Duos Technologies Group, Inc. (NASDAQ:DUOT) Q2 2022 Earnings Conference Call August 15, 2022 4:30 PM ET
Company Participants
Chuck Ferry – CEO
Adrian Goldfarb – CFO
Conference Call Participants
Michael Latimore – Northland Capital Markets
Richard Jackson – True North Financial
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’d like to turn the call over to Duos’ CEO, Chuck Ferry. Sir, please proceed.
Chuck Ferry
Welcome, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our financial results for the second quarter as well as other operational highlights. A copy of the press release is available in the Investor Relations section of our website. I encourage all listeners to view that release as well as our 10-Q filing with the SEC to better understand some of the details we’ll be discussing during our call. Now let’s get started.
In the second quarter, we executed really well across all segments of our business and are tracking according to our long-term growth plan. Our financial performance in Q2 represent an order of magnitude improvement over our results in recent reporting periods, as well as the third consecutive quarter we 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 byproduct of the foundational work we’ve done in the last year and a half 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 goals for the year. Operationally, we have currently — we currently have two railcar inspection portals, completing installation in the next three months, with two more portals that are under construction and expected to install in the first half of 2023. We were also completing installation of two 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 Goldfarb
Thank you, Chuck.
Before my comments on the financial results, I would like to mention that I see very good progress across all 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.
Turning to the results for the second quarter ended June 30 2022. I want to discuss the two 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 about 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’m pleased to report that our average revenue for 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 startup 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 we 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 by one 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 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 effects of 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. As mentioned previously, we started the year with the largest set of contract commitments in the company’s history. With both the first and second quarters 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 high cost of materials, due to increased production levels, and also to supply chain disruptions and inflation. While we expect that macro economic 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 time.
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 a 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 six months of 2022 increased 38% to $3.55 million from $2.57 million in the same period last year.
Increased in cost of revenues on a dollar and percentage basis occurred at a slow rate than increase in revenues during the period. The higher level of cost 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 costs is the high level of production costs from materials as well as the trucks supply chain disruptions and inflation. We anticipate further improvements in the overall gross margin in 2022. Gross margin for the first six 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 remain flat at $2.68 million, compared to $2.68 million for Q2 2021, a slight increases in cost for sales and marketing and research and development will offset by the decrease in general and administration costs compared to Q2 2021. 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 six 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 macro economic 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. 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 six 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. 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 in the first six 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 one-time $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. The company anticipated, it 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.
Our lasting effects from 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 also focus in product strategy on opportunities that are likely to bear results in the relatively short-term. 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 arise.
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 a full-year with 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.
Chuck Ferry
Thanks, Adrian.
Those who follow us those — those who have followed us know that I’ve been very direct about challenges our company has worked through the last 18 months. Now I am pleased to report that our Q2 results for the third quarter in a row, 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 strategies focused on five key areas as follows: one improve our technical and operational delivery, which will make satisfied customers with 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, 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 conduct similar visual inspections of trucks and aircrafts, focusing on recruiting and retaining top talent in a very competitive market space. I’ll now add further comments to each of these five 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 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’re 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 and 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.
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 planning 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 2022 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, going to further modifications, increasing the current total value to over $10 million. We’ve 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 the contract for another Class 1 rail operator to deploy an additional rip 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, expand 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 railcar much safer and faster. The secure corridor initiative is gaining momentum with support from both the U.S. and Mexican government agencies.
With another classroom 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 were also discussing this with this customers 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 supply chain pressures.
As we previously discussed lagging supply chains and extended contract close to revenue recognition to six months or more on average. Combining supply chain delays with an inflationary market is 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’re mitigating this challenge by negotiating spare parts pools with existing customers and are looking into adding long lead items in 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. Inflation and recessionary impacts have also required us to negotiate higher prices with customers, while accommodating cost increases from suppliers. Today, 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 applications that incorporate AI that automates fiscal inspections on mechanical equipment moving at high speed.
Looking back at the last 18 months, 100% renewal rate on all recurring services contracts, which is not even account for expansion revenues. The strong performance 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 20 deployed by the end of October. We currently provide AI to two of our major customers and we expect to deploy our AI into three 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 scanned approximately 1.5 million rail cars, detecting 1,000s of actionable defects in the field. This represents an 18% increase in the number of rail cars scanned over the previous quarter, with a 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 artificial intelligence offerings, we expect to achieve consistent profitable growth that we will see our recurring revenue stream serve as a fixed springboard for operations that accounts for an increasing percentage of our revenue.
Moving to commercial updates, while we are devoting significant resources to 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 two 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 recurring, we expect to expand our work with this customer in the future.
Our commercial outlook remains positive, thanks for operational and technical improvements. Nearly, all current customers are renewing and or additional scope of work is being added to existing reps. 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 a potential new business worth over $120 million as of today’s discussion.
Additionally, with the recent U.S. infrastructure bill is passing, we provided proposals to a dozen transit or passenger railroads eligible for grant money. 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 are the other supporting functions such as our 24/7 Service Operations Center, Field Services and project management teams. Getting this point as required significant time and resources for 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 were 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 of these opportunities. We remain committed to our vision which is physician 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.
Question-and-Answer Session
Operator
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Mike Latimore with Northland Capital Markets, please go ahead.
Michael Latimore
Great, thank you. Yes, Chuck, Adrian, congrats on the strong growth and gross margin spending here. Great to see.
Chuck Ferry
Thanks, Mike. Good to hear from you.
Michael Latimore
Yes, likewise. 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 revenues?
Adrian Goldfarb
In absolute dollars.
Michael Latimore
Okay. So basically third quarter and fourth quarter should be about the same?
Adrian Goldfarb
At this time, yes. That’s what it looks like.
Michael Latimore
Got you. And you also mentioned gross margins should continue to improve with the higher volumes?
Adrian Goldfarb
Yes, that’s a little bit of a dual edged 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, in terms of staffing, third-party contractors.
So that’s where all things being equal, we do expect as the volumes grow to have a increasing gross margins, but we’ll have to, we have to play that carefully with the impacts of inflation.
Chuck Ferry
So Mike, this is Chuck. And basically, what we’re in the process of doing constantly is attempting to keep our supplier and vendors obviously, we’re negotiating the best price that we can with them, but 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 — to cover that. So it’s a constant going back and forth as we’re going through these quarters.
Michael Latimore
Makes sense, makes sense. Looks like your pipeline grew 20% or so sequentially? What was kind of the big driver of that?
Chuck Ferry
Yes, I think the again, our pipeline is largely broken into three, three 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, we’ve been able to analyze our data a heck of a lot better. What we’ve realized is that we can, we’re actually, many of the rail cars that we are scanning, and 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 selling subscriptions to our data versus actually selling rips themselves. So that’s something that we’re developing right now in concept. We’re in conversation 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 Latimore
Interesting, okay. And that did contribute to the pipeline growth?
Chuck Ferry
Yes, yes, there is a good component of our pipeline, which is actually the car owners. And I don’t want to start off with her name, some are very large publicly traded company. So you can look them up.
Michael Latimore
Yes, okay. And then I think you also talked about an 18% sequential increase in detections I believe, I might have missed in the basket, have you given that number before?
Chuck Ferry
We have not, not in this forum. So again with our significantly improved software and artificial intelligence teams, their ability to evaluate and analyze the data that we have, it has become significantly better. So, we’ve now begun to track the analytics of the actual imagery and detections that we’re taking and we’ll keep track 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 queue by early 2023, we will have a total of 14 or so portals out. And so those numbers will actually increase.
Michael Latimore
Yes, that’s encouraging. Okay, so the AI is taking in nicely there. Great, well, I appreciate it. That’s all I need. Best of luck rest of the year.
Chuck Ferry
Thanks, Michael.
Adrian Goldfarb
Thanks, Michael.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Richard Jackson with True North Financial, please go ahead.
Richard Jackson
Yes, great progress. I’m trying to get my arms around this model and through 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?
Chuck Ferry
That’s a good question. Thanks, Richard. So obviously, our railcar inspection portal is basically a large coverage of all the sensors that captures all of the data. And then what we do through a set of software and what we’ll 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 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 two together, and you deploy it out into the edge, we call it a use case. And hopefully I’m answering that question, Does that makes sense?
Richard 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?
Chuck Ferry
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 four. 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.
Richard Jackson
So I take it, there’s more than one AIU per portal, or am I not getting it?
Chuck Ferry
Yes, so what we do is we deploy so currently right now with two of our customers, we have a total of 20 algorithms, or you might hear them called 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.
Richard Jackson
Okay, so you’re testing now 20 stress points and you’ll be testing for 28, is that what you’re saying?
Chuck Ferry
Yes, basically. So when depending on our portals, what our — we’ll 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 two of our customers, we’ve deployed 20 algorithms, where as 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.
Richard Jackson
I think so. So I’m trying to get my arms around the total addressable market here. So I think you said on a prior call the notes in front of me there were over 400 locations that would benefit from these portals, correct?
Chuck Ferry
Yes, what we said before is that we believe and we — and through our research, our total addressable market, we think the North American, North American Class 1 railroad network could accommodate as much as 150 of our railcar inspection portals. 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.
So as we add more artificial intelligence algorithms, our recurring revenue increases, which is why when we are talking 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 revenues.
Richard Jackson
Okay, so I believe you said two portals just got up and running. So 11 portals contributed to the $800,000 recurring revenue in the second quarter. Is that accurate?
Chuck Ferry
Yes, the artificial intelligence definitely contributed to the recurring revenue in this last quarter. And to clarify two of our major customers across three of our portals, we’re currently in contract to deliver. And we are delivering that artificial intelligence. We have a three 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.
Richard 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?
Chuck Ferry
Yes, that’s correct.
Richard Jackson
Okay, thank you. You’ve been generous with your explanations.
Chuck Ferry
Thank you very much.
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.
Chuck Ferry
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 earnings call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking terminology such as believes, expects, may, will, should, anticipate, plans and the opposite 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.
Risk and other influences, many of which are beyond our control, which may influence the accuracy of the statements and 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 filing with the SEC.
Thank you for joining us today for Duos Technologies Group 2022 second quarter conference call. You may now disconnect.
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