OPERATING LEASES - RIGHT OF USE ASSETS

12 Months Ended

Dec. 31, 2023

OPERATING LEASES - RIGHT OF USE ASSETS

OPERATING LEASES - RIGHT OF USE ASSETS

NOTE 6 – OPERATING LEASES – RIGHT OF USE ASSETS

The Company entered into a 72-month agreement to lease approximately 6,300 square feet of manufacturing, storage, and office space on January 1, 2020, for a period of 6 years with a related party, Primus Logistics, Inc. (“Primus”) an entity controlled by the Company’s CEO. Approximately 1,800 sf (28.5%) is used as a manufacturing facility with the balance used as corporate offices and storage. There was no security deposit paid, and the lease carries no optional extension periods. The term of the lease is for six years. At inception of the lease, the Company recorded a right of use asset and liability. The Company used an effective borrowing rate of 6.23% within the calculation.

In addition to the rental of manufacturing space, the Company transacts routine storage business with Primus. The primary business of Primus is the provisions of cold storage facilities used for perishable raw materials and finished products from pharmaceutical manufacturing companies. The company stores its raw hemp smokable material with Primus.

Base monthly rent commenced at $10,000 per month, with subsequent defined annual increases. All operating expenses are borne by the lessee. Amounts payable to the related party for rent as of December 31, 2023, and December 31, 2022, were $0 and $5,163 respectively. On December 31, 2023, and December 31, 2022, the amounts of $0 and $25,000 respectively, of prepaid rent were included in the deposits and prepayments account.

The Company assumed a 63-month lease in respect of a 47,544-sf industrial building in San Diego, as part of the terms of the original Green Star Labs, Inc. acquisition from the joint venture partner. Base rent is $69,102 as of month 33, increasing by 3% on the anniversary date of the lease. The lease expires on July 31, 2024, and there is one 5-year option to extend for a further five years. The Company recorded a right of use asset and liability in the amount of $5,449,811 representing the net present value of the remaining lease payments at an incremental borrowing cost (“IBR”) of 5.75%. Management is reasonably certain that the lease will be extended for a further five years.

On October 26, 2023, the Company signed a new 91-month lease, effective January 1, 2024, in respect of its Ruffin Road premises. Rental payments commence at $$77,972 per month with annual 3.5% CPI increases. The lease calls for a $389,861 security deposit, due upon execution of the lease, which has yet to be paid. As this new lease was signed in October 2023, GAAP rules require that we adjust the valuations of ROU assets and liabilities carried on the balance sheet at December 31, 2023, to account for the potential increase in value at the date of the extension.

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives. Our variable lease payments primarily consist of maintenance and other operating expenses from our real estate leases. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The following are the expected lease payments for Airway Road and Ruffin Road as of December 31, 2023. The lease is considered an “operating lease”.

	Related Party
Year Ending December 31	Airway Rd.			Ruffin Rd.			Total
2024	$	129,362		$	935,666		$	1,065,028
2025		129,362			968,414			1,097,776
2026		-			1,002,309			1,002,309
2027		-			1,037,390			1,037,390
2028		-			1,073,698			1,073,698
Thereafter		-			2,955,867			2,955,867
Total lease payments		258,724			7,973,344			8,232,068
Less: imputed interest/present value discount		(17,130	)		(1,726,033	)		(1,743,163	)
Total	$	241,594			6,247,311		$	6,488,905

Lease expense, on the straight-line basis was $655,075 for the year ended December 31, 2023, and $129,360 for the year ended December 31, 2022. The year 2023 includes the ROU asset of Green Star Labs from the date of acquisition.