A new pick

Edge AI, energy, inflection

As already hinted in my recent portfolio update a new name has been emerging of which I have yet to determine if it is a top pick or a good/great one. I like the setup enough already to take a significant position, but there are some open questions.

I am talking about Duos Technologies DUOT 0.00%↑ traded on the Nasdaq. It is a company I have become first aware of years ago but never got interested despite the interesting technology, due to what I perceived to be the worst capital structure I have ever seen in a debt free company. If I recall correctly, back then they had something like twice as many warrants as shares outstanding. Anyway, in 2024 I randomly came across the name again and became interested. The cap structure is much improved but not necessarily “clean”. And then something happened that convinced me this was going to be a pick. Check out the most recent slide deck.

The situation before November 2024

The company has changed significantly since I first looked at it years ago. Then it only had its railcar inspection technology. Basically, they build portals that allow real time inspection at speeds up to 125 mph and thus the detection of mechanical defects in railcars, which mitigates the need for manual inspection with out of service time and thus increases safety and efficiency. It is really quite impressive what they can do and they actually used AI before it was cool.

It is now a cloud-based solution with recurring revenues after they changed the business model. Truthfully, this has not been a huge success yet. Lack of resources, novel technology with slow adoption in a slow moving industry, long sales cycles, not the right strategy etc. But there is potential.

The company has changed management as well.

significant changes in the senior management team to include a new Chief Executive Officer, who joined the Company in September 2020 and has years of experience successfully leading start-up and turn-around companies. In addition, a key account executive from one of Duos’ competitors joined the team during late 2022 to support the continued revenue growth of the business bringing significant sales experience focused around the rail market. In the third quarter of 2023, the Company also brought on a new Chief Commercial Officer bringing significant experience from the sales and operations aspects of the intermodal and power industries. In 2021, the Company also hired a new Chief Technology Officer bringing 25 years of experience in designing and delivering value driven technologies. Our new CTO has already led the team through instrumental changes to its approach to software and artificial intelligence development. The team also saw a change in CFO in late 2022 with the new CFO bringing significant experience in growth for asset-intensive businesses which aligns with the subscription format the Company will expand into.

More on that later because it is a key aspect of the thesis.

Additionally, the company has entered a new market: edge data centers. The connection is that Duos already was building up know how in edge data centers since those were needed for their own portals to locally process the vast amounts of data in real time. But then they made a key hire: Doug Recker

Doug Recker is a renowned telecommunications industry veteran with over 30 years of experience successfully delivering multi-access Edge Data Center (“EDC”) and colocation services now leads the Duos Edge AI subsidiary’s initiatives to provide EDCs to remote districts, including schools and health facilities. Mr. Recker is responsible for managing, designing, implementing, and deploying EDC Infrastructure across the US for our client sites. He founded Edge Presence in 2017, which was sold to Ubiquity in 2023, and before that, he founded Colo5 Data Centers LLC, which was later acquired by Cologix, Inc. in 2014. The company installed over 40x TM2500s into power plants around the world.

Another good reference. So he is now leading Duos Edge AI and the potential is amazing. The company is so confident that they are publicly projecting $65M ARR by 2027 and $41M EBITDA. The pipeline is full.

Our plan is to have at least 15 Edge Data Centers deployed by the end of 2025, but Doug Recker and I are exploring options to accelerate that.

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there's $3.3 million of recurring revenue in '25 tied to the six you currently have

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15 Edge Data Centers that'll be put in incrementally starting now all the way through the end of 2025. So that $3.3 million really represents kind of an incremental build up to that 15

All of this got me interested in this $100M company. And then they announced what I perceived to be a great deal, but which turns out to be a home run.

Entering the power generation space with Fortress

They announced a deal with none other than Fortress Investment Group, whereby they would manage power generation assets (mobile gas turbines) with anticipated $42M in revenue over 2 years. Since the deal had not closed yet they wouldn’t talk in much detail about this on the conference call and specifically not about margins. But how does it all fit together and why power? Glad you asked.

I already mentioned the new management team. As it turns out the new CEO Chuck Ferry together with COO Chris King have been managing EXACTLY these assets in a prior life. In fact, Ferry was the CEO of APR Energy from 2018 to 2020 (he is even still listed under leadership as CEO). APR was then acquired by Atlas in a deal valued at $750M (!). Atlas went on to sell these assets again to Fortress Investment Group (notice the quote from Josh Pack, Co-CEO and Managing Partner at Fortress, he is one of the 3 top guys at Fortress). Needing someone to run these assets, who better to turn to than the guy who has done it previously and hence the partnership between Duos and Fortress.

But better yet, not only is Duos getting $42M in revenue over two years, they also disclosed upon closing of the transaction a 5% equity stake and that they already received $5M in cash. This is a real home run for Duos. We don’t know the value of the transaction and what those 5% could be worth, but we can make an educated guess:

The new owner of APR Energy, Atlas Corp, has reported US$60 million revenues and net profits of $7 million for the power rental company in the three months to 30 June.

It is the first full quarter results reported by Atlas since the completion of the APR acquisition at the end of February this year. No comparative quarterly results from 2019 were given in the release.

Atlas, which is quoted on the New York Stock Exchange, said its guidance for APR in 2020 was for revenues in the $190 to $220 million range (for the period from 29 February to 31 December), with EBITDA of between $110 and $130 million.

During the second quarter the company had 966 MW of power on rent, representing 68.4% utilisation of its fleet. That is an improvement from 65.4% in the first quarter of the year but compares to 72.3% in the second quarter of 2019.

So back then 966 MW power on rent did $110-130M EBITDA. Today we are talking about 850 MW. So presumably that could generate $100M in EBITDA very roughly. That could be worth $500M and the 5% for Duos would amount to $25M. Quite significant for a $100M mcap. And of course, Atlas also paid $750M for APR, but presumably in return for more than just these assets.

An open question is still what kinds of margins we can expect from those revenues. On the one hand I would think they cannot be too high, on the other hand there don’t seem to be indirect costs or many direct costs associated with it since current Duos personnel is managing the assets. We will see.

Note also that there are likely more such opportunities in the energy space for Duos and we can safely assume that those APR assets need someone to run them beyond the 2 year contract and why should that not be Duos as well.

Putting it all together

Apart from a brief spike, the stock has not much reacted to the Fortress deal, which is inconceivable to me. We know already that DUOT will be profitable in 2025 and they will show very strong revenue growth. They did about $3.2M revenue in Q3 2024 and $5.8 in the first 9 months. For all of 2024 it is maybe $9-10M. So even with no growth at all from the railcar business and Edge AI, just the Fortress deal alone would boost revenues by over 200% yoy for the whole year ($30M+). But I do expect significant growth at least from Edge AI. Additionally, the $5M received will eliminate liquidity issues and management has stated that they would only consider non-dilutive sources of capital going forward.

We could receive guidance for 2025 any day but at the latest in the upcoming full year 2024 earnings call (note, Duos will also present at The Microcap Conference 2025 on January 29). That is a significant catalyst for revaluation. I am not yet comfortable forecasting earnings in 2025 but I’d expect a couple million dollars maybe. But most importantly, this is an inflection point: From losing money and declining revenue to profitability and extreme revenue growth. This is often where the most money is made. Particularly since the company is not well followed and many who have known the company in the past have only the money losing and slow-moving railcar business in their heads.

One could rightfully ask how this all fits together and what edge the company is supposed to have, particularly in Edge AI. I am not yet sufficiently able to answer these questions for myself, in particular the last one. I would argue, the key is in the people and the skill set and experience they provide. Are they to be trusted though? Here I am very comfortable saying yes because, most of these guys have a military background, have been very successful in the past, and how can the involvement of Fortress not be a huge validation?

With all that I think the setup is fantastic. Certainly too good to pass upon.

I am not yet calling this a fat pitch or a top pick. But as we learn more it could turn into one.

Author’s Disclosure: I have a beneficial long position in the shares of DUOT either through stock ownership, options, or other derivatives, and I may buy or sell any of the stocks when you are reading this. I wrote this post myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. I am not a licensed securities dealer, broker or US investment adviser or investment bank.

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