COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2024

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 18 – 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 14, 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 Investor’s motion to dismiss. On September 7, 2023, a hearing was held on the motion to dismiss. As of the filing date of this Quarterly Report, a ruling has not been issued by the court on the motion. 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 September 30, 2024, 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 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, 2024, 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, 2024 and December 31, 2023.

Operating Lease

The Company currently maintains its corporate offices at 15233 Ventura Boulevard, Suite 420, Sherman Oaks, CA 91403 at no cost to the Company under an informal arrangement with its tenant while the Company seeks to identify suitable permanent office space. The Company previously maintained its leased corporate offices at 5805 Sepulveda Boulevard, Suite 500, Sherman Oaks, CA 91411 under a lease agreement (the “Lease”), which was originally set to expire on April 30, 2026. Effective on September 6, 2024, the Company early terminated the lease without penalty by mutual agreement with the landlord and the Company vacated the premises. The lease provided for the payment of base monthly rent in the amount of $7 thousand during the first 12 months of the term with an increase of 3% over the base monthly rent beginning on the one-year anniversary of the Lease. The Company previously occupied Suite 801 in the same building under a lease agreement that expired on April 30, 2024.

Rent expense was $16 thousand and $31 thousand for the three months ended September 30, 2024 and 2023, respectively. Rent expense was $75 thousand and $92 thousand for the nine months ended September 30, 2024 and 2023, respectively.

The Company classified the Lease as an operating lease in accordance with ASC 842, “Lease Accounting,” to be recognized as a right-of-use asset and a lease liability based on the present value of its lease payments over its lease term. The Company computed 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 in the lease agreement. The concluded IBR is 14.16%. Operating lease payments and lease expense were recognized on a straight-line basis over the lease term.

As a result of the early termination of the Lease, there are no future payments due under the operating lease.

The following table presents supplemental balance sheet information related to the particular operating lease in effect as of September 30, 2024 and December 31, 2023 (in thousands, except lease term and discount rate):

	September 30, 2024		December 31, 2023
Operating lease
Right-of-use asset, net	$	-	$	50
Right-of-use lease liability, current	$	-	$	45
Right-of-use lease liability, noncurrent		-
Total operating lease liability	$	-	$	45
Weighted average remaining lease term
Operating lease			0.29 years
Weighted average discount rate
Operating lease				11.30	%