COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2022

Commitments and contingencies (see 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 April 12, 2022, the Company filed a civil action in the California Superior Court against the Investor referenced in Note 15, alleging that the Investor entered into the Purchase Agreement as an unregistered securities dealer and unlicensed finance lender in violation of California law. The Company’s complaint seeks rescission of the Purchase Agreement, damages, attorneys’ fees and other relief. The Investor responded to the complaint by filing a demurrer/motion to dismiss and on August 31, 2022, the Company and Investor entered into a stipulation to stay the litigation for 30 days and allow the parties to engage in further settlement discussions.  The matter was unable to be resolved within the 30 days, and, pursuant to the Stipulation, the Company refiled its action in New York where a New York court will be required to apply California law to our causes of action for rescission and unfair competition. As of the filing date of this Quarterly Report, the Investor has not filed a response to the complaint.

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, 2022, the Company is not subject to any such these audits.

Employment Contracts

The Company has entered into employment agreements with two 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, 2022, the Company had no such severance obligations, in accordance with the severance benefit provisions of the respective employment agreements.

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, 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 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 lease 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 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, 2022 and December 31, 2021. 

Operating leases

The Company currently maintains its corporate offices at 5805 Sepulveda Boulevard, Suite 801, Sherman Oaks, CA 91411 which was previously occupied solely by Sera Labs. The 3,822 square feet of office space was absorbed by the Company in connection with its acquisition of Sera Labs in October 2020. The lease agreement (the “Lease”) which expires on April 30, 2024 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. The lease provides for the payment of base monthly rent in the amount of $0.01 million during the first 12 months of the term with annual increases, 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.

 Following the Asset Sale, the Company vacated its offices and manufacturing facility at 1620 Beacon Place, Oxnard, CA 93033. The month-to-month lease was assumed by the Buyer.

Total rent expense was $0.01 million and $0.03 million for the three months ended September 30, 2022 and 2021, respectively. Total rent expense was $0.1 million and $0.1 million for the nine months ended September 30, 2022 and 2021, respectively.

The Company classified the Lease as an operating lease in accordance with ASC 842, “Lease Accounting,” 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 incremental borrowing rate (“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, 2022, the current portion and long-term portion of operating lease liability is $0.1 million and $0.1 million, respectively.

The future payments due under the operating lease as of September 30, 2022 are as follows (in thousands):

Years
2022 (remaining)	$	33
2023		138
2024		46
Undiscounted cash flow		217
Effects of discounting		(18	)
Lease liabilities recognized	$	199

Operating leases

The following table presents supplemental balance sheet information related to operating and financing leases as of September 30, 2022 and December 31, 2021 (in thousands, except lease term and discount rate):

	September 30, 2022			December 31, 2021
Operating leases
Right-of-use assets, net	$	186		$	257
Right-of-use lease liabilities, current	$	118		$	104
Right-of-use lease liabilities, noncurrent		81			174
Total operating lease liabilities	$	199		$	278
Weighted average remaining lease term
Operating leases	1.58 years			2.29 years
Weighted average discount rate
Operating leases		11.30	%		11.30	%