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COMMITMENTS AND CONTINGENCIES | 3 Months Ended
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Mar. 31, 2026
Commitments and Contingencies (Note 13) |
COMMITMENTS AND CONTINGENCIES | NOTE 13 – COMMITMENTS AND CONTINGENCIES Operating Lease Obligations Office Lease 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. On November 24, 2021, the lease was amended to commence on March 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 March 31, 2026 and December 31, 2025, net of accumulated amortization, was $3,550,592 and $3,650,717, respectively. The office and warehouse lease has a remaining term of approximately 6.25 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 MLA |  |  |  |  |  |
|  | Three Months Ended March 31, |
|  | 2026 |  |  | 2025 |
Lease cost: |  |  |  |  |  |  |  |
Operating lease cost |  | $ | 195,409 |  |  | $ | 195,409 |
Short-term lease cost |  | $ | 7,834 |  |  | $ | 5,303 |
Other information: |  |  |  |  |  |  |  |
Operating cash outflow used for operating leases |  | $ | 204,204 |  |  | $ | 199,224 |
Weighted average discount rate |  |  | 9.0 | % |  |  | 9.0 | %
Weighted average remaining lease term |  |  | 6.25 years |  |  |  | 7.25 years |
As of March 31, 2026, future minimum lease payments due under our office operating leases are as follows:
Schedule of future minimum lease payments due under the operating lease |  |  |
|  | Amount |
Calendar year: |  |  |  |
2026 |  | $ | 614,314 |
2027 |  |  | 838,984 |
2028 |  |  | 859,856 |
2029 |  |  | 880,357 |
Thereafter |  |  | 2,303,214 |
Total undiscounted future minimum lease payments |  |  | 5,496,725 |
Less: Impact of discounting |  |  | (1,334,643 | )
Total present value of operating lease obligations |  |  | 4,162,082 |
Current portion |  |  | (823,625 | )
Operating lease obligations, less current portion |  | $ | 3,338,457 |
Land Leases The Company leases multiple land locations for deployment and operation of its modular edge data centers with varying monthly lease payments. Certain lease arrangements include $1 monthly payments, while others include variable payments from the Company to the landlords under revenue sharing arrangements calculated as a percentage of revenues generated from colocation services at the respective sites or the provision of a free rack within the data center valued at fair market value. Variable lease payments are excluded from the measurement of operating lease liabilities and will be expensed in the period incurred. Additionally, certain landlords for these sites may also be customers of the Company in the future whereby they will rent server rack space in the data centers. On August 1, 2025, Duos Edge AI, Inc. 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. On December 1, 2025, Duos Edge AI 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 $1,500 until the renewal term. The lease requires the tenant to pay real estate taxes, common area maintenance charges and 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. On September 1, 2025, Duos Edge AI, Inc. entered into a commercial ground lease with an effective date of November 1, 2025 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 $1 until installation of the modular structure, increasing to $1,801 due to a provision in the lease agreement that allows the lessor a free rack with fair market value of $1,800 during the lease term. The lease requires the tenant to pay real estate taxes, common area maintenance charges, and 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. On December 16, 2025, Duos Edge AI, Inc. entered into a commercial ground lease effective March 1, 2026 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 $1 until installation of the modular structure, increasing to $1,801 due to a provision in the lease agreement that allows the lessor a free rack with fair market value of $1,800 during the lease term. The lease requires the tenant to pay real estate taxes, common area maintenance charges, and 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 March 31, 2026, the minimum lease payments due under these land operating leases are as follows:
Schedule of future minimum lease payments due under the operating lease |  |  |
Calendar year: |  | Amount |
2026 |  | $ | 68,018 |
2027 |  |  | 103,224 |
2028 |  |  | 103,224 |
2029 |  |  | 103,224 |
Thereafter |  |  | 600,344 |
Total undiscounted future minimum lease payments |  |  | 978,034 |
Less: Impact of discounting |  |  | (353,311 | )
Total present value of operating lease obligations |  |  | 624,723 |
Current portion |  |  | 93,824 |
Operating lease obligations, less current portion |  | $ | 530,899 |
Weighted average discount rate |  |  | 10.0 | %
Weighted average remaining lease term |  |  | 9.6 years |
The present value of these payments is approximately $624,722, which was initially recorded as a lease liability and right-of-use asset on the consolidated balance sheet, with $93,824, classified as a current liability and $530,899 as a non-current liability as of March 31, 2026. The right-of-use asset was $604,885 as of March 31, 2026. See Note 1 for the Company’s materiality threshold applied to lease accounting under ASC 842.
Schedule of lease accounting |  |  |
|  | March 31, 2026 |
Lease Cost: |  |  |  |
Operating lease cost |  | $ | 25,003 |
Cash outflow |  | $ | 12,004 |
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 was 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 had 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 was 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 MLA 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 MLA |  |  |  |  |  |
|  | Three Months Ended March 31, |
|  | 2026 |  |  | 2025 |
Lease cost: |  |  |  |  |  |  |  |
Master Lease Agreement cost |  | $ | — |  |  | $ | 121,013 |
Short-term lease cost |  | $ | — |  |  | $ | 487,695 |
Other information: |  |  |  |  |  |  |  |
Operating cash outflow used for finance leases |  | $ | — |  |  | $ | 11,700 |
Weighted average discount rate |  |  | — |  |  |  | 8.63 | %
Weighted average remaining lease term |  |  | — |  |  |  | 5.17 years |
GPU-as-a-Service Arrangement The Company has entered into a master service agreement with Hydra Host, Inc. containing commitments to key vendors to purchase GPU servers, networking equipment, and related infrastructure to support its GPU as a service operations. Hydra Host Inc., as the operator under the arrangement, will arrange asset purchases with vendors and configure, install, operate, and maintain the servers on the Company’s behalf and secure a customer for the Company. As of March 31, 2026, the aggregate estimated cost of these commitments is approximately $145 million. The Company deposited $35.42 million with Hydra Host as of March 31, 2026 to secure the respective GPUs and server assets from third party vendors. Since under the arrangement the risk of loss for the purchased equipment does not transfer to the Company until the equipment is delivered, this deposit is included in Deposits on equipment in the accompanying consolidated balance sheet as of March 31, 2026. The remaining commitments are expected to be funded through a combination of senior debt financing and customer prepayments. The Company will secure senior debt financing to fund approximately 70% of its GPU infrastructure investments after approximately $43.5 million in funding has been provided to the GPU vendor through Hydra Host. The debt will be secured by the underlying GPU server assets which the Company is required to insure and will include customary covenants and reserve requirements. Interest rates vary based on market conditions and the future customer risk profile. As of March 31, 2026, Hydra Host has secured a customer for the Company and this customer provided a deposit of $15,000,000 to the Company in May 2026. Revenue will be significantly concentrated with a single customer agreement for use of all purchased GPU servers. In the arrangement, the Company bears the full risk of customer nonpayment, as the third party operator, Hydra Host, does not guarantee customer credit performance. Management will monitor customer payment history and credit exposure on an ongoing basis. The Company will retain ownership of the GPU servers at the conclusion of the customer contract and is exposed to residual value risk related to changes in technology, pricing, and market demand. The Company will evaluate GPU server assets and related deposits on equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

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