8-K
DUOS TECHNOLOGIES GROUP, INC. (DUOT)
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
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CURRENT REPORT
Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934
Date of Report (Date of earliest event reported):August 15, 2022
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Duos Technologies Group, Inc.
(Exact name of registrant as specified in itscharter)
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| 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) (ZipCode)
(904) 296-2807
(Registrant’s telephone number, includingarea 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 15, 2022, Duos Technologies Group, Inc. (the "Company") issued a press release announcing the financial and operating results of the Company for the second quarter ended June 30, 2022. The text of the press release is furnished as Exhibit 99.1 and incorporated herein by reference.
Additionally, on August 15, 2022, 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. Adrian G. Goldfarb, the Company's Chief Financial Officer, discussed the financial and operating results of the Company for the second quarter ended June 30, 2022. 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
| Exhibit No. | Description of Exhibit |
|---|---|
| 99.1 | Press<br> Release, dated August 15, 2022. |
| 99.2 | Transcript<br> of Earnings Call with Mr. Chuck Ferry and Mr. Adrian G. Goldfarb, dated August 15, 2022. |
| 104 | Cover Page Interactive Data File<br> (formatted as Inline XBRL and contained in Exhibit 101) |
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 16, 2022 | By: | /s/ Adrian Goldfarb |
| Adrian Goldfarb<br><br> <br>Chief Financial Officer |
EXHIBIT99.1
| duos****tech | FOR IMMEDIATE RELEASE |
|---|
Duos Technologies Group Reports Second Quarter2022 Results
Jacksonville, FL / Accesswire / August 15, 2022 - DuosTechnologies Group, Inc. (“Duos” or the “Company”) (Nasdaq: DUOT), a provider of vision based analytical technology solutions, reported financial results for the second quarter (“Q2 2022”) ended June 30, 2022.
Second Quarter 2022 and Recent OperationalHighlights
| · | Secured over $1 million in new business relating to upgrades and modifications of existing contracts and<br>projects currently in production. |
|---|---|
| · | Secured over $500,000 in new recurring annual revenue from deployment of the Company’s artificial<br>intelligence (“AI”) offerings at customer locations. |
| --- | --- |
| · | Added two data scientists to the AI team, further bolstering Duos’ technical capabilities in support<br>of growing revenues in this area. The AI team now represents the single largest division at Duos, supporting the Company’s increased<br>focus on driving recurring revenue growth through expanded services and maintenance. |
| --- | --- |
| · | Closed a new deal with a former customer to provide upgrades to their existing portal, which include hardware<br>upgrades, an annual service agreement and AI. The total value of these upgrades is roughly $360,000, with most of the revenues recurring. |
| --- | --- |
| · | Scanned approximately 1.5 million railcars during the quarter, detecting thousands of actionable defects<br>in the field. This represents an 18% increase in the number of railcars scanned over the previous quarter with the number of detections<br>increasing by over 19% as the AI software is deployed and becomes more effective. |
| --- | --- |
| · | Increased the reliability and turnaround time of equipment maintenance requests through the Company’s<br>24/7 remote service desk, which is responsible for monitoring, identifying, and repairing deployed system errors in real time. |
| --- | --- |
| · | Joined NVIDIA Metropolis, a partner program, application framework, and set of developer tools that bring<br>to market a new generation of vision AI applications. The Company adopted the application framework to meet its desire for the latest<br>AI-powered video analytics tools. |
| --- | --- |
Second Quarter 2022 Financial Results
It should be noted that the following FinancialResults represent the consolidation of the Company with its subsidiaries Duos Technologies, Inc. and truevue360™.
Total revenue for Q2 2022 increased 458% to $3.62 million compared to $649,000 in the second quarter of 2021 (“Q2 2021”). Total revenue for Q2 2022 represents an aggregate of approximately $2.78 million of technology systems revenue and approximately $837,000 in recurring services and consulting revenue. The increase in total revenue for Q2 2022 compared to Q2 2021 was driven by the production and start of installation of new and upgraded Railcar Inspection Portals (rip®), which are recorded in the technology systems portion of the business. Management expects this trend to continue for the rest of 2022 and into 2023 although supply chain issues continue to extend deadlines for shipment of key components used in Duos’ technology systems. While certain orders were delayed from 2021 into 2022, management remains encouraged by the breadth and scope of recent bids in which the Company has participated.
Cost of revenues for Q2 2022 increased 154% to $2.33 million compared to $918,000 for Q2 2021. Cost of revenues on technology systems increased during the three months ended June 30, 2022 compared to the equivalent period in 2021, which is consistent with the increase in revenues albeit at a slower overall rate. The higher level of cost was mainly due to higher costs of materials due to increased production levels and also to supply chain disruptions and inflation. While the Company expects that macro-economic factors will continue to drive prices, Duos expects its structural realignment to eventually aid in lowering costs as a percentage of the overall system price going forward although inflation may impede this effort. As previously noted, the Company’s organization and related cost structure was realigned to provide the capability to manufacture, install, and support multiple production systems simultaneously. In accordance with this shift in structure, certain staff were re-assigned or replaced, and new staff added in key areas, particularly engineering, software development and AI.
Gross margin for Q2 2022 increased 575% to $1.28 million compared to negative $270,000 for Q2 2021. As previously discussed, the Company has revamped its operations to support an anticipated increase in the number of new systems going forward. The result in additional cost of revenues was covered by a greater increase in revenues during the second quarter of 2022. The main reason for the increased costs is the higher level of production costs for materials as well as supply chain disruptions and inflation. We anticipate further improvements in the overall gross margin for the full year of 2022. Certain macro-economic factors, which are driving increased costs for materials and labor, may result in higher costs for project implementation that cannot be wholly or even partially passed on to our customers, which may result in delaying our progress towards profitability into 2023.
Operating expenses for Q2 2022 remained flat at $2.68 million compared to $2.68 million for Q2 2021. The slight increases in cost for sales and marketing and research and development were offset by the decrease in general and administration costs compared Q2 2021. Overall, the Company continues to focus on stabilizing operating expenses while meeting the increased needs of its customers.
Net operating loss for Q2 2022 totaled $1.39 million compared to net operating loss of $2.95 million for Q2 2021. The decrease in net operating loss for Q2 2022 compared to Q2 2021 was driven by higher revenues recorded in the quarter resulting from increases in both the Company’s technology systems and services and consulting revenues, slower growth in costs of those revenues, and flat operating expenses.
Net loss for Q2 2022 totaled $1.34 million compared to net loss of $2.95 million for Q2 2021. The decrease in net loss for Q2 2022 compared to Q2 2021 was driven by an increase in revenues as described above along with slower growing expenses.
Cash and cash equivalents at June 30, 2022 totaled $6.27 million compared to $894,000 at December 31, 2021.
Six Month 2022Financial Results
Total revenue increased 80% to $5.06 million from $2.80 million in the same period last year. The increase in total revenue was driven by the start of production and new installations in the technology systems portion of the Company’s business along with continuing increases in services and consulting revenues, which were driven by anticipated receipt of “notices to proceed” for new contracts that were expected earlier in the year.
Cost of revenuesincreased 38% to $3.55 million from $2.57 million in the same period last year. Cost of revenues on technology systems increased during the six months ended June 30, 2022 compared to the equivalent period in 2021, which is not only consistent with the increase in revenues but at a slower rate during this period than the increase in revenues partially due to timing differences. The higher level of cost was mainly due to higher costs related to higher revenues, but supply chain disruptions and inflation also continue to have an impact. Additional work previously necessary on certain of the Company’s installations is in the process of completion, some of which will be paid for by the clients as a result of damage done to certain systems. While we expect that macro-economic factors will continue to drive prices, the Company expects its structural realignment to aid in lowering costs as a percentage of the overall system price going forward. As previously noted, the Company’s organization and related cost structure was realigned to provide the capability to manufacture, install and support multiple production systems simultaneously. In accordance with this shift in structure, certain staff were re-assigned or replaced, and new staff added in key areas, particularly engineering, software development and AI.
Gross margin increased 545% to $1.50 million from $233,000 in the same period last year. As previously discussed, the Company has revamped its operations to support an anticipated increase in the number of new systems going forward. The resultant additional cost of revenues was covered by a greater increase in revenues during the first half of 2022. The main reason for the continuing high level of cost is higher costs of materials based on more production of systems as well as supply chain disruptions and inflation. The Company continues to anticipate continued improvement in the overall gross margin for the full year of 2022, with much of the improvement expected to occur in the second half of the year. Certain macro-economic factors, which are driving increased costs for materials and labor, may result in higher costs for project implementation that cannot be wholly or even partially passed on to customers and which may result in delaying our progress towards profitability into 2023.
Operating expensesincreased 11% to $5.54 million from $5.00 million in the same period last year. The increase in operating expenses was driven by costs associated with growing the business and the effects of inflation on salaries and general overhead. The Company continues to expect overall costs to grow due to macro-economic factors in addition to organic growth costs related to the business. Where possible, the Company continues to focus on stabilizing operating expenses while meeting the increase needs of customers.
Net operating loss totaled $4.04 million compared to net operating loss of $4.77 million in the same period last year. The decrease in losses from operations was primarily the result of higher revenues recorded in the period as a consequence of the start of new projects and receipt of materials for production. A positive trend was the higher revenue recorded without a corresponding greater relative cost of sales even with higher costs of materials resulting from supply chain disruptions and inflation.
Net losstotaled $3.99 million compared to a net loss of $3.36 million in the same period last year. The greater net loss was driven by the higher costs in 2021 being offset by the PPP loan forgiveness recorded in the first quarter of 2021 as other income.
Financial Outlook
At the end of the second quarter, the Company’s contracts in backlog represented approximately $14.0 - $16.0 million in revenue, of which approximately $12.0 million is expected to be recognized in calendar 2022. The balance of contract backlog is comprised of multi-year service and software agreements as well as project revenues spanning into fiscal 2023.
Based on these committed contracts and near-term pending orders that are already performing or scheduled to be executed throughout the course of 2022, the Company is reiterating its previously stated revenue expectations for the fiscal year ending December 31, 2022. The Company expects total revenue for 2022 to range between $16.5 million and $18 million, representing an increase of 99% to 117% from 2021.
Duos expects this improvement in operating results to be reflected over the course of the full year in 2022. As a result of timing and other factors, the Company expects revenues in the first and second quarters of 2022 to represent a significantly lower portion of annual revenue than the third and fourth quarters.
Management Commentary
“In the second quarter, we executed across all segments of our business and are tracking according to our long term growth plan,” said Duos Chief Executive Officer Chuck Ferry. “Our financial performance during the period represented an order of magnitude improvement over our results in recent quarters, highlighted by triple digit increases in revenues and gross margins along with stabilized expenses, the last metric serving as a byproduct of our foundational work over the last year and a half to be able to support a greater number of deployments as we scale. Operationally, we currently have four rail inspection portals at various stages of implementation, with three of those projects slated for completion in the coming quarter. We have continued to improve our installation procedures, in-field performance and maintenance capabilities, all of which have improved customer relations, leading to increased recurring revenue and add-on sales opportunities. While supply chain and inflationary pressures persist, we are continuing to take remedial actions that have mitigated impacts to a degree and have us firmly on the path to meet our financial targets for the year.”
Conference Call
The Company’s management will host a conference call today, August 15, 2022, 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 15, 2022
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: 13731992
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 vehicles including trains and trucks 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 statementsregarding the Company’s financial results and estimates and business prospects that involve substantial risks and uncertaintiesthat could cause actual results to differ materially. Forward-looking statements relate to future events and typically address the Company’sexpected 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 additionalcontracts; anticipated effects of macro-economic factors (including effects relating to supply chain disruptions and inflation); timingwith respect to revenue recognition; trends in the rate at which our costs increase relative to increases in our revenue; anticipatedreductions in costs due to changes in the Company’s organizational structure; potential increases in revenue, including increasesin recurring revenue; potential changes in gross margin (including the timing thereof); statements regarding our backlog and potentialrevenues 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-lookingstatements involve risks and uncertainties and there are important factors that could cause actual results to differ materially from thoseexpressed or implied by these forward-looking statements. These factors include, but are not limited to, the Company’s ability tocontinue as a going concern, the Company’s ability to generate sufficient cash to continue and expand operations, the competitiveenvironment 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 thatthe foregoing list of risks, uncertainties and factors is not exclusive. Additional information concerning these and other risk factorsis contained in the Company’s most recently filed Annual Reports on Form 10-K, subsequent Quarterly Reports on Form 10-Q, recentCurrent 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 reflectedin or suggested by these forward-looking statements are based on reasonable assumptions. No assurance, however, can be given that theCompany will achieve or realize these plans, intentions or expectations. Indeed, it is likely that some of the Company’s assumptionsmay prove to be incorrect. The Company’s actual results and financial position may vary from those projected or implied in the forward-lookingstatements and the variances may be material. Each forward-looking statement speaks only as of the date of the particular statement. Wedo not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statementsto reflect any change in our expectations or any change in events, conditions or circumstances on which any forward-looking statementis based, except as required by law. All subsequent written and oral forward-looking statements concerning the Company or other mattersattributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statementsabove.
ContactsCorporateFei 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@gatewayir.com
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| June 30, | June 30, | |||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| REVENUES: | ||||||||||||
| Technology systems | $ | 2,780,045 | $ | 100,401 | $ | 3,563,314 | $ | 1,590,699 | ||||
| Services and consulting | 837,097 | 548,267 | 1,493,144 | 1,212,723 | ||||||||
| Total Revenues | 3,617,142 | 648,668 | 5,056,458 | 2,803,422 | ||||||||
| COST OF REVENUES: | ||||||||||||
| Technology systems | 1,974,302 | 506,128 | 2,839,790 | 1,799,738 | ||||||||
| Services and consulting | 360,226 | 412,299 | 711,988 | 770,471 | ||||||||
| Total Cost of Revenues | 2,334,528 | 918,427 | 3,551,778 | 2,570,209 | ||||||||
| GROSS MARGIN | 1,282,614 | (269,759 | ) | 1,504,680 | 233,213 | |||||||
| OPERATING EXPENSES: | ||||||||||||
| Sales and marketing | 375,986 | 351,251 | 659,880 | 663,053 | ||||||||
| Research and development | 530,339 | 468,561 | 967,056 | 876,656 | ||||||||
| General and Administration | 1,770,764 | 1,858,896 | 3,913,837 | 3,464,272 | ||||||||
| Total Operating Expenses | 2,677,089 | 2,678,708 | 5,540,773 | 5,003,981 | ||||||||
| LOSS FROM OPERATIONS | (1,394,475 | ) | (2,948,468 | ) | (4,036,093 | ) | (4,770,768 | ) | ||||
| OTHER INCOME (EXPENSES): | ||||||||||||
| Interest expense | (2,706 | ) | (5,541 | ) | (5,886 | ) | (11,761 | ) | ||||
| Other income, net | 54,509 | 1,129 | 54,691 | 1,423,626 | ||||||||
| Total Other Income (Expenses) | 51,803 | (4,412 | ) | 48,805 | 1,411,865 | |||||||
| NET LOSS | $ | (1,342,672 | ) | $ | (2,952,880 | ) | $ | (3,987,288 | ) | $ | (3,358,903 | ) |
| Basic and Diluted Net Loss Per Share | $ | (0.22 | ) | $ | (0.83 | ) | $ | (0.70 | ) | $ | (0.95 | ) |
| Weighted Average Shares - Basic and Diluted | 6,096,541 | 3,553,718 | 5,727,133 | 3,544,579 |
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | |||||
|---|---|---|---|---|---|
| 2021 | |||||
| ASSETS | |||||
| CURRENT ASSETS: | |||||
| Cash | 6,268,429 | $ | 893,720 | ||
| Accounts receivable, net | 321,260 | 1,738,543 | |||
| Contract assets | 702,372 | 3,449 | |||
| Inventory | 780,218 | 298,338 | |||
| Prepaid expenses and other current assets | 718,294 | 354,613 | |||
| Total Current Assets | 8,790,573 | 3,288,663 | |||
| Property and equipment, net | 601,824 | 603,253 | |||
| Operating lease right of use asset | 4,767,219 | 4,925,765 | |||
| Security deposit | 740,793 | 600,000 | |||
| OTHER ASSETS: | |||||
| Patents and trademarks, net | 76,911 | 66,482 | |||
| Software development costs, net | 14,583 | — | |||
| Total Other Assets | 91,494 | 66,482 | |||
| TOTAL ASSETS | 14,991,903 | $ | 9,484,163 | ||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
| CURRENT LIABILITIES: | |||||
| Accounts payable | 1,306,992 | $ | 1,044,500 | ||
| Notes payable - financing agreements | 166,686 | 52,503 | |||
| Accrued expenses | 515,477 | 618,093 | |||
| Equipment financing payable-current portion | 54,373 | 80,335 | |||
| Operating lease obligations-current portion | 510,028 | 315,302 | |||
| Contract liabilities | 5,015,450 | 1,829,311 | |||
| Total Current Liabilities | 7,569,006 | 3,940,044 | |||
| Equipment financing payable, less current portion | — | 22,851 | |||
| Operating lease obligations, less current portion | 4,591,541 | 4,739,783 | |||
| Total Liabilities | 12,160,547 | 8,702,678 | |||
| Commitments and Contingencies (Note 4) | |||||
| STOCKHOLDERS' EQUITY: | |||||
| Preferred stock: 0.001 par value, 10,000,000 authorized, 9,480,000 shares available to be designated | |||||
| Series A redeemable<br> convertible preferred stock, 10<br> stated value per share, 500,000<br> shares designated; 0<br> issued and outstanding at June 30, 2022 and December 31, 2021 convertible into common stock at 6.30<br> per share | — | — | |||
| Series B convertible preferred stock, 1,000 stated value per share, 15,000 shares designated; 851 and 851 issued and outstanding at June 30, 2022 and December 31, 2021, convertible into common stock at 7 per share | 851,000 | 851,000 | |||
| Series C<br> convertible preferred stock, 1,000<br> stated value per share, 5,000<br> shares designated; 0<br> issued and outstanding at June 30, 2022 and 2,500<br> issued and outstanding at December 31, 2021, convertible into common stock at 5.50<br> per share | — | 2,500,000 | |||
| Common stock: 0.001 par value; 500,000,000 shares authorized, 6,107,209 and 4,111,047 shares issued, 6,105,885 and 4,109,723 shares outstanding at June 30, 2022 and December 31, 2021, respectively | 6,107 | 4,111 | |||
| Additional paid-in-capital | 51,616,040 | 43,080,877 | |||
| Total stock & paid-in-capital | 52,473,147 | 46,435,988 | |||
| Accumulated deficit | (49,484,339 | ) | (45,497,051 | ) | |
| Sub-total | 2,988,808 | 938,937 | |||
| Less: Treasury stock (1,324 shares of common stock at June 30, 2022 and December 31, 2021) | (157,452 | ) | (157,452 | ) | |
| Total Stockholders' Equity | 2,831,356 | 781,485 | |||
| Total Liabilities and Stockholders' Equity | 14,991,903 | $ | 9,484,163 |
All values are in US Dollars.
DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||
|---|---|---|---|---|---|---|
| June 30, | ||||||
| 2022 | 2021 | |||||
| Cash from operating activities: | ||||||
| Net loss | $ | (3,987,288 | ) | $ | (3,358,903 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
| Depreciation and amortization | 145,627 | 171,382 | ||||
| Stock based compensation | 438,809 | 153,163 | ||||
| Stock issued for services | 80,000 | — | ||||
| PPP loan forgiveness including accrued interest | — | (1,421,577 | ) | |||
| Amortization of operating lease right of use asset | 158,547 | 106,676 | ||||
| Changes in assets and liabilities: | ||||||
| Accounts receivable | 1,458,592 | 902,871 | ||||
| Contract assets | (698,923 | ) | (50,331 | ) | ||
| Inventory | (481,880 | ) | (20,166 | ) | ||
| Prepaid expenses and other current assets | (218,198 | ) | 118,221 | |||
| Accounts payable | 268,425 | (69,638 | ) | |||
| Payroll taxes payable | — | (3,146 | ) | |||
| Accrued expenses | (108,550 | ) | 66,338 | |||
| Operating lease obligation | 46,485 | (110,843 | ) | |||
| Contract liabilities | 3,186,138 | 297,050 | ||||
| Net cash provided (used) in operating activities | 287,784 | (3,218,903 | ) | |||
| Cash flows from investing activities: | ||||||
| Purchase of patents/trademarks | (13,660 | ) | (7,435 | ) | ||
| Purchase of software development | (15,000 | ) | — | |||
| Purchase of fixed assets | (140,549 | ) | (184,492 | ) | ||
| Net cash used in investing activities | (169,209 | ) | (191,927 | ) | ||
| Cash flows from financing activities: | ||||||
| Repayments of insurance and equipment financing | (213,404 | ) | (191,798 | ) | ||
| Repayment of finance lease | (48,812 | ) | (43,527 | ) | ||
| Proceeds from common stock issued | 6,095,000 | — | ||||
| Issuance cost | (576,650 | ) | — | |||
| Proceeds from preferred stock issued | — | 4,500,000 | ||||
| Net cash provided by financing activities | 5,256,134 | 4,264,675 | ||||
| Net increase in cash | 5,374,709 | 853,845 | ||||
| Cash, beginning of period | 893,720 | 3,969,100 | ||||
| Cash, end of period | $ | 6,268,429 | $ | 4,822,945 | ||
| Supplemental Disclosure of Cash Flow Information: | ||||||
| Interest paid | $ | 5,984 | $ | 22,339 | ||
| Taxes paid | $ | 1,264 | $ | — | ||
| Supplemental Non-Cash Investing and Financing Activities: | ||||||
| Notes issued for financing of insurance premiums | $ | 327,586 | $ | 303,487 |
EXHIBIT 99.2
DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022
| Call Participants |
|---|
| EXECUTIVES <br><br> <br><br> <br><br>Adrian G. Goldfarb <br><br>Chief Financial Officer <br><br> <br><br> <br><br>Charles Parker Ferry <br><br>CEO & Director <br><br> <br><br> <br><br>ANALYSTS <br><br> <br><br> <br><br>Michael James Latimore <br><br>Northland Capital Markets, Research Division <br><br> <br><br> <br><br>Rick Jackson |
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Presentation
Operator
Good afternoon. Welcome to Duos Technologies Second Quarter 2022 Earnings Conference Call. Joining us for today's call are Duos' CEO Chuck Ferry and CFO, Adrian Goldfarb. Following their remarks, we will open the call for your questions. Then before we conclude today's call, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call.
Now I would like to turn the call over to Duos' CEO Chuck Ferry. Sir, please proceed.
Charles Parker Ferry
CEO & Director
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. 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. In the second quarter, we executed real well across all segments of our business and are tracking according to our long-term growth plan. Our financial performance in Q2 represented an order of magnitude improvement over our results in recent reporting periods as well as the third consecutive quarter we have met or exceeded our internal revenue projections.
We improved demonstrably in nearly every meaningful financial metric, which is not only the result of executing certain deployments ahead of schedule, but also by product of the foundational work we've done in the last 1.5 years to be able to execute a greater scale when the opportunity was presented. Based on our performance to date, we remain on plan to meet our financial roles for the year.
Operationally, we have currently -- we currently have 2 railcar inspection portals completing installation in the next 3 months with 2 more portals that are under construction and been expected to install in the first half of 2023. We are also completing installation of 2 other projects in the third quarter. We continue to improve our installation procedures, in-field performance and maintenance capabilities, all of which have enhanced customer relations, leading to increased recurring revenue and add-on sales opportunities.
We will discuss more details about the business later on the call. So before I go any further, I'd like to turn the call over to our CFO, Adrian Goldfarb, who will walk us through the financial results for the quarter and first half of the year. Adrian?
Adrian G. Goldfarb
Chief Financial Officer
Thank you, Chuck. Before my comments on the financial results, I would like to mention that I see very good progress across all of the functions of the business from contracting to engineering, software development and manufacturing, installation and service. In particular, our AI development has made major strides, and all of this leads to the current improved financial results and expected continued improvements for the rest of this year and beyond.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Turning to the results for the second quarter ended June 30, 2022. I want to discuss the 2 components to revenue that we report. Technology systems which records revenue from turnkey engineered systems such as our railcar inspection portal and the increasing impact of our recurring revenue from services and consulting. This records recurring revenues from maintenance and support contracts for both technology systems and AI models plus any consulting services that are undertaken.
As previously discussed, we have been upgrading and expanding our overall technology capabilities, with a particular focus on AI as a key component of our overall product portfolio. I am pleased to report that our average revenue per installation continues to move higher. As a result, of meeting the demand from our customers for increased functioning capabilities.
While supply chain issues have started to show some signs of improvement, time between contract award and full revenue recognition remains longer than was the norm in prior years. At this time, we still expect to see higher revenues later this fiscal year and into 2023. In addition, we continue to focus on our revenue mix to support accelerating growth in our recurring revenue services and software going forward.
With respect to the results just reported, total revenue for Q2 2022 increased 458% to $3.62 million compared to $649,000 in the second quarter of 2021. Total revenue for Q2 2022 represents an aggregate of approximately $2.78 million technology systems revenue and approximately $837,000 in recurring services and consulting revenue, which is the highest amount of quarterly recurring revenue in the company's history.
The increase in total revenue for Q2 2022 compared to Q2 2021 was driven by the production and start of installation of new and upgraded railcar inspection portals which are recorded in the technology systems portion of the business. We expect this trend to continue for the rest of 2022 and into 2023, although supply chain issues continue to extend deadlines for shipment of key components used in our technology systems.
While certain orders were delayed from 2021 into 2022, we remain encouraged by the breadth and scope of recent bids in which the company has participated and the company's pipeline continues to expand.
Total revenue for the first half of 2022 increased 80% to $5.06 million from $2.8 million in the same period last year. The increase in total revenue was driven by the start of production and new installations in the technology systems portion of the business along with continuing increases in services and consulting revenues, which were driven by receipt of notices to proceed for new contracts earlier in the year.
Before turning to costs and profitability, I'll now provide an update on our contract commitments. As I've mentioned on previous calls, traditionally, there has been a period from the time you are awarded a contract until the moment when that contract can be recognized as revenue. The length of time between contract award and revenue recognition is extending beyond what has been the norm due to the fact that our installations have been impacted by the ongoing supply chain issues, which is a familiar theme for many companies.
We're also observing the increasing impact of inflation on components and contracted services on our cost structure, which we are taking steps to mitigate but which may still have an impact going forward. The effective inflation are not quantifiable at the current time, but are beginning to be evident in increased costs for materials and labor.
These effects may result in higher costs for project implementation that cannot be wholly or even partially passed on to our customers and thus may result in delaying our progress towards profitability.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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As mentioned previously, we started the year with a largest set of contract commitments in the company's history with both the first and second performance obligations met. That number now currently stands at approximately $14 million to $16 million, much of which we expect to book this year.
We will endeavor to keep you informed through our regular filings of progress on contract awards as an additional metric to track our progress towards our growth goals. With that in mind, let's discuss costs for the second quarter and the first half.
Cost of revenues for Q2 2022 increased 154% to $2.33 million compared to $918,000 for Q2 2021. Cost of revenues on technology systems increased for Q2 2022 compared to Q2 2021, which is consistent with the increase in revenues, albeit at a slower overall rate. The higher level of cost was mainly due to the higher cost of materials due to increased production levels and also to supply chain disruptions and inflation. While we expect that macroeconomic factors will continue to drive prices, the company expects structural realignment to eventually aid in lowering costs as a percentage of the overall system price going forward, although inflation may impede this effort.
As previously noted, the company's organization and related cost structure was realigned to provide the capability to manufacture, install and support multiple production systems simultaneously.
In accordance with the shift in structure, certain staff were reassigned or replaced and new staff added in key areas, particularly engineering, software development and AI.
Cost of revenues for the first 6 months of 2022 increased 38% to $3.55 million from $2.57 million in the same period last year. Increase in cost of revenues on a dollar and percentage basis occurred at a slower rate than the increase in revenues during the period.
The higher level of costs compared to revenues was mainly due to higher costs stemming from higher revenues, with supply chain disruptions and inflation also having an impact.
Gross margin for Q2 2022 increased 575% to $1.28 million compared to a negative $270,000 for Q2 2021. The increase in gross margin for Q2 2022 compared to Q2 2021 was driven by the revamp of our operations to support an anticipated increase in the number of new systems going forward.
The result in additional cost of revenues was covered by a greater increase in revenues during the second quarter of 2022. The main reason for the increased cost is the high level of production costs of materials as well as supply chain disruptions and inflation. We anticipate further improvements in the overall gross margin in 2022.
Gross margin for the first 6 months of 2022 increased 545% to $1.5 million from $233,000 in the same period last year. The increase in gross margin was also driven by the previously noted revamp of our operations to support an anticipated increase in the number of new systems going forward. Additionally, the additional cost of revenues was also again covered by a greater increase in revenues during the first half of 2022.
Operating expenses for Q2 2022 remained flat at $2.68 million compared to $2.68 million for Q2 2021. The slight increases in cost for sales and marketing and research and development were offset by the decrease in general and administration costs compared to Q2 2021.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Overall, we are continuing to focus on stabilizing operating expenses while meeting the increased needs of our growing customer base. Operating expenses for the first 6 months of 2022 increased 11% to $5.54 million from $5 million in the same period last year. The increase in operating expenses was driven by costs associated with growing the business and the effects of inflation on salaries and overhead. We expect overall costs to grow due to macroeconomic factors in addition to organic growth costs related to the business.
Net operating loss for Q2 2022 totaled $1.39 million compared to net operating loss of $2.95 million for Q2 2021. The improvement in net operating loss for Q2 2022 compared to Q2 2021 was driven by higher revenues recorded in the quarter resulting from increases in both the company's technology systems and services and consulting revenues, slower growth in the cost of those revenues and flat operating expenses.
Net operating loss for the first 6 months of 2022 totaled $4.04 million compared to net operating loss of $4.77 million in the same period last year. The greater net operating loss was driven by higher revenues recorded in the period as a consequence of the start of new projects and received materials for production.
A positive trend was the higher revenue recorded without a corresponding greater relative cost of sales, even with higher costs of materials resulting from supply chain disruptions and inflation.
Net loss for Q2 2022, totaled $1.34 million compared to net loss of $2.95 million for Q2 2021. The improvement in net loss for Q2 2022 compared to Q2 2021 was driven by an increase in revenues as noted previously above, along with slower growing expenses.
Net loss for the first 6 months of 2022 totaled $3.99 million compared to a net loss of $3.36 million in the same period last year. The greater net loss was driven by the higher costs in 2021 being offset by a onetime $1.4 million in other income as a result of the PPP loan forgiveness recorded in the first quarter of 2021.
Let's now discuss the balance sheet. We ended the quarter with approximately $6.27 million in cash and cash equivalents compared to $894,000 at December 31, 2021.
Company anticipates and has sufficient cash at this time, to support operations through the end of 2022 and into 2023. However, given current and anticipated increase in additional business and the ongoing supply chain disruptions which can delay implementation, we are considering further increasing our working capital.
Although lasting effects of the global pandemic and inflation have affected our operations, we now believe that this is expected to be an ongoing issue and our working capital assumptions reflect this new reality. We have analyzed our cash flow under stress test conditions and have determined that we have sufficient liquid assets on hand to maintain operations for at least the next 12 months.
Given the current increase in business and the associated increase in cost to support that business, we continually evaluate the capital that is required to fund the fundamental business changes that we are executing, including organization, product alignment and market focus and maintenance of our business strategy overall.
In addition, we are taking actions to eliminate certain costs that do not contribute to short-term revenue. We are realigning both management, staffing with a focus on improving skill sets necessary to build growth and profitability. We are also focusing product strategy on opportunities that are likely to bear results in the relatively short term.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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We will continue executing on the plan to grow our business and eventually achieve profitability without the absolute requirement for additional capital for existing operations, although we may elect to raise capital to fund growing our recurring revenue business and for selected opportunities as they arrive.
I'd now like to provide an update on our financial projections before turning the call back over to Chuck. Based on committed contracts and near-term pending orders that are already performing or scheduled to be executed throughout the course of 2022, we are reiterating our previously stated revenue expectations for the fiscal year ending December 31, 2022. We expect total revenue for 2022 to range between $16.5 million and $18 million, representing an increase of 99% to 117% from 2021.
We expect this improvement in operating results to be reflected over the course of the full year, the majority of revenues coming in the second half of the year. As a result of the second quarter's outperformance, we continue to expect a further revenue increase in the third quarter and anticipate similar results in the fourth quarter.
That concludes my financial commentary. I'll now pass the call back over to Chuck.
Charles Parker Ferry
CEO & Director
Thanks, Adrian. Those who have followed us know that I've been very direct about the challenges our company has worked through the last 18 months. Now I am pleased to report that our Q2 results are the third quarter in a row where we have met or exceeded our internal financial metrics. Additionally, Q2 represents the highest single quarter recurring revenues in the company's history. We will continue to emphasize growing that portion of the revenue at a greater rate going into next year.
As a reminder, our 2022 operating strategy is focused on 5 key areas as follows: one, improve our technical and operational deliveries, which will make satisfied customers who order more equipment and services; two, add more recurring revenue through our services, maintenance and artificial intelligence offerings; three, continue our primary commercial focus in the rail sector by adding more value to existing customers adding new customers in the Class 1s, passenger rail and we'll discuss car owners themselves a little bit later in the brief.
Add a second commercial line of business in the trucking intermodal industry and potentially into the aviation industry by using our railcar inspection portal technology to connect similar visual inspections in trucks and aircraft, focusing on recruiting and retaining top talent in a very competitive market space.
I'll now add further comments to each of these 5 major components of our strategy, beginning with improving our technical and operational delivery. Since my arrival in 2021 of the core components of our updated company values has been a commitment to achieving operational and technical excellence, we believe this approach leads to higher customer satisfaction and improve new deal closure rates.
From a high level, customer service continues to improve, and we have successfully met our service level agreements with all of our customers, maintaining a 95% or higher availability rate on all deployed systems. Our time to respond to resolve problem tickets has also decreased. Just as important, we are collecting performance metrics, identifying and correcting systemic issues across the railcar inspection portal fleet. Since implementing a proactive maintenance approach, which includes preventative maintenance checks and services, our reliability rates have increased in turn.
Our hardware engineering team has made significant improvements on reliability but also the ability to more rapidly easily repair and remotely monitor, helping to drive maintenance costs down as well. The software team has done a terrific job updating software already deployed and have introduced a more standardized method of developing and deploying software upgrades.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Finally, our project management has definitely improved, allowing us more accurate basis of estimates, thereby enabling us to plan better ahead.
As of today, we are on plan with all current deployments. I'll now take a minute to provide brief updates within our currently in-progress deployments. Beginning with a $9 million master services agreement that we secured in March from a major national passenger carrier, installation remains on track for the latter part of '22 with completion expected in early 2023.
As an update, I'm pleased to report we have already tacked on an additional $1.1 million of value to that contract owing to further modifications, increasing the current total value to over $10 million. We have also identified further options that could grow the contract to even greater levels over the next several months.
Moving to another current deployment. In January, we announced a contract for another Class 1 rail operator to deploy an additional rail on the U.S. side of the customer Southwestern border operations in Texas. Installation and development efforts remain on schedule for early fall completion date.
With this customer, we are also in discussions to deploy other technologies ranging from unmanned aerial vehicles, expanded edge data center capabilities and information sharing with several U.S. government and law enforcement agencies.
This is part of a larger strategic initiative to create a secure corridor from Southern Mexico across the U.S. border with the goal to move rail commerce safer and faster. The secure corridor initiative is gaining momentum with support from both the U.S. and Mexican government agencies.
With another Class 1 customer, our installation of a new portal in the Southeast United States is also on plan. We anticipate project completion by early fall of this year, and we are also discussing this -- with this customer the potential to develop more long-term, comprehensive railcar inspection portal coverage of their network.
Our installation with a major Canadian transit agency will be completed in Q3. We have also added work to provide maintenance services and artificial intelligence, which is expected to generate higher recurring revenues beginning in 2023.
Our long-term Florida County security project will be completed in early Q3, and we are currently in discussions with this customer to provide further modifications and upgrades to previously installed work.
For a minute, I'd like to touch on some of the risks that our business faces and how we plan to mitigate them. Last quarter, we discussed the impacts of inflation and supply chain pressures as we previously discussed lagging supply chains to extended contract close to revenue recognition to 6 months or more on average.
Combining supply chain delays with an inflationary market has created logically, a dual negative impact that compresses margins. Coupled together, these issues continue to raise costs and extend the timeline for procurement, manufacturing, installation, field maintenance and most importantly, people.
We are mitigating this challenge by negotiating spare parts pools with existing customers and are looking into adding long lead items in the inventory when it makes financial sense to do so. During the period, we had a modest uptick in inventory for this exact reason, which has proven to be a prudent move, allowing us to meet our financial targets.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Inflation and recessionary impacts also required us to negotiate higher prices with customers while accommodating cost increases from suppliers. To date, we have not experienced issues with customers as operators and distributors within the supply chain largely understand the challenges of the current environment.
Moving to our second focus area, which is to continue adding more recurring revenue through our services, maintenance and artificial intelligence offering. As a reminder, we derive recurring revenue from allocations that incorporate AI that automates fiscal inspections while mechanical equipment moving at high speed.
Looking back at the last 18 months, we have a 100% renewal rate on all recurring services contracts, which does not even account for expansion revenues. This strong performance level has allowed us to continue growing our recurring revenue base over the past few quarters, a trend we expect to continue throughout the balance of the year and even accelerate in 2023 and certain large-scale deployments come online.
Consistent customer retention will lead to strong recurring revenue, and it comes as a result of providing highly reliable quality products and services, which continues to be our focus. Within our AI operations, we have added additional resources to meet the growing demand for our artificial intelligence. And this investment to rebuild and grow our AI capabilities beginning to show results in both capacity and quality of algorithms.
To date, we have deployed 20 AI use cases that are performing at a 95% or higher reliability rate, and we're on track to have 28 deployed by the end of October. We currently provide AI to 2 of our major customers, and we expect to deploy our AI to 3 more of our major customers later this year.
These expansion opportunities serve as a reminder of the importance of developing and investing in our artificial intelligence and software capabilities. More algorithms operating on solid software and IT infrastructure comes online every day for our customers, helping them improve their safety, velocity, dwell time and maintenance metrics.
With our high-performing AI and software teams, our ability to use data analytics to see how effective we are is also improving. In the last 90 days, our reps have spanned approximately 1.5 million railcars, protecting thousands of actionable defects in the field. This represents an 18% increase in the number of railcars stand over the previous quarter with the number of detections increasing by over 19% as the AI software is deployed and becomes more effective.
Contracts we secured earlier this year, both for new installations as well as upgrades to existing portals I just mentioned, include provisions for increased algorithm delivery, a trend we expect to continue going forward.
From a high level, as we layer on additional services, increased maintenance work across a larger customer base and improve the quality, complexity and applications for our artificial intelligence offerings, we expect to achieve consistent profitable growth that we will see our recurring revenue streams serve as a fixed springboard for operations and accounts for an increasing percentage of our revenue.
Moving to commercial updates. While we are devoting significant resources into executing against our current backlog and have successfully kept up with timelines, as mentioned, closing new customers is also a primary consideration. During the period, we closed a new deal with a former customer that had fallen out of contract over 2 years ago, to provide upgrades to their existing portal, which includes hardware upgrades, annual services agreement and artificial intelligence for a portal located in Mexico.
Total value of these upgrades is approximately $360,000 with most of the revenues occurring. We expect to expand our work with this customer in the future.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Our commercial outlook remains positive, thanks to our operational and technical improvements nearly all current customers are renewing and/or additional scope of work is being added to existing rips. Smaller modifications have already been added with several customers, and we expect additional growth across all of our customers -- all of our current customer base.
In total, the overall value for contracts added during the quarter was approximately $1.1 million, thanks to our improved execution in recent months as well as funds received from other contracts, Duos was cash flow positive for the month of June.
With new and existing customers, we have a pipeline of potential new business worth over $120 million as of today's discussion.
Additionally, with the recent U.S. infrastructure bills passing, we provided proposals to a dozen transit for passenger railroads that are eligible for [ grant line ]. We are evaluating other solutions for inspecting moving vehicles as well including trucks and aircraft, which could provide similar benefits in terms of safety and efficiency, required inspections to improve safety and efficiency in those industries.
Moving to our final area of focus that is recruiting and retaining talent. As of today, we have assembled a very, very talented team of hardware, software, IT and artificial intelligence, engineering and development capability, equally good at the other supporting functions such as our 24/7 service operations center, field services and project management teams.
Getting to this point has required significant time and resources, but recruiting and retaining quality employees in my experience is the most critical factor to be successful. Over time, we have introduced improved salaries and benefits to be more competitive. After the high turnover rates in 2020 and 2021, I'm pleased to report that a much lower turnover rate in the first half of 2022 as we begin to stabilize the workforce.
In summary, this year continues to be centered on execution. We are continuing to meet performance obligations for existing contracts as well as sign new business with current and prospective Class 1 rail and transit operators. We are also continuing to develop and deploy our artificial intelligence and software capabilities, furthering our expansion efforts into adjacent market opportunities and investing in our internal operations to better capitalize on all these opportunities.
We remain committed to our vision, which is to position Duos as a business that deploys cutting-edge technologies that help our customers operate safer and more efficiently.
And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Question and Answer
Operator
[Operator Instructions] Our first question comes from the line of Mike Latimore with Northland Capital Markets.
Michael James Latimore
Northland Capital Markets, Research Division
Congrats on the strong growth and gross margin standing here. Great to see.
Charles Parker Ferry
CEO & Director
Thanks, Mike. Good to hear from you.
Michael James Latimore
Northland Capital Markets, Research Division
So I guess just one kind of modeling clarification. I think, Adrian, you said that you expected third quarter revenue to be up sequentially and then similar fourth quarter. By similar fourth quarter, did you mean in absolute dollars or in growth rate, sequential records?
Adrian G. Goldfarb
Chief Financial Officer
In absolute dollars.
Michael James Latimore
Northland Capital Markets, Research Division
Okay. So basically, third quarter and fourth quarter should be about the same.
Adrian G. Goldfarb
Chief Financial Officer
At this time, yes, that's what it looks like.
Michael James Latimore
Northland Capital Markets, Research Division
Got it. And you also mentioned gross margin should continue to improve with the higher volumes?
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Adrian G. Goldfarb
Chief Financial Officer
Yes. That's a little bit of a dual-edge sword right now because of the supply chain and even more so now the impact of inflation. Obviously, we contract for these systems quite a bit ahead of time and inflation is now something that we have to take very, very seriously as we go and negotiate contracts. So it's a question of being able to secure the materials in sufficient time to deploy them so we can record revenue but also not overpaying for those.
And we see the inflation really across the board. It's in terms of materials, it's in terms of out-staffing, third-party contractors. So that's where, all things being equal, we do expect as the volumes grow to have increasing gross margins, but we have to play that carefully with the effects of inflation.
Charles Parker Ferry
CEO & Director
So Mike, this is Chuck, basically, when we're in the process of doing constantly is attempting to keep our supplier and vendors. Also, we're negotiating the best price we can with them, but the prices are going up. At the same time, we're engaged with all of our customers to try and get price increases to cover that. So it's a constant going back and forth as we're rolling through these quarters.
Michael James Latimore
Northland Capital Markets, Research Division
Makes sense. It looks like your pipeline grew 20% or so sequentially. What was kind of the big driver of that?
Charles Parker Ferry
CEO & Director
Yes. I think the -- again, our pipeline is largely broken into 3 main components. One is Class 1s. The second major component is transit and passenger rail, and then we'll call things that are other. We have had some -- we talked about how we've been able to analyze our data, analyze better. What we've realized is that we can -- we're actually -- many of the railcars that we are scanning and then with the imagery attached to it is actually owned by car owners.
So part of that pipeline involves actually selling into the car owners themselves. And we think that, that may be a future area for us to sell in what we'll call a subscription manner where we're really just selling subscriptions to our data versus actual selling rips themselves. So that's something that we're developing right now in concept. We're in conversations with several of the car owner companies, which are quite large. And we should have some more to report on that, I think, in the next earnings call.
Michael James Latimore
Northland Capital Markets, Research Division
Interesting. Okay. And that did contribute to the pipeline growth?
Charles Parker Ferry
CEO & Director
Yes. Yes. There's a good component of our pipeline, which is actually the car owners. And I don't want to start off with their names. Some of them are very large publicly traded company, so I'll -- you can look them up.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Michael James Latimore
Northland Capital Markets, Research Division
Yes, good. And then I think you also talked about an 18% sequential increase in detections, I believe. I might have missed in the past. But have you given that number before?
Charles Parker Ferry
CEO & Director
We have not, not a miss forum. So again, with our significantly improved software and our artificial intelligence teams. Their ability to evaluate and analyze the data that we have has become significantly better. So we've now begun to track the analytics of the actual imagery detections that we're taking, and we'll keep track of that and kind of report out here on a go-forward basis.
Again, we have 11 railcar inspection portals out in the field now. And so we're able to now see and track kind of the numbers going through that by early -- by early 2023, we'll have a total of 14 or so portals out, and so those numbers will actually increase.
Michael James Latimore
Northland Capital Markets, Research Division
Yes, that's encouraging. So the AI is taking in nice there.
Operator
[Operator Instructions] Our next question comes from the line of Richard Jackson with True North Financial. Please go ahead.
Rick Jackson
Yes. Great progress. I'm trying to get my arms around this model and you threw some data points, I think, could be helpful, and I'll make sure I'm understanding them correctly. So what's the difference between an AIU and a portal?
Charles Parker Ferry
CEO & Director
No, that's a good question. Thanks, Richard. So obviously, our railcar inspection portal is the -- is basically a large coverage [indiscernible] sensors that captures all of the data. And then what we do through a set of software and what we call artificial intelligence, we analyze that data and present it to the customer.
So when we use the term artificial intelligence, it's basically taking images and it's analyzing mostly a pattern analysis in those images. So when we use the term artificial intelligence use case, we actually deploy use cases into the field. And what I mean by that, a use case is a combination of a training set, which means a set of images, both good and bad, that's used to train the algorithm.
The algorithm itself is a set of software and logic that takes those images. And basically, when you match the 2 together and you deploy it out into the edge, we call it a use case. And hopefully, I'm answering that question. Does that make sense?
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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Rick Jackson
I think so, depending on the next answer. So this quarter that generated $800,000 of recurring revenue, how many portals are up and running generating that revenue?
Charles Parker Ferry
CEO & Director
Yes. We currently have 11 portals that are deployed out into the field. And right now, as we speak, we're actually in the process of installing an additional 4, so I think I misspoke before. So we've got 11 now. And by the end of this year, we'll have 13. And by early 2023, we'll have a total of 15 out in the field.
Rick Jackson
So I take it there's more than 1 AIU per portal? Or am I not getting it?
Charles Parker Ferry
CEO & Director
Yes. So what we do is we deploy, so currently right now with 2 of our customers, we have a total of 20 algorithms or you likely to call 20 AI use cases they're deployed. Effectively, what we're doing is 20 of the mechanical inspection points are looked at through -- in an automatic manner using this AI, and we're continuing to build upon that as we go.
Rick Jackson
Okay. So you're testing now 20 stress points that you'll be testing for 28. Is that what you're saying?
Charles Parker Ferry
CEO & Director
Yes. Basically, so when depending on our portals, I will call it our base generation portals, we can see anywhere from about 20 to 25 individual mechanical inspection points on each single railcar. In the case of 2 of our customers, we've deployed 20 algorithms whereas we're looking at those individual mechanical inspection points, the system automatically flags any detections that we have through that artificial intelligence, which effectively can either automate it or it helps the customer make a much faster decision about what to do and how to action on that individual inspection point, if that makes sense.
Rick Jackson
I think so. So I'm trying to get my answer on total addressable market here. So I think you said on a prior call, I don't know the notes in front of me, there were over 400 locations that would benefit from these portals, correct?
Charles Parker Ferry
CEO & Director
Yes. What we said before is that we believe and we -- and through our research, our total addressable market, we think the North American Class 1 railroad network that could accommodate as much as 150 of our railcar inspection for us. Again, separate from that is artificial intelligence. So each time we deploy an algorithm, it comes with a bit of a development fee but also more importantly, a recurring revenue component to it.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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So as we add more artificial intelligence algorithms our recurring revenue increases, which is why earlier [indiscernible] talk about increasing the amount of algorithms from 20 to 28 as we increase those numbers of algorithms increase the number of customers that will pay for those algorithms we're effectively adding to that recurring revenue.
Rick Jackson
Okay. So I believe you said 2 portals just got up and running. So 11 portals contributed to the $800,000 in recurring revenue in the second quarter. Is that accurate?
Charles Parker Ferry
CEO & Director
Yes. The artificial intelligence definitely contributed to the recurring revenue in this last quarter. And to clarify, 2 of our major customers across 3 of our portals, we're currently in contract to deliver, and we are delivering that artificial intelligence. We have 3 additional customers that we're in discussions with that we'll be adding artificial intelligence into later this year, and that will again bolster that recurring revenue.
Rick Jackson
So is it safe to assume that as you add to the AIUs, the recurring revenue will increase with it because you're adding more value?
Charles Parker Ferry
CEO & Director
Yes, that's correct.
Operator
Thank you. As there are no further questions, I would now like to hand the call back to Mr. Ferry for any closing remarks.
Charles Parker Ferry
CEO & Director
Yes. Again, I'd like to thank everyone for joining us today. And as always, we appreciate the opportunity to present. Thank you very much, and back to you, operator.
Operator
Thank you. 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 earning call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking terminologies such as believes, expects, may, will, should, anticipates, plans and their opposites or similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performances or events and are subject to a number of uncertainties, risks and other influences.
| **DUOS TECHNOLOGIES GROUP, INC. FQ2 2022 EARNINGS CALL | AUG 15, 2022** |
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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 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' filings with the SEC.
Thank you for joining us today for Duos Technologies Group 2022 Second Quarter Conference Call. You may now disconnect.