# Duos Technologies Group, Inc. (DUOT) 10-Q SEC filing - Q1 FY2026
- Filed: May 15, 2026, 4:32 PM EDT
- Fiscal quarter: Q1 FY2026
- Calendar quarter: Q1 2026
- Accession: 0001553350-26-000088
- OpenCapital page: https://www.opencapital.sh/filings/0001553350-26-000088
- Markdown URL: https://www.opencapital.sh/filings/0001553350-26-000088.md
- Official SEC filing index: https://www.sec.gov/Archives/edgar/data/1396536/000155335026000088/0001553350-26-000088-index.htm
## Filing documents
- [10-Q (duos_10q-033126.htm)](https://www.sec.gov/Archives/edgar/data/1396536/000155335026000088/duos_10q-033126.htm)
---
## 10-Q
SEC source: [duos_10q-033126.htm](https://www.sec.gov/Archives/edgar/data/1396536/000155335026000088/duos_10q-033126.htm)
**UNITED STATES**
**SECURITIES AND EXCHANGE COMMISSION**
**WASHINGTON, D.C. 20549**
**FORM 10-Q**
☒ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
**For the quarterly period ended March 31, 2026**
**OR**
☐ **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
**For
the transition period from ________________ to ________________**
Commission file number 000-55497
**Duos Technologies Group, Inc.**
*(Exact name of registrant as specified in its charter)*
**Florida** **65-0493217**
*(State or other jurisdiction of*
*incorporation or organization)* *(IRS Employer Identification No.)*
**7660 Centurion Parkway, Suite 100, Jacksonville,Florida 32256**
*(Address of principal executive offices)*
**(904) 296-2807**
*(Registrant’s telephone number, including
area code)*
Securities registered pursuant to Section 12(b)
of the Act:
**Title of each class** **Trading Symbol(s)** **Name of each exchange on which registered**
**Common Stock, par value $0.001** **DUOT** **The Nasdaq Capital Market**
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting Company, or an emerging growth Company.
See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting Company,” and
“emerging growth Company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting Company ☒
Emerging growth Company ☐
If
an emerging growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 6, 2026,
the registrant has one class of common equity, and the number of shares outstanding of such common equity is 29,323,469.
**TABLE OF CONTENTS**
| | **PART I – FINANCIAL INFORMATION** | |
| --- | --- | --- |
| Item 1. | [Financial Statements](#a_001) | 1 |
| Item 2. | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](#a_002) | 46 |
| Item 3. | [Quantitative and Qualitative Disclosures about Market Risk](#a_003) | 57 |
| Item 4. | [Controls and Procedures](#a_004) | 57 |
| | **PART II – OTHER INFORMATION** | |
| Item 1. | [Legal Proceedings](#a_005) | 58 |
| Item 1A. | [Risk Factors](#a_006) | 58 |
| Item 2. | [Unregistered Sales of Equity Securities and Use of Proceeds](#a_007) | 58 |
| Item 3. | [Defaults Upon Senior Securities](#a_008) | 58 |
| Item 4. | [Mine Safety Disclosures](#a_009) | 58 |
| Item 5. | [Other Information](#a_010) | 58 |
| Item 6. | [Exhibits](#a_011) | 59 |
[SIGNATURES](#a_012) 60
i
**PART I FINANCIAL INFORMATION**
## Item 1. Financial Statements.
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
### CONSOLIDATED BALANCE SHEETS
| Line item | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| | (unaudited) | |
| ASSETS | | |
| CURRENT ASSETS: | | |
| Cash | $33,030,791 | $15,472,229 |
| Accounts receivable, net | 2,538,189 | 730,211 |
| Accounts receivable, net - related parties | 688,214 | 5,304,231 |
| Lease receivable | 35,831 | 35,361 |
| Contract assets | 3,772,388 | 741,722 |
| Inventory | 306,759 | 306,759 |
| Prepaid expenses and other current assets | 979,713 | 489,071 |
| Total Current Assets | 41,351,885 | 23,079,584 |
| Inventory - non current, net | 391,770 | 391,770 |
| Deposits on equipment | 41,230,217 | — |
| Lease receivable, less current portion | 218,493 | 227,629 |
| Property and equipment, net | 27,630,520 | 27,737,806 |
| Operating lease right of use asset - Office Lease, net | 3,550,592 | 3,650,717 |
| Operating lease right of use asset - Land, net | 604,885 | 357,561 |
| Security deposit | 450,000 | 450,000 |
| OTHER ASSETS: | | |
| Equity Investment - Sawgrass APR Holdings LLC | 7,233,000 | 7,233,000 |
| Patents and trademarks, net | 193,342 | 186,073 |
| Software development costs, net | 62,358 | 95,275 |
| Total Other Assets | 7,488,700 | 7,514,348 |
| TOTAL ASSETS | $122,917,062 | $63,409,415 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| CURRENT LIABILITIES: | | |
| Accounts payable | $4,447,654 | $4,860,782 |
| Notes payable - financing agreements | 442,454 | 2,041 |
| Accrued expenses | 496,767 | 306,205 |
| Operating lease obligation - Office Lease | 823,625 | 818,519 |
| Operating lease obligation- Land | 93,824 | 53,000 |
| Contract liabilities, current - Technology Systems | 92,303 | 134,331 |
| Contract liabilities, current - Technology Solutions | 2,896,585 | 1,132,164 |
| Contract liabilities, current - Services and consulting | 166,449 | 169,369 |
| Contract liabilities, current - related parties | 2,712,375 | 3,616,500 |
| Total Current Liabilities | 12,172,036 | 11,092,911 |
| Operating lease obligation - Office Lease, less current portion | 3,338,457 | 3,452,481 |
| Operating lease obligation - Land, less current portion | 530,899 | 311,457 |
| Total Liabilities | 16,041,392 | 14,856,849 |
| Commitments and Contingencies (Note 13) | | |
| STOCKHOLDERS' EQUITY: | | |
| Preferred stock: $0.001 par value, 10,000,000 authorized, 9,441,000 shares available to be designated | | |
| Series A redeemable convertible preferred stock, $10 stated value per share, 500,000 shares designated; 0 and 0 issued and outstanding at March 31, 2026 and December 31, 2025, respectively, convertible into common stock at $6.30 per share | — | — |
| Series B convertible preferred stock, $1,000 stated value per share, 15,000 shares designated; 0 and 0 issued and outstanding at March 31, 2026 and December 31, 2025, respectively, convertible into common stock at $7 per share | — | — |
| Series C convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 0 and 0 issued and outstanding at March 31, 2026 and December 31, 2025, respectively, convertible into common stock at $5.50 per share | — | — |
| Series D convertible preferred stock, $1,000 stated value per share, 4,000 shares designated; 999 and 999 issued and outstanding at March 31, 2026 and December 31, 2025, respectively, convertible into common stock at $3.00 per share | 1 | 1 |
| Series E convertible preferred stock, $1,000 stated value per share, 30,000 shares designated; 12,500 and 12,500 issued and outstanding at March 31, 2026 and December 31, 2025, respectively, convertible into common stock at $2.61 per share | 13 | 13 |
| Series F convertible preferred stock, $1,000 stated value per share, 5,000 shares designated; 0 and 0 issued and outstanding at March 31, 2026 and December 31, 2025, respectively, convertible into common stock at $6.20 per share | — | — |
| Common stock: $0.001 par value; 500,000,000 shares authorized, 29,558,377 and 20,449,462 shares issued, 29,557,053 and 20,448,138 shares outstanding at March 31, 2026 and December 31, 2025, respectively | 29,559 | 20,449 |
| Additional paid-in-capital | 194,698,834 | 132,892,595 |
| Accumulated deficit | (87,695,285) | (84,203,040) |
| Sub-total | 107,033,122 | 48,710,018 |
| Less: Treasury stock (1,324 shares of common stock at March 31, 2026 and December 31, 2025) | (157,452) | (157,452) |
| Total Stockholders' Equity | 106,875,670 | 48,552,566 |
| Total Liabilities and Stockholders' Equity | $122,917,062 | $63,409,415 |
See accompanying condensed notes to the unaudited
consolidated financial statements.
1
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
### CONSOLIDATED STATEMENTS OF OPERATIONS
_(Unaudited)_
| Line item | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 |
| --- | --- | --- |
| REVENUES: | | |
| Technology systems | $44,259 | $64,684 |
| Technology solutions | 562,454 | — |
| Services and consulting | 532,467 | 972,751 |
| Services and consulting - related parties | 1,552,572 | 3,914,750 |
| Hosting Revenue | 30,275 | — |
| Total Revenues | 2,722,027 | 4,952,185 |
| COST OF REVENUES: | | |
| Technology systems | 17,545 | 232,264 |
| Technology solutions | 506,570 | — |
| Services and consulting | 4,254 | 748,194 |
| Services and consulting - related parties | 543,857 | 2,658,068 |
| Hosting | 39,433 | — |
| Total Cost of Revenues | 1,111,659 | 3,638,526 |
| GROSS MARGIN | 1,610,368 | 1,313,659 |
| OPERATING EXPENSES: | | |
| Sales and marketing | 488,847 | 294,975 |
| Research and development | — | 424,431 |
| General and administrative | 4,753,067 | 2,383,881 |
| Total Operating Expenses | 5,241,914 | 3,103,287 |
| LOSS FROM OPERATIONS | (3,631,546) | (1,789,628) |
| OTHER INCOME (EXPENSES): | | |
| Interest expense | — | (322,577) |
| Interest income on lease receivable | 3,440 | — |
| Interest income | 83,559 | 32,728 |
| Other Income (expense) | — | (186) |
| Realized gain on sale of investments | 52,302 | — |
| Total Other Income (Expenses), net | 139,301 | (290,035) |
| NET LOSS | $(3,492,245) | $(2,079,663) |
| Basic and Diluted Net Loss Per Share | $(0.15) | $(0.18) |
| Weighted Average Shares-Basic and Diluted | 23,618,144 | 11,390,016 |
See accompanying condensed notes to the unaudited
consolidated financial statements.
2
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**
**FOR THE THREE MONTHS ENDED MARCH 31,
2026 and 2025**
**(Unaudited)**
| Line item | Preferred Stock D / # of Shares | Preferred Stock D / Amount | Preferred Stock E / # of Shares | Preferred Stock E / Amount | Common Stock / # of Shares | Common Stock / Amount | Additional / Paid-in- Capital | Accumulated Deficit | Treasury Stock | Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance December 31, 2024 | 1,299 | $1 | 13,500 | $14 | 8,922,576 | $8,921 | $76,777,856 | $(74,368,009) | $(157,452) | $2,261,331 |
| Series D convertible preferred stock converted to common stock | (300) | — | — | — | 100,000 | 100 | (100) | — | — | — |
| Common stock issued for cash under ATM | — | — | — | — | 633,683 | 634 | 3,954,306 | — | — | 3,954,940 |
| Stock options compensation | — | — | — | — | — | — | 22,030 | — | — | 22,030 |
| Restricted stock compensation | — | — | — | — | 1,961,898 | 1,962 | 950,011 | — | — | 951,973 |
| Stock issuance costs | — | — | — | — | — | — | (138,226) | — | — | (138,226) |
| Stock options exercised | — | — | — | — | 27,712 | 28 | 107,897 | — | — | 107,925 |
| Stock issued for services | — | — | — | — | 9,360 | 9 | 49,991 | — | — | 50,000 |
| Stock compensation under ESPP | — | — | — | — | — | — | 21,644 | — | — | 21,644 |
| Net loss for the three months ended March 31, 2025 | — | — | — | — | — | — | — | (2,079,663) | — | (2,079,663) |
| Balance March 31, 2025 | 999 | $1 | 13,500 | $14 | 11,655,229 | $11,654 | $81,745,409 | $(76,447,672) | $(157,452) | $5,151,954 |
| Balance December 31, 2025 | 999 | $1 | 12,500 | $13 | 20,449,462 | $20,449 | $132,892,595 | $(84,203,040) | $(157,452) | $48,552,566 |
| Common stock issued for cash in Equity Offering | — | — | — | — | 8,666,666 | 8,667 | 64,991,328 | — | — | 64,999,995 |
| Warrants issued with equity offering | — | — | — | — | — | — | 2,305,016 | — | — | 2,305,016 |
| Stock options compensation | — | — | — | — | — | — | 20,000 | — | — | 20,000 |
| Restricted stock compensation | — | — | — | — | — | — | 1,001,170 | — | — | 1,001,170 |
| Stock issuance costs | — | — | — | — | — | — | (6,980,016) | — | — | (6,980,016) |
| Restricted stock issued for services | — | — | — | — | 420,000 | 420 | 341,421 | — | — | 341,841 |
| Stock options exercised for cash | — | — | — | — | 2,500 | 3 | 16,022 | — | — | 16,025 |
| Stock options exercised - cashless | — | — | — | — | 5,556 | 6 | (6) | — | — | — |
| Stock issued for services | — | — | — | — | 14,193 | 14 | 94,986 | — | — | 95,000 |
| Stock compensation under ESPP | — | — | — | — | — | — | 16,318 | — | — | 16,318 |
| Net loss for the three months ended March 31, 2026 | — | — | — | — | — | — | — | (3,492,245) | — | (3,492,245) |
| Balance March 31, 2026 | 999 | $1 | 12,500 | $13 | 29,558,377 | $29,559 | $194,698,834 | $(87,695,285) | $(157,452) | $106,875,670 |
See accompanying condensed notes to the unaudited
consolidated financial statements.
3
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
### CONSOLIDATED STATEMENTS OF CASH FLOWS
_(Unaudited)_
| Line item | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 |
| --- | --- | --- |
| Cash from operating activities: | | |
| Net loss | $(3,492,245) | $(2,079,663) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Depreciation and amortization | 144,146 | 712,388 |
| Gain on sale of investments | (52,302) | — |
| Inventory write-off | — | 25,000 |
| Provision for credit losses, accounts receivable | 65,312 | — |
| Stock based compensation | 1,379,329 | 995,647 |
| Stock issued for services | 95,000 | 50,000 |
| Amortization of debt discount related to warrant liabilities | — | 269,311 |
| Amortization of operating lease right of use asset - Office Lease | 100,125 | 91,142 |
| Amortization of right of use asset - land | 9,441 | — |
| Amortization of lease right of use asset - Edge Data Centers | — | 75,633 |
| Changes in assets and liabilities: | | |
| Accounts receivable | (1,873,290) | (106,053) |
| Accounts receivable-related parties | 4,616,018 | (1,466,191) |
| Lease receivable | 8,666 | — |
| Contract assets | (3,030,666) | (64,684) |
| Inventory | — | 10,624 |
| Prepaid expenses and other current assets | 181,191 | (42,467) |
| Accounts payable | (413,128) | (271,304) |
| Accrued expenses | 190,563 | 77,879 |
| Operating lease obligation - Office Lease | (108,919) | (94,956) |
| Operating lease obligation - land | 3,501 | — |
| Financing lease obligations - Edge Data Centers | — | 33,680 |
| Contract liabilities, Services and Consulting | (2,921) | — |
| Contract liabilities, Technology Systems | (42,028) | (187,165) |
| Contract liabilities, CN Digital Agreement | — | (548,121) |
| Contract liabilities, Technology Solutions | 1,764,421 | — |
| Contract liabilities, related parties | (904,125) | (2,154,125) |
| Net cash used in operating activities | (1,361,911) | (4,673,425) |
| Cash flows from investing activities: | | |
| Purchase of patents/trademarks | (11,212) | (9,264) |
| Deposits on equipment | (41,230,217) | — |
| Purchase of marketable securities | (29,693,638) | — |
| Sale of marketable securities | 29,745,940 | — |
| Purchase of property and equipment | — | (572,359) |
| Net cash used in investing activities | (41,189,127) | (581,623) |
| Cash flows from financing activities: | | |
| Repayments on financing agreements | (231,420) | (136,606) |
| Repayments of notes payable, related parties | — | (1,000,000) |
| Proceeds from common stock issued | 64,999,995 | 3,954,940 |
| Proceeds from exercise of stock options | 16,025 | 107,925 |
| Stock issuance costs | (4,675,000) | (138,226) |
| Net cash provided by financing activities | 60,109,600 | 2,788,033 |
| Net increase (decrease) in cash | 17,558,562 | (2,467,015) |
| Cash, beginning of period | 15,472,229 | 6,266,296 |
| Cash, end of period | $33,030,791 | $3,799,281 |
| Supplemental Disclosure of Cash Flow Information: | | |
| Interest paid | — | $3,865 |
| Taxes paid | — | $15,945 |
| Supplemental Non-Cash Investing and Financing Activities: | | |
| Notes issued for financing of insurance premiums | $671,833 | $249,448 |
| Transfer of inventory to property and equipment | — | $49,609 |
| Initial ROU asset and liability | $256,765 | — |
| Stock issuance costs related to warrants issued with equity offerings | $2,305,016 | — |
See accompanying condensed notes to the unaudited
consolidated financial statements.
4
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
**Nature of Operations**
Duos Technologies Group, Inc., through its operating
subsidiaries, Duos Technologies, Inc., Duos Edge AI, Inc., Duos Energy Corporation, and Duos Technology Solutions, Inc. (collectively
the “Company”) is a technology Company that designs, develops, deploys, and operates intelligent technology solutions that
leverage machine vision and artificial intelligence (“AI”), as well as digital infrastructure platforms, including edge data
centers and power and energy consulting services.
The Company’s solutions include applications
for real-time data acquisition and analysis, including the inspection and monitoring of fast-moving vehicles, as well as the deployment
of distributed computing infrastructure and related services.
The Company’s operations are organized around
the development and delivery of digital infrastructure, technology-enabled services, and AI-driven solutions that support data processing,
automation, and operational efficiency across commercial, industrial, and public sector markets.
The Company’s principal business activities
include:
- the development and deployment of edge data center infrastructure and related hosting services;
- the design and delivery of AI-enabled technologies and analytics platforms;
- the provision of technology systems and integrated solutions for infrastructure and industrial applications;
- the delivery of consulting and energy-related services, including power infrastructure planning and asset management services; and
- the provision of technology solutions services, including procurement, logistics coordination, and deployment support for digital infrastructure projects
In 2024, the Company’s management team determined
that it would be in the best interests of the Company and its shareholders to leverage the skills and expertise that have been built up
since 2021 to expand into other markets. The Company elected to develop new offerings based on its existing technology and formed a new
subsidiary in July 2024 called Duos Edge AI (“Edge”). The objective of this new subsidiary is to market a special part of
the Rail Inspection Portal (“RIP”) for the provision of high-speed and function processing of data and applications with a
focus on reducing latency in response times to end-users. The Company has many years of experience via its expert staff in bringing these
types of capabilities to remote locations, also known as “the edge”. Edge processing can be an extremely efficient and lower
cost alternative to traditional data centers. The strategy for Edge is to serve rural communities, also known as Tier 3 and 4 markets,
and install Edge data centers in these locations thereby providing access to high-speed communications and advanced processing capabilities
as a substitute for solutions where large amounts of data are “backhauled” using “the Cloud”. The Company developed
these capabilities as an adjunct to its RIP offerings due to the need for fast results (less than 60 seconds) in identifying defects and
maintenance issues on moving railcars.
Also in late 2024, the Company formed a third
subsidiary, Duos Energy Corporation (“Duos Energy”) with the express purpose of providing consulting services and solutions
for the rapidly growing demand for electrical power outside of traditional utilities. As an outgrowth of its new Edge Data Center subsidiary,
and the current expert staff on-hand, the Company has engaged with multiple third parties to act in a consulting and ultimately asset
management capacity whereby the Company’s staff is engaged directly to supply this type of power solutions for multiple uses including
for large data centers supporting AI “hyperscalers”. In conjunction with this, in late 2024, the Company engaged with Fortress
Investment Group (“FIG”) to assist in FIG’s purchase of approximately 850 Mega Watts of electrical generation capacity
(consisting of 30 mobile gas turbine generators) and associated equipment to support their installation and operation (“balance-of-plant”).
In late November 2024, Sawgrass Buyer LLC, an entity formed and owned by FIG, executed an asset purchase agreement with Atlas Corporation,
APR Energy Holdings Limited and a number of its wholly-owned affiliates (collectively, “APR”). Chuck Ferry, our then CEO,
was formerly the CEO of APR from 2018 to 2020. The transaction closed on December 31, 2024. At closing, Sawgrass Buyer LLC entered into
an Asset Management Agreement (“AMA”) with the Company under which a substantial portion of Company staff, including certain
members of the management team (including Mr. Ferry), would oversee operations of Sawgrass Buyer LLC. The AMA has a two-year term with
customary cancellation provisions. At closing, the Company also received a 5%, non-voting ownership interest in Sawgrass APR Holdings,
LLC (“Sawgrass Parent”), the ultimate parent Company of Sawgrass Buyer LLC. Subsequent to closing, Sawgrass Buyer LLC changed
its name to New APR Energy, LLC (“New APR”).
5
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
Under the AMA, Duos Energy manages the deployment
and operations for a fleet of mobile gas turbines and “balance-of-plant” inventory, providing management, sales and operations
functions to New APR in connection with the assets. In exchange for services to be performed under the AMA, the Company received an initial
cash payment from New APR and common units in Sawgrass Parent. While the Company has board representation in Sawgrass Parent, its common
units are non-voting and the Company does not control the board of directors of Sawgrass Parent.
Where the Company has an interest in a Variable
Interest Entity (“VIE”), it will consolidate any VIE in which the Company has a controlling financial interest and is deemed
to be the primary beneficiary. A controlling financial interest has both of the following characteristics: (1) the power to direct the
activities of the VIE that most significantly impact its economic performance; and (2) the obligation to absorb losses of the VIE that
could potentially be significant to the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If both
of the characteristics are met, the Company is considered to be the primary beneficiary and therefore will consolidate that VIE into our
consolidated financial statements. Investments in partnerships, unincorporated joint ventures and LLCs that maintain specific ownership
accounts for each investor are excluded from the scope of ASC 323-10. However, ASC 323-30 provides guidance on applying the criteria for
equity method accounting to investments in partnerships, unincorporated joint ventures and LLCs. When an investor in a partnership, unincorporated
joint venture or LLC has the ability to exercise significant influence over that investment, it should apply the equity method (ASC 323-10)
by analogy (ASC 323-30-25-1). Sawgrass Parent is deemed to be a VIE and the Company holds a 5% interest in Sawgrass Parent and an interest
in the subsidiary New APR through the AMA, both of which are considered variable interests. However, the Company does not represent the
primary beneficiary as it does not possess the ability to direct the activities that most significantly impact the economic performance
of Sawgrass Parent. Accordingly, the Company does not consolidate Sawgrass Parent. Due to the Company’s interest in Sawgrass Parent,
it was determined that the Company has significant influence over Sawgrass Parent. Therefore, the Company accounts for its investment
in Sawgrass Parent as an Equity Method Investment. The Company also concluded that the arrangement with Sawgrass Parent is within the
scope of ASC 606, Revenue from contracts with customers, and the common units issued to the Company by Sawgrass Parent represented non-cash
consideration. The initial carrying value of the equity method investment as of December 31, 2024 of $7.2 million was measured equal to
the fair value of the common units received for future services to be performed under the AMA. The Company recorded $7.2 million of deferred
revenue for services to be performed under the AMA. During the year ended December 31, 2024, the Company did not recognize any revenue
associated with the AMA. The Company recorded the equity method investment in Sawgrass Parent of $7.2 million, equal to the fair value
of the common units as of December 31, 2024. (See Note 9).
In 2025, the Company’s operations evolved
to focus on scalable, recurring revenue models associated with infrastructure hosting, managed services, infrastructure-related services,
and long-term service agreements, particularly in connection with its edge computing platform and digital infrastructure projects.
In 2026, the Company and New APR mutually agreed
to reduce the scope of services under the AMA, resulting in a corresponding decline in related party revenue and associated costs as part
of streamlining operations and aligning resources with its core strategic initiatives.
In 2026, the Company formed another subsidiary, Duos Technology
Solutions, Inc. with the express purpose of providing infrastructure related services, including procurement, logistics coordination, vendor
management and deployment support for data center and digital infrastructure projects.
**Digital Infrastructure and Edge Data Centers**
Through its subsidiary Duos Edge AI, the Company
is engaged in the development and deployment of modular edge data centers designed to provide localized computing capacity for artificial
intelligence workloads, data processing, and latency-sensitive applications.
These facilities are intended to support enterprise,
telecommunications, and public sector customers, particularly in regional and underserved markets. The Company’s edge data center
platform is designed to generate recurring revenues through hosting, colocation, and managed infrastructure services.
The Company has committed capital and operational
resources toward the expansion of this platform, which management expects to represent a significant component of its future business
activities.
**Technology Solutions and Infrastructure
Services**
In 2025, the Company expanded its operations through
the establishment of a Technology Solutions business vertical. This business provides infrastructure-related services, including procurement,
logistics coordination, vendor management, and deployment support for data center and digital infrastructure projects.
These services complement the Company’s
infrastructure platform and support both internal deployments and third-party customer engagements.
6
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Energy and Consulting Services**
Through Duos Energy Corporation, the Company provides
consulting and advisory services related to energy procurement, power infrastructure, and grid interconnection, as well as asset management
services.
The Company has entered into a contractual
arrangement, including the AMA that commenced in January 2025, which is contributing to revenues over the contract term. These
services support the increasing demand for energy associated with digital infrastructure and data center operations.
**Basis of Presentation**
The accompanying unaudited consolidated financial
statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (all of which are
of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months
ended March 31, 2026 are not necessarily indicative of the results that may be expected for the year ending December 31, 2026 or for any
other future period. These unaudited consolidated financial statements and the unaudited condensed notes thereto should be read in conjunction
with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2025 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2026.
**Principles of Consolidation**
The consolidated financial statements include
Duos Technologies Group, Inc. and its wholly owned subsidiaries, Duos Technologies, Inc., Duos Edge AI, Inc., Duos Energy Corporation,
and Duos Technology Solutions, Inc. (collectively the “Company”). All inter-company transactions and balances are eliminated
in consolidation.
**Use of Estimates**
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these
estimates. The most significant estimates in the accompanying consolidated financial statements include the valuation of intangible assets
for impairment analysis, allowance on accounts receivable and notes receivable, estimated useful life of long-lived assets, valuation
of deferred tax assets, valuation of other long-lived assets, estimates of net contract revenues and the total estimated costs to determine
progress towards contract completion, valuation of inventory, valuation of right of use assets and corresponding lease liabilities, valuation
of warrants issued with debt and stock, valuation of stock-based awards and the valuation of a minority interest in Sawgrass Parent. We
base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates.
7
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
Due to the unavailability of Q1-2026 financials
from Sawgrass Parent, our equity method investee, the Company has applied a one-quarter lag (in accordance with ASC 323-10-35-6) in reporting
and recording the value of its 5% minority investment. The Company records its 5% interest using the Equity Method as we have significant
influence. ASC 323-10-35-4 requires an entity to recognize its share of earnings or loss of an equity method investee which adjusts the
carrying amount of the investment and is reflected as earnings or loss in income. Pursuant to the terms of the Amended and Restated Limited
Liability Company Agreement of Sawgrass APR Holdings LLC (the “Agreement”), Net Profit and Net Loss for any Fiscal Year is
allocated among the members in such a manner that, as of the end of such fiscal year, the Capital Account Balance of each Member, as increased
by the Member’s share of “minimum gain” and “partner minimum gain” (as such terms are used in Treasury Regulations
Section 1.704-2), to the extent possible, to be equal to the amount which would have been distributed to such Member pursuant to a Hypothetical
Liquidation, as defined in the Agreement, as of the end of the last day of such fiscal year. Under the Hypothetical Liquidation, the assets
of Sawgrass Parent are disposed of in a taxable disposition for the book value of such assets and the remaining amounts, after repayment
of outstanding obligations are distributed to the members pursuant to the Agreement. Per the Agreement, the Company is entitled to pro-rata
distributions only after Preferred Holders have received their Total Contributed Capital and subsequent distributions to Preferred and
Incentive Unit Holders have reached the Multiple on Invested Capital (MOIC) Threshold of 1.5 times the initial contributions. Therefore,
it is likely that early periods will not generate sufficient earnings to provide the Company with a return in the form of a claim on net
assets. Based on the terms of the Agreement our specified allocation of earnings and losses of 5% differs from the allocation of cash
from operations and liquidation. Therefore, we will apply the guidance in ASC 970-323-35-17 by analogy, which states, if the specified
allocation for earnings differs from the allocation of cash from operations and on liquidation, the investor should not use the specified
earnings or loss percentages to determine its share of the investee’s earnings. Rather, the investor should analyze the investment
agreement to determine how the increase or decrease in the investee’s net assets during the reporting period would affect the cash
that the investor would receive over the investee’s life and on its liquidation.
As per the guidance above, the subsequent recognition
of the equity method investment should reflect the Company’s claim on net assets, determined by its rights to distributions and
residual assets under the Agreement’s distribution waterfall. The Hypothetical Liquidation at Book Value (HLBV) method satisfies
this requirement by simulating a hypothetical liquidation at each reporting period, allocating net assets based on the rights and priorities
defined in the Agreement. This approach reflects the Company’s economic interest in the Sawgrass Parent by estimating the amount
it would receive in a liquidation scenario, aligning the recognition of income or loss with the actual distribution provisions under the
Agreement. Accordingly, this method appropriately represents the cash distribution under Section 10 and the allocation of profit and loss
under Section 9.1 of the Agreement.
At the initial investment date, the Company’s
hypothetical claim on net assets was zero, and it is expected to remain so, until other investors have received their Total Contributed
Capital and the MOIC Threshold has been met. As a result of the MOIC not being met, the Company’s share of earnings under the HLBV
method is zero during these early periods. Because the Company is not obligated to fund Sawgrass Parent’s losses, no losses will
be allocated unless the investment becomes impaired, and such losses will not exceed the initial investment of $7.2 million. Similarly,
net income will not be allocated until the HLBV calculation results in an allocation that exceeds the Company’s carrying value.
Accordingly, the Company will continue to present
the equity method investment at its initial fair value unless the HLBV calculation yields a profit or the investment becomes impaired.
Management believes that the use of estimates
and assumptions in applying the equity method is reasonable.
The Company “as lessor” entered into
a master capital lease agreement with Region 16 Education Service Center for the lease of a 500kW generator. The lease commenced on June
1, 2025, and includes 84 monthly payments of $4,035.38, with a $1 buyout option at the end of the lease term. In accordance with ASC 842,
the lease has been classified as a sales-type finance lease. The present value of the lease payments was calculated using an implied annual
interest rate of 5.29%, which equates the present value of the lease payments and buyout to the fair value of the generator at inception
of $282,772. The resulting lease receivable and interest income are recognized over the lease term based on the amortization schedule
derived from this rate.
8
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Concentrations**
**Cash Concentrations**
Cash is maintained at financial institutions and
at times, balances may exceed federally insured limits. We have not experienced any losses related to these balances. As of March 31,
2026, the Company had balances in two financial institutions which combined exceeded federally insured limits by approximately $32,000,000.
Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s consolidated financial
condition, results of operation and cash flows.
**Significant Customers and Concentration of
Credit Risk**
The Company had certain customers whose revenue
individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented
10% or more of the Company’s total accounts receivable, as follows:
For the three months ended March 31, 2026, three
customers accounted for 33% (related party), 24% (related party) and 11% of revenues. For the three months ended March 31, 2025, three
customers accounted for 60% (related party), 18% (related party), and 11% of revenues.
At March 31, 2026, two customers accounted for54% and 21% (related party) of accounts receivable. At December 31, 2025, one customer, a related party, accounted for 88% of accounts
receivable. Much of the credit risk is mitigated due to historical timely payments of our Customers.
**Geographic Concentration**
For the three months ended March 31, 2026, approximately4% of revenue was generated from one customer outside of the United States. For the three months ended March 31, 2025, approximately 14% of revenue was generated from three customers outside of the United States.
**Significant Vendors and Concentration of Credit
Risk**
In some instances, the Company relies on a limited
pool of vendors for key components related to the manufacturing of its subsystems. These vendors are primarily focused on data center
hosting, camera, server and lighting technologies integral to the Company’s solution. Where possible, the Company seeks multiple
vendors for key components to mitigate vendor concentration risk.
**Fair Value of Financial Instruments and
Fair Value Measurements**
The Company follows Accounting Standards Codification
(“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured
at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted
accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure
about such fair value measurements.
ASC 820 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs.
These inputs are prioritized below:
Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions that the market participants would use in the valuation of the asset or liability based on the best available information.
9
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
The Company analyzes all financial instruments
with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard
for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
The estimated fair value of certain financial
instruments, including accounts receivable, prepaid expenses, accounts payable, accrued expenses and notes payable are carried at historical
cost basis, which approximates their fair values because of the short-term nature of these instruments.
**Investments**
The Company invests excess cash in highly
liquid, investment-grade financial debt instruments. These investments are classified as trading securities and are recorded at fair
value. Changes in fair value, including realized and unrealized gains and losses, are recognized in earnings within other income
(expense).
The Company’s investment portfolio is intended to preserve
liquidity and provide a return on excess cash. Investments are evaluated on an ongoing basis to ensure they continue to meet trading classification
criteria. Because the investments are classified as trading, no amounts are recorded in other comprehensive income.
**Accounts Receivable**
The Company follows ASC 326, "Financial Instruments
- Credit Losses" for accounts receivable. In accordance with ASC 326, an allowance for credit losses is maintained for estimated
forward-looking losses resulting from the possible inability of customers to make required payments (current expected losses). The amount
of the allowance is determined principally on the basis of past collection experience and known financial factors regarding specific customers.
Accounts receivable are stated at estimated net
realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for credit losses. In determining
the collections on the account, historical trends are evaluated, and specific customer issues are reviewed to arrive at appropriate allowances.
The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required
allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based
on how recently payments have been received from customers.
In
July 2025, the FASB issued ASU 2025-05, *Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets*,
which provides a practical expedient permitting entities to assume that current economic conditions as of the reporting date remain unchanged
over the remaining life of current accounts receivable and current contract assets arising from ASC 606 transactions. The Company adopted
ASU 2025—05 effective January 1, 2026
and elected the practical expedient, under which expected credit losses are estimated using historical loss experience adjusted for current
conditions. Adoption of this guidance did not have a material impact on the Company’s contract assets, current receivables, allowance
for credit losses, or consolidated financial statements.
**Inventory**
Inventory consists primarily of spare parts and
consumables and long-lead time components to be used in the production of our technology systems or in connection with maintenance agreements
with customers. Any inventory deemed to be obsolete is written off. Inventory is stated at the lower of cost or net realizable value.
Inventory cost is primarily determined using the weighted average cost method.
The Company classifies inventory as a current
asset when it is expected to be sold or utilized in production or under maintenance contracts within the normal operating cycle, typically
twenty-four months. Inventory that is determined to be slow-moving or not expected to be sold or utilized within the next twenty-four
months is reclassified to non-current assets under Non-current inventory
The assessment of slow-moving inventory is based
on historical sales trends, demand forecasts, and management’s judgment regarding market conditions. Once reclassified, the inventory
is reviewed annually for impairment, and any necessary write-downs are recognized in the consolidated statement of operations.
10
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
During the three months ended March 31, 2025, the Company recognized
inventory shrinkage in the amount of $25,000. The shrinkage was recorded as a reduction to the carrying value of inventory and recorded
to cost of revenues as an expense in the period. The Company continuously evaluates the recoverability of its inventory. There were no
material impacts on the Company's financial position as a result of the shrinkage.
As of March 31, 2026 and December 31, 2025, the
Company classified $391,770 and $391,770 of inventory respectively, to non-current assets due to extended product cycles.
**Intangible Asset**
In May 2024, the Company recognized an intangible
asset which represents digital image data rights received under a license agreement as non-monetary consideration under a five-year customer
contract. The intangible asset was being amortized over the five-year contractual term. This asset was fully impaired in 2025 (See Note
7).
**Property and Equipment**
Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided by the straight-line method over the estimated economic life of the property and equipment
(three to fifteen years). When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and
any gain or loss resulting from their disposal is included in the statement of operations. Leasehold improvements are expensed over the
shorter of the term of our lease or their useful lives.
**Software Development Costs**
Software development costs incurred prior to establishing
technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a
software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary
to establish that the product meets its design specifications, including functionality, features, and technical performance requirements.
Software development costs incurred after establishing technological feasibility for software sold as a perpetual license, as defined
within ASC 985-20 (Software – Costs of Software to be Sold, Leased, or Marketed) are capitalized and amortized on a product-by-product
basis when the product is available for general release to customers. Software development costs are evaluated for impairment annually
by comparing the net realizable value to the unamortized capitalization costs and writing these costs down to net realizable value.
**Patents and Trademarks**
Patents and trademarks which are stated at amortized
cost, relate to the development of video surveillance security system technology, intelligent video analytics, security systems and modular
data center infrastructure and are being amortized over 17 years.
**Long-Lived Assets**
The Company evaluates the recoverability of its
property, equipment, and other long-lived assets, including finite-lived intangible assets, in accordance with FASB ASC 360-10-35-15 “Impairment
or Disposal of Long-Lived Assets”, which requires recognition of impairment of long-lived assets in the event there are indicators
of impairment and the net book values of such assets exceed the estimated future undiscounted cash flows attributable to such assets or
the business to which such intangible assets relate. This guidance requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
11
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Equity Method Investments**
If an investment qualifies for the equity method
of accounting, the Company’s investment is recorded initially at cost and subsequently adjusted for equity in net income (loss)
and cash contributions and distributions. The net income or loss of an unconsolidated equity method investment is allocated to its investors
in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from
the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective equity
method investee and the Company’s share of the underlying equity of such equity method investee are amortized over the respective
lives of the underlying assets as applicable. These items are reported as a single line item in the consolidated statements of operations
as income or loss from investments in unconsolidated equity method investees. Investments are reviewed for changes in circumstance or
the occurrence of events that suggest an other-than-temporary event where our investment may not be recoverable.
On December 31, 2024, the Company entered into
an Asset Management Agreement (the “AMA”), with New APR, an entity formed by affiliates of FIG. Under the AMA, Duos Energy
manages the deployment and operations of a fleet of mobile gas turbines and balance-of-plant inventory, providing management, sales and
operations functions to New APR in connection with the assets. In exchange for services to be performed under the AMA, the Company received
an initial cash payment and common units in Sawgrass Parent. While the Company has board representation in Sawgrass Parent, its common
units are non-voting and the Company does not control the board of directors of Sawgrass Parent.
Where the Company has an interest in a Variable
Interest Entity (“VIE”) it will consolidate any VIE in which the Company has a controlling financial interest and is deemed
to be the primary beneficiary. A controlling financial interest has both of the following characteristics: (1) the power to direct the
activities of the VIE that most significantly impact its economic performance; and (2) the obligation to absorb losses of the VIE that
could potentially be significant to the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If both
of the characteristics are met, the Company is considered to be the primary beneficiary and therefore will consolidate that VIE into the
consolidated financial statements.
Investments in partnerships, unincorporated joint
ventures and LLCs that maintain specific ownership accounts for each investor are excluded from the scope of ASC 323-10. However, ASC
323-30 provides guidance on applying the criteria for equity method accounting to investments in partnerships, unincorporated joint ventures
and LLCs. When an investor in a partnership, unincorporated joint venture or LLC has the ability to exercise significant influence over
that investment, it should apply the equity method (ASC 323-10) by analogy (ASC 323-30-25-1).
Sawgrass Parent is deemed to be a VIE and the
Company holds a 5% interest in it and an interest in the subsidiary New APR through the AMA, both of which are considered variable interests.
However, the Company does not represent the primary beneficiary as it does not possess the ability to direct the activities that most
significantly impact the economic performance of Sawgrass Parent. Accordingly, the Company does not consolidate Sawgrass Parent. Due to
the Company’s interest in Sawgrass Parent, it was determined that the Company has significant influence over Sawgrass Parent. Therefore,
the Company accounts for its investment in Sawgrass Parent as an Equity Method Investment.
The Company also concluded that the arrangement
with Sawgrass Parent is within the scope of ASC 606, Revenue from contracts with customers, and the common units issued to the Company
by Sawgrass Parent represented non-cash consideration. The initial carrying value of the equity method investment as of December 31, 2024
of $7.2 million was measured equal to the fair value of the common units received for future services to be performed under the AMA. The
Company recorded $7.2 million of deferred revenue for services to be performed under the AMA. During the year ended December 31, 2024,
the Company did not recognize any revenue associated with the AMA. The Company initially recorded the equity method investment in Sawgrass
Parent of $7.2 million, equal to the fair value of the common units as of December 31, 2024. Revenue recognition started January 1, 2025.
For the three months ended March 31, 2026 the Company recorded revenue in the amount of $904,125 with remaining deferred revenue of $2,712,375.
The Company assesses its equity method investment
for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.
No impairment losses on this equity method investment were recognized during the three months ended March 31, 2026 or 2025. See further
disclosure of accounting policies related to this equity method investment above under “Use of Estimates.”
12
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Product Warranties**
The Company has a 90-day warranty period for materials
and labor after final acceptance of a project. If any parts are defective they are replaced under our vendor warranty which is usually12 to 36 months. Final acceptance terms vary by customer. Some customers have a cure period for any material deviation and if the Company
fails or is unable to correct any deviations, a full refund of all payments made by the customer will be arranged by the Company. As of
March 31, 2026 and December 31, 2025, the warranty costs have been de-minimis, therefore no accrual of warranty liability has been made.
**Loan Costs**
Loan costs paid to lenders, or third parties are
recorded as debt discounts to the related loans and amortized to interest expense over the loan term.
**Sales Returns**
Our systems are sold as integrated systems and
there are no sales returns allowed.
**Revenue Recognition**
The Company follows Accounting Standards Codification
606, Revenue from Contracts with Customers (“ASC 606”), that affects the timing of when certain types of revenues will be
recognized. The basic principles in ASC 606 include the following: a contract with a customer creates distinct contract assets and performance
obligations, satisfaction of a performance obligation creates revenue, and a performance obligation is satisfied upon transfer of control
to a good or service to a customer.
Revenue is recognized by evaluating our revenue
contracts with customers based on the five-step model under ASC 606:
1. Identify the contract with the customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to separate performance obligations; and
5. Recognize revenue when (or as) each performance obligation is satisfied.
The Company generates revenue from six sources:
(1) Technology Systems
(2) AI Technologies
(3) Technical Support including related party revenues from the AMA which began in January 2025
| (4) | Consulting services including related party revenues from the AMA which began in January 2025 |
| --- | --- |
| (5) | Hosting |
| (6) | Technology Solutions |
Technology Systems
For revenues related to technology systems, the
Company recognizes revenue over time using a cost-based input methodology in which significant judgment is required to estimate costs
to complete projects. These estimated costs are then used to determine the progress towards contract completion and the corresponding
amount of revenue to recognize.
Accordingly, the Company bases its revenue recognition
on ASC 606-10-25-27, where control of a good or service transfers over time if the entity’s performance does not create an asset
with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date including a
profit margin or reasonable return on capital. Control is deemed to pass to the customer instantaneously as the goods are manufactured
and revenue is recognized accordingly.
13
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
In addition, the Company has adopted ASC 606-10-55-21
such that if the cost incurred is not proportionate to the progress in satisfying the performance obligation, we adjust the input method
to recognize revenue only to the extent of the cost incurred. Therefore, the Company will recognize revenue at an equal amount to the
cost of the goods to satisfy the performance obligation. To accurately reflect revenue recognition based on the input method, the Company
has adopted the implementation guidance as set out in ASC-606-10-55-187 through 192. Under this method, contract revenues are recognized
over the performance period of the contract in direct proportion to the costs incurred. Costs include direct material, direct labor, subcontract
labor and other allocable indirect costs. All un-allocable indirect costs and corporate general and administration costs are also charged
to the periods as incurred. Any recognized revenues that have not been billed to a customer are recorded as an asset in “contract
assets”. Any billings of customers more than recognized revenues are recorded as a liability in “contract liabilities”.
However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined to be both probable
and reasonably estimable.
AI Technologies
The Company has revenue from applications that
incorporate artificial intelligence (AI) in the form of predetermined algorithms which provide important operating information to the
users of our systems. The revenue generated from these applications of AI consists of a fixed fee related to the design, development,
testing and incorporation of new algorithms into the system, which is recognized as revenue at a point in time upon acceptance, as well
as an annual application maintenance fee, which is recognized as revenue ratably over the contracted maintenance term.
Technical Support
Technical support services are provided on both
an as-needed and extended-term basis and may include providing both parts and labor. Maintenance and technical support provided outside
of a maintenance contract are on an “as-requested” basis, and revenue is recognized over time as the services are provided.
Revenue for maintenance and technical support provided on an extended-term basis is recognized over time ratably over the term of the
contract. This includes related party revenue from the AMA which began on January 1, 2025 related to installation and maintenance of certain
assets deployed by New APR.
Consulting Services
The Company’s consulting services business
generates revenues under contracts with customers from four sources: (1) Professional Services (consulting and auditing and including
revenues from the AMA which began in January 2025); (2) Software licensing with optional hardware sales; (3) Customer service
training, and (4) Maintenance/support
(1) Revenues for professional services, which are of short-term duration, are recognized when services are completed;
(2) For all periods reflected in this report, software license sales have been one-time sales of a perpetual license to use our software product and the customer also has the option to purchase third-party manufactured handheld devices from us if they purchase our software license. Accordingly, the revenue is recognized upon delivery of the software and delivery of the hardware, as applicable, to the customer;
(3) Training sales are one-time upfront short-term training sessions and are recognized after the service has been performed;
(4) Maintenance/support is an optional product sold to our software license customers under one-year contracts accordingly, maintenance payments received upfront are deferred and recognized over the contract term.
Hosting
The Company generates hosting revenue from deploying
and operating edge data centers, which provide customers with dedicated cabinet space on a monthly basis. The revenue from hosting consists
of fixed monthly fees per cabinet, recognized as revenue ratably over the contractual hosting term, as the Company provides continuous
access to the hosted infrastructure and related services.
The
Company will generate future Hosting revenue by also renting GPU’s as a service through a Master Service Agreement. These revenues
will come from a single customer. The revenue from GPU as a service will be recognized gross of operator’s costs as the Company
has been identified as principal to the service agreement. Revenue will be recognized using a time-based
and usage-based measure, over the contractual hosting
and rental term.
14
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
Technology Solutions
Integrated infrastructure solutions, including procurement, logistics,
and deployment support services was introduced as a business vertical in 2025. Technology Solutions provides infrastructure-related services,
including manufacturer-agnostic sourcing of equipment, logistics coordination, supply chain management, and fulfillment services in support
of digital infrastructure and data center deployments. These services are designed to complement the Company’s edge data center
platform and address customer requirements for supply chain efficiency, reduced lead times, and execution support
Multiple Performance Obligations and Allocation
of Transaction Price
Arrangements with customers may involve multiple
performance obligations including project revenue and maintenance services in our Technology Systems business. Maintenance will occur
after the project is completed and may be provided on an extended-term basis or on an as-needed basis. In our consulting services business,
multiple performance obligations may include any of the above six sources. Training and maintenance on software products may occur after
the software product sale while other services may occur before or after the software product sale and may not relate to the software
product. Revenue recognition for a multiple performance obligations arrangement is as follows:
Each performance obligation is accounted for separately
when each has value to the customer on a standalone basis and there is Company specific objective evidence of the selling price of each
deliverable. For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate
units of accounting based on their relative selling prices as determined by the price of the items when sold separately. Once the selling
price is allocated, the revenue for each performance obligation is recognized using the applicable criteria under GAAP as discussed above
for performance obligations sold in single performance obligation arrangements. A delivered item or items that do not qualify as a separate
unit of accounting within the arrangement are combined with the other applicable undelivered items within the arrangement. The allocation
of arrangement consideration and the recognition of revenue is then determined for those combined deliverables as a single unit of accounting.
The Company sells its various services and software and hardware products at established prices on a standalone basis which provides Company
specific objective evidence of selling price for purposes of performance obligations related to selling price allocation. The Company
only sells maintenance services or spare parts based on its established rates after it has completed a system integration project for
a customer. The customer is not required to purchase maintenance services. All elements in multiple performance obligations arrangements
with Company customers qualify as separate units of account for revenue recognition purposes.
**Cost of Revenues**
Cost of revenues consists primarily of expenses
related to our five lines of business: Technology Systems, Services, Consulting, Hosting and Technology Solutions. These costs include
inventory, shipping, certain fixed labor and overhead, and allocated depreciation and amortization, as applicable to each line of business.
**Advertising**
The Company expenses the cost of advertising.
During the three months ended March 31, 2026 and 2025, there were no advertising costs.
**Stock Based Compensation**
The Company accounts for employee and non-employee
stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and directors including stock options, restricted stock units,
and employee stock purchases based on estimated fair values. The stock-based compensation carries a graded vesting feature subject to
the condition of time of employment service with awarded stock-based compensation tranches vesting evenly upon the anniversary date of
the award.
The Company estimates the fair value of stock
options granted using the Black-Scholes option-pricing formula. In accordance with ASC 718-10-35-8, the Company elected to recognize the
fair value of the stock award using the graded vesting method as time of employment service is the criteria for vesting. The Company’s
determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding a number of
highly subjective variables.
15
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
For restricted stock awards, fair value is measured
at the closing market price of the Company’s common stock on the grant date. That value is then recognized over the requisite vesting
period. The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for stock
options using the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined
based upon the prevailing rate of United States Treasury securities with similar maturities.
The Company accounts for forfeitures as they occur.
**Income Taxes**
The Company accounts for income taxes in accordance
with the Financial Accounting Standards Board FASB Accounting Standards Codification (“ASC”) 740, Income Taxes, which requires
the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income
tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either
be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
For the three months ended March 31, 2026 and
the year ended December 31, 2025, the Company recorded an effective income tax rate of approximately 0%. The effective tax rate differs
from the U.S. federal statutory rate primarily due to a full valuation allowance maintained against the Company’s net deferred tax
assets. As a result, losses incurred during the current period did not result in the recognition of an income tax benefit. The Company
has recorded a valuation allowance equal to its net deferred tax assets for the years ended December 31, 2025, 2024, and 2023, as it is
not more likely than not that sufficient future taxable income will be available to realize the benefit of the NOL carryforwards and other
deferred tax assets.
Any penalties and interest assessed by income
taxing authorities are included in operating expenses.
The federal and state income tax returns of the
Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed. Tax years
2023, 2024 and 2025 remain open for potential audit.
**Earnings (Loss) Per Share**
Basic earnings per share (EPS) are computed by
dividing the net loss applicable to common stock by the weighted average number of common shares outstanding. Diluted net loss per common
share is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding for
the period and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental
common shares issuable upon the exercise or conversion of stock options, stock warrants, convertible debt instruments, convertible preferred
stock or other common stock equivalents. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.
At March 31, 2026, there were (i) an aggregate
of 808,610 outstanding warrants to purchase shares of common stock, (ii) employee stock options to purchase an aggregate of 325,003 shares
of common stock, (iii) 333,000 common shares issuable upon conversion of Series D Convertible Preferred Stock, and (iv) 4,789,273 common
shares issuable upon conversion of Series E Convertible Preferred Stock, all of which were excluded from the computation of diluted net
earnings per share because their inclusion would have been anti-dilutive.
At March 31, 2025, there were (i) an
aggregate of zero 0 outstanding warrants to purchase shares of common stock, (ii) employee stock options to purchase an aggregate of475,368 shares of common stock, (iii) 333,000 common shares issuable upon conversion of Series D Convertible Preferred Stock, and
(iv) 5,172,416 common shares issuable upon conversion of Series E Convertible Preferred Stock, all of which were excluded from the
computation of diluted net earnings per share because their inclusion would have been anti-dilutive.
16
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Leases**
The Company follows ASC 842 “Leases”.
This guidance requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities for most operating leases. In
addition, this guidance requires that lessors separate lease and non-lease components in a contract in accordance with the revenue guidance
in ASC 606.
The Company made an accounting policy election
to not recognize short-term leases with terms of twelve months or less on the 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 as
a single lease component.
Leases that are clearly insignificant will not
be accounted for under ASC 842 and instead the Company will recognize lease payments in expense as incurred.
At the inception of a contract the Company assesses
whether the contract is, or contains, a lease.
The Company’s assessment is based on:
(1) whether the contract involves the use of a
distinct identified asset,
(2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the period, and
(3) whether we have the right to direct the use
of the asset.
Operating ROU assets represent the right to use
the leased asset for the lease term and operating lease liabilities are recognized based on the present value of minimum lease payment
over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate
based on the information available at the lease commencement date to determine the present value of future payments. The lease term includes
all periods covered by renewal and termination options where the Company is reasonably certain to exercise the renewal options or not
to exercise the termination options. Operating lease expense is recognized on a straight-line basis over the lease term and is included
in general and administration expenses in the consolidated statements of operations.
The Company accounts for leases as a lessor in
accordance with ASC 842-30. Under ASC 842-30, leases are classified as either operating, sales-type or finance leases based on the terms
and characteristics of the lease agreement. The Company is the lessor in a master capital lease agreement entered into during the second
quarter of 2025 with Region 16 Education Service Center. Under the terms of the agreement, Region 16 is leasing a 500kW generator for
a period of 84 months beginning June 1, 2025. Monthly lease payments are $4,035.38, with a $1 buyout option at the end of the lease term.
The lease meets the criteria for classification as a sale-type finance lease under ASC 842 due to the presence of a bargain purchase option
and the lease term covering a substantial portion of the asset’s useful life. At lease inception, the Company reclassified the generator
from property and equipment and recognized a lease receivable equal to the present value of the lease payments. The present value of the
lease payments was calculated to be $282,772, which approximates the fair value of the generator. The implied annual interest rate used
to calculate the present value was 5.29%, determined using the internal rate of return (IRR) method. This rate reflects the financing
component embedded in the lease payments. Over the lease term, the Company recognizes interest income on the lease receivable and reduces
the receivable as payments are received. The final $1 payment at the end of the lease term will transfer ownership of the generator to
Region 16. The Company believes this lease arrangement is appropriately accounted for under ASC 842 and reflects the economic substance
of the transaction.
**Recent Accounting Pronouncements**
From time to time, the FASB or other standards
setting bodies will issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards
Update (“ASU”).
17
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
In November 2024, the FASB issued ASU
2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures(Subtopic 220-40), which
requires entities to provide more detailed disaggregation of expenses in the income statement, focusing on the nature of the
expenses rather than their function. The new disclosures will require entities to separately present expenses for significant line
items, including but not limited to, depreciation, amortization, and employee compensation. Entities will also be required to
provide a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated
quantitatively, disclose the total amount of selling expenses and, in annual reporting periods, provide a definition of what
constitutes selling expenses. This pronouncement is effective for fiscal years beginning after December 15, 2026, and interim
periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company does not expect
the adoption of this new guidance to have a material impact on the consolidated financial statements.
In September 2025, the FASB issued ASU No. 2025-06,
Intangibles: Goodwill and Other‒Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use
Software (ASU 2025-06). The guidance modernizes the recognition and disclosure framework for internal-use software costs by removing all
references to software development project stages so that the guidance is neutral to different software development methods. This ASU
is effective for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting
periods, and can be applied using a prospective, retrospective or modified transition approach with early adoption permitted. The Company
is evaluating the impact of adopting ASU 2025-06.
Management does not believe that any other recently
issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
### **NOTE 2 – LIQUIDITY**
Under Accounting Codification ASC 205, Presentation
of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate
whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due
within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not
take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements
are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC
205-40.
As reflected in the accompanying consolidated
financial statements, the Company had a net loss of $3,492,245 for the three months ended March 31, 2026. During the same period, cash
used in operating activities was $1,361,911. The working capital surplus and accumulated deficit as of March 31, 2026, were $29,179,849 and $87,695,285, respectively.
The Company successfully raised approximately
$3,544,689 in gross proceeds from the sale of common stock through its At-The-Market (ATM) offering program in 2024 and raised an additional
$8,927,347 in gross proceeds from the ATM in 2025. Furthermore, in 2025, the Company raised approximately $45 million from other equity
offerings. More recently on February 26, 2026, the Company priced a public offering of its common stock for gross proceeds of approximately
$65 million. The offering closed on March 2, 2026, and was conducted pursuant to the Company’s effective shelf registration statement
on Form S-3 and related prospectus supplements filed with the SEC. The capital raised is expected to bolster the Company’s balance
sheet and position it to pursue strategic initiatives related to Duos Edge AI, from a stronger financial foundation. In the long run,
the continuation of the Company as a going concern is dependent upon the ability of the Company to continue executing its business plan,
generate enough revenue, and attain consistently profitable operations. We have analyzed our cash flow under “stress test”
conditions and have determined that we have sufficient liquid assets on hand or available via the capital markets to maintain operations
for at least twelve months from the issuance date of this report.
In addition, management has taken and continues
to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning
both management and staffing with a focus on improving certain skill sets necessary to build growth and profitability and focusing product
strategy on opportunities that are likely to bear results in the relatively short term. The Company believes that, with the combination
of its current capital and commercial sales success, it will have sufficient working capital to meet its obligations over the following
twelve months. Recently, the Company has seen growth in its contracted backlog as well as significant, positive signs from new commercial
projects that indicate improvements in future revenues.
18
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
Management believes that, at this time, the conditions
in our traditional market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding
contract and the additional time needed to execute on new contracts previously reported could put a strain on our cash reserves. However,
given the Company’s current capital, the anticipated steady cash flow from the Hosting and Technology solutions line of business
and proven ability to raise capital via the public markets indicate there is no substantial doubt for the Company to continue as a going
concern for a period of twelve months. We expect to continue executing the plan to grow our business and achieve profitability as previously
discussed. The Company may selectively look at opportunities for fundraising in the future including potential debt offerings to support
asset acquisitions. Management has extensively evaluated our requirements for the next twelve months and has determined that the Company
currently has sufficient cash and access to capital to operate for at least that period.
While no assurance can be provided, management
believes that these actions provide the opportunity for the Company to continue as a going concern and to grow its business and achieve
profitability with access to additional capital funding. Ultimately the continuation of the Company as a going concern is dependent upon
the ability of the Company to continue executing the plan described above which was put in place in late 2024 and will continue in 2026
and beyond. These consolidated financial statements do not include any adjustments related to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
### **NOTE 3 – ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE, RELATED PARTIES**
Accounts receivable were as follows at March 31,
2026 and December 31, 2025:
| Schedule of accounts receivable | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Accounts receivable | $2,603,501 | $730,211 |
| Accounts receivable, related parties | 688,214 | 5,304,231 |
| Allowance for credit losses | (65,312) | — |
| Accounts receivable, net | $3,226,403 | $6,034,442 |
The Company recorded credit loss (recovery) expense
in the amount of $65,312 and $(76,037) for the three months ended March 31, 2026 and March 31, 2025, respectively.
The activity related to our allowance for credit losses at March
31, 2026 and December 31, 2025 is summarized below.
| Schedule of allowance for doubtful accounts | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Allowance for credit losses, beginning balance | — | $(76,037) |
| Allowance for credit losses provision | (65,312) | — |
| Less recoveries | — | 76,037 |
| Allowance for credit losses, ending balance | $(65,312) | — |
19
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 4 – PROPERTY AND EQUIPMENT**
The major classes of property and equipment are
as follows at March 31, 2026 and December 31, 2025:
| Schedule of property and equipment | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Furniture and Fixtures | $161,097 | $161,097 |
| Tools and Equipment | 1,618,643 | 1,618,643 |
| EDC PODS and Generators | 3,248,578 | 1,791,061 |
| Leasehold Improvements | 306,910 | 306,910 |
| Construction in Progress | 24,131,853 | 25,589,371 |
| Internal Use Software | 381,441 | 381,441 |
| | 29,848,522 | 29,848,523 |
| Accumulated Depreciation | (2,218,002) | (2,110,717) |
| Property and Equipment, net | $27,630,520 | $27,737,806 |
| Line item | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Internal Use Software consisted of the following: | | |
| Internal Use Software | $381,441 | $381,441 |
| Accumulated Depreciation | (344,106) | (322,487) |
| Internal Use Software, net | $37,335 | $58,954 |
| Line item | Three months ended March 31, 2026 | Three months ended March 31, 2025 |
| --- | --- | --- |
| Depreciation Expense: | | |
| Property and equipment, excluding internal use software | $85,667 | $68,050 |
| Internal Use Software amortization expense | 21,619 | 24,943 |
| | $107,286 | $92,993 |
### **NOTE 5 – PATENTS AND TRADEMARKS**
| Schedule of patents and trademarks | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Patents | $487,791 | $476,578 |
| Accumulated Amortization | (294,449) | (290,505) |
| Patents and trademarks, net | $193,342 | $186,073 |
Amortization expense for the three months ended March 31, 2026
and 2025 was $3,943 and $2,851, respectively.
20
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 6 – SOFTWARE DEVELOPMENT COSTS**
| Schedule of software development costs | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Software Development | $796,807 | $796,807 |
| Accumulated amortization | (734,449) | (701,532) |
| Software Development, net | $62,358 | $95,275 |
The following is a schedule of estimated future
amortization expense of software development costs at March 31, 2026:
| Schedule of estimated future amortization expense of software | |
| --- | --- |
| 2026 | 48,739 |
| 2027 | 13,619 |
| | $62,358 |
Amortization of software development costs for
the three months ended March 31, 2026 and 2025 was $32,917 and $68,424, respectively.
### **NOTE 7 – INTANGIBLE ASSET**
In May 2024, the Company recorded an intangible
asset with a fair value of $11,161,428. This asset represented non-monetary consideration received under a 5-year customer contract, in
which the Company would provide maintenance services to the customer. The intangible asset represents Digital Image data rights in the
form of a license agreement received by the Company from the customer.
The fair value of the asset was determined on
the contract inception date based on the standalone selling price of the service and goods to be provided to the customer under the 5-year
contract since the Company could not reasonably estimate the fair value of the data rights received. The non-monetary transaction was
accounted for in accordance with Accounting Standards Codification (ASC) 606-10-32-21 through ASC 606-10-32-24.
On the contract inception date, the Company recorded
deferred revenue of $11,161,428 as contract liabilities with a current and non-current component, and then immediately recognized $199,008 of this deferred revenue relating to the completed pilot program. The remaining deferred revenue was being recognized over the 5-year
term.
In accordance with ASC 350-30-35-1, the amortization
for the intangible asset is based on its useful life and the useful life of an intangible asset is the period over which it is expected
to contribute directly or indirectly to the future cash flows of that entity. Accordingly, amortization of the intangible asset was recognized
over the life of the contract of five years.
During the year ended December 31, 2025, the Company
evaluated its long-lived assets for impairment in accordance with ASC 350-30-35-14, which requires finite-lived intangible assets to be
tested for impairment under ASC 360 when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Management identified impairment indicators during
2025 related to its CN Digital Image data rights, including (i) a significant adverse change in the extent and manner in which the asset
was being used, (ii) adverse legal and contractual developments, (iii) the absence of current and projected cash flows, and (iv) the expectation
that the asset would be terminated or otherwise disposed of significantly before the end of its previously estimated useful life.
The Company generated minimal subscription revenue
from the licensed data, and during 2025 the Company ceased providing the related maintenance services. In addition, contractual disputes
arose between the parties, and by late 2025 both parties had ceased performance and were negotiating termination of the arrangement.
21
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
As a result of these events, the Company performed
a recoverability test as of December 31, 2025 by comparing the carrying amount of the asset to the sum of its estimated undiscounted future
cash flows. The Company determined that the carrying amount of the asset was not recoverable, as estimated undiscounted future cash flows
were negligible. The Company measured the impairment loss based on the asset’s estimated fair value as of December 31, 2025. Given
the absence of historical or expected future cash flows, the lack of an observable market for the asset, and the ongoing contractual dispute,
the Company determined that the fair value of the Digital Image data rights was zero.
Accordingly, the Company recorded an impairment
of $8,130,461, representing the full carrying amount of the Digital Image data rights. Because the asset was originally recognized as
part of a non-cash exchange with a corresponding deferred liability offset recorded on the balance sheet, the impairment was recorded
by eliminating both the intangible asset and the related deferred liability. As a result, the impairment did not impact the Company’s
consolidated statements of operations for the year ended December 31, 2025.
### **NOTE 8: CASH ADVANCE PAYMENT – SAWGRASS APR HOLDINGS LLC**
| Schedule of cash advance payment | Amount |
| --- | --- |
| Cash as of December 31, 2024 | $5,000,000 |
| Contract liabilities, current of December 31, 2025 | — |
| Revenue recognized for the year ended December 31, 2025 | $5,000,000 |
In December 2024, the Company entered into a series
of contracts with Fortress under which the Company deploys and operates a fleet of mobile gas turbines and balance-of-plant inventory,
providing management, sales and operations functions to New APR in connection with the assets. In exchange for services performed under
the Asset Management Agreement (“AMA”), the Company received an advance cash payment and common units in Sawgrass Parent (see
Note 9). The Company accounted for the arrangement with New APR as *Revenue from contracts with customers*. New APR advanced the
Company $5.0 million in cash upon execution of the contract, which was recorded as a contract liability and was applied ratably on a monthly
basis against amounts incurred under the AMA for a period of 12 months in 2025. In the event that the AMA was terminated within the first
12 months, any balance remaining of the advanced funds would have been credited in full to the Company.
The advanced consideration did not provide
the benefit of financing as the cash was consumed within the first year of the contract to align the interests of both parties under
the AMA. As of March 31, 2026, deferred revenue under the arrangement was zero 0, comprised of the $5.0 million advance payment less
$5.0 million recognized as earned revenue under the AMA for the 12 months ended December 31, 2025.
### **NOTE 9 – EQUITY INVESTMENT – SAWGRASS APR HOLDINGS LLC**
| Schedule of equity investment | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Equity Investment - Sawgrass APR Holdings LLC | $$7,233,000 | 7,233,000 |
At the close of business December 31, 2024, Duos Energy Corporation,
a subsidiary, executed the AMA with New APR to manage its operations. The Company’s former CEO is currently a Director of the Company,
and is also the CEO of New APR and the operations of New APR are housed in the same facility as the Company in Jacksonville, Florida.
The Company was issued a 5% non-voting ownership
interest in Sawgrass Parent, in the form of 25,882,353 common units, which is accounted for using the equity method. The Company determined
the equity method was appropriate since Sawgrass Parent is considered a related party due to common management and the Company can exert
significant influence over the operations of New APR. The Company concluded that the arrangement with New APR is within the scope of ASC
606, Revenue from contracts with customers, and the common units issued to the Company by Sawgrass Parent represented non-cash consideration
under ASC 606-10-32-31. The initial carrying value as of December 31, 2024 of $7.2 million was measured equal to the fair value of the
common units received for future services to be performed under the AMA which is being recognized over a period of two years, the initial
contractual term of the AMA. The Company recorded $7.2 million of an equity method investment asset and $7.2 million of contract liabilities
for services to be performed under the AMA. For the three months ended March 31, 2026, the Company did not recognize any equity in net
income (loss) of the investee.
22
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
During the three months ended March 31, 2026,
the Company recognized $904,125 of contract liabilities as revenue, and $2,712,375 remained as contract liability at March 31, 2026. (See
Note 11).
The Company assesses its equity method investment
for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.
No impairment losses were recognized for the three months ended March 31, 2026.
### **NOTE 10 – DEBT**
**Notes Payable – Insurance Premium
Financing Agreements**
The Company’s notes payable relating to
financing agreements classified as current liabilities consist of the following as of:
| Schedule of notes payable / Notes Payable | March 31, 2026 / Principal | March 31, 2026 / Interest | December 31, 2025 / Principal | December 31, 2025 / Interest |
| --- | --- | --- | --- | --- |
| Third Party - Insurance Note 1 | $252,510 | 6.90% | — | 7.65% |
| Third Party - Insurance Note 2 | 44,105 | — | 2,041 | — |
| Third Party - Insurance Note 3 | 145,839 | — | — | — |
| Total | $442,454 | | $2,041 | |
The Company entered into an agreement on April
15, 2025 with its insurance provider by issuing a note payable (Insurance Note 1) for the purchase of an insurance policy in the amount
of $207,207 with a down payment in the amount of $42,241 in the second quarter of 2025 and ten monthly installments of $17,140. The Company
paid off the debt in the third quarter of 2025. The Company renewed its agreement on February 10, 2026 with its insurance provider by
issuing a note payable (Insurance Note 1) for the purchase of an insurance policy in the amount of $401,042 with a down payment in the
amount of $80,785 in the first quarter of 2026 and ten monthly installments of $33,047. At March 31, 2026 and December 31, 2025, the balance
of Insurance Note 1 was $252,510, and $0, respectively.
The Company entered into an agreement effective
February 3, 2025 with its insurance provider by issuing a note payable (Insurance Note 2) for the purchase of an insurance policy in the
amount of $24,594 in the second quarter of 2025 and twelve monthly installments of $2,050. There were also audit premium adjustments in
the amount of $6,084. The Company renewed its agreement effective March 31, 2026 with its insurance provider by issuing a note payable
(Insurance Note 2) for the purchase of an insurance policy in the amount of $52,112 in the first quarter of 2026 and twelve monthly installments
of $4,217. At March 31, 2026 and December 31, 2025, the balance of Insurance Note 2 was $44,105 and $2,041, respectively.
The Company entered into an agreement on February
3, 2025 with its insurance provider by issuing a note payable (Insurance Note 3) for the purchase of an insurance policy in the amount
of $249,448, with a down payment paid in the amount of $119,535 in the first quarter of 2025 and seven monthly installments of $18,559.
The Company paid off the balance early in 2025. The Company extended the policy period to March 31, 2026 in January of 2026, paying two
monthly premiums totaling $69,112. The Company renewed its agreement on March 14, 2026 with its insurance provider by issuing a note payable
(Insurance Note 3) for the purchase of an insurance policy in the amount of $218,680, with a down payment paid in the amount of $72,841 in the first quarter of 2026 and seven monthly installments of $16,207. At March 31, 2026 and December 31, 2025, the balance of Insurance
Note 3 was $145,839 and $0, respectively, due to early payoff**.**
**Notes Payable, Related Parties**
On July 22, 2024, the Company and Duos Edge entered
into secured promissory notes (the “Notes”) with two institutional investors in the Company, 21 April Fund LP and 21 April
Fund Ltd. These investors own more than 10% of the outstanding shares and are therefore considered related parties. The principal amounts
of the Notes were $1,520,000 for the Note issued to 21 April Fund Ltd. and $680,000 for the Note issued to 21 April Fund LP. The Notes
accrued interest at an annual rate of 10% and the principal and any accrued interest on the Notes were due on December 30, 2025. The Company
guaranteed all of Duos Edge’s obligations pursuant to the Notes.
The Company made early payments on the Notes in
2025, through August 2025 in the amount of $2,200,000 of principal and $188,356 of accrued interest.
23
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 11 – REVENUES AND CONTRACT ACCOUNTING**
**Revenue Recognition and Contract Accounting**
The Company generates revenue from six sources:
(1) Technology Systems; (2) AI Technology which is included in the consolidated statements of operations line-item Technology Systems;
(3) Technical Support; (4) Consulting Services which is included in the consolidated statements of operations line-item Services and Consulting;
(5) Hosting and (6) Technology Solutions.
Contract assets and contract liabilities on uncompleted
contracts for revenues recognized over time are as follows:
**Contract Assets**
Contract assets on uncompleted contracts represent
cumulative revenues recognized in excess of billings and/or cash received on uncompleted contracts accounted for under the cost-to-cost
input method which recognizes revenue based on the ratio of costs incurred to total estimated costs.
At March 31, 2026 and December 31, 2025, contract
assets, consisted of the following:
**As of March 31, 2026:**
| Schedule of contract assets on uncompleted contracts | Technology Systems | Technology Solution | Total |
| --- | --- | --- | --- |
| Deferred Cost | — | $3,028,435 | $3,028,435 |
| Cumulative revenues recognized | 10,024,940 | — | 10,024,940 |
| Less cumulative billings | (9,280,987) | — | (9,280,987) |
| Contract Asset | $743,953 | $3,028,435 | $3,772,388 |
**As of December 31, 2025**
| Deferred Cost | Technology Systems / — | Technology Solution / $ | Technology Solution / — | Total / — |
| --- | --- | --- | --- | --- |
| Cumulative revenues recognized | 10,022,709 | | — | 10,022,709 |
| Less cumulative billings | (9,280,987) | | — | (9,280,987) |
| Contract Asset | $741,722 | $ | — | $741,722 |
**Contract Liabilities**
Contract liabilities on uncompleted contracts
represent billings and/or cash received that exceed cumulative revenues recognized on uncompleted contracts accounted for under the cost-to-cost
input method, which recognizes revenues based on the ratio of the cost incurred to total estimated costs.
Contract liabilities on services and consulting
revenues represent billings and/or cash received in excess of revenue recognized on service agreements that are not accounted for under
the cost-to-cost input method.
At March 31, 2026 and March 31, 2025, contract
liabilities consisted of the following:
**Three months ended March 31, 2026**
| Schedule of contract liabilities on uncompleted contracts | Technology Systems | Services and Consulting | Technology Solutions | CN Digital Agreement | Services and Consulting- Related Parties | Total |
| --- | --- | --- | --- | --- | --- | --- |
| Beginning balance at December 31, 2025 | $134,331 | $169,369 | $1,132,164 | — | $3,616,500 | $5,052,364 |
| Revenue recognized from the beginning balance | (42,028) | (141,700) | — | — | (904,125) | (1,087,853) |
| Billings during the period | — | 208,170 | 1,764,421 | — | — | 1,972,591 |
| Revenue recognized from current billings | — | (69,390) | — | — | — | (69,390) |
| Ending balance at March 31, 2026 | $92,303 | $166,449 | $2,896,585 | — | $2,712,375 | $5,867,712 |
| Contract assets, less current portion | $(92,303) | (166,449) | $(2,896,585) | — | $(2,712,375) | $(5,867,712) |
| Contract assets, non-current portion | — | — | — | — | — | — |
24
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
Technology Systems
At March 31, 2026 and December 31, 2025 contract liabilities, technology
systems consisted of the following:
| Schedule of contract liabilities, technology systems | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Billings and/or cash receipts on uncompleted contracts | $1,264,658 | $1,264,658 |
| Less: Cumulative revenues recognized | $(1,172,355) | $(1,130,327) |
| Contract liabilities, technology systems, current | $92,303 | $134,331 |
The Company expects to recognize all current contract
liabilities within 12 months from the respective consolidated balance sheet date.
CN Digital Agreement
In May 2024, the Company recorded an initial deferred
revenue as a contract liability in the amount of $11,161,428 of which $199,008 related to a pilot program was immediately recognized as
revenue (See Note 7) and another $1,569,310 was recognized in 2024. During the year ended December 31, 2025, the Company recognized revenue
of $1,461,567 from this deferred revenue. This contract liability resulted from a five-year contract with a customer where the Company
received non-monetary consideration recorded as intangible assets (See Note 7). This transaction was accounted for under ASC 606-10-32-21
through ASC-606-10-32-24, Non-Cash Consideration. The performance obligations, which included various support and maintenance services
were to be recognized as revenue pro-rata over time during the five-year contract term. The Company performed a recoverability test as
of December 31, 2025 by comparing the carrying amount of the asset to the sum of its estimated undiscounted future cash flows. The Company
determined that the carrying amount of the asset was not recoverable, as estimated undiscounted future cash flows were negligible. The
Company measured the impairment loss based on the asset’s estimated fair value as of December 31, 2025. Given the absence of historical
or expected future cash flows, the lack of an observable market for the asset, and the ongoing contractual dispute, the Company determined
that the fair value of the CN Digital Image License was zero.
Accordingly, the Company recorded an impairment
of $8,130,461, representing the full carrying amount of the CN Digital Image License. Because the asset was originally recognized as
part of a non-cash exchange with a corresponding deferred liability offset recorded on the balance sheet, the impairment was recorded
by eliminating both the intangible asset and the related deferred liability. As a result, the impairment did not impact the Company’s
consolidated statements of operations for the year ended December 31, 2025.
Services and Consulting Related Parties
In December 2024, the Company entered into a series
of contracts with Fortress under which the Company will deploy and operate a fleet of mobile gas turbines and balance-of-plant inventory,
providing management, sales and operations functions to Sawgrass in connection with the assets. In exchange for services performed under
the Asset Management Agreement (“AMA”), the Company received an advance cash payment and common units in Sawgrass (see Note
9). Sawgrass paid the Company $5.0 million in cash upon execution of the contract, which was applied ratably on a monthly basis against
amounts incurred under the AMA for a period of 12 months in 2025. In the event that the AMA was terminated within the first 12 months,
any balance remaining of the advanced funds would be credited in full to Duos.
25
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
As of December 31, 2024 deferred revenue under
the arrangement was $5.0 million, comprised of the $5.0 million advance payment. The Company recognized $5.0 million in revenue under
the AMA during the year ended December 31, 2025. No revenues were recognized during the three months ended March 31, 2026.
The Company also concluded that the arrangement
with Sawgrass is within the scope of ASC 606, Revenue from contracts with customers, and the common units issued to the Company by Sawgrass
Parent represented non-cash consideration. The initial carrying value as of December 31, 2024 of $7.2 million was measured equal to the
fair value of the common units received for future services to be performed under the AMA. The Company recorded $7.2 million of deferred
revenue for services to be performed under the AMA (see Note 9). During the year ended December 31, 2024, the Company did not recognize
any revenue associated with the AMA. The Company initially recorded the equity method investment in Sawgrass of $7.2 million, equal to
the fair value of the common units as of December 31, 2024.
As of March 31, 2026, the balance in contract
liabilities pertaining to the value of the equity method interest will be recognized as revenue as follows:
| Schedule of balance in contract liabilities / Calendar Year | Amounts |
| --- | --- |
| 2026 (Remaining) | $2,712,375 |
| Contract Liabilities | $2,712,375 |
**Disaggregation of Revenue**
The Company is following the guidance of ASC 606-10-55-296
and 297 for disaggregation of revenue. Accordingly, revenue has been disaggregated according to the nature, amount, timing and uncertainty
of revenue and cash flows. We are providing qualitative and quantitative disclosures.
**Qualitative:**
1. We have six distinct revenue sources:
a. Technology Systems (Turnkey, engineered projects);
b. AI Technology (Associated maintenance and support services);
c. Technical Support (Operational support,
asset management of power generation systems);
d. Consulting Services (Predetermined
algorithms to provide important operating information to the users of our systems);
e. Hosting (Deployment and operation
of edge data centers, providing customers with cabinet space and related infrastructure service); and
f. Technology Solutions - delivers manufacturer-agnostic
infrastructure sourcing, integration, and value-added
supply chain services supporting data
center, AI, and enterprise deployments
2. We currently operate in North America including the USA, Mexico
and Canada.
3. Our customers include rail transportation, and commercial.
4. Our technology systems and equipment projects fall into two types:
a. Transfer of goods and services over time.
b. Goods delivered at a point in time.
5. Our services & maintenance contracts are fixed price and fall
into two duration types:
a. Turnkey engineered projects and professional
service contracts that are less than one year in duration and are typically one to two quarters in length; and
b. Maintenance and support contracts ranging from one to
five years in length.
26
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Quantitative:**
**For the three months ended March 31, 2026**
| Schedule of disaggregation of revenue / Segments | Technologies | Technology Solutions | Data Center Hosting & Related Services | Asset Management | Total |
| --- | --- | --- | --- | --- | --- |
| Primary Geographical Markets | | | | | |
| North America | $576,726 | $562,454 | $30,275 | $1,552,572 | $2,722,027 |
| Major Goods and Service Lines | | | | | |
| Turnkey Projects | $44,259 | — | — | — | $44,259 |
| Maintenance and Support | 532,467 | 562,454 | 30,275 | 1,552,572 | 2,677,768 |
| | $576,726 | $562,454 | $30,275 | $1,552,572 | $2,722,027 |
| Timing of Revenue Recognition | | | | | |
| Goods transferred over time | $44,259 | $562,454 | — | — | $606,713 |
| Services transferred over time | 532,467 | — | 30,275 | 1,552,572 | 2,115,314 |
| | $576,726 | $562,454 | $30,275 | $1,552,572 | $2,722,027 |
**For the three months ended March 31, 2025**
| Segments | Technologies | Technology Solutions | Data Center Hosting & Related Services | Asset Management | Total |
| --- | --- | --- | --- | --- | --- |
| Primary Geographical Markets | | | | | |
| North America | $1,037,435 | — | — | $3,914,750 | $4,952,185 |
| Major Goods and Service Lines | | | | | |
| Turnkey Projects | $64,684 | — | — | — | $64,684 |
| Maintenance and Support | 972,751 | — | — | 3,914,750 | 4,887,501 |
| | $1,037,435 | — | — | $3,914,750 | $4,952,185 |
| Timing of Revenue Recognition | | | | | |
| Goods transferred over time | $64,684 | — | — | — | $64,684 |
| Services transferred over time | 972,751 | — | — | 3,914,750 | 4,887,501 |
| | $1,037,435 | — | — | $3,914,750 | $4,952,185 |
27
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 12 – SEGMENT REPORTING**
Beginning on January 1, 2025, the Company operates
in four operating and reportable segments which consist of (1) applying machine vision and AI to analyze high-speed objects and generate
revenue from system installations, AI integrations, support, and consulting, herein known as the “Technologies” segment, (2)
deploying Edge Data Centers for localized data processing in rural and underserved markets and providing GPUaaS, herein known as the “Data
Center Hosting & Related Services” segment, (3) delivering manufacturer-agnostic infrastructure sourcing, integration, and value-added
supply chain services supporting data center, AI, and enterprise deployments, herein known as the “Technology Solutions” segment
and (4) providing Asset Management Services under the AMA with New APR, managing mobile gas turbines and related assets, herein known
as the “Asset Management Services” segment. The Company has determined that these reportable segments were strategic business
units that offer different products and services. Currently, these reportable segments are being managed separately based on the fundamental
differences in their operations.
The Company’s Technologies segment applies
machine vision and AI to monitor and analyze high-speed objects such as trains, trucks, automobiles, and aircraft, and generates revenue
through its technology systems, AI applications, ongoing technical support, and consulting services.
The Technology Solutions business unit, which
delivers manufacturer-agnostic infrastructure sourcing, integration, and value-added supply chain services supporting data center, AI,
and enterprise deployments.
The Company’s Data Center Hosting &
Related Services segment generates revenues through the deployment of Edge Data Centers that enable faster, localized data processing
in rural and underserved markets, providing scalable solutions for enterprise and government clients and providing GPU as a service.
The Company’s Asset Management Services
segment generates revenues through the AMA with New APR, whereby Duos Energy oversees the deployment and operation of a fleet of mobile
gas turbines and balance-of-plant inventory, providing management, sales, and operations support to New APR.
Corporate and unallocated amounts that do not
relate to a reportable segment have been allocated to “Corporate & Unallocated.”
The Company’s chief operating decision maker
(“CODM”) is its Chief Executive Officer. The decisions concerning the allocation of the Company’s resources are made
by the CODM with oversight by the Board of Directors. The CODM evaluates the performance of each segment and makes decisions concerning
the allocation of resources based upon segment operating profit (loss), generally defined as income or loss before interest expense and
income taxes. The CODM assesses segment performance by using each segment’s operating income (loss) and considers budget-to-actual
variances on a periodic basis (at least quarterly) when making decisions about operational planning, including whether to invest resources
into the segments or into other parts of the Company. Segment assets are reviewed by the Company’s CODM and are disclosed below.
The accounting policies of the Technologies, Data Center Hosting & Related Services, Technology Solutions, and Asset Management Services
segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements.
28
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
Information with respect to these reportable business
segments for the three months ended March 31, 2026 and 2025 was as follows:
**Three Months ended March 31, 2026**
| Schedule of reportable business segments | Technologies | Technology Solutions | Data Center Hosting & Related Services | Asset Management Services | Corporate and Unallocated | Consolidated |
| --- | --- | --- | --- | --- | --- | --- |
| Net revenues | $576,726 | $562,454 | $30,275 | $1,552,572 | — | $2,722,027 |
| Cost of revenues | 21,799 | 506,570 | 39,433 | 543,857 | — | 1,111,659 |
| Operating Expenses (excluding depreciation and amortization) | 2,761,763 | 467,228 | 550,455 | — | 2,437 | 3,781,883 |
| Depreciation and amortization | 101,894 | — | — | — | — | 101,894 |
| Stock Compensation | — | — | — | — | 1,358,137 | 1,358,137 |
| Income (loss) from operations | (2,308,730) | (411,344) | (559,613) | 1,008,715 | (1,360,574) | (3,631,546) |
| Interest Expense | — | — | — | — | — | — |
| Other Income | 1,477 | — | 3,440 | 5,892 | 128,492 | 139,301 |
| Income (loss) before provision for income taxes | (2,307,253) | (411,344) | (556,173) | 1,014,607 | (1,232,082) | (3,492,245) |
| Provision for income taxes | — | — | — | — | — | — |
| Net income (loss) | $(2,307,253) | $(411,344) | $(556,173) | $1,014,607 | $(1,232,082) | $(3,492,245) |
**Three Months ended March 31, 2025**
| Line item | Technologies | Technology Solutions | Data Center Hosting & Related Services | Asset Management Services | Corporate and Unallocated | Consolidated |
| --- | --- | --- | --- | --- | --- | --- |
| Net revenues | $1,037,435 | — | — | $3,914,750 | — | $4,952,185 |
| Cost of revenues | 980,458 | — | — | 2,658,068 | — | 3,638,526 |
| Operating Expenses (excluding depreciation and amortization) | 1,649,951 | — | 315,066 | — | — | 1,965,017 |
| Depreciation and amortization | 164,233 | — | 34 | — | — | 164,267 |
| Stock Compensation | — | — | — | — | 974,003 | 974,003 |
| Income (loss) from operations | (1,757,206) | — | (315,100) | 1,256,682 | (974,003) | (1,789,628) |
| Interest Expense | (3,265) | — | (319,312) | — | — | (322,577) |
| Other Income | 19,168 | — | 10,678 | 2,083 | 613 | 32,542 |
| Income (loss) before provision for income taxes | (1,741,304) | — | (623,734) | 1,258,765 | (973,390) | (2,079,663) |
| Provision for income taxes | — | — | — | — | — | — |
| Net income (loss) | $(1,741,304) | — | $(623,734) | $1,258,765 | $(973,390) | $(2,079,663) |
Total assets by segment on March 31, 2026 and
December 31, 2025 were:
| Schedule of segment assets | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Technologies | $2,771,431 | $2,266,518 |
| Technology Solutions | 5,375,733 | 581,366 |
| Data Center Hosting & Related Services | 69,456,717 | 28,024,994 |
| Asset Management Services | 7,921,214 | 12,537,718 |
| Corporate and Unallocated | 37,391,967 | 19,998,819 |
| | $122,917,062 | $63,409,415 |
All assets are located in the United States.
29
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **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 | Three Months Ended March 31, 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 / Calendar year: | Amount |
| --- | --- |
| $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 |
30
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**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.
_March 31, 2026_
| Schedule of lease accounting | |
| --- | --- |
| 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.
31
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
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 | Three Months Ended March 31, 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.
32
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 14 – STOCKHOLDERS’ EQUITY**
**Series B Convertible Preferred Stock**
The following summary of certain terms and provisions
of our Series B Convertible Preferred Stock (the “Series B Convertible Preferred Stock”) is subject to, and qualified in its
entirety by reference to, the terms and provisions set forth in our certificate of designation of preferences, rights and limitations
of Series B Convertible Preferred Stock (the “Series B Convertible Preferred Certificate of Designation”) as previously filed.
Subject to the limitations prescribed by our articles of incorporation, our board of directors is authorized to establish the number of
shares constituting each series of preferred stock and to fix the designations, powers, preferences, and rights of the shares of each
of those series and the qualifications, limitations and restrictions of each of those series, all without any further vote or action by
our stockholders. Our board of directors designated 15,000 of the 10,000,000 authorized shares of preferred stock as Series B Convertible
Preferred Stock with a stated value of $1,000 per share. The shares of Series B Convertible Preferred Stock were validly issued, fully
paid and non-assessable.
Each share of Series B Convertible Preferred
Stock was convertible at any time at the holder’s option into a number of shares of common stock equal to $1,000 divided by
the conversion price of $7.00 per
share. Notwithstanding the foregoing, we could not effect any conversion of Series B Convertible Preferred Stock, with certain
exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series B Convertible
Preferred Stock (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of
such holder’s affiliates) would beneficially own a number of shares of our common stock in excess of 4.99% (or, at the
election of the purchaser, 9.99%) of the shares of our common stock then outstanding after giving effect to such conversion. The
Series B Convertible Preferred Certificate of Designation does not prohibit the Company from waiving this limitation. Upon any
liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders would be entitled to
participate on an as-converted-to-common stock basis (without giving effect to the Beneficial Ownership Limitation) with holders of
the common stock in any distribution of assets of the Company to the holders of the common stock. As of March 31, 2026 and December
31, 2025, respectively, there are zero 0 and zero 0 shares of Series B Convertible Preferred Stock issued and outstanding.
**Series C Convertible Preferred Stock**
The Company’s Board of Directors
designated 5,000 shares as the Series C Convertible Preferred Stock (the “Series C Convertible Preferred Stock”). Each share of the
Series C Convertible Preferred Stock had a stated value of $1,000.
The holders of the Series C Convertible Preferred Stock, the holders of the common stock and the holders of any other class or
series of shares entitled to vote with the common stock shall vote together as one class on all matters submitted to a vote of
shareholders of the Company. Each
share of Series C Convertible Preferred Stock had 172 votes (subject to adjustment); provided that in no event may a holder
of Series C Convertible Preferred Stock be entitled to vote a number of shares in excess of such holder’s Beneficial Ownership
Limitation (as defined in the Certificate of Designation and as described below). Each share of Series C Convertible Preferred Stock
was convertible, at any time and from time to time, at the option of the holder, into that number of shares of common stock (subject
to the Beneficial Ownership Limitation) determined by dividing the stated value of such share ($1,000) by the conversion price,
which is $5.50 (subject to adjustment). The Company shall not effect any conversion of the Series C Convertible Preferred Stock, and
a holder shall not have the right to convert any portion of the Series C Convertible Preferred Stock, to the extent that after
giving effect to the conversion sought by the holder such holder (together with such holder’s Attribution Parties (as defined
in the Certificate of Designation)) would beneficially own more than 4.99% (or upon election by a holder, 19.99%) of the number of
shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon such
conversion (the “Beneficial Ownership Limitation”). All holders of the Series C Preferred Stock elected the 19.99%
Beneficial Ownership Limitation. As of March 31, 2026 and December 31, 2025, respectively, there are zero 0 and zero 0 shares of Series C Convertible Preferred Stock issued and outstanding.
33
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Series D Convertible Preferred Stock**
On September 28, 2022, the Company amended its
articles of incorporation to designate 4,000 shares as the Series D Convertible Preferred Stock (the “Series D Convertible Preferred
Stock”). Each share of the Series D Convertible Preferred Stock has a stated value of $1,000. The holders of the Series D Convertible
Preferred Stock, the holders of the common stock and the holders of any other class or series of shares entitled to vote with the common
stock shall vote together as one class on all matters submitted to a vote of shareholders of the Company. Each share of Series D Convertible
Preferred Stock has 333 votes (subject to standard anti-dilution adjustment); provided that in no event may a holder of Series D Convertible
Preferred Stock be entitled to vote a number of shares in excess of such holder’s Beneficial Ownership Limitation (as defined in
the Certificate of Designation and as described below). Each share of Series D Convertible Preferred Stock is convertible, at any time
and from time to time, at the option of the holder, into that number of shares of common stock (subject to the Beneficial Ownership Limitation)
determined by dividing the stated value of such share ($1,000) by the conversion price, which is $3.00 (subject to adjustment). The Company
shall not effect any conversion of the Series D Convertible Preferred Stock, and a holder shall not have the right to convert any portion
of the Series D Convertible Preferred Stock, to the extent that after giving effect to the conversion sought by the holder such holder
(together with such holder’s Attribution Parties (as defined in the Certificate of Designation)) would beneficially own more than
4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock outstanding immediately after giving effect to the
issuance of shares of common stock issuable upon such conversion (the “Beneficial Ownership Limitation”). All but one of the
holders of the Series D Preferred Stock elected the 19.99% Beneficial Ownership Limitation. The Company shall reserve and keep available
out of its authorized and unissued Common Stock, solely for the issuance upon the conversion of the Series D Convertible Preferred Stock,
such a number of shares of Common Stock as shall from time to time be issuable upon the conversion of all of the shares of the Series
D Convertible Preferred Stock then outstanding. Additionally, the Series D Convertible Preferred Stock does not have the right to dividends
and in the event of an involuntary liquidation, the Series D shares shall be treated as a pro rata equivalent of common stock outstanding
at the date of the liquidation event and have no liquidation preference.
On September 30, 2022, the Company entered into
a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing investors in the Company (the “Purchasers”).
Pursuant to the Purchase Agreement, the Purchasers purchased 999 shares of the newly authorized Series D Convertible Preferred Stock,
and the Company received proceeds of $999,000. The Purchase Agreement contains customary representations, warranties, agreements and indemnification
rights and obligations of the parties. On October 29, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with a certain existing investor in the Company (the “Purchaser”). Pursuant to the Purchase Agreement, the
Purchaser purchased 300 shares of the newly authorized Series D Convertible Preferred Stock, and the Company received proceeds of $300,000.
The Purchase Agreement contains customary representations, warranties, agreements and indemnification rights and obligations of the parties.
At the Annual Meeting on May 16, 2023, the
stockholders approved the convertibility of the Series D Preferred Stock into common stock.
On March 22, 2024, March 28, 2024, and April 3,
2024, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with certain existing and other
accredited investors (the “2024 Purchasers”). Pursuant to the Purchase Agreements, the 2024 Purchasers purchased an aggregate
of 870 shares of Series D Preferred Stock, at a price of $1,000 per share, and the Company received proceeds of $870,000.
In connection with such Purchase Agreements, the
Company entered into Registration Rights Agreements and filed registration statements with the SEC covering the resale by the Purchasers
of the shares of common stock into which the shares of Series D Convertible Preferred Stock are convertible. The Registration Rights Agreements
contain customary representations, warranties, agreements and indemnification rights and obligations of the parties.
The Registration Rights Agreements contain provisions
for liquidated damages equal to 1% multiplied by the aggregate subscription amount paid, paid each month, in the event certain deadlines
are missed.
In April, May, July and October of 2024, 870 outstanding
shares of Series D Convertible Preferred Stock were converted into 290,002 shares of common stock. In February of 2025, 300 outstanding
shares of Series D Convertible Preferred Stock were converted into 100,000 shares of common stock. As of March 31, 2026, and December
31, 2025, there were 999 and 999 shares of Series D Convertible Preferred Stock issued and outstanding, respectively.
34
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Series E Convertible Preferred Stock**
The Company’s Board of Directors has designated30,000 shares as the Series E Convertible Preferred Stock (the “Series E Convertible Preferred Stock”). Each share of the
Series E Convertible Preferred Stock has a stated value of $1,000. The holders of the Series E Convertible Preferred Stock, the holders
of the common stock and the holders of any other class or series of shares entitled to vote with the common stock shall vote as one class
on all matters submitted to a vote of shareholders of the Company. Each share of Series E Convertible Preferred Stock has 333 votes (subject
to adjustment); provided that in no event may a holder of Series E Convertible Preferred Stock be entitled to vote a number of shares
in excess of such holder’s Beneficial Ownership Limitation. Each share of Series E Convertible Preferred Stock is convertible at
any time and from time to time, at the option of the holder, into that number of shares of common stock (subject to the Beneficial Ownership
Limitation) determined by dividing the stated value of such share ($1,000) by the conversion price, which was $3.00 (subject to adjustment)
(see adjustment below to $2.61). The Company shall not effect any conversion of the Series E Convertible Preferred Stock, and the holder
shall not have the right to convert any portion of the Series E Convertible Preferred Stock, to the extent that after giving effect to
the conversion sought by the holder such holder (together with such holder’s Attribution Parties (as defined in the Certificate
of Designation)) would beneficially own more than 4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock
outstanding immediately after giving effect to the issuance of shares of common stock issuable upon such conversion (the “Beneficial
Ownership Limitation”). All but one of the holders of the Series E Preferred Stock elected the 19.99% Beneficial Ownership Limitation.
The Company on March 27, 2023 entered into a Securities
Purchase Agreement (the “Purchase Agreement”) with existing investors in the Company (the “Purchasers”). Pursuant
to the Purchase Agreement, the Purchasers purchased 4,000 shares of a newly authorized Series E Convertible Preferred Stock at a price
of $1,000 per share, and the Company received proceeds of $4,000,000. The Purchase Agreement contains customary representations, warranties,
agreements and indemnification rights and obligations of the parties.
The existing investors’ Purchase Agreement
also provided that the Company would not, with certain exceptions, sell or issue common stock or Common Stock Equivalents (as defined
in the Purchase Agreement) on or prior to December 31, 2023 that entitled any person to acquire shares of common stock at an effective
price per share less than the then conversion price of the Series E Convertible Preferred Stock without the consent of the Purchasers.
On November 9, 2023, the Company entered into
a Securities Purchase Agreement (the “November Purchase Agreement”) with existing investors in the Company (the “Purchasers”).
Pursuant to the Purchase Agreement, the Purchasers purchased 2,500 shares of Series E Convertible Preferred Stock, at a price of $1,000
per share, and the Company received proceeds of $2,500,000.
The November Purchase Agreement also provided
that the Company would not, with certain exceptions, sell or issue common stock or Common Stock Equivalents (as defined in the November
Purchase Agreement) on or prior to June 30, 2024 that entitled any person to acquire shares of common stock at an effective price per
share less than the then conversion price of the Series E Convertible Preferred Stock (which was $3.00 per share) without the consent
of the Purchasers. If the Company sold shares less than the conversion price, with the consent of Purchasers, then the Series E conversion
price would be amended to that lower share price. This provision had not been triggered as of June 30, 2024.
The Purchasers under the November Purchase Agreement
also were the holders of the Company’s Series F Convertible Preferred Stock issued on August 1, 2023. The purchase agreement relating
to the shares of Series F Convertible Preferred Stock required the consent of the holders in the event the Company were to issue common
stock or rights to acquire common stock prior to December 31, 2023 at an effective price per share less than the then conversion price
of the Series F Convertible Preferred Stock, which was $6.20 per share. As a result, on November 10, 2023 the Company and the holders
of the Series F Convertible Preferred Stock entered into Exchange Agreements pursuant to which the holders of Series F Convertible Preferred
Stock exchanged their 5,000 shares of Series F Convertible Preferred Stock for an equal number of shares of Series E Convertible Preferred
Stock. As a result of the November Purchase Agreement and the Exchange Agreements, the Company issued a total of 7,500 shares of Series
E Convertible Preferred Stock and the 5,000 shares of Series F Convertible Preferred Stock were cancelled.
On March 22, 2024 and March 28, 2024, the Company
entered into Securities Purchase Agreements (the “Purchase Agreements”) with certain existing and other accredited investors
(the “2024 Purchasers”). Pursuant to the Purchase Agreements, the 2024 Purchasers purchased an aggregate of 2,125 shares of
Series E Convertible Preferred Stock, at a price in each case of $1,000 per share, and the Company received proceeds of $2,125,002. Those
purchase agreements had similar price protections as the November Purchase Agreement but extended the price protection date to December
31, 2024, for all Series E holders.
35
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
In connection with such Purchase Agreements, the
Company also entered into Registration Rights Agreements with the Purchasers. Pursuant to the Registration Rights Agreements, the Company
filed with the SEC registration statements covering the resale by the Purchasers of the shares of common stock into which the shares of
Series E Convertible Preferred Stock are convertible.
The Registration Rights Agreements contain customary
representations, warranties, agreements and indemnification rights and obligations of the parties. The Registration Rights Agreements
contain provisions for liquidated damages equal to 1% multiplied by the aggregate subscription amount paid, paid each month, in the event
certain deadlines are missed.
On September 19, 2024, the conversion rate of
the Series E Convertible Preferred Stock was lowered to $2.61 from $3.00 per share based on the down round protection provision triggered
by the warrants induced exercise price of $2.61 per share. This will lead to the issuance of an additional 678,640 shares of common stock
upon the conversion of the preferred shares.
In October of 2024, 125 outstanding shares of
the Series E Convertible Preferred Stock were converted into 47,892 shares of common stock.
On May 28, 2025, a shareholder converted 1,000 shares of Series E Convertible Preferred Stock with a stated value of $1,000,000 with a conversion price of $2.61 per common share resulting
in the issuance of 383,143 shares of the Company’s common stock.
As of March 31, 2026, and December 31, 2025, respectively,
there were 12,500 and 12,500 shares of Series E Convertible Preferred Stock issued and outstanding.
**Series F Convertible Preferred Stock**
The Company's Board of Directors designated 5,000 shares as the Series F Convertible Preferred Stock (the “Series F Convertible Preferred Stock”). Each share of Series F Preferred
Stock was convertible, at any time and from time to time, at the option of the holder, into that number of shares of common stock (subject
to the beneficial ownership limitation described below) determined by dividing the stated value of such share ($1,000) by the conversion
price, which is $6.20 (subject to adjustment) which equates to 161 common shares for each converted Series F preferred share. The Company,
however, shall not effect any conversion of the Series F Convertible Preferred Stock, and the holder shall not have the right to convert
any portion of the Series F Convertible Preferred Stock, to the extent that after giving effect to the conversion sought by the holder
such holder (together with such holder’s Attribution Parties (as defined in the Certificate of Designation)) would beneficially
own more than 4.99% (or upon election by a holder, 19.99%) of the number of shares of common stock outstanding immediately after giving
effect to the issuance of shares of common stock issuable upon such conversion. The purchasers of the Series F Convertible Preferred Stock
elected that their ownership limitation would be 19.99%.
The holders of the Series F Convertible Preferred
Stock, the holders of the common stock and the holders of any other class or series of shares entitled to vote with the common stock shall
vote together as one class on all matters submitted to a vote of shareholders of the Company. Each share of Series F Convertible Preferred
Stock had 161 votes (subject to adjustment); provided that in no event may a holder of Series F Preferred Stock be entitled to vote a
number of shares in excess of such holder’s ownership limitation.
On August 2, 2023, the Company entered into a
Securities Purchase Agreement (the “Purchase Agreement”) with existing, accredited investors in the Company (the “Purchasers”).
Pursuant to the Purchase Agreement, the Purchasers purchased 5,000 shares of a newly authorized Series F Convertible Preferred Stock,
and the Company received proceeds of $5,000,000. The Purchase Agreement contains customary representations, warranties, agreements and
indemnification rights and obligations of the parties.
The Company also agreed that it would not, with
certain exceptions, sell or issue common stock or Common Stock Equivalents (as defined in the Purchase Agreement relating to the Series
F Preferred Stock) on or prior to December 31, 2023 that entitled any person to acquire shares of common stock at an effective price per
share less than the then conversion price of the Series F Preferred Stock without the consent of the holders. As a result of that agreement,
upon the issuance of 2,500 shares of Series E Preferred Stock (which had a conversion price of $3.00 per share) on November 10, 2023,
the holders exchanged their 5,000 shares of Series F Preferred Stock for 5,000 shares of Series E Preferred Stock. All of the shares of
Series F Preferred Stock thereupon were cancelled with zero shares now outstanding.
As of March 31, 2026, and December 31, 2026,
respectively, there were zero 0 and zero 0 shares of Series F Convertible Preferred Stock issued and outstanding.
36
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Common stock issued**
**2026 Transactions**
On January 1, 2026, the Company issued restricted
stock awards to an officer for a total of 150,000 shares of restricted stock with 3-year cliff vesting with an aggregate grant-date fair
value of $1,687,504 based on a $11.25 price per share.
On January 1, 2026, the Company issued restricted
stock awards to eight employees for a total of 145,000 shares of restricted stock with 25% vesting on January 1, 2027, 25% vesting on
January 1, 2028 and 50% vesting on January 1, 2029 with an aggregate grant-date fair value of $1,631,254 based on a $11.25 price per share.
On January 15, 2026, a former employee exercised
options to purchase 2,500 shares generating total gross proceeds of $19,009, incurring stock issuance cost of $101, payroll tax cost of
$2,883, and yielding net proceeds of $16,025. The exercise were made pursuant to the Company’s 2021 Equity Incentive Plan and were
conducted in accordance with the applicable terms of the plan and the individual award agreements.
On February 1, 2026, the Company issued restricted
stock awards to two employees for a total of 125,000 shares of restricted stock with 3-year cliff vesting with an aggregate grant-date
fair value of $1,175,008 based on a $9.40 price per share.
On March 2, 2026, the Company issued 8,666,666 shares of its common stock under a public offering priced at $7.50 per share, resulting in net proceeds of approximately $60.3 million
net of offering costs of $4.7 million. In connection with the offering on March 2, 2026, the underwriters were issued 433,334 warrants.
See warrants disclosure below.
On March 3, 2026, a former employee completed
a cashless exercise of stock options for 5,556 shares of the Company’s common stock.
On March 31, 2026, the Company issued 14,193 shares
of common stock for payment of board fees to four directors valued at $95,000 for services to the board which was expensed during the
three months ended March 31, 2026. The volume-weighted average price (VWAP) on the grant date used to value the services is $6.69 per
share.
**2025 Transactions**
Effective January 1, 2025, the Company’s
executive leadership team was granted a total of 1,841,898 shares of restricted stock, subject to a three-year cliff vesting schedule,
with an aggregate grant-date fair value of $11,014,544 based on a $5.98 price per share.
On February 5, 2025, a holder of our Series D
Convertible Preferred Stock converted 300 shares of Series D Convertible Preferred Stock into 100,000 shares of Common Stock.
Effective March 26, 2025, the Company issued a
restricted stock award to an employee for a total of 100,000 shares of restricted stock with 3-year cliff vesting with an aggregate grant-date
fair value of $604,000 based on a $6.04 price per share.
During the three months ended March 31, 2025,
the Company issued an aggregate of 633,683 shares of common stock at a weighted average price of $6.24 per share through its At-The-Market
(ATM) offering program, generating total gross proceeds of $3,954,940, incurring stock issuance costs of $137,851 and yielding net proceeds
of $3,817,089.
On March 31, 2025, the Company issued 9,360 shares
of common stock for payment of board fees to four directors valued at $50,000 for services to the board which was expensed during the
three months ended March 31, 2025. The volume-weighted average price (VWAP) on the grant date used to value the services is $5.34 per
share.
During the three months ended March 31, 2025,
certain employees exercised stock options to acquire a total of 27,712 shares of the Company’s common stock, generating total gross
proceeds of $107,925, incurring stock issuance cost of $375 and yielding net proceeds of $107,550. The exercises were made pursuant to
the Company’s 2016 and 2021 Equity Incentive Plans and were conducted in accordance with the applicable terms of the plans and the
individual award agreements.
During the three months ended March 31, 2025,
the Company issued 10,000 shares of restricted common stock to each of Mr. Ehrman and Mr. Mavrommatis, directors of the Company, subject
to a one-year cliff resting period. The shares had an aggregate grant-date fair value of $119,600, based on a $5.98 price per share.
37
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
**Employee Stock Purchase Plan**
In the fourth quarter of 2022, the board of directors
adopted an Employee Stock Purchase Plan (“ESPP”) which was effective as of January 1, 2023 with a term of 10 years. The ESPP
allows eligible employees to purchase shares of the Company's common stock at a discounted price, through payroll deductions from a minimum
of 1% and up to 25% of their eligible compensation up to a maximum of $25,000 or the IRS allowable limit per calendar year. The Company’s
Chief Financial Officer administers the ESPP in conjunction with approvals from the Company’s Compensation Committee, including
with respect to the frequency and duration of offering periods, the maximum number of shares that an eligible employee may purchase during
an offering period, and, subject to certain limitations set forth in the ESPP, the per-share purchase price. Currently, the maximum number
of shares that can be purchased by an eligible employee under the ESPP is 10,000 shares per offering period and there are two six-month
offering periods that begin in the first and third quarters of each fiscal year. The purchase price for one share of Common Stock under
the ESPP is currently equal to 85% of the fair market value of one share of Common Stock on the first trading day of the offering period
or the purchase date, whichever is lower (look-back feature). Although not required by the ESPP, all payroll deductions received or held
by the Company under the ESPP are segregated and deemed as “restricted cash” until the completion of the offering period and
redemption of the applicable shares and those withheld amounts are recorded as liabilities. The maximum aggregate number of shares of
the Common Stock that may be issued under the ESPP is 1,000,000 shares.
Under ASC 718-50 “Employee Share Purchase
Plans” the plan is considered a compensatory plan and the compensation for each six-month offering period is computed based upon
the grant date fair value of the estimated shares to be purchased based on the estimated payroll deduction withholdings. The grant date
fair value was computed as the sum of (a) 15% purchase discount off of the grant date quoted trading price of the Company’s common
stock and (b) the fair value of the look-back feature of the Company’s common stock on the grant date which consists of a call option
on 85% of a share of common stock and a put option on 15% of a share of common stock.
As of March 31, 2026, the Company has an accrued
liability of $33,538 included in accrued expenses of employee contributions for the ESPP which may convert to shares of common stock upon
the close of the offering period open from January 1, 2026 to June 30, 2026. The liability is offset by restricted cash held by the Company
in the same amount for employee contributions which the Company expects to convert to common stock upon closure of the offering period
at June 30, 2026. Additionally, the Company recorded a stock-based expense associated with the ESPP for the three months ended March 31,
2026 of $16,318.
The Company computed the fair value of the look-back
feature call and put options for January 1, 2026 to March 31, 2026 using a Black Scholes option pricing model using the following assumptions:
_At March 31, 2026_
| Schedule of stock-based compensation pro rata | |
| --- | --- |
| Grant date share price | $6.86 |
| Grant date exercise price | $5.83 |
| Expected term | 0.5 years |
| Expected volatility | 76.29% |
| Risk-free rate | 3.70% |
| Expected dividend rate | 0% |
During the offer period, the Company records stock-based
compensation pro rata as an expense and a credit to additional paid-in capital. The following table discloses relevant information for
the ESPP at March 31, 2026 and for three months then ended.
_At March 31, 2026_
| Schedule of relevant information for ESPP | |
| --- | --- |
| Cash payment received from employee withholding | $33,538 |
| Cash from employee withholdings used to purchase shares under ESPP | — |
| Accrued employee withholdings at March 31, 2026 | $33,538 |
38
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
_For the Three Months ended March 31, 2026_
| Cash from employee withholding used to purchase ESPP shares | — |
| --- | --- |
| Stock based compensation expense | 16,318 |
| Total increase to equity for year ended March 31, 2026 | $16,318 |
**Stock-Based Compensation**
Stock-based compensation expense recognized under
ASC 718-10 for the three months ended March 31, 2026 and 2025, was $20,000 and $22,030, respectively, for stock options granted to employees
and directors. This expense is included in general and administration expenses in the consolidated statements of operations. Stock-based
compensation expense recognized during the periods is based on the grant date fair value of the portion of share-based payment awards
that is ultimately expected to vest during the period. At March 31, 2026, the total compensation cost for stock options that was not yet
recognized was $52,113. This cost will be recognized over the remaining vesting term of the options ranging from 3 months to 2.8 years.
Stock-based compensation expense recognized under
ASC 718-10 for the three months ended March 31, 2026 and 2025, was $1,343,011 and $951,973, respectively, for shares of restricted stock
granted to employees. During the three months ended March 31, 2026, the Company granted a total of 420,000 shares of restricted stock
with an aggregate grant-date fair value of $4,493,766, computed as 295,000 shares at $11.25 per share and 125,000 shares at $9.40 per
share. This expense is included in general and administration expenses in the consolidated statements of operations. Stock-based compensation
expense recognized during the periods is based on the grant-date fair value of the restricted stock units that are ultimately expected
to vest. At March 31, 2026, the total compensation cost for restricted stock not yet recognized was $11,917,154. This cost will be recognized
over the remaining vesting term of the restricted stock ranging from 2 to 3 years.
**Treasury Stock**
At March 31, 2026, and December 31, 2025, the
Company held 1,324 shares of Common Stock at an aggregate value of $157,452 of treasury stock.
39
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 15 – COMMON STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK**
**Options**
**2026**
During the three months ended March 31, 2026,
the Company’s Board of Directors granted 5,000 5 year stock options with a strike price of $11.44 per share to one key employee.
These options were awarded as a one-time award as a retention incentive and have a fair value of $40,948 and carry a three-year vesting
period.
| Schedule of options activity | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value |
| --- | --- | --- | --- | --- |
| Outstanding at December 31, 2024 | 606,452 | $5.29 | 2.0 | $514,394 |
| Granted | 20,000 | $5.64 | 2.5 | $112,200 |
| Forfeited | (271,449) | $5.71 | — | — |
| Outstanding at December 31, 2025 | 355,003 | $5.00 | 1.8 | $2,219,665 |
| Exercisable at December 31, 2025 | 283,000 | $5.15 | 1.5 | $1,727,688 |
| Outstanding at December 31, 2025 | 355,003 | $5.00 | 1.8 | $2,219,665 |
| Granted | 5,000 | $11.44 | 4.8 | — |
| Exercised | (15,000) | $4.69 | — | — |
| Forfeited/Expired | (20,000) | $4.18 | — | — |
| Outstanding at March 31, 2026 | 325,003 | $5.16 | 1.8 | $575,104 |
| Exercisable at March 31, 2026 | 251,334 | $5.24 | 1.5 | $408,018 |
The fair value of the incentive stock option grants
for the three months ended March 31, 2026 and 2025 were estimated using the following assumptions:
| Schedule of fair value of warrants | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 |
| --- | --- | --- |
| Stock price | $11.25 | — |
| Exercise Price | $11.44 | — |
| Risk free interest rate | 3.55% | — |
| Expected term in years | 5 | — |
| Dividend yield | — | — |
| Volatility of common stock | 93.67% | — |
Weighted average grant date fair value per
option was $8.19 for the three months ended March 31, 2026.
**Warrants**
**2026**
In connection with the Company’s equity
financing completed during the quarter ended March 31, 2026, the Company issued 5-year warrants for 433,334 common shares at an exercise
price of $9.00 per share to the investment bankers who facilitated the offering. The warrants were issued contemporaneously with the closing
of the financing and were included as part of the negotiated engagement terms. The warrants are indexed to the Company’s common
stock, provide for settlement in a fixed number of shares for a fixed exercise price, and are freestanding equity instruments. Accordingly,
they meet the criteria for equity classification under ASC 815-40 and are not subject to remeasurement in future periods.
40
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
The Company determined the warrants were non-compensatory
pursuant to ASC 340-10-S99-1, as they were issued as part of the overall consideration for services directly related to the capital raise,
were not tied to future performance, and did not include any vesting or service conditions.
The fair value of the warrants was determined
using the Black-Scholes option-pricing model based on the following key assumptions: expected volatility, risk-free interest rate, expected
term, and expected dividend yield as of the grant date. The resulting fair value of approximately $2,305,016 was recorded as a reduction
to Additional Paid-In Capital (APIC) within stock issuance costs, with a corresponding credit to APIC for the issuance of the warrants.
The Company used the following assumptions in
determining the fair value of the warrants:
| Schedule of assumptions / Date of Grant | March 2, 2026 |
| --- | --- |
| Stock Price | $7.61 |
| Exercise Price | $9.00 |
| Expected Remaining Term (Years) | 5.00 |
| Expected Volatility | 92% |
| Dividend Yield | 0% |
| Discount Rate - Bond Equivalent Yield | 3.620% |
No income statement impact is expected related
to these warrants in future periods.
| Schedule of warrants outstanding / Outstanding at December 31, 2024 / Warrants expired, forfeited, cancelled or exercised | Number of Warrants / — | Weighted Average Exercise Price / — | Weighted Average Remaining Contractual Term (Years) / — | Aggregate Intrinsic Value / — |
| --- | --- | --- | --- | --- |
| Warrants issued | 375,276 | $7.20 | 5.0 | $— |
| Outstanding at December 31, 2025 | 375,276 | $7.20 | 4.6 | $1,519,868 |
| Exercisable at December 31, 2025 | 375,276 | $7.20 | 4.6 | $1,519,868 |
| Outstanding at December 31, 2025 | 375,276 | $7.20 | 4.6 | $1,519,868 |
| Warrants expired, forfeited, cancelled or exercised | — | $— | — | $— |
| Warrants issued | 433,334 | $9.00 | 5.0 | $— |
| Outstanding at March 31, 2026 | 808,610 | $8.16 | 4.7 | $— |
| Exercisable at March 31, 2026 | 808,610 | $8.16 | 4.7 | $— |
**Restricted Stock**
| Schedule of restricted stock / Unvested at December 31, 2024 | Number of Shares / — | Weighted Average Grant Date Fair Value Per Share / — |
| --- | --- | --- |
| Restricted stock granted | 2,146,898 | $6.13 |
| Restricted stock forfeited | (162,500) | $6.00 |
| Restricted stock vested | (20,000) | $5.22 |
| Unvested at December 31, 2025 | 1,964,398 | $6.15 |
| Vested at December 31, 2025 | 20,000 | $5.22 |
| Unvested at December 31, 2025 | 1,964,398 | $6.15 |
| Restricted stock granted | 420,000 | $10.70 |
| Restricted stock forfeited | — | $— |
| Restricted stock vested | (10,000) | $5.98 |
| Unvested at March 31, 2026 | 2,374,398 | $6.95 |
| Vested at March 31, 2026 | 30,000 | $5.47 |
41
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 16 – DEFINED CONTRIBUTION PLAN**
The Company has a 401(k)-retirement savings plan
(the “401(k) Plan”) covering all eligible employees. The 401(k) Plan allows employees to defer a portion of their annual compensation,
and the Company may match a portion of the employees’ contributions generally after the first six months of service. During the
three months ended March 31, 2026, the Company matched 100% of the first 4% of eligible employee compensation that was contributed to
the 401(k) Plan. For the three months ended March 31, 2026, the Company recognized expense for matching cash contributions to the 401(k)
Plan totaling $21,282.
### **NOTE 17 – RELATED PARTY TRANSACTIONS**
Frank Lonegro serves on the Board of
Directors and is a member of the Audit, Compensation and Corporate Governance and Nominating Committees. Mr. Lonegro is the Chief
Executive Officer of Landstar System, Inc. (“Landstar”), based in Jacksonville, Florida. The Company has previously
utilized Landstar for shipping services including transporting large items. Most recently, Landstar was the designated vendor
involved in shipping an Edge Data Center to an Amtrak site in Secaucus, New Jersey. Mr. Lonegro was not involved in the selection of
his Company by the Company, with which there was an existing relationship pre-dating Mr. Lonegro’s appointment to the Board of
the Company. Mr. Lonegro did not participate in any Board discussions or votes relating to the selection of Landstar nor approval of
the transactions with Landstar. The terms of these transactions were reviewed and approved by the management team. For the three
months ended March 31, 2026 and March 31, 2025, the Company expensed zero 0 and $8,690,
respectively, on transactions relating to Landstar. At March 31, 2026 and December 31, 2025, the amounts owed were zero 0 and zero 0, respectively, and are included in accounts payable in the accompanying balance sheets.
Brian James serves on the Board of Directors
and is the president of NAT Tech LLC dba National Technologies (“NTI”). The Company has provided equipment to NTI in the
normal course of business. For the three months ended March 31, 2026 and March 31, 2025, the Company recognized revenue , net of sales
tax, $44,429 and zero,respectively on transactions relating to NTI. At March 31, 2026
and December 31, 2025, the amounts due were $48,356 and zero 0,
respectively, and are included in the accounts receivable in the accompanying balance sheets.
Kristen Sanderson, Senior Vice President of Duos
Technologies Solutions Inc, has a personal relationship with Doug Recker, who joined the Company in April 2024 as President of Duos Edge
AI, Inc and assumed the role of Chief Executive Officer of Duos Technologies Group, Inc. effective April 1, 2026. Ms. Sanderson joined
the Company on October 20, 2025, and as of March 31, 2026, reported directly to Mr. Recker.
For the three months ended March 31, 2026, Ms.
Sanderson received total compensation of $56,469.
In the fourth quarter of 2022, the Company elected
to not renew a support contract with an existing customer due to a change in focus by the Company away from its Integrated Correctional
Automation System (“iCAS”) business and the limited amount of revenue expected from that business going forward. On June 29,
2023, the Company completed a transaction whereby it sold assets related to its iCAS business and a recommendation to that customer to
engage with the eventual buyer going forward. The transaction was completed with a third-party buyer of which the Company’s then
former Chief Financial Officer is a director. The former officer, who was rehired as our CFO in May of 2024 and served in that position
through November 15, 2025, did not participate in the transaction on behalf of the Company which was negotiated by the CEO. (see Note
18)
In late 2024, Duos engaged with Fortress Investment
Group (“FIG”) to assist in FIG’s purchase of approximately 850 megawatts of electrical generation capacity (consisting
of 30 mobile gas turbine generators) and associated equipment to support their installation and operation (“balance of plant”).
In late November 2024, Sawgrass Buyer LLC, an entity formed and owned by FIG, executed an asset purchase agreement with Atlas Corporation,
APR Energy Holdings Limited and a number of its wholly-owned affiliates (collectively, “APR”). Chuck Ferry, our former CEO,
was formerly the CEO of APR from 2018 to 2020. The transaction closed on December 31, 2024. At closing, Sawgrass Buyer LLC entered into
an Asset Management Agreement (“AMA”) with the Company under which a substantial portion of Company staff, including certain
members of the management team (including Mr. Ferry), would oversee operations of Sawgrass Buyer LLC. The AMA term is two years and subject
to customary cancellation provisions. At closing, the Company also received a 5% non-voting equity ownership interest in Sawgrass APR
Holdings, LLC (“Sawgrass Parent”), the ultimate parent Company of Sawgrass Buyer LLC. As part of the transaction, certain
members of the Company’s management team, including Charles Ferry, Duos’ Chief Executive Officer(through his resignation in
March 2026), and Christopher King, Duos Chief Operating Officer (through his resignation in September 2025), serve in a similar position
with New APR in addition to their role at the Company. Mr. Ferry is also Executive Chairman and a member of the Board of New APR. Mr.
Goldfarb, the Company’s former CFO (as of November 15, 2025), is an observer on the board of New APR but has have no executive role
or management responsibilities at the new entity. The Company continued to pay 50% of the compensation for Mr. Ferry through March 2026.
42
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
As a result of the relationships between Duos
Energy Corporation and the FIG related entities described above, Sawgrass Parent and New APR are considered related parties to the Company.
(See Notes 3, 8, 9, and 11 for related party balances).
In 2024, the Company borrowed $2,200,000 from
two lenders that are related parties because together they hold more than 10% of the Company’s voting common stock. (See Note 10).
In the year ended December 31, 2025, the Company repaid the loan including interest in the amount of $2,388,356.
### **NOTE 18 – SALE OF ASSETS**
On June 29, 2023, the Company completed a transaction
whereby it sold assets related to its Integrated Correctional Automation System (iCAS) business with a single customer. In the fourth
quarter of 2022, the Company elected to not renew a support contract due to the limited nature of the business. The transaction was completed
with a third-party buyer of which the Company’s former Chief Financial Officer (until November 2025) and now current Strategic Advisor
is a director. The former officer did not participate in the transaction on behalf of the Company which was negotiated by the CEO.
The assets of the iCAS business were sold for
a convertible promissory note with a principal amount of $165,000 with a 10% original issue discount as well as common stock purchase
warrants. The note originally matured in 2 years from the date of sale and is convertible immediately through the later of the maturity
date or payment by the borrower of the default amount, as defined in the note, into shares of the buyer’s common stock at a conversion
price of $0.003 or 55,000,000 shares. The conversion of the note carries restrictions which include limiting conversion to the extent
it would not exceed 4.99% of the common stock outstanding of the buyer. The convertible promissory note is subject to standard anti-dilution
provisions. In June 2025, the Company and the borrower amended the convertible promissory note increasing the principal amount to $180,000
and extending the maturity date to June 29, 2027. There was no change to other terms and conditions. In July 2025, the Company and the
borrower agreed to a further 2-year extension of the note at the same terms and conditions. The iCAS note receivable was fully reserved
in accordance with management’s assessment.
The common stock purchase warrants are for a total
of 55,000,000 common shares of the buyer at an exercise price of $0.01 per share. The warrants are subject to standard anti-dilution provisions.
The warrants were not exercisable until on or after six months from the issuance date and no later than on or before the third anniversary
of the issuance date. The Company may exercise the warrants at any time after the six-month anniversary of the issuance date on a cashless
basis if there is no effective registration statement covering the resale of the Warrant Shares at prevailing market prices by the holder.
The exercise of these warrants is subject to beneficial ownership limits of 4.99% which may be increased by the holder up to 9.99% as
defined in the warrant. Given that the shares carried no intrinsic value at the time of the transaction and that the overall fair value
is de minimis, the Company has not recorded the warrants associated with the transaction. As of the date of this filing, the Company continues
to hold the warrants.
The original issue discount was accrued into interest
income over the term of the note.
The note receivable was recorded as follows on
March 31, 2026 and December 31, 2025:
| Schedule of note receivable | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Convertible note receivable | $180,000 | $180,000 |
| Less allowance on note receivable | (180,000) | (180,000) |
| Convertible note receivable, net | — | — |
43
**DUOS TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES**
**CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
**March 31, 2026 and 2025**
**(Unaudited)**
### **NOTE 19 – SUBSEQUENT EVENTS**
On April 1, 2026, Douglas
Recker was appointed Chief Executive Officer of the Company. In connection with his appointment, Charles Ferry resigned as Chief Executive
Officer of the Company. Mr. Ferry continues to serve as a member of the Company’s Board of Directors and remains Chief Executive
Officer of New APR Energy, LLC, in which the Company holds a 5% equity interest. In connection with Mr. Ferry’s resignation,
the Company and Mr. Ferry amended and restated the Equity Award Agreement originally entered into on January 1, 2025 (the “Original
Agreement”). Under the Original Agreement, Mr. Ferry had been granted 552,889 shares of the Company’s common stock pursuant
to the Company’s 2021 Equity Incentive Plan, as amended, subject to a three-year cliff vesting schedule with vesting on December
31, 2027. The Original Agreement provided that the shares would be forfeited if Mr. Ferry ceased employment with the Company prior to
the vesting date or upon the occurrence of certain other specified events. Pursuant to the amended and restated agreement, the number
of shares subject to the award was reduced to 261,445 shares. The vesting date of December 31, 2027 remains unchanged; however, vesting
is now conditioned upon Mr. Ferry’s continued service as a member of the Company’s Board of Directors through the vesting
date. All other material terms of the award remain unchanged. In accordance with the Company’s accounting policy to recognize forfeitures
as they occur, previously recognized compensation expense related to the forfeited portion will be reversed in the period of forfeiture.
On May 1, 2026, a former consultant
completed a cashless exercise of stock options and received 17,756 shares of the Company’s common stock upon exercise of 33,334 stock options.
In connection to the GPU as a service arrangement
with Hydra Host, the Company received a $15 Million prepayment deposit from the single customer on May 1, 2026. The deposit will be amortized
as revenue over the term of the project, 3 years, once services begin. The customer prepayment will be used to fund the initial investment
of the GPU servers and related services.
On May 5, 2026, a former employee exercised options
to purchase 10,104 shares and the Company received proceeds in the amount of approximately $57,000. The exercise was made pursuant to
the Company’s 2021 Equity Incentive Plan and was conducted in accordance with the applicable terms of the plan and the individual
award
44
## Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operation.**
*This quarterly report on Form 10-Q and other
reports filed by Duos Technologies Group, Inc., and its operating subsidiaries, Duos Technologies, Inc. (“Duos”), Duos Edge
AI, Inc. (“Edge”), Duos Energy Corporation (“Energy”), and Duos Technologies Solutions, Inc. (“Solutions”)
(Duos Technologies Group, Inc., Duos, Edge, Energy, and Solutions, collectively the “Company” “we”, “our”,
and “us”) from time to time with the Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking
statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well
as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,”
“believe,” “estimate,” “expect,” “future,” “intend,” “plan,” “aim,”
“project,” “target,” “will,” “may,” “should,” “forecast” or the
negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking
statements. Such statements typically address the Company’s expected future business and financial performance and are subject to
risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2025, relating to the Company’s industry, the Company’s
operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual results may differ materially from those anticipated, believed,
estimated, expected, intended, or planned.*
*These factors include, but are not limited
to, risks related to the Company’s ability to generate sufficient cash to continue and expand operations, the competitive environment
generally and in the Company’s specific market areas, changes in technology, the availability of and the terms of financing, changes
in costs and availability of goods and services, economic conditions in general and in the Company’s specific market areas, changes
in federal, state and/or local government laws and regulations potentially affecting the use of the Company’s technology, changes
in operating strategy or development plans and the ability to attract and retain qualified personnel. The Company cautions that the foregoing
list of risks, uncertainties and factors is not exclusive. Additional information concerning these and other risk factors is contained
in the Company’s most recently filed Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, recent Current Reports
on Form 8-K, and other filings filed by the Company with the SEC, which are available at the SEC’s website, http://www.sec.gov.
The Company believes its plans, intentions and expectations reflected in or suggested by these forward-looking statements are based on
reasonable assumptions. No assurance, however, can be given that the Company will achieve or realize these plans, intentions or expectations.
Indeed, it is likely that some of the Company’s assumptions may prove to be incorrect. The Company’s actual results and financial
position may vary from those projected or implied in the forward-looking statements and the variances may be material. Each forward-looking
statement speaks only as of the date of the particular statement. We do not undertake or accept any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events,
conditions or circumstances on which any forward-looking statement is based, except as required by law. All subsequent written and oral
forward-looking statements concerning the Company or other matters attributable to the Company or any person acting on its behalf are
expressly qualified in their entirety by the cautionary statements above.*
*Our financial statements are prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make
certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable
based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported
amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material
differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s
judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read
in conjunction with our financial statements and notes thereto appearing elsewhere in this report.*
45
**Overview**
We intend for this discussion to provide
information that will assist in understanding our financial statements, the changes in certain key items in those financial statements,
and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.
**Plan of Operation**
The Company’s plan of operation
is focused on improving operational execution, advancing its technology platform, and scaling its digital infrastructure initiatives to
support long-term revenue growth and increased recurring revenues.
During the first quarter of 2026, the
Company continued to transition its business toward a more diversified model centered on digital infrastructure, artificial intelligence,
and technology-enabled services. The Company’s operations are increasingly focused on expanding its edge computing platform, growing
its energy and consulting capabilities, and enhancing its technology solutions offerings.
Key elements of the Company’s
plan of operation include:
Expansion of Edge Data Center Platform
The Company, through Duos Edge AI, Inc.,
is actively deploying a network of modular Edge Data Centers (“EDCs”) designed to support localized computing, artificial
intelligence workloads, and low-latency applications.
The Company’s EDC strategy is
intended to support recurring revenue through hosting, colocation, and managed infrastructure services. The execution of this strategy
requires capital investment, customer adoption, and operational execution, each of which is subject to risks.
Expansion into Energy and Power Solutions
The Company expanded its operations
into energy and power solutions through Duos Energy Corporation, which focuses on energy consulting, power infrastructure planning, and
behind-the-meter (“BTM”) energy solutions.
The Company entered into an Asset Management Agreement
(“AMA”) with New APR beginning in January 2025. In connection with this agreement, the Company also acquired a minority, non-voting
equity interest in the ultimate parent of New APR. In 2026, the Company and New APR mutually agreed to reduce the scope of services under
the AMA, resulting in a corresponding decline in related party revenue and associated costs as part of streamlining operations and aligning
resources with its core strategic initiatives.
Growth of Technology Solutions and Infrastructure
Services
In the first quarter of 2026, the Company
expanded its Technology Solutions business to provide infrastructure-related services supporting data center and digital infrastructure
deployments.
These services include procurement,
supply chain management, logistics coordination, and deployment support for infrastructure projects. The Company’s Technology Solutions
platform is intended to complement its EDC strategy and provide additional revenue opportunities through both internal deployments and
third-party customer engagements.
The Company believes that demand for
integrated infrastructure solutions is increasing; however, the growth of this business is subject to supply chain conditions, vendor
availability, and competitive factors.
Development of AI Technologies and Automation
The Company continues to invest in the
development of proprietary artificial intelligence technologies, including computer vision, machine learning, and predictive analytics.
These technologies are being integrated
across the Company’s platforms to enhance performance, enable automation, and support real-time data processing. The Company is
also advancing AI-powered capabilities such as self-diagnostics, predictive maintenance, and system monitoring.
46
Transition to Recurring Revenue Models
The Company continues to transition
certain offerings toward subscription-based and recurring revenue models. This includes expanding hosting services, software-based offerings,
and long-term service agreements.
In connection with its inspection technologies,
the Company has introduced more modular and flexible deployment options, allowing customers to select specific capabilities aligned with
their operational requirements. This approach is intended to improve scalability and increase recurring revenue over time.
Legacy Technology Systems
The Company’s legacy business,
which is the railcard inspection portal, has become less important to the Company’s future as we diversify our business strategy.
The Company expects that over time,
its legacy systems will represent a decreasing percentage of total revenues as newer infrastructure and service-based offerings expand.
Prospects and Outlook
The Company’s prospects are influenced by
its ability to execute its strategic initiatives and by broader industry trends affecting digital infrastructure, artificial intelligence,
and energy markets.
The Company’s primary objectives
for 2026 and beyond include:
Scaling Edge Data Center Deployments
The Company intends to expand its network
of Edge Data Centers to support increasing demand for distributed computing and AI workloads. These deployments are expected to target
enterprise customers, telecommunications providers, and public sector organizations, particularly in underserved markets.
The Company believes that localized
computing infrastructure will play an important role in supporting next-generation applications; however, adoption rates, capital availability,
and competitive factors may impact growth.
Deployment of 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 operation. 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 capital commitments was approximately $145 million, as of March 31, 2026 $35.42 Million has been deposited to secure the
respective GPUs and Server assets. 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. The debt will be secured by the underlying GPU server
assets and include customary covenants and reserve requirements. Interest rates may vary based on market conditions and the future customer
risk profile.
Expansion of Energy and Power Solutions
The Company intends to build upon its
initial energy and consulting activities, including the AMA with New APR, to expand its presence in the distributed energy and fast power
markets.
The Company believes that increasing
demand for power associated with data centers and AI infrastructure presents a significant opportunity; however, this market is subject
to regulatory, operational, and competitive risks.
Growth of Technology Solutions Platform
The Company expects to further develop
its Technology Solutions capabilities, including infrastructure procurement, logistics, and deployment services.
These offerings are intended to support
both the Company’s internal infrastructure initiatives and third-party customer projects, providing additional revenue diversification.
Continued Development of AI and Automation
Technologies
The Company plans to continue enhancing
its AI capabilities to improve system performance, enable automation, and support advanced analytics across its platforms.
Forward-Looking Considerations
The Company believes that its diversified
strategy, including digital infrastructure, energy solutions, and technology services, positions it to pursue growth opportunities in
multiple markets.
However, the Company’s ability
to achieve its objectives is subject to numerous risks and uncertainties, including:
- The ability to obtain sufficient capital to fund infrastructure and GPU as a service development
- Execution risks associated with deploying and operating EDCs and engaging in the GPU as a service agreement
- Dependence on key contracts
47
- Customer adoption of new technologies and services
- Supply chain and vendor risks
- Competitive market conditions
- Macroeconomic and regulatory factors
With the diversification
into Edge Computing and power generation, coupled with continued growth in its core machine vision and AI-based inspection technologies,
the Company is well-positioned to drive increased revenue, improve profitability, and generate long-term shareholder value.
Although the Company’s prospects for
future revenue growth are anticipated to be favorable, investing in our securities involves risk and careful consideration should be made
before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are
beyond our control and unexpected macro events can have a severe impact on the business. Please see the risk factors identified in “Item
1A– Risk Factors” in the 2025 Annual Report.
**Results of Operations**
The following discussion should be read in conjunction
with the unaudited financial statements included in this report.
**Comparison for the Three Months Ended March
31, 2026 Compared to Three Months Ended March 31, 2025**
The following table sets forth a summary of our
unaudited Consolidated Statements of Operations and is used in the following discussions of our results of operations:
| Line item | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 |
| --- | --- | --- |
| Revenues | $2,722,027 | $4,952,185 |
| Cost of revenues | 1,111,659 | 3,638,526 |
| Gross margin | 1,610,368 | 1,313,659 |
| Operating expenses | 5,241,914 | 3,103,287 |
| Loss from operations | (3,631,546) | (1,789,628) |
| Other income (expense) | 139,301 | (290,035) |
| Net loss | $(3,492,245) | $(2,079,663) |
**Revenues**
| Line item | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, / % Change |
| --- | --- | --- | --- |
| Revenues: | | | |
| Technology systems | $44,259 | $64,684 | -32% |
| Technology solutions | 562,454 | — | 100% |
| Services and consulting | 532,467 | 972,751 | -45% |
| Services and consulting – Related parties | 1,552,572 | 3,914,750 | -60% |
| Hosting | 30,275 | — | 100% |
| Total revenues | $2,722,027 | $4,952,185 | -45% |
The decrease in technology systems revenues to
$44,259 from $64,684 for the three months ended March 31, 2026, compared to the three months ended March 31, 2025, is primarily attributed
to continued delays outside of the Company’s control with deployment of our two high-speed Railcar Inspection Portals, which are
recorded in the technology systems portion of our business. Although these systems remain largely ready for deployment, customer delays
at the deployment site continue to prevent installation even though these two high-speed Railcar Inspection Portals were deep into their
production and manufacturing phases, which did not allow us to record the next phase of recognition. We believe that the customer is approaching
the completion of the local site preparation and is preparing for field installation in 2026.
The Company began recognizing revenues from its
Technology Solutions business unit during the second half of 2025. The Technology Solutions business unit provides manufacturer-agnostic
infrastructure sourcing, integration, and value-added supply chain services supporting data center, AI, and enterprise deployments. No
such revenues were recognized during the comparable prior-year period.
The decrease in services and consulting revenue
from the rail business from $972,751 to $532,467 for the three months ended March 31, 2026, compared to the three months ended March 31,
2025, was primarily attributable to the cessation of revenue recognition related to the CN Digital Image Agreement.
The decrease in related-party services and consulting
revenue for the three months ended March 31, 2026 was primarily driven by New APR beginning to reduce the scope of services provided under
the Asset Management Agreement (“AMA”) established on December 31, 2024. Under the AMA, Duos Energy oversees the deployment
and operation of a fleet of mobile gas turbines and related balance-of-plant inventory and provides management, sales, and operational
support services to New APR. As a result, the Company generated $648,447 of revenue under the AMA during the three months ended March
31, 2026, compared to $3,010,625 during the comparable 2025 period. In addition, the Company recognized $904,125 of revenue during each
of the three months ended March 31, 2026 and 2025 related to the amortization of a deferred revenue liability associated with the Company’s
5% non-voting equity interest in the ultimate parent of New APR. Revenue generated under the AMA and from the 5% interest is reported
within “Services and consulting – related parties” in the statements of operations.
48
During the second quarter of 2025, the Company
began recognizing revenues from the deployment of Edge Data Centers, which are reported within the “Hosting” category. The
$30,275 of revenue recognized during the three months ended March 31, 2026 relates to Edge Data Centers that became operational during
the second quarter of 2025. The Company continues to invest capital in expanding its network of Edge Data Centers, each of which is expected
to begin generating revenue upon deployment and commencement of operations with its anchor tenant.
The
Company expects services revenue from both its hosting and technology solutions to increase throughout 2026. This growth is expected
to be driven by the deployment of additional edge data centers coming online,
as well as expanding technology solutions revenue tied to growth in the data center market.
**Cost of Revenues**
| Line item | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, / % Change |
| --- | --- | --- | --- |
| Cost of revenues: | | | |
| Technology systems | $17,545 | $232,264 | -92% |
| Technology solutions | 506,570 | — | 100% |
| Services and consulting | 4,254 | 748,194 | -99% |
| Services and consulting – Related parties | 543,857 | 2,658,068 | -80% |
| Hosting | 39,433 | — | 100% |
| Total cost of revenues | $1,111,659 | $3,638,526 | -69% |
Cost of revenues largely comprises equipment and
labor necessary to support the implementation of new systems, support and maintenance of existing systems, software projects, and support
of the AMA with New APR.
During the three months ended March 31, 2026,
cost of revenues related to technology systems decreased compared to the same period in 2025, primarily driven by a reduction in personnel-related
fixed costs. The decrease also reflects the continued ramp-down of manufacturing activities in advance of field installation of the Company’s
two high-speed Railcar Inspection Portals, which has temporarily slowed project activity and further reduced cost of revenues pending
customer readiness for site deployment.
Cost of revenues related to services and consulting
from the rail business decreased for the three months ended March 31, 2026, compared to the same period in 2025, primarily attributable
to the cessation of amortization expense recognized in connection with the CN Digital Image Agreement, which had previously been recorded
in cost of revenues, as well as lower personnel-related fixed costs.
Cost of revenues related to services and consulting
from related parties decreased significantly during the three months ended March 31, 2026, compared to the same period in the prior year.
The reduction was primarily driven by New APR beginning to scale back the scope of services provided under the AMA, pursuant to which
Duos Energy manages the deployment and operations of a fleet of mobile gas turbines and related balance-of-plant inventory, including
management, sales, and operational support services for New APR.
Consistent with the revenues generated from the
deployment of Edge Data Centers, reflected in the Hosting category, the Company has begun recognizing associated cost of goods sold, primarily
consisting of depreciation of the Edge Data Center pods and operating costs required to support the operation of the hosting infrastructure. No
such costs were recognized during the comparable prior-year period.
49
**Gross Margin**
| Line item | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, / % Change |
| --- | --- | --- | --- |
| Revenues | $2,722,027 | $4,952,185 | -45% |
| Cost of revenues | 1,111,659 | 3,638,526 | -69% |
| Gross margin | $1,610,368 | $1,313,659 | 23% |
Gross margin improved from 27% during the three
months ended March 31, 2025 to 59% during the same period in 2026, primarily due to reduced cost of revenues under the AMA related costs
impacting cost of goods sold within the Technology Systems and Services and Consulting business lines. In addition, the Company recognized
$904,125 of revenue during each of the three months ended March 31, 2025 and 2026 related to its 5% non-voting equity interest in the
ultimate parent of New APR. As this revenue had no associated cost of revenue, it contributed at a 100% gross margin.
**Operating Expenses**
| Line item | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, / % Change |
| --- | --- | --- | --- |
| Operating expenses: | | | |
| Sales and marketing | $488,253 | $294,975 | 66% |
| Research and development | — | 424,431 | -100% |
| General and administration | 4,753,067 | 2,383,881 | 99% |
| Total operating expenses | $5,241,914 | $3,103,287 | 69% |
During the three months ended March 31, 2026,
the Company experienced an increase in overall operating expenses compared to the same period in 2025. Sales and marketing expenses increased
as additional resources were deployed to support business development initiatives. Research and development expenses decreased to zero
due to scaled-back testing activities related to prospective technologies. General and administration expenses increased by 99%. This
was due to multiple factors (1) the reduction of AMA related expenses, in 2026 there were approximately $187,000 required to be reclassed
to COGS compared to AMA related expenses of approximately $1.2 million which were reclassed to COGS in 2025. (2) Higher non-cash stock-based
compensation of approximately $1.3 million in 2026 compared to approximately $1 million in 2025. (3) Bonus expense of approximately $600,000
in 2026 compared to zero in 2025. Overall, the Company continues to focus on managing operating expenses while supporting the evolving
needs of its customers.
**Loss from Operations**
Loss from operations was $3,631,546 for the three
months ended March 31, 2026, compared to $1,789,628 for the same period in 2025. The increase in operating loss was primarily driven by
lower revenues during the quarter, resulting from the reduced scope of services provided under the Asset Management Agreement, as well
as higher operating expenses, including non-cash stock-based compensation expense related to restricted stock awards.
**Other Income (Expense)**
Other income(expense) for the three months ended
March 31, 2026 was $139,301 and ($290,035) for the comparative period in 2025. Other income in 2026 was primarily driven by higher interest
income resulting from a significantly larger cash balance compared to the prior period, as well as a $52,302 gain on the sale of investments
recognized during the first quarter of 2026, which did not occur in the comparable 2025 period and no interest expense in 2026 compared
to $322,577 in 2025.
50
**Net Loss**
Net loss for the three months ended March 31,
2026 and 2025 was $3,492,245 and $2,079,663, respectively. The increase in net loss was primarily attributable to lower revenues resulting
from the reduced scope of services provided by Duos Energy under the AMA with New APR, as discussed above, as well as higher operating
expenses, including increased non-cash stock-based compensation expense related to restricted stock awards. Net loss per common share
was $0.15 and $0.18 for the three months ended March 31, 2026 and 2025, respectively.
**Liquidity and Capital Resources**
As of March 31, 2026, the Company has a working
capital surplus of $29,179,849 and the Company had a net loss of $3,492,245 for the three months ended March 31, 2026.
**Cash Flows**
The following table sets forth the major components
of our statements of cash flows data for the periods presented:
| Line item | For the Three Months Ended March 31, 2026 | For the Three Months Ended March 31, 2025 |
| --- | --- | --- |
| Net cash used in operating activities | $(1,361,911) | $(4,673,425) |
| Net cash used in investing activities | (41,189,127) | (581,623) |
| Net cash provided by financing activities | 60,109,600 | 2,788,033 |
| Net increase (decrease) in cash | $17,558,562 | $(2,467,015) |
Net cash used in operating activities for the
three months ended March 31, 2026 and 2025 was $1,361,911 and $ 4,673,425, respectively. The decrease in net cash used in operating activities
in 2026 was primarily driven by the collection of related-party accounts receivable, growth in Technology Solutions contract liabilities,
and higher non-cash add-backs related to stock-based compensation. These favorable impacts were partially offset by a larger net loss,
increases in trade accounts receivable and contract assets as project and service billings exceeded collections, continued reductions
in related-party contract liabilities as the Company executes under the AMA, and lower depreciation and amortization expense compared
to the prior-year period.
Net cash used in investing activities was
$41,189,127 and $581,623 for the three months ended March 31, 2026 and 2025, respectively. The increase in 2026 reflects continued
investment in capitalized construction-in-progress costs related to the edge data centers currently owned by the Company, as well as
significant deposits made on GPUs scheduled for deployment in 2026. For the three months ended March 31, 2026 we purchased
marketable securities in the amount of $29,693,638 and sold marketable securities for proceeds of $29,745,940 for a gain of $52,302.
There were no such transactions in the three months ended March 31, 2025.
51
Net cash provided by financing activities for
the three months ended March 31, 2026 and 2025 was $60,109,600 and $2,788,033, respectively. Cash flows provided by financing activities
during the first three months of 2026 were primarily attributable to a public offering of common stock for net proceeds of approximately
$60.3 million. Cash flows provided by financing activities during the first three months of 2025 were primarily attributable to gross
proceeds of $3,954,940 from our At-The-Market (ATM) offering program, offset partially by $1,000,000 in repayments toward the principal
balance of the secured promissory notes entered into with 21 April Fund LP and 21 April Fund Ltd.
On a long-term basis, our liquidity is dependent
on the successful continuation of the revenue diversification strategy into the Technology Solutions and Edge Data Center subsidiaries,
and expansion of operations and receipt of revenues across all operating segments. We believe our current capital and revenues are sufficient
to fund such expansion and our operations over the next twelve months, although we are dependent on timely payments from our customers
for projects and work in process. However, we expect such timely payments to continue. Material cash requirements will be satisfied within
the normal course of business including substantial upfront payments from our customers prior to starting projects. The Company may elect
to purchase materials and supplies in advance of contract award but where there is a high probability of that award. Demand for our products
and services will be dependent on, among other things, market acceptance of our products and services, the technology market in general,
and general economic conditions, which are cyclical in nature. Because a major portion of our activities is the receipt of revenues from
the sales of our products and services, our business operations may continue to be challenged by our competitors and prolonged recession
periods.
**Liquidity**
Under Accounting Codification ASC 205, Presentation
of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate
whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due
within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not
take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements
are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC
205-40.
As reflected in the accompanying consolidated
financial statements, the Company had a net loss of $3,492,245 for the three months ended March 31, 2026. During the same period, cash
used in operating activities was $1,361,911. The working capital surplus and accumulated deficit as of March 31, 2026, were $29,179,849
and $87,695,285, respectively.
The Company successfully raised approximately $3,544,689 in gross
proceeds from the sale of common stock through its At-The-Market (ATM) offering program in 2024 and raised an additional $8,927,347 in
gross proceeds from the ATM in 2025. Furthermore, in 2025, the Company raised approximately $45 million from other equity offerings. More
recently on February 26, 2026, the Company priced a public offering of its common stock for gross proceeds of approximately $65 million.
The offering closed on March 2, 2026, and was conducted pursuant to the Company’s effective shelf registration statement on Form
S-3 and related prospectus supplements filed with the SEC. The capital raised is expected to bolster the Company’s balance sheet
and position it to pursue strategic initiatives related to Duos Edge AI, from a stronger financial foundation. In the long run, the continuation
of the Company as a going concern is dependent upon the ability of the Company to continue executing its business plan, generate enough
revenue, and attain consistently profitable operations. We have analyzed our cash flow under “stress test” conditions and
have determined that we have sufficient liquid assets on hand or available via the capital markets to maintain operations for at least
twelve months from the issuance date of this report
In addition, management has taken and continues
to take actions including, but not limited to, elimination of certain costs that do not contribute to short term revenue, and re-aligning
both management and staffing with a focus on improving certain skill sets necessary to build growth and profitability and focusing product
strategy on opportunities that are likely to bear results in the relatively short term. The Company believes that, with the combination
of its current capital and commercial sales success, it will have sufficient working capital to meet its obligations over the following
twelve months. Recently, the Company has seen growth in its contracted backlog as well as significant, positive signs from new commercial
projects that indicate improvements in future revenues.
52
Management believes that, at this time, the conditions
in our traditional market space with ongoing contract delays, the consequent need to procure certain materials in advance of a binding
contract and the additional time needed to execute on new contracts previously reported could put a strain on our cash reserves. However,
given the Company’s current capital, the anticipated steady cash flow from the Hosting and Technology Solutions lines of business
and proven ability to raise capital via the public markets indicate there is no substantial doubt for the Company to continue as a going
concern for a period of twelve months. We expect to continue executing the plan to grow our business and achieve profitability as previously
discussed. The Company may selectively look at opportunities for fundraising in the future including potential debt offerings to support
asset acquisitions. Management has extensively evaluated our requirements for the next twelve months and has determined that the Company
currently has sufficient cash and access to capital to operate for at least that period.
While no assurance can be provided, management
believes that these actions provide the opportunity for the Company to continue as a going concern and to grow its business and achieve
profitability with access to additional capital funding. Ultimately the continuation of the Company as a going concern is dependent upon
the ability of the Company to continue executing the plan described above which was put in place in late 2024 and will continue in 2026
and beyond. These consolidated financial statements do not include any adjustments related to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
**Critical Accounting Estimates**
**Revenue Recognition**
For technology systems, the Company recognizes
revenue over time using a cost-based input methodology in which significant judgment is required to estimate costs to complete projects.
These estimated costs are then used to determine the progress towards contract completion and the corresponding amount of revenue to recognize.
The Company follows the principles in ASC 606 which include the following: a contract with a customer creates distinct contract assets
and performance obligations, satisfaction of a performance obligation creates revenue, and a performance obligation is satisfied upon
transfer of control to a good or service to a customer.
Revenue is recognized by evaluating our revenue
contracts with customers based on the five-step model under ASC 606:
| 1. | Identify the contract with the customer; |
| --- | --- |
| 2. | Identify the performance obligations in the contract; |
| 3. | Determine the transaction price; |
| 4. | Allocate the transaction price to separate performance obligations; and |
| 5. | Recognize revenue when (or as) each performance obligation is satisfied. |
The Company generates revenue from six sources:
1. Technology Systems
2. AI Technologies
3. Technical Support including related party revenues
from the AMA which began in January 2025
4. Consulting Services including related party
revenues from the AMA which began in January 2025
5. Hosting
6. Technology Solutions
**Equity Method Investments**
If an investment qualifies for the equity method
of accounting, the Company’s investment is recorded initially at cost and subsequently adjusted for equity in net income (loss)
and cash contributions and distributions. The net income or loss of an unconsolidated equity method investment is allocated to its investors
in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from
the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective equity
method investee and the Company’s share of the underlying equity of such equity method investee are amortized over the respective
lives of the underlying assets as applicable. These items are reported as a single line item in the consolidated statements of operations
as income or loss from investments in unconsolidated equity method investees. Investments are reviewed for changes in circumstance or
the occurrence of events that suggest an other-than-temporary event where our investment may not be recoverable.
53
On December 31, 2024, the Company entered into
an Asset Management Agreement (the “AMA”), with New APR, an entity formed by affiliates of Fortress Investment Group (“FIG”). Under
the AMA, Duos Energy manages the deployment and operations of a fleet of mobile gas turbines and balance-of-plant inventory, providing
management, sales and operations functions to New APR in connection with the assets. In exchange for services to be performed under the
AMA, the Company received an initial cash payment and common units in Sawgrass Parent. While the Company has board representation in Sawgrass
Parent, its common units are non-voting and the Company does not control the board of directors of Sawgrass Parent.
Where the Company has an interest in a Variable
Interest Entity (“VIE”) it will consolidate any VIE in which the Company has a controlling financial interest and is deemed
to be the primary beneficiary. A controlling financial interest has both of the following characteristics: (1) the power to direct the
activities of the VIE that most significantly impact its economic performance; and (2) the obligation to absorb losses of the VIE that
could potentially be significant to the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If both
of the characteristics are met, the Company is considered to be the primary beneficiary and therefore will consolidate that VIE into the
consolidated financial statements.
Investments in partnerships, unincorporated joint
ventures and LLCs that maintain specific ownership accounts for each investor are excluded from the scope of ASC 323-10. However, ASC
323-30 provides guidance on applying the criteria for equity method accounting to investments in partnerships, unincorporated joint ventures
and LLCs. When an investor in a partnership, unincorporated joint venture or LLC has the ability to exercise significant influence over
that investment, it should apply the equity method (ASC 323-10) by analogy (ASC 323-30-25-1).
Sawgrass Parent is deemed to be a VIE and the
Company holds a 5% interest in Sawgrass Parent and an interest in the subsidiary New APR through the AMA, both of which are considered
variable interests. However, the Company does not represent the primary beneficiary as it does not possess the ability to direct the activities
that most significantly impact the economic performance of Sawgrass Parent. Accordingly, the Company does not consolidate Sawgrass Parent.
Due to the Company’s interest in Sawgrass Parent, it was determined that the Company has significant influence over Sawgrass Parent.
Therefore, the Company accounts for its investment in Sawgrass Parent as an Equity Method Investment.
The Company also concluded that the arrangement
with Sawgrass Parent is within the scope of ASC 606, Revenue from contracts with customers, and the common units issued to the Company
by Sawgrass Parent represented non-cash consideration. The initial carrying value as of December 31, 2024 of $7.2 million was measured
equal to the fair value of the common units received for future services to be performed under the AMA. The Company recorded $7.2 million
of deferred revenue for services to be performed under the AMA. During the year ended December 31, 2024, the Company did not recognize
any revenue associated with the AMA. The Company initially recorded the equity method investment in Sawgrass Parent of $7.2 million, equal
to the fair value of the common units as of December 31, 2024.
Due to the unavailability of Q1-2026 financials
from Sawgrass Parent, our equity method investee, the Company has applied a one-quarter lag (in accordance with ASC 323-10-35-6) in reporting
and recording the value of its 5% minority investment. The Company records its 5% interest using the Equity Method as we have significant
influence. ASC 323-10-35-4 requires an entity to recognize its share of earnings or loss of an equity method investee which adjusts the
carrying amount of the investment and is reflected as earnings or loss in income. Pursuant to the terms of the Amended and Restated Limited
Liability Company Agreement of Sawgrass APR Holding LLC (the “Agreement”), Net Profit and Net Loss for any Fiscal Year is
allocated among the members in such a manner that, as of the end of such fiscal year, the Capital Account Balance of each Member, as increased
by the Member’s share of “minimum gain” and “partner minimum gain” (as such terms are used in Treasury Regulations
Section 1.704-2), to the extent possible, to be equal to the amount which would have been distributed to such Member pursuant to a Hypothetical
Liquidation, as defined in the Agreement, as of the end of the last day of such fiscal year. Under the Hypothetical Liquidation, the assets
of Sawgrass Parent are disposed of in a taxable disposition for the book value of such assets and the remaining amounts, after repayment
of outstanding obligations are distributed to the members pursuant to the Agreement. Per the Agreement, the Company is entitled to pro-rata
distributions only after Preferred Holders have received their Total Contributed Capital and subsequent distributions to Preferred and
Incentive Unit Holders have reached the Multiple on Invested Capital (MOIC) Threshold of 1.5 times the initial contributions. Therefore,
it is likely that early periods will not generate sufficient earnings to provide the Company with a return in the form of a claim on net
assets. Based on the terms of the Agreement our specified allocation of earnings and losses of 5% differs from the allocation of cash
from operations and liquidation. Therefore, we will apply the guidance in ASC 970-323-35-17 by analogy, which states, if the specified
allocation for earnings differs from the allocation of cash from operations and on liquidation, the investor should not use the specified
earnings or loss percentages to determine its share of the investee’s earnings. Rather, the investor should analyze the investment
agreement to determine how the increase or decrease in the investee’s net assets during the reporting period would affect the cash
that the investor would receive over the investee’s life and on its liquidation.
54
As per the guidance above, the subsequent recognition
of the equity method investment should reflect the Company’s claim on net assets, determined by its rights to distributions and
residual assets under the Agreement’s distribution waterfall. The Hypothetical Liquidation at Book Value (HLBV) method satisfies
this requirement by simulating a hypothetical liquidation at each reporting period, allocating net assets based on the rights and priorities
defined in the Agreement. This approach reflects the Company’s economic interest in the Sawgrass Parent by estimating the amount
it would receive in a liquidation scenario, aligning the recognition of income or loss with the actual distribution provisions under the
Agreement. Accordingly, this method appropriately represents the cash distribution under Section 10 and the allocation of profit and loss
under Section 9.1 of the Agreement.
At the initial investment date, the Company’s
hypothetical claim on net assets was zero, and it is expected to remain so, until other investors have received their Total Contributed
Capital and the MOIC Threshold has been met. As a result of the MOIC not being met, the Company’s share of earnings under the HLBV
method is zero during these early periods. Because the Company is not obligated to fund Sawgrass Parent’s losses, no losses will
be allocated unless the investment becomes impaired, and such losses will not exceed the initial investment of $7.2 million. Similarly,
net income will not be allocated until the HLBV calculation results in an allocation that exceeds the Company’s carrying value.
Accordingly, the Company will continue to present
the equity method investment at its initial fair value unless the HLBV calculation yields a profit or the investment becomes impaired.
Management believes that the use of estimates and assumptions in applying
the equity method is reasonable.
The Company assesses its equity method investment
for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.
No impairment losses were recognized during the **t**hree months ended March 31, 2026 or 2025.
**Impairment of Intangible Assets**
In May 2024, the Company recorded an intangible
asset with a fair value of $11,161,428. This asset represents non-monetary consideration received under a 5-year customer contract, in
which the Company would provide maintenance services to the customer. The intangible asset represents Digital Image data rights in the
form of a license agreement received by the Company from the customer.
The fair value of the asset was determined on
the contract inception date based on the standalone selling price of the service and goods to be provided to the customer under the 5-year
contract since the Company could not reasonably estimate the fair value of the data rights received. The non-monetary transaction was
accounted for in accordance with Accounting Standards Codification (ASC) 606-10-32-21 through ASC 606-10-32-24.
On the contract inception date, the Company recorded
deferred revenue of $11,161,428 as contract liabilities with a current and non-current component, and then immediately recognized $199,008 of this deferred revenue relating to the completed pilot program. The remaining deferred revenue was being recognized over the 5-year
term.
In accordance with ASC 350-30-35-1, the amortization
for the intangible asset is based on its useful life and the useful life of an intangible asset is the period over which it is expected
to contribute directly or indirectly to the future cash flows of that entity. Accordingly, amortization of the intangible asset is recognized
over the life of the contract of five years.
During the year ended December 31, 2025, the Company
evaluated its long-lived assets for impairment in accordance with ASC 350-30-35-14, which requires finite-lived intangible assets to be
tested for impairment under ASC 360 when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Management identified impairment indicators during
2025 related to its CN Digital Image data rights, including (i) a significant adverse change in the extent and manner in which the asset
was being used, (ii) adverse legal and contractual developments, (iii) the absence of current and projected cash flows, and (iv) the expectation
that the asset would be terminated or otherwise disposed of significantly before the end of its previously estimated useful life.
The Company generated minimal subscription revenue
from the licensed data, and during 2025 the Company ceased providing the related maintenance services. In addition, contractual disputes
arose between the parties, and by late 2025 both parties had ceased performance and were negotiating termination of the arrangement.
As a result of these events, the Company performed
a recoverability test as of December 31, 2025 by comparing the carrying amount of the asset to the sum of its estimated undiscounted future
cash flows. The Company determined that the carrying amount of the asset was not recoverable, as estimated undiscounted future cash flows
were negligible. The Company measured the impairment loss based on the asset’s estimated fair value as of December 31, 2025. Given
the absence of historical or expected future cash flows, the lack of an observable market for the asset, and the ongoing contractual dispute,
the Company determined that the fair value of the CN Digital data rights License was zero.
Accordingly, the Company recorded an
impairment of $8,130,461 in 2025, representing the full carrying amount of the CN Digital Image License. Because the asset was originally
recognized as part of a non-cash exchange with a corresponding deferred liability offset recorded on the balance sheet, the
impairment was recorded by eliminating both the intangible asset and the related deferred liability. As a result, the impairment did
not impact the Company’s consolidated statements of operations for the year ended December 31, 2025.
55
**Stock Based Compensation**
The Company accounts for employee and non-employee
stock-based compensation in accordance with ASC 718-10, “*Share-Based Payment*,” which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and directors including stock options, restricted stock units,
and employee stock purchases based on estimated fair values. The stock-based compensation carries a graded vesting feature subject to
the condition of time of employment service with awarded stock-based compensation tranches vesting evenly upon the anniversary date of
the award.
The Company estimates the fair value of stock
options granted using the Black-Scholes option-pricing formula. In accordance with ASC 718-10-35-8, the Company elected to recognize the
fair value of the stock awards using the graded vesting method as time of employment service is the criteria for vesting. The Company’s
determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding a number of
highly subjective variables.
For restricted stock awards, fair value is measured
at the closing market price of the Company’s common stock on the grant date. That value is then recognized over the requisite vesting
period.
The Company estimates volatility based upon the
historical stock price of the Company and estimates the expected term for stock options using the simplified method for employees and
directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States
Treasury securities with similar maturities.
## Item 3. Quantitative and Qualitative Disclosures
About Market Risk.**
Not applicable.
## Item 4. Controls and Procedures.
***Evaluation of Disclosure Controls and Procedures***
With the participation of our Chief Executive
Officer, Chief Financial Officer and Controller,, we have evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)),
as of the end of the period covered by this Report. Based upon such evaluation, our Chief Executive Officer, Chief Financial Officer and
Controller have concluded that, as of the end of such period, our disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including
our Chief Executive Officer, Chief Financial Officer and Controller, as appropriate to allow timely decisions regarding required disclosure.
***Changes in Internal Control over Financial
Reporting***
There were no changes in our internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March
31, 2026 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
56
**PART II OTHER INFORMATION**
## Item 1. Legal Proceedings.
From time to time, we may be involved in litigation
relating to claims arising out of our operations in the normal course of business. We are currently not involved in any litigation that
we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to
the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common
stock, any of our subsidiaries or any of our Company’s or our subsidiaries’ officers or directors in their capacities as such,
in which an adverse decision could have a material adverse effect.
## Item 1A. Risk Factors.
See the risk factors previously disclosed in our Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on March 31, 2026. In addition, GPU as a service presents new material
risk factors for the Company. Revenue will be concentrated with a single customer; the Company bears the full risk of customer
nonpayment, as the third-party operator, Hydra Host, does not guarantee customer credit performance. 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.
We believe there are no other changes that constitute
material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 31, 2026.
## Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
## Item 3. Defaults Upon Senior Securities.
There has been no default in the payment of principal,
interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
## Item 4. Mine Safety Disclosures.
Not applicable
## Item 5. Other Information.
**Trading Plans**
During the quarter ended March 31, 2026, no director
or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements
(in each case, as defined in Item 408(a) of Regulation S-K).
57
## Item 6. Exhibits.
| Exhibit No. | Description |
| --- | --- |
| 4.1 | Form of Underwriter’s Warrant (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 2, 2026) |
| 10.1 | Employment Agreement, made and entered into as of November 16, 2025, between Duos Technologies Group, Inc. and Leah F. Brown (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 2026) |
| 10.2 | Equity Award Agreement, made and entered into as of November 16, 2025, between Duos Technologies Group, Inc. and Leah F. Brown (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 2026) |
| 10.3 | Amended and Restated Equity Award Agreement between Duos Technologies Group, Inc. and Charles P. Ferry (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2026) |
| 31.1* | Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). |
| 31.2* | Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). |
| 32.1** | Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2** | Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
58
**SIGNATURES**
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
**DUOS TECHNOLOGIES GROUP, INC.**
Date: May 15, 2026 By: /s/ Frank D. Recker
Frank D. Recker
Chief Executive Officer
Date: May 15, 2026 By: /s/ Leah F. Brown
Leah F. Brown
Chief Financial Officer
59