Duos Technologies Group, Inc. (DUOT) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Duos Technologies Second Quarter 2019 Earnings Conference Call. During the presentation your lines will remain on listen-only mode. [Operator Instructions]. Joining us for today's call are Duos’ Chairman and CEO, Gianni Arcaini and CFO Adrian Goldfarb. Following their remarks we will open up the call for your questions. And before we conclude today's call, I will provide necessary cautious regarding Forward-Looking Statements made by management during this call. I would like to turn the call over to Duos’ Chairman and CEO Gianni Arcaini. Sir, please proceed.

Well, thank you very much Christen. Welcome everyone and thank you for joining us today. Earlier today, we issued a press release announcing our financial results for the second quarter of 2019 as well as other operational highlights. A copy of this press release is available in the Investor Relations section of our website. Additionally, as some of you may have seen, we also issued an additional press release relating to a new contract win for Rail Inspection Portal business. I plan to provide additional commentary on our results as well as this new win shortly But before we begin with a discussion of our results, I would like to take a few minutes as we always do to provide a brief overview of who we are and what we do, particularly for those of you who may be less familiar with our Company. At Duos we provide advance medical technology solutions with a strong portfolio of intellectual property. In simple terms, we create highly sophisticated technology solutions for a wide range of customers. We focus on improving their business processes to ultimately provide a measurable ROI. To that end, we have been continue to develop a broad range of proprietary technologies, which we typically deploy as turnkey systems. These advanced tools include machine learning and other forms of artificial intelligence as well as advanced video analytics that we deliver through a combination of our image capture technologies suite, which includes backend, processing and middleware Praesidium and our customer facing software platforms blended as centraco. Our key focus remains in mission-critical security, inspections and operational applications. Our target markets predominantly include the rail transportation, retail distribution, critical infrastructure security and law enforcement sectors. We estimated the total addressable market opportunity in our combined core target markets exceeds about a $100 billion. In addition to our strengths and technology development, one major differentiator is that our technologies do not require any change in our customer’s business practices. A significant aspect of our core platforms is the adaptability to values - verticals requiring a very little adjustments through our code and system architecture. Our long-term market strategy is diversified and designed to address cyclical market segments relativities. We will be discussing our results for the quarter and happy to shortly however I want to stress that historically our business is subject to shifts in timing, particularly our quarterly numbers, which should be viewed in the context of our cumulative performance and we are executing our business plan to deliver strong growth and profitability. Since becoming a public company in 2015 we set out a long-term strategy, not only with a focus on our business world markets, but also build a sustainable competitive advantage as an advanced technology business. A key element of that plans to build on growth with a growing percentage of our business from recurring revenues. I'm pleased to say that we are on target with our plan as we will be clear when we discuss our progress in our new truevue360 subsidiary shortly. While our revenues will continue to fluctuate between quarters, we believe that these valuations will become less pronounced as we grow over the next 24 to 36 month on our way to building a much larger business. At the beginning of the first quarter of 2019, we launched truevue3601 a subsidiary who’s primary mission is to develop, market and operate our artificial intelligence and machine learning program. truevue360 will not only serve our current customer base, but also pursue many AI opportunities in other verticals. We began investing in the development and resources of truevue360 during the fourth quarter of 2018 and completed our staffing goals by the end of February of this year. I'm pleased to report that as of the end of the second quarter of this year truevue360 is fully operational and has launched its subscription based model. We now have the option to operate independently from third-parties, which is consistent with our strategic plan. As a side note, we have also added a special unit for AI focused training consisting of 27 truthing engineers during the quarter. There are significant potential for large - AI models within our current customer base and in adjacent verticals. We are expecting to benefit from the added revenue predictability and higher margins that came from the subscription based model. We expect to begin recognizing initial revenues for our truevue360 operations later this year, which should translate to more profitable growth in 2020. Long-term we expect truevue360 contribute significantly to our recurring revenue base overtime. The talent pool available for higher in today's market continues to be very tight, particularly within the advanced computer engineering and disciplines. Investing in our talent pool continues to be a central part of all companies financial plan. As of today our told headcount includes 85 employees, domestically plus 11 full-time contractors overseas. We expect our headcount to grow by approximately 15% by the end of the year. With that overview now complete, I would like to pull out a brief summary of all results. In the second quarter, we continue to make positive incremental progress in our long-term development roadmap, but we did also experience order implementation delays which impacted our near-term financial performance. During this lack in revenue recognition during Q2, we also encountered other timing related discrepancies which skewed the presentation of spending relative to our results. More specifically as I just mentioned a moment ago, we significantly increased our staffing and continue to build out the necessary infrastructure to support the scale of growth we are anticipating through the end of this year and beyond. However, despite the quarterly set back, year-to-date our results have still handily outpaced last year's performance most notably evidenced in our 30% top-line increase and 33% improvement in gross profit. What I'm going to shore is, we are continuing to operate with a long-term growth orientation, however at this stage in our Company’s development, we are unfortunately still susceptible to the quarterly fluctuations that come from being a heavy project based revenue business. My comments a moment ago, relating to our future product roadmap, as well as the development of our truevue360 subsidiary are both examples of how we are working to address this issue going forward. In a more immediate term, we are evaluating additional opportunities to introduce more predictability into our operations that alleviates quarter-to-quarter judgment. While we do not run our business quarter-to-quarter, we understand the reality of being a publicly traded Company and the scrutiny that inherently comes with opposition. That said, contract delays with a few key customers aside, this farther was a fairly active one as you may have noticed from our press releases during the period. I try to provide a high level overview on many of these items today. But for the sake of everyone listening, I would encourage you to visit the investor relations section of our website where you can read about many of these items in greater detail. Well, at this point, I would like to turn the call over to our CFO, Adrian Goldfarb, who will walk us through the financial results for the second quarter. After Adrian's presentation, I will further discuss our recent progress during the quarter before finishing with a brief update on outlook for 2019. Adrian, it is your turn.

Thank you, Gianni. Before getting into my discussion of the Q2 results, I would like to give some perspective between this quarter's results and the very strong quarter we recorded in Q1. On previous calls, I discussed how the majority of our revenue is recognized and our adoption of ASC 606 at the beginning of last year. Comparisons of each quarter are now on the same accounting basis. Our results last quarter were positively impacted by several factors including early completion of certain projects. Conversely, our Q2 results were negatively impacted by delays in completing customer installations due to external factors. In addition, one anticipated major contract was delayed substantially awaiting sign offs related to the multi country nature of the project. And we are pleased to report that as announced this morning, the specific contract has now been executed and will be substantially completed this year as scheduled. As I have also discussed in previous calls, our revenue recognition policy is based on the principles of ASC 606 using the input method. Although ASC 606 was not effected during this quarter, our results can vary substantially between measurement periods, and are highly dependent on the stages of completion of our project business. This will become less pronounced as the business grows. Our revenues are spread between a greater number of projects and recurring revenues portion of our business becomes more meaningful. Now turning to our financial results for the second quarter of 2019. Total revenue for the second quarter decrease 58% to 1.4 million compared to 3.2 million in the equivalent quarter in 2018. The decrease in total revenue was primarily due to execution delays by one customer acceptance in the projects portion of our business. As well as an additional delay by another customer to the start of a major project pending resolution of certain terms and conditions in the contract. While these delays may impact the products revenue portion of the Company’s business, they are not expected to have any material impact for the full-year Total revenue for the six months 2019 increased 30% to 5.7 million compared to 4.4 million in equivalent year ago period. The increase in total revenue is driven by the strength of the projects portion of the Company’s business, as well as increases in revenue in all areas of the Company’s business in the first quarter of 2019, which was offset by delays involving certain customers during the second quarter of 2019 as mentioned before. Gross profit was 174,000 or 13% of revenues for the current quarter, which was decrease of 86% from 1.3 million or 39% of revenues for the equivalent quarter in 2018. The decrease in gross profit and gross profit as a percentage of revenue was mainly the result of difference in timing between the Company’s significant increase in staffing related to future project implementation in the quarter, which was unfortunately not offset due to certain customer delays for project implementation. The requirement for additional staffing is an anticipation of a significantly greater number of projects over the next 18-months. Gross profit for the first six months of 2019 was 2.3 million for 41% of revenues compared to 1.7 million, or 40% of revenues for the first six months of 2018. The increase in gross profit was mainly the result of the increase in project revenue, and the positive effect of revenue increases from new projects with a lower relative overall growth and associated costs, which was offset by a difference in timing between Company’s significant increase of staffing, and certain customer delays for project implementation both mentioned previously. Gross Profit as a percentage of revenue also improved as a result of actions the Company has taken to streamline its operations. Turning to our costs, these increased 30% 2.1 million for 1.9 million in the same quarterly period last year. The increase in operating expenses was primarily due to an increase in resources related to the Company’s anticipated growth. Selling and marketing expenses increased in-line with the Company’s investment in resources to support that growth. There was no measurable increase in salaries, wages and contract labor during the period and research and development expenses outside of labor costs decrease. For the first six months of 2019, operating expenses increased 36% to 4.2 million from 3.1 million in the same period last year. The increase in operating expenses was primarily due to an increased number of employees in both companies operating subsidiary Duos Technology, as well as in the truevue360 subsidiary and additional contract expenses related to an increase in revenue. Selling and marketing expenses, research and development and other general administrative costs increased in-line with the Company’s investment and resources to grow the business. We recorded a net loss in Q2 of $1.9 million or $0.08 loss per share, compared to a net loss of 634,000 or $0.03 loss per share in the equivalent quarter. For the six month period net loss was 1.9 million, or 17 loss per share, compared to the loss of 1.4 million or $0.07 loss per share in the same period ago. I'm going to correct something there, net loss is 1.9 million or $0.08 loss per share, compared to a net loss of 1.4 million or $0.07 loss per share in the same period a year ago. The increase net loss for both periods was primarily attributable to the decrease in project revenue previously mentioned. Let's now discuss the balance sheet. As of June 2019, our cash position remain stable while we ended the quarter with 281,000 in cash and cash equivalents. We also had a net receivables of more than 1.8 million. For the quarter, we used 2.7 million in cash in operations due to the impact of the delays previously addressed. It should be noted that these numbers include funding of our truevue360 startup costs. With our improving order book and recent capital infusion for warrant executions, we still believe that we have runway to execute on our business plan in 2019. We remain comfortable with our financial position and anticipate continued improvement in the balance sheet going forward. I would now like to discuss the outlook for the fiscal year ending December 31, 2019. In our previous call, we confirmed the guidance of 2019 of between $14 million and $15 million in revenue for the full-year. I’m pleased to report that given the strong half year performance and growing order book, we are maintaining that guidance and we will give further updates throughout 2019 as we evaluate progress on projects that are currently in execution and new orders that we will be closing in Q3. It is worth mentioning that our guidance is based on anticipated contracts, some of which are already performing and anticipated orders from existing customers. I would again caution that individual quarterly revenue performance can vary based on factors previously discussed and investors should not take a single quarter as indicative of future performance. This completes my financial summary. I would now like to turn the call back over to Gianni for additional insights into our recent operational progress as well as our outlook for 2019.

Well, thanks, Adrian. I would like to provide some key updates from the quarter, as well as expanding up on our outlook in the remainder of the year. As I mentioned in my opening remarks, we continue to make incremental progress on our product roadmap. Starting in Q1, we formed a dedicated team of development engineers to focus specifically on expanding our existing technology roadmap. I'm pleased to report that the early efforts from this group have already translated into promising results, as we announced a number of new products offerings during the quarter. First in May, we announced apis3D, which is our next generation automated Pantograph Inspection System employing 3D technology as well as algorithmic defect analysis for transit and light rail train inspection. This solution is in high demand in the United States and we are working on several projects opportunities with a number of national rail operators. We believe this product has the potential to accelerate the rail industries ongoing transition to Automated Inspection Systems. In June, we announced the release of our next generation Automated Logistics Information System, or ALIS, which now includes AI capabilities enabling automation of critical gatehouse processing for trucks and train likes in the distribution centers of our staging yards. The growth of distribution center operations throughout the country is driving ever increasing demand for technology advancements that provide additional cost savings and efficiencies. That addition of AI to ALIS system is expected to increase gate throughput. Address loss prevention challenges, provide a secure entry and exit, as well as a reduction in yearly expenses and costs and also ensure the protection of Company assets. Our product development team is currently working on a number of technology upgrades and new technologies we will discuss at a later date. While we of course focused on generating and accelerating new business. We remain dedicated to providing technology innovations and superior quality in our current products. Operationally, we are still winning new business as well as expanding our relationships with existing blue-chip customers. Growth as you may have seen from our press release issued today and is mentioned by Adrian a moment ago, we were just rewarded a $2.3 million contract with another Class I Railroad. That award includes a five year contract with technical support, we expect to generate additional recurring revenue from the development and maintenance of our significant library of AI algorithms with the objective of operating certain aspects of this customer’s inspection. As with our RIP business, earlier in the quarter secured a 1.1 million contract extension with an existing customer renewing our management and support agreement. The scope of what covered in the agreement requires uninterrupted software services, tech support and maintenance for several inspection portals at the U.S., Mexican border. Moving to our automated Pantograph Inspection System division, we also recently received a purchase order to provide a multi track apis for Chicago Metra, which oversees all commuter rail operations in the 3700 square mile North Eastern region. Chicago Metra has a long been trusted partner of ours and we are looking forward to expanding our relationship together. For example, Chicago Metra has agreed to allow us to install our new apis-3D for better testing on one of their tracks. For those of you who are not familiar with Pantograph Technology. Pantograph relay current from high voltage over electrical wires to power the train and our inspected for visual damage in the form of cracks, chips and bends that could result in track ban time if not properly identified and preventive repaired. For this deployment we are on-track for system installation in the third quarter and we will be working closely with Chicago Metra to increase their track safety, as well as reduced down time over the coming years. Moving to our other non-operational items we are sharing from the quarter. First, effective June 19 of this year Duos Technologies qualified and began trading under OTCQX best market. Graduating to the OTCQX means that we have met the more stringent requirements of the QX markets. We believe trading under OTCQX offers an opportunity to generate even greater interest in our Company from a broader universe of potential investor. Second, I’m pleased to announce that we have appointed a new member to our Board of Directors Ned Mavrommatis who will serve as an independent Director and as a Co-Chair of our Audit Committee. He will be also a member of the Compensation and the Nominating Committees. NED is our CPA, currently serves as the CFO of ID Systems a company traded on NASDAQ. With his appointment Duos has now five total director and three independent directors. Moving on we also participated in also the few industry events during the quarter but these types of events don’t contribute an immediate ROI for our business, we believe will play a curtail role in creating additional awareness of our solutions in the marketplace. So back in May, we hosted a number of rail industry experts and leaders as part of our first annual 2019 Rail Solution Summit. I think these were given unique insight into impact Artificial Intelligence machine learning will have on the rail industry. In addition, we unveiled upcoming Duos’ product roadmap for the first time, which included some of the new intelligent automated inspection solutions under development for both the fleet and passenger rail market. In June, we joined other railroad industry leaders and experts in presenting our solutions to key policy makers at both rail, tech 2019 and the 2019 rail update on Capitol Hill. Rail Tax 2019, Washington D.C. was hosted by the Association of American Railroads or also known as AR. This annual event brings together the nation's Class I railroads to offer demonstrations of new rail technology innovations focusing on safety and efficiency to congressional policymakers and other transportation stakeholders. The 2019 Railroad Day on Capitol Hill was held at the following day in Washington D.C. then provided a setting for railroads and their suppliers to meet one-on-one with Members of Congress in order to discuss issues affecting the broader railroad industry. Duos’ representatives attended and met with many of the policymakers independently. We are appreciative of the interest and attention we received from many Members of Congress. We took time to discuss the impact and importance of these technologies. While adjacent to our outlook, entering the second half of the year and in addition to the deal we just announced today, we are seeing positive momentum building. We expect to recognize most if not all of the delayed revenues from the past quarter in Q3 and Q4. Based on our current opportunity pipeline and backlog, we feel confident in our ability to build on our expected sequential growth with a strong finish to the year. As already mentioned, a minute ago, we fully expect to achieve our annual revenue projections and look forward to providing additional insight into our progress in the coming quarters. And with that, we are ready to open the call for your questions. Operator, would you like to proceed?

Thank you. [Operator Instructions] thank you. We have an incoming question coming from the line of [Peter Brafe] (Ph) private investor.

Hello, since I heard during presentation at the Trickle Research Conference here in Denver last spring and got interested in following the story ever since. So this new contract that you announced in the press release today for 2.3 million, is this one of the contracts you referred to as being one that did not close in the second quarter?

Yes.

And I don't know if you could answer this enough, but is this a U.S., railroad customer?

Yes. That is a U.S. railroad.

Okay. Now do you report a backlog figure? I didn't see it in the press release.

Yes. So we don't officially report a backlog figure in our investor presentations, which typically would present at like events like you, you were in the Trickle Research, and also the other conferences. As part of the presentation, I gave kind of an overview of our backlog pipeline and I do update that. Every quarter, there will be an update coming out probably in the next couple of weeks. That is not an official number. It is just to give some guidance, because as you can see, with this nature of the project businesses we have mentioned, things can shift between quarters, now I have often spoken about that.

Sure. And also, you mentioned at the time, I believe you mentioned that the New York Subway System was one of several Municipal Systems that are evaluating your stuff. Is the Chicago Metra, I don't know is that the Chicago Subway System that was Metra is?

Yes, it is.

So do you think that - I mean, that sounds like a pretty significant event to sign them on, are you continuing to see a lot of interest in other transit systems in other major cities, either in the U.S., or in other parts of the world?

Well, currently we are focusing on the U.S. market. And there is a strong desire by U.S., transit organizations to stay in Made in America. That gives a little bit of an advantage to some competitors, which are all overseas. One of the reasons we have accelerated the development of some of the transit solutions such as the apis3D and Support is really at urge of some of the larger transit systems in the United States. And there is a lot of activity there. There is probably about 12, 13 very large transit systems and I can tell you we are talking to all of them.

And the nature of these businesses is it initial contract, which if everybody is happy will expand into a longer term relationship with follow-on orders that would increase the magnitude of the overall value overtime?

Yes, that is a fair assessment. Yes.

Okay. Alright. Well, good. I will continue to follow you guys and thank you. Good progress.

Thank you.

Thanks for joining.

Okay. [Operator Instructions] Thank you. Okay, so the next question is coming from the line of [William Bremer] (Ph) [indiscernible] Capital.

I want to get a sense of your capital allocation given your balance sheet at this time, in terms of capital needs for the next say 12 to 18 months what do you see given the bookings that are starting to develop?

So that is good question, so we originally did - just to give you a little bit of history. We originally did a capital raise back at the end of 2017 and that was at the time sufficient capital for us to execute the business with a two-year outlook. So were about where we are with that. And the way that that works is that we started off with about $2 million thereabouts in working capital and as we go through the project phases, we will draw down and build up on that. Obviously with some of the delays with this balance sheet particularly at the end of Q2 we have gone to the lower end of that which is pretty typical for us in this project cycle. Now as we go forward, we are obviously going to evaluate that if the business looks like the growth is accelerating, which the early indication that it are, we will obviously evaluate what our capital needs going forward, but I can tell you from my standpoint, the management hasn’t made yet any assessment on ultimately what we are going to do in that area.

And maybe I follow-up on that. We always have to be very conservative in what we disclose during these call. As a Chairman I’m anxious to tell you much more, but I get pull backed by attorneys and our CFO and CAO. The thing is that typically, the rule of thumb we have based on our history is about 20% off your top revenue, of your annual revenue as working capital. So we gave guideline of about 50 million for this year, which we believe we are going to achieve. So if you calculate 20% of that it’s about three million. We were able to convert some of the warrants, so we had an inflow this year of about $2.3 million. However most of that was used for the startup cost of truevue360, which was really the purpose of this initial additional rates. So at this point in time let me put it this way, we feel that we will have enough runway for this year, we are not cash-in-cash, we are not ready to go to the cash swimming pool, but we are used to live a kite life and we will certainly reach out at the end of the year. Between now and next year we are not give you a guidance at this point, but next year looks like would be a significant growth and we will have to adjust our capital needs for that purpose. Now remember, one of the things that we have always announced is we also are planning to up listing to NASDAQ which we have disused in detail because it is a known factor. With this up listing to NASDAQ, we have a number of strategic plans in-line and you probably will see very soon some of our thoughts and strategies.

I wish you all the very best in terms of getting to NASDAQ and I do hope that your next raise or two given your bookings and the strength of the Company as its turning you do get better economics.

That really we are certainly planning to, you know when we did the raise in 2017, because of time delays of the capital raise and all these things, our backs were a little bit to wall. But we have a totally different situation today. And I agree with you, we probably will be much more aggressive in terms of pricing and support.

My last question is, is there any place on the website that gives investors an opportunity to know where you will be presenting to come see you going forward?

Yes, we have on our investor website I believe, there is a section of - on the right side there is a section where we say where we are either presenting or any other events. We have an event coming up in September, we are presenting in September. So but if you have any additional question, please feel free to call Adrian, he can help you and tell you exactly when we are where. Or Gateway, you can call Gateway as they know to track us down, but Gateway will not know the industry events. But they are published in our website.

And also we put out press releases when we are going to present it in the background as well ahead of time.

But feel free to call us anytime.

Thank you very much, gentlemen. Good luck.

Thank you.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Arcaini for closing remarks.

Alright, thank you very much, Christian. So I hope that our presentation was helpful for all of you. And as I said before, please feel free anytime to either call Adrian, if you want financial information. You can call me if you need strategic information or then Gateway who knows both. Again, thank you for joining us today. It is pleasure to thank our employees, partners and investors for their continued support. We look forward to updating you on our next call. Operator.

Before we conclude today's call, I would like to provide you a Safe Harbor statement that includes important cautions regarding Forward-Looking Statements made during this call. This earnings call contains forward-looking statements between the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking terminology such as beliefs, expects, may, will, should, anticipate, plans and their opposites or similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences many of which are beyond our control, which may influence in the accuracy of the statements and the projections upon which the statements are based and could cause the Duos Technologies Group actual results to differ materially from those anticipated by the forward-looking statements. These risks and uncertainties include but are not limited to those described in Item One A, induce Annual Report on Form 10-K, which is expressly incorporated herein by reference and other factors as may periodically be described in Duos’ filings with the SEC. Thank you for joining us today for the Duos Technologies Group 2019 second quarter earnings conference call. You may now disconnect.