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COMMITMENTS AND CONTINGENCIES
 9 Months Ended
Sep. 30, 2025
 Commitments and Contingencies (Note 9)  
COMMITMENTS AND CONTINGENCIES

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

Operating Lease Obligations

 

On July 26, 2021, the Company entered a new operating lease agreement for office and warehouse combination space of 40,000 square feet, with the lease commencing on November 1, 2021, and ending April 30, 2032. This new space combines the Company’s two separate work locations into one facility, which allows for greater collaboration and also accommodates a larger anticipated workforce and manufacturing facility. On November 24, 2021, the lease was amended to commence on December 1, 2021, and end on May 31, 2032. The Company recognized an ROU asset and operating lease liability in the amount of $4,980,104 at lease commencement. Rent for the first eleven months of the term was calculated based on 30,000 rentable square feet. The rent is subject to an annual escalation of 2.5%, beginning November 1, 2023. The Company made a security deposit payment in the amount of $600,000 on July 26, 2021. Per the contract, in the 18th month and every 12th month thereafter, the security deposit is reduced by $50,000 and now stands at $450,000. The right of use asset balance at September 30, 2025, net of accumulated amortization, was $3,748,465.

 

The office and warehouse lease has a remaining term of approximately 6.75 years and includes an option to extend for two renewal terms of five years each. The renewal options are not reasonably certain to be exercised, and therefore, they are not included when determining the lease term used to establish the right-of-use asset and lease liability. The Company also has several short-term leases, primarily related to equipment. The Company made an accounting policy election to not recognize short-term leases with terms of twelve months or less on the consolidated balance sheet and instead recognize the lease payments in expense as incurred. The Company has also elected to account for real estate leases that contain both lease and non-lease components (such as common area maintenance) as a single lease component.

 

The following table shows supplemental information related to leases:

 Schedule of supplemental information related to lease        
  

Nine Months Ended

September 30,

 
   2025   2024 
Lease cost:          
Operating lease cost  $586,228   $586,228 
Short-term lease cost  $15,351   $16,477 
           
Other information:          
Operating cash outflow used for operating leases  $597,672   $583,101 
Weighted average discount rate   9.0%   9.0%
Weighted average remaining lease term   6.75 years    7.75 years 

  

 

As of September 30, 2025, future minimum lease payments due under our operating leases are as follows:

 Schedule of future minimum lease payments due under the operating leases    
   Amount 
Calendar year:     
2025 (Remaining)  $200,884 
2026   818,518 
2027   838,984 
2028   859,856 
Thereafter   3,183,571 
   Total undiscounted future minimum lease payments   5,901,813 
Less: Impact of discounting   (1,527,592)
Total present value of operating lease obligations   4,374,221 
Current portion   (813,496)
Operating lease obligations, less current portion  $3,560,725 

 

On August 1, 2025, Duos Edge AI, Inc., a subsidiary of Duos Technologies Group, entered into a commercial ground lease with a term of ten years commencing upon delivery of a modular structure to the premises, with one five-year renewal option. Base monthly rent is $2,500 for the first year or until installation of a second modular structure, increasing to $3,500 thereafter. If renewed, monthly rent will be $4,300 during the renewal term. The lease requires the tenant to pay real estate taxes, common area maintenance charges, utilities, and maintain insurance coverage. Tenant is responsible for all costs associated with site preparation and installation of improvements, including modular structures and backup power systems.

 

As of September 30, 2025, future minimum lease payments due under this operating lease are as follows:

 

      
Calendar year:  Amount 
2025 (Remaining)  $7,500 
2026   35,000 
2027   42,000 
2028   42,000 
Thereafter   276,500 
Total undiscounted future minimum lease payments   403,000 
Less: Impact of discounting   (150,304)
Total present value of operating lease obligations   252,696 
Current portion   (32,000)
Operating lease obligations, less current portion  $220,696 
Weighted average discount rate   10.0%
Weighted average remaining lease term   9.84 years 

 

The present value of these payments is approximately $251,000, which was initially recorded as a lease liability and Right-of-use asset on the consolidated balance sheet, with $32,000 classified as a current liability and $220,696 as a non-current liability as of September 30, 2025. The Right-of-use asset was $248,438 at September 30, 2025. See Note 2 Summary of Significant Accounting Policies for the Company’s materiality threshold applied to lease accounting under ASC 842.

Schedule of supplemental information related to the lease     
   Nine Months Ended 
September 30,
2025		 
  Lease Cost:    
Operating lease cost  $6,758 
Cash outflow  $2,500 

 

Master Lease Agreement

 

On November 1, 2024, the Company entered into a Master Lease Agreement (“MLA”) for a total lease obligation of $2,662,282. The lease is structured with a repayment term of 66 months, with fixed monthly payments commencing on December 10, 2024. At the end of the lease term, the Company has the option to purchase the leased asset for $1.

 

In accordance with ASC 842, the lease is classified as a finance lease, as the $1 buyout option indicates a transfer of ownership. As a result, the Company has recorded a right-of-use asset and a corresponding lease liability on its balance sheet. Interest expense and amortization of the right-of-use asset is being recognized over the lease term. Management believes this lease structure supports the Company’s operational and financial objectives.

 

In the third quarter 2025, the Company exercised its purchase option under the Master Lease Agreement and settled the obligation early with a payment of $2,150,000. Accordingly, the Company derecognized the remaining lease liability of $2,079,697 and the related right-of-use asset of $1,868,359 and recorded the equipment as a fixed asset at $1,938,662. The $1,938,662 asset balance is the aggregate of the remaining right-of-use asset of $1,868,359 and the difference between the $2,150,000 repayment and the $2,079,697 remaining right-of-use liability.

 

The following table shows supplemental information related to the MLA:

 Schedule of supplemental information related to the lease        
  

Nine Months Ended

September 30,

 
   2025   2024 
Lease cost:          
Master Lease Agreement cost  $242,026   $— 
Short-term lease liability  $—   $— 
           
Other information:          
Operating cash outflow used for finance leases  $2,253,563   $— 
Weighted average discount rate   —    — 
Weighted average remaining lease term   —    —