NOTE 9: COMMITMENTS AND CONTINGENCIES

Lease Agreements

Warehouse and Office Space

On May 19, 2022, the Company entered into a 5-year lease of approximately 3,100 square feet of warehouse and office space. The lease requires base monthly rent of $3,358 per month for the first year and provides for 5% increase in base rent on each anniversary date. At inception of the lease, the Company recorded a right-of-use asset and obligation of $157,363, equal to the present value of remaining payments of minimum required lease payments.

As of June 30, 2026, and December 31, 2025, right-of-use assets (“ROU”) are summarized as follows:

As of June 30, 2026, and December 31, 2025, operating lease liabilities related to the ROU assets are summarized as follows:

As of June 30, 2026, the weighted average lease term remaining is 0.92 years and the imputed interest rate is 14%, compared to the weighted average lease term remaining of 1.42 years with the same imputed interest rate of 14% as of December 31, 2025.

The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2026:

The Company amortized $18,517 and $16,002 of the right-of-use asset for the six months ended June 30, 2026 and 2025, respectively.

For the three months ended June 30, 2026, and June 30, 2025, the Company recognized rent expense totaled $16,180 and $15,531 , respectively.

For the six months ended June 30, 2026, and June 30, 2025, the Company recognized rent expense totaled $32,403 and $34,596, respectively.

Legal Matters

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Except as set forth below and/or as previously disclosed, there are no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations and there are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

On December 17, 2024, the Company entered into a Settlement Agreement and Release (“Daze Agreement”) with 7 Daze, LLC (“Daze”) following assertion by the Company of patent infringement of U.S. patent no. 8,205,622 (the “Patent”) by Daze’s auto draw electronic cigarettes (the “Dispute”). Pursuant to the terms of the Daze Agreement, the parties agreed to settle the Dispute, and the Company granted to Daze and certain of its affiliates a fully paid-up, royalty free, non-exclusive license to practice the invention in the Patent. Pursuant to the terms of the Daze Agreement, Daze agreed to pay the Company the sum of $100,000 according to the following payment schedule:

As of December 31, 2025, the Company has received all of the amounts due under the Daze Agreement.

On February 17, 2025, the Company entered into a Settlement Agreement and Release (the “Pop Vapor Agreement”) with Pop Vapor Co, LLC (“Pop Vapor”) regarding Patent (United States Patent No. 8,205,622) infringements of Company branded products. Pursuant to the terms of the Pop Vapor Agreement, Pop Vapor agreed to pay the Company $30,000. The Company received the $30,000 cash payment, which was recognized as settlement income, in April 2025. In addition to the settlement payment, Pop Vapor agreed to pay the Company a royalty of $0.05 per unit of the POP Hit brand devices sold by Pop Vapor from April 1, 2024 until the earlier of the life of the Patent (expires on July 16, 2030) or the invalidity or unenforceability of the Patent. As of June 30, 2026, the Company received total payments from Pop Vapor of $39,630, all of which were received during 2025 and consisted of $30,000 in cash payments and $9,630 of royalty income.

On March 27, 2025, the Company entered into a Settlement Agreement and Release (the “Zaydan Agreement”) with Zaydan Innovations, Inc. (“Zaydan”) regarding Patent infringements of Company branded products. Pursuant to the terms of the Zaydan Agreement, Zaydan agreed to pay the Company $7,500. The Company received the $7,500 cash payment, which was recognized as settlement income, in April 2025.

On May 5, 2025, the Company entered into a Settlement Agreement and Release (the “Ashh Agreement”) with Ashh, Inc. (“Ashh”) regarding trademark and patent infringements of Company branded products. Pursuant to the terms of the Ashh Agreement, Ashh agreed to pay the Company $50,000. The Company received the $50,000 cash payment, which was recognized as settlement income, in May 2025. In addition to the settlement payment, once all of the product covered by the current inventory licensed has been sold, Ashh agreed to pay the Company a royalty of $0.03 per unit of the licensed devices sold by Ashh until the earlier of the life of the Patent (expires on July 16, 2030) or the invalidity or unenforceability of the Patent. The Company did not receive any royalty income during the six months ended June 30, 2026 from this agreement.

On May 29, 2025, the Company entered into a Settlement Agreement and Release (the “All Rise Agreement”) with All Rise Records Inc. (“All Rise”) regarding Patent infringements of Company branded products. Pursuant to the terms of the All Rise Agreement, All Rise agreed to pay the Company $30,000, to be recognized as settlement income when received. All Rise agreed to pay the $30,000 settlement amount in monthly installments of $5,000 beginning on June 1, 2025. In addition to the $30,000 settlement payment, All Rise agreed to pay the Company a royalty of $0.05 per unit of the All Rise e-cigarette devices sold by All Rise from June 1, 2025 through the life of the Patent (expires on July 16, 2030). All Rise also agreed to pay the Company a royalty of $0.12 per unit of the All Rise inverter torch lighters sold by All Rise from June 1, 2025 through the life of U.S. patent 11.913.644 (expires on February 27, 2044). As of June 30, 2026, the Company received total payments of $30,000 pursuant to the All Rise Agreement, all of which were received during fiscal year 2025. No royalty income was received during the six months ended June 30, 2026.

On September 10, 2025, the Company entered into a Settlement Agreement and Release (the “Ferrara Agreement”) with Ferrara Candy Company (Ferrara) in relation to the ‘935 Application and the WIPO Registration, and Ferrara has filed Opposition Proceeding before the Trademark and Trial and Appeal Board. Pursuant to the terms of the Ferrara Agreement, Ferrara agreed to pay the Company $1,000, to be recognized as settlement income when received. The Company received the $1,000 cash payment, which was recognized as settlement income, in November 2025.

In November 2025, the Company entered into a Settlement Agreement and Release (the “Flumgio Agreement”) with Flumgio Technology Inc. (Flumgio) regarding Patent infringements of Company branded products. Pursuant to the terms of the Flumgio Agreement, Flumgio agreed to pay the Company $50,000, to be recognized as settlement income when received. The Company received the $50,000 cash payment, which was recognized as settlement income, in November 2025.

In December 2025, the Company entered into a Settlement Agreement and Release (the “J Brands Agreement”) with J Brands LLC (J Brands) regarding Patent infringements of Company branded products. Pursuant to the terms of the J Brands Agreement, J Brands agreed to pay the Company $70,000, to be recognized as settlement income when received. The Company received the $70,000 cash payment, which was recognized as settlement income, in January 2026.

On January 30, 2026, the Company and EBL, an unaffiliated licensee of the Company, entered into a Litigation Resolution Agreement (the “EBL Agreement”) with Shenzhen Weiboli Technology Co, Ltd (“Weiboli”), Shenzhen iMiracle Technology Co. Ltd. (“SIT”), iMiracle (HK) Limited (“iMiracle”), Heaven Gifts International Limited (“Heaven Gifts”), YLSN Distribution LLC (“YLSN”), ECTO World LLC (“ECTO”), D&A Distribution LLC (“D&A”), UNISHOW (U.S.A.), Inc. (“UNISHOW”), SV3 LLC d/b/a MI-POD (“MI-POD”), Kingdom Vapor Inc. (“Kingdom Vapor”), and GD Sigelei Electronic Tech. Co Ltd. (“GD Sigelei”), Waterfall Holding LLC (“Waterfall”), LA Vapor, Inc. (“LA Vapor”), World Wholesale Inc. (“WWI”), G&A Wholesale Distributors Inc. (“G&A”), and Kloud King Distributors, Inc. d/b/a KKSMOKE.COM (“Kloud King” and collectively with Weiboli, SIT, iMiracle, Heaven Gifts, YLSN, ECTO, D&A, UNISHOW, MI-POD, Kingdom Vapor, GD Sigelei, Waterfall, LA Vapor, WWI and G&A, the “Defendants”). The parties entered into the EBL Agreement in connection with settlement of all disputes between them, including certain pending litigation identified in the EBL Agreement (collectively, the “Actions”) concerning U.S. trademark 5,486,616 (the “616 Trademark”) for the mark ELF in International Class 34 for use in connection with “Electronic cigarette lighters; Electronic cigarettes; Smokeless cigarette vaporizer pipe” and U.S. patent number 8,205,622 entitled “Electronic Cigarette” (the “622 Patent”). The parties to the EBL Agreement deny any other party’s allegations and claims in such litigation, do not admit liability, and desire to settle and compromise all disputes between them, including the Actions, on the terms and conditions set forth in the EBL Agreement.

Pursuant to the terms of the EBL Agreement, (i) the Company and the Defendants agreed to dismiss the Actions with prejudice within one business day of receipt by the Company of $5,250,000 (the “Consideration”) from the Defendants, and (ii) the Company agreed to dismiss with prejudice any other pending action in the U.S. and worldwide against any Defendant within five business days of receipt of the Consideration. The Company received $3,200,000 of the Consideration, after payment of attorneys’ fees.

On March 9, 2026, the Company entered into a settlement agreement with Boulder International Inc. to resolve patent infringement litigation related to U.S. Patent No. 8,205,622, covering Boulder’s “Pro” and “Twilight” vape devices.

Under the agreement, Boulder agreed to pay a total settlement amount of $30,000 in three equal installments of $10,000 each. The first two installment was received on April 9, 2026 and May 28, 2026 respectively The remaining installment was scheduled for twelve weeks after the first payment date. The litigation is to be dismissed with prejudice upon receipt of the settlement consideration, with no admission of liability by either party.

In addition to the settlement payment, the Company granted Boulder a non-exclusive, non-transferable, perpetual license to the patent. Under the license, Boulder will pay royalties of 4% of net sales of specified products for a two-year period beginning March 1, 2026. The agreement also provides for reporting and audit rights with respect to the royalty obligations.

Additionally, the Company irrevocably conveyed, transferred and assigned to iMiracle all of the Company’s right, title and interest in and to the ‘616 Trademark and all U.S. trademark registrations and trademark applications for any elf-formative marks, together with the goodwill of the business connected with the use of, and symbolized by, the Assigned Trademarks (as defined in the EBL Agreement). In furtherance thereof, the Company agreed to transfer, assign, convey and deliver to iMiracle, at no additional consideration, certain tangible and/or intangible assets materially related to and necessary to evidence and preserve the goodwill symbolized by the Assigned Trademarks, and to assign and transfer to iMiracle all of the Company’s right, title and interest in the ELF trademarks identified in the EBL Agreement. Pursuant to the terms of the EBL Agreement, within the 75-day period after the effective date of the EBL Agreement, the Company and EBL may sell off existing inventory of ELF branded products already manufactured and in stock as of the effective date of the EBL Agreement. The Company and its affiliates may not manufacture or produce any new products bearing the Assigned Trademarks, including but not limited to, any products branded, labeled, packaged or otherwise identified as “ELF” or any confusingly similar designation, at any time on or after the effective date of the EBL Agreement. The Company also agreed to, and agreed to cause its affiliates to, irrevocably withdraw, dismiss and terminate all ELF Trademark Challenge Proceedings (as defined in the EBL Agreement) within 10 business days following execution of the EBL Agreement.

The Company also agreed to file with the U.S. Patent and Trademark Office, within 14 days of execution of the EBL Agreement, a request for the express abandonment of U.S. Application Serial No. 97834845, and to irrevocably withdraw and abandon the trademark applications identified in the EBL Agreement filed with the European Union.

Pursuant to the terms of the EBL Agreement, the Company granted to Defendants a fully paid, worldwide, irrevocable, non-exclusive, perpetual license to the ‘622 Patent.

The EBL Agreement contains customary representations, warranties and covenants of the Company and the Defendants.

On January 30, 2026, the Company entered into a settlement with EBL to terminate its ELF® brand license. The Company paid $150,000, and granted EBL a limited license under U.S. Patent No. 8,205,622 with restricted sublicensing solely to specified third parties, with third-party royalties payable to EBL. Therefore, the Company has no right to the royalty revenue generated pursuant to the sublicense agreement.

On April 21, 2026, R.J. Reynolds Vapor Company (“RJR”) filed a declaratory judgment action against the Company in the U.S. District Court for the District of Delaware, Case No. 1:26-cv-00459, seeking a declaration of non-infringement of U.S. Patent No. 8,205,622 B2 with respect to certain Vuse electronic cigarette products. The matter remained pending as of June 30, 2026 and was subsequently resolved pursuant to the Settlement and Patent License Agreement described in Note 11.

During the six months ended June 30, 2026 and 2025, the Company recognized net settlement income of $3,000,990 and $17,279, respectively, net of related legal fees. These amounts are included in settlement income (expense), net in the accompanying statements of operations.

During the three months ended June 30, 2026, the Company recognized net settlement-related expense of $91,265, compared with net settlement income of $17,279 during the three months ended June 30, 2025, in each case net of related legal fees. These amounts are included in income (expense), net, in the accompanying statements of operations.