Duos Technologies Group, Inc.

Good afternoon. Welcome to Duo's Technology Second Quarter 2023 Earnings Conference Call. Joining us for today's call are Duo's 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'd like to turn the call over to Duo's 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 second 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. In about two weeks from now, September 1st, I will have served as CEO for DuosTech for three years. For those that know me, I have successfully led turnarounds with several businesses and military organizations over the past 35 years and instinctively have learned to recognize when an organization has turned the corner and is now ready for prime time. DuosTech is very much ready for prime time and looking forward is in the best position ever with a clear pathway in the next 12 to 24 months to achieve our strategy and achieve financial profitability. There are two key things investors should be watching right now. The first is the Railway Safety Act, which is steadily making its way through Congress. If passed, this bill will call for the FRA to write regulations on the use of wayside detection systems, which includes our technology. Since the derailment at East Palestine, Ohio, six months ago, our commercial inquiries have skyrocketed. My sense is that regardless of whether this bill passes or not, duals will benefit from the renewed focus on safety across the industry. We are currently in discussions with all the class ones and many car owners and shippers about how they can benefit from our rail car inspection portal. We have had the opportunity to highlight our technology and benefits to the FRA, Transport Canada, and the heads of key labor unions. Everyone who sees the technology understands it is the way of the future. The second thing investors should watch is the artificial intelligence revolution. AI has been a hot topic for several years, but even more so in the last six months. The rail industry is certainly implementing AI throughout its operations. In this regard, DUOS has made significant advances in the development of our AI. We believe our AI portfolio of over 40 use cases that directly correlate to FRA and AAR defects has already prevented many derailments, improved safety, and the system is now being used by at least two of our major railroad customers to support regulatory waivers or waiver applications. There are certainly other pure play AI or machine vision companies assisting the rail sector, but none of them provide a turnkey solution like DUOS, where we integrate all aspects of hardware, software, IT, and AI, making it the most technologically advanced and reliable machine vision AI wayside detection system in the field. I want to remind everyone what our strategy is. In the rail industry, we are expanding our current customer base in class one, short line, and passenger rail. More importantly, we have initiated our subscription business, closing our first subscription customer earlier this year, and have car owners and shippers that I expect to close in the coming quarters. To accelerate expanding to the subscription business, we are in discussions with our current customers to buy back existing portals. Looking ahead, we have identified the first 10 new subscription portal locations. With this, we have mapped out a plan to grow to a network of 40 to 50 portals, with multiple subscribers each in the coming 18 to 36 months. We have also begun to address the multiple international inquiries that have been coming in. There is particular interest for a portal solution in European passenger rail sector, for example. Our business platform and technology are ready to scale more rapidly, if necessary, in response to the Railway Safety Act and AI revolution. Lastly, we expect to roll out a technical update of our truck inspection portal in FY 2024 and reengage in the trucking and intermodal industry where we have previous experience. We have also strengthened our strategic partnerships with Dell Computers and NVIDIA. By integrating technology from Dell, NVIDIA, and other industry leaders with our proprietary know-how, we recently ran a test for acquiring and processing information at the edge. Our results showed that we acquired and processed 85 gigabytes of data per second, simulating a train at 125 miles per hour. To put this in simple terms, 85 gigabytes per second will fill up your personal laptop in approximately four seconds. The test validated our ability to scan a train at high speed and transmit important safety data in less than 60 seconds. For those familiar with wayside detection alerts, sending immediate defect information to the train operator and or dispatcher is critical to avoiding a derailment. One final comment before turning it over to Andrew for the financials. As you know, Mr. Ed Harris, a 40-year railroad veteran, left our Board of Directors when he became the Chief Operating Officer at Canadian National Railroad some months ago. I am pleased to announce that Mr. Frank Linegro has recently joined our Board to backfill that director position. Frank is a 30-year railroad veteran with leadership roles in finance, law, technology, and operations, having enjoyed a distinguished career at CSX. Frank currently serves as a Chief Financial Officer for Beacon Roofing Supply, a Fortune 500 company. Frank brings decades of leadership experience in key areas of transportation and industrial sectors, including rail operations and safety technology, strategic planning, and financial and regulatory stewardship, all of which are vital to our strategy going forward. With that, I'll turn it over to Andrew to cover the financials, after which I'll address some more of the news on our subscription offering and discuss our risk areas. Andrew.

Thank you, Chuck. I'll now briefly walk through our second quarter results before expanding on my view of the business. Total revenue for Q2 2023 decreased 51% to $1.77 million compared to $3.62 million in the second quarter of 2022. Total revenue for Q2 2023 represents an aggregate of approximately $870,000 of technology systems revenue and approximately $900,000 in recurring services and consulting revenue. For the first six months of 2023, total revenue decreased 13 percent to $4.41 million from $5.06 million in the same period last year. Total revenue for the first six months of 2023 represents an aggregate of approximately $2.7 million of technology systems revenue and approximately $1.72 million in recurring services and consulting revenue. The decrease in total revenue for both periods was driven by the certain external site factors of the customer that have delayed delivery of two high-speed rail inspection portals. Growth in the services portion of revenues was driven by the successful completion of two freight rail car inspection portals earlier this year, as well as the deployment of additional artificial intelligence detections and represents services and support for those detections. Cost of revenues for Q2 2023 decreased 33% to $1.56 million compared to $2.33 million for Q2 2022, following a similar trend with revenue. The decline in costs of revenues was mainly attributable to the company bearing the initial cost of procurement and allocation of material for two high-speed rips for a transit customer in Q2 2022 without related spend in Q2 of 2023. The marginal increase in cost of revenues from services and consulting was attributed to higher labor costs, as well as costs associated with two new portals coming online during early 2023, as opposed to the corresponding period of 2022. For the first six months of 2023, cost of revenues increased 3 percent to $3.67 million from $3.55 million in the same period last year. The cost of revenues were largely flat on a year-over-year basis, largely due to timing of projects. Gross margin for Q2 2023 decreased 83% to 212,000 compared to 1.28 million for Q2 2022. For the first six months of 2023, gross margin decreased 50% to 749,000 from 1.5 million in the same period last year. The decrease in gross margin was driven by the timing delays of business activity in Q2 23 related to the manufacturing delivery of two high-speed transit-focused RIPs for one customer. Operating expenses for Q2 2023 increased 27% to $3.41 million compared to $2.68 million for Q2 2022. Sales and marketing costs saw only marginal decreases while research and development expenses increased slightly. The largest increase was observed in general in administrative costs, which can primarily be attributed to the timing of certain payroll-related expenses that took effect in April of 2023, which is a variance with the same period a year ago, largely due to timing. Overall, the company continues to focus on maintaining operating expenses while meeting the increasing needs of its customers, For the first six months of 2023, operating expenses increased 16% to $6.1 million from $5.54 million in the same period of last year. The company maintained its cost of sales, marketing, and research and development at a consistent level while observing a slight rise in the general and administrative costs. Net operating loss for Q2 of 2023 totals $3.2 million compared to net operating loss of $1.39 million for Q2 of 2022. For the first six months of 2023, net operating loss totaled $5.35 million compared to an operating loss of $4.0 million in the same period of last year. The increase in loss from operations was primarily the result of lower revenues recorded in the second quarter as a consequence of project delays previously noted, partially offset by continued increases in services and consulting revenue. Net loss for Q2 2023 totaled 3.04 million compared to net loss of 1.34 million for Q2 of 2022. For the first six months of 2023, net loss totaled 5.19 million compared to a net loss of 3.99 million in the same period last year. The increase in net loss was mostly attributable to the decrease in revenues, as previously noted, along with growing expenses. For the three months ended, June 30, 2023, and 2022, net loss per common share was 42 cents and 22 cents, respectively. And for the six months ended, June 30, 2023, and 2022, net loss per common share was 72 cents and 70 cents, respectively. Now, let's discuss the balance sheet. We ended the quarter with approximately $2.45 million in cash and cash equivalents compared to $1.1 million at December 31, 2022. We had an additional 286,000 receivables and $1.54 million of inventory consisting primarily of long lead items for two pending RIP installations. Subsequent to the quarter end, the company raised gross proceeds of $5 million from the sale of Series F convertible preferred stock in early August of 2023 with an investor and an at-the-market offering equivalent to $6.20 per share. As a result of these transactions, the company currently has approximately $5 million in cash and cash equivalents. Excuse me. The company has approximately $6 million in cash and cash equivalents. In summary, our cash position is strong, and we are adequately capitalized to execute our current plans. Duos has been fortunate to have the support of our long-term shareholders, as evidenced with our most recent capital infusion. We also see a bright future for Duos on the horizon, and we appreciate their continued support as we implement our subscription platform. I'd now like to provide an update on our financial projections. At the end of the second quarter, our contracts and backlog represented approximately $7.8 million in revenue, of which approximately $3 to $5 million is expected to be recognized during the remainder of 2023. And the balance of the contract backlog is comprised of multi-year services and software agreements, as well as project revenues spanning into fiscal year 2024. Based on these committed contracts and visibility to near-term pending orders that are expected to be executed throughout the course of 2023, as well as the planned expansion of our subscription business model and other contributing factors, we are reiterating our previously stated revenue expectations for the fiscal year ended December 31, 2023. We expect total revenue for 2023 to range between 20 and 21 million, representing a 33 to 40 percent increase compared to 2022. We expect the improvement in operating results to be reflected over the course of the full year in 2023. As a result of timing other factors, we expect revenues in the third quarter to moderately increase compared to the second quarter of 2023, before ramping up significantly in the fourth quarter and into 2024. I'd now like to touch on my outlook for Duos. As our long-term shareholders know, Duos typically transitions between periods of growth interspersed with pauses as new contracts begin the execution cycle. In fact, in Duos' history, The company typically has operated in a 18 to 24-month cycle, with the quarterly and annual results reflecting the reality of that cycle for CapEx-oriented sales. DUOS has studied the value proposition of the RIP product, whereby the data delivered across time provides significant returns to users well beyond the initial CapEx point of sale. To improve the revenue profile of the company and refocus it with the value delivered via the RIP solutions, Late last year, the company undertook a transition of its core business to a recurring revenue model, and we are now beginning the execution phase of that transition cycle. This is a major positive step for Duos' long-term horizon, but does bring challenges as the company balances demonstrable short-term revenue growth while not mortgaging its future. As we indicated earlier this year, 2023 is a year of transition for Duos. My assessment of our progress is that we are on track to complete the transition by the end of 2023 through a series of commercial successes and the execution of several strategic initiatives underway, but still expect to turn in a revenue performance that will provide year-over-year growth. As Chuck mentioned, we remain encouraged by the commercial opportunities that have begun to present themselves, though we understand that increased revenues and profitability must remain top of mind. As previously noted, the primary challenge we anticipate is timing of contracts and revenue recognition. As such, we saw a slowdown in the second quarter due to delays by customers, which we expect to moderately improve in the third quarter before picking up again later this year. We are proactively managing this with contract modifications across current customers as well as other commercial operators, and currently we do not anticipate a change to our financial guidance for the year. We anticipate in the near term announcing additional commercial and strategic successes, which will contribute to our 2023 results and increase our backlog for 2024 and beyond. This concludes my financial commentary. I'll now pass the call back over to Chuck.