately prior to the conversion date. The net carrying value of the note at March 31, 2015 and December 31, 2014 was $50,000 and $0 respectively. The Company recorded a premium of $50,000 as the note is considered stock settled debt which was charged to interest expense during the three months ended March 31, 2015.