ASURE SOFTWARE INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q contains certain statements made by management that may constitute “forward-looking” statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements about our financial results may include expected or projected U.S GAAP and non-U.S. GAAP financial and other operating and non-operating results. The words “believe,” “may,” “will,” “estimate,” “projects,” “anticipate,” “intend,” “expect,” “should,” “plan,” and similar expressions are intended to identify forward-looking statements. Examples of “forward-looking statements” include statements we make regarding our operating performance, future results of operations and financial position, revenue growth, earnings or other projections. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. The achievement or success of the matters covered by such forward-looking statements involves risks, uncertainties and assumptions, over many of which we have no control. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the Company’s results could differ materially from the results expressed or implied by the forward-looking statements we make. The risks and uncertainties referred to above include—but are not limited to—risks associated with breaches of the Company’s security measures; risks associated with the Company’s rate of growth and anticipated revenue run rate, including impact of the current environment; interruptions to supply chains and extended shut down of businesses; political unrest, including the current issues between Russia and Ukraine; reductions in employment and an increase in business failures, specifically among our clients; the Company’s ability to convert deferred revenue and unbilled deferred revenue into revenue and cash flow, and ability to maintain continued growth of deferred revenue and unbilled deferred revenue; possible fluctuations in the Company’s financial and operating results; the expiration of major revenue streams such as Earned Retention Tax Credits; regulatory pressures on economic relief enacted as a result of the COVID-19 pandemic that change or cause different interpretations with respect to eligibility for such programs; privacy concerns and laws and other regulations may limit the effectiveness of our applications; factors affecting the Company’s term loan; domestic and international regulatory developments, including changes to or applicability to our business of privacy and data securities laws, money transmitter laws and anti-money laundering laws; the financial and other impact of any previous and future acquisitions; the Company’s ability to continue to release, gain customer acceptance of and provide support for new and improved versions of the Company’s services; successful customer deployment and utilization of the Company’s existing and future services; technological developments; the nature of the Company’s business model; interest rates; competition; various financial aspects of the Company’s subscription model; impairment of intangible assets; restrictive debt covenants; interruptions or delays in the Company’s services or the Company’s Web hosting; access to additional capital; the Company’s ability to hire, retain and motivate employees and manage the Company’s growth; litigation and any related claims, negotiations and settlements, including with respect to intellectual property matters or industry-specific regulations; volatility and weakness in bank and capital markets; factors affecting the Company’s deferred tax assets and ability to value and utilize them; volatility and low trading volume of our common stock; collection of receivables; and general developments in the economy, financial markets, credit markets and the impact of current and future accounting pronouncements and other financial reporting standards. Further information on these and other factors that could affect the Company’s financial results is included in the reports on Forms 10-K, 10-Q and 8-K, and in other filings we make with the SEC from time to time. These documents are available on the SEC Filings section of the Investor Information section of the Company’s website at investor.asuresoftware.com. Asure assumes no obligation and does not intend to update these forward-looking statements, except as required by law. OVERVIEW Our Business The following review of Asure’s financial position as of June 30, 2023 and December 31, 2022, and results of operations for the three and six months ended June 30, 2023 and 2022 should be read in conjunction with our 2022 Annual Report on Form 10-K filed with the SEC on February 27, 2023. Asure’s internet website address is www.asuresoftware.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our internet website free of charge as soon as reasonably practicable after they are electronically filed, or furnished to, the SEC. Asure’s internet website and the information contained in our website or connected to our website are not incorporated into this Quarterly Report on Form 10-Q. However, we do post information on the investor relations page of our website that we believe may be of interest to our investors. 18 Table of Contents Asure is a provider of cloud-based Human Capital Management (“HCM”) software solutions delivered as Software-as-a-Service (“SaaS”) for small and medium-sized businesses (“SMBs”). We offer human resources (“HR”) tools necessary to build a thriving workforce, provide the resources to stay compliant with dynamic federal, state, and local tax jurisdictions and their respective labor laws, freeing cash flows so SMBs can spend their financial capital on growing their businesses rather than administrative overhead that can impede growth. Our solutions also provide new ways for employers to connect with and to differentiate themselves with their employees in order to enhance their relationships with their talent. Asure’s HCM suite (“Asure HCM”) includes Payroll & Tax solutions, HR compliance and services, Time & Attendance software and data integrations that enable employers and their employees to enhance efficiencies and take advantage of value-added solutions, which we refer to as AsureMarketplace™. AsureMarketplace™ automates interactions between our HCM systems with third-party providers to enhance efficiency, improve accuracy and to extend the range of services offered to employers and their employees. The Company’s approach to HR compliance services incorporates artificial intelligence technology to enhance scalability and efficiency while prioritizing client interactions. We offer our services directly and indirectly through our network of Reseller Partners. From recruitment to retirement, our solutions help more than 100,000 SMBs across the United States. Approximately 15,000 of our clients are direct and the 85,000 remaining clients are indirect, as they have contracts with Reseller Partners who white label our solutions. We strive to be the most trusted HCM resource to SMBs. We target less densely populated U.S. metropolitan cities where fewer of our competitors have a presence. Our solutions solve three primary challenges that prevent businesses from growing: HR complexity, allocation of human and financial capital, and the ability to build great teams. We have and will continue to invest in research and development to expand our solutions. Our solutions reduce the administrative burden on employers and increases employee productivity while managing the employment lifecycle. Acquisitions On January 1, 2022, we acquired certain assets of a reseller partner, which were used to provide payroll processing services. The partner is located in the northeastern United States. The aggregate purchase price that the Company paid for these assets was $2,350, as follows: (i) $1,970 in cash at closing (including $31 of transaction costs) and (ii) the delivery of a promissory note in the amount of $411. The Company paid the full amount due, including interest, on this promissory note on May 1, 2023. On September 30, 2021, the Company acquired certain assets of two payroll businesses, which were used to provide payroll processing services. In connec tion with these acquisitions there are two outstanding promissory notes payable in the amounts of $2,223 and $4,667 as of June 30, 2023. The acquisition related to the promissory note in the amount of $4,667 also included contingent purchase consideration. As of June 30, 2023, the Company calculated the final contingent consideration due in connection with the acquisition. As a result, the fair value for the contingent consideration was determined to be $587, which was added as an increase to the principal balance due on the promissory note during the second quarter of 2023. The two outstanding promissory notes mature on September 30, 2023 and September 30, 2026. In July 2020, the Company acquired certain assets of a payroll tax business. The Asset Purchase Agreement set forth two subsequent purchase consideratio n payments, which are contingent on certain thresholds. The first contingent purchase consideration was paid in June 2021. The outstanding contingent purchase consideration of $2,299 was paid in July 2023 through the issuance of 214 shares of the Company’s common stock in lieu of cash. As a result, no further contingent purchase obligation remains. 19 Table of Contents RESULTS OF OPERATIONS (in thousands) The following table sets forth, for the fiscal periods indicated, the percentage of total revenues represented by certain items in the Company’s Condensed Consolidated Statements of Comprehensive Loss: Six Months Ended June 30, 2023 2022 Revenues 100 % 100 % Gross profit 73 % 62 % Sales and marketing 25 % 21 % General and administrative 32 % 36 % Research and development 5 % 7 % Amortization of intangible assets 10 % 15 % Total operating expenses 72 % 80 % Interest expense (6) % (4) % Other (expense) income, net — % 3 % Loss from operations before income taxes (5) % (20) % Net loss (5) % (20) % Revenue Revenues are comprised of recurring revenues, professional services, hardware, and other revenues. We expect our revenues to increase as we introduce new applications, expand our client base and renew and expand relationships with existing clients. As a percentage of total revenues, we expect our mix of recurring revenues, and professional services, hardware and other revenues to remain relatively constant. While revenue mix varies by product, recurring revenue represented over 80% of total revenue in six months ended June 30, 2023, compared to 94% in six months ended June 30, 2022. Our revenue was derived from the following sources (in thousands): Three Months Ended June 30, Variance 2023 2022 $ % Recurring $ 22,960 $ 19,014 $ 3,946 21 % Professional services, hardware and other 7,460 1,286 6,174 480 % Total $ 30,420 $ 20,300 $ 10,120 50 % Six Months Ended June 30, Variance 2023 2022 $ % Recurring $ 50,916 $ 42,018 $ 8,898 21 % Professional services, hardware and other 12,568 2,615 9,953 381 % Total $ 63,484 $ 44,633 $ 18,851 42 % Recurring Revenues Recurring revenues include fees for our payroll, payroll tax, tax management, time and labor management, HR compliance services, AsureMarketplace™ and other Asure solutions as well as fees charged for form filings and delivery of client payroll checks and reports. These revenues are derived from fixed amounts charged per billing period and sometimes an additional fee per employee or transaction processed. We do not require clients to enter into long-term contractual commitments for our services. Our billing period varies by client based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. We also generate recurring revenues from our Reseller Partners that license our solutions. Because recurring revenues are based, in part, on fees for use of our applications and the delivery of checks and reports that are levied on a per-employee basis, our recurring revenues increase as our clients hire more employees. Recurring revenues are recognized in the period services are rendered. 20 Table of Contents Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2 and Form 1099, and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the first quarter of the year and many of our clients are subject to form filing requirements mandated by the Affordable Care Act (“ACA”), first quarter revenues and margins are generally higher than in subsequent quarters. We anticipate our revenues will continue to exhibit this seasonal pattern related to ACA form filings for so long as the ACA (or replacement legislation) includes employer reporting requirements. In addition, we often experience increased revenues during the fourth quarter due to unscheduled payroll runs for our clients that occur before the end of the year. We expect the seasonality of our revenue cycle to decrease to the extent clients utilize more of our non-payroll applications. Our revenue also includes interest earned on funds held for clients as well as revenues generated via fixed fee arrangements for provisioning and filing for Employee Retention Tax Credit (“ERTC”) credits. Interest earned is generated from funds we collect from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. These collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We typically invest funds held for clients in money market funds, demand deposit accounts, commercial paper, fixed income securities and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees. The amount of interest we earn from the investment of client funds is also impacted by changes in interest rates. Asure also generates revenues from provisioning and filing for ERTC. Revenue generated for such activity is based on multi-year contracts with volume commitments and is recorded as recurring revenues. Recurring revenue for the three months ended June 30, 2023 was $22,960, an increase of $3,946, or 21%, from $19,014 for the three months ended June 30, 2022. Recurring revenue increase is primarily due to an increase in HR compliance revenue, an increase in interest earned on funds held for clients, and an increase in revenue from AsureMarketplace™. Recurring revenue for the six months ended June 30, 2023 was $50,916, an increase of $8,898, or 21%, from $42,018 for the six months ended June 30, 2022. Recurring revenue increase is primarily due to a n increase of approximately $3,800 in interest earned on funds held for clients, an increase of $3,200 in HR compliance revenue, and an increase of $1,900 in revenue from AsureMarketplace™. Professional Services, Hardware and Other Revenues Professional services, hardware and other revenues represents implementation fees, one-time consulting projects, on-premise maintenance, hardware devices to enhance our software products as well as ERTC revenues that are transactional in nature. Professional services, hardw are and other revenue increased $6,174, or 480%, for the three months ended June 30, 2023 from the similar period in 2022, primarily due to growth in non-recurring ERTC revenues. ERTC revenues are expected to wind down as ERTC tax credits under the CARES Act and such regulations will expire in 2025. Professional services, hardware and other re venue increased $9,953, or 381%, for the six months ended June 30, 2023 from the similar period in 2022, primarily due to growth in non-recurring ERTC revenues. Although our total customer base is widely spread across industries, our sales are concentrated in SMBs. We continue to target SMBs across industries as prospective customers. Geographically, we sell our products primarily in the United States. In addition to continuing to develop our workforce solutions and release of new software updates and enhancements, we continue to actively explore other opportunities to acquire additional products or technologies to complement our current software and services. Gross Profit and Gross Margin Consolidated gross profit for the three months ended June 30, 2023, was $22,018, an increase of $9,757, or 80%, from $12,261 for the three months ended June 30, 2022. Gross margin as a percentage of revenue was 72% for the three months ended June 30, 2023 as compared to 60% for the three months ended June 30, 2022. Our increase in gross margin is primarily attributable to the increase in revenue and more efficient operations driven by consolidation and standardization efforts across the Company. 21 Table of Contents Consolidated gross profit for the six months ended June 30, 2023 was $46,418, an increase of $18,693, or 67%, from $27,725 for the six months ended June 30, 2022. Gross margin as a percentage of revenue was 73% for the six months ended June 30, 2023 as compared to 62% for the six months ended June 30, 2022. Our increase in gross margin is primarily attributable to the increase in revenue and more efficient operations driven by consolidation and standardization efforts across the Company. Our cost of sales relates primarily to direct product costs, compensation for operations and related consulting expenses, hardware expenses, and the amortization of our purchased software development costs. We include intangible amortization related to developed and acquired technology within cost of sales. Sales and Marketing Expenses Sales and marketing expenses primarily consist of salaries and related expenses for sales and marketing staff, including stock-based expenses and commissions. Marketing programs includes events, corporate communications and product marketing activities. Sales and marketing expenses for the three months ended June 30, 2023 were $8,515, an increase of $3,926, or 86%, from $4,589 for the three months ended June 30, 2022 , primarily due to an increase in direct sales personnel, higher sales commissions owing to increased revenues, and an increase in accounts receivable reserves. Sales and marketing expenses as a percentage of revenue increased to 28% for the three months ended June 30, 2023 from 23% for the same period in 2022. Sales and marketing expenses for the six months ended June 30, 2023 were $15,715, an increase of $6,229, or 66%, from $9,486 for the six months ended June 30, 2022 , primarily due to an increase in direct sales personnel, higher sales commissions owing to increased revenues, and an increase in accounts receivable reserves. Sales and marketing expenses as a percentage of revenue increased to 25% for the six months ended June 30, 2023 from 21% for the same period in 2022. We expect to continue to expand and increase selling costs as we focus on hiring direct sales personnel, expanding recognition of our brand, and lead generation. General and Administrative Expenses General and administrative expenses primarily consist of salaries and related expenses, including stock-based expenses for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, and other corporate expenses such as transaction costs for acquisitions. General and administrative expenses for the three months ended June 30, 2023 were $10,336, an increase of $1,640, or 19%, from $8,696 for the three months ended June 30, 2022 , primarily attributable to increased personnel, share-based compensation, and contracting costs. General and administrative expenses as a percentage of revenue decreased to 34% for the three months ended June 30, 2023 from 43% for the same period in 2022. General and administrative expenses for the six months ended June 30, 2023 were $20,292, an increase of $4,111, or 25%, from $16,181 for the six months ended June 30, 2022, primarily attributable to increased personnel, share-based compensation, and contracting costs. G eneral and administrative expenses as a percentage of revenue decreased to 32% for the six months ended June 30, 2023 from 36% for the same period in 2022. Research and Development Expenses Research and development (“R&D”) expenses consist primarily of salaries and related expenses, including stock-based expenses for employees supporting our R&D activities. R&D expenses for the three months ended June 30, 2023 were $1,325, a decrease of $147, or 10%, from $1,472 for the three months ended June 30, 2022. The decrease in R&D expense is primarily attributable to an increase in capitalized software expenses driven by continued investments in development of our products, partially offset by higher personnel costs. R&D expenses as a percentage of revenue decreased to 4% for the three months ended June 30, 2023 from 7% for the same period in 2022. R&D expenses for the six months ended June 30, 2023 were $3,304, and remained flat compared with $3,293 for the six months ended June 30, 2022. R &D expenses as a percentage of revenue decreased to 5% for the six months ended June 30, 2023 from 7% for the same period in 2022. 22 Table of Contents We plan to continue to enhance our products and technologies by leveraging the latest technology stack, Robotic Process Automation (“RPA”), and artificial intelligence (“AI”), and development partnerships. We expect that our expanded investment in product, engineering, SaaS hosting, mobile and hardware technologies will lay the groundwork for broader market opportunities and represent a key aspect of our competitive differentiation. We also plan to expand our technological resources through organic improvements and acquired intellectual property. We expect to continue to expand the breadth of integration between our solutions, allowing direct clients and resellers the ability to easily add and implement components across our entire solution set. Our initiatives include providing our customers with more accurate and efficient automation powered by an informed knowledge base. Consistent with that effort, our engineering team utilizes an AI development Copilot to increase their productivity and efficiency. Our operations team utilizes a digital assistant to allow for a more efficient and accurate way to automate repetitive tasks, which we believe will free up our time for more strategic work and reducing the risk of errors. We are committed to providing the best-in-class solutions. Our development efforts for future releases and enhancements are driven by feedback received from our existing and potential customers and by gauging market trends. We believe we have the appropriate development team to design and enhance our solution suite and integrated platform. We have also made significant investments outside of core R&D into compliance and certifications, including SOC I Type 2 and SOC II Type 2 certifications, BIPA, CCPA, and other initiatives. Amortization of Intangible Assets Amortization expense for the three months ended June 30, 2023 was $3,294, a decrease of $58, or 2%, from $3,352 for the three months ended June 30, 2022. Amortization expense as a percentage of revenue decreased to 11% for the three months ended June 30, 2023 from 17% for the same period in 2022. Amortization expense for the six months ended June 30, 2023 was $6,596, a decrease of $188, or 3%, from $6,784 for the six months ended June 30, 2022. Amortization expense as a percentage of revenue decreased to 10% for the six months ended June 30, 2023 from 15% for the same period in 2022. Interest Expense, Net Interest expense, net for the three months ended June 30, 2023 was $1,593 compared to $1,085 for the three months ended June 30, 2022. Interest expense, net as a percentage of revenue was 5% for the three months ended June 30, 2023 and June 30, 2022 . The increase in interest expense, net in the current period is primarily due to the interest rates on our borrowings under our credit facility with Structural Capital Investments II LP. Interest expense, net for the six months ended June 30, 2023 was $3,538 compared to $1,901 for the six months ended June 30, 2022. Interest expense, net as a percentage of revenue was 6% and 4% for the six months ended June 30, 2023 and June 30, 2022, respectively . The increase in interest expense, net in the current period is primarily due to the interest rates on our borrowings under our credit facility with Structural Capital Investments II LP. Other (Expense) Income, Net Other (expense) income, net for the three months ended June 30, 2023 was $(93) compared to $1,147 for the three months ended June 30, 2022. Other (expense) income, net as a p ercentage of revenue was negligible for the three months ended June 30, 2023 compared to 6% for the same period ended June 30, 2022. For the three months ended June 30, 2023, the amounts in other (expense) income, net primarily consisted of loss on disposal of assets. F or the three months ended June 30, 2022 , the amounts in other (expense) income, net primarily consisted of a fair value adjustment on contingent purchase consideration in connection with the acquisition of a payroll business in September 2021. Other (expense) income, net for the six months ended June 30, 2023 was $(9) compared to $1,147 for the six months ended June 30, 2022. Other (expense) income, net as a percentage of revenue was negligible for the six months ended June 30, 2023, and 3% for the six months ended June 30, 2022. For the six months ended June 30, 2023 , the amounts in other (expense) income, net primarily consisted of loss on disposal of assets. For the six months ended June 30, 2022, the amounts in other (expense) income, net primarily consisted of a fair value adjustment on contingent purchase consideration in connection with the acquisition of a payroll business in September 2021. Income Taxes 23 Table of Contents For the three months ended June 30, 2023 and 2022, we recorded income tax expense attributable to continuing operations of $627 and $74, respectively, an increase of $553 or 747%. For the six months ended June 30, 2023 and 2022, w e recorded income tax expense attributable to continuing operations of $390 and $104, respectively, an increase of $286 or 275%. Net Loss We incurred a loss of $3,765, or $0.18 per share, during the three months ended June 30, 2023, compared to a loss of $5,860, or $0.29 per share, during the three months ended June 30, 2022. Loss as a percentage of total revenues was 12% and 29% for the three months ended June 30, 2023 and 2022, respectively. We incurred a loss of $3,426, or $0.17 per share, during the six months ended June 30, 2023, compared to a loss of $8,877, or $0.44 per share, during the six months ended June 30, 2022. Loss as a percentage of total revenues was 5% and 20% for the six months ended June 30, 2023 and 2022, respectively. LIQUIDITY AND CAPITAL RESOURCES (in thousands) June 30, 2023 December 31, 2022 Cash, cash equivalents and restricted cash (1) $ 21,613 $ 17,010 (1) This balance excludes cash equivalents in funds held for clients Working Capital . We had working capital of $13,583 at June 30, 2023, an increase of $5,490 from working capital of $8,093 at December 31, 2022. Working capital as of June 30, 2023 and December 31, 2022 includes $3,293 and $8,461 of short-term deferred revenue, respectively. Deferred revenue is an obligation to perform future services. We expect that deferred revenue will convert to future revenue as we perform our services, but this does not represent future payments. Deferred revenue can vary based on seasonality, expiration of initial multi-year contracts and deals that are billed after implementation rather than in advance of service delivery. Operating Activities . Net cash provided by operating activities of $6,096 for the six months ended June 30, 2023 was primarily driven by non-cash adjustments to our net loss of approximately $16,082, primarily due to depreciation and amortization. This was offset by changes in operating assets and liabilities, which resulted in a use of $6,560 in cash. Net cash provided by operating activities of $7,481 for the six months ended June 30, 2022 was driven by non-cash adjustments to our net loss of approximately $11,058, primarily due to depreciation and amortization, offset by our net loss of $8,877. For the six months ended June 30, 2022, changes in operating assets and liabilities resulted in cash provided of $5,300. Investing Activities . Net cash used in investing activities of $17,266 for the six months ended June 30, 2023 is primarily due to purchases of available-for-sale securities and maturities of $18,885, offset by proceeds from sales and maturities of available-for-sale securities of $5,940. Net cash used in investing activities of $21,570 for the six months ended June 30, 2022 is primarily due to purchases of available-for-sale securities and maturities of $19,870. Financing Activities . Net cash used in financing activities was $15,602 for the six months ended June 30, 2023, which primarily consisted of a net decrease in client fund obligations of $17,225. Net cash used in financing activities was $32,524 for the six months ended June 30, 2022, which primarily consisted of a net decrease in client fund obligations of $32,716. Principal payments on the Senior Credit Facility with Structural Capital Investments III, LP begin in October 2023 after the expiration of the interest only period, and are based on a five year amortization schedule, with a balloon payment due in October 2025. The Company also has two promissory notes outstanding in connection with two payroll businesses acquired in September 2021, in the amounts of $2,223 and 4,667 as of June 30, 2023. The two outstanding promissory notes mature on September 30, 2023 and September 30, 2026. Sources of Liquidity . As of June 30, 2023, the Company’s principal sources of liquidity consisted of approximately $21,613 of cash, cash equivalents and restricted cash, together with cash generated from operations of our business over the next twelve months. 24 Table of Contents We cannot assure that we can grow our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future acquisitions; however we do believe that we have sufficient liquidity to support our business operations for at least the next twelve months. Future business demands may lead to cash utilization at levels greater than recently experienced or expected. We may need to raise additional capital in the future in order to grow our existing software operations and to seek additional strategic acquisitions in the near future. Further, we cannot assure that we will be able to raise additional capital on acceptable terms, or at all. CRITICAL ACCOUNTING POLICIES We have prepared our Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles and included the accounts of our wholly owned subsidiaries. We have eliminated all significant intercompany transactions and balances in the consolidation. Preparation of the Condensed Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year-end and the reported amounts of revenues and expenses during the fiscal year. The more significant estimates made by management include the valuation allowance for our gross deferred tax asset, the determination of the fair value of our long-lived assets. We base our estimates on historical experience and on various other assumptions that management believes are reasonable under the given circumstances. These estimates could be materially different under different conditions and assumptions. Additionally, the actual amounts could differ from the estimates made. Management periodically evaluates estimates used in the preparation of our financial statements for continued reasonableness. We prospectively apply appropriate adjustments, if any, to our estimates based upon our periodic evaluation. For a description of our critical accounting policies, see Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2022. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to our exposure from market risks from those disclosed in our 2022 Annual Report on Form 10-K.