NOTE 13 – 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 18^th month and every 12^th month thereafter, the security deposit is reduced by $50,000 and now stands at $450,000. The right of use asset balance at December 31, 2025, net of accumulated amortization, was $3,650,717.

The office and warehouse lease has a remaining term of approximately 6.5 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:

As of December 31, 2025, future minimum lease payments due under our operating leases are as follows:

The Company leases multiple land locations for deployment and operation of its modular edge data centers with monthly lease payments of $1 and a term of 5 to 10 years. Certain lease arrangements 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. 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., a subsidiary of the Company, 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, a subsidiary of the Company 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 for month until 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 December 31, 2025, future minimum lease payments due under these operating leases are as follows:

The present value of these payments is approximately $364,523, which was initially recorded as a lease liability and right-of-use asset on the consolidated balance sheet, with $53,000 classified as a current liability and $311,457 as a non-current liability as of December 31, 2025. The right-of-use asset was $357,561 as of December 31, 2025. See Note 1 Summary of Significant Accounting Policies for the Company’s materiality threshold applied to lease accounting under ASC 842.

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:

Executive Severance Agreement

Pursuant to a separation agreement with Gianni Arcaini, our former Chief Executive Officer and Chairman of the Board (the “Separation Agreement”), Mr. Arcaini’s employment with the Company ended on September 1, 2020 (“Separation Date”). The Separation Agreement provided that he would receive separation payments over a 36- month period equal to his base salary plus $75,000 as well as certain limited health and life insurance benefits. The Separation Agreement also contained confidentiality, nondisparagement and non-solicitation covenants and a release of claims by Mr. Arcaini. In accordance with the Separation Agreement, the Company paid to Mr. Arcaini the total sum of $747,788. On March 1, 2021, the Company paid to Mr. Arcaini a lump-sum amount equal to the first six months of payments, or $124,631, owed to Mr. Arcaini and the Company continued to pay him in semi-monthly installments for 30 months thereafter, as contemplated in Mr. Arcaini’s Separation Agreement. On November 21, 2024, the Company paid Mr. Arcaini a further $23,890 to settle a dispute concerning certain benefits that were claimed by him as part of the separation agreement. As a condition of this payment, Mr. Arcaini forfeited all of his equity in the Company consisting of 100,716 non-qualified stock options granted under the 2016 Equity Incentive Plan.