Duos Technologies Group Q4 2023 Earnings Call Transcript

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April 1, 2024

There are 3 speakers on the call.

Operator

Good afternoon. Welcome to Duo Technologies 4th Quarter and Full Year 2023 Earnings Conference Call. Joining us for today's call are Duo's CEO, Chuck Fairey 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 Fery. Sir, please proceed.

Speaker 1

Thank you. Welcome everyone and thank you for joining us. Earlier today, we issued a press release announcing our financial results for the Q4 and full year 2023, 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 ks filing with the SEC to better understand some of the details we'll be discussing during our call.

Speaker 1

Today, in addition to giving commentary on the recent financials, I'm going to update the assessment I gave during the last earnings call. During that call, I told you that I believe the company was in the best position it had ever been to achieve our strategy and long term value for shareholders. We anticipated the short term financial headwinds as manifested in our results for last year would provide additional challenges for us in executing our strategy. I am pleased to report that despite these challenges, our mid and long term outlook remains unchanged, and I'm expecting much improved performance for 2024. Outside of the most recent financial results, the company continues to make significant progress on many different strategic programs, and I'll be giving you a more comprehensive assessment in my commentary following the financial report from our CFO.

Speaker 1

What remains critical for us in the coming 12 months is to complete the transition from a volatile CapEx only business to a technology focused subscription business with steady recurring revenue. We'll update you on progress with our plan and the critical milestones to achieve this after we review the financial results. Over to you, Mitra.

Speaker 2

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. Our results for Q4 and the full year exemplified its volatility in revenue, underscoring the continued challenges in a purely CapEx model and supporting our ongoing efforts to focus on primarily subscription based model in the future. In addition, the company is currently pursuing certain opportunities that are within our technology based expertise of machine vision and AI systems, but addressing additional industries, which Chuck will speak to in his assessment. To be clear, the business results for Q4 2023 were disappointing, but anticipated based on delays out of our control with 3 of our existing customers.

Speaker 2

Forecasting and timing of revenues for the railroad industry that is adopting new cutting edge technology has been challenging and we are making adjustments to ensure we achieve breakeven and make the business more predictable. We remain strongly positioned within the rail sector and now within the artificial intelligence value chain to make this company profitable. Let's now get into our results for the quarter and for the year. Total revenue for the quarter decreased 76% to 1.5 $2,000,000 compared to $6,350,000 in the Q4 of 2022. Total revenue for the year decreased 50% compared to 2022.

Speaker 2

Much of the decrease was due to customer driven delays beyond the company's control during the ongoing production of the 2 high speed transit focused RIPS and thus resulting in timing delays of the overall project delivery, shifting anticipated revenues into the second half of twenty 24. Company also began its transition into a greater focus on AI software and support services, much of which are recurring revenue where there was an increase in services and consulting revenues. Underlying recurring revenues climbed by approximately 23% on a year over year basis. This growth is fueled by the expansion of service contracts following the completion of new portals in the early 2023, coupled with deployment of AI services deployed with several customers and the onset of a data subscription services contract with the transit customer. The company anticipates these revenue sources will continue growing throughout 2024 and beyond.

Speaker 2

Cost of revenues for the quarter decreased 67% to $1,220,000 compared to $3,680,000 for Q4 of 2022. For the year, cost of revenues decreased 20% overall due to the decrease in revenues previously noted. Cost of revenues on services consulting decreased by 4% year over year despite a small increase in revenues for this category which is a positive trend. The company continues to put into service additional artificial intelligence algorithms and maintenance and support services which are high margin and represent only marginal increases in the requisite cost to deliver these services. Gross margin in Q4 2023 decreased 89 percent to $303,000 compared to $2,670,000 in Q4 20 22.

Speaker 2

For the year, gross margin decreased 72% for the year ended December 31, 2023, as compared to the same period of 2022. The decline was a direct result of project delays that were experienced in the latter half of twenty twenty three offset by a slight increase in service and consulting contribution. The business activity in 2023 consisted primarily of continued progression into the advanced stages of procurement manufacturing for these 2 transit focused RIPS. Operating expenses for Q4 2023 increased 20 percent to $3,310,000 compared to $2,760,000 for Q4 20 22. For the year overall, operating expenses were 10% higher in 2023 as compared to full year 2002.

Speaker 2

There was a 12% increase in sales and marketing related to the increased investment into the capability of the commercial team, including the addition of professionals, extensive experience and leadership in the rail industry. Additionally, a small increase in general and administrative costs was influenced by several factors, including non cash and amortization charges associated with roughly 400,000 share options that were issued during 2023. In late 2023, the company took steps to rationalize some staff positions given the lower performance in 2023 with an anticipated impact of around $1,000,000 in savings and operating costs across 2024. These changes and expense reflect the company's ongoing efforts to invest in talent and expand capabilities in line with the long term operating plan. Net operating loss for Q4 20 23 totaled $3,000,000 compared to net operating loss for approximately $1,000,000 for Q4 2022.

Speaker 2

The loss for operations for the year ended December 31, 2023, 2022 were 11 point $4,000,000 $6,800,000 respectively. The increase in losses from operations during the year was a result of the temporary decline in system revenues stemming from a timing shift in business activity as well as project delays and 2022 was $11,200,000 $6,800,000 respectively. The increase in net loss is primarily attributable to the delays of project activity in 2023 compared to 2022. This was offset slightly with an increase in the company's recurring services and consulting revenue. Net loss per share was $1.56 1 $0.10 for the years ended December 31, 2023, 2022 respectively.

Speaker 2

With regard to the balance sheet, we ended the year with approximately $3,270,000 in cash and cash equivalents. We have an additional quarter of $1,000,000 in receivables as well as $1,350,000 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. Just recently, the company took in net proceeds of more than $2,700,000 from the sale of Series D and Series E convertible preferred stock with both existing and new investors. As of this call, the company currently has approximately $3,400,000 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 and previous capital infusions.

Speaker 2

We appreciate their continued support as we implement our subscription platform. At the end of the year, our contracts and backlog represented approximately $6,600,000 in revenue, and we have approximately $6,000,000 to $7,000,000 in near term renewals, contract modifications and near term awards providing additional visibility in 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 major transit and freight operators ongoing network operations. As anticipated, the net short term effect of our project delays out of our control during 2023 did not allow us to book sufficient revenue to meet our guidance range, which we withdrew in Q4. The underlying positive news is that the lower revenue reported is the result of project delays rather than contract cancellations.

Speaker 2

In fact, the majority of the revenues causing our miss of earlier guidance in 2023 are all expected to be booked during 2024. We maintain sufficient capital to execute our near term plans. The business has no debt and we hold inventory in the balance sheet and the capital necessary to execute the next 2 to 3 projects. This flexibility gives us the ability to execute contracts that we expect to be completed in the next 2 to 3 quarters with a lower cash outlay than normally forecasted. That concludes my financial commentary.

Speaker 2

I'll now pass the call back to Chuck.

Speaker 1

Thank you, Andrew. We continue to be told by our current customers, potential customers, regulators and labor unions that our railcar inspection portal is best in class in terms of performance, reliability and standardization of the hardware, software, IT infrastructure and artificial intelligence. We have shown the technology to a significant number of car manufacturers, owners and shippers and the audience is at first stunned by the capability and then the conversation turns how to turn how to use this data which to our knowledge has never previously been available, how it can be used to increase overall return on investment in terms of safety, cost of risk, maintenance efficiencies, and improvement to velocity and dwell metrics. Recently I've been with the senior leadership team for our large passenger customer where they've been using the data from a subscription from several portals and are very excited by the excellent results they've received thus far. We anticipate this customer will continue to expand the use of this technology in the future.

Speaker 1

In 2023, we were requested to show the technology to more than 30 congressmen and senators on Capitol Hill and several state legislators and governors. We've also demonstrated the technology to the national leadership of Mechanical Carman. We strongly believe this tool would greatly benefit rail safety when used by qualified mechanical personnel. We have also demonstrated our technology to the Customs and Border Patrol Agency and have shown them where we can discover suspected illegal riders with our machine vision and artificial intelligence detections. They are keen to use this solution to assist with the challenges at the border and it can be used to increase CBP officer safety and help railroads get across the border faster.

Speaker 1

Our challenge is to turn that positive reaction into contracts that grow revenue and profits. Over the last three and a half years, Duo's has significantly improved our technical reliability, installation speed and responsiveness to our customers. We've made major advances to our artificial intelligence portfolio which has now been adopted by all of our current customers. We have also dramatically increased the computing speed at the edge for our artificial intelligence detections and making the results available in 60 seconds or less, which is much faster than our competitors and enables immediate safety notifications for locomotive engineers and dispatchers. So, we have previously discussed diversifying our business to further enhance our position as a machine vision and artificial intelligence company into other verticals.

Speaker 1

We currently operate 13 inches data centers with our railcar inspection portals that enable extremely fast computing power and artificial intelligence inferencing, which the industry calls AI at the edge. In fact, last year we won an internal fast computing international sales competition sponsored by Dell Technologies, where we beat out all teams to include a well known large defense contractor and another company that deploys satellites in the space. Tune in to see media that has been or will be released by Dell Technologies and NVIDIA that discusses our advances in computing power at the edge and our partnership in general. Given this expertise and partnering with Dell Technologies and NVIDIA, we are in discussions with several companies outside the rail industry to use our knowledge and expertise to support their edge computing requirements given the massive demand for artificial intelligence, computing and 5 gs rollout. This is aligned with our strategy to be an important part of the overall AI value chain.

Speaker 1

Earlier this year, we issued a press release announcing that the US Patent and Trademark Office granted us a patent for use of artificial intelligence to detect defects in trains and methods to use. This patent is important in several respects, not only does it recognize our AI methodology, but it also covers how we acquire, compute and present the data with our railcar inspection. The granting of this patent shows significant accomplishments and value of our hardware, software, IT, and artificial intelligence teams. We have also made progress in shifting our revenue model to become more software, artificial intelligence and services focused. Our recently signed deals with 2 major railroads for AI subscription and support services contracts is just the beginning.

Speaker 1

I believe a trend for other operators to engage us to provide automated inspections of railcars. As a data point, our technology conducted scans of more than 8,500,000 railcars last year. That translates to 665,000 unique railcars or approximately 40% of the total freight car population in North America. We continue to invest in research and development and will release a number of new technologies in 2024 including but not limited to a new version of our world class Centrico platform, which is a software user interface that the mechanical car inspectors use to virtually inspect railcars. Centrico was originally designed to be the hub and interface for sensor based systems and in the last 3 years it has been extensively updated and hardened.

Speaker 1

I will have more to say about this in future calls, but it's safe to say that the new version will be an important component in the generative AI value chain, supporting a large number of deployed algorithms which are now in operation with all of our customers. In some cases, these automated detections through the portals and machine vision systems are being used to obtain regulatory layers. We are also now creating generative artificial intelligence to strengthen the training sets that make our AI use cases faster and more reliable. As previously reported, we appointed Chris King as our Chief Commercial Officer. Chris worked for me as a Chief Commercial Officer at APR Energy, and he was a key leader responsible for growing that business from $225,000,000 revenue in 2016 to more than $600,000,000 of revenue in 2019.

Speaker 1

He has significant experience closing deals and he's having very positive impact here at Duo's. Our current backlog remains steady at around $6,600,000 and we are engaged in more than $100,000,000 of opportunities that we expect to drive our growth both this year and beyond. As part of that opportunity set, we are progressing in talks to build the first of several Duo Zone portals from which to sell data subscriptions located at heavily traffic railcars interchange points in the United States. Furthermore, we have also identified or in discussions with several large telecommunications companies to deploy its data centers in support of the AI infrastructure support chain. At our last call, I outlined the risks to our plans and it's worth reviewing them at this time.

Speaker 1

The primary risks continue to be project delays out of our control and timing of revenue recognition with current customers and then slow adoption of this technology with new customers in the rail sector. We will continue to press forward into the rail sector, which we know will adopt our technology at a large scale, but also initiate efforts to diversify our offerings into the broader AI value chain. 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. We have developed a significant opportunity with our edge data centers and other technology to provide additional value in the broader AI value chain. We will continue our efforts to transition from a CapEx business to a recurring revenue business in the coming 12 months.

Speaker 1

I'd like to thank our current customers, which includes Amtrak, Canadian National, CPKC, CSX, Feramex, Chicago Metro, and LA Metro for their continued contract renewals. I also want to thank our long term shareholders for their financial support, which has been critical to our success. I believe that our company is in a great position to significantly grow in value despite our current financial results. Thank you for your time and we'll open the call for your questions. Operator, please provide the appropriate instructions.

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Ed Woo with Ascendiant Capital Markets. Please proceed with your question.

Speaker 1

Yes. Thank you for taking my questions and congratulations on the progress. As we move further and farther away from the major train in East Palatine, Ohio last year, what's the regulatory environment? And do you see that the legislature, the Congress is still putting train safety as a high priority? Yes, it's good to hear from you.

Speaker 1

So I think just a brief update. So you've got the Railway Safety Act Bill of 2023 waiting its turn on the Senate floor and then it's still in committee over on the House side. I think as we've, as you said, got further away from East Palestine and gotten closer to the national elections, I think the likelihood and I think the consensus is pretty common amongst all the industry stakeholders that the likelihood that that Railway Safety Act goes through, I think is diminishing. I think that we have though said publicly a number of times is that despite that fact, the railroads in general, the rail industry has gotten a lot more focused on safety in general. We've seen a lot of our Class 1 customers as well as Shorelines make investments quietly into additional wayside detection technologies.

Speaker 1

We're in discussion with a lot of them about ours. I think you've also got what we've said before that our strategy to expand our technology on a larger scale into this industry should not rely and does not rely on the passage of that bill. Since the East Palestine, we've got a lot more commercial activity. We've said before, it takes a little while to move from inquiry to contract here with the large Class Is, but we are making progress and I expect to announce some of that in the coming quarters. Hopefully, that answers the question.

Speaker 1

Yes, it does. Thank you and I wish you guys good luck. Thank you. Okay. Appreciate it.

Speaker 1

Thank you, Ed. So I don't see any other questions about this board right this moment. We do have a I'm sorry, go ahead moderator.

Operator

Apologies. Management will now take select listeners submitted questions.

Speaker 1

Okay. So we did we took some written questions in and I will work through a couple of them that I think are appropriate here. So one of the questions was there's been several articles recently published in railway trends websites regarding CRISSE grants and potential inspections of machine vision projects. Can you comment if DUOS has been awarded a CRISSE related projects? So it's a good question and we did see some recent press release related to Chrissy projects.

Speaker 1

At this point right now, we cannot confirm any awards related to Christy projects. However, we can say that several of our existing customers, potential new customers appear to either be expecting to receive prissy money or in some cases actually receive some prissy money and we believe some of those will bear fruit for us here in 2024. The next question again which is a good one, I alluded to it in my comments. It says you've mentioned before about diversifying the business to enhance Duos' position with AI and machine vision and can you further elaborate on this? So Duos has already had and continues to establish a reputation for delivering fast real time data driven results for our rail customers.

Speaker 1

Part and parcel with our railcar inspection portal, we've now got years of experience conducting edge computing where we're doing this AI edge processing and inferencing is what they call it. And all that sits out in those edge data centers. And so, we've gotten a lot of experience in that. And recently in partnership with both Dell and NVIDIA, we've been introduced to a different set of folks in the telecommunications industry that are interested in seeking our assistance in placing edge data centers out. This is something we've been quietly working on for the last year, but now we think we're actually going to see some progress on that here in the near term.

Speaker 1

Again, the overall goal is to participate in the AI value chain writ large, which this is directly and squarely in. And it's also designed to further drive our desire to get into a more recurring revenue versus the one time CapEx revenue. And I think we'll take maybe one more here. So Yes, the question here was can you comment more on your partnerships with Dell and NVIDIA. So we've been partnered with Dell and NVIDIA probably for more than 3 years now.

Speaker 1

Those partnerships have actually strengthened particularly in the last 18 months, again with Dell. We've been doing some we use commercial off the shelf servers from Dell or edge servers, but they add some bespoke capabilities to it as does NVIDIA to create what we do at the edge with our railcar artificial intelligence. Recently there has been social media posts from both those companies about our progress in the rail vertical. And I think Dell in particular and I think NVIDIA probably a little bit later also has some follow on marketing that they're doing with us. And we're in discussion with both companies to see how we can obviously those 2 large companies are very large technical companies that we'd like to be partnered with.

Speaker 1

And the good news is that we're able to engage them at some pretty senior levels to continue our efforts in this rail space. So with that, I think we've approached our time limit and I'd like to turn it back over to our moderator please.

Operator

Thank you. At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Ferry for his closing remarks.

Speaker 1

Yes, I really appreciate everybody joining the call and we look forward to follow on calls to give you updates on the business. Thank you.

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 within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking terminology such as beliefs, 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 statements and the projections upon which the statements are based and could cause Duo Technologies Group, Inc. Actual results to differ materially from those anticipated by the forward looking statements.

Operator

These risks and uncertainties include, but are not limited to, those described in Item 1A and Duo's Annual Report on Form 10 ks, which is expressly incorporated herein by reference and other factors as may periodically be described in Duo's filings with the SEC. Thank you for joining us today for Duo Technologies Group's 4th quarter and full year 2023 earnings call. You may now disconnect.

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Duos Technologies Group Q4 2023
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