Duos Technologies Group, Inc.

Good afternoon. Welcome to Duos Technologies' fourth quarter and full year 2022 earnings conference call. Joining us for today's call are Duos CEO, Chuck Ferry, and CFO, Andrew Murphy. Following their remarks, we'll 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. We always appreciate attendance by many of our long-term and current shareholders, and we can also see that we're joined today by a number of new shareholders. Welcome. Earlier today, we issued a press release announcing our financial results for the fourth quarter and full year, 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 10K filing with the SEC to better understand some of the details we'll be discussing during our call. Before I begin with my opening remarks, I would like to address some recent events that are likely to have an impact in our primary rail market and bring much more focus from stakeholders, including customers, unions, regulators, and the rail industry on what DUOS can offer. Due to the recent unfortunate derailment in East Palestine, Ohio, DUOS has been contacted on many different levels to better understand what our technology does and the many years of investment in our rail car inspection portal and what that can offer. During much of the first quarter, to a greater extent since the derailment, DUOS has been engaged in discussions regarding how our technology might be deployed on a greater scale in the United States to identify and reduce mechanical failures and derailments. More specifically, we have been requested to provide information on our rail car inspection portal capabilities to congressional leaders, regulators, and unions, as well as current and potential customers, as to the benefits of using technologies such as our rail car inspection portal, combined with artificial intelligence and human-in-a-loop feedback processes that can augment currently mandated inspections. Later in the call, I will provide additional details. Before I ask our CFO, Andrew Murphy, to give us a summary of the 2022 results, let me discuss some highlights. The fourth quarter capped a strong finish to a banner year for our company. Despite significant external challenges throughout the entirety of 2022, we were able to produce a record performance. Revenue was up 71% in Q4 and 82% for the full year. which is the highest revenue performance in company history. Additionally, we achieved a 100% renewal rate of recurring revenue contracts in 2022, leading to an approximate 30% increase in support and AI revenues compared to 2021. Operationally in Q4, we successfully deployed two new RIPs for Class 1 customers with at least two additional RIPs expected to come online in 2023. putting us on track to have a total of 15 RIPs installed by the end of the third quarter 2023. Our AI catalog has 35 models that are available for deployment today, and we expect to further grow that catalog to 50 use cases by the end of this year. We have also begun to develop AI applications to include passenger rail use cases. Heading into 2023, our current backlog sits north of $10 million. which eclipses our entire top-line output in 2021. With more than $8 million expected to be recognized this calendar year, we have clear visibility to continue executing against the outsized demand we're seeing. We are also moving full speed ahead with our subscription offering, having identified the initial sites for DUOS-owned portals. Our belief is that this new offering and pricing model will dramatically increase our potential customer base while also expanding the margins and predictability of our revenues over the long term. Our mission remains focused on the long-term growth and profitability of the company. Before turning the call over to Andrew, I'd like to thank our current customers, which represent 50% of the Class 1 operators in North America, not only for their business, but also for their leadership in identifying the value that can be brought to bear on safety and efficiency on the rail network by the deployment of improved wayside detection technologies, which includes our rail car inspection portal. We believe that our solution is particularly effective in augmenting the mechanical car inspectors who work hard every day under all weather conditions to identify, repair, and prevent mechanical failures and derailment conditions. And now I'll turn the call over to Andrew to walk us through the financial results for the quarter and the year. Andrew.

Thank you, Chuck. Before turning to the results, I would like to add my own commentary regarding the tremendous opportunity for Duos. As Chuck has just discussed, the recent events in Ohio have opened up channels of communication with many different stakeholders. From my perspective, as we chart the course for the company financially, we now have many different potential avenues for driving new sources of revenue, including sales of complex systems, which is our traditional business model, the newly announced subscription program for which we plan to make significant investments the next several years, and other opportunities which may include other lines of business. I would also like to comment that we have a focus on driving growth with a target on achieving breakeven and profitability in the next 12 to 14 months. As previously discussed, we've been upgrading and expanding our overall technology capabilities with a particular focus on artificial intelligence as a key component of our overall product portfolio. While supply chain issues have shown some signs of improvement, Time between contract award and full revenue recognition remains longer than was the norm in prior years. We continue to focus on our revenue mix to support accelerating growth in our recurring revenue services and software, while opportunistically growing revenues from project-based work related to the portal installations. We have also diversified our revenue sources, which Chuck will speak to later in the call. On that point, We've previously introduced an additional business line focused on subscription offerings in which DUOS will 100% own and operate our rail car inspection portals at strategic locations within the North American Rail Network. We've begun procurement for equipment and components and have identified locations for the installation of our first DUOS-owned subscription, RIPS. The RIPS will supply the same near real-time machine vision-based data and artificial intelligence-based detections to rail car owners but they will be offered on a subscription model. While installing subscription RIPs may have a depressive effect on revenue in the near term, we believe that over the long term, we'll be able to drive greater lifetime value and higher margins. We also expect revenues to be more normalized in payment cycles rather than experiencing intermittent pops for new contracts, which will make our financial model more predictable. Chuck will share further updates on this initiative shortly. Now let's get into the results for the quarter and for the year. Total revenue for the quarter increased 60% to 5.9 million compared to 3.7 million in the fourth quarter of 2021. We want to point out quickly a typographical error on this percentage that was noted in our press release that just came out. Total revenue for the year increased 82% to just over 15 million compared to 8.2 million for 2021. The increase in revenues was driven by new revenues being recorded after lengthy delays in receiving notices to proceed for anticipated new contracts earlier in the year that pushed delivery dates into the second half of 2022 and into 2023. The increase also resulted from the delivery of two RIP projects across 2022 in addition to the onset of a new high-speed RIP project, which we will continue to recognize well into 2023. Additionally, the growth in services and consulting revenue stems from our success in deploying artificial intelligence as well as change orders to existing service agreements during the year. Cost of revenues for the quarter increased 91% to $3.8 million compared to $1.9 million for Q4 2021. For the year, cost of revenues increased 65% to $10.2 million up from $6.2 million for 2021. The increase in cost stems from additional project work related to delivery of two RIPs, as previously noted. The cost of revenues on technology systems grew at a slower pace than revenues, primarily because we neared completion of those two RIPs and thus recognized additional profits of these projects as it satisfied its project-related obligations. Cost of revenues on services and consulting increased as a result of one-time services completed on existing RIP sites, during which We incurred some additional material costs as well as project management engineering team labor to complete the project. Additionally, we have made significant progress on manufacturing with special purpose high value RIP, which we anticipate completing during 2023. Gross margin for the quarter increased 24% to 2.1 million compared to 1.73 million for Q4 2021. For the year, gross margins increased 133% to $4.7 million compared to $2 million for 2021. The improvement in margin was a direct result in the increased business activity that we recognized in the latter half of 2022 that was related to the manufacturing and near completion of installation of the two new RIPs, a number of one-time service events, and significant progress made on the previously mentioned special purpose high-value RIPs. Operating expenses for the quarter increased 57% to $3.1 million compared to $1.97 million for the year. Operating expenses increased 22% to $11.6 million compared to $9.5 million for 2021. In Q4, there was an increase in sales and marketing related to the increased investment and overall capability of the commercial team. Research and development costs declined during the quarter, which was a result of some of the technical resources from the IT and engineering teams being temporarily consumed as part of the significant increase in project and service revenues that led to the company performing additional projects and one-time service work year over year. Additionally, general and administrative costs increased primarily due to a focus on employee retention and increased headcounts as part of the growth plan. For the year, we had additional costs related to staff retention, via non-cash charges of an employee stock option plan, as well as a discretionary performance program, which was a new initiative for the entire organization designed to drive higher performance and attract and retain better quality resources in a tight labor market. As a result, employee retention in the fourth quarter was 100%. We still face pressure on existing staff compensation as a result of inflation during 2022, but remain focused on managing and stabilizing administrative costs without interruption to customer service. Net operating loss for the quarter totaled $950,000 compared to operating losses of $240,000 for Q4 of 2021. The increase in net loss was driven by increases in cost of revenues as well as operating expenses. Net operating loss for the year totaled $6.87 million compared to a net operating loss of $7.4 million for 2021. We continue to face inflationary and supply chain pressures through 2022 and have worked to balance these impacts through management of customer contracts and other cost control efforts. The decrease in loss from operations was a result of mostly improved revenues stemming from the deployment of new portals, receipt of materials, and manufacturing related to a high value set of portals to be completed during 2023. The net loss for the quarter totaled approximately $950,000 compared to a net loss of $200,000 for Q4 of 2021. For the year, the net loss totaled $6.86 million compared to a net loss of $6.01 million for 2021. The increase in the net loss is primarily attributed to a one-time effect of the PPP loan forgiveness program gained in the first half of 2021. Despite the increased net loss year-over-year, we showed an improvement in the operating loss level in 2022. Now let's discuss the balance sheet. We ended the quarter with approximately $1.1 million in cash and cash equivalents compared to $894,000 at the end of 2021. We had an additional $3.4 million in receivables bolstering our near-term liquidity position to approximately $4.53 million. We also have $1.4 million of inventory consisting primarily of long lead items for two pending RIP installations, as disclosed on our 8K. We have raised $4 million from our larger shareholder to support the build-out of our subscription RIP business. In summary, our cash position remains strong, and while we expect a near-term increase in spend and inventory levels to support commercial efforts, we'll continue to monitor supply chains to reduce financial impact where possible. I'd now like to provide an update on our financial projections before turning the call back to Chuck. Based on committed contracts and near-term pending orders that are already performing or scheduled to be executed through the remainder of 2023, we are reiterating our revenue expectations for fiscal year ending December 31, 2023. We expect total revenue to range between 20 and 21 million, representing an increase of 33 to 40% over 2022. At the end of 2022, the company's contracts and backlog represented approximately 10.7 million in revenue, of which approximately 8.4 million is expected to be recognized in calendar year 2023. The balance of the contract backlog is comprised of multi-year services and software agreements, as well as project revenue spanning into fiscal year 2024. We expect our improvement in operating results to be reflected over the course of the full year 2023. As a result of typical business seasonality, as well as timing and other factors, we expect revenue in the first quarter of 2023 to decline compared to the fourth quarter of 2022, before subsequently increasing throughout the remainder of the year. We are still working to manage through the ever-changing list of supply chain and shipping challenges, including product shortages and unreliable lead times, which may impact the timing of revenue recognition, but not the revenue backlog in totality. That concludes my financial commentary. I'll now pass the call back over to Chuck.