Good afternoon and welcome to Duos Technologies Second Quarter 2020 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 cautious regarding forward-looking statements made by management during the call. Now, I would like to turn the call over to Duos' Chairman and CEO, Gianni Arcaini. Sir, please proceed..

Thank you very much. Welcome everyone and thank you for joining us. Earlier today, we issued a press release announcing our financial results for the second quarter of 2020, as well as other operational highlights. A copy of the press release is available as usual in the Investor Relations section of our website.

Before I begin, I want to make it a point to emphasize that we are holding today's call in the midst of a broader company transition pace, both with respect to our senior leadership, as well as our operations. With that understanding our remarks today will be brief.

As many of you listening today are aware about a month ago, I announced my retirement from the Duos CEO position. This will become effective September 1.

While this decision of course has been bittersweet, [Adrian] and the board believe the timing is right to hand over the reins to a new leader, who will guide our company through its next phase of growth.

I have a distinct privilege to build and lead an extraordinarily talented team, whose ingenuity and dedication has placed our company's disruptive technologies at the top of its class. Our up-listing to NASDAQ in February of this year was a significant milestone achievement, very few companies are able to attain.

And I'm proud to be leaving the day-to-day operations of the company in a position of strength. We are well capitalized that our core technologies as the chief market adoption, both of which have Duos poised for growth and success in the future.

I think our team members, customers, partners, and most importantly, our shareholders for the support and all that contributed to make Duos a success. Going forward, I plan on continuing to serve in my capacity as Chairman of the Board and we'll be doing everything I can to ensure a smooth transition for our company and its new CEO.

As part of that process, we have initiated a thermal search process to identify a successor with the right mix of technical acumen, business development experience and strong leadership abilities.

We have been encouraged by the results of the process today, and are looking forward to providing more substantive updates as the processing is - its conclusion in the very near future. And with that, I will now get into our results for the quarter.

In the second quarter, we generated incrementally improved results in the face of ongoing difficult market conditions, and believe we have effectively adapted our organization to the current working environment.

Prior to the COVID-19 outbreak, our expectations had already factored in a modest start to the year with sequential growth going forward, and that projection will remain intact.

After a temporary pause in activity in response to the ongoing global pandemic, Deal flow in recent months has begun to resume as evidenced by a few of the notable wins we recorded during the period. The $1.8 million RIP award that we received in April was a strong step forward.

And additional deals we announced for 945,000 and $2.1 million in May and June, respectively, I was optimistic that this is a new turn [indiscernible]. We're also encouraged by the strength of our pipeline, which continues to portend a back loaded second half as many of the contract awards that were delayed by COVID are now being revisited.

Now therefore, I get into this - before I get any further into this we would update in our current outlook, I will now turn the call over to our CFO, Adrian Goldfarb who will walk us through the financial results for the quarter.

Adrian?.

Thank you, Gianni. Before discussing the results for the quarter, I would like to add the best wishes on behalf of the entire Duos team for your service to our organization. We all wish you an enjoyable retirement. Now turning to our financial results for the second quarter.

Total revenue for the second quarter increased 47% to $1.98 million, compared to $1.35 million in the equivalent quarter in 2019. The increase in total revenue for the quarter was due to completion of certain milestones in our technology systems area during the quarter.

Total revenue for the six months ended June 30, 2020 decreased 48% to $2.97 million from $5.7 million in the same period last year. The decrease in total revenue was driven by a slowdown in overall business bookings during the first six months due to delays in executing new contracts, and certain travel restrictions related to COVID-19.

Gross profit in Q2 was $739,000 or 37% of revenues, which was an increase of 324% from 174,000 or 30% of revenues for the equivalent quarter in 2019. The increase in gross profit was due to the increase in revenues previously described.

Gross profit for the six months ended June 30, 2020 decreased 63% to 842,000 or 28.3% of total revenue from $2.31 million or 40.5% of total revenue in the same period last year.

The decrease in gross profit was mainly the result of lower revenues during the period, and the proportion of costs allocated to projects being higher as a percentage against those lower revenues. Turning to our costs, operating expenses increased 2% in Q2 2020 to $2.17 million from $2.12 million in the same quarterly period last year.

Operating expenses for the six months ended June 30, 2020 increased 4% to $4.36 million from $4.21 million in the same period last year. The increase in operating expenses was primarily due to some onetime expenditures related to our capital raise conducted earlier in the year.

The company has taken actions to reduce certain expenditures to align our sales with the current slowdown in revenues due to delays in execution. We recorded a net loss in Q2 of $1.47 million or $0.42 loss per share, compared to a net loss of $1.95 million, or $1.9 per share in the equivalent quarter in 2019.

The decrease in net loss was primarily attributable to reductions in anticipated expenditures as related to the impact of low revenues driven by COVID-19. Net loss for the six months ended June 30, 2020 totaled $3.61 million or $1.16 loss per share, compared to a net loss of $1.91 million or $1.14 loss per share in the same period a year ago.

The greater net loss was primarily attributable to the effect of lower overall revenues during the comparable period. However, the loss on a per share basis remained similar for the period. Let's now discuss the balance sheet. We ended the quarter with $5.37 million in cash and cash equivalents and we also had net receivables of 497,000.

In Q2, we used $3.15 million of cash in operations, compared to $2.71 million in the same period a year ago. The increase in net cash used in operations for the three months ended on June 30, 2020 was a result of delays in execution of certain projects, which have now anticipated to complete and be built in the following quarters.

Finally, I'd like to provide an update on our current financial projections. On our previous call, we formally rescinded our previously issued guidance for the full year 2020.

Due to the delays in project execution resulting from the restrictive travel environment currently in place, as well as additional uncertain impact on the overall economy from the COVID-19 outbreak, we are not providing 2020 revenue guidance at this time.

Going forward, we will continue to reevaluate the growth and predictability of our operating performance with respect to providing financial forecast and I expect to give an update during our next earnings call. And with that, I will now turn the call back over to Gianni to provide a further update on the business.

Gianni?.

Thanks a lot, Adrian. I will now highlight some of our major achievements and wins for the quarter before finishing with a brief outlook for the remainder of the year. Our most recent win came in June from an existing class 1 railroad customers.

In total, we were awarded a $2.5 million contract to integrate up to a 100 artificial intelligence used cases into our centraco platform beginning later this summer. The initial integration will occur at one of the railroads existing rip sites with plans to expand to several other locations in the very near future.

We will execute this project in two phases with half occurring in 2020 and the remainder in early 2021. The contract also includes a significant recurring service and maintenance component for the new software being developed.

We are particularly excited about the expansion of our relationship with this current customer, because we believe it speaks to the already recognized value. We are able to provide to their inspection and safety efforts. Furthermore, this award is yet another major milestone in achieving full automation of the railcar mechanical inspection process.

We believe this particular software platform expansion is not only adaptable to the rail sector, but also to many other industries. As we continue to improve our capabilities in our core markets, we will look to expand into these adjacent opportunities as a logical next step.

As I mentioned on our last call in May, we were also awarded a $945,000 follow-on contract for Monroe County Sheriff's Office in Florida to provide our Intelligent Correctional Automation System, we call it the ICAS.

As a provider of intelligent analytical technology solutions, Duos is also a leader in intelligent integrated command and control solutions for correctional facilities. Our ICAS system provides all digital video, intercom, detention door control and access control and is integrated into a singular command and control platform branded centraco.

The completely integrated system provides superior monitoring and control, is substantially more cost effective and integrates all aspects of control into a single intuitive user interface. ICAS was specifically designed to replace legacy jail and correctional facility automation systems that are based upon programmable logic controllers.

The new modular digital input/output system will coordinate all aspects of controlled movement and situational awareness for the facility. Implementation is expected to begin later this year with the completion date in 2021. We are pleased with our continued relationship and longstanding service to the Monroe County Sheriff Office.

Going forward, we plan to pursue the correctional facilities vertical as we expand our business development plan. Also of note, in April, we were awarded a $1.8 million contract for a turnkey Rail Inspection Portal in the United States, which is expected to be completed by the end of the third quarter of this year.

This week, we received an award in the amount of $1.3 million to expand our existing detection technology platform, which we will execute during 2020.

I'm also pleased to inform you that we just this week executed a master service agreement with one of our major railroad customers covering service and support and upgrades to existing installations beginning in the latter half of 2020 and extending through 2022.

We will include more detailed information of these latest awards in the press release early next week. I'll now take a minute to provide some updates on the immediate future.

Looking ahead to the second half of the year, our current outlook has been impacted to a degree based on the information we currently have, the timeline for growth continues to move at a drawn outpace and a projected close of anticipated major new contract will remain uncertain.

In the meantime, beginning in the current quarter, we have taken decisive measures to right-size our operations to ensure for the long-term viability of our business. Our current capital position will provide us with the necessary resources to continue implementing our growth strategy.

As conditions improved, we will look to make additional adjustments to address our anticipated increased demand over coming quarters. As organizations around the world are looking presently to leverage technology, to automate and streamline processes in a more distributed fashion, the opportunity for Duos is greater than ever.

While some timelines have been pushed out, others have been accelerated and we are confident that the broad applicability of our solutions will enable us to take advantage of this accelerated digital transformation over long-term. And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions..

[Operator Instructions] Our first question today comes from Ashok Kumar of ThinkEquity. Please proceed with your question..

Well thank you. And Gianni, wish you the very best and look forward to the next phase. Just some broad questions Adrian and Gianni.

The first is the $2.1 million add-on contract, is that with CSX? And I was wondering when it's the initiation and completion phase for that? And I think in earlier comments, you had mentioned about final acceptance of a rip project site in Mexico? I was wondering if you have any further visibility on the completion of that final acceptance? And in terms of the $1.8 million the turnkey rip, I think you reaffirmed that will be completed by the end the third quarter of this year? And then Gianni, I think also you talked briefly about the correctional facilities vertical.

Are there any additional contracts that you could - that you far enough along that you'd be able to talk about the opportunity [indiscernible] like as platform? And the last question is on the further platform development for the truevue360. I think you had made extensive, I think progress in the AI labeling effort.

If you could just provide any additional color? And once again, thank you very much and wish you all the best..

Thank you, Ashok. Let me try to dissect all the different questions. Number one, you stated, it was a CSX contract award or whatever. As an absolute policy, we do not and cannot disclose which customers particularly the railroad customers are very sensitive to mentioning their name in our press releases, but we have been servicing CSX, CN, KCS.

So it's going to be one of those. With respect to Mexico, I'm pleased to report that the system in Mexico is completed. We are now working on calibrating some of the artificial intelligence applications. We are in the midst of that process, but the system works very well.

And so, do the systems here in the United States, which we have recently deployed and in fact, one of the systems we deployed, we started about two months ago. I'm pleased to report that is close to completion. It is already in production. The question as to truevue360 applications, we are in the midst of expanding both Rail and Non-Rail applications.

As we get awards, obviously, we will report those awards, as we get them in. I know that I sound a little bit ambiguous, but unfortunately, we are understanding requests from our rail customers, not to mention their name in connection with whatever we want, we will see. I hope, I think, I covered most of it..

Yes. Gianni just any brief color on the ICAS opportunity and the Correctional facility in vertical? Any visibility you got that you could provide us? Thank you..

Yes, on the Correctional facilities, that's an interesting vertical, because in the past, we have specifically done some of the video surveillance work inside the correctional facilities. This new expanded contract also includes the courthouse and essentially encompasses the entire Monroe County law enforcement community.

So we should be completed with that work early '20, not early, but sometime in 2021. And once we have that, it will serve as a prototype to go to other facilities and other counties and state presence and offer that solution. So it is a combination of developing a prototype, of course, it is also a commercial application.

But that will be a strong product for us going forward..

[Operator Instructions] Our next question is from Nelson Baquet of ThinkEquity. Please proceed with your question..

And I wanted to ask - it seems to me that the gross margins are like 300-plus percent and compared to last year and I wanted to know what the reason for that change was?.

Yes.

Adrian, do you want to address that?.

Yes, yes, Gianni. Sure, I will. So I'm not sure what your fringes there, the 300%, but maybe let me give some clarity to the gross margin position. And I mentioned this in my comments. So, as you know, and we don't discuss this anymore, because we've mentioned it in so many other calls. We book revenue according to the ASC 606 standard.

And the way that's done is that has the effect typically of more back ending loading the revenue into the latter part of the project. Now because the company has become more efficient in deploying projects and our time to execution is faster now, the impact isn't as great as it might have been a year or two ago.

But that does have the impact that if you start a project late in a quarter, you might book some revenue from that but you will book very minimal margin, because the cost of sale is almost the same as the revenue in that early stage. That then kind of self-results as you get to the latter stage of the project.

So what happens is then as you go into the following period, reporting period, the revenue is a much higher percentage. So you can get these effects between quarters. And I've spoken about this before whereby the gross margin will look outsized one way, and may look smaller on the other one.

The best way to analyze our financials is probably on - would normally outside of the current pandemics that we're in, we will be normally probably on about a six-month basis. Everything is kind of slowed up right now. So, what happens is you are going to get some outsized effect.

But if you look at our annual results, typically we get to or close to a 50% gross margin on aggregate. And the other thing is that as Gianni mentioned a couple of the contracts, there is some of those that are both more on the recurring revenue side and more on the licensing and service and maintenance side.

So you will see a general effect where our gross margins will generally be moving higher. But as a general rule, the Company aims to hit about a 50% gross margin across all of our businesses on aggregate. And so, you should probably not pay too much attention in the period-to-period variances. So Nelson, I hope that answers your question..

No, it does. And I said 300, but it is an increase of 337%..

Correct, correct. Okay..

Okay. Wonderful. Yes, that makes a lot of sense. And I appreciate it, thanks..

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

Thanks, operator, and thank you all for joining us on today's call. I especially want to thank Duos's shareholders, employees, customers and partners, who have supported the company over the years. I'd like to close by saying, it has been an honor to lead this organization over the years. The company is well positioned for its next stage of growth.

And I look forward to our future success in the years ahead. Operator, please..

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 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 periodically be described in Duos filings with the SEC.

Thank you for joining us today for Duos Technology Group's 2020 second quarter earnings conference call. You may now disconnect..