Duos Technologies Group, Inc.

Good afternoon. Welcome to Duos Technologies' second quarter 2024 earnings conference call. Joining us for today's call are Duos' 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 released our press release, as well as our 10-Q announcing our financial results for the second quarter, 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 on to better understand some of the details we'll be discussing during today's call. In the last few earnings calls, I have articulated our strategy to diversify our growing technology business into areas where we have expertise and synergies with the intent to more rapidly increase our value and return on investment to our shareholders. On our call today, I'm going to report on those diversification efforts and what they will mean for us going forward. We are making steady progress with our rail car inspection portal business to include ongoing installation projects with Amtrak and the planning for a new RIP installation at a large chemical manufacturer. As I have reported earlier, we now have an important agreement and partnership in place with one of our long-term Class 1 railroad customers, currently the largest user of our wayside technology. The new agreement allows us to add subscribers to seven of our 13 portals, along with an eighth portal owned by a different customer. We'll talk more about this subscription offering later in the call. Our edge data center business called Duos Edge AI has made fast progress commercially given the high demand for edge computing infrastructure. Our plans to have four edge data centers installed in various locations in Texas this year are on schedule, and we expect recurring revenue from those data centers to begin in Q4. I just returned from a TD Cowan data center investor conference being held in Boulder, Colorado, and I can tell you that there is its excitement in this industry about our business when discussing it with potential customers, investors, and analysts. Our pipeline of new orders is growing, and I expect to install at least 15 more Edge data centers in FY 2025. I have previously spoken about the power industry experience that the Duos team and I have from our time at APR Energy. With our entry into the data center space, we are now getting requests to participate and, in some cases, lead opportunities to install power and support data centers here in the United States. Based on this rapidly growing demand, we have incorporated Duos Energy Corporation as a third subsidiary to Duos Technologies Group and already have a small pipeline of projects that could further accelerate our goal for more recurring revenue and profitability. We'll discuss each line of business in more detail after the financial review, so at this time, I'll turn it over to Adrian to cover our financial results.

Thanks, Chuck. Following on from Chuck's introductory remarks, I would like to give a brief commentary on the recent operational highlights and my expectations as to how and when these will translate into revenue growth and, most importantly, profitability. As Chuck mentioned, the company is in the process of expanding into three distinct lines of business. Complex visualization with AI, as manifested in our legacy DoorsTech business, the recently announced business of providing edge data centers, and related operational services, and the brand new subsidiary, which will focus on power provision for data centers, both edge and traditional. While these three divisions may on the face of it look as if they are not related, in fact, EOS and its management team and staff have extensive experience in all three domains. Chuck will address the three-year strategic plan for the company in his commentary, following my discussion of the financials. But from my perspective, the transition plan is expected to be complete by the end of 2024 with an expected markedly improved financial position and guidance at the conclusion of the transition period. During the last call, I stated that I believe that we are on the threshold of steadily improving results and I believe we are seeing the first signs of this in our most recent quarterly results. As such, we will detail out our plan for the remainder of 2024 And indications are that a 70 plus million dollar investment in building a talented organization, intellectual property with highly defendable patents, and now access to new markets with key assets that the company owns or plans to own, will provide a solid foundation for the expected increasing recurring revenues. With that in mind, let us now look at the results for the second quarter and first half of 2024. During the second quarter, Total revenue for the quarter decreased 15% to $1.51 million, compared to $1.77 million in the second quarter of 2023. Total revenue for Q2 2024 represents an aggregate of approximately $265,000 of technology systems revenue, but more than $1.25 million in recurring services and consulting revenue, representing a 38% increase in this important metric. For the six months ended 2020-24, total revenue decreased 42% to $2.58 million from $4.41 million in the same period last year. Total revenue for the six months of 2024 represents an aggregate of approximately a half a million dollars in technology systems revenue and approximately $2.05 million in recurring services and consulting revenue, which is also an increase in recurring revenues of 19%. Growth of the services portion of revenues was driven by the successful completion and implementation of artificial intelligence detection, which represents services and support for those detections, as well as increases in service contract revenue due to higher service contract prices. For both periods, the small revenues in the technology systems area reflects the ongoing delays in revenue recognition for the Amtrak installation who, as discussed previously, postponed delivery last year into Q4 of this year. I'm pleased to report that although revenue was expected to be booked in Q4, the company has accelerated delivery of part of the system, and we expect to report an increase in these revenues in Q3. I should caution, however, that due to the complex nature of this project at the site, further delays may be encountered such that the project might not be complete until mid-2025. Cost of revenues for the second quarter increased 13% to $1.73 million compared to $1.53 million for Q2 2023. And for the six months ended 2024, cost of revenue decreased 26% to $2.7 million from $3.64 million in the same period last year. Both periods reflect certain cost increases related to project delivery where we expect to record higher revenues in Q3 and to the effect of the new Class I subscription business startup costs. Gross margin for Q2 2024 decreased 189% to negative $215,000 compared to $241,000 for Q2 2023. And for the six months ended 2024, gross margin decreased 115% to negative $120,000 from $779,000 in the same period last year. Per my previous comment, when comparing the results between the two periods, the stage of completion for production and installation can be factored into these comparisons and taken into account when analyzing the two periods. Specifically, the decrease in gross margin was driven by the timing of business activity in Q2 2024 related to the manufacturing of two high-speed transit-focused RIPs for Amtrak. As previously mentioned, the temporary decline in technology revenues was not completely offset by related ongoing costs to support that revenue segment. Operating expenses for Q2 2024 decreased by 11% to $3 million, compared to $3.39 million for Q2 2023. And for the six months ended 2024, operating expenses decreased 4%, 5.86 million from 6.07 million in the same period last year. The company implemented a number of expense reduction measures in late 2023, and the results of these measures are now being seen in the overall financial results. The decreases being recorded are related to targeted costs in some developments, and more specifically, administrative costs that are offset with continued investment in sales resources as the company continues to build the commercial resources necessary to address the expansion into new markets. The expense cuts have been precise to reduce investments in certain areas where certain activities are now complete, but we continue to invest in the technology that has delivered the wide-ranging patent for the RIP and associated AI. We continue to anticipate that operating expenses will remain stable throughout the remainder of 2024, but we have taken additional actions in Q3 to further improve efficiency and align our staffing to address both the new and existing business areas so as not to impact the expected growth in revenue. Net operating loss for Q2 2024 totaled $3.22 million compared to net operating loss of $3.15 million for Q2 2023. And for the six months ended 2024, net operating loss totaled $5.98 million compared to a net operating loss of $5.30 million in the same period last year. Although operating losses were higher than the comparative quarter a year ago, the increase was proportionally less than the relative decrease in revenues and gross margins. The increase in loss from operations was primarily the result of lower revenues recorded in the first and second quarters as a consequence of the delays previously noted, offset by continued increases in services and consulting revenue. Net loss for the second quarter was $3.2 million, or negative 43 cents per share, compared to a net loss of $2.9 million, or negative 42 cents a share, for Q2 2023, with the 7% increase being lower proportionally than might have been expected with a decrease in overall revenues. For the six months ended 2024, net loss totaled $5.96 million, or negative $0.81 per share, compared to a net loss of $5.13 million, or negative $0.72 per share in the same period last year. The increase in net loss was attributable to the decrease in revenues as previously noted above, partially offset by the increase in services and consulting revenue and a decrease in operating expenses. With regard to the balance sheet, at June 30th, 2024, cash and cash equivalents was approximately a half million dollars compared to 2.44 million at December 31, 2023. In addition, the company had over 1.27 million in receivables and contract assets for a total of approximately 1.77 million in cash and expected short-term liquidity. Lewis also has more than $1 million in inventory as of June 30, 2024, consisting primarily of long lead items for future RIP installations that are expected to be deployed this year and 2025. There has been a large increase in other assets, notably the recording of a $10.7 million intangible asset, which represents the estimated fair value of five years of data to support the recently signed long-term services and data sharing agreement executed with the previously mentioned Class 1 customer for the provision of subscription services. Total current liabilities are $5.81 million versus $3.25 million as of December 31, 2023. $2.2 million of this increase is non-cash and related to the data services agreement. Long-term contract liabilities have increased by $8.5 million, reflecting the non-current portion of this agreement. My overall comment on the balance sheet is that it remains stable in anticipation of the expected growth in the business in the second half of the year. Turning to backlog. At the end of the second quarter, the company's contracts in backlog and near-term renewals and extensions are now more than $19.6 million. of which approximately $6.9 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. It should be noted that $10.7 million of the revenue backlog is for data access to support the new subscription business and is accounted for as a non-manatory exchange that resulted from an amendment to a master material and service purchase agreement with a Class I railroad. 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 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.