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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
——————
FORM 8-K
——————
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported):
August 14, 2023
——————
Duos Technologies Group, Inc.
(Exact name of registrant as specified in its
charter)
——————
Florida |
001-39227 |
65-0493217 |
(State or Other Jurisdiction |
(Commission |
(I.R.S. Employer |
of Incorporation) |
File Number) |
Identification No.) |
7660 Centurion Parkway, Suite 100, Jacksonville,
Florida 32256
(Address of Principal Executive Offices) (Zip
Code)
(904) 296-2807
(Registrant’s telephone number, including
area code)
Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
Common Stock (par value $0.001 per share) |
|
DUOT |
|
The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant
is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the
Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results
of Operations and Financial Condition.
On August 14, 2023, Duos Technologies Group,
Inc. (the "Company") issued a press release announcing the financial and operating results of the Company for the
quarter and six months ended June 30, 2023. The text of the press release is furnished as Exhibit 99.1 and incorporated
herein by reference.
Additionally, on August 14, 2023, the Company
held an earnings phone call open to the public (the "Earnings Call"). Mr. Chuck Ferry, the Company's Chief Executive
Officer, along with Mr. Andrew W. Murphy, the Company's Chief Financial Officer, discussed the financial and operating results of
the Company for the quarter and six months ended June 30, 2023. The transcript of the Earnings Call is furnished as Exhibit
99.2 and incorporated herein by reference.
Item 7.01
Regulation FD Disclosure.
The information
set forth in Item 2.02 of this Current Report on Form 8-K is incorporated by reference into this Item 7.01.
The information
in Item 2.02 and Item 7.01 of this Current Report on Form 8-K, including Exhibits 99.1 and 99.2, is being furnished and shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities
of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as
expressly set forth by specific reference in such filing.
The press release and transcript
of the Earnings Call may also be found on our website at https://www.duostechnologies.com/.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
|
DUOS TECHNOLOGIES GROUP, INC. |
|
|
|
|
|
|
Dated: August 15, 2023 |
By: |
/s/ Andrew W. Murphy |
|
|
Andrew W. Murphy
Chief Financial Officer |
|
|
Exhibit 99.1
Duos Technologies Group Reports Second Quarter
2023 Results
JACKSONVILLE, FL /
Globe Newswire / August 14, 2023 - Duos Technologies Group, Inc.
(“Duos” or the “Company”) (Nasdaq: DUOT), a provider of machine vision and artificial intelligence that
analyzes fast moving vehicles, reported financial results for the second quarter (“Q2 2023”) ended June 30, 2023.
Second Quarter 2023 and Recent Operational
Highlights
| · | Announced an add-on award of $1.9 million for the enhancement of a planned Railcar Inspection Portal (“rip®”
or “RIP®”) system in the passenger transportation sector, pushing the total contract value to more than $13.7 million.
This latest addition is part of a long-term installation of the Company's most advanced RIP system, which will capture high-speed images
of railcars at up to 125 miles per hour. |
| · | Implemented first subscription services agreement with a passenger transit operator. In connection with
the agreement, Duos will offer access to its RIP and optional artificial intelligence detection models for key inspection points. The
agreement, renewable annually, is initially valued at $300,000 and encompasses customer training, installation, and railcar data services
across up to three existing, active portals. |
| · | Performed over 2.1 million comprehensive railcar scans in the second quarter across 13 portals. This metric encompasses all railcars
scanned at locations across the U.S., Canada, and Mexico. |
| · | Released new AI detection model covering end-of-car cushion inspection, detecting a condition which could
potentially lead to derailments, for use with the Company’s RIP solution. The new model was developed in response to a specific
customer request and deployed during mid Q2. The Company currently has over 40 models deployed and operational for freight and transit
customers with plans to deploy more than 50 different models by the end of 2023. |
| · | Upgraded the Company’s centraco® and truevue360™ systems
to enable near “real-time” reporting and facilitate immediate alerts to on-board personnel of any issue that is deemed critical. |
| · | Appointed rail industry veteran Frank Lonegro to the Board of Directors. Mr. Lonegro enjoyed a long
and distinguished career at CSX Corporation and currently serves as the Chief Financial Officer for Beacon Roofing Supply,a Fortune 500
company. His addition brings the Company’s board composition back to five total directors, four of whom are independent. |
| · | As of the end of the second quarter, the Company had $7.8 million of revenue in backlog and expects $3.0
million to 5.0 million to be recognized during the remainder of 2023. |
| · | Strengthened industry collaborations with Dell Technologies and NVIDIA to support AI development and achieve
significant increases in performance at near “real-time” reporting. |
Second Quarter 2023 Financial Results
It should be noted that the following Financial Results represent the
consolidation of the Company with its subsidiaries Duos Technologies, Inc. and TrueVue360, Inc.
Total revenue for Q2 2023 decreased 51% to
$1.77 million compared to $3.62 million in the second quarter of 2022 (“Q2 2022”). Total revenue for Q2 2023 represents an
aggregate of approximately $870,000 of technology systems revenue and approximately $900,000 in recurring services and consulting revenue.
The decrease in total revenue was driven by the delays in production and manufacturing of two high-speed Rail Inspection Portals for a
passenger transit client, which are recorded in technology systems. Growth of the services portion of revenues was driven by the successful
completion and implementation of artificial intelligence detections and represents services and support for those detections.
Cost of revenues for Q2 2023 decreased 35%
to $1.53 million compared to $2.33 million for
Q2 2022. The decline in cost of revenues was mainly attributable to the Company bearing the costs of procuring and allocating material
for two high-speed RIPs for a transit customer in Q2 2022 without a related spend in Q2 2023. The marginal increase in cost of revenues
on services and consulting was attributable to higher labor costs as well as costs associated with new portals coming online during early
2023, as opposed to the corresponding period in 2022.
Gross margin for Q2 2023 decreased 81% to
$241,000 compared to $1.28 million for Q2 2022. The decrease in gross margin was driven by the timing of business activity in Q2 2023
related to the manufacturing and delivery of two high-speed, transit-focused RIPs for one customer.
Operating expenses for Q2 2023 increased 27%
to $3.39 million compared to $2.68 million for Q2 2022. Sales and marketing costs saw only marginal decreases, while research and development
expenses increased slightly. The largest increase was observed in general and administration costs, which can be primarily attributed
to the timing of the Company's awarding of discretionary performance compensation that took effect in April 2023 compared to similar charges
occurring during the third quarter of 2022. Overall, the Company continues to focus on maintaining operating expenses while meeting the
increased needs of its customers.
Net operating loss for Q2 2023 totaled $3.15
million compared to net operating loss of $1.39 million for Q2 2022. The increase in loss from operations was primarily the result of
lower revenues recorded in the second quarter as a consequence of the delays previously noted, offset by continued increases in services
and consulting revenue.
Net loss for Q2 2023 totaled $2.99 million
compared to net loss of $1.34 million for Q2 2022. The increase in net loss was mostly attributable to the decrease in revenues as previously
noted above along with timing to operating expenses year-over-year, partially offset by the sale of a legacy business recognized in Other
Income.
Cash and cash equivalents at June 30, 2023
totaled $2.45 million compared to $1.12 million at December 31, 2022. As of quarter end, the Company had an additional $287,000 in receivables.
Duos also held $1.54 million in inventory as of June 30, 2023, consisting primarily of long-lead items for future RIP installations.
Subsequent to the quarter end, the Company raised
gross proceeds of $5 million from the sale of Series F Convertible Preferred Stock in August 2023 via a private transaction with the Company’s
largest shareholder at the market price equivalent of $6.20. As a result of this transaction, the Company currently has approximately
$6.0 million in cash and cash equivalents.
Six Month 2023 Financial Results
Total revenue decreased
13% to $4.41 million from $5.06 million in the same period last year. Total revenue for the first six months of 2023 represents an aggregate
of approximately $2.70 million of technology systems revenue and approximately $1.72 million in recurring services and consulting revenue.
An increase in recurring revenues by 15% was offset by the decrease in technology systems revenue. Total revenue was impacted by delays
in the delivery of two high-speed RIPs for a passenger transit client. Growth of the services portion of revenues was driven by the successful
completion and implementation of artificial intelligence detections and represents services and support for those detections.
Cost of revenues increased 2% to
$3.64 million from $3.55 million in the same period last year. The increase in cost of revenues was a result of timing of project work
ongoing for the Company.
Gross margin decreased 48% to $779,000
from $1.50 million in the same period last year. The decrease in gross margin was driven by the timing of business activity in Q2 2023
related to the manufacturing of two high-speed, transit-focused RIPs for one customer.
Operating expenses increased 10%
to $6.07 million from $5.54 million in the same period last year. The Company maintained its costs for sales, marketing, and research
and development at a consistent level, while observing a slight rise in general and administrative costs. This increase in G&A costs
can be primarily attributed to the timing of performance-based compensation awarded in the second quarter of 2023 compared to the same
period in 2022.
Net operating loss totaled $5.30 million
compared to net operating loss of $4.04 million in the same period last year. The increase in loss from operations was primarily the result
of lower revenues recorded in the second quarter as a consequence of the delays previously noted, offset by continued increases in services
and consulting revenue.
Net loss totaled $5.13 million compared
to a net loss of $3.99 million in the same period last year. The increase in net loss was mostly attributable to the decrease in revenues
as previously noted above along with growing expenses, partially offset by the sale of a legacy business recognized in Other Income.
Financial Outlook
At the end of the second quarter, the Company’s
contracts in backlog represented approximately $7.8 million in revenue, of which approximately $3.0 million to 5.0 million is expected
to be recognized during the remainder of 2023. The balance of contract backlog is comprised of multi-year service and software agreements
as well as project revenues spanning into fiscal 2024.
Based on these committed contracts and near-term
pending orders that are already performing or scheduled to be executed throughout the course of 2023 as well as the planned expansion
of the Company’s subscription business model and other contributing factors, Duos is reiterating its previously stated revenue expectations
for the fiscal year ending December 31, 2023. The Company expects total revenue for 2023 to range between $20.0 million and $21.0 million,
representing an increase of 33% to 40% compared to 2022.
Duos expects its improvement in operating results
to be reflected over the course of the full year in 2023. As a result of timing and other factors, the Company expects revenues in the
third quarter of 2023 to moderately increase compared to the second quarter of 2023 before ramping up more significantly in the fourth
quarter and into 2024.
Management Commentary
“During the second quarter, we continued
to drive incremental progress as we make the ongoing transition from a predominantly project-based, CAPEX-only model to a hybrid, subscription-first
business,” said Duos Chief Executive Officer Chuck Ferry. “Over the last twelve months, we’ve generated approximately
$14.4 million in revenue with the recurring component continuing to reliably increase over that time. Our ability to generate improved
revenue during this span supports our longer-term outlook while the steady, recurring revenue performance validates our decision to invest
in dual income streams. Additionally, as a result of recent transactions and continued, diligent cost management, we have ample liquidity
to execute on our near-term goals.
“On the technology side, we are
continuing to make major improvements in our AI capabilities. As of today, we have expanded the number of AI use cases in our catalogue
to 40 in total with several recent and upcoming releases focused specifically on the passenger rail segment in response to customer demand.
Through our strategic partnerships with Dell Technologies and NVIDIA, we’ve been able to operate at ever-greater computing density,
enabling us to deliver near-real-time responses to mission critical areas and yet maintain a smaller server footprint.
“While we continue to navigate temporary project-related
delays, interest in our solutions from the rail industry has never been greater. Between pending government legislation, skyrocketing
interest in all kinds of AI applications, and the commercial demand we’re seeing as a result, we believe we are entering a unique
inflection point with the right technology at the right time. Duos remains in its strongest-ever position, and we look forward to capitalizing
on the opportunities ahead.”
Conference Call
The Company’s management will host a conference
call today, August 14, 2023, at 4:30 p.m. Eastern time (1:30 p.m. Pacific time) to discuss these results, followed by a question-and-answer
period.
Date: Monday, August 14, 2023
Time: 4:30 p.m. Eastern time (1:30 p.m. Pacific time)
U.S. dial-in: 877-407-3088
International dial-in: 201-389-0927
Confirmation: 13740403
Please call the conference telephone number 5-10
minutes prior to the start time of the conference call. An operator will register your name and organization.
If you have any difficulty connecting with the conference
call, please contact Gateway Investor Relations at 949-574-3860.
The
conference call will be broadcast live via telephone and available for online replay via the investor section of the Company's website
here.
About Duos Technologies Group, Inc.
Duos Technologies Group, Inc. (Nasdaq: DUOT),
based in Jacksonville, Florida, through its wholly owned subsidiary, Duos Technologies, Inc., designs, develops, deploys and operates
intelligent vision based technology solutions supporting rail, logistics, intermodal and government customers that streamline operations,
improve safety and reduce costs. The Company provides cutting edge solutions that automate the mechanical and security inspection of fast-moving
trains, trucks and automobiles through a broad range of proprietary hardware, software, information technology and artificial intelligence.
For more information, visit www.duostech.com.
Forward- Looking Statements
This news release includes forward-looking statements
regarding the Company's financial results and estimates and business prospects that involve substantial risks and uncertainties that could
cause actual results to differ materially. Forward-looking statements relate to future events and typically address the Company's expected
future business and financial performance. The forward-looking statements in this news release relate to, among other things, information
regarding anticipated timing for the installation, development and delivery dates of our systems; anticipated entry into additional contracts;
anticipated effects of macro-economic factors (including effects relating to supply chain disruptions and inflation); timing with respect
to revenue recognition; trends in the rate at which our costs increase relative to increases in our revenue; anticipated reductions in
costs due to changes in the Company's organizational structure; potential increases in revenue, including increases in recurring revenue;
potential changes in gross margin (including the timing thereof); statements regarding our backlog and potential revenues deriving therefrom;
and statements about future profitability and potential growth of the Company. Words such as "believe," "expect,"
"anticipate," "should," "plan," "aim," "will," "may," "should,"
"could," "intend," "estimate," "project," "forecast," "target," "potential"
and other words and terms of similar meaning, typically identify such forward-looking statements. Forward-looking statements involve risks
and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied
by these forward-looking statements. These factors include, but are not limited to, the Company's ability to continue as a going concern,
the Company's ability to generate sufficient cash to continue and expand operations, the competitive environment generally and in the
Company's specific market areas, changes in technology, the availability of and the terms of financing, changes in costs and availability
of goods and services, economic conditions in general and in the Company's specific market areas, changes in federal, state and/or local
government laws and regulations potentially affecting the use of the Company's technology, changes in operating strategy or development
plans and the ability to attract and retain qualified personnel. The Company cautions that the foregoing list of risks, uncertainties
and factors is not exclusive. Additional information concerning these and other risk factors is contained in the Company's most recently
filed Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, and other filings filed
by the Company with the U.S. Securities and Exchange Commission (the "SEC"), which are available at the SEC's website, http://www.sec.gov.
The Company believes its plans, intentions and expectations reflected in or suggested by these forward-looking statements are based on
reasonable assumptions. No assurance, however, can be given that the Company will achieve or realize these plans, intentions or expectations.
Indeed, it is likely that some of the Company's assumptions may prove to be incorrect. The Company's actual results and financial position
may vary from those projected or implied in the forward-looking statements and the variances may be material. Each forward-looking statement
speaks only as of the date of the particular statement. We do not undertake or accept any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions
or circumstances on which any forward-looking statement is based, except as required by law. All subsequent written and oral forward-looking
statements concerning the Company or other matters attributable to the Company or any person acting on its behalf are expressly qualified
in their entirety by the cautionary statements above.
Contacts
Corporate
Fei Kwong, Director, Corporate Communications
Duos Technologies Group, Inc. (Nasdaq: DUOT)
904-652-1625
fk@duostech.com
Investor Relations
Matt Glover or Tom Colton
Gateway Investor Relations
949-574-3860
DUOT@gateway-grp.com
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
| | |
| | |
| | |
| |
| |
For
the Three Months Ended | | |
For
the Three Months Ended | | |
For
the Six Months Ended | | |
For
the Six Months Ended | |
| |
June
30, | | |
June
30, | | |
June
30, | | |
June
30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
|
|
|
|
|
|
|
|
| |
| | |
| |
REVENUES: |
|
|
|
|
|
|
|
| |
| | |
| |
Technology
systems |
|
$ |
870,494 |
|
|
$ |
2,780,045 |
| |
$ | 2,698,258 | | |
$ | 3,563,314 | |
Services
and consulting |
|
|
899,565 |
|
|
|
837,097 |
| |
| 1,716,089 | | |
| 1,493,144 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
Total
Revenues |
|
|
1,770,059 |
|
|
|
3,617,142 |
| |
| 4,414,347 | | |
| 5,056,458 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
COST OF REVENUES: |
|
|
|
|
|
|
|
| |
| | | |
| | |
Technology systems |
|
|
1,072,106 |
|
|
|
1,974,302 |
| |
| 2,839,315 | | |
| 2,839,790 | |
Services
and consulting |
|
|
456,616 |
|
|
|
360,226 |
| |
| 796,523 | | |
| 711,988 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
Total
Cost of Revenues |
|
|
1,528,722 |
|
|
|
2,334,528 |
| |
| 3,635,838 | | |
| 3,551,778 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
GROSS MARGIN |
|
|
241,337 |
|
|
|
1,282,614 |
| |
| 778,509 | | |
| 1,504,680 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
OPERATING EXPENSES: |
|
|
|
|
|
|
|
| |
| | | |
| | |
Sales and marketing |
|
|
301,077 |
|
|
|
375,986 |
| |
| 608,654 | | |
| 659,880 | |
Research and development |
|
|
537,801 |
|
|
|
530,339 |
| |
| 942,686 | | |
| 967,056 | |
General
and Administration |
|
|
2,550,709 |
|
|
|
1,770,764 |
| |
| 4,522,217 | | |
| 3,913,837 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
Total
Operating Expenses |
|
|
3,389,587 |
|
|
|
2,677,089 |
| |
| 6,073,557 | | |
| 5,540,773 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
LOSS FROM OPERATIONS |
|
|
(3,148,250 |
) |
|
|
(1,394,475 |
) | |
| (5,295,048 | ) | |
| (4,036,093 | ) |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
| |
| | | |
| | |
Interest
expense |
|
|
(3,230 |
) |
|
|
(2,706 |
) | |
| (4,410 | ) | |
| (5,886 | ) |
Other
income, net |
|
|
162,080 |
|
|
|
54,509 |
| |
| 166,375 | | |
| 54,691 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
Total
Other Income (Expenses) |
|
|
158,850 |
|
|
|
51,803 |
| |
| 161,965 | | |
| 48,805 | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
NET LOSS |
|
|
(2,989,400 |
) |
|
|
(1,342,672 |
) | |
$ | (5,133,083 | ) | |
$ | (3,987,288 | ) |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
Basic and Diluted
Net Loss Per Share |
|
|
(0.42 |
) |
|
|
(0.22 |
) | |
$ | (0.72 | ) | |
$ | (0.70 | ) |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
|
|
|
|
|
|
|
|
| |
| | | |
| | |
Weighted Average Shares-Basic and
Diluted |
|
|
7,169,340 |
|
|
|
6,096,541 |
| |
| 7,163,142 | | |
| 5,727,133 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
June 30 | |
December 31 |
| |
2023 | |
2022 |
| |
| (Unaudited) | | |
| | |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 2,452,248 | | |
$ | 1,121,092 | |
Accounts receivable, net | |
| 286,871 | | |
| 3,418,263 | |
Contract assets | |
| 1,006,791 | | |
| 425,722 | |
Inventory | |
| 1,544,755 | | |
| 1,428,360 | |
Prepaid expenses and other current assets | |
| 496,545 | | |
| 441,320 | |
| |
| | | |
| | |
Total Current Assets | |
| 5,787,210 | | |
| 6,834,757 | |
| |
| | | |
| | |
Property and equipment, net | |
| 609,941 | | |
| 629,490 | |
Operating lease right of use asset | |
| 4,534,593 | | |
| 4,689,931 | |
Security deposit | |
| 550,000 | | |
| 600,000 | |
Convertible note receivable, net | |
| 150,625 | | |
| — | |
Patents and trademarks, net | |
| 92,603 | | |
| 69,733 | |
Software development costs, net | |
| 579,655 | | |
| 265,208 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 12,304,627 | | |
$ | 13,089,119 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 760,029 | | |
$ | 2,290,390 | |
Notes payable - financing agreements | |
| 259,062 | | |
| 74,575 | |
Accrued expenses | |
| 302,108 | | |
| 453,023 | |
Equipment financing payable-current portion | |
| — | | |
| 22,851 | |
Operating lease obligations-current portion | |
| 769,563 | | |
| 696,869 | |
Contract liabilities | |
| 2,439,640 | | |
| 957,997 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 4,530,402 | | |
| 4,495,705 | |
| |
| | | |
| | |
Operating lease obligations, less current portion | |
| 4,389,690 | | |
| 4,542,943 | |
| |
| | | |
| | |
Total Liabilities | |
| 8,920,092 | | |
| 9,038,648 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 4) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY: | |
| | | |
| | |
Preferred stock: $0.001 par value, 10,000,000 authorized, 9,446,000 shares available to be designated | |
| | | |
| | |
Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 and 0 issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $6.30 per share | |
| — | | |
| — | |
Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 0 and 0 issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $7 per share | |
| — | | |
| — | |
Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 0 and 0 issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $5.50 per share | |
| — | | |
| — | |
Series D convertible preferred stock, $1,000 stated value per share, 4,000 shares designated; 1,299 and 1,299 issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $3 per share | |
| 1 | | |
| 1 | |
Series E convertible preferred stock, $1,000 stated value per share, 30,000 shares designated; 4,000 and 0 issued and outstanding at June 30, 2023 and December 31, 2022, respectively, convertible into common stock at $3 per share | |
| 4 | | |
| — | |
Common stock: $0.001 par value; 500,000,000 shares authorized, 7,240,545 and 7,156,876 shares issued, 7,239,221 and 7,155,552 shares outstanding at June 30, 2023 and December 31, 2022, respectively | |
| 7,240 | | |
| 7,156 | |
Additional paid-in-capital | |
| 61,029,659 | | |
| 56,562,600 | |
Accumulated deficit | |
| (57,494,917 | ) | |
| (52,361,834 | ) |
Sub-total | |
| 3,541,987 | | |
| 4,207,923 | |
Less: Treasury stock (1,324 shares of common stock at June 30, 2023 and December 31, 2022) | |
| (157,452 | ) | |
| (157,452 | ) |
Total Stockholders' Equity | |
| 3,384,535 | | |
| 4,050,471 | |
| |
| | | |
| | |
Total Liabilities and Stockholders' Equity | |
$ | 12,304,627 | | |
$ | 13,089,119 | |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
| |
|
|
|
| |
For
the Six Months Ended |
|
| |
June
30 |
|
| |
2023 | |
|
2022 |
|
| |
| |
|
|
|
Cash from operating activities: | |
| | |
|
| |
|
Net loss | |
$ | (5,133,083 | ) |
|
$ | (3,987,288 |
) |
Depreciation and amortization | |
| 230,592 | |
|
| 145,627 |
|
Stock based compensation | |
| 302,743 | |
|
| 438,809 |
|
Stock issued for services | |
| 65,000 | |
|
| 80,000 |
|
Amortization of operating lease right
of use asset | |
| 155,338 | |
|
| 158,547 |
|
Changes in assets and liabilities: | |
| | |
|
| |
|
Accounts receivable | |
| 3,131,392 | |
|
| 1,458,592 |
|
Note receivable | |
| (150,625 | ) |
|
| — |
|
Contract assets | |
| (581,069 | ) |
|
| (698,923 |
) |
Inventory | |
| (116,393 | ) |
|
| (481,880 |
) |
Security
deposit | |
| 50,000 | |
|
| — |
|
Prepaid expenses and other
current assets | |
| 403,225 | |
|
| (218,198 |
) |
Accounts payable | |
| (1,530,361 | ) |
|
| 268,425 |
|
Accrued expenses | |
| (150,914 | ) |
|
| (108,550 |
) |
Operating lease obligation | |
| (80,559 | ) |
|
| 46,485 |
|
Contract
liabilities | |
| 1,481,643 | |
|
| 3,186,138 |
|
| |
| | |
|
| |
|
Net cash (used in) provided
by operating activities | |
| (1,923,071 | ) |
|
| 287,784 |
|
| |
| | |
|
| |
|
Cash flows from investing activities: | |
| | |
|
| |
|
Purchase of patents/trademarks | |
| (28,720 | ) |
|
| (13,660 |
) |
Purchase of software
development | |
| (360,437 | ) |
|
| (15,000 |
) |
Purchase
of fixed assets | |
| (159,203 | ) |
|
| (140,549 |
) |
| |
| | |
|
| |
|
Net cash used in investing
activities | |
| (548,360 | ) |
|
| (169,209 |
) |
| |
| | |
|
| |
|
Cash flows from financing activities: | |
| | |
|
| |
|
Repayments of insurance and
equipment financing | |
| (273,965 | ) |
|
| (213,404 |
) |
Repayment of finance lease | |
| (22,851 | ) |
|
| (48,812 |
) |
Proceeds from common stock
issued | |
| — | |
|
| 6,095,000 |
|
Issuance cost | |
| (17,645 | ) |
|
| (576,650 |
) |
Proceeds
from shares issued under Employee Stock Purchase Plan | |
| 117,048 | |
|
| — |
|
Proceeds
from preferred stock issued | |
| 4,000,000 | |
|
| — |
|
| |
| | |
|
| |
|
Net cash provided by financing
activities | |
| 3,802,587 | |
|
| 5,256,134 |
|
| |
| | |
|
| |
|
Net increase
in cash | |
| 1,331,156 | |
|
| 5,374,709 |
|
Cash,
beginning of period | |
| 1,121,092 | |
|
| 893,720 |
|
Cash,
end of period | |
$ | 2,452,248 | |
|
$ | 6,268,429 |
|
| |
| | |
|
| |
|
Supplemental
Disclosure of Cash Flow Information: | |
| | |
|
| |
|
Interest paid | |
$ | 4,410 | |
|
$ | 5,984 |
|
Taxes paid | |
$ | — | |
|
$ | 1,264 |
|
| |
| | |
|
| |
|
Supplemental
Non-Cash Investing and Financing Activities: | |
| | |
|
| |
|
Notes issued for financing
of insurance premiums | |
$ | 458,452 | |
|
$ | 327,586 |
|
Exhibit 99.2
Duos Technologies Group, Inc.
Second Quarter 2023 Earnings Conference Call
August 14, 2024
Chuck Ferry, CEO and
Director
Andrew Murphy,
CFO
Q&A Participants
Aditya Dagaonkar - Northland
Capital
Edward Woo - Ascendiant
Capital Markets
Operator
Good afternoon. Welcome
to Duos Technologies Second Quarter 2023 Earnings Conference Call.
Joining us for today's call
are Duos' CEO, Chuck Ferry, and CFO, Andrew Murphy. Following their remarks, we will open the line 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
Welcome, everyone, and thank
you for joining us. Earlier today, we issued a press release announcing our financial results for the second 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.
Now, let's get started.
About two weeks from now, September 1, I will have served as CEO for Duos Tech for three years. For those that know me, I have successfully
led turnarounds with several businesses and military organizations over the past 35 years and, instinctively, have learned to recognize
when an organization is turning the corner and is now ready for prime time.
Duos Tech is very much ready
for prime time and looking forward is in the best position ever, with a clear pathway in the next 12 to 24 months to achieve our strategy
and achieve financial profitability.
There are two key things
investors should be watching, right now. The first is the Railway Safety Act, which is steadily making its way through Congress.
If passed, this bill will call for the FRA to write regulations on the use of wayside detection systems, which includes our technology.
Since the derailment in
East Palestine, Ohio, six months ago, our commercial inquiries have skyrocketed. My sense is that regardless of whether this bill
passes or not, Duos will benefit from the renewed focus on safety across the industry.
We are currently in discussions
with all the Class 1s and many car owners and shippers about how they can benefit from our railcar inspection portal. We have had the
opportunity to highlight our technology and benefits to the FRA, Transport Canada and the heads of key labor unions. Everyone who sees
the technology understands it is the way of the future.
The second thing investors
should watch is the artificial intelligence revolution. AI has been a hot topic for several years, but even more so in the last six months.
The rail industry is certainly implementing AI, throughout its operations. In this regard, Duos' has made significant advances in the
development of our AI.
We believe our AI portfolio
of over 40 use cases that directly correlate to FRA and AAR defects has already prevented many derailments, improved safety, and the system
is now being used by at least two of our major railroad customers to support regulatory waivers or waiver applications.
There are certainly other
pureplay AI or machine vision companies assisting the rail sector, but none of them provide a turnkey solution like Duos, where we integrate
all aspects of hardware, software, IT and AI making it the most technologically advanced and reliable machine vision AI wayside detection
system in the field.
I want to remind everyone
what our strategy is. In the rail industry, we are expanding our current customer base and Class 1, short line, and passenger rail. More
importantly, we have initiated our subscription business, closing our first subscription customer earlier this year, and have car owners
and shippers that I expect to close in the coming quarters.
To accelerate expanding
to the subscription business, we are in discussions with our current customers to buy back existing portals. Looking ahead, we have identified
the first 10 new subscription portal locations. With this we have mapped out a plan to grow to a network of 40 to 50 portals with multiple
subscribers each, in the coming 18 to 36 months.
We have also begun to address
the multiple international inquiries that have been coming in. There is particular interest for a portal solution in European passenger
rail sector, for example.
Our business platform and
technology are ready to scale more rapidly, if necessary, in response to the Railway Safety Act and AI revolution.
Lastly, we expect to roll
out a technical update of our truck inspection portal in FY 2024 and reengage in the trucking and intermodal industry where we have previous
experience.
We've also strengthened
our strategic partnerships with Dell Computers and NVIDIA. By integrating technology from Dell, NVIDIA and other industry leaders with
our proprietary knowhow, we recently ran a test for acquiring and processing information at the edge. Our results show that we acquired
and processed 85 gigabytes of data per second, simulating a train at 125 miles per hour.
To put this in simple terms,
85 gigabytes per second will fill up your personal laptop in approximately four seconds. The test validated our ability to scan a train
at high speed and transmit important safety data in less than 60 seconds. For those familiar with wayside detection alerts, sending immediate
defect information to a train operator and or dispatcher is critical to avoiding a derailment.
One final comment before
turning it over to Andrew for the financials. As you know, Mr. Ed Harris, a 40 year railroad veteran, left our Board of Directors when
he became the Chief Operating Officer at Canadian National Railroad, some months ago. I am pleased to announce that Mr. Frank Lonegro
has recently joined our Board to backfill that director position.
Frank is a 30 year railroad
veteran with leadership roles in finance, law, technology and operations, having enjoyed a distinguished career at CSX. Frank currently
serves as a Chief Financial Officer for Beacon Roofing Supply, a Fortune 500 company.
Frank brings decades of
leadership experience in key areas of transportation and industrial sectors, including rail operations and safety technology, strategic
planning and financial and regulatory stewardship, all of which are vital to our strategy, going forward.
With that, I'll turn it
over to Andrew to cover the financials, after which I'll address some more of the news on our subscription offering and discuss our risk
areas. Andrew.
Andrew Murphy
Thank you, Chuck. I'll now
briefly walk through our second quarter results before expanding on my view of the business.
Total revenue for Q2 2023
decreased 51% to $1.77 million, compared to $3.62 million in the second quarter of 2022. Total revenue for Q2 2023 represents an aggregate
of approximately $870,000 of technology systems revenue and approximately $900,000 in recurring services and consulting revenue.
For the first six months
of 2023, total revenue decreased 13% to $4.41 million, from $5.06 million in the same period last year. Total revenue for the first six
months of 2023 represents an aggregate of approximately $2.7 million of technology systems revenue and approximately $1.72 million in
recurring services and consulting revenue.
The decrease in total revenue
for both periods was driven by the certain external site factors of the customer that have delayed delivery of two high speed rail inspection
portals.
Growth in the services portion
of revenues was driven by the successful completion of two freight RIP railcar inspection portals earlier this year, as well as the deployment
of additional artificial intelligence detections and represents services and support for those detections.
Cost of revenues for Q2
2023, decreased 33% to $1.56 million, compared to $2.33 million for Q2 2022, following a similar trend with revenue. The declining cost
of revenues was mainly attributable to the company bearing the initial cost of procurement and allocation material for two high speed
RIPs for a transit customer in Q2 2022, without related spend in Q2 2023.
The marginal increase in
cost of revenues from services and consulting was attributed to higher labor costs, as well as cost associated with two new portals coming
online during early 2023, as opposed to the corresponding period in 2022.
For the first six months
of 2023, cost of revenues increased 3% to $3.67 million from $3.55 million in the same period, last year. The cost of revenues were largely
flat on a year-over-year basis, largely due to timing of projects.
Gross margin for Q2 2023,
decreased at 83% to $212,000, compared to $1.28 million for Q2 2022.
For the first six months
of 2023, gross margin decreased 50% to $749,000 from $1.5 million in the same period, last year. The decrease in gross margin was driven
by the timing delays of business activity in Q2 '23 related to the manufacturing delivery of two high speed transit focused RIPs for one
customer.
Operating expenses for Q2
2023, increased 27% to $3.41 million, compared to $2.68 million for Q2 2022.
Sales and marketing costs
saw only marginal decreases while research and development expenses increased slightly.
The largest increase was
observed in general and administrative costs, which can primarily be attributed to the timing of certain payroll related expenses that
took effect in April 2023, which was a variance with the same period a year ago, largely due to timing.
Overall, the company continues
to focus on maintaining operating expenses, while meeting the increasing needs of its customers. For the first six months of 2023, operating
expenses increased 16% to $6.1 million from $5.54 million in the same period of last year.
The company maintained its
cost of sales, marketing and research and development at a consistent level, while observing a slight rise in the general and administrative
costs.
Net operating loss for Q2
2023, totals $3.2 million, compared to net operating loss of $1.39 million for Q2 of 2022. For the first six months of 2023, net operating
loss totaled $5.35 million, compared to a net operating loss of $4.0 million in the same period of last year.
The increase in loss from
operations was primarily the results of lower revenues recorded in the second quarter as a consequence of project delays previously noted,
partially offset by continued increases in services and consulting revenue.
Net loss for Q2 2023, totals
$3.04 million, compared to net loss of $1.34 million for Q2 2022. For the first six months of 2023, net loss totaled $5.19 million, compared
to a net loss of $3.99 million in the same period, last year. The increase in net loss was mostly attributable to the decrease in revenues
as previously noted, along with growing expenses.
For the three months ended
June 30, 2023 and 2022, net loss per common share was $0.42 and $0.22, respectively. And for the six months ended June 30, 2023 and 2022,
net loss per common share was $0.72 and $0.70, respectively.
Now, let's discuss the balance
sheet. We ended the quarter with approximately $2.45 million in cash and cash equivalents, compared to $1.1 million at December 31, 2022.
We had an additional $286,000 receivables and $1.54 million of inventory consisting of product primarily of long lead items for two pending
RIP installations.
Subsequent to the quarter
end, the company raised gross proceeds of $5 million from the sale of Series F convertible preferred stock in early August of 2023 with
an investor and an at the market offering equivalent to $6.20 per share.
As a result of these transactions,
the company currently has approximately $5 million in cash and cash equivalents--excuse me, the company has approximately $6 million in
cash and cash equivalents.
In summary, our cash position
is strong and we are adequately capitalized to execute our current plans. Duos has been fortunate to have the support of our long term
shareholders as evidenced with our most recent capital infusion, who also see a bright future for Duos on the horizon, and we appreciate
their continued support as we implement our subscription platform.
I'd now like to provide
an update on our financial projections. At the end of the second quarter, our contracts in backlog represented approximately $7.8 million
in revenue, of which approximately $3 million to $5 million is expected to be recognized during the remainder of 2023, and the balance
of the contract backlog is comprised of multi-year services and software agreements, as well as project revenues spanning into fiscal
year 2024.
Based on these committed
contracts and visibility to near term pending orders that are expected to be executed throughout the course of 2023, as well as the planned
expansion of our subscription business model and other contributing factors, we are reiterating our previously stated revenue expectations
for the fiscal year ended December 31, 2023.
We expect total revenue
for 2023 to range between $20 million and $21 million, representing a 33% to 40% increase, compared to 2022. We expect the improvement
in operating results to be reflected over the course of the full year in 2023.
As a result of timing and
other factors, we expect revenues in the third quarter to moderately increase, compared to the second quarter of 2023, before ramping
up significantly in the fourth quarter and into 2024.
I'd now like to touch on
my outlook for Duos. As our long term shareholders know, Duos typically transitions between periods of growth interspersed with pauses
as new contracts begin the execution cycle. In fact, in Duos' history, the company typically has operated in an 18 to 24 month cycle with
the quarterly and annual results reflecting reality of that cycle for CapEx oriented sales.
Duos has studied the value
proposition of the RIP product, whereby the data delivered across time provides significant returns to users, well beyond the initial
CapEx point of sale.
To improve the revenue profile
of the company and refocus it with the value delivered via the RIP solution late last year, the company undertook a transition of its
core business to a recurring revenue model. We are now beginning the execution phase of that transition cycle. This is a major positive
step for Duos’ long term horizon, but does bring challenges as the company balances demonstrable short term revenue growth, while
not mortgaging its future.
As we indicated earlier
this year, 2023 is a year of transition for Duos. My assessment of our progress is that we are on track to complete the transition by
the end of 2023 through a series of commercial successes and the execution of several strategic initiatives underway, but still expect
to turn in a revenue performance that will provide year-over-year growth.
As Chuck mentioned, we remain
encouraged by the commercial opportunities that have begun to present themselves, though we understand that increased revenues and profitability
must remain top of mind. As previously noted, the primary challenge we anticipate is timing of contracts and revenue recognition.
As such, we saw a slowdown
in the second quarter due to delays by customers, which we expect to moderately improve in the third quarter before picking up again later
this year.
We are, proactively, managing
this with contract modifications across current customers, as well as other commercial operators. And currently, we do not anticipate
a change to our financial guidance for the year. We anticipate in the near term announcing additional commercial and strategic successes,
which will contribute to our 2023 results and increase our backlog for 2024, and beyond.
This concludes my financial
commentary. I'll now pass the call back over to Chuck.
Chuck Ferry
Thanks, Andrew.
As we have discussed on
this call and during previous ones, expanding from a CapEx only business to a heavier mix of subscription is critical for the long term,
but there are short term pressures on revenue and risk of timing. As such, let's discuss the subscription strategy and progress made implemented.
In July, we implemented
our first subscription services agreement with a passenger rail - passenger transit operator. The agreement, renewable annually, is initially
valued at $300,000 per year and encompasses customer training, installation and railcar data services across three existing Class 1 portals.
This is important because
this customer is very thoughtfully planning and testing ,while they will use the safety data from our solution to improve overall operating
schema. This is in preparation for when they expect to further expand the use of portals and a combination of CapEx and subscription formats.
We are currently awaiting
a decision award with a short line rail operator to install subscription portal in the Southeastern United States, later this year. This
multi-year deal will allow for multiple subscribers and includes a partnership where Duos can validate new technology in a live portal.
We're also awaiting notice from existing Class 1 customers for additional portals as part of their FY '24 capital budgets, which are being
formulated at this time.
We are currently working
with a number of car owners and shippers who have expressed strong interest in subscriptions to assist them in the best ways to incorporate
the data into their operations.
On the surface, car owners
and shippers may seem the same but, in reality, each has its own operational challenges, and we are finding our subscription offering
is very flexible in providing what they need now and capable of expanding in the future.
As I've mentioned previously,
we are in discussions with our current customers to buy back existing portals and then operate them as a turnkey solution with multiple
subscribers on each portal. If successful, this will accelerate our subscription plan.
At the same time, we have
identified the next ten subscription portal locations based on a corridor and key interchange point strategy that our veteran railroaders
have crafted, and we are in discussions with the owners of those right of way locations, at this time. While we advance our subscription
plan, it may require some near term decision to invest in subscription portals, while foregoing opportunities to sell CapEx portals.
The opportunity with Southeastern
and Shortline railroad I mentioned above is an example of that. The decision to forego projects that could be near term CapEx opportunities
that would provide more immediate revenue results versus taking a five to 10 year opportunity with far greater revenue potential via a
subscription portal is what we're really thinking about.
Ultimately, we know that
a business based primarily on revenue--on recurring revenue with better margins is a pathway to profitability because it allows us to
add multiple subscribers at each portal, thus increasing the total revenue that can be achieved from a single installation.
Other benefits of the expansion
into subscription include allowing Duos to make technological updates at our pace, which is often faster than our conversion cycle under
the CapEx format.
Those updates will benefit
not just one customer at their own portal but everyone who has access to a subscription, allowing Duos to make the investment to build
out a portal network so that the initial CapEx outlay can be eliminated as a challenging cost hurdle for the rail operators, car owners
or shippers.
Building a technology roadmap
for our customers allowing them to access our full portfolio, thereby allowing the greatest number of customers to improve the safety
of their operations and the maintenance of their cars.
So, let's discuss risks.
As Andrew mentioned earlier, Duos and its current CapEx weighted revenues format makes quarter-to-quarter consistency challenging. As
an example, we have experienced project delays beyond our control with our largest passenger customer.
However, the good news is
that this is offset by contract modifications that have added 40% of contract value, which is worth more than $4 million of additional
revenue for this project.
Rather, you should look
at us over a longer period and consider the potential upside given a successful transition to our subscription model. Near term, we'll
continue to thoughtfully take risks and pursuing subscription opportunities versus CapEx. However, we will have a blend of both for at
least the next several years.
I'm certainly no stranger
to risk management, so you can bet we are, proactively, working on plans to mitigate this timing risk. And so I'm reaffirming our guidance
for FY '23, at this time.
In closing, between pending
government legislation, skyrocketing interest in AI and a commercial demand across the rail industry we're seeing as a result, we believe
we are entering a unique inflection point with the right technology at the right time. Duos remains in its strongest position ever, and
we look forward to capitalizing on our opportunities ahead.
And with that, we're ready
to open the call for your questions. So, Operator, if you would please provide the appropriate instructions.
Operator
Thank you. At this time,
we will be conducting a question-and-answer session. If you would like to ask a question, please press “*”, “1”
on your telephone keypad. A Confirmation tone will indicate your line is in the question queue. You may press “*”, “2”
if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your
handset, before pressing the star keys.
One moment, please, while
we poll for questions.
Our first question comes
from Mike Latimore with Northland Capital. Please proceed with your question.
Aditya Dagaonkar
Hi, this is Aditya on behalf
of Mike Latimore. Could you give some color on what would be the revenue mix between services and systems revenue for this year?
Chuck Ferry
Yeah, this is Chuck. Thanks
for the question. I'll kind of start this out. I think, one of the--when we start with this question, this is kind of, how do we feel
about the rest of the year. And then I'll let Andrew kind of talk about what that mix looks like. I would say look, basically, we have
a plan to meet our 2023 guidance through a mix of existing contract mods and the installation of at least two more portals, by the end
of the year.
And I would note that we
already have about $1.5 million worth of the long lead items on hand for these two portals, and we’re in active discussions with
several customers who want them, before year end.
And I'll turn it over to
Andrew to maybe talk about what that mix looks like.
Andrew Murphy
Sure, I think to Chuck's
point, we will still have a very heavy CapEx focus in the second half of the year. However, right now, we are undertaking several strategic
initiatives that have allowed Duos to very quickly phase into the subscription program.
And so, I think while it
may not be a significant or meaningful amount of overall revenue by the end of this year, I expect we're going to establish a large recurring
base for future years for our subscription program.
So I think in 2022, we had
an 80%-20% split between CapEx and recurring revenues. We anticipate that that will grow, especially in the latter half of 2023, but we
expect some of those results to bear more fruit going into 2024.
Aditya Dagaonkar
All right. And could you
also give some more color on the portal cashless buyback?
Chuck Ferry
Yeah, we'll talk about it
in concept just because we're in discussions at this point and certainly those are sensitive and we will not talk about the customers,
themselves. But basically, the concept is that look, we have customers that have purchased portal, existing portals. And obviously, we
provide services and maintenance and software licensing for those on a recurring basis.
The concept is that they
would return ownership of those portals to us. We would then own and operate and basically run them as a turnkey solution to them. Part
of that would include providing technology updates for them, in some cases, introducing new subsystems that are being developed, right
now. And basically, then being able to more rapidly respond to those sorts of things.
The concept, though, is
that we would basically provide services for that base customer, if you will, with services in kind for the next few years to basically
pay down the buyback price. So this has been very favorably--very favorably received. And we're in active discussions. And I'm hopeful
to be able to, announce maybe in the next few months success with that, which will accelerate our subscription efforts.
Aditya Dagaonkar
All right. Thank you.
Operator
As a reminder, if you would
like to ask a question, please press “*”, “1” on your telephone keypad. One moment, please, while we pull for
questions.
Our next question comes
from Ed Woo with Ascendiant Capital Markets. Please proceed with your question.
Edward Woo
Yeah, thank you very much
for taking my question. My question is very, on a very general topic- AI. You guys been, obviously, using it in your technology for a
long time; it's getting a lot of buzz. But can you just quickly talk about how you guys are able to advance it and make your product even
better so that everybody kind of knows your involvement with it? Thank you.
Chuck Ferry
Yeah, so, we've talked to
both of this format, and others. We are currently right now in the machine vision, wayside detection area. Duos is the only company that
does--that performs, basically, all of the necessary tasks to produce good AI.
And by that, I mean our
solution, we control the proprietary aspects of all the hardware, software, IT and artificial intelligence. There are other--there are
some Class 1 customers and others out there that are using some other machine vision technology from competitors. What they are having
to use third-party AI providers.
So, what they're having
to do is they're basically -- they're not in control of all aspects of the AI. This is very, very important, because in this machine vision
AI for moving railcars, any small slight changes that you make in the hardware, the software, the IT and the AI will offset and cause
the AI to not perform very well. And so, and this is feedback we're getting from some of the Class 1 operators that use our competitors’
equipment.
So, the big difference and
advances for us is that we still perform it all in-house. We have a very experienced team that also includes mechanical car inspectors
in our AI development team. It's not a very large team, but it's a very, it's a very talented team.
And the other key aspect
is our current customers participate and provide excellent information and data points for us to make sure that the AI that we develop
is meaningful. It's focused on things that cause derailments, and it's directly correlated to FRA and AAR mandated inspection points.
I hope that answers your question.
Edward Woo
Yes, thank you very much.
And I wish you guys, good luck. Thank you.
Chuck Ferry
We appreciate it. Thank
you. We will wait for the next question. Go ahead.
Operator
Okay. Management will now
take select listeners’ submitted questions?
Chuck Ferry
Yes. Thank you. So, we've
had a couple of questions kind of come in, over the last week or so. One of the questions that we have right now is, the question is,
do you expect the recent derailments to drive more sales in the next 12 months?
You know, look, the rail
industry, Duos Tech included and all of our current customers' safety is absolutely paramount and first and foremost and front and center
for the entire industry. I would say that, since the East Palestine events made us certainly put a lot more focus and emphasis on rail
safety, there's considerable efforts in Congress, right now, to pass the bill.
Congress, of course, is
in recess right now, but we have been told when they come out of recess, certainly the Senate will hear the bill on the floor during the
month of September. But I think even regardless of that, you're going to see a drive to adopt more technology like ours on a go forward
basis.
I think now that the FRA
and Transport Canada, as well as some of the labor unions, have gotten more familiar with our technology and others like it. I think they're
starting to get more comfortable with it, and the pace is going to pick up, regardless. So, we never want to see more derailments, but
I think it's certainly going to be our focus on a go forward basis.
Another question we have
here is, and I think I'll let Andrew take this one is, what does success look like for the business here over the next couple of quarters?
Andrew Murphy
Yeah, that's a great question.
I think success for us looks like a combination of CapEx sales, as we mentioned in the earnings call, which will continue over the next
several years and just continuing to be a core component of our business. But an expansion of our offerings with our existing customers,
but really a continued focus on our recurring revenues.
While CapEx is certainly
valuable to us and helps in terms of the near term revenue recognition and will continue to be a part of that offering, the company really
wants to continue to focus on that recurring revenue, with a target to grow recurring revenues to 50 plus percent of annual revenue or
more. While this won't happen overnight, we do believe we are laying the groundwork with strategic initiatives in 2023.
As we talked about earlier,
in 2022, our recurring revenues, without subscription customers, was approximately 20% of our total revenue and we believe we can grow
that figure out, significantly.
Coupled with that, we will
also be able to achieve a sustainable breakeven on both cash flow and net profit, as we phase into subscription model.
Chuck Ferry
Yeah, I'll do one more here
and then we'll turn it back over if there's any more questions. But this question came in, again, asking for a bit of an update about
the proposed legislation that's making its way through Congress, the Railway Safety Act. And what's the likelihood of the FRA mandating
automated inspections?
I just want to remind our
investors and those who will read the transcripts afterwards, at this moment right now, the FRA does not currently have any regulatory
authority over the use and deployment of wayside detection devices. That is largely left in the hands of the Class 1 railroads and other
rail operators to employ those systems.
So, if this bill is to pass--will
pass, there's a section in there that's very specific that the FRA, more importantly, the Department of Transportation Secretary will
be required to within one year to write a regulation that will--write a set of regulations and standards around the use of wayside detection
devices.
And it's our understanding
that the wayside detection devices will not just be--it’ll be heat detection devices, impact detection devices, and also machine
vision and camera detection devices.
So again, this is kind of
a big deal if it does pass. But again, I think the industry is already headed this direction, anyway. And so, regardless of the bill,
our strategy remains solid, regardless whether it passes or not.
So, operator, I'll turn
it over to you. If we have more questions, we'll take them, but if not, we'll turn it back over to you for closing statements.
Operator
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.
Chuck Ferry
Thank you, Operator, and
thank you, everybody, for joining. Again, I also very much appreciate our shareholders, our current shareholders, especially our long-term
shareholders who have been very, very supportive of us and understand the potential that we have and what this new model means for us
in terms of value.
So, thank you everybody
for attending, and I'll turn it back over to our moderator to complete the call.
Operator
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 meanings of the Private Securities Litigation Reform Act
of 1995. Forward-looking terminology 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 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 the 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’ filing with the SEC.
Thank you for joining us
today for Duos Technologies Group second quarter 2023 conference call. You may now disconnect.
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