Duos Technologies Group, Inc.

Good afternoon. Welcome to Duos Technologies' third quarter 2020 earnings conference call. Joining us for today's call are Duos CEO Chuck Ferry and CFO Adrian Goldfarb. Following their remarks, we will open the call for your questions. Then, before we conclude today's call, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call. Now, I would like to turn the call over to Duos CEO Chuck Ferry. Sir, please proceed.

Welcome everyone and thank you for joining us. Earlier today we issued a press release announcing our financial results for the third quarter of 2020, as well as other operational highlights. A copy of the press release is available in the investor relations section of our website. As many of you are aware, this is my first earnings call as a new CEO for Duos Technologies. In recognition of that fact, I'd like to take this time to introduce myself. Prior to joining Duos, I was a CEO of APR Energy. which is a global fast-track power company. During my time at APR, I managed $325 million annual P&L and oversaw roughly 800 employees and installed and operated 17 globally dispersed power plants. Prior to that, I was the general manager for Arma Global Corporation, a defense contracting company that delivers IT engineering services and logistics solutions in the U.S. Special Operations Command and other government agencies. While at ORMA, the company grew from $20 million in annual revenue to $200 million, and from 80 employees to approximately 1,000, leading to an acquisition by General Dynamics. I also previously spent several years as a business developer and operations manager at Lockheed Martin, as well as an individual consultant. Before my time in the private sector, I spent 26 years in the U.S. Army, serving in infantry, ranger, and special operations units as an enlisted man, NCO and officer that included 48 months of combat service in Somalia, Afghanistan, and Iraq. In my previous military and civilian leadership roles, I've been involved in developing requirements, delivering, and deploying cutting-edge technologies. I joined DUOS because I believe that the solutions DUOS offers are world-class, and I've been very impressed by the talent and the ability of the DUOS team, where I believe I can provide the most value to our organization is my experience in generating teamwork and turning strategies into actions and results. My past assignments leading complex infantry and special operations units, coupled with the experience of leading businesses in both the growth and turnaround phases, has prepared me well. I understand what needs to be done to make Duos a profitable and sustainable business. I want to thank the employees of Duos who have welcomed me, and I can say that I've really enjoyed the first few months on the team. Thank you to our board of directors for their confidence in appointing me and for their continued support. And thank you to our investors and our shareholders. I look forward to hearing from all of you in the coming months. Since joining the company on September 1st, the management team and I, with support from our board, have been working to formulate and begin the execution of a strategy aimed at positioning DUOS for profitable growth and expansion in the years ahead. As of today's call, we have completed an assessment of the company's current position in terms of commercial, operations, finance, and personnel, and then outlined a strategy and operating plan designed to accomplish two main goals. First, deliver operational and technical excellence to our customers. Second, prioritize our product offerings and focus on a more profitable and sustainable go-to-market strategy that will improve margins and increase recurring revenue. In a few moments, I'll provide more details on this assessment and go-forward strategy However, before I do, I want to turn the call over to our CFO, Adrian Goldfarb, who will walk us through the financial results for the quarter. Adrian.

Thank you, Chuck. Before discussing the numbers in detail, I would like to make a few introductory comments. From a purely financial standpoint, this past quarter has been extremely challenging. After a successful uplisting to NASDAQ earlier in the year, we were almost immediately hit with the effects of the ongoing pandemic. This changed many of our original assumptions for the business operations for 2020. Fortunately, an assessment of the situation leads us to believe that although we were likely to suffer delays in receiving orders and implementation schedules, we would likely be able to resume later this year. In addition, the pause gave us time to examine and consider certain aspects of the business that could be significantly improved. And I'm pleased to report that the management team has and will continue to focus on areas to strengthen overall operations and result in improvement in financial results that can be expected. Chuck will discuss much of this later in the call. Now turning to our financial results for the third quarter. Total revenue for the third quarter decreased 42% to $1.28 million compared to $2.2 million in the equivalent quarter in 2019. The decrease in total revenue for the quarter was due to a decline in technology systems revenue as a result of an earlier delay in receiving an order for a large project. This was initially planned for execution during the third quarter of 2020, but will now be substantially completed in the fourth quarter. Total revenue for the nine months ended September 30, 2020, decreased 46% to $4.26 million. from 7.9 million in the same period last year. The decrease in total revenue was driven by slower than anticipated contract awards by one customer pending resolutions of certain terms and conditions, which has now been resolved. The current pandemic environment has also impacted expected receipt of awards and caused delays in execution due to travel and other restrictions. Gross profit in Q3 was 295,000 or 23% of total revenue, which was a decrease of 71% from 1.03 million or 47% of total revenue for the equivalent quarter in 2019. The decrease in gross profit was due to the higher overall cost of sales relative to revenue recorded during the quarter largely due to implementation delays as noted previously. Gross profit for the nine months ended September 30th, 2020, decreased 66% to 1.14 million or 27% of total revenue from 3.33 million or 42% of total revenue in the same period last year. The decrease in gross profit was mainly the result of the fixed costs related to maintaining a minimum staff to begin execution once orders were received, not being offset by sufficient revenues as had been anticipated earlier in the year. Turning to our costs, operating expenses increased 39% in Q3 2020 to $3 million, from $2.16 million in the same quarterly period last year. The increase in operating expenses was primarily due to an increase in administration expenses, which was offset by a decrease in sales and marketing, engineering, research and development, and AI technologies expenses. The increase in administration expenses was related to a one-time charge for severance payment due to the retirement of the company's former CEO and chairman. Operating expenses for the nine months ended September 30, 2020, increased 16 percent to $7.36 million from $6.37 million in the same period last year. The increase in operating expenses was primarily due to an increase in administration expenses and AI technologies expenses. which were offset by decreases in sales and marketing, engineering, and research and development. The increase in administration expenses was related to a one-time charge for severance payment due to the retirement of the company's former CEO and chairman, as noted previously. AI technologies costs were higher as a result of additional growth in this area and an increase in resources allocated from the R&D department. With development work for the company's AI platform completed, Costs in this area are expected to normalize going forward. We recorded a net loss in Q3 of $2.71 million, or $0.77 loss per share, compared to a net loss of $1.14 million, or $0.63 loss per share in the equivalent quarter in 2019. The increase in net loss was attributable to the increase in administration expenses, as noted previously. Net loss for the nine months ended September 30, 2020, totaled $6.32 million or $1.95 loss per share, $1.95, compared to a net loss of $3.05 million or $1.78 loss per share in the same period a year ago. The greater net loss was primarily attributable to an overall decrease in revenue for the period, as well as an increase in expenses, as noted previously. Now let's discuss the balance sheets. We ended the quarter with $4.12 million in cash and cash equivalents, and we also had net receivables of $1.34 million. For the nine-month period, we used $4.22 million of cash in operations compared to $3.62 million in the same period a year ago. The increase in net cash used in operations for the nine months ended September 30, 2020, with the result of higher expenditures related to current and future projects execution in anticipation of new projects. Finally, I'd like to provide an update on our financial projections. We had previously suspended guidance due to the uncertain impact of the coronavirus on our operations and our customers. At this time, management has been able to quantify the impact to our financials, and we are resuming giving short-term guidance at this time. For the fiscal year ending December 31, 2020, We expect total revenue to range between $7.5 and $8 million. As a reminder, our guidance calculation is based on contract and backlog and near-term pending orders that are already performing or scheduled to be executed during the fourth quarter of 2020. As many of you listening are aware, our quarterly results are subject to a degree of volatility and timing impact, making performance difficult to project in the short term. Going forward, it is our intention to provide more of an incremental outlook on our operations to the extent that we are able. The company's business is in the early stages of a recovery, and management has undertaken significant internal restructuring efforts beginning in Q4 to build revenues for both new systems and recurring revenue services. Management also expects that the current cash position will remain largely unchanged through the end of first quarter 2021. Although uncertainties continue in the macroeconomic climate, management believes that 2021 will yield a much stronger financial performance for revenue and profitability. The company plans to release guidance for 2021 in early January. I will now turn the call back over to Chuck to provide a further update on the business. Chuck.