Duos Technologies Group, Inc.

Good afternoon. Welcome to Duo Technologies' first quarter 2024 earnings conference call. Joining us for today's call are Duo CEO, Chuck Ferry, and CFO, Adrian Goldfarb. Following their remarks, we will open the call for your questions. Then, before we conclude today's call, I'll provide the necessary questions regarding the forward-looking statements made by management during this call. Now, I would like to turn the call over to Duo CEO, Chuck Ferry. Sir, please go ahead.

Welcome, everyone, and thank you for joining us. We've just issued our press release, as well as our 10-Q announcing our financial results for the first quarter of 2024 and other operational highlights. Copies of both are available in the investor relations section of our website. I encourage all listeners to view that release and 10-Q filing with the SEC to better understand some of the details we'll be discussing during today's call. Some of the highlights that I'll discuss in more detail after the financial report include an award for a new rail car inspection portal valued at $2.7 million, an improved backlog of $10 million, and a new, very comprehensive patent on our rail car inspection portal. We have also formed a second operating entity called DUOS Edge AI and are in contract negotiations to install and operate our first four Edge data centers this year. Before we get into the financials, I want to remind everyone that we anticipated short-term financial headwinds as we transitioned from a pure play CapEx business focused on the rail sector to a recurring and more diversified business within the broader AI value chain that I believe will result in significant shareholder value over the next few years. As we discussed in a recent press release, Adrian Goldfarb will reassume the CFO position following the departure of Andrew Murphy. Andrew did an outstanding job for us and was a significant contributor to the turnaround that we have executed in the last few years. Andrew worked for me for over eight years at both APR Energy and here at Duos. He's an exceptional financial professional and business leader, and we wish him the very best. Given the critical stage that the company is at, the board and I asked Adrian to reassume the role, given his close working relationship with Andrew and myself, in laying the groundwork for the strategy that will make our company valuable. His long-term knowledge of the company and his experienced leadership will ensure no gaps between incoming and outgoing CFO. I'm personally very happy he's agreed to return to this important role and very much enjoy working with him. With that, I would like to invite Adrian to review our most recent financial results. Adrian.

Thank you, Chuck. Before discussing the results for Q1, I would like to give a brief commentary on the company and its progress thus far. As you may or may not be aware, I've been working with Chuck on the strategy for DOIS and assisting him with implementing the plans and programs that are now underway. In particular, I've maintained a close relationship with the capital markets in terms of communicating the vision as it continues to develop. It was not a hard decision for me to return to CFO, but I truly believe that the company is in a very good position to profitably grow into a much larger entity, and I look forward to being a part of that success. My general commentary, before getting into specific financial results, is that traditionally, DOIS growth has not been linear. Since 2022, we have taken concrete steps to structure the business in such a way that we can produce more consistent and predictable growth. That transition has been in effect for much of the past 18 months, and while we are not giving updated guidance today, I believe that we are on the threshold of steadily improving results. The evidence to support that belief will be discussed by Chuck following my comments. Lastly, I would like to thank all of the shareholders who have offered their congratulations for support since returning as the CFO, and I hope to return that by being able to report increasingly stronger results in successive quarters. Now let's look at some of the highlights from the first quarter. Total revenue for the quarter decreased 60% to $1.07 million. compared to $2.64 million in the first quarter of 2023. Total revenue for Q1 2024 represents an aggregate of approximately $270,000 of technology systems revenue and approximately $800,000 in recurring services and consulting revenue. The revenue decrease in the first quarter compared to the equivalent quarter a year ago is primarily related to timing and revenue recognition for a major customer, who postponed delivery last year into Q4 of this year. That revenue is expected to be booked in Q4. It is also important to note that the 2 percent decline in recurring services and consulting revenue for the same comparison period marks the transition from certain services revenue to subscription. We expect a similar effect in Q2 and then incremental growth in the second half of 2024 as increases in subscription and other revenues are recorded. Cost of revenues for the quarter decreased 54%, 0.98 million compared to 2.11 million for Q1 2023, reflecting the decline in revenues and the associated lower costs that were largely in line with the revenue decrease. It should be noted that the company does record certain ongoing costs in cost of revenues related to ongoing expenses related to both system production and service delivery, and those costs will typically be a large percentage during periods of lower overall revenues, leading to temporarily reduced margins. Gross margin for Q1 2024 decreased 82% to $94,000 compared to $537,000 for Q1 2023. For my previous comment, when comparing the results between the two periods, the stage of completion for manufacturing and installation can be factored into those comparisons and should be taken into account when analyzing the two periods. Operating expenses for Q1 2024 increased 6% to $2.86 million compared to $2.68 million for Q1 2023. The entire amount of this increase is due to additional investment in sales resources as the company builds the commercial team in anticipation of a much higher level of activity in the subscription and recurring revenue areas. The full increase was offset by modest reductions in R&D, and some of our activities are now complete, notably the technology behind the wide-ranging patents for the RIP and associated AI. In addition, the reduction in administrative costs is the result of the cost reductions that have been implemented. We anticipate that operating expenses will remain stable throughout the remainder of 2024, with further efficiencies being implemented in areas that do not impact the expected growth in revenues. Net operating loss for Q1 2024 totaled 2.76 million, compared to net operating loss of 2.15 million for Q1 2023. Although operating losses were higher than the compared quarter a year ago, the increase was proportionally less than the relative decrease in revenue and gross margin. Net loss for the first quarter was 2.75 million, or negative 38 cents per share, compared to a net loss of 2.14 million, or negative 30 cents a share, for Q1 2023, with the 28% increase being lower proportionally than might have been expected with a decrease in overall revenue. With regard to the balance sheet, at March 31, 2024, cash and cash equivalents totaled 2.98 million, compared to 2.44 million at December 31, 2023. In addition, the company had over $1.5 million in receivables and contract assets for a total of approximately $4.5 million in cash and expected short-term liquidity, a similar position to the comparable quarter a year ago. U.S. also has $1.5 million in inventory as of March 31, 2024, consisting primarily of long-lead items for future RIP installations that are expected to be deployed this year. Total current liabilities are 3.08 million versus 3.25 million a year ago. My overall comment on the balance sheet is that it remains stable in anticipation of expected growth in the business in the second half of this year. At the end of the first quarter, companies' contracts and backlog and near-term renewals and extensions are now more than $10 million, of which approximately $7 million is expected to be recognized as revenue during the remainder of 2024. The balance of contract backlog comprises multi-year service and software agreements, as well as project revenues. Before turning the call back to Chuck, I would like to address the subject of guidance. As we have discussed previously, we have experienced some difficulty in giving accurate guidance within the timeframe of a fiscal year due to the delays and uncertainties in our current market space. However, we believe that the current analyst expectations for annual revenues this year represent a reasonable estimate at this time. Chuck will be addressing the transition into new markets, including our growing recurring revenue initiatives such as AI and subscriptions, for which we have already announced some success this year. As we transition another few months, my expectation is that we will be able to formally reintroduce guidance. This concludes my financial commentary, and I will now pass the call back to Chuck.