NOTE 13. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facilities under non-cancelable operating leases expiring June 30, 2030. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and liabilities for the lease renewal were recognized at the inception date which is November 7, 2025 based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate based on the information available. At June 30, 2026, the weighted average remaining lease term for the lease renewal is 4.0 years and the weighted average discount rate is 3.67%. In addition to the rent payment, The Company pays a proportionate share of operating costs, taxes, and insurance costs. The annual cost for these additional rent expenses ending June 30 2026 and 2025 were $284,356 and $256,157 respectively.

Supplemental balance sheet information related to leases at June 30, 2026 is as follows:

Maturities of operating lease liabilities at June 30, 2026 are as follows: 

Equipment Notes Payable

The Company has acquired equipment under the provisions of long-term equipment notes. For financial reporting purposes, minimum note payments relating to the equipment have been capitalized. The equipment acquired with these equipment notes has a total cost of $781,118. These assets are included in the fixed assets listed in Note 5 - Equipment and Leasehold Improvements and include production equipment. The equipment notes have stated or imputed interest rates ranging from 6.75% to 11.60%.

The following is an analysis of the minimum future equipment note payable payments subsequent to June 30, 2026:

Finance Leases Payable

The Company has lease obligations for equipment under the provisions of long-term finance leases. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The equipment acquired with these leases has a total cost of approximately $132,975. These assets are included in the finance lease and include production equipment.

On January 5, 2022, the Company entered into a finance lease agreement with Raymond in the amount of $22,862 with monthly payments of $514 with a 48 month term at an imputed interest rate of 3.75%. This lease concluded on January 1, 2026 and was paid in full.

On March 15, 2024, the Company entered into a finance lease agreement with Canon Solutions in the amount of $63,948 with monthly payments of $1,325 with a 60 month term at an imputed rate of 8.90%.

On June 3, 2024, the Company entered into a finance lease agreement with Raymond in the amount of $39,972 with monthly payments of $807 with a 60 month term at an imputed rate of 7.80%.

One March 20, 2026, the Company entered into a finance lease agreement with Well Fargo Equipment Financing in the amount of $29,350 with monthly payments of $665.67 with a 48 month term at an imputed rate of 4.23%.

At June 30, 2026, the weighted average remaining lease term is 3.1 years, and the weighted average discount rate is 10.2%

The following is an analysis of the minimum finance lease payable payments subsequent to June 30, 2026:

Employment Agreements

The Company has entered into an employment agreement with Louis Friedman, President and Chief Executive Officer. The agreement provides for an annual base salary of $160,000 and eligibility to receive a bonus. In certain termination situations, the Company is liable to pay severance compensation to Mr. Friedman for up to nine months at his current salary.

On January 15, 2024, the Company, through OneUp, engaged Chris Knauf to serve as Chief Financial Officer and Controller of the Company. The Company shall pay Mr. Knauf an annual salary of $160,000 and Mr. Knauf received options to purchase 200,000 shares of the Company’s common stock, exercisable at $0.08 per share on the date of the agreement and subsequently on July 1, 2024, an additional option to purchase an additional 200,000 shares of common stock exercisable at $0.08 per share. On March 1, 2026, Mr. Knauf reduced his salary compensation to $36,000 per year.

Legal Proceedings

As of the date of this Annual Report, there are no material pending legal or governmental proceedings relating to the Company or properties to which the Company is a party. To the Company’s knowledge, there are no material proceedings to which any of its directors, executive officers or affiliates are a party adverse to the Company or which have a material interest adverse to the Company.