Duos Technologies Group, Inc.

Welcome to Duos Technologies' first quarter 2021 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 first quarter of 2021, as well as other operational highlights. A copy of the press release is available in the investor relations section of our website. I encourage all of our listeners to view that release, as well as our forthcoming 10Q filing with the SEC to better understand some of the details we'll be discussing during our call. Now let's get started. After a strong finish to the year, we continued our operating momentum into the first quarter of 2021. While it has only been a month and a half since our last update call, we have continued to make encouraging progress in that time and are on track to meet the goals established in our 2021 operating plan. Operationally, we continue to actively upgrade our products, revamp testing protocols, enhance internal communications, onboard quality personnel, and improve internal financial reporting and forecasting results. Our goal is to integrate these efficient processes as a core competency of our operations. To that end, earlier in the year we implemented a rapid deployment initiative to be able to respond to market-driven demand more quickly. This effort has shortened the delivery times on major projects, including our recently announced Oblique View, where we've already implemented our solution at a Class 1 railroad with plans for additional installations in the coming months. Financially, these efforts translated into a 117% increase in revenues, which was mostly driven by new deployments, but also benefited from an incremental increase within our services segment, the latter of which we are working to build over time into a more predictable, higher margin base. Going forward, we will invest further in people, process, and tool sets to ensure we can deliver a higher number of systems in a shorter timeframe and on budget. I look forward to providing more specific details in just a moment, but before I do, I'd like 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 I start, let me apologize in advance for my somewhat scratchy voice today. My comments today will be broadly focused on some presentation changes in our income statement. These changes capture the significant strategic and operational changes that the company is undergoing, both now and going forward, to support a production-focused business rather than one that is engaged in prototypes and research and development. Going forward, we will be presenting two components to revenue. Technology systems, which records revenue from turnkey engineered systems, such as our rail car inspection portal and AI, in addition to services and consulting, which primarily records recurring revenues from maintenance and support, plus any consulting services that are undertaken. This will allow for easier analysis of the amount of recurring revenues against one-time system deployments. Further, in concert with the changes outlined previously, we now record any and all costs of delivering those revenues, including all of the staffing related to supporting those operations in production mode, plus associated overhead. I will make further comments on the short-term impact of these changes later in the call. I'd like to reiterate that I'm very comfortable with our financial position at this time. DUAS has a strong balance sheet with no debt and sufficient working capital and reserves to support the ongoing changes in the business and for the expected growth in the revenues anticipated for this year and into 2022. Turning to the numbers. Total revenue for the first quarter increased 117% to $2.15 million compared to $991,000 in the equivalent quarter in 2020. This was the aggregate of about $1.49 million for technology systems and $664,000 in mostly recurring services revenue. The increase in total revenue was driven by the projects portion of our business and reflects the results of our ongoing investment in streamlining project build, delivery, and quality control processes. The increase in project revenues was also accompanied by an increase in services revenue as a 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. Cost of revenues using the reclassification of certain costs described in my opening remarks increased 66% to $2.73 million compared to $1.65 million in the same quarterly period last year. For clarity, cost of revenues on technology systems increased during the period compared to the equivalent period in 2020 as the result of the strategic review that senior management undertook in the final months of 2020. The company's organization and related cost structure has been realigned to give the capability to manufacture, install, and support multiple production systems simultaneously. Prior to this realignment, the company's organization was focused primarily on research and development and deployment of prototype systems with implementation resources being allocated as necessary. In conjunction with this change, increased costs are now being recognized against project and support revenues with a similar reduction in costs previously recognized for research and development engineering development, and internal support. Part of the increase in costs was related to certain additional expense related to the deployment of initial systems. Some of these changes are expected to be unique to the initial systems and therefore one time in nature. It is anticipated that they will have a temporary impact on the gross margin, which will be offset by increases in revenue and lower deployment costs later in the year. Gross margin in Q1 was a negative $576,000, albeit this was an improvement compared to a negative $635,000 for the equivalent quarter in 2020 when compared on a like-for-like basis. The improved gross margin was mostly driven by an increase in recorded revenues, which was offset by an increase in deployment costs, as previously discussed. As I mentioned, we revamped our operations to support an increase an increase in the number of new systems being deployed going forward. The resultant additional cost of revenues, while somewhat offset by decreases in SG&A expenses, is not yet covered by a comparable increase in revenues as of this report. We anticipate an improvement in the overall gross margin for the full year 2021, with much of those improvements coming in the second half of the year. Turning to our costs, operating expenses decreased 13%, in Q1 2021 to $1.25 million from $1.43 million in the same quarterly period last year. The decrease in operating expense was driven by a substantial decrease in overall administration costs and was slightly offset by an increase in sales and marketing and R&D expenses. We recorded a net loss in Q1 of $406,000, or $0.11 per share, compared to a net loss of $2.15 million or 80 cents per share in the equivalent quarter in 2020. The decrease in net loss was primarily attributable to the increase in total revenue, as well as an increase in other income during the period related to the forgiveness of our CARES Act PPP loan. Now let's discuss the balance sheet. We ended the quarter with approximately $7 million in cash and cash equivalents, and we also had net receivables of $1.39 million. As noted previously, toward the end of Q1, we entered into a securities purchase agreement with two of our larger existing shareholders who agreed to purchase a total of 4,500 units of a newly authorized Series C convertible preferred stock. Doers received net proceeds of $4.5 million from this transaction. During the quarter, we were also approved for forgiveness on our $1.4 million PPP loan. More recently, with the increase in the company's stock price, we've recorded an increase in warrant exercises. These will be recognized in our second quarter financial reporting and have been exercised on a cashless basis, which has a positive effect on our fully diluted share count. All these actions together have improved our balance sheet significantly and have prepared us for the expected growth in revenues this year and beyond. We remain in a solid liquidity position with an ample amount of capital for our current growth plans. I'd now like to provide an update on our financial projections before turning the call back over to Chuck. For the fiscal year ending December 31, 2021, we are reiterating our previously issued guidance. We expect total revenue to be approximately $18 million. As a reminder, our guidance is based on contracts and backlog and expected near-term pending orders that are already performing or scheduled to be executed by the fourth quarter of 2021. Although the impacts are lessening over time, we continue to experience some friction in finalizing contracts as well as execution challenges where national boulders are involved. However, assuming we are able to achieve our top-line guidance, we also expect our operations to attain profitability in the second half of the year with an improved cash liquidity position by year-end. Even if uncertainties continue in the macroeconomic climate, we believe that 2021 will yield a much stronger financial performance for revenue and profitability. That concludes my financial commentary. I'll now pass the call back over to Chuck.