Duos Technologies Group, Inc.

Good afternoon. Welcome to DUO's Technology Third Quarter 2023 Earnings Conference Call. Joining us today on today's call are DUO 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 DOF 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 third 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 will be discussing during our call. Today, I'm going to discuss my assessment that the company is in the best position it has ever been to achieve our strategy and long-term value, despite some short-term financial headwinds, which Andrew will walk us through in a moment. I want to remind everyone that we believe DUOS is currently the North American rail industry leader in machine vision and artificial intelligence wayside detection technology. Three of the six Class I railroads plus Fairmax and Amtrak use our rail car inspection solution with strong results. During the third quarter, we scanned 2.3 million rail cars, and subsequent to the end of the quarter, I'm happy to report our detections are now deployed with all of our railroad customers. While full adoption of machine vision wayside technology paired with AI is going more slowly than we would like, there is strong consensus among industry leaders that this technology will be fully adopted in the coming years, As the rail industry makes continued safety improvements, we believe that DUOS is in a strong position with the support of our current rail customers to be in the leading edge of this adoption. What is critical for us in the next 12, the coming 12 to 18 months, is the transition from a volatile CapEx-only business to a machine vision, artificial intelligence subscription business with steady recurring revenue. We'll discuss our plan and the critical milestones for this after we review the financial results. Andrew.

Thank you, Chuck. As we have discussed in previous calls, Duos has historically operated with periods of intermittent growth interspersed with temporary lulls as large new contracts begin the execution cycle and progress through various stages of development. More recently, we discussed the strategic shift of the business toward a recurring revenue model given the volatility and previously noted forecast challenges of our legacy CapEx focus structure. Our results for Q3 exemplify this volatility in revenue, underscoring the challenges in the CapEx model, and support our ongoing efforts to focus on a primarily subscription-based model in the future. To be clear, the business is in a strong position both fundamentally and financially. However, contract timing represents Duo's biggest threat to predictability. This makes quarter-over-quarter comparisons not necessarily meaningful to the current position of the company. As a result, the focus of today's call is an assessment of where we currently stand in our long-term vision and strategy to transform our business into a sustainable, predictable, leading technology company. For that reason, I will be brief in my commentary to allow for analysis on the strategic vision. Now let's get into our results for the third quarter. Total revenue for the third quarter of 2023 was $1.53 million and $5.95 million for the first nine months of 2023. This was a decrease in total revenue on a year-over-year basis for both periods, driven by a combination of factors including customer-driven delays on key projects originally slated to be completed late in the third quarter of 2023 and timing of new CapEx projects. Gross margin was $227,000 for the third quarter of 2023 and $1.01 million for the first nine months of 2023. This represents a decrease in revenue on a year-over-year basis, largely driven by the same period-over-period drivers noted in revenue. Operating expenses for the third quarter were $3.2 million and $9.27 million for the first nine months of 2023. Of note, expenses were essentially flat from Q2 2023 to Q3 2023, and the company has implemented several expense reductions, which will manifest themselves in the fourth quarter of 2023 and beyond. Net operating loss for the third quarter totaled $2.97 million and $8.27 million for the nine months ended September 30, 2023. The loss from operations was primarily the result of continued lower revenues recorded in the third quarter and year-to-date as a consequence of the project delays previously noted. This had a similar impact on overall net loss. For the three months ended September 30, 2023 and 2022, net loss per common share was 41 cents and 30 cents respectively. For the nine months ended September 30, 2023 to 2022, net loss per common share was $1.12 and $1.01 respectively. Let's now discuss the balance sheet. We ended the quarter with approximately $3.27 million in cash and cash equivalents. We have an additional quarter of a million dollars in receivables, as well as $1.35 million in contract assets, together constituting over $1.6 million in future cash flow, as well as $1.5 million of inventory consisting primarily of long lead items for two pending RIP installations. Subsequent to the end of the quarter, in early November, the company took in net proceeds of $2.5 million from the sale of Series E convertible preferred stock with an existing investor. As of this call, the company has approximately $4.1 million in cash and cash equivalents. Duos continues to have the support of our long-term shareholders who recognize the strategic path the company is pursuing, as evidenced by this most recent capital infusion, and we appreciate their continued support as we implement our subscription platform. At the end of the third quarter, our contracts and backlog represented approximately $6.4 million in revenue. And we have approximately $5 to $7 million in near-term renewals and contract modifications, providing additional visibility and future revenue performance and cash receipts. We remain encouraged by the long-term nature of our contracts and believe our maintenance and artificial intelligence services ensure that the rail car inspection portals are critical to three of the six Class 1 railroads and their other major transit and freight operators' ongoing network operations. The net effect of the aforementioned timing challenges during 2023 is that we will not be able to book sufficient revenue to meet our guidance range and thus are withdrawing full-year 2023 revenue guidance. While the near-term results have been lower than expected, I am confident in the long-term vision and progression towards those objectives. As noted, we're sufficiently capitalized to execute our near-term plans The business has no debt, and we hold inventory on the balance sheet to execute anticipated projects. This flexibility gives us bandwidth to take advantage of contracts that are pending and expected to be signed in the next few months, as well as convert some of the key subscriptions and CapEx projects in our pipeline. This financial position, coupled with our expected success on strategic initiatives, will position the company for growth of its recurring revenues and positive overall outlook. In summary, We are financially positioned to execute our current plans and we have visibility to near-term cash from the combination of backlog and forthcoming change orders. That concludes my financial commentary and I'll now pass it back over to Chuck. Thank you, Andrew.