COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2023

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

 NOTE 20 - 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. On November 18, 2022, the Company filed an amended complaint alleging six additional causes of action, including fraud, breach of contract and unfair competition. The Investor responded to the New York amended complaint by filing a motion to dismiss and on February 3, 2023, the Company filed its opposition response to the motion to dismiss.  As of the filing date of this Annual Report, the Investor has not filed a response to our opposition to their motion to dismiss. Settlement discussions between the parties are ongoing.

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 December 31, 2023, the Company is not subject to any such audits.

Employment Contracts

The Company has entered into employment agreements with two executive officers. Under the provisions of the agreements, 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 December 31, 2023, 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, 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 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 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 December 31, 2023 and 2022.

Operating leases

The Company currently maintains its corporate offices at 5805 Sepulveda Boulevard, Suite 801, Sherman Oaks, CA 91411. The office space consists of 3,822 square feet of office space and the lease agreement (the “Lease”) expired on April 30, 2024. The Company has entered into a new two-year lease with its current landlord for 2,902 square feet of office space in the existing building which expires on April 30, 2026. The lease provides for the payment of base monthly rent in the amount of $7 thousand during the first 12 months of the term with annual increases, over the base monthly rent then in effect, by 3%.

Total rent expense was $123 thousand and $122 thousand for the years ended December 31, 2023 and 2022, 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 December 31, 2023, the current portion of operating lease liability is $45 thousand.

The future payments due under the operating lease for the years ended December 31 are as follows (in thousands):

2024	$	46
2025		-
2026		-
2027		-
2028		-
Undiscounted cash flow		46
Effects of discounting		(1	)
Lease liabilities recognized	$	45

Operating lease

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

	2023			2022
Operating lease
Right-of-use assets, net	$	50		$	160
Right-of-use lease liabilities, current	$	45		$	124
Right-of-use lease liabilities, noncurrent		-			46
Total operating lease liabilities	$	45		$	170
Weighted average remaining lease term
Operating lease	0.29 years			1.29 years
Weighted average discount rate
Operating lease		11.3	%		11.3	%

Sera Labs Acquisition Contingent stock consideration

In October 2020, the Company acquired all of the issued and outstanding stock of Sera Labs in exchange for consideration of, subject to customary adjustments, an aggregate of approximately (i) $1.0 million in cash and (ii) up to 6,909,091 shares of the Company’s common stock. Pursuant to the Sera Labs Merger Agreement, Sera Labs security holders are also entitled to receive up to 5,988,024 shares of the Company’s common stock (the “Clawback Shares”) based on the achievement of certain sales and gross margin milestones. Our chief executive officer who is also a director of the Company is the beneficial owner of the security holders and is therefore entitled to receive the Clawback Shares if earned.  During the original earnout period through the second anniversary of the merger, the Company did not provide the marketing and growth funds to Sera Labs required under the Sera Labs Merger Agreement on which the sales and gross margin milestones were based.  On August 11, 2022, after considering the impact on the Sera Labs’ ability to achieve the prescribed milestones for the issuance of the Clawback Shares due to the under-funding of Sera Labs, the Board agreed to extend the period in which the Clawback Shares may be earned to December 31, 2023.  Our chief executive officer recused herself from the discussion and voting on the resolution approving the extension. On December 31, 2023, the Company issued 4,790,419 shares of common stock pursuant to the Sera Labs Merger Agreement at a value of approximately $355 thousand based on a price per share of $0.074.

The acquisition was accounted for in accordance with ASC 805. The equity consideration to be provided is subject to a variety of earn-out and milestone provisions thus of the 12,897,115 total potential shares to be issued, 5,988,024 shares were considered contingent shares based on the achievement of certain sales and gross margin milestones (“Contingent Shares”).

The following table presents the changes in fair value of contingent stock consideration (in thousands):

Fair value at December 31, 2021	$	1,430
Change in fair value of contingent stock consideration		(570	)
Fair value at December 31, 2022		860
Change in fair value of contingent stock consideration		(505	)
Issuance of shares		(355	)
Fair value at December 31, 2023	$	-