Duos Technologies Group, Inc.

Afternoon, and welcome to Duo Technologies' second quarter 2026 earnings conference call. Joining us for today's call are Duo's CEO, Doug Recker, and CFO, Adrian Goldfarb. Following their remarks, we will open the call to 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 Mr. Doug Recker. Sir, please go ahead.

Welcome, everyone, and thank you for joining us today. Earlier today, we issued our earnings press release, and we will file our 10-Q for Q2 2026 by Wednesday, August 19, 2026. Copies will be available in the investor relations section of our website. I encourage all listeners to view the press release and our 10-Q filing to better understand some of the details we'll be discussing during this afternoon's call. At a high level, the second quarter represented another important step in our transformation into a data center and AI infrastructure company. Throughout the quarter, we continued executing on our strategy of expanding our edge data center platform, growing Duo's technology solutions and advancing several key strategic initiatives designed to support long-term revenue growth and profitability. While Adrian will provide details on the quarter's financial performance, I'd like to spend a few minutes discussing the key operational developments and strategic progress we made during the quarter. Beginning with the rail business, I'm pleased to report that we have successfully completed the sale of Duos Technologies, Inc. on August 5th. Post-transaction, Duos Technologies, Inc. has become an independent, privately held company operating under the Duos TI brand and led by Javier Acosta as president. This transaction represents the completion of the strategic repositioning initiative we announced earlier this year. By completing this divestiture, we are now able to dedicate our capital, management, resources, and operating focus entirely towards scaling Duo's Edge and Duo's technology solutions. We believe this streamlined structure will allow us to accelerate execution, improve organizational focus, Thank you. Thank you. Our attention is centered on executing our deployment strategy, expanding customer relationship, and converting our growing backlog and pipeline into long-term recurring revenue streams. Now, separately, new APR Energy sold substantially all of its assets during the quarter. As a reminder, we held a 5% stake in the APR parent company, and the sale value of our interest at approximately $16 million. We received $50.4 million in cash with the remaining $10 million subject to a 12-month holdback that is recorded as a receivable on our balance sheet. Combined with the rail divestiture, these transactions essentially complete our full transition to a data center operation where we also materially strengthen our cash position to execute against the opportunity ahead. Looking beyond 2026, we believe the strengths Thank you for joining us today. Devon brings years of experience driving growth in the digital infrastructure business, including with SBA and, more recently, Telstra InfraGo. And he will help drive execution across our edge data centers and technology solutions platforms. We are also in the final stages of our search for a new CFO with significant public market experience. We look forward to sharing more details as that process concludes. We believe this addition further strengthens our ability to execute against the growth opportunities ahead. With those updates addressed, I'd now like to turn to our core business growth opportunities, Duo's Technology Solutions and Duo's Edge AI. Okay, now get your popcorn ready because it's about to get really exciting. Let's start with the technology solutions. This business continues getting traction and remains an important component of our growth strategy. During the quarter, revenues totaled approximately $3.23 million, driven primarily by continued growth in the data center deployments and the trust that these operators and our ability to secure and deliver critical equipment, they need to keep their projects on time. We also increased our backlog to $25 million, demonstrating the continued demand for our services here from enterprise, contractors, data center operators, and AI infrastructure players. The opportunity remains significant because this business allows us to generate revenue with relatively low capital requirements while also supporting our own infrastructure deployments. We remain encouraged by the opportunities we're seeing in the market today. Our growth continues to be driven by the strategic relationships we've built in a relatively short period of time. We're focused on delivering solutions in market-facing, unprecedented timing, demands, and supply constraints. We've secured strategic MSA contracts, proven our ability to deliver, and continue to gain traction with our manufacturing and vendor partners. Today, data center operators, contractors, and hyperscalers need more traditional order takers. They need partners who can pivot quickly and navigate the largest boom in the industry has ever seen. That's exactly our technology solutions team brings to market, solutions. and Ferdous Edge AI, the demand environment for AI infrastructure remains exceptionally strong. One of the most significant developments since our last earning call was signing of a five-year co-location agreement with Axe Compute, Inc., an Eocloud infrastructure platform to provide 10 megawatts of critical IT load capacity out of Columbus, Georgia campus. This agreement is valued at more than $111 million in contracted revenue. over the initial term and is expected to become operational during the fourth quarter of 2026. We believe this agreement is an important validation of our strategy to develop owned, high-density AI infrastructure in attractive markets where power availability, speed of deployment, and operational flexibility are critical to customers. It also demonstrates the increasing demand we are seeing for large-scale AI and cloud customers seeking scalable infrastructure solutions outside traditional Tier 1 markets. And as announced earlier today, that relationship has now taken a major step forward. Together with Axe Compute, we announced new service orders adding up to 55 megawatts of AI data center capacity across multiple U.S. locations under a five-year agreement, an expansion that builds directly on the 10-megawatt deployment we are planning to deliver at our Georgia facility. The agreements represent an expected $500 million-plus in aggregate base payments over their initial five-year term. As part of the expansions, the parties have entered into a related agreement contemplating aggregate cash equity investments by Axe Compute of up to $140 million in the projects, subject to required approvals, financing, financial technical design, and other conditions. Axe Compute and Duos will jointly own the new data centers, with Duos holding 51% and Axe Compute holding 49%. For Duos, this structure provides a non-dilutive financing model that allows us to launch more data centers faster. Initial project readiness is targeted to begin in late 2026 and continue in early 2027, subject to construction, commissioning, and performance testing. That demand is evident across our pipeline and customer engagement activity. During the quarter, we hosted an open house in several markets, including Lubbock, Dumas, Hereford, and Abilene, providing prospective customers, community leaders, and strategic partners the opportunity to see our deployments firsthand. For example, we recently announced an opportunity with zero latency company, OLAC, covering up to 15 sites and 225 cabinets. which speaks to the level of interest we're seeing across that portfolio. Beyond these markets development efforts, we also continue making progress with NYSTAR. This quarter, we continue to expect deployment activities to progress in line with our planned mutual deployment schedule. As a reminder, this deal represents approximately 2 megawatt of contracted capacity and serves as another important validation of our edge data center platform and our ability to support customers with high-density AI compute requirements. Importantly, the nine-star agreement is expected to contribute recurring co-location revenue as capacity comes online in customer utilization ramps. While revenue recognition will be dependent on final deployment and timing operational commencement, we believe the project provides another meaningful building block and our path towards establishing a larger portfolio of recurring infrastructure revenue. Put together with our Columbus announcement and the AXE compute expansion, these agreements validate our edge data center strategy and support our confidence in future growth. Now turning to Hydrohost, the Hydrohost deployment remains one of the most significant opportunities in the company's history and continues to serve as a cornerstone of our growth strategy. During the quarter, we continue making progress on deployment activities and customer onboarding. We visited our Columbus facility last week, hosted by our customer. They were very impressed with our quality and speed of deployment and the progress we've been able to make in just a few weeks. We remain focused on bringing additional capacity online and supporting customer utilization as deployment progresses. Revenue recognition is expected to increase as systems become operational, and GPU Capacity is placed in service. From a financial standpoint, we continue to benefit from the strong contractual foundation of the agreement, including customer deposits already received and additional funding milestones expected to be completed pursuant to the contract terms. Most importantly, we believe this relationship provides meaningful expansion opportunities beyond the initial deployment. The growing demand for AI training, inference, and high-performance computing workloads continues to create opportunities for additional capacity. We remain engaged in discussions regarding future expansion scenarios. Overall, we are encouraged by the progress that they continue to believe this relationship positions to us to participate meaningfully in the rapidly expanding AI infrastructure market. Regarding capacity expansion, We continue to execute our nationwide deployment strategy. Our goal for 2026 remains approximately 25 megawatt, and we are 100% on plan to achieve that milestone. We also continue to evaluate opportunities to accelerate deployments where customer demand and power availability support attractive economics. As we've discussed previously, our strategy is not simply to add capacity, but to deploy capacity in locations where power, connectivity, and customer demand align to create long-term value. The demand environment remains highly favorable, and we believe our modular approach provides us with the flexibility to scale efficiently while maintaining a disciplined approach to capital deployment. As a result, we remain confident in our ability to continue expanding our edge data center footprint, in support of both existing customer commitments and future opportunities. We believe the trends we are seeing continue to support our business model and long-term growth opportunities. As we look beyond this year, we expect the combination of contracted backlog and expanding pipeline and additional capacity coming online to continue driving growth into 2027, and we will remain focused on translating that visibility into durable long-term sharehold value. Now we'd like to turn it over to our CFO, Adrian Goldfarb, who will go over our financials for the second quarter of 2026. Adrian? Thank you, Doug.

This was the most consequential quarter in the company's history, and it completed our transformation. During the quarter we signed, and on August 5th closed, the divestiture of our legacy rail business, which is now reported as discontinued operations for all periods presented. We also brought the APR chapter to a close. The asset management agreement was amended beginning in the first quarter to reduce the scope of services and the related revenues are winding down with minimal amounts expected through the third quarter. The staff supporting the agreement and their full cost base have transferred out. In May, new APR sold substantially all of its assets and that sale crystallized the value of our 5% interest at approximately $60 million. We received $50.4 million in cash with the remaining $10 million subject to a 12-month holdback and carried as a receivable on our balance sheet. Against a $7.2 million carrying value, the transaction generated a $53.2 million gain. Our H-Data Center and AI infrastructure model is now our sole operating focus and when I speak to results today, I'm speaking to continuing operations unless I say otherwise. I will now walk through our second quarter 2026 financial performance and highlight the key drivers of our business. Total revenue from continuing operations for Q2 2026 increased 30% to $6.18 million compared to $4.77 million in the second quarter of 2025 as now presented to exclude the divested rail business. Composition tells the story of the pivot. Technology Solutions contributed $3.23 million, our largest revenue line, against a zero year ago. Related party services and consulting revenue was $2.91 million, which included $2.71 million of one-time accelerated recognition of the remaining APR deferred revenue. Go-forward AMA revenue will be minimal as it winds down through the third quarter. hosting revenues just beginning to build. For the six months ended June 30, 2026, total revenues were $8.32 million compared to $8.68 million in the same period last year. The modest headline decline is the pivot working as designated. AMA revenue declined $4.2 million on the wind down, while Technology Solutions added $3.8 million from a standing start. Cost of revenues for Q2 2026 decreased 9% to $2.73 million compared to $2.99 million for Q2 2025. For the six months, cost of revenues decreased 32% to $3.82 million from $5.65 million in the same period last year. The decrease reflects the wind-down of the low-margin AMA pass-through cost structure. Growth margin for Q2 2026 increased 94% to $3.45 million or 55.8% of revenue compared to $1.78 million or 37.3% for Q2 2025. For the six months, gross margin increased 48% to $4.5 million or 54.1% of revenue from $3.03 million or 34.9% in the same period last year. This improvement in margin quality is structural, not seasonal. It reflects the shift of our revenue base towards technology solutions and infrastructure services. Operating expenses for Q2 2026 were $3.4 million, up 2% compared to $3.32 million for Q2 2025. Over six months, operating expenses were $7.63 million compared to $5.11 million in the same period last year. The first half increase carries deliberate investment, growth hiring, public company costs, and stock-based compensation put in place ahead of the second half revenue ramp. Income from operations for Q2 2026 was approximately $50,000, compared to a loss from operations of $1.54 million for Q2 2025, a significant improvement in moving towards profitability as a data center infrastructure company. For the sixth month, the loss from operations was $3.13 million compared to $2.07 million in the same period last year, reflecting the first quarter investment period ahead of revenue, the increase being largely the result of non-cash compensation. Including the $53.2 million gain on the sales investments, income from continuing operations before income taxes was $53.6 million for the quarter. After an income tax provision of $5 million, net income from continuing operations was $48.7 million, compared to a loss of $1.6 million in Q2 2025. The loss from discontinued operations narrowed to $0.8 million from $1.9 million. The consolidated net income for Q2 2026 was $47.8 million, compared to a net loss of $3.5 million from Q2 2025. Basic earnings per share of $1.61 from continuing operations and diluted earnings per share of $1.37 and a loss of $0.14 per share in the same period last year, also from continuing operations. For the six months, consolidated net income for continuing operations was $45.6 million, or $1.70 per basic share, and $1.41 per diluted share, compared to a net loss of $5.6 million, or a loss of $0.21 per share, in the same period last year. As we discussed on previous earnings polls, returning to positive adjusted EBITDA has been an important milestone for the company. I'm pleased to report that we got there ahead of plan. Adjusted EBITDA for Q2 2026 was positive at approximately half a million dollars, excluding the one-time gain on sales investments and stock-based compensation. We expect adjusted EBITDA to remain positive in both remaining quarters of 2026, with meaningful expansion in the fourth quarter as the GPU deployment wraps. Shifting to the balance sheet, the company ended Q2 2026 with $112.3 million in cash compared to $15.5 million at December 31, 2025, and stockholders' equity of $207.4 million. The increase reflects the $50.4 million received from the sale of substantially ordered assets of UAPR Energy, our March public offering, and our $55 million registered direct offering completed in June with a single large institutional investor. We are effectively debt-free, with no borrowings beyond a small insurance financing balance. Columbus Seller Note and our planned GPU senior debt associate arrive in the second half of our design, matched against the assets that they fund. The number I'm most proud of this quarter is operating cash flow. Cash provided by operating activities from continuing operations was positive $11.9 million for the first half, a swing of nearly $20 million from the prior year. Our customers are funding our growth, $18.8 million of long-term deferred revenue, which includes the customer prepayment under our GPU program. sits on our balance sheet. Offsetting the $50.4 million gain on investment, we're investing outflows of $77.1 million with staged growth capital, $68.8 million of deposits against our GPU equipment program, $5.8 million of deposits on real estate, and edge data construction, assets that begin producing revenue in the second half. Thus, towards its quarter end, we completed the $30 million acquisition of our Columbus, Georgia data center, structured capital efficiently with $15 million in cash and a $15 million zero-coupon seller note repaid only as incremental power is delivered to the site. Columbus is being equipped to support 2,304 NVIDIA B300 GPUs. Put together, our financial position gives us the ability to meaningfully deploy capital to support our expected growth in the second half and beyond. Turning to our outlook, I want to be explicit about our guidance philosophy. We guide to what is contracted, deposited, and scheduled, not to what is possible. Our outlook assumes no acceleration in GPU energization and no contribution from transactions that are not closed. At the end of the second quarter, the company's bookings represented approximately $43.5 million in revenue, all of which is expected to be recognized during the year, including contracted backlog and near-term anticipated awards. In addition, approximately $1.1 million of contracted technology solutions to close revenue recorded in 2025 will be recognized as revenue in 2026, further supporting the company's performance. Based on these committed contracts and near-term pending orders that are already performing or are scheduled to be executed through the remainder of 2026, we are reconfirming our expectation for total revenue in 2026 to exceed $50 million. Let me briefly walk through how we bridge from $6.18 million of QQ revenue to our full-year target. Our GPU as a service business is the primary driver, which we expect to contribute approximately $26 million. and the deployment comes online and utilization ramps in the second half. In addition, we expect approximately $25 million from our technology solutions backlog, a solid base of committed revenue that includes $2.9 million currently recorded as deferred revenue to be recognized in the second half. We remain confident in this outlook given the accelerating demand for our edge data center model, continued customer expansions, new hosting deployments, and continued capacity build-out. On profitability, we expect positive adjusted EBITDA in both the third and fourth quarters, with fourth quarter adjusted EBITDA in the range of $8 to $10 million. The way to understand 2027 is through our fourth quarter exit rate. In the fourth quarter of 2026, we expect recurring infrastructure revenue, GPU as a service co-location and hosting, of approximately $17 to $18 million. which represent an expected annualized recurring revenue exit run rate in excess of $70 million, contracted under multi-year agreements and carrying gross margins well above 70%. For full year 2027, our early framework calls for total revenues of at least $160 million. A full year of the GPU program, a full year of our contracted co-location deployments now in development, and continued growth in technology solutions. That framework includes only announced and contracted programs. Additional site acquisitions and point of substructures in our pipeline will be incremented. We expect adjusted EBITDA margins to expand very significantly in 2027 as the recurring revenue base scales against a substantially fixed cost structure, and we will provide formal 2027 guidance with our third quarter results. Six months ago, this company was a rail inspection business with an asset management side agreement. Today, it is a funded, effectively debt-free data center infrastructure company with $112 million in cash, positive operating cash flow, 2,304 NVIDIA B300 GPUs being installed in a facility we own, and a contracted path to an annualized recurring revenue exit rate above $70 million. The pivot is complete. Now we execute. Doug, I'll send it back to you for your final comments. Thank you, Adrian. I told you it was going to be exciting stuff.