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Commitments and Contingencies

9 Months Ended

Sep. 30, 2022

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

10. Commitments and Contingencies

Operating Leases

The Company leases its warehouses and office space under long-term lease arrangements. None of its leases include characteristics specified in ASC 842, Leases, that require classification as financing leases, and accordingly, these leases are accounted for as operating leases. The Company does not recognize a right-of-use asset and lease liability for short term leases, which have terms of 12 months or less. For longer-term lease arrangements that are recognized on the Company’s Balance Sheet, the right-of-use asset and lease liability are initially measured at the commencement date based upon the present values of the lease payments due under the leases.

The implicit interest rates of the Company’s lease arrangements are generally not readily determinable and as such, the Company applies an incremental borrowing rate, which is established based upon the information available at the lease commencement date, to determine the present value of lease payments due under the arrangement. Under ASC 842, the incremental borrowing rate (IBR) for leases must be (1) a rate of interest over a similar term, and (2) for an amount that is equal to the lease payments. The Company uses both the Federal Reserve Economic Data (FRED) U.S. corporate debt effective yield and the U.S. Treasury rates adjusted for credit spread as the primary data points for purposes of determining the IBR.

In the first quarter of 2022, the Company entered into two new long-term, non-cancelable operating lease agreements for office and warehouse space resulting in the Company recognizing an additional lease liability totaling of $2,348,509, representing the present value of the lease payments discounted using an effective interest rate of 8.07% and 8.86%, and corresponding right-of-use assets of $2,348,509. The leases expire in December 2026 and December 2028. The second lease contains one three-year option to renew. The lease is guaranteed by the current CEO.

In the first quarter of 2021, the Company entered into a long-term, non-cancelable operating lease agreement for office and warehouse space resulting in the Company recognizing an additional lease liability totaling of $1,268,089, representing the present value of the lease payments discounted using an effective interest rate of 7.47% and a corresponding right-of-use asset of $1,268,089. The lease expires in January 2028 and contains one three-year option to renew. The lease is guaranteed by the current CEO.

The Company has two other leases that expire in January 2023 and February 2025. The leases generally provide for annual increases based on a fixed amount and generally require the Company to pay real estate taxes, insurance, and repairs. Both leases are guaranteed by the current CEO.

The following is a summary of total lease costs during the three months and nine months ended September 30, 2022 and 2021:

Schedule of lease cost


		Three Months Ended September 30,								Nine Months Ended September 30,
		2022				2021				2022				2021
Operating lease cost		$	198,795			$	80,931			$	561,949			$	223,175
Short-term lease costs			450				1,504				3,077				3,223
Variable lease costs			—				—				—				—
Sublease income			(25,022	)			(30,360	)			(98,364	)			(54,677	)
		$	174,223			$	52,075			$	466,662			$	171,721

The weighted-average remaining lease term was 5.71 years and 5.64 years as of September 30, 2022 and December 31, 2021, respectively. The weighted average discount rate was 8.50% and 8.02%, as of September 30, 2022 and December 31, 2021, respectively. Operating cash flows from the operating leases totaled $115,442 and $48,602 for the three months ended September 30, 2022 and 2021, respectively and $322,112 and $127,980 for the nine months ended September 30, 2022 and 2021, respectively.

The total lease liability as of September 30, 2022 and December 31, 2021 was $3,338,046 and $1,311,649, respectively.

The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of September 30, 2022, for years ending September 30:


	Total
2023	$	729,741
2024		723,081
2025		721,971
2026		727,150
2027		703,541
Thereafter		645,402
Total future minimum lease payments		4,250,886
Less imputed interest		(912,840	)
Total	$	3,338,046

Current lease liability	$	465,471
Noncurrent lease liability		2,872,575
Total	$	3,338,046

Subleases

The Company subleases office and warehouse space under three of its existing operating leases with similar terms as the Company’s lease agreements. Because the Company is not relieved of its primary obligations under the original lease, the Company accounts for the subleases as a lessor. Sublease rental income is recorded based on the contractual rental payments which are not substantially different from recognition on a straight-line basis over the

lease term and totaled $25,022 and $30,360 during the three months ended September, 2022 and 2021, respectively, and $98,364 and $54,677 during the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022 and December 31, 2021, deferred income and a sublease deposit totaled $14,168 and $13,690, respectively, and is included in accrued expenses and other current liabilities on the accompanying Balance Sheets.

The following are the total future minimum sublease payments as of September 30, 2022:


Years ending September 30,
2023	$	60,056
2024		35,977
2025		15,175
Total future minimum lease payments	$	111,208

Litigation

The Company may be involved from time to time in litigation or claims arising in the ordinary course of its business. While the ultimate liability, if any, arising from these claims cannot be determined with certainty, the Company believes that the resolution of any such matters will not likely have a material adverse effect on the Company’s financial statements.