Duos Technologies Group, Inc.
Q1 2022 Earnings Call Transcript

Published: 16 May 2022

[Operator:]

Good afternoon. Welcome to Duos Technologies First Quarter 2022 Earnings Conference Call. Joining us today's call are Duos CEO, Chuck Ferry; 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'd like to turn the call over to Duos’ CEO, Chuck Ferry. Sir, please proceed.

[Chuck Ferry:]

Thank you, Maria. Welcome, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our financial results for the first quarter as well as other operational highlights. A copy of the press release is available in the Investor Relations section of our website. I encourage all listeners to view that release as well as our 10-Q filing with the SEC to better understand some of the details we'll be discussing during our call. So now, let's get started. The first quarter was in line with our stated plan and has us well positioned to execute on our exiting backlog through the remainder of this year and in 2023. As we discussed in our March update, the last 18 months has been about laying a foundation for the business we plan to build upon going forward. 2022 will be a year of execution. We plan to meet performance obligations for existing contracts, sign new business with current and prospective Class I rail and transit operators, continue to develop and deploy artificial intelligence and software capabilities to meet the growing demands and needs of these customers, further our expansion efforts into adjacent market opportunities, and invest in internal operations to better capitalize on all these opportunities. Through this process, we will continue to focus on achieving operational and technical excellence to provide better products, improve customer service and attract top talent. As of today, our business is performing at highest level in nearly two years, the results of which will begin to show in the latter half of 2022 and into 2023. We will discuss more details about the business later on the call. So before I go any further, I'd like to turn the call over to our CFO, Adrian Goldfarb, who will walk us through the financial results for the quarter. Adrian?

[Adrian Goldfarb:]

Thank you, Chuck. My comments today will be focused on our results for the first quarter ended March 31, 2022. I want to remind everyone of our two components to revenue that we report, technology systems, which records revenues from turnkey engineered systems such as our Railcar Inspection Portal, including AI software technology licensing, and services and consulting, which primarily records recurring revenues from maintenance and support contracts about technology systems and AI models, plus any consulting services that are undertaken. As previously discussed, we've been upgrading and expanding our overall technology capabilities with a particular focus on AI as a key component of our overall product portfolio. I'm pleased to report that our average revenue per installation continues to move higher as a result of meeting the demand from our customers for increased function and capabilities. Due to the ongoing issues with supply chain, the time between contract award and for revenue recognition has been lengthening. But we expect to see higher revenues later this fiscal year and into 2023. In addition, we continue to focus on our revenue mix to support growth in our recurring revenue services and software going forward. Now, let's look at the numbers. Total revenue for the first quarter decreased 33% to $1.44 million compared to $2.15 million in the first quarter of 2021. Total revenue for Q1 2022 represents an aggregate of approximately $783,000 of technology systems revenue and approximately $656,000 in recurring services and consulting revenue. The decrease from Q1 2022 compared to Q1 2021 was a result of a previously discussed delays in receiving anticipated notices to proceed for new contracts, as well as supply chain issues, which are extending deadlines for shipment of key components used in our technology systems. Because of delays in anticipated start dates, certain installations may produce revenues towards the end of 2022, portions of which may ultimately be recorded in 2023. However, we remain encouraged by the breadth and scope of recent bids in which we have participated. Before turning to cost and profitability, in future calls, I plan to discuss our contract commitments, as this is becoming an increasingly important factor as we move forward. As I've mentioned on previous calls, traditionally, there's been a period of time, from the time we are awarded a contract until the moment when that contract can be recognized as revenue. The length of time between contract awarded and revenue recognition is extending beyond what has been the norm, due to the fact that installations have been impacted by the ongoing supply chain issues, which is a familiar theme for most technology companies. We are also observing the increasing impact of inflation on components and contracted services on a cost structure, which we're taking steps to mitigate, which may still have an impact going forward. As mentioned on our previous call, we started the year with the largest set of contract commitments in the Company's history. With this quarter’s performance obligations met, that number has modestly decreased and now currently stands at approximately $17 million, much of which we expect to book this year. We will endeavor to keep you informed through our regular filings of progress on contract awards as an additional metric to track our progress toward our growth goals. With that in mind, let's discuss costs for the first quarter. Cost of revenues for the first quarter decreased 26% to $1.22 million, compared to $1.65 million in the first quarter of 2021. Cost of revenues on technology systems decreased for Q1 2022, compared to Q1 2021, which is consistent with the decrease in revenues. Cost of revenues on services and consulting also decreased in line with the decrease in revenues. While relatively flat when comparing the first quarter of 2022 and equivalent period in 2021, an overall positive trend on service and consulting revenue is expected to continue as more of our business comes from recurring revenue. While there was a general cost decrease, we also experienced increased costs associated with the revamping of our operations to support an anticipated influx in the number of new systems going forward. Since much of our cost of operations is related to personnel, and we have been hiring more highly experienced and skilled personnel, we have observed a general increase in the salaries being demanded as a result of both, inflationary pressures and a more competitive job market. In addition, and also as discussed previously, the impact of inflation may negatively affect the cost of revenues, such that we may experience high costs for materials. Cost of revenues is expected to continue to increase in future years, but offset by faster revenue growth. Gross margin for Q1 2022 decreased 56% $222,000, compared to $503,000 for Q1 2021. The decrease in gross margin for Q1 2022, compared to Q1 2021 was driven by a decrease in recorded revenues as well as elevated costs associated with revamping our operations to support that -- an anticipated increase in the number of new systems going forward. The main reason for the continuing high level of cost is high cost of materials due to the supply chain disruptions and inflation. We anticipate an improvement in the overall gross margin for the full year 2022 as expected revenues increase, with much of the improvement coming in the second half of the year. Operating expenses for Q1 2022 increased 23% to $2.86 million compared to $2.33 million for Q1 2021. The increase in operating expenses for Q1 2022 compared to Q1 2021 was driven by a 30% increase in general and administration expenses, nearly half of which was a noncash charge related to stock compensation and a 22% increase in research and development costs, partially offset by 9% decrease to sales and marketing cost. Net operating loss for Q1 2022 totaled $2.64 million, compared to a net operating loss of $1.82 million for Q1 2021. The increase in net operating loss for Q1 2022 compared to Q1 2021 was primarily attributable to the lower revenue and higher operating costs as discussed previously. Net loss for Q1 2022 also totaled $2.64 million, compared to a net loss of $406,000 for the first quarter of 2021. The increase in net loss for Q1 2022 compared to Q1 2021 was primarily attributable to loan forgiveness related to the Paycheck Protection Plan recorded in Q1 2021, as well as the previously noted decrease in revenue. Let's now discuss the balance sheet. We ended the quarter with approximately $5.33 million in cash, cash equivalents compared to $894,000 at December 31, 2021. As a reminder, in February 2022, the Company conducted an underwritten offering off the shelf of its common stock, resulting in gross proceeds of approximately $5.5 million after fees and expenses. The Company has sufficient cash at this time to support operations through the end of 2022 and into 2023. At the present time, we have 12 months of operating cash flow without taking into consideration any anticipated new business. We believe our capital position will allow us to weather unexpected delays without significant operational impact and will enable us to pursue large projects that require major resource deployment. We increased our working capital surplus, after receiving the previously mentioned gross proceeds of approximately $5.5 million in the successful takedown of the shelf registration statement. Additionally, over the next few weeks, we are expecting to receive several large payments related to recent contracts awards that will collectively bring in an additional $5 million to $6 million. Altogether, we have the necessary capital required to finance the fundamental business changes that we are executing including organization, product alignment, and market focus and maintenance of our business strategy overall. Management continues to seek to eliminate certain costs that do not contribute to short-term revenue while focusing investments on products and services that we expect to bear fruit longer term. Going forward, we expect macroeconomic effects to continue to impact us, particularly current supply chain issues, which are extending deadlines for the shipment of key components using our technology systems and inflation, which is an ongoing upward pressure on costs. To combat these issues, we believe it is critical to begin procuring ahead of formal contract awards. The recent cash injections have relieved the strain on our cash reserves and have given sufficient lead time necessary to implement and service our committed contracts as well as increase the number of open bids and prospective business opportunities on the horizon. We continue executing the plan to grow our business and achieve profitability. And we do not believe that we will need to raise additional capital for operations for 2022. That said, we may do so to fund selective opportunities that may arise, including any acquisitions that we may pursue. I'd now like to provide an update on our financial projections before turning the call back over to Chuck. Based on committed contracts and near-term pending orders that are already performing or scheduled to be executed throughout the course of 2022. We are reiterating our previously stated revenue expectations for the fiscal year ending December 31, 2022. We expect total revenue for 2022 to range between $16.5 million and $18 million, representing an increase of 99% to 117%, from 2021. Additionally, we expect this improvement in operating results to be reflected over the course of the full year. Due to timing and other factors, we are modeling revenues in the second quarter to sequentially improve with that improvement accelerating in the second half of the year. This concludes my financial commentary. I'll now pass the call back over to Chuck.

[Chuck Ferry:]

Thanks, Adrian. For the remainder of my remarks today, I'd like to provide an update on our strategy and the progress we're making within our 2022 operating plan. I will then provide a brief update on our outlook before turning it over to questions. As a reminder, our 2022 operating strategy is focused on five key areas as follows

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Mike Latimore with Northland Capital. Please go ahead.

[Mike Latimore:]

Thanks. Yes. Hi, guys. Congrats on the strong start to the year there.

[Chuck Ferry:]

Thank you.

[Mike Latimore:]

Interesting to hear about the sizable cash payments coming in shortly. I guess, is there any rev rec associated with those, are those more kind of balance sheet items?

[Chuck Ferry:]

Mike, thanks for joining us today. I'll start and then Adrian -- will play catch-up or cleanup for me on the financial side of things. Yes. We’re expecting -- these are contracts that we won late part of last year and then these are now pretty sizable milestone payments. Typically we'll get anywhere from 30% to 50% of the contract value in upfront payments. That obviously helps us manage our cash on a go-forward basis. These are quite helpful and the fact that we've already ordered most of our long lead items prior to receiving these large cash rewards, these large cash payments. So obviously, that's very helpful for us. Adrian, do you want to add any color?

[Adrian Goldfarb:]

Yes. There is not much cleanup required. So, as far as the rev rec concern was, I guess, that's the second part of the question. Yes, there will be a little bit -- obviously, it lags the actual cash received, because the cash payments come in, they use to pre-fund certain components in some cases. And this is part of the reason for the raise early in the year. We have been pre-purchasing components. We've mentioned that in a lot of our filings. And as those things come in, we recognize some of the revenue as the manufacturing happens according to the ASC 606 standard, we will recognize more. So, yes, the cash coming in won’t be immediately recognize but will put us on this study path, which we expect to be increasing somewhat sequentially in Q2, and then will accelerate as we go into Q4.

[Mike Latimore:]

And then, I think you mentioned the pipeline number, I believe you said $100 million. Can you remind me what it was last time you gave that figure and then what's changed?

[Chuck Ferry:]

Yes. I think we probably gave a similar number to that last time -- transfers and catch a little bit -- last time, it has gone up here recently. I will tell you, again, that pipeline -- those are, that's a pipeline of opportunities, portion of which -- let's call it about one-third of that is with either our current Class I customers that are basically expanding the work that we're doing for them right now. Probably another third of that is with either, we hope will be new Class I customers. But also now, we're getting a lot of inquiries. And we're responding to requests and providing proposals to a number of transit railroads, who are now the beneficiaries of the federal funding, which is now becoming available, specifically to a lot of those organizations. Another third of it is mostly due to our automated logistics information system queries coming in from that, but also international customers in the rail space. So, we've got -- again, we're getting quite a bit of inquiries from both potential ALIS customers, mostly here in North America but then in the rail space, a lot of international customers, we've been responding to inquiries from those. So, that's kind of the makeup of that of that pipeline.

[Mike Latimore:]

And then, the services line, it looks like it's grown sequentially for four quarters in a row now. I guess, should we think about this as sort of a new baseline and you can build from here or..?

[Chuck Ferry:]

Yes, absolutely. So, we're showing now, certainly, once we get customers using our equipment, they stay with us really long-term and are renewing their services and maintenance. But we're also now starting to see the recurring revenue being pumped up further by the successful deployment of artificial intelligence. And that's a trend that you're going to see continue to improve on a go forward basis.

[Operator:]

[Operator Instructions] There appear to be no further questions 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.

[End of Q&A:]

[Chuck Ferry:]

Yes. Thank you, operator. Again, I wanted to thank everybody for joining us on today's call. It looks like we got a good mix. A number of you are currently shareholders. So, thank you very much for joining us and for your support. And those that are new to us, thanks for joining us and having a look at us. And so, I'll go ahead and turn it back over to you, operator, to finish things up.

[Operator:]

Thank you, Mr. Ferry. 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 these statements are based and could cause Duo's Technologies 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 Duo's 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 for Duos Technologies Group’s 2022 first quarter conference call. You may now disconnect, and have a great day.