Duos Technologies Group Inc (DUOT) 2019 Q4 法說會逐字稿

Good afternoon. Welcome to Duos Technologies Fourth Quarter and Full Year 2019 Earnings Conference Call. Joining us for today's call are Duos' Chairman and CEO, Gianni Arcaini; and CFO, Adrian Goldfarb. Following their remarks, we will open the call for your questions. Then before we conclude today's call, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call.

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

Thank you, Jessie. Welcome, everyone, and thank you for joining us. First and foremost, our heart goes out to the many families impacted by the devastating effects of the coronavirus. Our thoughts and prayers are with you and your loved ones. I'm sure our company news may not be a priority on your mind today. So we will keep today's remarks a little shorter than usual.

At this point, our company remains fully operational. Earlier today, we issued a press release announcing our financial results for the fourth quarter and full year 2019 as well as other operational highlights. A copy of this press release is available in the Investor Relations section of our website. I plan to provide additional commentary on our results shortly.

As you know, we provide advanced analytical 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 return on investment. To that end, we have and continue to develop a broad range of proprietary technologies, which we typically deploy as turnkey systems. Our focus is increasingly shifting to advanced deep machine learning and artificial intelligence applications as well as advanced video analytics that we deliver through a combination of our image and data capture technology suite, which includes back-end processing and middleware, branded as praesidium, and our customer-facing software platform branded as centraco. Just a side note, all of our software applications are proprietary and developed in-house.

Our chief focus remains on mission-critical security, inspection and operational applications. Our target markets predominantly include the rail transportation, retail distribution, critical infrastructure security and law enforcement sectors. We estimated a total addressable market opportunity in our combined core target markets exceeds $100 billion.

In addition to our strength in technology development, one major differentiator is that our technologies do not require any significant change in our customers' business practices.

A chief aspect of our core platforms is the adaptability to various verticals requiring minor adjustments to our code and system architecture. Our long-term market strategy is to be increasingly diversified and set up to address critical market segments' volatility.

And now to our business update. As you can see from the results we published this afternoon, we ended 2019 on a high note. I don't think it would be hyperbolic to say that it was truly a transformational year for Duos. In confirming our preliminary estimates that we originally published in January, I can now say that both Q4 and 2019 as a whole, we have recorded -- were record performances for our business.

In the fourth quarter, we also achieved profitability. Our results for the fourth quarter validate our decision to strategically allocate greater resources earlier in the year to meet this expected increase in demand. Earlier this year, we announced a successful capital raise of more than $9 million, which will provide us with the necessary resources to continue growing our business over the long-term. And particularly, will provide us with the necessary cash reserves to face the current unprecedented market volatility. Perhaps the most exciting recent development that Duos has been, our February uplisting to the NASDAQ Capital Markets. Being listed on the National Exchange has been a multi-year strategic priority for us and I'm very proud of our collective teams for making this goal a reality. In connection with the uplisting, we also had the privilege of ringing the ceremonial NASDAQ Opening Bell. The event was covered by select financial media, including TD Ameritrade Network, The Watch List, among others.

With our new listing on the National Exchange, we are eager to capitalize on the opportunity to more widely spread the Duos story to a new broader audience. Now before I go any further into our recent updates, I'll now turn the call over to my colleague, CFO, Adrian Goldfarb, who will walk us through our financial results for the fourth quarter and for the year. Adrian?

Thank you, Gianni. On previous calls, I have discussed how the majority of our revenue is recognized as a result of our adoption of ASC 606 at the beginning of last year. Comparisons of each quarter are now on the same accounting basis. It should also be noted that the financial results I'll be discussing represent the consolidation of the company with its subsidiaries, Duos Technologies Inc. and TrueVue360. All of our investments in the new AI subsidiary are incorporated in the company's operating expenses. As I've also discussed in previous calls, our revenue recognition policy is based on the principles of ASC 606 using the input method.

Now turning to our financial results for the fourth quarter and full year 2019. Total revenue for the fourth quarter increased 125% to $5.75 million compared to $2.56 million in the equivalent quarter in 2018. The significant increase in total revenue was partially the result of timing shifts from previous quarters and was also driven by the current strength of the projects portion of our business, with additional contributions from maintenance and technical support.

For the full year 2019, total revenue increased 13% to $13.64 million compared to $12.05 million in the equivalent year-ago period. Gross profit in Q4 was $3.15 million or 55% of revenues, which was an increase of 176% from $1.14 million or 45% of revenues for the equivalent quarter in 2018. The increase in gross profit was driven by the increase in project revenues previously mentioned and the positive effect of continuing revenue increases from new projects.

Gross profit for the full year 2019 was $6.48 million or 48% of revenues, an increase of 25% compared to $5.2 million or 43% of revenues for the full year 2018. The implementation of ASC 606, covering revenue from contracts with customers, had a temporary impact on overall gross margin and certain costs are recognized ahead of revenues. We recorded an overall increase in gross margin for the year compared to the prior year, which is a positive trend.

We anticipate overall gross margins to continue to improve in the coming years driven by higher sales from both existing and new customers and certain economies of scale for the larger projects. The increase in revenues will positively impact recurring revenue for maintenance and technical support with the resulting increase in gross margin.

Turning to our costs. Operating expenses increased 28% in Q4 2019 to $2.52 million from $1.98 million in the same quarterly period last year, reflecting an increase in resources related to the increases in revenues for the period as well as additional resources related to the new TrueVue360 AI subsidiary. The increase in operating expenses was mainly driven by selling and marketing expenses, which increased in line with our investment in resources to grow the business.

For the full year 2019, operating expenses increased 31% to $8.89 million from $6.77 million in the same period last year, reflecting the same increases previously mentioned for the quarter. We also increased human resources headcount for the development of the new TrueVue360 AI platform as well as operational costs for the new laboratory for training the machine learning systems. This rate of increase is expected to slow in 2020. Other general and administrative costs were higher as a result of additional business and non-project related travel.

We reported a net income in Q4 of $592,000 or $0.30 per share compared to a net loss of $836,000 or negative $0.56 loss per share in the equivalent quarter in 2018. The improvement in net income was primarily attributable to the increase in project revenues previously mentioned, more than covering a planned increase in operating expenses recorded in the same period. For the full year 2019, net loss was $2.47 million or $1.25 loss per share compared to a net loss of $1.58 million or $1.06 loss per share in the same period -- the same year-ago period. The increase in net loss was primarily attributable to an increase in expenses related to TrueVue360, including software development, contracts out in Europe and machine learning trainers at the Florida R&D Center.

Let's now discuss the balance sheet. We ended the quarter with $56,000 in cash and cash equivalents, and we also had net receivables of $2.6 million. In 2019, we used $4 million in cash and operations due to the impact of project delays earlier in the year as well as headcount increases previously mentioned.

A few housekeeping items before turning the call back over to Gianni. At the beginning of this year, we entered into a series of transactions in connection with our NASDAQ uplisting. First, to comply with one of the Exchanges' listing requirements, which mandates that a new company stock price must be $4 or higher at the time of listing. In January, we executed a reverse split of our shares of common stock at a ratio of 1 for 14. Second, on February 12, 2020, the SEC declared effective our registration statement on Form S-1 relating to our uplisting and proposed securities offering. Third, on February 13, our stock officially listed onto the NASDAQ Capital Market and began trading under the ticker symbol DUOT.

Fourth, on February 18, we completed an underwritten public offering of 1,542,188 shares of our common stock at an offering price of $6 per share, resulting in total gross proceeds of $9.25 million. The proceeds also reflect the exercise of the over-allotment option prior to deducting underwriting discounts, commissions and offering expenses. We intend to use the net proceeds from the offering for research and development activities, sales and marketing and for general working capital purposes. Further details of all these transactions can be found in the Investor Relations section of our website as well as in our filings with the SEC.

Finally, I'd like to provide an update on our current financial projections. We have previously provided revenue guidance of $20 million for 2020, which would represent an approximately 47% increase over the $13.6 million recorded in 2019. This guidance was based on contracts and backlog and near-term pending orders that are already performing or scheduled to be executed throughout the course of 2020. The majority of our customers and by connection Duos as well have been identified as essential to continued infrastructure viability. As a result, our workforce is considered essential under the rule. However, while we do not have actionable information that would suggest the need to reduce revenue guidance for the year, we would like to caution that because of the substantially increased global uncertainty due to the COVID-19 pandemic, revenues in the first half of the year could be substantially below those of the comparable period in 2019 due to potential delays in project execution, resulting from the restricted travel environment currently in place. While we still expect to generate robust double-digit growth in 2020, we are refraining from providing updated annual revenue expectations until more reliable information becomes available.

And with that, I'll now turn the call back over to Gianni to provide an update on the business. Gianni?

Well, thank you, Adrian. I will now highlight some of our major achievements and wins for the year as well as provide an update on our TrueVue360 activities. Beginning first with our customer wins. In January of this year, we successfully implemented the first full-scale Rail Inspection Portal or rip in record time for CSX Transportation, one of the 7 Class 1 Railroad operators, who own and operate a combined 140,000 miles of rail track. After completion, the portal was featured in a commercial video published by CSX, highlighting their renewed and expanded commitment to safety, improvement and technological enhancements. As an existing customer, but a first-time buyer of our next-generation rip, CSX has shown that they remain committed to working with cutting-edge technology providers like Duos to ensure the highest level of safety and efficiency. The next phase of this initial project includes the addition of artificial intelligence algorithms, which when installed over the coming months, will mark the completion of CSX's overall automation process.

Next, we also substantially completed another rip with a different customer, which is scheduled for final acceptance at the site in Mexico before the end of this month. Obviously, that's today or tomorrow. Moving on, in Q4, we completed engineering and the launch of a significant better test installation of a state-of-the-art 3D version of Duos' automated pantograph inspection system or what we call it apis in a transit rail location in Chicago. We recently also completed installation of the individual version of our -- sorry, the industrial version of our portal technology with specific focus on tank car inspection in Michigan.

Finally, we also completed our next-generation centraco platform, which will provide additional security and logistics for banking group. Moving next to TrueVue360. At the beginning of the first quarter of 2019, we launched TrueVue360, a subsidiary whose wish is to develop, market and operate artificial intelligence and deep machine learning applications. TrueVue360 will not only serve our current customer base, but also pursue many AI opportunities in other verticals.

We began investing in the development resource of TrueVue360 during the fourth quarter of 2018 and completed our staffing goals by the end of February 2019. TrueVue360 launched its subscription-based model into the market late last year and has been fully operational for a few months now.

More recently, we completed the development of our comprehensive AI platform, which allows us to operate independently from any third parties, which is consistent with our strategic plan. As the next step in this program, at the end of the year, we fully migrated our operations from our third-party platform provider to the TrueVue360 platform. What this means, with our comprehensive AI platform now completed, we are now able to expand our market reach well beyond the rail space and target several verticals that are heavily incorporating artificial intelligence applications into their operations.

Effective January 2020, our plan includes expansion of our business development team dedicated to our AI program. I would also like to point out that we have built a very strong team of data scientists, software development and AI professionals. Our innovation team is working to develop a number of new disruptive technologies for the various verticals we serve. We expect these innovations to have a positive contribution with both new and existing customers in the coming months, which should drive additional growth and further diversify our revenue mix.

In the third quarter of 2019, we announced our first major contract and expect to begin recognizing initial revenue from our TrueVue360 operation beginning in 2020. Long term, we expect TrueVue360 to contribute significantly to our recurring revenue base over time. The investment that we have and will continue to make in our TrueVue360 subsidiary is included in our consolidated financial statements.

At this point, I would usually provide more color on our outlook for the current year. And as stated before, we have no actionable information suggesting a change to our previous guidance. However, of course, we must address the recent developments and potential consequences of a continued worldwide implosion of our economy. Obviously, all aspects of the economy have been and continue to be impacted, making projections even more difficult than usual. We are maintaining constant communication with all our customers. And while the majority of our staff is currently working remotely, we are fully functional and have put a plan in place to ensure ongoing business continuity in light of current conditions. Based on the information we currently have, we still expect to grow significantly this year and build on our success from 2019.

And with that, we are ready to open the call for your questions. Operator, please provide the appropriate instructions.

(Operator Instructions) Our first question will come from the line of Ashok Kumar with ThinkEquity.

A two-part question. The first is, could you address the long-term drivers of your financial -- the rising ASPs and margins and initiatives in new industries? And two is relative to your original 2020 revenue forecast of $20 million. Would it be safe to say that you do have bookings in place to support this revenue, just the timing of what is uncertain?

Thank you, Ashok. I'll take the first part of the question. So the current improvements in gross margin, as I addressed in my comments, are related to an overall increase in selling price. That's not necessarily because we're increasing prices, but the configurations of a lot of our systems are getting more expensive now as we move into the AI sector. Of course, we're producing more systems and certainly did in year 2019. And so there are certain economies of scale that come along with that. And overall, as we get a little bit more efficient, that drives an overall increase in gross margins. Related to the second part of your question, which in terms of the original $20 million guidance and whether there are bookings in place. I think our comments addressed it. We obviously take our guidance extremely seriously. We maintain a lot of detailed analysis to show whether we're going to meet or exceed certain guidance. But at this time, there's so much uncertainty around that, that we're being very cautious about any statements that we've given. As I mentioned, our first half revenues are probably likely to be lower than the equivalent period last year just because of the uncertainty. And at this time, there's no, as Gianni mentioned, there's no actionable information that would say that we would change the $20 million other than, it's not prudent for us at this time to make any further comment on that.

Yes, to follow-on to what Adrian just said, Ashok. We actually, internally, have a pipeline that is much higher than $20 million. But the caution is really geared towards the functionability of our customers. I'll give you an example. Some of our customers, as part of the immediate coronavirus workflow changes, would not allow people to go to their active tracks because they don't have sufficient flag people to help us. Others like Kohl's or other logistics companies that we were hoping to do some of the revenue in the first quarter, second quarter, obviously, they have shut down, like Macy's. They just furloughed 120,000 people. T.J. Maxx, Kohl's, they all closed operations for the time being.

So we don't believe that this will impact us significantly because we looked at what are the potential negative impacts of delays. We just believe that our third and fourth quarter will be real hectic. We like hectic. Last year, we almost doubled revenue in the fourth quarter. And we are going to be staffed adequately. So at this point in time, we don't want to ring the alarm bell, but it is just a cautionary note. You all know what's going on worldwide.

Gianni and Adrian, just the takeaway there is due to the macro headwinds, the purchase orders related to the bookings could take longer to execute?

Sorry, could you repeat the question, Ashok?

Yes, Gianni and Adrian, so the takeaway is because of the macro headwinds, the purchase orders related to the bookings could take longer to execute?

Yes.

Not longer, but we will shift later in the year.

(Operator Instructions) Our next question comes from the line of Michael Legg with the Benchmark Company.

Could you guys just talk a little bit about the rip platform and all the different elements that can be incorporated into it from the high-end price point and what entry-level is? And then talk a little bit about what you're seeing on the order side from that and where the price point may be in the middle?

Okay. So the basic system price point is about $1.8 million. We are in negotiations with one of our customers to now add very significant detection capabilities. If you remember, maybe you don't, but the total detection target, number of detection targets is about 100. If you go to the FAA and look at what they expect to be detected and be automatically detected to replace the manual inspection, it's a total of over 100 detection targets. We are teaming up with IBM on this. In fact, CN has engaged IBM, who is working very hard on developing some of their algorithms. And we will, of course, iterate all these into our platform, centraco. So the expanded system or the system expansion itself is about $1.2 million. So if you look at the long-term, the rip total cost of ownership -- well not the cost of ownership, but the cost to acquire the new version is between $2.5 million and $3 million.

(Operator Instructions) At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Arcaini for any additional closing comments. Mr. Arcaini, if you'd like to conclude the call?

Sorry, we had put it on mute not to disturb you. So as I said, I would wish that we would have a call under better circumstances. Our team is ready and able to complete any project that comes our way even in this interim period. In fact, we are dispatching some of our team members up to Tennessee to add some technology to some of our customer's sites. There's one opportunity that I can't quantify exactly, but the transit transportation is now more able to give us a track time, so there might be a silver lining on the sky for immediate value.

So thanks again, everybody. Please feel free to call us directly if you have any questions, you know you can always call Adrian and myself. Thank you very much.

Thank you. 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. This earnings call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking terminologies 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 Technology Group, Inc.'s 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 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 Duos Technology Group's 2019 Fourth Quarter and Full Year Earnings Conference call. You may now disconnect.