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Note 11 - Leases

9 Months Ended

Sep. 30, 2024

11.

Leases

Operating leases

The Company has active operating lease arrangements for office space and warehouse facilities. The Company is typically required to make fixed minimum rent payments relating to its right to use the underlying leased assets. Although these leases have terms that are either month-to-month or terms that are one year or less (with renewal options), the Company concluded in the fourth quarter of 2023 that the term renewal options are reasonably certain to be exercised. As a result of changes in certain circumstances related to some of the Company's short-term leases, the Company was required to classify such leases as operating leases in accordance with the provisions of ASC 842. Therefore, the Company recognized operating lease liabilities with corresponding ROU assets based on the present value of the minimum rental payments of such leases.

On March 28, 2023, the Company entered into the Berthaphil Sublease with Berthaphil to sublease approximately 3,600 square yards of a warehouse building based in the Clark Freeport Zone in the Philippines. The term of the Berthaphil Sublease is two years and two months with a turnover date of July 1, 2023 (the "turnover date") and a rental commencement of September 1, 2023. However, the warehouse building was not available for use to the Company until the early part of the fourth quarter of 2023. Therefore, the commencement date was deferred until the fourth quarter of 2023, which is when the Company was given access to use the warehouse building. There was a grace period of two months for rental payments starting from the turnover date. The monthly rent for the first year is $15,000, escalating to $15,750 for the second year and $16,530 for the remaining term. In addition to the monthly rent, the Company is required to pay an additional 5% of the monthly rent as common area maintenance costs. The Berthaphil Sublease may be renewed for an additional period that is mutually agreed upon subject to certain terms and conditions. The Company intends to use the leased space as a production facility as it seeks to expand its business presence in the region and the United States. The Company accounted for this lease as an operating lease under ASC 842 and recorded an operating lease liability and a corresponding ROU asset for this lease.

On July 1, 2024, the Company entered into a month-to-month lease contract with Southern Management Corporation to lease a residence in Osceola, Arkansas for the purpose of housing certain of the Company's employees. The monthly lease cost is $3,000. This lease is treated as a short-term lease expense.

On August 26, 2024, the Company entered into a one-year lease contract with 120 Park SD, LLC to lease a location in Manalapan, New Jersey with the purpose of servicing the Company's New Jersey customers. The monthly lease cost is $2,900 and at the end of the one-year lease term, the lease converts into a month-to-month arrangement. This lease is treated as a short-term lease expense.

The Company's lease agreements do not provide an implicit borrowing rate. Therefore, the Company used a benchmark approach to derive an appropriate incremental borrowing rate. The Company benchmarked itself against other companies of similar credit ratings and comparable credit quality and derived an incremental borrowing rate to discount each of its lease liabilities based on the remaining lease terms.

ROU assets at September 30, 2024 were $316,767. Short-term and long-term operating lease liabilities were $313,479 and $0 at September 30, 2024, respectively.

Quantitative information regarding the Company’s leases is as follows:

	*Nine Months Ended*
	*September 30,*
	*2024*			*2023*
Lease expenses
Operating lease expenses	$	267,803		$	—
Short-term lease expenses		66,831			177,397
Total lease cost	$	334,634		$	177,397
Other information
Cash paid for the amounts included in the measurement of lease liabilities for operating leases:
Operating cash flows	$	259,048		$	—
Weighted-average remaining lease term (in years):
Operating leases		1.00			—
Weighted-average discount rate:
Operating leases		14	%		—	%

Future minimum payments under operating leases are as follows:

2024	$	87,924
2025		248,873
Total payments	$	336,797