Good afternoon. Welcome to Duos Technologies Third Quarter 2019 Earnings Conference Call. Joining us for today's call are Duos' Chairman and CEO, Gianni Arcaini; and CFO, Adrian Goldfarb. .

Following their remarks, we will open the call for your questions. Then before we conclude today's call, I will provide the necessary cautions regarding the forward-looking statements made by management during this call. .

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

Thank you, Rebecca. Welcome, everybody, and thank you for joining us. .

Earlier today, we issued a press release announcing our financial results for the third quarter of 2019 as well as other operational highlights. A copy of the release, by the way, is available in the Investor Relations section of our website. I plan to provide additional commentary on our results shortly. .

But before we begin with the discussion of our results, I'd like to take a few minutes, as I always do, to provide a brief overview of who we are and what we do, particularly for those who you may -- who have not been familiar with our company in the past. .

At Duos, we provide advanced analytical technology solutions with a strong portfolio of intellectual property. In simple terms, we create highly sophisticated technology solutions for our wide range of customers. We focus on improving their business processes to ultimately provide a measurable return on investment.

To that end, we have and continue to develop a broad range of proprietary technologies, which we typically deploy as turnkey systems.

These advanced tools include machine learning and other forms of artificial intelligence as well as advanced video analytics that we deliver through a combination of our image and data capture technology suite, which includes back-end processing and middleware branded as praesidium and our customer-facing software platform branded as centraco..

Our chief focus is our mission-critical security, inspections and operational applications. Our target markets predominantly include the rail transportation, retail distribution, critical infrastructure security and the law enforcement sectors.

We estimate that the total addressable market opportunity in our combined core target markets exceeds $100 billion. .

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

A significant aspect of our core platforms is the adaptability to various verticals requiring very little adjustments to our code and system architecture. Our long-term market strategy is to be increasingly diversified and set up to address critical and cyclical market segment volatility. .

We will be discussing our results for the quarter and 9 months shortly. However, I want to stress that, historically, our business has been and for the moment continues to be subject to shifts in timing, particularly our quarterly numbers, the results of any one period should be viewed in context of our cumulative performance.

Viewed in this manner, we are continuing to execute on our long-term business plan to deliver strong growth and ultimately sustained profitability. .

Since becoming a public company in 2015, we set out a long-term strategy to not only focus on business in growth markets, but also build a sustainable, competitive advantage as an advanced technology business. A key element of that plan is to generate growth with an increasing percentage of our business coming from recurring revenues. .

I am pleased to say that we are on target with our plan as we'll be clear when we update our progress for the TrueVue360 subsidiary shortly.

While our revenues will continue to fluctuate between quarters for the time being, we believe that these variations will become less pronounced as we grow over the next 24 to 36 months on our way to building a much larger business. .

At the beginning of the first quarter of 2019, we launched TrueVue360, a subsidiary whose mission is to develop, market and operate our artificial intelligence and machine learning programs. TrueVue360 will not only serve our current customers, but also pursue many AI opportunities in other verticals.

We began investing in the development resources of TrueVue360 during the fourth quarter of 2018 and completed our staffing goals by the end of February. As I mentioned on our previous call, as of the end of the second quarter of this year, TrueVue360 was fully operational and has launched its subscription-based model into the market. .

I'm excited to report that TrueVue360 has completed the development of our comprehensive AI platform, which allows us to operate independently from any third-parties, which is consistent with our strategic plan. .

As the next item on our product development road map, by the end of the year, we are planning to fully migrate our operations from our current third-party platform provider to the TrueVue360 platform. That process has progressed rapidly. And we are in a good position to get everything finalized prior to the year-end. .

Looking ahead, there is significant potential for licensing our AI models within our current customer base and in adjacent verticals. We are experiencing to benefit -- we are expecting to benefit from the added revenue predictability and higher margins that come from the subscription-based model.

In Q3, we announced our first major contract and expect to begin recognizing initial revenues from our TrueVue360 operations beginning in 2020. Long term, we expect TrueVue360 to contribute significantly to our recurring revenue base over time.

I would also like to point out that we have built a very strong team of data scientists, software development and AI professionals. The investment that we have and we'll continue to make in our TrueVue360 subsidiary is included in our consolidated financial statements. .

The completion of our comprehensive AI platform will allow us to expand our market reach well beyond the rail space and target several verticals that are exponentially incorporating artificial intelligence applications into their operations.

Effective January 2020, our plan includes expansion of our business development team dedicated to our AI program. We're also excited to report that our rail-centric AI applications are rapidly growing and are gaining increased demand for all our rail customers.

Given the significance of the industry, we will announce specific achievements of our AI program in separate communications. .

On the HR side of things, we are also in the process of filling a senior business development role within TrueVue360. As I mentioned, our effort to fill this newly created position, I should also reiterate that the talent pool available for hiring in today's market continues to be very tight, specifically for the areas in which we are looking. .

Investment in our talent pool continues to be a central part of our company's financial plan. As of today, our total head count includes 78 employees domestically plus 11 full-time contractors overseas.

Our staffing is now in line with current opportunities, but we will continue to evaluate both head count and skill sets as our business grows in 2020 and beyond. .

With that overview now complete, I'd like to provide a brief summary of our results. In the third quarter, we took additional steps in the right direction, generating sequential growth over Q2 and finalizing a number of significant contracts in the rail segment of our business.

As I said, our results in Q3 still reflect some of the lingering effects from the continued project-based delays I spent a great deal of time discussing on our previous call. We now have good fourth quarter visibility for our full year guidance projections. We will also be giving guidance for 2020. .

As we have made mention many times before, and as I alluded to a moment ago, the majority of our current revenue comes from our project-based business. As such, we believe that the proper way to view our growth and progress is through a 12- to 18-month lens at a minimum.

That said, as a public company, we are faced with the reality that our performance has to be reported based on 90-day windows that are not an accurate reflection of our sales pipeline, operating capability and growth prospects. .

While we continue to believe that the rail industry presents a significant growth opportunity for Duos, we have spent the better part of past year looking at new ways to reduce our susceptibility to the vagaries of the market. .

Our efforts within TrueVue360 represents the first major step in reducing our dependency on project-based revenue volatilities. In 2019, we set in place a strategy to have our revenues become more consistent between quarters. Currently, we receive about 10% of our overall revenues from recurring revenue sources, primarily service and tech support.

As we continue to deploy our systems in the rail business and other markets, our plan is to increase the percentage of overall revenue from 10% to 20% and expect to complete this transition over the next 24 months. .

On the plus side, while the past few quarters have been impacted by this lumpiness, there are also quarters where we benefit from the upside scenario. We expect the fourth quarter of this year to be one of those instances. .

As I mentioned last quarter, while our additional head count increases contributed to greater operating expenses in the quarter when compared to the revenues we recorded, having that team now in place and accounting for the operating capacity they now provide, gives us a great degree of confidence in our ability to execute major projects concurrently and in shorter time spans.

With our current backlog and the visibility we have into additional agreements in the last few months of the year, we are anticipating significant growth in revenue going forward. .

At this point, I would like to turn the call over to our CFO, Adrian Goldfarb, who will walk us through the financial results for the third quarter. After Adrian's presentation, I will further discuss our recent progress during the quarter before finishing with a brief update on our outlook for 2019 and 2020. .

Adrian?.

Thank you, Gianni. On previous calls, I had discussed how the majority of our revenue is recognized and our adoption of ASC 606 at the beginning of last year. Comparisons of each quarter are now on the same accounting basis.

It should also be noted that the financial results I will be discussing represent the consolidation of the company with its subsidiaries, Duos Technologies Inc. and TrueVue360. All of our investments in the new AI subsidiary are incorporated in the company's operating expenses. .

As I've also discussed in previous calls, our revenue recognition policy is based on the principles of ASC 606 using the input method. Although ASC 606 was not a factor during this quarter, our results can vary substantially between measurement periods and are highly dependent on the stages of completion of our project business.

This will become less pronounced as the business grows, our revenues are spread between a greater number of projects and the recurring revenue portion of our business becomes more meaningful. .

Now turning to our financial results for the third quarter and first 9 months of 2019. Total revenue for the third quarter decreased 57% to $2.2 million compared to $5.1 million in the equivalent quarter in 2018 due to slower-than-anticipated contract awards from 2 customers pending resolution of certain terms and conditions.

These orders have now been received. However, additional execution delays from one customer in the project portion of our business continued to have an impact, albeit to a lesser degree than previously envisioned.

Although these delays may impact the project revenue portion of our business, the net effect is that they are not expected to have any material impact for the full year.

We are continuing to make improvements in our project build and delivery process largely as a result of the investments in the establishment of the engineering and operations center in 2018, which has shortened delivery times on major projects. .

Total revenue for the first 9 months of 2019 decreased 17% to $7.9 million compared to $9.49 million in the equivalent year ago period. The decrease in total revenue reflects unanticipated delays in contract executions for 2 large new projects and the effect of such delays.

Since we expected these contracts to be signed in 2019, we took the decision to begin acquiring certain components ahead of the contracts in order to ensure no material impact to our expected revenues for this year. .

Maintenance and technical support revenues were lower in the quarter and 9-month period as a result of new maintenance contracts being delayed in line with the delays in implementation.

The renewals of existing contracts have somewhat offset this impact, and we believe that a shift to the next generation of technology systems, which are currently being installed will have a positive impact going forward.

The maintenance and technical support revenues are driven by successful completion of projects and represent services for those installations. We expect to continue our growth with new long-term recurring revenue from our customers, which will be coming online in the next several months. .

Gross profit was $1.03 million or 47% of revenues for the current quarter, which was a decrease of 56% from the $2.33 million or 46% of revenues for the equivalent quarter in 2018. The decrease in gross profit was driven by lower revenues recorded during the period. However, gross profit as a percentage of revenue increased during the same time frame.

Going forward, we anticipate that overall gross margins for the full year to be close to historical norms and continue to improve. .

Gross profit for the first 9 months of 2019 was $3.33 million or 42% of revenues, a decrease of 18% compared to $4.06 million or 43% of revenues for the first 9 months of 2018. The decrease in gross profit was again the result of lower revenues recorded during the period.

Gross profit as a percentage of revenue has remained stable for the period and broadly comparable with the same period in the prior year. .

Turning to our costs. Operating expenses increased 27% in Q3 2019 to $2.15 million from $1.69 million in the same quarterly period last year, reflecting the increase in resources related to our anticipated growth. Selling and marketing expenses increased in line with our investment in resources to support that growth.

The measurable increase in salaries, wages and contract labor during the period is as a result of an anticipated larger order book and also reflects increased spending on research and development staff for our TrueVue360 subsidiary. We are also continuing to invest in staff resources to ensure timely execution.

Professional fees were also minimal for the period due to the fact we are not engaged in any significant activities related to fundraising or other activities outside of the normal course of business. Other G&A costs were higher as a result of additional business and nonproject-related travel. .

For the first 9 months of 2019, operating expenses increased 33% to $6.36 million from $4.8 million in the same period last year, again, reflecting an increase in resources related to anticipated new contracts and investments in research and development staffing.

Selling and marketing expenses increased significantly, in line with the company's plans to grow the business. The increase in salaries, wages and contract labor was higher during the period due to an increased number of employees and additional contract expenses related to an overall expected increase in revenues.

These increases are also a result of an increased investment in the company's TrueVue360 subsidiary, specifically for R&D staffing. For the period, there were no revenues for TrueVue360, although we are anticipating revenues going forward, some of which now appear in the backlog.

Research and development expenses, including -- excluding personnel, decreased for the period. Professional fees were higher due to an increase in expenses related to legal fees with certain onetime expenses for the recent warrant execution and other expenses related to travel and a much larger workforce, including additional facilities.

Other G&A costs were in line with the additional staff expenses and the growth of the company. It is anticipated that going forward, operating expenses will continue to grow at a slower rate than revenue increases. .

We recorded a net loss in Q3 of $1.14 million or $0.04 loss per share compared to net income of $633,000 or $0.03 per share in the equivalent quarter in 2018. The greater net loss was primarily attributable to the increase in investment in our AI subsidiary with a decrease in project revenues for the period. .

For the 9-month period, net loss was $3.05 million or $0.13 loss per share compared to a net loss of $745,000 or $0.04 loss per share in the same period a year ago.

The increase in net loss was primarily attributable to the overall increase in staffing costs related to investment in TrueVue360, together with increases in general and administrative costs and selling and marketing expenses for the period against lower overall revenue. .

Let's now discuss the balance sheet. As of September 2019, our cash position remained stable. We ended the quarter with $767,000 in cash and cash equivalent, an improvement from the prior quarter, and we also had net receivables of more than $1.4 million. .

For 2019, we have used $3.6 million in cash in operations due to the impact of the delays previously addressed. This has largely been offset by financing activities, including warrant executions and short-term debt, some of which already has been repaid. It should be noted that these numbers include funding of our TrueVue360 start-up costs.

With our improving order book and recent capital infusion from warrant executions and short-term debt, we have sufficient runway to execute on our business plan in 2019. .

We remain comfortable with our financial position and anticipate continued improvements in our balance sheet going forward. .

I would now like to discuss our outlook for the fiscal year ending December 31, 2019. In our previous call, we confirmed the guidance of 2019 of between $14 million and $15 million in revenue for the full year. As per my previous comments, we have experienced delays with contract execution and implementation with certain customers.

When the original guidance was given, we expected approximately $6 million in revenues from certain project implementation.

Although some of this has now been delayed to 2020, I am pleased to report that given our results for the first 9 months to date as well as our visibility on new and current projects for the remainder of the year, we have secured new additional business that will allow us to achieve at or near our original guidance.

As such, we are revising our revenue guidance for the full year 2019 to between $13.5 million and $14 million. .

It's worth remembering that our guidance is based on contracts that are in backlog and will be substantially executed by year-end. We are also anticipating additional orders from both new and existing customers, some of which may be implemented prior to the end of the fiscal year. .

Finally, I'm pleased to report that we saw increases in our backlog, pending contracts and pipeline. We are giving initial guidance of $20 million for revenue in 2020. .

This completes my financial summary. I'd now like to turn the call back over to Gianni for additional insights into our recent operational progress as well as our outlook for the remainder of 2019.

Gianni?.

Thank you, Adrian. And now I get to talk about the good stuff. So I'd like to provide some key updates for the quarter as well as expand upon our outlook for the remainder of the year. .

In the first part of this year, we formed a dedicated team of development engineers to focus specifically on expanding our existing technology road map. Since that time, I am pleased to report we have already seen excellent initial traction with a handful of new technologies to be announced soon.

Our product development team is currently working on a number of technology upgrades and new technologies, which we plan to discuss at a later date. While we are, of course, focused on generating and accelerating new business, we remain dedicated to providing technology innovations and superior quality in our current products.

Operationally, we are also still winning new business as well as expanding our relationships with our existing blue-chip customers.

First, as you may have seen from our press releases issued just a week ago, we were recently awarded a $1.8 million contract with a Class 1 freight railroad customer to implement a turnkey rail inspection portal, or as we call it, a rip.

As mentioned in the press release, we expect the installation of the system to be fully completed prior to the end of this year, allowing us to recognize substantially all of the revenue from this current -- from this contract during this calendar year.

The award includes a contract for tech support as well as the development and maintenance of a significant library of AI algorithms. .

Also within our rip business, back in August, we were awarded a $2.3 million contract with an existing Class 1 freight railroad customer to replace an earlier-generation system with our latest generation of the rip technology. This award also includes provisions for 5 years of technical support. .

Also in August, we were awarded an expanded contract with a current Class 1 railroad customer for the development and maintenance of an expanding library of artificial intelligence algorithms to increasingly automate this customer's inspection process.

This contract has an initial value of approximately $1 million and will be recognized with $200,000 annually over the 5-year life of the contract. This award also provides for an initial library of AI-based algorithms for maintenance and inspection of the customers' railcars.

Important to note about this deal is that the development of the models and applications as well as hosting will be undertaken by our TrueView360 subsidiary.

This agreement represents the first of what we anticipate to be many additional recurring revenue-based agreements for TrueVue360 as we build-out our capabilities in this space for existing and new customers alike. .

Moving to updates. Earlier in Q3, we received the purchase order to provide a multitrack automated pantograph inspection system or called apis for Chicago Metra, which oversees all commuter rail operations in the 3,700-square mile Northeastern Illinois region.

For those of you less familiar with the pantograph technology, the pantograph technology is a mission-critical component in the transit rail industry. Pantograph relay current from high-voltage overhead electrical wires to power the train.

The friction points to the high-voltage wire consist of sacrificial carbon fiber stripe -- sorry, strip, I think, I should say, which is constantly inspected for visual damage in the form of cracks, chips or bends that could result in track downtime if not timely identified and repaired.

We are currently in an advanced stage of developing a 3D version of this technology, which, combined with our AI machine learning algorithms, will provide stakeholders with an early warning of degrading carbon fiber strips.

By adding these preventive detection capabilities, transit operators are expected to be able to significantly reduce commuter traffic interruptions due to unscheduled downtime. I'm sure that some of you experience that every time. .

We recently completed the development of a car and truck version of an undercarriage inspection system. We were able to reduce manufacturing costs by over 50% compared to the next low priced technology in the market. This undercarriage inspection technology will be deployed with a robust AI feature, which will be developed by our TrueVue360 team.

Furthermore, our track intrusion detection system has been rebranded as trackaware. I am pleased to report that since deployment, our AI-based beta units at the New York location, we have recorded nearly 0 false positives. Furthermore, we are planning to distribute this solution through large camera manufacturers as an onboard system.

Our TrueVue360 business development team will be marketing this product starting in January of 2020. .

Moving to a few other nonoperational items worth sharing from the quarter. .

First, we also participated in some notable industry events during the quarter. As I've said before, while these types of events don't contribute an immediate ROI for our business, they have played a demonstrably critical and crucial role in creating additional awareness of our solutions in the marketplace.

Back in late September, we exhibited at the 59th Annual Railway Interchange 2019, which was held in Minneapolis, Minnesota. .

Exhibiting at the RSSI conference was a great opportunity for Duos to raise our profile within the rail community and get our solutions in front of relevant industry personnel who understand the value that our technology holds.

At the event, we displayed the latest generation of our Rail Inspection Portal system as well as one of our latest innovations, the Track Intrusion Detection System or trackaware for short.

Trackaware utilizes advanced artificial intelligence to monitor transit facilities and right-of-way to detect and characterize the presence of people or objects on and around the track bed. .

Now shifting to our outlook. Well into the final quarter for the year, we have continued to see strong positive momentum building for new deals and finalized agreements.

While Q3 was, again, impacted by some of the ongoing delays we have already mentioned, we still expect to recognize most, if not all, of those today's revenues before the end of the year. .

Based on our current opportunity pipeline and backlog, we remain confident in our ability to generate sequential growth again in Q4 with a potential strong finish for the year.

More explicitly, as Adrian mentioned a minute ago, we fully expect to achieve our revised annual revenue projection and anticipate providing additional announcements in the coming weeks. .

In summary, we are very excited and confident in both the near- and long-term prospects for our business and we are looking forward to providing additional updates on our progress as we expect to close out the year on a high note. .

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

[Operator Instructions] And now our first question will come from Ashok Kumar from ThinkEquity. .

To follow up to your earlier comment in terms of project-related revenues, they tend to be nonlinear over the course of the year.

So as you look into 2020, could you give some color in terms of the contribution from the asset management and AI and potentially acquisitions that could give a more linear profile to the top line?.

A related question also is given your OpEx forecast for '20, what do you think is going to be your break-even profitability levels? Will it be in high teens? And what will be the time line to get there?.

Thank you, Ashok. This is Adrian. So there are multiple parts and I'll see if I can address each of the parts of the question. With respect to the business going forward in 2020, as we have described in quite some detail, the recurring revenue part of that business is going to be growing primarily through the AI piece of the business or TrueVue360.

As I mentioned, I think, during my dialogue, that part is expected to grow over time to become about 20% of our total revenue in the next 24 months. So you'll see some impact of that in 2020.

There is nothing right now in that initial guidance, and please understand that as initial guidance for 2020, at the moment, we've not really put anything specifically in there in terms of the break down between our project business and also our AI businesses. That will come, as Gianni mentioned, in future announcements going forward. .

With respect to the second part of your question, we are currently working on our forecast going forward. We're giving -- we have given obviously the initial guidance that's based on some metrics that we provide each quarter in terms of our backlog and our pending contracts in our pipeline.

And so that's based on -- that we're anticipating plus more [indiscernible] that are already being worked on. We have not yet looked at in terms of what the contribution will be to that. However, we are going to be moving forward towards breakeven on profitability, obviously, as that revenue line grows. .

Got it. And you stated aggregate margins of 50% and I assume you'll be able to sustain at those levels in calendar '20. .

You're speaking about gross margins, correct, Ashok?.

Yes. Yes. .

Yes. So traditionally, we have a long history to bear this out. Our business typically has produced around about a 50% or better gross margin.

As I mentioned, always in the beginning of my section, since the move to ASC 606, sometimes the way that revenues are measured from quarter to quarter don't always provide for that and you could end up in a situation like we had last quarter where the expenses are much higher against the revenue that you can actually record.

But over the year, this tends to smooth out, and in fact, you can see that the overall gross margin reported in Q3 was around 47% and has been pretty stable. We expect that gross margin to continue to improve over time.

And in fact, it wouldn't be unusual to expect that to continue to increase as the recurring revenue portion of our business, it becomes a greater component of the overall revenue. .

[Operator Instructions] At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Arcaini for his closing remarks. .

Well, again, thank you for joining us today. I especially want to thank our employees, our partners, investors and our customers for their continued support. We're looking forward to an exciting 2020, and we will update you on our next call accordingly.

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 meaning 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, Inc.'s actual results to differ materially from those anticipated by the forward-looking statements.

These risks and uncertainties include but are not limited to those described in Item 1A in Duos' annual report on Form 10-K, which is expressly incorporated herein by reference and other factors as may previously be described in Duos' filings with the SEC. .

Thank you for joining us today for Duos Technology Group's 2019 Third Quarter Earnings Conference Call. You may now disconnect..