Duos Technologies Group, Inc.

Good afternoon. Welcome to Duos Technologies' first quarter 2023 earnings conference call. Joining us for today's call are Duos CEO Chuck Ferry and CFO Andrew Murphy. 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 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 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. We began the year building on the significant momentum we've generated over the past several quarters. which is on track to deliver on our financial and operational goals for 2023. In the first quarter, we increased revenues 84% to $2.64 million and gross margin 142% to $537,000. Additionally, over the last 12 months, we've generated approximately $16.2 million in revenues, underscoring our ability to deliver long-term performance over a sustained period and outside of quarterly fluctuations. Growth during that time has come from a diversified pool of new customer contracts, add-on sales to existing agreements, and an increasing stream of recurring revenues as we expand our customer base as well as the breadth of our artificial intelligence offerings. By the end of this year, we expect to have more than 50 commercialized artificial intelligence use cases covering a wide range of rail car inspection points, including several derailment-specific indicators along with newly developed AI specific to passenger rail cars. We have also remained in active discussions with many congressional leaders, regulators, rail operators, and other major stakeholders in providing support and technical information for the Rail Safety Act, which is continuing to make its way through Congress. Current versions of the bill include our technology as one of several types of wayside detection systems. While our operational roadmap is not reliant on this bill passing, We have seen increased levels of interest from a wide range of rail operators and rail car owners who are looking to accelerate their technology investments to improve safety standards. Work on our subscription offering is moving at full speed ahead, with the initial sites for Duo Zone portals having been identified. 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. With our backlog at $9.4 million, we believe we have strong visibility into performance over the coming quarters, as well as further confidence in our long-term growth outlook. Our mission remains focused on the long-term growth and profitability of the company, and we plan to build on our current momentum to guide a strong performance throughout the remainder of 2023. With that overview complete, I will now turn the call over to our CFO, Andrew Murphy, to walk us through the financial results for the quarter, as well as our outlook for the year before we dive into industry developments.

Andrew. Thank you, Chuck. I wanted to reiterate Chuck's sentiments on Duo's progress over the last several years. We're very happy to see our trailing 12 months revenue climb to $16.2 million, an 8% increase over full year 2022 revenue, and a 96% increase over the company's performance in 2021. We remain encouraged by the commercial opportunities that have begun to present themselves thanks to the diligence of our commercial team, and some of the recent events around derailments and subsequent legislative activity. That said, as we look ahead, 2023 is not without its challenges. The primary challenge we anticipate is timing of contracts and revenue recognition. As such, we anticipate we will see a slowdown in the second quarter due to delays by customers before picking up again in the latter half of 2023. We currently do not anticipate that this will change our overall guidance, but the timing within quarters will be challenging to predict. In spite of these challenges, we're continuing to see subscription opportunities present themselves, and the company will continue to focus on growing out its recurring revenue services and improve profitability and ensure long-term financial health of the organization. Now let's get into our results for the first quarter. Total revenue for the quarter increased 84% to $2.64 million compared to $1.44 million in Q1 of 2022. Total revenue for Q1 represents an aggregate of approximately $1.8 million of technology systems revenue and approximately $838,000 in recurring services and consulting revenue. The increase in revenues was driven by progress in the manufacturing of two high-speed passenger rail car inspection portals for a transit customer and successful delivery of artificial intelligence detections models for a number of our freight customers. Cost of revenues for the quarter increased 73% to $2.11 million compared to $1.22 million in Q1 of 2022. The increase in cost of revenues was driven by a similar increase in the cost of technology systems stemming from the manufacturing of the high-speed passenger rail car inspection portals. Gross margins for the quarter increased 142% to $537,000 compared to $222,000 in Q1 of 2022. The improvement in gross margin was driven by high revenues related to the high-speed RIPs, coupled with the additional algorithms deployed during the first quarter of 2023. Operating expenses for the quarter decreased 5% to $2.72 million compared to $2.86 million in Q1 of 2022. There was an increase in sales and marketing costs related to additional investment in staff, and additionally, general and administrative costs decreased primarily due to a year-over-year reduction, and non-cash employee compensation charges. The net loss for the quarter totaled $2.18 million compared to a net loss of $2.64 million in Q1 of 2022. The improvement in the net loss was driven by the higher margins stemming from the passenger RIPs, increased services, and little to no change in the operating expenses of the business. Now let's discuss the balance sheet. We ended the quarter with approximately 4.3 million in cash and cash equivalents, compared to 1.12 million at December 31, 2022. We have an additional $717,000 in receivables, bolstering our near-term liquidity position to approximately $5.1 million. We also have $1.5 million of inventory consisting primarily of long lead items for two pending RIP inspections, or excuse me, RIP installations, and as previously disclosed, we raised approximately $4 million during the quarter to support the build-out of our subscription RIP business. In summary, our cash position is strong, and while we expect a near-term increase in spend and inventory levels to support our commercial efforts, we'll continue to monitor supply chains to reduce financial impacts where possible, while continuing to make thoughtful investments to improve our inventory and speed of installations. We are happy to report that our investment of inventory during late 2022 allows DUOs to be staged to begin delivering freight-focused portals during 2023 as we've procured some of the key long lead items for approximately two portals. I'd now like to provide an update on our financial projections before turning the call back over to Chuck. At the end of 2022, contracts and backlog represented approximately $10.7 million in revenue. of which approximately 2.6 million was recognized during the first quarter. Coupled with additional change orders on existing customers' projects, at the end of the first quarter, backlog stands at 9.4 million, of which approximately 7.7 million is expected to be recognized during the remainder of 2023. The balance of the contract backlog is comprised of multi-year service and software agreements, as well as project revenues. Based on these commitments, contracts and near-term pending orders that are already performing or scheduled to be executed throughout the remainder of 2023. We are reiterating revenue expectations for the fiscal year ended at December 31, 2023. We expect total revenue for 2023 to range between 20 and 21 million, representing an increase of 33 to 40% compared to 2022. We expect our improvement in operating results to be reflected over the course of the full year in 2023. As a result of customer timing and other factors, we expect revenues in the second quarter to be similar or slightly lower compared to the first quarter of 2023 before ramping up more significantly in the latter half of the year. That concludes my financial commentary. I'll now pass the call back over to Chuck.