13. LEASES

Finance Lease

The Company leased certain equipment under non-cancellable finance lease agreements. The leases have remaining lease terms of less than one year. The Company has elected the short-term lease recognition exemption for all leases with a term of 12 months or less. Lease payments for short-term leases are recognized as expense on a straight-line basis over the lease term, and no right-of-use asset or lease liability is recorded for these leases. The Company has also elected the practical expedient to not separate lease components from non-lease components and instead accounts for each lease component and its associated non-lease components as a single lease component.

Supplemental balance sheet information related to the Company’s finance lease as of December 31, 2024, is as follows:

As of December 31, 2024 the balance of right-of-use asset was deemed impaired and the Company recorded an impairment loss of $1,015,304.  The impairment was due to non-use of such assets. The Company believes it will not be able to recognize the value of the asset further and has thus deemed it fully impaired. Additionally, the Company recorded an amount of $551,502 as an impairment loss for additional potential amounts due through the estimated remainder of the lease.

Operating Lease

The Company leases its manufacturing facility under the terms of an operating lease in Conroe, Texas. The lease has an effective date of October 1, 2025 and ends on October 30, 2027. The Company is required to make monthly lease payments of $16,000 throughout the term of the lease.

The Company recognized a right of use asset and lease liability in the amount of $348,822 based on an incremental borrowing rate of 10.25%. As the lease did not provide an implicit rate, the Company used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. 

Anticipated future lease costs, which are based in part on certain assumptions to approximate minimum annual rental commitments under non-cancellable leases, are as follows:

Total lease expense amounted to $114,821 and $370,238 for the years ending December 31, 2025 and 2024, respectively. The Company paid $114,821 and $370,238 in lease payments during the years ended December 31, 2025 and 2024, respectively, which is included within operating cash flows.