Duos Technologies Group, Inc. (DUOT) Earnings Call Transcript & Summary

Good day. Welcome to the Second Annual Winter Wonderland Best Ideas Conference. The next presenting company is Duos Technologies Inc. If you would like to ask a question during the webcast, you may do so at any point during the presentation by clicking on the Ask Question button on the left of your screen. Type your question into the box and hit the send button to submit your questions. I'd now like to turn the floor over to today's host, Chuck Ferry, CEO of Duos Technologies Inc. Sir, the floor is yours.

Thank you very much, moderator. I'm Chuck Ferry, I'm the Duos Tech CEO. I'm joined today with my CFO, Adrian Goldfarb; and also Fei Kwong, who runs our Investor Relations; thanks for joining. We'll take you to Slide #3, please. Very briefly, we're headquartered here out of Jacksonville, Florida. We're small, obviously, publicly traded company on the NASDAQ, DUOT. We're an advanced technology company, really specializing in machine vision, artificial intelligence that's deployed on a set of proprietary software. We don't really move commerce, so to speak. We'll talk about that in a minute, but we help customers, particularly in the rail and trucking industry move their commerce safer and faster. We have a staff of about 70 folks here out of Jacksonville, Florida, very, very heavy on technology and engineers and technicians, largely around hardware, software, artificial intelligence, IT infrastructure, engineers, along with a healthy dose of project and program management as well as manufacturing capabilities here internal to the company, and then, of course, we have some excellent both small and large partners that operate with us. And then we also operate -- once we install our equipment, we operate and maintain it through our 24/7 service operations center, and I'll come to that all here in a minute. Next chart, please. As briefly here, the senior -- the management team, I've previously been the CEO first -- Chief Operating Officer and President for a company called APR Energy and then later CEO of a power company. This company at that point was over $300 million of top line revenue from 2016 to 2020. We delivered fast power plants internationally in a number of jurisdictions, really in all of the different continents. From 2010 to 2016, helped run a company called ARMA Global. It was very small, when we started about 80 folks and about $20 million top line revenue. In a very short period of time, in about 4 years, we grew it to over 1,200 employees with over $200 million of revenue. Duos Tech is about the same size that company was when I started with it. Prior to that, I served 26 years in the United States Army as an enlisted man, NCO, and officer in inventory, Ranger and special operations units to include 4 years accrued in combat in Mogadishu, Somalia; Iraq; and Afghanistan. I'd like to turn it over to my CFO and let him introduce himself as well, please.

Thank you, Chuck. Good afternoon, everybody. My name is Adrian Goldfarb, CFO, here at Duos Technologies. I've got about 40 years plus in the tech business. And for the last 13-plus years, I've been leading 2 or 3 different companies as Chief Financial Officer, all in the public micro-cap space.

And like I said, kind of run down our team, obviously, it's the management team, but also the next 1 or 2 layers of leadership below that is just an absolutely terrific team that we've been able to form since I joined the company here in September of 2020. So let's go to Chart #5, and let me just kind of tell you exactly what it is that we do here at Duos Tech. So we -- one of the primary products that we deploy into the Class 1 railroads is a railcar inspection portal. If you can think of -- on the left-hand side of this chart, you'll see kind of a large car garage, if you will. And inside that is an array of cameras and lights, top sides and bottoms, along with some laser and very specialized and proprietary speed sensors. So the railcar basically proceeds through the portal at full speed, anywhere from 60 to 70 miles an hour, and we can image topside and bottom and a tremendous amount of detail, each individual railcar and up to about 25 individual inspection points. We acquire all that data, and then through an edge data center, which is obviously located there in that small building you see on the left side of the picture, we basically acquire or crunch and analyze all that data and then we provide a finalized report, which I'll show you here in a moment. On the right side of this picture -- so we have 11 -- excuse me, we have 11 of these systems currently deployed. We have 7 with Canadian National, 2 soon to be 3 with CSX and then one soon to be 2 with Kansas City Southern. And then we also have another system deployed with FeraMAX, which is one of the largest Mexican-operated railroads south of the border. On the right-hand side is the latest generation. We've actually modified 3 of those 11 rail inspection portals and added additional cameras, lights and perspectives, and we can now see upwards of 90-plus individual inspection points, which is important because the federal rail administration, currently by law, requires a manual inspection that's done with mechanical car inspectors walking along the sides of the train. It can take a team of 2 to 4 inspectors anywhere from 1.5 hours to 3 hours to inspect a train and that's required by law anytime it departs from a station. Our system can scan it at full speed and produce a report in about 3 to 5 minutes after the last railcar transits through the portal and provide that finished in more detailed and more accurate report to the customer in a much shorter time. If you go to Slide 6, this will kind of show you some examples of the type of imagery that we're able to capture while the train is moving at 60 miles an hour. Bottom left-hand side, you'll see a couple -- this obviously is the device that connects to railcars. This is looking from a top linear line-scan camera. And you can literally see the emboss writing on that coupler at full speed, obviously, inside our software user-interface, which I'll show you in a moment. You can drill into this and see all sorts of things, like car pins and things like that. Top right-hand corner comes from a view -- we call it our oblique vehicle undercarriage examiner. This is a new device that's undergoing patent applications right now. This is an array of cameras that can look underneath the railcar up into the nooks and crannies, not only can it see individual inspection points but it can also detect illegal riders and other illegal packages that have been stuffed, which is important, particularly for our Kansas City customer, which is currently working with customs and border protection as well as our company to move their trains a bit quicker with less inspections as they cross the U.S.-Mexican border. If you go to the next chart, Slide 7, this is really where -- this is really our product, and this is really what the customer is buying. So this is our software, proprietary software user interface. And what this does, like I said, 3 to 5 minutes after the train passes through the portal, it acquires all of the imagery and inspection points on each individual railcar through this software, which we produced here in Jacksonville and deployed to our customers, displays each individual railcar. And then obviously, the different perspectives align with each other. So it's a nice easy tool for mechanical carmen instead of being on the field. He's behind in one of our workstations to very quickly scan through a train. But then on the right-hand side he's basically identifies each railcar, let's say, there's 100 railcars in this particular train, he identifies each of those cars by an individual tag number and then through the application of artificial intelligence, we can automatically flag an individual defect to bring that to the attention of the mechanical carman. Or if the customer chooses, they can automatically support that through their mechanical department to take some sort of an action, whether it's a safety action or whether it's to maintain something at the next logical stop. The last chart shows just a little bit more in depth about artificial intelligence. Unless you know a lot about trains, I'll tell you what this is, this is basically a break piston. One of the algorithms that we run is called a brake piston engaged or disengaged. In this particular picture, you'll see that the Piston is not engaged. That's because you can't see a nice big shiny collar pulling out from that red box right there. So that is the proper position for the railcar. Obviously, we don't want the breaks on while the train is moving at 60 or 70 miles an hour. However, surprisingly, sometimes these breaks are unfortunately left on, but the trains are powerful enough, they can actually drag or move these cars regardless. And so what we do is, we're confirming through artificial intelligence that all of the brakes, in this particular train, consist are properly deployed that is disengaged and everything is a good function and in order. If you go to the next chart, let me talk a little bit about where we're at with the company. So I joined as a CEO in September of 2020. I was asked to -- by the shareholders and the Board members at that time to replace the outgoing CEO who is retired. And at that point when I joined, the company had not been profitable and really wasn't realizing the value of the technology and the potential that it had to deliver. So based on my assessment, I determined that there are a couple of things that need to be fixed. One, we needed to improve our technical and our operational delivery and regain the confidence of our current customers, which at that time was Canadian National CSX, Kansas City Southern and also another large retail chain that uses our automated logistics information system, or I'll call it our truck portal, which uses similar technology to what we use with our railcar inspection portal. We also took it upon ourselves at that point right there to improve the overall talent on the staff. When I joined, we had about 55 to 60 folks here on the staff. We have had a bit of a turnover on that, but as a result, we currently have about 70 folks on staff right now. The overall talent level is significantly higher and the level of teamwork that occurs, especially between our hardware, software, IT and artificial intelligence teams is significantly improved, and that is now demonstrating itself, in that, our customers are happier and they're beginning to show more orders. So 2021, when we started that year, I've been in the job a couple of months, we had given guidance that we would make about $18 million for 2021. Unfortunately, we had some headwinds. Like, many companies did. We had a resurgence of COVID-19, which that along with the challenges around the supply chain caused some of our customers that we were expecting to order, and we were in discussions to order with, they took a pause and kind of delayed a bit. We did adjust our guidance in the middle of 2021, and we brought that down to about $8 million to $9 million. I'm pleased to report that as we are closing the books -- we're still going through our audit, but we've been able to preliminarily report that we've made just north of $8 million of revenue -- and then just as importantly, our last quarter, we were just at about a breakeven point, which was certainly our target and our goal. As we enter 2022, that's really where now we've got some good news. That is some of the commercial initiatives that we implemented in 2021 are now beginning to bear fruit. Current customers, both CSX and KCS now have put in additional orders for additional rail inspection portals for 2022. We've also added a new customer that is Toronto Transit Authority. We added them into contract late last year, and we're delivering a good, call it, automatic pantograph system this year. Last year, we had discussed very briefly that we were competing for a bit of work with a large passenger rail customer in our quarterly earnings. You'll see, they were named as Amtrak. We have received positive news with that initiative, and that has allowed us to give very confidently now preliminary revenue guidance for this year to land between $16.5 million to $18 million of revenue, and that is all contractual backlog. That is not what we're going to hope to get, that is actually in contract. And we have an excellent pipeline beyond that of good current customers, new customers in the rail sector, also new pipeline opportunities in our truck inspection portal offering, where we are -- it's our internal goal to get to at least $25 million of top line revenue into breakeven. As we go forward from a strategy standpoint, which we'll talk about on Slide 10, and I'll turn it over to Adrian. This year, our strategy is pretty clear. We're going to remain focused on the rail sector, but we are already adding additional customers, and we want to add further customers to diversify inside that line of business, not just Class 1 railroads but also inside the transit and passenger railroads, and we've already had some good initial success with that. Last year, I had kind of pumped the brakes on our automated logistics information system. I'd like to call it our truck inspection portal. We have released those breaks, and we have a good pipeline of 15 to 20 solid inquiries from large retail or intermodal customers, at least 3 or 4 of which we're currently in discussions with. Longer term, and I don't expect to see revenue from it this year, but they are -- we are exploring these areas, and that is a potential solution to inspect aircraft, and then another possibility of operating edge data centers. We already operate our own edge data centers for our own purposes with our rail inspection portals, and it's something that we've been approached from -- by a number of large data carriers and data producers to see if we might be interested in that. So those are 2 other areas outside of that, that we're exploring as part of our strategy. I'd like to turn it over to Adrian and cover some of our financials, please.

Thank you, Chuck. I'm going to go through and do just a little bit of a high-level observation and some commentary on our financials. Let's talk a bit initially about 2022. As Chuck has already mentioned, we put out initial guidance of $16.5 million to $18 million, and that, just to remind everyone is with contracts that are already in backlogs. So it's the execution of those contracts as we go through the fiscal year. We also have a strategic plan put in place for growing key industry revenues and then project execution against that. And you saw some of the industries -- additional industries that we're looking at. One of the main focuses from a financial standpoint is growing our recurring revenue base. The company has been steadily growing its recurring revenue base, primarily from the service and operations side, but obviously, we're starting to add now software licensing and also artificial intelligence support to that, and so that will continue to make up a growing proportion of the company's revenues today about 10% to 20% but growing into a higher number as we go over the next few years. And then also, if you look at our news, we have announced a number of major new contract wins already for Q1 of 2022, and those revenues will be parsed out as we go through the years the projects are deployed. Next slide, please. So what I want to do is give you just a quick look at the financials. These are obviously the historical financials through our last published report, which was the 10-Q 3 published in and about November, takes us through the first 9 months of 2021. We -- at that time, we're showing revenues of about $4.5 million. I'm pleased to report, and as was recently press released, we did about $3.75 million in Q4 and came close to if not getting to breakeven. So with that, our fiscal year 2021 full year revenues is about just under $8.3 million, which is a small improvement over the year before. I want to address something that I do get questions about, which is our negative gross margins that were published through the first 9 months. One of the things that we undertook when Chuck arrived here was to make sure that we understood exactly what it costs to -- for us to put our systems into. And it wasn't because we didn't understand the cost before, but we were primarily in a research and development mode at that time. And so we put down the components and some of the labor that went to that but not necessarily all of the overhead costs. So we did a representation of our financials starting actually in 2020, such that the true cost of deploying a system went above the line so it gets accounted as the cost of revenues. And the effect of that was to temporarily depress our gross margins, in fact, made them negative through the first 9 months. So for the fourth quarter, I'm pleased to report that, that number turned positive that we showed about a 19% gross margin, which isn't actually where we need to be, but is an improvement over that. And the other commentary that I would have on it is that from quarter-to-quarter, we may show negative gross margins depending on how much the revenue is, but there will be continued slow, steady improvement as we go through 2022. And as Chuck mentioned, our aim, at least on the internal budget side, is to get to breakeven. Next slide, please. In terms of the balance sheet, this is obviously selected data that was as of September 30. We've moved on a little bit since that time. But I'm pleased to report that as of today, following our raise that took place last week, we have close to $7 million in cash in the bank. So we're well funded at this point to get through the growing backlog and also a growing complexity of the projects that we're evolved in. So we're in good shape of that and that will also have a positive effect on that working capital obviously and also our stockholders' equity. Pre-raise, our working capital did improve over the fourth quarter, such that it did turn positive, and there was a net change of about $700,000 on that. Next slide, please. Lastly, the cap structure. Post our raise of last week, we now have just under 6 million shares of common stock. And in addition to that, we do have just under 1.4 million warrants. Those warrants are expiring this November. They are struck at 770. And so 1 of 2 things will happen, either we will receive some cash for those warrants and/or those warrants will disappear as they expire. There is no extensions or repricing or any other features that are in there. So those warrants will resolve themselves one way or another by November of this year. Second item is, we do have options. These are all employee stock options, which are for retention of some very valuable staff that we recruited over the past 12 months. As you know, a good portion of our staff is technical. Those people can demand a premium, and so it was felt that the company needed to have a good option program, and so that is represented by those warrants. They are struck at a weighted average of about 5.25, so a little bit north of where the stock price is today. Just a last comment on the Series B and C. Well, Series C convertible now has no more common stock equivalents. Series B has a few left by one of our largest shareholders, and that's primarily just to -- as a vehicle to be able to hold a percentage of the company's stock, and so there is a 9.9% ownership limitation built into that. That number there, though, just represents the common stock equivalents, and we expect those to both go to 0. In any event, our Series B and Series C were straightforward -- a straightforward preferred shares. There was no ratchets or any other redemptions or anything else that was in there that could have maybe distorted at the cap table. So it's a clean cap table. Our total share count fully diluted is about 8.5 million shares. And the market capitalization, as of couple of days ago, was in and around the $30 million either at its base or is fully diluted. And with that, I will turn the presentation back to Chuck.

Yes. So that completes the presentation. I think we've got a couple of minutes here for a few questions. We'll see if we have any.

And so we're pulling up. And I'll take the first one because it's nice and easy, and that is, how is the weather? We're here in sunny Florida, and it's awesome right now. The second one is, does the $16.5 million to $18 million include the contract wins you have won in first quarter? The answer is yes. So the $16.5 million to $18 million includes all of the contract wins up to this point and today. So obviously, above and beyond that, we've got some good opportunities in the pipeline like we talked about, where I feel pretty confident that ultimately we should be able to come in north of that number. And if we -- and look, if we have a material change above that guidance right there, we'll certainly update that throughout the year in the effort of full transparency. And so we've got another question that's come in. Do you expect the backlog to continue to grow? Like I said, the answer is yes. Right now, we have about $40 million to $50 million of good, identified opportunities in our pipeline across from 2022 as well into 2023. About 1/3 of that is with our current customers in the rail sector. About 1/3 of that would be new customers, either Class 1 or transit passenger rail customers. And then about 1/3 of that is the newer customers inside that trucking industry, either the logistics operators or intermodal operators. Okay. And we'll check one more time here for a couple of questions. And we don't see any. So moderator, thank you very much. We'll turn it back over to you.

Thank you. Ladies and gentlemen, that does conclude the Duos Technologies' presentation. This concludes today's event. Remember, one-on-one meeting requests are still open, so be sure to log into the conference platform and request more meetings. You may now disconnect.