Duos Technologies Group, Inc.

Good afternoon. Welcome to Duos Technologies' first quarter 2025 earnings conference call. Joining us for today's call are Duos' CEO, Chuck Ferry, and CFO, Adrian Goldsvarg. 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. I'd like to turn the call over to Duo's CEO, Chuck Perry. Please go ahead, Chuck.

Welcome, everyone, and thank you for joining us.

Earlier today, we used our earnings press release in our 10-2 for the first quarter of 2025. Copies are available in the investor relations section of our website. I encourage all listeners to view the press releases and our 10-2 filing to better understand some of the details we'll be discussing during today's call. Since the last training call in March, only six weeks ago, we've made significant progress, particularly in our power and edge data center lines of business. Let's first talk about our power line of business. Through our asset management agreement with APR Energy, we have now successfully contracted 570 megawatts with the APR Energy Gap Turbine Fleet, which is an increase of 180 megawatts since our last report six weeks ago. I expect the contract to close on an additional 160 megawatts in the coming two weeks. Altogether, this means we will have approximately 730 megawatts of gas turbines contracted in just five months for entering into our asset management agreement with APRNG and Fortress Investment Group. These assets will be deployed across multiple projects in the United States and Mexico in the coming three months. With our edge data center business called USAGI, We have previously reported contracting our first edge data center in Amarillo, Texas, in support of school district 16. We now have customer commitment for an additional eight edge data centers and expect to complete these installations in the coming six months. We remain competent in our plan to place 15 edge data centers by the end of this year. Overall, we are on track to execute our strategy and meet the guidance that we have previously issued. With that, I'll turn it over to Adrian Goldfarb. to our CFO to get further into the financial review. Thank you, Chuck. Before covering the specific results for the first quarter, I will make some brief introductory remarks discussing the progress that has been made during this quarter. I will also discuss some of the additional disclosure we are making in our 10Q related to recording our financials, given that we are now operating in three distinct segments. It is important to understand that while the results being presented are significantly improved compared to a year ago, this is just the beginning of a wholesale transformation for Duos. As a reminder, we now record financials for three separate divisions. Duos Technologies, which in the last few years has focused on the rail industry. Duos Edge AI, a wholly-owned subsidiary which was started last summer with the objective of moving into the Edge data center market with a product that is a spin-off from our rail car inspection portal. And Duos Energy, also created last summer as a vehicle for us to supply services to the behind-the-meter power business. Duos Energy now serves as a vehicle for supporting our asset management agreement, or AMA, with new ATR. Each division has a distinct role and objectives with the goal of growing Duos to becoming a much larger entity. While we have not had the success we hoped for in the rail industry, We have been successful in building some world-class technologies, and the reaction is universally positive to what can be accomplished. Despite the slow adoption of the rail industry, a lot of work continues with our key customers, and we also plan to roll out some new products later this year, both in software and hardware. Our HAI division has been extremely active in marketing the concept of a remote but highly capable data center to serve local communities and businesses. As a reminder, the offering behind this business was an outpost of development work done at Duos Technologies, and our pilot rollout in Amarillo earlier this year was attended by over 150 staff and executives representing industry, government, and media. This event generated significant interest such that, as discussed in our press release this morning, we have solidified our financial arrangements with AccuTech supply of edge-share defences built to our specifications. As Chuck mentioned, we have identified locations for at least nine EDCs with excellent prospects for an additional six units and we expect to achieve our 15 units deployed targets by year end. We will begin recording revenues from these units starting in Q2 and building throughout 2025. We expect to enter 2026 with more than $3 million in annual recurring revenue on multi-year contracts. Our asset management agreement with UAPR Energy is off-trace fast stuff. We recorded almost $4 million in revenues in the quarter and I expect that number to grow steadily over the next three quarters leading to guidance previously issued. Finally, as I initially discussed in this report and going forward, we will provide additional information pertaining to the performance of the individual businesses. For example, we now report the results from the AMA as separate line items on the P&L for both revenue and cost of goods sold. In future, we will also report on the impact of certain material items, such as our equity ownership in UAPR. And now, let me give a summary of our results for the first quarter. Total revenue for Q1 2025 increased 363% to $4.95 million, compared to $1.07 million in the first quarter of 2024. The substantial majority of our revenue for Q1 2025 was approximately $4.9 million in recurring services and consulting revenue, of which $3.9 million was primarily driven by U.S. Energy beginning to execute against the Asset Management Agreement with MuATR. As a reminder, under the AMA, DeWitt Energy oversees the deployment and operations of a fleet of mobile gas servants and related balanced plant inventory, providing management, sales, and operational support services to new APR. As new APR continues to grow its business, and as Chuck has discussed, DeWitt's revenues from this segment are expected to have a positive impact on gross margins that I will discuss momentarily. Cost of revenues for Q1 2025 increased 273% to $3.64 million, compared to $0.98 million for Q1 2024. The significant increase in cost of revenues was primarily due to supporting the AMA with new APRs, which is now listed as a separate item in the amount of $2.66 million. An additional contributing factor to the increase in cost of revenues on services and consulting is approximately $548,000 in amortization expense of the intangible asset accounted for as a non-managed transaction related to our RIP subscription business, which was not present in the corresponding period of 2024. Overall, the cost of revenues on technology systems decreased compared to the equivalent period in 2024. This reduction is primarily driven by our ability in Q1 2025 to reallocate certain fixed operating and servicing costs for technology systems to support the AMA, an allocation we could not make in a comparative period because the agreement was not yet in effect. It also reflects the ramp down of manufacturing ahead of field installation of our two high-speed rail car inspection portals, which has been delayed due to circumstances out of our control, temporarily slowing project activity and further reducing cost of revenues while we await customer readiness for site deployment. Growth margins for Q1 2025 increased 1,288% to $1.31 million compared to 90,000 for Q1 2024. Growth margin improved primarily due to Jewish Energy beginning performance of the AMA with new APR. This includes over $900,000 in revenue, recognized during the three months ended March 31, 2025, related to the company's 5% non-voting equity interest in the ultimate parent of new APR, which carried no associated costs and therefore contributed at a 100% margin. These revenues and the associated margin contribution were not present in the prior year period. As I mentioned earlier, the increase in business from the AMA is expected to improve growth margins on this segment, due to the greater profitability for DUAS on certain aspects of the work it will perform on behalf of UAPR. Operating expenses for Q1 2025 increased 9% to $3.1 million, compared to $2.86 million for Q1 2024. The increase in expenses is largely attributed to non-cash, stock-based compensation charge for restricted stock granted to the executive team on January 1, 2025. Under new employment agreements, with a three-year cliff-setting schedule. Sales and marketing costs declined as resources were allocated to the cost of service and consulting revenues in support of the AMA with new APR. Conversely, research and development expenses rose 11%, reflecting new engineering efforts to develop new and enhanced product offerings that I previously mentioned. The company continues to focus on stabilizing operating expenses while meeting the increased needs of our customers. Net operating loss for Q1 2025 totaled $1.79 million, compared to a net operating loss of $2.76 million for Q1 2024. The decrease in loss from operations was primarily the result of increased revenues during the quarter driven by revenue generated by Dewitt Energy through the AMA with new APR. Net loss for Q1 2025 totaled $2.08 million, compared to a net loss of $2.75 million for Q1 2024. A 24% decrease in net loss was mostly attributed to the increase in revenues generated by US Energy through the AMA, with new APR as described above. There was also approximately $322,000 of interest paid during the quarter, which was not present in the equivalent quarter one year ago. In our last call, I highlighted the substantial improvement in the company's balance sheet as of 12-31-2024. In the first quarter, we have largely maintained that strength and also improved in some areas, notably shareholder's equity, which now stands at over $5.1 million. We ended the quarter with $6.48 million in cash and expected short-term liquidity. As previously discussed, a significant asset for DUIS is the equity investment in SoGraph APR Holdings, the ultimate parent of new APR energy. Our 5% equity holding in this business is currently valued at over $7.2 million and is expected to generate profits in future years as a profit interest structure. As Chuck will discuss, the tremendous progress that UAPO is making will be added in the short term through the AMA and in the longer term through the expected increase in valuation of our equity holding. All of this is positive for Duo's future potential and I look forward to updating you further in our earnings calls later this year. On the liability side, the company has traditionally operated with little to no debt, other than some minor financing contracts related to insurance or IT equipment. As a reminder, in 2024, we received $2.2 million in debt funding for our initial three EDCs, and were able to secure that for around 10% cost of capital, which is an attractive rate for a company of our size. We also secured additional financing for a further three EDCs in the form of a massive capital lease with a similar cost of capital and flexible payment terms as we deploy these assets in preparation for the associated cash flow. I'm pleased to announce that during the quarter we have retired $1 million of the steps and expect to retire a further $1.2 million by the end of this year, keeping our leverage ratios within reasonable limits. Next, I would like to update you on our backlog and pipeline. We've expected revenues for the management and operations of new APR energy expected deployments over our edge data centers, and current and anticipated contracts in our rail business. Our current contracts and backlog represent more than $45 million in revenue, with approximately $17.4 million or more of that projected to be recognized in 2025, plus a further $7 to $8 million in expected near-term awards and renewals. During the last call, We re-instituted guidance, and we are maintaining that guidance, where we expect to record between $28 and $30 million in consolidated revenue from our fee subsidiaries. Although we do not normally give quarterly guidance, our performance in Q1 was at the upper end of the projected range of $4 to $5 million, and I expect a similar performance in Q2. With respect to our previously stated expectations to lose some money in the first half as we transition and build new businesses, We are reiterating this projection, applying to minimise this as much as possible by some expense reductions, which will be somewhat offset by an anticipated increase in one-time expenses related to deferred compensation. However, as previously stated, we continue to expect a break-even and may make money in the third and fourth quarters and end the full year with positive adjusted EBITDA, the major adjustment being for non-cash stock compensation. This concludes my formal remarks, and at this point, I will turn the call back to Chuck for his commentary. Chuck. Thank you, Adrian. As you can see from Adrian's commentary, the business has made good progress since the beginning of the year. Let me add some additional details to my opening remarks. With our asset management agreement supporting APR Energy, closing commercial contracts in both the data center space and traditional fast-powered jobs has gone at a lightning pace. As I said earlier, we have 570 megawatts in contract now, and I expect that to increase to 730 megawatts in the next two weeks. As a reminder, through the asset management agreement, we operate approximately 850 megawatts of power generation along the balance of plant where we provide turn-sealed power plants, normally installed within 30 to 90 days, depending on the situation. Currently, we have two projects here in the United States fully installed and operating. One of them is with a large data center operating as part of a behind-the-meter solution. In progress currently are two more installations. The first is with another U.S. data center operating a behind-the-meter solution, and the second is a traditional fast power project in Mexico. We are expecting a third project that will provide a fast power solution for another U.S. customer who has an immediate need. I expect all projects to be online producing electricity in the next 90 days or so. Simultaneously, we are in discussions with multiple U.S. data center developers for longer-term behind-the-meter power solutions. Our staff is also assisting APR Energy in evaluating follow-on asset acquisitions to expand the fleet. The positive effect for DUOS is a solid source of revenues through the asset management agreement and growing the value of our 5% equity stake in APR Energy's parents. With our Edge Data Center business, Doug Recker and his team have also made vast progress since our last earnings call. As I said earlier, we now have customer commitments for an additional eight Edge Data Centers and are working to complete contracts and coordinate installations that are planned over the next six months. These include two Edge Data Centers in Tampa, Texas, one Edge Data Center in Dumas, Texas, one Edge Data Center in Victoria, Texas, two Edge Data Centers in Lubbock, Texas, And finally, a second edge data center in Amarillo, Texas for a new customer not related to region 16. We were also recently placed to procure an order for four additional new edge data centers necessary to support our pipeline. This would put the total number of edge data centers owned at 10. Adrian, Doug, and I remain confident in our plan to place 15 edge data centers by the end of this year. A special thanks to our partner, AccuTech, who has been super supportive of our deployment strategies. I also want to give my highest compliments in regards to the DUOS leaders and staff. As you can tell, we are executing a number of simultaneous projects. We currently have our teams deployed in multiple locations, and they are working very hard to execute installations that include rail car inspection portals for Amtrak, data centers for our Texas-based customers, and fast power plants for our data center and traditional power customers. As always, I want to thank our business partners, board of directors, and our shareholders for their continued support. The outlook for duals looks very promising right now, and I'm excited to be able to lead. Thank you for listening, and now we'll open the call for your questions. Operator, please provide the appropriate instructions. Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation code will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question comes from the line of Michael Lattimore with Northland Capital Markets. Please proceed.

All right, great. Thank you.

Yeah, let's first start the year here. In terms of the power business, it looks like gross margin is around 32%.

Does that kind of get the range to think about throughout this year?

Yeah, Aiden's shaking his head yes. Yeah, so on the power business, we feel very confident in the forecast that we put together for the year on that. And yeah, that's a good number to think about for our gross margin. Obviously, as we go through the year, we're going to try to improve that. and there'll be some opportunities, I think, to try to do that.

Okay. And it looks like you've got really good visibility on the data center business. You know, in the past, you've sort of talked a little bit about maybe some hyperscaler opportunities. Can you give any update on that?

Yeah. So, you know, one of the things that really kind of flipped the switch on that was we, you know, it was in the press, of course, was the First Edge Data Center we put into Amarillo and supported Agent 16, and that really attracted a lot of attention from a lot of these other customers down in the state of Texas and also outside of Texas. So that really kind of spurred that on. It also attracted the attention of a couple of different hyperscalers. I would prefer not to disclose their names at this time, but we are in active discussions with probably about three or four hyperscalers that are interested in putting their product, if you will, or their computing power into these edge data centers in support of these smaller markets. And then also interested in behind-the-meter power as they're developing a larger data center part. So it's kind of a win-win for both those lines of business.

Excellent. And I guess there's two clarification questions, Tom. Adrian, did you say you expect 2Q to be similar to 1Q in terms of revenue?

Yes, yes. You know, as I said, we don't normally give quarterly guidance, but I am expecting that Q2 will be similar to Q1. Okay. And then just asking for you, what should we have stock count and depreciation be for the second quarter of the year? Just trying to get back in there and give it a number. Yeah, so the stock comp is running at about, it's about $500,000 or $600,000 a quarter. And then, sorry, what was the other number you asked? Depreciation. Yeah, the depreciation will start to increase as the edge data sensors come online, but I don't expect much impact for that for Q2.

Okay. Great. Thanks. Congrats on a great starter. Thanks, Mike. The next question comes from the line of Ed Wu with Ascendian Capital Markets.

Please proceed. Yeah, congratulations also on the progress. My question is, you know, there's been a little bit of volatility, obviously, with the tariff. Have you noticed any change in the sales cycle of trying to, you know, sign contracts either in the edge data center business or with your power business? Have you had any, you know, change in macro outlook with any of your potential customers? No, we haven't. And we're actually in pretty good shape compared to some other companies in that regard. On the power side, You know, APR Energy owns all of the assets, and all of the assets right this moment are in the United States. And so those are literally shielded from tariffs. If APR, you know, with our assistance, thinks about buying more assets than we are, I stated that in my comments, those could potentially be subject to tariffs. But right now, it's of no impact to us. On the ed data center side, there are some raw materials. that are used in the construction of the data centers that could be subject to the tariffs. But right now, we're kind of shielded by that based on the agreement that we have with AccuTech. But it is something for us to watch. But, again, for right now, there's no impact to us on those two lines of business.

And you don't really see people kind of holding off on signing deals or entering into agreements with you guys?

No, not at all. In these two lines of business, commercially, they're both on fire right this moment, which is a great thing for us. So there's no slowdown right now. And it has put us into an enviable position where we're able to kind of evaluate you know, which customers we actually want to prioritize. So right now we're in good shape.

Great. Great to hear, and I wish you guys good luck. Thank you. Okay. Thank you, Ed. And the next question comes from the line of Dan Marston with West Capital Management. Please proceed.

Yeah, hi. Thanks very much. Congrats, guys, on all the progress. The transformation seems pretty astonishing. A couple of questions. On the Edge Data Center, on your guidance of 150 to 200 by end of year 27, given 15 by the end of this year, that assumes a pretty massive ramp going into the next two years. How do you see that playing out? In other words, would you expect all of those to be for the typical school districts that you've been targeting, or do you have some contribution coming in from the potential hyperscaler customers you're speaking with? Yeah, no, Dan, thanks for the question. I would see it as a combination of both. So, you know, right now we're focused because we're interested in a lot of activity, you know, on these school districts down in Texas, which are in the in a good position where they have federal and state funds to, you know, to kind of pull these things in. It allows us to go and install on their property and not have to pay a whole lot from a real estate perspective. And then it attracts, you know, a lot of customers from that local market now to fill out that educated center. So it's a win-win scenario there. As I said before, we are in discussion with a couple different hyperscalers. What we're seeing in this data center space is that because there's not enough power for many of the larger data center parts to be had right this moment, many of the data center hyperscalers are taking a real hard look at using edge data centers, which don't require as much power in one location. In other words, they're kind of distributed. you know, out, you know, out amongst, you know, a particular area, it's easier to get power for them. And so they're looking at not only individual edge data centers at a particular location, but potentially small, what we call pod farms, you know, where you have, you know, 5, 10, you know, maybe up to 20 of these things in a single location that they don't draw nearly as much power. and they get the computing put out closer to where the customers need it. So we're going to see more of that, and I anticipate we'll probably be able to commercially talk about that in more detail. I'm going to bet here in the next quarter or two for sure, based on those discussions.

No, I appreciate that, Chuck.

You mentioned the scarcity of power for the large data center parks. Can you – provide any updates relating to your projects out in Tampa, the large park there.

Any additional commentary or timing you're expecting to have that operational? Yeah.

You know, we publicly thought, you know, we're absolutely committed to developing APR Energy is with Fortress Investment Group as a sponsor. And, of course, we're a part of that. The plans right now are to develop that data center part. We have progressed it to the point where we will close on actually owning the property there probably in the next two months. And then all of the studies and all the prep work that goes in is ongoing right now. So, you know, APR and their We'll make their final decision to progress that here in the next month or so. And when they do, they'll announce that. But I will say that there are other similar opportunities that look a lot like Tampa as well. So, you know, kind of watch this stage because this is an opportunity where we'll be assisting APR in providing, obviously, the temporary bridging behind the meter power. very likely a permanent power solution, and then the actual build-out of the data center park itself for one or two of the key hyperscalers that we're in discussions with right now.

Yeah, I really appreciate that color, Chuck. You submit maybe the remedial question, but considering the current portfolio of power is soon to be sold out, if you will,

how do you see that playing out in terms of allocating for new projects, whether it be Pampa or others that come on stream?

Anything that you can talk to would be appreciative.

Yeah, so our fleet of power turbines, obviously it's finite. And again, it will be obvious to those who are familiar with that business, I've been careful not to tell folks, at least in this call, the length of term of contracts and things like that. So, you know, very broadly, a lot of the work that we've contracted is for work to be performed this year, and it'll allow us to, it'll allow APR Energy and we'll benefit through the asset management agreement to monetize those assets very, very quickly, shortly after this shortly after the acquisition of these things. And then we have probably three or four very large behind-the-meter data center projects that are already lined up to take these assets. So effectively what we're trying to do is we're trying to maintain a very high utilization rate of those assets. That's the name of the game in that business is high utilization rate. I will say that the demand for this is so high, we are assisting APR Energy in evaluating opportunities to acquire additional assets so we can actually grow the overall value of the APR business. And, of course, for us, we benefit from that 5% ownership stake in that business. So it's a win-win for both companies.

I appreciate that, Chuck, answering the question. And congrats again. The progress has been really amazing. So good luck. Thanks very much. All right. Thanks, Dan. Appreciate it. Thank you. Ladies and gentlemen, this concludes the question and answer session.

I'll hand the call back to Mr. Clary for closing remarks. Yeah. Thanks very much, operator. Again, thanks to everybody that's on the call today. And again, just want to reiterate my thanks to all of our partners, our shareholders, our board members. And then a special thank you to the to the dual leadership and employee team that's making all this good stuff happen.

Thank you very much.

Before we conclude today's call, I would like to provide Rose's safe harbor statement that includes important cautions regarding forward-looking statements made during this call. This earnings call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking terminology such as believes, expects, may, will, should, anticipates, plans, and or opposites or similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are made. are based and could cause Duo Technologies Group Inc's actual results to differ materially from those anticipated by the forward-looking statements. These risks and uncertainties include, bar not limited to, those described in item 1A in Duo's annual report on Fuentense, which is expressly incorporated herein by reference, and other factors as may periodically be described in Duo's filing to the FTC. Thank you for joining us today for Duo Technologies Group's first quarter 2025 running call, even at disconnect.