Duos Technologies Group, Inc.

Good afternoon. Welcome to Duos Technologies' fourth quarter and full year 2021 earnings conference call. Joining us for today's call are Duos CEO Chuck Ferry and CFO Adrian Goldfarb. Following the 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 fourth quarter and full year 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 10K filing with the SEC to better understand some of the details we'll be discussing during our call. Now let's get started. The fourth quarter marked a strong finish to an eventful year. Looking at our financial results, Q4's revenue accounted for 45% of our total output for the year. This metric underlies what was a tale of two halves for the business, filled with both challenges and opportunities in a year where we were turning the business around. Based on my previous experience turning around both military and civilian organizations, it can sometimes feel like it's going too slow. But if you stick to it, you will make progress. Here at Duos, we are starting to make meaningful progress. But first, let me discuss the challenges that we pushed through in 2021. Let's start off with the task of turning the business around while simultaneously dealing with the effects of COVID-19, rising inflation, and a problematic supply chain, which in turn caused delays and orders in the first half of 2021. But Duo stuck to it and continued to execute on our turnaround plan. We have made significant technical and operational improvements. We have upgraded our staff. and are now benefiting from the new team's talent, determination, and teamwork. We have deployed improved technical modifications into the field and delivered improved artificial intelligence, which is directly responsible for several new orders as we ended 2021 and started 2022, which includes orders with our existing Class 1 customers, along with Toronto Transit Authority and Amtrak. This, along with a successful capital raise this past February, puts us in a much improved position with strong order book, and with the capital that we need. As we look to the year ahead, I'm more confident than ever that the markets we address want our solution. We have a team that can deliver on it, and we're in a good financial position. I'm not saying everything to turn this business around is done. There is still a ton of work to be done, and there are risks, but it is great to be able to discuss the good progress that we have made thus far. We will discuss more details about the business, so before I go any further, I'd like to turn the call over to our CFO, Adrian Goldfarb will walk us through the financial results for the quarter and the full year.

Adrian. Thank you, Chuck, and good afternoon, everyone. My comments today will be broadly focused on our results for the fourth quarter and full year ended December 31, 2021. I want to remind everyone of our income statement presentation changes that we implemented at the beginning of 2021. As we've done for the past few quarters, we will be presenting two components to revenues. 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 also 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 for increased function and capabilities. In addition, our revenue mix will feature growth in our recurring revenue services and software going forward. Now let's turn to the numbers. Total revenue for the fourth quarter was essentially unchanged at 3.72 million compared to 3.78 million in the same period of 2020. This amount represents an aggregate of approximately 3.12 million of technology systems revenue and 592,000 of recurring services and consulting revenue. The company's recurring services and consulting revenue is expected to increase as strategic investments in AI systems and infrastructure expand. Total revenue for the year increased 3% to $8.26 million compared to $8.04 million in the same period in 2020. This amount represents the aggregate of approximately $5.87 million of technology systems revenue and $2.39 million of recurring services and consulting revenue. Performance during both periods was driven by new revenues being recorded after lengthy delays in receiving notices to proceed for anticipated new contracts in 2021, which pushed delivery dates into the second half of this year and into 2022. As an additional note, although the industries in which we operate are showing signs of recovery from the delays incurred because of the COVID-19 pandemic, other macroeconomic effects are anticipated to impact our company, including inflation and the current supply chain issues, which are extending deadlines for shipment of key components used in DUOS technology systems. Because of this, some revenue may be recognized later in 2022 or into 2023. That said, we believe our proactive changes in supply chain management have been successful in enabling us to deliver finished products on time, barring any additional unforeseen global issues that further delay supply or affect customer execution We fully expect to be able to steadily increase active contracts and expand clientele moving forward in the coming year. Before turning to costs and profitability, in future calls I plan to discuss our contract commitments, as this is becoming an increasingly important factor as we move forward. As I've mentioned on previous calls, traditionally there has been a period from the time we are awarded a contract until the moment when that contract can be recognized as revenue. The length of time between contract award and revenue recognition is extending beyond what has been the norm due to the fact that our installations are becoming generally larger and more complex and further impacted by ongoing supply chain issues, which is a familiar theme for most technology companies. We are also observing the increasing impact of inflation on components and contracted services on our cost structure, which we are taking steps to mitigate but which may still have an impact going forward. I'm pleased to announce that we have started the year with the largest set of contract commitments in the company's history, which currently stands at approximately $19 million, much of which we expect to book this year. We will endeavor to keep you informed of our progress on contract awards as an additional metric to track our progress towards our growth goals. With that in mind, let's discuss costs for the prior quarter and the full year. Cost of revenues for the fourth quarter increased 9% to $3.1 million compared to $2.83 million in the same period in 2020. Cost of revenues for the year increased 39% to $10.82 million compared to $7.8 million in the same period last year. The increase in cost of revenues for technology systems in Q4 and 2021 was driven by additional work being necessary for some of our existing installations, additional costs related to new deployments of undercarriage technology, supply chain disruptions, and inflation. Cost of revenues also increased on services and consulting at a slightly higher rate than the increase in revenues. This trend is expected to reverse in 2022 and beyond as more of our business comes from recurring revenue. DUOS is focused on expanding support operations in 2022, in line with the expected increase in recurring revenue streams and expected higher gross margins. To date, we have put a lot of investment into the business to be able to support a much higher revenue run rate, both in recurring and new business. The costs of this investment are not yet fully amortized over the existing business, though Q4 showed a preview of the expected increase in gross margins in future periods. Gross margins for the fourth quarter decreased 35 percent to 618,000 compared to 951,000 in the period last year. The decrease in gross margin was driven by a decrease in recorded revenues and an increase in total cost to support those underlying revenues. The main reason for the elevated level of cost is the result of additional development work being necessary on certain elements of our more complex installations, as well as higher costs of materials due to supply chain disruptions and inflation as previously discussed. The resultant additional cost of revenues was partially offset by decreases in G&A expenses. We anticipate an improvement in the overall gross margin for the full year reporting in 2022, with much of the improvement coming in the second half of the year when ongoing contract revenues are recognized. Gross margin for the year decreased to a loss of $2.56 million compared to a profit of $236,000 in the same period last year. The decrease in gross margin was mainly the result of higher costs and certain delays related to supply chain issues. Throughout 2021, the company experienced an increase in costs related to the revamp of our operations to support an anticipated increase in the number of new systems. As previously mentioned, the main reason for the continuously elevated level of cost is the result of additional development work being necessary on certain elements of our more complex installations, as well as higher costs of materials due to supply chain disruptions and ongoing inflationary pressures. The resultant additional cost of revenues, while somewhat offset by decreases in G&A expenses, was not covered by a comparable increase in revenues as of the third quarter of 2021. However, these costs were offset by positive gross margins in the fourth quarter. Turning to our costs, operating expenses for the fourth quarter decreased 33% to $858,000 compared to $1.36 million in the same period last year. The decrease in operating expenses was driven by a 37% decrease in administration expenses and a 26% decrease in sales and marketing costs, partially offset by a modest increase in research and development costs. Operating expenses for the year decreased 29% to $4.9 million, compared to $6.87 million in the same period last year. The decrease in operating expenses was the result of a 44 percent decrease in overall administration costs, offset by a 72 percent increase in sales and marketing. The decrease was also partially due to the recording of a separation agreement in 2020, combined with other reductions in costs in the 2021 period as part of the restructuring of the business, along with the transition to the new CEO. Net loss for the fourth quarter totaled $250,000 compared to net loss of $426,000 in the same period last year. The improvement in net loss was primarily attributable to the decrease in operating expenses previously noted, partially offset by the aforementioned increase in total cost of revenues. Net loss for the year 2021 totaled $6.01 million compared to a net loss of $6.75 million in the same period last year. Improvement in net loss is primarily attributable to the effect of the Paycheck Protection Plan loan forgiveness, which was offset by increases in project expenses as previously described. Let's now discuss the balance sheet. We ended the year with approximately $894,000 in cash and cash equivalents compared to $3.97 million on December 31, 2020. Subsequent to the year end, In February 2022, the company conducted an underwritten public offering of its common stock, resulting in gross proceeds of approximately $5.5 million before expenses. As of March 28, 2022, we had a pro forma cash position of approximately $5.7 million. At the present time, we have 12 months operating cash flow without taking into consideration any anticipated new business. We believe our capital position will allow us to weather unexpected delays without significant operational impact and will enable us to pursue large projects that require major resource deployment. We increased our working capital surplus after receiving the previously mentioned gross proceeds of approximately $5.5 million from the successful takedown of the shelf registration S3, which gives us the capital required to finance the fundamental changes that we undertook in the last quarter of 2020 and throughout 2021. Management continues to seek to eliminate certain costs that do not contribute to short-term revenue while focusing investments on products and services that we expect to bear fruit longer term. We are also prioritizing our management and staff to focus on having the skill sets necessary to deliver the work in our expanded order book. During 2021, management reorganized our engineering and technical teams and selectively improved organizational efficiency to grow the business as the expected order flow increases in 2022. Going forward, we expect macroeconomic effects to continue to impact us, particularly current supply chain issues, which are extending deadlines for the shipment of key components used in our technology systems. To combat these longer lead times to procure materials effectively, we believe it is critical to begin procuring ahead of formal contract awards. The recent cash injections have relieved the strain on our cash reserves and have given sufficient lead time necessary to implement and service our committed contracts, as well as increased the number of open bids and prospective business opportunities on the horizon. We continue executing the plan to grow our business and achieve profitability, and we do not believe that we will need to raise additional capital for operations for 2022. That said, we may do so to fund selective opportunities that may arise. At this time, I'm pleased to announce that the going concern disclosure that was made in the third quarter's 10Q filing has been resolved, and the company has sufficient cash to sustain at least 12 months of operations into the second quarter of 2023. I'd now like to provide an update on our financial projections before turning the call back over to Chuck. During the fourth quarter of 2021, we were successful in closing several high value contracts and are entering 2022 with a strong commitment of new contracts, currently representing approximately $6.5 to $18 million in revenue to be recognized in calendar 2022. Based on these contracts in backlog and near term pending orders that are already performing or scheduled to be executed through the course of 2022, we are reiterating our previously stated revenue expectations for fiscal year ending December 31, 2022. We expect total revenue to range between $16.5 million and $18 million, representing an increase of 99% to 117% from 2021. We expect this improvement in operating results to be reflected over the course of the full year. As a result of timing and other factors, we also expect revenues in the first quarter to sequentially decrease from the fourth quarter of 2021 before improving in later periods. That concludes my financial commentary. I'll now pass the call over to Chuck.