Duos Technologies Group Inc (DUOT) 2019 Q2 法說會逐字稿

Good afternoon. Welcome to Duos Technologies Second Quarter 2019 Earnings Conference Call. (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. Then before we conclude today's call, I'll provide the necessary cautions regarding forward-looking statements made by management during this call.

I'd like to turn the call over to Duos Chairman and CEO, Gianni Arcaini. Sir, please proceed.

Well, thank you very much, Christian, and 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 '19 as well as other operational highlights. A copy of the 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 our Rail Inspection Portal business. I plan to provide additional commentary on our results as well as this new win shortly. Now before we begin with a discussion of our results, I'd 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 advanced analytical technology solutions with a strong portfolio of intellectual property. In simple terms, we create highly sophisticated technology solutions for our wide range of customers. We focus on improving their business processes to ultimately provide a measurable ROI. To that end, we have, and continue to, develop a broad range of proprietary technologies, which we typically deploy as currency 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 technology suite, which includes back-end processing and middleware, branded as praesidium, and our customer-facing software platform, branded as centraco. Our chief focus remains on mission-critical security, inspection and operational applications. Our target markets predominantly includes 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 $100 billion.

In addition to our strength in technology development, one major differentiator is that our technologies do not require any change in our customers' business practices. A significant aspect of our core platforms is the adaptability to various verticals requiring very little adjustments to our code and system architecture. Our long-term market strategy is diversified and designed to address cyclical market segments volatilities. We will be discussing our results for the quarter and half year shortly. However, I want to stress that, historically, our business is subject to shifts in timing, particularly our quarterly members, which should be viewed in context of our cumulative performance, and we are executing our business plan to deliver strong growth and profitability.

We've become a public company in '15, we set out a long-term strategy, not only we will focus other than growth markets, but also build a sustainable competitive advantage as an advanced technology business. A key element of that plan is to build our 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 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 variations will become less pronounced as we grow old the next 24 to 36 months, on our way to building a much larger business. At the beginning of the first quarter of 2019, we launched truevue360, a subsidiary whose 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 first part 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 is significant potential for licensing our 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 to contribute significantly to our recurring revenue base over time. The talent pool available for hire in today's market continues to be very tight, particularly within the advanced computer engineering disciplines. Investment in our talent pool continues to be a central part of our company's financial plan. As of today, our total 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'd like to provide a brief summary of our results. In the second quarter, we continue to make positive incremental progress in our long-term development road map but we did also experience order implementation delays, which impacted our near-term financial performance. Given this lag in revenue recognition during Q2, we also encountered other timing-related discrepancies which skewed the presentation of our spending relative to our results. More specifically, as I just mentioned a moment ago, we significantly increased our staffing and continued to build out the necessary infrastructure to support the scaled growth we are anticipating through the end of this year and beyond. However, despite the quarterly setback, year-to-date, our results have single-handedly outpaced last year's performance, most notably evidenced in our 30% top line increase and 33% improvement in gross profit.

The long and the short 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 road map as well as the development of our truevue360 subsidiary are both examples of how we're working to address this issue going forward. In the more immediate term, we are evaluating additional opportunities to introduce more predictability into our operation 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 our position.

That said, contract related through the few key customers aside, this quarter was a fairly active one, as you might have noticed from our press releases during the period. I plan to provide a high-level overview of 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 our outlook for 2019.

Adrian, it's 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 have discussed how the majority of our revenues 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.

I'm 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've 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 effective 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 the 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 decreased 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 for 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 projects revenue portion of the company's business, they are not expected to have any material impact for the full year.

Total revenue for the 6 months 2019 increased 30% to $5.7 million compared to $4.4 million in the equivalent year-ago period. The increase in total revenue was driven by the strength of the project's 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 a 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 in anticipation of a significantly greater number of projects over the next 18 months.

Gross profit for the first 6 months of 2019 was $2.3 million or 41% of revenues compared to $1.7 million or 40% of revenues for the first 6 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 in associated costs, which was offset by a decreased difference in timing between the company's significant increase in staffing and certain customer delays, project implementation as 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 13% to $2.1 million from $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 decreased. For the first 6 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 the company's operating subsidiary, Duos Technologies, as well as in the truevue360 subsidiary and additional contract expenses related to an increase in revenues.

Selling and marketing expenses, research and development and other general and 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 6-month period, net loss was $1.9 million or 17 loss per share compared to a 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 was $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 in net loss for both periods was primarily attributable to the decrease in project revenue as previously mentioned.

Let's now discuss the balance sheet. As of June 2019, our cash position remains 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 and operations due to the impact of the delays previously addressed. It should be noted that these numbers include funding of our truevue360 start-up 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 continuing improvement on the balance sheet going forward.

I would now like to discuss our 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 am 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'll 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 that investors should not take a single quarter as indicative of future performance.

This completes my financial summary. I'd 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'd like to provide some key updates from the quarter as well as expanding upon our outlook in the remainder of the year. As I mentioned in my opening remarks, we continue to make incremental progress on our product road map. Starting in Q1, we formed a dedicated team of development engineers to focus specifically on expanding our existing technology road map. I'm pleased to report that the early efforts from this group has already translated into promising results as we announced the number of new product offerings during the quarter.

First, in May, we announced apis3D, which is our next-generation automated pantograph inspection systems employing 3D technology as well as algorithmic detect analysis for transit and light rail train inspection. This solution is in high demand in the United States, and we are working on several project opportunities with a number of national rail operators. We believe this product has the potential to accelerate the rail industry's 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 entering or exiting distribution centers or staging jobs. The growth of distribution center operations throughout the country is driving ever-increasing demand for technology advancements that provide additional cost savings and efficiencies. The addition of AI to our alis system is expected to increase scale throughput, address loss-prevention challenges, provide a secure entry and exit as well as a reduction in yearly expenses and costs. It also ensures 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're, 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 also still winning new business as well as expanding our relationships with existing blue-chip customers.

First, as you may have seen from our press release issued today and as mentioned by Adrian a moment ago, we are just awarded a $2.3 million contract with another Class 1 freight railroad. The award includes a 5-year contract for 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 automating certain aspects of this customer's railcar inspection.

Also, with our RIP business, earlier in the quarter, secured a $1.1 million contract expansion -- sorry, contract extension with an existing customers, renewing our maintenance and support agreement. The scope of work covered in the agreement requires uninterrupted software services, tech support and maintenance for several inspection portal -- 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 multitrack apis with Chicago Metra, which oversees all commuter rail operations in the 3,700 square mile northeastern Illinois region. Chicago Metra has long been a 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 apis3D for beta testing on one of their tracks.

For those of you who are less familiar with pantograph technology, pantographs relay current from high-voltage overhead electrical wires to power the train and are inspected from visual damage in the form of cracks, chips and then that could result in test downtime, if not properly identified and preventively repaired.

For this deployment, we are on track for system installation in the third quarter and we'll be working closely with Chicago Metra to increase their track safety as well as reduce downtime over the coming years.

Moving to a few other nonoperational items we're sharing from the quarter. First, effective June '19 of this year, Duos Technologies qualified and began trading on the OTCQX Best Market. Graduating to the OTCQX means that we have met the more stringent requirements of the QX market. We believe trading on the OTCQX offers an opportunity to generate even greater interest in our company from a broader universe of potential investors. 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 a CPA, currently serves as the CFO of I.D. Systems, a company traded on NASDAQ. With this appointment, Duos has now 5 total directors and 3 independent directors.

Moving on, we also participated in and hosted a few industry events during the quarter. While these types of events don't consume an immediate ROI for our business, we believe they play a crucial 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 Solutions Summit. After these, we're given unique insights into the impact artificial intelligence machine learning will have on the rail industry. In addition, we unveiled the upcoming Duos product growth road map for the first time, which included some of the new intelligence, automated inspection solutions and the development for both the freight and passenger rail market.

In June, we joined other railroad industry leaders and experts in presenting our solutions to key policymakers at both RailxTech 2019 and the 2019 Railroad Day on Capitol Hill. RailxTech 2019, held in Washington, D.C., was hosted by the Association of American Railroads, or also known as AAR. This annual event brings together the nation's Class 1 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 in Capitol Hill was held the following day in Washington, D.C. They 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 in attendance.

We're appreciative of the interest and attention we received from many members of Congress. We took time to discuss the impact and the importance of these technologies.

Now shifting to our outlook. Entering the second half of the year and in addition to the deal we just announced today, we have seen 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 Adrian 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?

(Operator Instructions) We have a question coming from the line of [Peter Brophy], a private investor.

Since I heard Adrian's presentation at the Trickle Research Conference here in Denver last spring and got interested, I've been following the progress 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 is -- I don't know if you could answer this enough, but is this a United -- a U.S. railroad customer?

Yes. It's a U.S. railroad.

Okay. So 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 we present at like events -- like you were at 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'll be an update coming out probably in the next couple of weeks. That's not an official number. It's just to give some guidance, because as you can see, with the nature of the project business, as we've mentioned, things can shift between quarters. And I've also 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? Is that what 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's a strong desire by U.S. transit organizations to stay in mainland America, and that gives us a little bit of an advantage. There's some competitors, which are overseas. One of the reasons we have accelerated the development of some of the transit solutions such as the apis3D support is really at the urge of some of the larger transit systems in the United States. And there's 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 -- is it an 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 over time?

Yes, that's a fair assessment. Yes.

(Operator Instructions) The next question is coming from the line of William Bremer, Vanquish Capital.

Can you hear me?

Yes. Yes, we can hear you.

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's a 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 2-year outlook. So we're 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've 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 indications that this are, we will obviously evaluate what our capital needs going forward. But I can tell you from my standpoint, the management team hasn't made yet any assessment on ultimately what we're going to do in that area.

So maybe a follow-up on that. We always have to be very conservative in what we disclose during these calls. As a Chairman, I really am anxious to tell you much more. But I get pulled back by attorneys and our CFO and CAO. The thing is that typically, the rule of thumb, we have, based on our history, assuming about 20% of your top revenue, of your annual revenue as working capital.

So we give guideline of about $50 million for this year, which we believe we're going to achieve. So if you calculate 20% of that, it's about $3 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 start-up cost of truevue360, which was really the purpose of this initial additional raise.

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 fresh in cash, we're not ready to go to the cash swimming pool but we're used to live a tight life, and we will certainly reach out at the end of the year. But between now and next year, we are not giving you 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 do an uplisting to NASDAQ which we haven't discussed in detail because it's a known factor. With this uplisting to NASDAQ, we have a number of strategic plans in line. And you probably will see very soon some of our thoughts and strategies.

Well, I wish you all the very best in terms of getting to NASDAQ. And I do hope that your next raise or 2, given your bookings and the strength of the company as it's turning, you do get better economics.

We are certainly planning to. When we did the raise in 2017, because of time delays of the capital raise and all these things, our OpEx were a little bit through the 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'll be presenting to come see you going forward?

Yes, we have -- on our Investor website, I believe, there's a section of -- on the right side there's a section where we say where we are either presenting or any other events.

We have an event coming up in September. We're 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.

Or Gateway. You can call Gateway. They know. They track us down, but Gateway may not know the industry events, but they're all published on our website.

Yes. And also, we put out press releases when we are going to present in the events well ahead of time.

Right, right. But free to call us anytime.

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

All right. Well, thank you very much. We're months too soon. 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. I guess thank you for joining us today. I specially want to thank our employees, partners and investors for their continued support. We look forward to updating you on our next call. Operator?

So before we conclude today's call, I'd 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 terminologies such as beliefs, expects, may, will, should, anticipates, plans and the 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 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-K, which is especially 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 Duos Technologies Group 2019 Second Quarter Earnings Conference Call. You may now disconnect.