Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Form 10-K and other reports filed by the Company 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,” 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 reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of this Annual Report on Form 10-K, 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 significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, the Company does not intend to update any of the forward-looking statements.
Our consolidated 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 consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our consolidated 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 consolidated financial statements and notes thereto appearing elsewhere in this report.
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 2025, 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, including those described in Item 1A. Risk Factors.
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.
Growth of Technology Solutions and Infrastructure Services
In 2025, 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.
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 continues to support its legacy inspection systems and related technologies. While these systems continue to generate revenue, they are no longer the primary focus of the Company’s growth 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.
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 development
Execution risks associated with deploying and operating EDCs
Dependence on key contracts
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” elsewhere in this Annual Report.
Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements included in this report.
For the year ended December 31, 2025 compared to December 31, 2024
The following table sets forth a summary of our Consolidated Statements of Operations that is used in the following discussions of our results of operations:
For the Years Ended
December 31,
Revenues
Cost of revenues
Gross margin
Operating expenses
Loss from operations
Other income (expenses)
Net loss
Revenues
For the Years Ended
December 31,
% Change
Revenues:
Technology systems
Technology solutions
Services and consulting
Services and consulting – Related parties
Hosting
Total revenues
The decreases in technology systems revenues from $2,252,357 to $373,270 for the year ended December 31, 2025, compared to the year ended December 31, 2024, is primarily attributed to 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 has begun recognizing its first revenues from the Technology Solutions business unit, which provides manufacturer-agnostic infrastructure sourcing, integration, and value-added supply chain services supporting data center, AI, and enterprise deployments identified as “Technology Solutions”. The significant increase in services revenue, related parties for the year ended December 31, 2025, was primarily driven by Duos Energy beginning to execute on the AMA with New APR that was established on December 31, 2024. Under the AMA, Duos Energy oversees the deployment and operations of a fleet of mobile gas turbines and related balance-of-plant inventory, providing management, sales, and operational support services to New APR. As a result, the Company generated $18,740,343 in revenue from the AMA during the year 2025. In addition, the Company recognized $3,616,500 in revenue from amortized deferred revenue liability associated with its 5% non-voting equity interest in the ultimate parent of New APR. Revenue from the AMA and the 5% interest is reported under “Services and consulting – related parties” on the statements of operations. Services revenue from the rail business decreased modestly during the year 2025.
The Company is now recording its first revenues from the deployment of Edge Data Centers and identified as “Hosting”. The $56,000 of revenues recorded in the year 2025 represent those received from the first data center which became “live” in the second quarter. The Company is investing capital in building out a network of these data centers all of which will begin generating revenue following deployment with the “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
For the Years Ended
December 31,
% Change
Cost of revenues:
Technology systems
Technology solutions
Services and consulting
Services and consulting – Related parties
Hosting
Total cost of revenues
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 asset management agreement with New APR.
During the year ended December 31, 2025, the cost of revenues on technology systems decreased compared to the equivalent period in 2024; however, the decrease was less significant than the corresponding drop in revenue due to fixed cost components that do not vary with revenue. This reduction primarily reflects our ability to reallocate certain fixed operating and servicing costs for technology systems to support the AMA, an allocation we could not make in the comparative period because the agreement was not yet in effect. It also reflects the ramp-down of manufacturing ahead of field installation of our two high-speed Railcar Inspection Portals, which has continued to temporarily slow project activity and further reduced cost of revenues while we await customer readiness for site deployment.
Cost of revenues on services and consulting decreased in the year ended December 31, 2025 compared to the prior year period. This decrease in costs is primarily due to a reduction in personnel-related costs and a lower volume of service calls during the period.
Cost of revenues on services and consulting, related parties significantly increased in the year ended December 31, 2025 compared to the prior year period. This rise in costs is primarily due to supporting the AMA with New APR, where Duos Energy oversees the deployment and operations of a fleet of mobile gas turbines and related balance-of-plant inventory, providing management, sales, and operational support services to New APR.
Consistent with the initial revenues generated from the deployment of Edge Data Centers, 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.
Gross Margin
For the Years Ended
December 31,
% Change
Revenues
Cost of revenues
Gross margin
Gross margin improved in the year 2025 compared to the same period in 2024, primarily due to Duos Energy beginning execution of the AMA with New APR. This includes $3,616,500 in revenue recognized during the year ended December 31, 2025, related to the Company’s 5% non-voting equity interest in the ultimate parent of New APR, which carried no associated costs and therefore contributed at a 100% margin. These revenues and the associated margin contribution were not present in the prior year period. Additionally, when comparing results between periods, the stage of completion for manufacturing and installation activities within our technology business may vary and should be considered in the analysis.
Operating Expenses
For the Years Ended
December 31,
% Change
Operating expenses:
Sales and marketing
Research and development
General and administration
Total operating expense
During the year ended December 31, 2025, the Company experienced an increase in overall operating expenses compared to the same period in 2024. Sales and marketing costs declined as resources were allocated to costs of service and consulting revenues in support of the AMA with New APR. Additionally, research and development expenses fell by 45% owing to scaled-back testing of prospective technologies. General and administration costs increased 100%, largely due to non-cash stock-based compensation charged for restricted stock granted to the executive team on January 1, 2025, under new employment agreements with a three-year cliff vesting schedule and the payment of cash bonuses in the 2025 period related to the closure of the APR transaction and the associated AMA and 5% ownership grant compared to the prior year. Additionally, there were general and administration costs that were allocated to cost of service and consulting revenues in support of the AMA with New APR. Overall, the Company continues to focus on stabilizing operating expenses while meeting the increased needs of our customers.
Loss From Operations
The loss from operations for the years ended December 31, 2025 and 2024 were $9,762,878 and $10,983,526, respectively. The decrease in loss from operations was primarily the result of increased revenue generated by Duos Energy through the AMA with New APR.
Other Income (Expense)
Other income (expense) for the year ended December 31, 2025 was ($72,153) and $219,069 for the comparative period in 2024. Other income in 2025 was primarily driven by higher interest income resulting from a significantly larger cash balance compared to the prior period, offset by a loss on extinguishment of debt and higher interest expense, as discussed below. In 2024 the other income was primarily due to a gain from the fair value adjustment of the warrant liability and gain on extinguishment of debt resulting from the exercise of warrants.
Interest Expense
Interest expense for the years ended December 31, 2025 and 2024 was $439,261 and $286,114, respectively. The increase in interest expense is primarily due to the amortization of the debt discount on the $2.2 million note and the associated monthly interest expense in 2025; This note, related to the acquisition and build out of 3 Edge data centers, was only entered into during the comparative prior period, resulting in lower interest expense for that timeframe.
Net Loss
The net loss for the years ended December 31, 2025 and 2024 was $9,835,031 and $10,764,457, respectively. The decrease in net loss is primarily attributable to the increase in revenues generated by Duos Energy through the AMA with New APR as described above. Net loss per common share was $0.64 and $1.39 for the years ended December 31, 2025 and 2024, respectively.
Liquidity and Capital Resources
As of December 31, 2025, the Company has a cash balance of $15,472,229 and an accounts receivable balance of $6,034,442.
Cash Flows
The following table sets forth the major components of our statements of cash flows data for the periods presented:
For the Years Ended
December 31,
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash
Net cash used in operating activities for the years ended December 31, 2025 and 2024 was $13,748,223 and $3,488,687, respectively. The increase in net cash used in 2025 was driven primarily by the decrease in contract liabilities and increase in accounts receivable offset by elevated non-cash add-backs for depreciation, amortization, and stock-based compensation. The significant build-up in accounts receivable occurred as project and service billings outpaced collections coupled with a draw-down of contract liabilities as we execute on the AMA.
Net cash used in investing activities for the years ended December 31, 2025 and 2024 was $23,734,605 and $1,841,298, respectively. The increase in investing activities in 2025 compared to 2024 was driven by higher continued investment in capitalized construction-in-progress costs associated with the manufacturing and deployment of Edge Data Centers. The remaining amounts primarily relate to purchases of computer equipment, product and software development costs, and disbursements for patent-related costs.
Net cash provided by financing activities for the years ended December 31, 2025 and 2024 was $46,688,761 and $9,154,439, respectively. Cash flows provided by financing activities during the year 2025 were primarily attributable to gross proceeds of $8,927,347 from our At-The-Market (ATM) offering program and a public offering of common stock for gross proceeds of approximately $45 million, offset partially by $2,200,000 in repayments toward the principal balance of the secured promissory notes entered into with 21 April Fund LP and 21 April Fund Ltd. Cash flows provided by financing activities during 2024 were primarily attributable to gross proceeds of approximately $2,995,002 from issuances of Series D and Series E Convertible Preferred Stock, along with a combined total of $4,444,210 in proceeds from the issuance of common stock via warrant exercises of $899,521 and our ATM offering program for proceeds of $3,544,689. 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 by our competitors and 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 $9,835,031 for the year ended December 31, 2025. During the same period, cash used in operating activities was $13,748,223. The working capital surplus and accumulated deficit as of December 31, 2025, were $11,986,673 and $84,203,040, respectively.
The Company successfully raised approximately $3,544,689 in gross proceeds through its ATM offering program in 2024 and secured an additional $3,954,940 in gross proceeds during the first two months of 2025. Furthermore, in the second quarter of 2025, the Company raised $1,835,874 in gross proceeds through its ATM offering program, followed by an additional $3,136,533 in July 2025. On July 30, 2025, the Company priced a public offering of its common stock for net proceeds of approximately $37.1 million. The offering closed on August 1, 2025, and was conducted pursuant to the Company’s effective shelf registration statement on Form S-3 and related prospectus supplements filed with the SEC. On September 2, 2025, the Underwriter exercised the Over-Allotment Option in full to purchase 838,851 shares of Common Stock, generating additional net proceeds of approximately $4.7 million. The Over-Allotment Option closed on September 2, 2025. 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 financial foundation. In the long run, the continuation of the Company as a going is dependent upon the ability of the Company to continue executing its business plan, generate enough revenue, and consistently operations. We have analyzed our cash flow under “ 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 certain skill sets necessary to build growth and and focusing product strategy on 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 , it will have sufficient working capital to meet its obligations over the following twelve months. In the last twelve months the Company has seen growth in its contracted backlog as well as significant, signs from new commercial projects that indicate in future revenues. Management believes that, at this time, the conditions in our traditional market space with ongoing contract , 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 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 for the Company to continue as a going for a period of twelve months. We expect to continue executing the plan to grow our business and as previously discussed. The Company may selectively look at 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 the Company revenue contracts with customers based on the five-step model under ASC 606:
Identify the contract with the customer;
Identify the performance obligations in the contract;
Determine the transaction price;
Allocate the transaction price to separate performance obligations; and
Recognize revenue when (or as) each performance obligation is satisfied.
The Company generates revenue from six sources:
Technology Systems
AI Technologies
Technical Support
Consulting Services including revenues from the AMA which began in January 2025
Hosting
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.
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 Entities (“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 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.
Due to the unavailability of Q4-2025 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 , as defined in the Agreement, as of the end of the last day of such fiscal year. Under the Hypothetical , 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 prorata 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 of 5% differs from the allocation of cash from operations and . 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 , the investor should not use the specified earnings or 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 .
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 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 year ended December 31, 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, 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.
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 amortizes the fair value of the stock award over the requisite service periods of the awards, which is generally the vesting period. 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.
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.
