Duos Technologies Group, Inc.

Good afternoon. Welcome to DUOS Technologies' third quarter 2021 earnings conference call. Joining us for today's call are DUOS CEO Chuck Ferry and CEO of OVG Green Goldfarb. Following their remarks, we will open the call for your questions. Then before we conclude today's call, I will 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 thanks for joining us. Earlier today, we issued a press release announcing our financial results for the third 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 listeners to view that release, as well as our forthcoming 10-Q filing with the SEC, to better understand some of the details we'll be discussing during our call. Now, let's get started. From a high level in the third quarter, we delivered improved results compared to recent quarters and the prior year. As a headline, revenue increased 36% year over year, which was largely the result of winning anticipated business that had been previously delayed. More specifically, we received long awaited official notice to proceed on making upgrades to two current rail inspection portals already deployed with an existing class one rail customer. This quarter's modest return to growth was an encouraging step in the right direction while we position ourselves to meet an increasing pipeline of large contract opportunities in the coming months. While the macroeconomic climate continues to present challenges, including increasing pricing pressure and extended lead times for certain parts, we are taking steps to mitigate some of these issues, such as obtaining long lead items in advance of formal notices to proceed in order to reduce the overall deployment time for technology systems. Internally, we've made improvements to processes across all work functions, further strengthened our current solutions, and invested in our technology capabilities, all of which have our company in its strongest position ever operationally. As of today, we remain confident in our ability to meet our near-term financial targets. I can firmly state that I've never been more optimistic about this company, our team, and our future. Longer term, we believe the initial progress we're seeing today supports the work we've done thus far, and underlies a greater opportunity ahead. Now, before I provide further updates, I'd like to turn the call over to our CFO, Adrian Goldfarb, who will walk us through the financial results for the quarter and the first nine months of the year. Adrian.

Thank you, Chuck. My comments today will be broadly focused on our results for the third quarter and nine months ended September 30th, 2021. I want to remind everyone of our income statement presentation changes that we implemented at the beginning of the year. As we did in the prior quarter, we will be presenting two components to revenue, technology systems, which records revenue from turnkey engineered systems, such as our rail car inspection portal, as well as AI software revenue, and services and consulting, which primarily records recurring revenues from maintenance and support business, plus any consulting services that are undertaken. Further, we now record all costs of delivering those revenues including all the staffing related to those operations in production mode plus associated overhead. As previously discussed, we have been upgrading and expanding our overall technology capabilities with a particular focus on AI as a key component of our overall product portfolio. Our average revenue per installation is now higher as a result of meeting the demand from our customers or increased functioning capabilities. In addition, our revenue mix will feature growth in our recurring revenue services and software going forward. Now turning to the numbers. Total revenue for the third quarter increased 36% to $1.74 million compared to $1.28 million in the equivalent quarter in 2020. This was the aggregate of about $1.15 million for technology systems $587,000 in recurring services and consulting revenue. The increase in total revenue was the result of progress in new installations in the technology systems portion of the business, following the receipt of an anticipated notice to proceed on a significant upgrade to two key installations. Some of that revenue was recognized during the quarter, resulting in a 58% increase in technology systems revenue in comparison to the equivalent quarter a year ago. In Q3, our services and consulting revenue increased by 6%, reflecting a steady growth trend that is expected to continue as we add new customers, install additional systems, and layer on enhancements to our existing portfolio of products currently in the field. Total revenue for the nine months ended September 30, 2021, increased 7% to $4.54 million from $4.26 million in the same period last year. This was the aggregate of about 2.74 million for technology systems and 1.8 million in recurring services revenue. The increase in total revenue was also driven by additional revenue recognition from recent notices to proceed. For the first nine months of 2021, our services and consulting revenue increased by 27%. There was a slight decrease in revenue from technology systems which was more than offset by the increase in services and consulting revenue. Due to the pandemic and other macroeconomic effects, such as current supply chain disruptions, which continue to extend deadlines for shipment of key components used in the company's technology systems, there are uncertainties that can impact our operations. As a result, certain installations may produce revenue towards the end of the year, some of which may ultimately be recorded in 2022. Cost of revenues for the third quarter increased 83% to $2.8 million compared to $1.53 million in the same period last year. Cost of revenues on technology systems increased during the period compared to the equivalent period in 2020 by a greater amount than the increase in revenues. The increase is primarily due to the additional work required to address previously identified quality issues, most of which are now resolved. as well as an increase in cost related to the deployment of an undercarriage technology. We expect cost to be lower going forward as a percentage of the overall system price. Cost of revenues decrease for services and consulting, which comprises equipment, labor, and overhead necessary to support the implementation of new systems and support and maintenance of existing systems. The decrease was due to lower costs in servicing clients as well as the elimination of certain costs related to the IT asset management business that were recorded in the equivalent period. Cost of revenues for the nine months ended September 30, 2021, increased 55% to $7.72 million from $4.97 million in the same period last year. The increase was driven by increased cost of deployment related to certain installations where new technologies were being deployed for the first time. Costs for services and consulting increased at a proportionate, although slightly lower, slower rate than the increase in revenues. And this trend is expected to continue as certain economies of scale become evident late in the year and continue into 2022. Overhead more than doubled for the period, reflecting higher costs for staffing, current and anticipated projects, although this rate of increase is expected to flatten in the fourth quarter of 2021 and beyond. Gross margin for the third quarter totaled a negative 1.06 million compared to negative 247,000 in the same period last year. The decrease in gross margin was driven by higher costs as a result of the shift in expenses from R&D to the cost of technologies deployed. These higher costs are anticipated to be offset in the fourth quarter and beyond by higher revenues with the net result being a move to a positive gross margin as the business expands. We anticipate an improvement in the overall gross margin for the full year reporting in 2021, with much of the expected improvement coming in the fourth quarter. For the nine months ended September 30th, 2021, decreased to 3.18 million from 715,000 in the same period last year. Decreasing gross margin with the result of lower technology systems revenues during the first nine months of 2021 due to delays in contract award and supply chain issues. In addition, there were costs involving the revamping of our operations to support an anticipated increase in the number of new systems going forward. Turning to our costs, operating expenses for the third quarter decreased 44% to $1.3 million from $2.46 million in the same period last year. Decrease in operating expenses was primarily driven by a substantial decrease in overall administration costs, offset by increases in sales and marketing, as well as research and development. Operating expenses for the nine months ended September 30, 2021, decreased 27% to $4.04 million from $5.51 million in the same period last year. The decrease in operating expenses can be attributed to decreases in administration costs offset by an increase in sales and marketing and research and development. We recorded a net loss in Q3 of 2.45 million, or 68 cents per share, compared to a net loss of 2.71 million, or 77 cents lost per share, in the equivalent quarter in 2020. Decrease in net loss was primarily attributable to the increase in revenue noted previously. Net loss for the nine months ended September 30, 2021, totaled negative $5.81 million, or $1.63 loss per share, compared to a net loss of $6.32 million, or $1.95 loss per share, in the same period a year ago. The improvement in net loss was primarily attributable to the impact of the CARES Act PPP loan forgiveness and the effect of lower operating expenses during the 2021 nine-month period compared to the prior year. Let's now discuss the balance sheet. We ended the quarter with approximately $2.26 million in cash and cash equivalents compared with $3.97 million on December 31, 2020. At the present time, we have six months of operating cash flow, assuming we do not record any anticipated new business. To date, our stable capital structure has allowed us to weather the unexpected delays in anticipated start dates without significant operational impacts. However, going forward, we expect macroeconomic effects to impact us, particularly current supply chain issues, which, as previously noted, are extending deadlines for shipment of key components used in our technology systems. In order to respond to the much longer lead times to procure materials effectively, We believe it is critical to begin procuring ahead of formal contract awards. Accordingly, we anticipate additional demands on our working capital due to market conditions. We are confident that this decision reflects the current reality and sets us up for continued strong execution in the long run. Over the next 12-month period, as new opportunities previously identified are closed and accepted by our customers, we expect that working capital will increase. Additionally, we have a current S3 registration statement giving us the ability to raise capital in tranches of between $3 million and $5 million if necessary. Although there is no current expectation that this will be required for working capital with our current book of business, should we receive official contract awards for several of the larger contracts in our pipeline, we may need to raise additional funds to service those contracts. I'd now like to provide an update on our financial projections before turning the call back over to Chuck. For the fiscal year ended December 31, 2021, we are reconfirming our latest projections and expect total revenue of approximately $8 million to $9 million. Our guidance is based on contract and backlog and near-term pending orders that are already performing or were scheduled to be executed by the fourth quarter of 2021. We also expect our operations to achieve close to break even for the last quarter of 2021 with an improved cash liquidity position by year end based on anticipated orders. Although uncertainties continue in the macroeconomic climate, we do maintain that 2022 will yield a much stronger financial performance for revenue and we are anticipating profitability for the next fiscal year. That concludes my financial commentary. I'll now pass the call back over to Chuck.