Duos Technologies Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 14, 2023

There are 5 speakers on the call.

Operator

Good afternoon. Welcome to Duo's Technology Third Quarter 2023 Earnings Conference Call. Joining us on today's call are Duo's CEO, Chuck Sarey 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.

Operator

Now I would like to turn the call over to Duo's CEO, Chuck Ferri. Sir, please proceed.

Speaker 1

Welcome, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our financial results for the Q3 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. Today, I'm going to discuss my assessment That the company is in the best position it has ever been to achieve our strategy long term value despite some short term financial headwinds, which Andrew will walk us through in a moment.

Speaker 1

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. 3 of the 6 Class 1 railroads, plus Fairamex and Amtrak use our railcar inspection solution with strong results. During the Q3, we scanned 2,300,000 railcars 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 DUS is in a strong position with the support of our current rail customers to be in the leading edge of this adoption.

Speaker 1

What is critical for us in the next 12 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?

Speaker 2

Thank you, Chuck. As we have discussed in previous calls, Duos has historically operated with periods of intermittent growth, interspersed with temporary walls as large new contracts begin the execution cycle and progressed to various stages of development. More recently, we discussed the strategic shift of the business toward recurring revenue model, Given the volatility and previously noted forecast challenges of our legacy CapEx focused structure, our results To be clear, the business is in a strong position both fundamentally and financially. However, contract timing represents Duo's biggest 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 briefing my commentary to allow for analysis on the strategic vision.

Speaker 2

Now let's get into our results for the Q3. Total revenue for the Q3 of 2023 was 1,530,000 and $5,950,000 for the 1st 9 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 Q3 2023 and timing of new CapEx projects. Gross margin was $227,000 for the Q3 of 2023 $1,010,000 for 1st 9 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.

Speaker 2

Operating expenses for the Q3 were 3,200,000 and $9,270,000 for the 1st 9 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 Q4 of 2023 and beyond. Net operating loss for the 3rd quarter totaled 2,970,000 and $8,270,000 for the 9 months ended September 30, 2023. The loss from operations was primarily the result of continued lower revenues recorded in the Q3 and year to date as a consequence of the project delays previously noted. This had a similar impact on overall net loss.

Speaker 2

For the 3 months ended September 30, 2023, 2022, net loss per common share was $0.41 $0.30 respectively. For the 9 months ended September 30, 2023, 2022, Net loss per common share was $1.12 $1.01 respectively. Let's now discuss the balance sheet. We ended the quarter with approximately $3,270,000 in cash and cash equivalents. We have an additional $250,000 in receivables as well as $1,350,000 in contract assets, together constituting over $1,600,000 in future cash flow as well as $1,500,000 of inventory consisting primarily of long lead items for 2 pending RIP installations.

Speaker 2

Subsequent to the end of the quarter, in early November, the company took and net proceeds of $2,500,000 from the sale of Series E Convertible Preferred Stock with an existing investor. As of this call, The company has approximately $4,100,000 in cash and cash equivalents. Duos continues to have the support of our long term shareholders to 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 Q3, our contracts and backlog represented approximately $6,400,000 revenue, and we have approximately $5,000,000 to $7,000,000 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 railcar inspection portals are critical to 3 of the 6 Class 1 railroads and our other meter transit and freight operators' ongoing network operations.

Speaker 2

The net effect of the aforementioned timing challenges during 2023 is that we will not be able to book sufficient revenue to meet our 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 key subscriptions and CapEx projects in our pipeline.

Speaker 2

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.

Speaker 1

Thank you, Andrew. Let's briefly discuss where we are as a company right now. Our current customers and many potential new customers have told us That technically our railcar inspection portal is the best in class in terms of performance, reliability and standardization of the hardware, software, IT infrastructure and artificial intelligence. Major advancements have been made in AI development And I'm pleased to say that all of Duos' customers are using our AI Detections catalog of 40 plus use cases with excellent results. In some applications, our customers are using the portals and detections catalog to obtain regulatory waivers.

Speaker 1

We have continued to invest in research and development to stay at the forefront of the industry. This coming year, we'll deploy a new thermal undercarriage examiner, A new 360 degree wheel and brake inspection system and a new hot bearing detector system, all of which can be integrated into the existing railcar inspection portal. Another key technical breakthrough Deployed to the TricEdge is a system update whereby the portals can acquire, compute and present inspection results in as little as 60 seconds after the railcar pass through the portal, which allows for instant notification to train crews, dispatchers and railroad mechanical teams. This achievement has been publicly recognized by 2 of our technical partners, Dell Computers and NVIDIA. Another compelling feature is that our machine vision AI safety data is exchangeable and can be uniformly distributed amongst the stakeholders of the larger network in near real time.

Speaker 1

Commercially, we have a lot of high level interest we have a high level of interest for all the Class 1s, Several short lines and passenger railroads. Our backlog at the end of the quarter of approximately 6,400,000 With another $5,000,000 to $7,000,000 of near term contract modifications as well as multiyear service extensions expected on the next two quarters with existing customers further emphasizes the long term value in the RIT program. We currently have active proposals and evaluation of a handful of different rail carriers for dozens of new portals, which also includes larger international opportunities. As we've always stated, the closing cycle for new CapEx deals is slow and episodic. That is exactly why we've decided to shift our focus to the subscription model, which does a couple of things.

Speaker 1

First, It doesn't change our original total addressable market of 150 portals to effectively cover the North American network. 2nd, it now adds hundreds of car owners, lessors and shippers, many of whom have shown strong interest in using our safety data to more effectively manage the maintenance of their fleet to improve safety and overall car utilization rates. We currently have 2 subscription customers. 1 is a passenger rail carrier and the other is one of the largest car operating companies in North America. We are also in discussions with a dozen other prospective subscribers.

Speaker 1

I expect that with support from our partners, Our subscriptions will grow significantly in the near future to promote a safer rail network. So now let me outline our plan and the key milestones to watch that will ultimately center for us for profitable business. The first key milestone is partnering with existing customers where we already have portals, which will enable us to offer subscriptions to car owners and shippers. We were also in discussions to build the 1st subscription portal where we will own and operate it at one of the nation's busiest interchange points for hard hazardous cargo. As you can imagine, post East Palestine, there has been renewed interest Across the industry, it shares safety data from wayside detection systems.

Speaker 1

In this concept, a rail carrier benefits by having cars arrive in better mechanical condition, which is both safer and an enabler to improve overall car utilization rate. The carriers can also benefit by seeing the railcars before they accept them and interchange with them. The second is continuing our commercial efforts I recently read a government report on lessons learned from the implementation of positive train control. The primary challenge was to achieve interoperability and the ability to easily exchange data amongst carriers and other stakeholders. As with the adoption of any safety technology, the long game is to have this interoperability and do it with minimal investment across all stakeholders.

Speaker 1

The third is to continue to work with our railroad partners to gain support from key industry stakeholders such as the American Association of Railroads, The Federal Rail Administration, labor unions and others. The 4th is to work with our partners on a Southern Board strategy. 1 of our Class I partners is already using our technology, which is highly capable of identifying the legal riders for waiver application to move rail farmers faster and more securely across the southern border as near shoring because a more critical issue for the United States. We are currently in discussions with our rail partners and federal rail federal and state law enforcement agencies to expand the use of our technology to better enable these organizations to securely move commerce across the board. The final milestone is to expand our solution internationally.

Speaker 1

We already have several proposals and active evaluation for a handful of portals and have Railcar inspection portal becomes the industry standard for machine vision and wayside detection enabled with AI. The portals will be installed across the entire North American network and eventually around the globe whether owned by duos or our customers and operate them for the sharing of safety data amongst the Class 1s, Short lines, passenger, regulatory, other federal, state and local authorities. Corals would form part of an overall safety management system For data from all wayside detection systems, onboard telemetry data and other rail track network data could be viewed in a single system. Highly functional analytics and AI will be applied and the information used by human operators to make decisions and take actions in near real time. If we are successful achieving our goal, we would have 100 to 150 portals installed on our North American network, all allowing for data access via subscriptions.

Speaker 1

Under this model, the business would generate annual recurring revenues that are many factors above our current CapEx focused business model. So what are the risks to achieving our goals? Primary risks are project delays and timing of revenue recognition and cash collection. The current CapEx model remains episodic And difficult to forecast, but we'll continue to be a part of our revenue structure in the foreseeable future. We have shown we can manage through this in the past And we will continue to see this kind of pressure as we transition to a subscription model.

Speaker 1

Another risk is the speed with which the industry will adopt this cutting edge technology. As I have said, there is broad consensus across all railroads stakeholders, the technology such as ours is needed and will be widely implemented. The impending Railway Safety Act whether it passes or not has spurred the entire industry to get even more focused on safety. Our technology can also be a key technical enabler for our rail operators and law enforcement agencies at Southern Border. In closing, I want to highlight that I believe our company has a leadership position in the rail sector with machine vision and AI wayside detection.

Speaker 1

Our transition over the next 12 to 18 months into a recurring revenue business model, selling into a growing demand for this technology puts us in a very strong position to give an unexpected high return on investment to our loyal shareholders. I also believe that despite Our current short term revenue challenges, the company remains in good financial position with sufficient cash for operations and near term business opportunities It will accomplish the key milestones I discussed earlier and provide a good return to our shareholders. And with that, we're ready to open the call for your questions. Operator, would you please provide the appropriate instructions?

Operator

Thank you. The floor is now open for questions. And our first question comes from Mike Latimore from Northland Securities. Go ahead, Mike.

Speaker 3

Hi, guys. This is Owen Rickard on for Mike tonight. First question, is the postponement of deployments with the large transmit customer a cancellation? And if not a cancellation, will deployments occur in 2024?

Speaker 1

Yes. Thanks for the question. To be real clear, it is not, I see again not a cancellation. It is a delay for that customer right there that's up along the Northeast Corridor. What's going on is you've Two large tunnel projects and a bridge project that are north of our portal locations.

Speaker 1

Project delays out of our control at those three sites have caused delays around the civil works And some of the other preparatory works to insert those portals. So we're definitely expecting to complete those portals in the coming year. But again, I think that customer is managing themselves through some project delays. And unfortunately, we are being impacted from that. That being said, I want to add that that customer has worked very closely with us And has actually added a number of additional contract modifications and Other modifications to add additional work in the form of subscriptions that has actually added to the overall value of that customer.

Speaker 1

So, While we're while the delays are frustrating for us, it has actually added to the overall value to the overall backlog for the company.

Speaker 3

Got it. Thanks. And then what are you guys assuming for sales cycles on subscription deals? And how many subscription customers are expecting to land in fiscal year 'twenty four?

Speaker 1

Yes. We talked before the sales cycle for a normal CapEx sale is oftentimes It will run 12 to 18 months, which is a long cycle. In the subscription cycle, we've already been through this. That sales cycle is shorter. I would probably place it about anywhere from 3 to 9 months depending on the customer.

Speaker 1

We already have 2 solid subscription customers now And we're already talking to a dozen or so others. Each of them has their own separate set of situations. So I would expect We would probably add at least 6 to 12 additional subscriptions, subscription customers over the course of 2024 At a minimum as we progress.

Speaker 3

Okay. And then last one, do many customers want to

Speaker 1

I'll try to categorize like this. I always try to be very transparent. The type of data, the type of safety data, which is machine vision In artificial intelligence driven, it's pretty new to this industry. A lot of the car owners and shippers Have not previously had access to this data. Now the Class 1 carriers have had access to this data now for a couple of years, certainly our 3 main customers.

Speaker 1

And I believe as we go forward, our current Class 1 customers will actually help And assist in kind of talking about the use of that data and help us actually drive Bringing on those subscription customers. I do I will say that the current shippers and car owners are kind of looking at as to how the Class I customers use that data and then the discussions that we're having, which are very detailed and very technical, There's a lot of excitement for how they can use it and how they can use that to make sure as an enabler to keep their car utilization rates higher At this point.

Operator

And our next question comes from Rafe Khaled from Ascendiant Capital. Go ahead.

Speaker 4

Hi, it's Rafei for Edward Wu. Two questions. First one, can you talk a little bit about or expand on your international marketing efforts? And then the second one, Do you see any change in demand when there is a government shutdown or upcoming elections?

Speaker 1

Yes. So on the first question, Particularly over the last year, we've taken a lot of inquiries internationally. These inquiries have come in from Europe, they've come in from Australia, They've come in from the Middle East and we've also seen the inquiries come in obviously from Canada and Mexico, but also down in Latin America. In terms of marketing, we've approached it 1 or 2 ways. Number 1, we're very fortunate that We haven't done a lot of international marketing directly, but we've still taken an increase.

Speaker 1

So I think that comes from You know, having a good website and I think having an overall good reputation within the Class 1, the American North American Class 1 Network, a lot of times the calls come in after they queried some of our customers. So that's very helpful. We have taken in some of our leads, if you will, internationally from our technology partners, Both Dell Computers and NVIDIA, which we're very thankful for. And then the 3rd pathway internationally has been working with partners. There are some larger wayside detection and rail vendor partners.

Speaker 1

I don't want to name the publicly right now, But we are partnered with 1 or 2 of the larger rail vendors in the international market that have a good international footprint, where we've partnered with them on some of these international opportunities. So we're excited to do that. And it's certainly in that partnership allows us to be a little bit more aggressive in some of the requests for proposals that are currently under evaluation. On the second question, the government shutdown. As you know, I spent a number of years in the Army, so we still always be very careful of watch government shutdowns.

Speaker 1

They can be very disruptive to not only employees, but also their families. In our case, a government shutdown, I do not see that impacting our business at this time. Again, most of our business is with commercial entities They're not at least directly impacted by that. Our one true government customer right now, as it stands, last time we were threatened with a We've gone through shutdowns, it did not impact us. If we had an extended shutdown, our 1 passenger rail customer, it could impact them.

Speaker 1

But right now, I don't really I'm not particularly concerned about it. Andrew, unless you see it differently, that's kind of my take

Speaker 2

on it. No, I think that's a very consistent approach with what we've seen so far with that customer.

Speaker 1

Thank you very much. Okay. Any other questions? I appreciate we'll answer them for you.

Operator

And at this time, this concludes our question and answer session. I would now like to turn the floor back over to Stifari for his closing remarks.

Speaker 1

Yes. Before we conclude today's call, I'd like to provide Dulos is excuse me, I stand corrected. Thanks, operator. Appreciate your support today and thank you for everyone joining us And thank you especially for our shareholders that are on the call today.

Operator

Before we conclude today's call, I would like to provide Duos' Safe Harbor statement that includes important cautions regarding forward looking statements made during this call. The earnings call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking technologies such as believes, expects, may, will, should, anticipates, 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 the accuracy of the statements and the projections upon which the statements are based and could cause Duos Technologies Group Incorporated 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 1A in Duos' Annual Report on Form 10 ks, which is expressly incorporated herein by reference and on other factors as may periodically be described in Duos' filings with the SEC.

Operator

Thank you for joining us today for Duos Technology Group's 3rd quarter 2023 conference call. You may now disconnect and have a nice day.

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Earnings Conference Call
Duos Technologies Group Q3 2023
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