COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2021

COMMITMENTS AND CONTINGENCIES

NOTE 21 - COMMITMENTS AND CONTINGENCIES

NOTE 21 - COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

On October 21, 2020, the Company filed a demand to commence arbitration with the American Arbitration Association against Canopy for Canopy’s failure to perform under the License Agreement. On April 28, 2021 the Company entered into an agreement resolving the dispute between the parties, pursuant to which neither party admitted liability, the parties released their respective claims and obligations, and Canopy agreed to pay a total of $3.9 million, of which $2.3 million was paid to the Company on May 6, 2021, and the balance of $1.6 million will be paid to the Company’s attorneys within 45 calendar days.

On March 26, 2021, a vendor that the Company utilized for consulting services relating to various quality, compliance and regulatory filed a complaint against the Company for breach of contract. On May 18, 2021, the Company responded to the compliant denying their claims and also filed a cross complaint against this vendor for breach of contract by failing to provide deliverables as required by the contract. The Company is currently unable to determine what additional expenses will be incurred in order to defend this matter. As such, the Company cannot determine whether there is a reasonable possibility that a loss will be incurred, nor can it estimate the range of any such potential loss. Accordingly, the Company has not accrued an amount for any potential loss associated with this action.

Tax Filings

The Company tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. As of September 30, 2021, the Company is not subject to any such these audits.

Employment Contracts

The Company has entered into employment and severance benefit contracts with certain executive officers. Under the provisions of the contracts, The Company may be required to incur severance obligations for matters relating to changes in control, as defined, and certain terminations of executives. As of September 30, 2021, The Company had such severance obligations for certain executive officers, in accordance with the severance benefit provisions of their respective employment and severance benefit agreements.

On May 8, 2020 the Company entered into a separation agreement (the “Separation Agreement”) with Jessica Rousset whereby the parties have agreed to a mutual separation of Mrs. Rousset’s employment as the Company’s Chief Operating Officer, effective May 8, 2020.

Pursuant to the terms of the Separation Agreement, Mrs. Rousset will be entitled to the following severance benefits: (i) a gross sum of $93,461.54, paid in equal installments over a nine -month period; (ii) for a period of nine months, an amount equal to the cost of her COBRA health benefits if she enrolls for COBRA coverage; (iii) acceleration of vesting of each equity award held by her to the extent the award would have vested had she remained employed for nine months following her resignation; and (iv) an extended exercise period for certain equity awards held by her such that she may exercise vested shares under such outstanding equity awards until May 8, 2021. The Separation Agreement contains a release and certain restrictive covenants that are binding upon Mrs. Rousset

Indemnification

In the normal course of business, The Company may provide indemnification of varying scope under The Company’s agreements with other companies or consultants, typically The Company’s clinical research organizations, suppliers and others. Pursuant to these agreements, The Company will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of The Company’s products. Indemnification provisions could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to The Company’s products. The Company’s office and laboratory facility leases also will generally contain indemnification obligations, including obligations for indemnification of the lessor for environmental law matters and injuries to persons or property of others, arising from The Company’s use or occupancy of the leased property. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, lease, or license agreement to which they relate. Historically, The Company has not been subject to any claims or demands for indemnification. The Company also maintains various liability insurance policies that limit The Company’s financial exposure. As a result, The Company management believes that the fair value of these indemnification agreements is minimal. Accordingly, The Company has not recorded any liabilities for these agreements as of September 30, 2021 and December 31, 2020.

Operating leases

The Company maintains its corporate offices and manufacturing facility at 1620 Beacon Place, Oxnard, CA 93033, which contains approximately 25,000 square feet. The Company is currently on a month-to-month lease.

Sera Labs will pay base monthly rent in the amount of $0.1 million during the first 12 months of the Term. Base monthly rent will increase annually, over the base monthly rent then in effect, by 3%. If the Lease is terminated based on the occurrence of an “event of default,” The Company will be obligated to pay the abated rent to the lessor.

On May 1, 2019, Sera Labs entered into a lease agreement to lease a 3,822 square feet office space and was absorbed by the Company upon acquisition of Sera Labs on October 2, 2020. The agreement contains an option to extend the lease for an additional 36 months and the Company will reassess the lease term of the contract when it has determined it is reasonably certain to exercise the option. Sera Labs will pay base monthly rent in the amount of $0.01 million during the first 12 months of the Term. Base monthly rent will increase annually, over the base monthly rent then in effect, by 3%. If the Lease is terminated based on the occurrence of an “event of default,” The Company will be obligated to pay the abated rent to the lessor.

Total rent expense was $0.1 million and $0.07 million for the three months ended September 30, 2021 and 2020, respectively. Total rent expense was $0.3 million and $0.2 million for the nine months ended September 30, 2021 and 2020, respectively.

The Company classified the Sera Labs lease as an operating lease in accordance with ASC 842 and has recognized a right-of-use asset and a lease liability based on the present values of its lease payments over its respective lease term. The Company used the services of a valuation company to compute the IBR which is necessary to determine the present value of its lease payments since a borrowing rate is not explicitly available on the lease agreement. The concluded IBR is 11.30%. Operating lease payments and lease expense are recognized on a straight-line basis over the lease term.

As of September 30, 2021, the current portion and long-term portion of operating lease liability is $0.1 million and $0.2 million, respectively.

The future payments due under the operating lease as of September 30, 2021 are as follows (in thousands):

Years
2021 (remaining)	$	33
2022		134
2023		138
2024		46
2025		-
Undiscounted cash flow		351
Effects of discounting		(48	)
Lease liabilities recognized	$	303

Finance leases

During 2019 the Company entered into a 5-year equipment lease rental which requires the Company to pay monthly payments of $0.02 million. The Company determined the payments represented substantially all of the fair value of the asset and recorded a right of use asset for $0.06 million and a finance lease liability for $0.06 million during the year ended December 31, 2019 within other assets and liabilities. The company will make payment of $0.02 annually until October 2024. Interest associated with the lease is $0.1 million or less annually based on a discount rate of 9.0%. As of September 30, 2021, the current portion and long-term portion of finance capital lease liability was $0.013 million and $0.03 million, respectively. As of December 31, 2020, the Company the current and long-term portion of finance capital lease liability was $0.01 million and $0.04 million, respectively.

Future minimum lease payments under non-cancellable capital leases as of September 30, 2021 are as follows (in thousands):

2021 (remaining)		6
2022		14
2023		14
2024		9
2025		-
Thereafter		-
Finance lease liabilities recognized	$	43

Operating and Financing leases

The following table presents supplemental balance sheet information related to operating and financing leases as of September 30, 2021 and December 31, 2020 (in thousands, except lease term and discount rate):

	September 30, 2021			December 31, 2020
Operating leases
Right-of-use assets, net	$	280			343
Right-of-use lease liabilities, current	$	104			93
Right-of-use lease liabilities, noncurrent		199			278
Total operating lease liabilities	$	303			371
Financing Leases
Finance lease right-to-use assets, net	$	43			52
Current liabilities	$	13			12
Noncurrent liabilities		30			40
Total financing lease liabilities	$	43			52
Weighted average remaining lease term
Operating leases	2.55 years			3.31 years
Financing leases	3.06 years			3.82 years
Weighted average discount rate
Operating leases		11.30	%		11.3	%
Financing leases		9.0	%		9.0	%