Ernexa Therapeutics Inc. 10-K

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Exchange Act, about our expectations, beliefs, or intentions regarding our product development efforts, business, financial condition, results of operations, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in “Item 1A — Risk Factors” of this Annual Report on Form 10-K. We do not undertake any obligation to update forward-looking statements except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. These forward-looking statements reflect our views only as of the date they are made. Overview We are a clinical-stage biopharmaceutical company focused on exploring the role that cytokine-based therapy can have on the immune system in treating patients with cancer, both as a single agent and in combination with other anti-cancer therapies. We are seeking to develop IRX-2, a novel cytokine-based therapy, to treat patients with cancer. We also are exploring opportunities to advance oncology, blood disorder, and monogenic disease therapies using gene-editing and cell therapy technology through a license with Factor Bioscience Limited, or Factor, and through our acquisition of Novellus, Inc. and Novellus, Ltd. in July 2021, or the Acquisition. Recent Developments Acquisition of Novellus On July 16, 2021, we acquired Novellus, Inc. and Novellus, Inc.’s wholly owned subsidiary, Novellus, Ltd. Brooklyn also acquired 25.0% of the total outstanding equity interests of NoveCite, Inc. Total consideration was $124.0 million, which consisted of (a) $22.8 million in cash and approximately and (b) approximately 7,022,000 shares of common stock, which under the terms of the Acquisition Agreement were valued at a total of $102.0 million, based on a price of $14.5253 per share. 60 Table of Contents Merger with NTN Buzztime, Inc. On March 25, 2021, we completed the Merger with NTN Buzztime, Inc. In accordance with the Merger Agreement, on March 25, 2021, Brooklyn amended its restated certificate of incorporation in order to effect: • prior to the Merger, a reverse stock split of its common stock, par value $0.005 per share, at a ratio of one-for-two; and • following the Merger, a change in its corporate name from “NTN Buzztime, Inc.” to “Brooklyn ImmunoTherapeutics, Inc.” On March 26, 2021, we sold the rights, title and interest in and to the assets relating to the business operated under the name “NTN Buzztime, Inc.” prior to the Merger to eGames.com Holdings LLC, or eGames.com, in exchange for eGames.com’s payment of a purchase price of $2.0 million and assumption of specified liabilities relating to such pre-Merger business. This transaction, which we refer to as the Disposition, was completed in accordance with the terms of an asset purchase agreement dated September 18, 2020, as amended, between us and eGames.com. The Merger has been accounted for as a reverse acquisition in accordance with U.S. generally accepted accounting principles, or GAAP. Under this method of accounting, Brooklyn LLC was deemed the “acquiring” company and Brooklyn (then known as NTN Buzztime, Inc.) was treated as the “acquired” company for financial reporting purposes. Operations prior to the Merger are those of Brooklyn LLC, and the historical financial statements of Brooklyn LLC became the historical financial statements of Brooklyn with respect to periods prior to the completion of the Merger. Impact of COVID-19 Pandemic The development of our product candidates has been, and could continue to be, disrupted and materially adversely affected by past and continuing impacts of the COVID-19 pandemic. This is largely a result of measures imposed by the governments and hospitals in affected regions, businesses and schools were suspended due to quarantines intended to contain this outbreak. The spread of COVID-19 from China to other countries resulted in the Director General of the World Health Organization declaring COVID-19 a pandemic in March 2020. While the constraints of the pandemic are being lifted, we are still assessing the longer-term impact of the COVID-19 pandemic on our development plans, and on the ability to conduct our clinical trials. COVID-19 could continue to disrupt production and cause delays in the supply and delivery of products used in our operations, may affect our operations, including the conduct of clinical studies, or the ability of regulatory bodies to grant approvals or supervise our candidates and products, may further divert the attention and efforts of the medical community to coping with the COVID-19 and disrupt the marketplace in which we operate and may have a material adverse effects on our operations. COVID-19 may also affect our employees and employees and operations at suppliers that may result in delays or disruptions in supply. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. Additionally, if the COVID-19 pandemic has a significant impact on our business and financial results for an extended period of time, our liquidity and cash resources could be negatively impacted. The extent to which the COVID-19 pandemic and ongoing global efforts to contain its spread will impact our operations will depend on future developments, which are highly uncertain, and include the duration, severity and scope of the pandemic and the actions taken to contain or treat the COVID-19 pandemic. Further, the specific clinical outcomes, or future pandemic related impacts of emerging COVID-19 variants cannot be reliably predicted. The patients in our clinical trials have conditions that make them especially vulnerable to COVID-19, and as a result we have seen slowdowns in enrollment in our clinical trials. While our INSPIRE trial in patients with squamous cell carcinoma of the oral cavity is fully populated, our other clinical studies are likely to continue to encounter delays in enrollment as a result of the pandemic. 61 Table of Contents Basis of Presentation Revenues We are a development stage company and have had no revenues from product sales to date. We will not have revenues from product sales until such time as we receive regulatory approval of our product candidates, successfully commercialize our products or enter into a licensing agreement which may include up-front licensing fees, of which there can be no assurance. Research and Development Expenses We expense our research and development costs as incurred. Our research and development expenses consist of costs incurred for company-sponsored research and development activities, as well as support for selected investigator-sponsored research. Upfront payments and milestone payments for the licensing of technology are expensed as research and development in the period in which they are incurred if the technology is not expected to have any alternative future uses other than the specific research and development project for which it was intended. In-Process Research and Development (“IPR&D”) that is acquired through an asset acquisition and has no alternative future uses and, therefore, no separate economic values, is expensed to research and development costs at the time the costs are incurred. The major components of research and development costs include preclinical study costs, clinical manufacturing costs, clinical study and trial expenses, insurance coverage for clinical trials, expensed licensed technology, consulting, scientific advisors and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials and allocations of various overhead costs related to our product development efforts. In the normal course of our business, we contract with third parties to perform various clinical study and trial activities in the on-going development and testing of potential products. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events or milestones, the successful enrollment of patients, the allocation of responsibilities among the parties to the agreement, and the completion of portions of the clinical study or trial or similar conditions. Preclinical and clinical study and trial associated activities such as production and testing of clinical material require significant up-front expenditures. We anticipate paying significant portions of a study’s or trial’s cost before such begins and incurring additional expenditures as the study or trial progresses and reaches certain milestones. General and Administrative Expenses Our general and administrative expenses consist primarily of salaries, benefits and other costs, including equity-based compensation, for our executive and administrative personnel, legal and other professional fees, travel, insurance, and other corporate costs. 62 Table of Contents Comparison of the Years Ended December 31, 2021 and 2020 Years Ended December 31, Change % Change 2021 2020 Operating expenses: Research and development $ 12,705,000 $ 3,951,000 $ 8,754,000 $ 222 % Acquired in-process research and development 80,538,000 - 80,538,000 N/A General and administrative 14,724,000 3,297,000 11,427,000 347 % Transaction costs 5,765,000 - 5,765,000 N/A Change in fair value of contingent consideration (180,000 ) 19,240,000 (19,420,000 ) -101 % Total operating expenses 113,552,000 26,488,000 87,064,000 329 % Loss from operations (113,552,000 ) (26,488,000 ) (87,064,000 ) 329 % Other expenses: Loss on sale of NTN assets (9,648,000 ) - (9,648,000 ) N/A Other income (expense), net 899,000 (43,000 ) 942,000 -2191 % Total other expense (8,749,000 ) (43,000 ) (8,706,000 ) 20247 % Loss before income taxes (122,301,000 ) (26,531,000 ) (95,770,000 ) 361 % Provision for income taxes (5,000 ) - (5,000 ) N/A Net loss (122,306,000 ) (26,531,000 ) (95,775,000 ) 361 % Series A preferred stock dividend (16,000 ) - (16,000 ) N/A Net loss attributable to common stockholders $ (122,322,000 ) $ (26,531,000 ) $ (95,791,000 ) 361 % Research and Development Expenses Years Ended December 31 2021 2020 Change % Change License fees $ 6,500,000 $ - $ 6,500,000 N/A Stock-based compensation 1,597,000 - 1,597,000 N/A Clinical trials 1,292,000 412,000 880,000 214 % Payroll-related 2,342,000 1,985,000 357,000 18 % Other expenses, net 974,000 1,554,000 (580,000 ) -37 % Total research and development expenses $ 12,705,000 $ 3,951,000 $ 8,754,000 222 % For the year ended December 31, 2021, our research and development expenses increased by approximately $8.75 million from the year ended December 31, 2020 due to upfront payments associated with licensed technology, which were expensed because there is no future alternative use for the licensed technology other than for the intended purpose, increased clinical trial expenses, increased headcount and increased stock-based compensation when compared to 2020. Acquired IPR&D During the year ended December 31, 2021, we expensed the approximately $80.5 million fair value of the IPR&D acquired in the Acquisition because there is no future alternative use for the IPR&D other than for its intended purpose. General and Administrative Expenses Years Ended December 31 2021 2020 Change % Change Professional fees $ 7,351,000 $ 2,352,000 $ 4,999,000 213 % Stock-based compensation 3,638,000 91,000 3,547,000 3898 % Payroll-related 1,299,000 (98,000 ) 1,397,000 -1426 % Insurance 1,134,000 122,000 1,012,000 830 % Other expenses, net 1,302,000 830,000 472,000 57 % Total general and administrative expenses $ 14,724,000 $ 3,297,000 $ 11,427,000 347 % 63 Table of Contents The $11.42 million increase in general and administrative expense for the year ended December 31, 2021 from the year ended December 31, 2020 was primarily related to increased professional fees such as legal, accounting and consulting fees associated with merger and acquisition activity, including the Merger and the Acquisition, as well as costs associated with becoming a publicly traded company, increased stock-based compensation resulting from the issuance of equity awards, increased payroll-related expense due to an increase in our headcount and increased insurance expenses when compared to 2020. Transaction Costs For the year ended December 31, 2021, we incurred approximately $5.8 million in transaction costs related to the issuance of common stock to Brooklyn LLC’s financial advisor upon consummation of the Merger, and there were no comparable transaction costs for the year ended December 31, 2020. Change in Fair Value of Contingent Consideration As of December 31, 2020, our contingent consideration liability was approximately $20.1 million and related to royalties we would be obligated to pay under certain IRX-2 license agreements based on future revenues from any future IRX-2 product sales. During the year ended December 31, 2021, the change in fair value of the contingent consideration was a decrease to the liability of $180,000, based on our third-party valuation analysis. Loss on Sales of NTN Assets The approximately $9.6 million loss on the sale of NTN assets during the year ended December 31, 2021 was incurred upon completion of the Disposition, and there was no comparable loss on sale for the year ended December 31, 2020. Other Income (Expense), Net Years Ended December 31 2021 2020 Change % Change Employer retention tax credit $ 664,000 $ 664,000 N/A Income from Brooklyn PPP loan forgiveness 310,000 - 310,000 N/A Other expenses, net (1,000 ) - (1,000 ) N/A Interest expense, net (74,000 ) (43,000 ) (31,000 ) 72 % Total other income (expense), net $ 899,000 $ (43,000 ) $ 942,000 -2191 % During the year ended December 31, 2021, we recognized an increase in other income, net of expense of $899,000, as compared to other expense of $43,000 for the year ended December 31, 2020, primarily as a result of a withholding tax refund related to the employer retention tax credit under the Coronavirus Aid, Relief, and Economic Security Act administered by the U.S. Small Business Administration, or the CARES Act, and the forgiveness of Brooklyn LLC’s Paycheck Protection Program loan, or the PPP Loan, which was primarily offset by interest accrued on notes payable that we assumed as part of the acquisition of the assets of IRX Therapeutics, LLC in 2018. Such notes bore interest at the rate of 14% and matured on December 31, 2021, on which date the Company repaid such notes in full, including all accrued and unpaid interest thereon. Provision for Income Taxes Our income tax provision is for state income tax related to our U.S. operations. At December 31, 2021 and 2020 we had available net operating loss (“NOL”) carryforwards of approximately $20,679,000 and $0 for federal income tax purposes, respectively, of which $20,679,000 can be carried forward indefinitely. We have available $1,397,000 and $747,000 state NOLs for the years ended December 31, 2021 and 2020, respectively. We also have foreign NOL carryforwards of $4,759,000 and $0 for the years ended December 31, 2021 and 2020, respectively, which carry forward indefinitely. Section 382 of the Internal Revenue Code (“IRC”) imposes limits on the ability to use NOL carryforwards that existed prior to a change in control to offset future taxable income. Such limitations would reduce, potentially significantly, the gross deferred tax assets disclosed in the table above related to the NOL carryforwards. We continue to disclose the NOL carryforwards at their original amount in the table above as no potential limitation has been quantified. We have also established a full valuation allowance for all deferred tax assets, including the NOL carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets. 64 Table of Contents Liquidity and Capital Resources At December 31, 2021, we had cash and cash equivalents of approximately $17.0 million. During the second quarter of 2021, we entered into Purchase Agreements with Lincoln Park, pursuant to which we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to an aggregate of $60.0 million in shares of our common stock. Future sales of common stock by us, if any, are subject to certain limitations, and may occur from time to time, at our sole discretion. As of April 12 , 2022, we had issued and sold approximately 3,552,000 shares of common stock for total gross proceeds of $54.1 million and net proceeds of $52.0 million. For further information, see “—Recent Developments—Purchase Agreements.” On March 9, 2022, we consummated the PIPE Transaction, resulting in net proceeds of approximately $11 million. see “—Recent Developments—PIPE Transaction.” Pursuant to the purchase agreement entered into in respect of the PIPE Transaction, we are prohibited from issuing equity under the Purchase Agreements for a period of one-year following consummation of the PIPE Transaction. We have to date incurred operating losses, and we expect these losses to increase in the future as we expand our product development programs and operate as a publicly traded company. Developing product candidates, conducting clinical trials and commercializing products are expensive, and we will need to raise substantial additional funds to achieve our strategic objectives. It will likely be some years before we obtain the necessary regulatory approvals to commercialize one or more of our product candidates. Based on our current financial condition and forecasts of available cash, including as mentioned above, we believe we do not have sufficient funds to fund our operations for the next twelve months from the filing of the financial statements contained in this Annual Report on Form 10-K. There can be no assurance that we will ever be in a position to commercialize IRX-2 or any other product candidate we may acquire, or that we will obtain any additional financing that we require in the future or, even if such financing is available, that it will be obtainable on terms acceptable to us. In that regard, our future funding requirements will depend on many factors, including: • the scope, rate of progress and cost of our clinical trials and other product development activities; • future clinical trial results; • the terms and timing of any collaborative, licensing and other agreements that we may establish; • the cost and timing of regulatory approvals; • the cost and delays in product development as a result of any changes in regulatory oversight applicable to our products; • the cost and timing of establishing sales, marketing and distribution capabilities; • the effect of competition and market developments; and • the cost of filing and potentially prosecuting, defending and enforcing any patent claims and other intellectual property rights. We plan to raise additional funds to support our product development activities and working capital requirements through the remaining availability under the Second Purchase Agreement (to the extent we are permitted to use such agreement), public or private equity offerings, debt financings, corporate collaborations or other means. We may also seek governmental grants to support our clinical trials and preclinical trials. Further, we may seek to raise capital to fund additional product development efforts even if we have sufficient funds for our planned operations. Any sale by us of additional equity or convertible debt securities could result in dilution to our stockholders. There can be no assurance that any such required additional funding will be available to us at all or available on terms acceptable to us. 65 Table of Contents Further, to the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our technologies or grant sublicenses on terms that are not favorable to us. If we are not able to secure additional funding when needed, we may have to delay the commercialize of our products, reduce the scope of or eliminate one or more research and development programs, which could have an adverse effect on our business. Sources of Funds Equity Securities On March 6, 2022, we entered into a Securities Purchase Agreement with the PIPE Investor providing for the private placement (the “PIPE Transaction”) to the PIPE Investor of approximately 6,857,000 Units, each of which consisted of (i) one share of our common stock (or, in lieu thereof, one Pre-Funded Warrant) and (ii) one Common Warrant, resulting in net proceeds of approximately $11 million. The PIPE Transaction closed on March 9, 2022. see “—Recent Developments—PIPE Transaction.” On April 26, 2021, we and Lincoln Park Capital Fund, LLC, or Lincoln Park, executed the First Purchase Agreement, pursuant to which we had the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park would be obligated to purchase, up to $20.0 million of shares of Brooklyn’s common stock, subject to certain limitations. In consideration for Lincoln Park’s entry into the First Purchase Agreement, we issued Lincoln Park approximately 56,000 shares of common stock. As of December 31, 2021, we issued and sold to Lincoln Park approximately 1,128,000 shares of common stock under the First Purchase Agreement for gross proceeds of $20.0 million, and no further shares may be sold to Lincoln Park under the First Purchase Agreement. On May 26, 2021, we and Lincoln Park executed the Second Purchase Agreement, pursuant to which we have the right from time to time, but not the obligation, to sell to Lincoln Park, and Lincoln Park would be obligated to purchase, up to $40.0 million of shares of Brooklyn’s common stock, subject to certain limitations. In consideration of Lincoln Park’s entry into the Second Purchase Agreement, we issued to Lincoln Park 50,000 shares of common stock. As of December 31, 2021, Brooklyn had issued and sold approximately 2,424,000 shares of common stock under the Second Purchase Agreement for total gross proceeds of $34.1 million. Pursuant to the Securities Purchase Agreement in respect of the PIPE Transaction, we may not effect transactions under the Second Purchase Agreement for a period of one year immediately following closing of the PIPE Transaction. For further information on the Purchase Agreements, see “—Recent Developments—Purchase Agreements.” As a condition to the closing of the Merger, Brooklyn LLC was required to have at least $10.0 million in cash and cash equivalents at the effective time of the Merger. In furtherance of, and prior to, the Merger, certain of its members entered into agreements pursuant to which those members purchased additional units of Brooklyn LLC for an aggregate purchase price of $10.5 million. Disposition . On March 26, 2021, we completed the Disposition, in which we sold to eGames.com our rights, title and interest in and to the assets relating to the business we operated prior to the Merger under the name “NTN Buzztime, Inc.” in exchange for eGames.com’s payment of a purchase price of $2.0 million and assumption of specified liabilities relating to such pre-Merger business. Brooklyn LLC PPP Loan . On May 4, 2020, Brooklyn LLC issued a note in the principal amount of approximately $310,000 to Silicon Valley Bank evidencing the loan, or the Brooklyn LLC PPP Loan, Brooklyn LLC received under the Paycheck Protection Program, or PPP, of the CARES Act administered by the U.S. Small Business Administration. Brooklyn LLC PPP Loan had an interest rate of 1.0% per annum. 66 Table of Contents Under the terms of the CARES Act, certain amounts of the Brooklyn LLC PPP Loan could be forgiven if they were used for qualifying expenses as described in the CARES Act. In June 202 1 , Brooklyn LLC submitted its loan forgiveness application for the Brooklyn LLC PPP Loan, and in September 202 1 , the lender informed Brooklyn LLC that the U.S Small Business Administration had approved the forgiveness of 100% of the outstanding principal and interest of the Brooklyn LLC PPP Loan. As of December 31, 2021, there was no outstanding principal balance under the Brooklyn LLC PPP Loan. Uses of Funds Net Cash Used in Operating Activities . Our operations used $23.5 million during the year ended December 31, 2021. Our cash use for operating activities is influenced by the level of our net loss and the amount of cash we invest in personnel and technology development to support anticipated growth in our business. License Obligations . We are obligated to pay certain amounts to Factor pursuant to the license agreement we entered into in April 2021, including $2.5 million in October 2021, which was paid, and $3.5 million in October 2022. The license agreement also provides for milestone payments and royalties on the net sale of product developed under the license agreement. Lease Obligations . We are obligated to pay approximately $750,000 per year for our facilities leases, subject to annual increases and to a sharing of common area expenses with other tenants in the building. The leases expire at varying times between December 202 6 and June 2028. Acquisition . On July 16, 2021, we used approximately $22,882,000 of cash as partial consideration for the Acquisition, and we issued common stock valued at a total of $102.0 million, based on a price of $14.5253 per share, for the remaining portion of the Acquisition’s purchase price. Brooklyn PPP Loan . On April 18, 2020, Brooklyn (then known as NTN Buzztime, Inc.) was granted a loan, which we refer to as the Brooklyn PPP Loan, in the aggregate amount of $1,625,000, pursuant to the PPP under the CARES Act. Under the terms of the PPP, certain amounts of the Brooklyn PPP Loan could be forgiven if they were used for qualifying expenses as described in the CARES Act. In October 2020 the U.S. Small Business Administration approved the forgiveness of $1,093,000 of the $1,625,000 principal amount of the Brooklyn PPP Loan, leaving a principal balance of approximately $532,000, all of which, plus accrued and unpaid interest, was due and, in accordance with the terms of the Merger Agreement, paid by Brooklyn upon the closing of the Merger. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, our expected course of development, historical experience and other factors we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. 67 Table of Contents Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (a) the reported amounts of assets and liabilities; (b) disclosure of contingent assets and liabilities at the date of the consolidated financial statements; (c) the reported amounts of revenues and expenses during the reporting period and (d) the reported amount of the fair value of assets acquired in connection with business combinations. Actual results could differ from those estimates. Our significant estimates and assumptions include the recoverability and useful lives of long-lived assets and the contingent consideration liability. Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in the acquisition of IRX Therapeutics, Inc. in November 2018 (the “IRX Acquisition”), which was accounted for as a business combination. Goodwill is not amortized but is tested for impairment annually, or if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying value. Since management evaluates Brooklyn as a single reporting unit, goodwill is tested for impairment at the entity level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the entity is less than its carrying value. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. If the entity does not pass the qualitative assessment, then the entity’s carrying value is compared to its fair value. Goodwill is considered impaired if the carrying value of the entity exceeds its fair value. Impairment of Long-Lived Assets We review long-lived assets and certain identifiable assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. An impairment exists when the carrying value of the long-lived asset is not recoverable and exceeds its fair value. 68 Table of Contents Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between willing market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: • Level 1 Inputs – Valued based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. • Level 2 Inputs – Valued based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. • Level 3 Inputs – Valued based on inputs for which there is little or no market value, which require the reporting entity to develop its own assumptions. The carrying amounts reported on the balance sheet for cash and cash equivalents, accounts receivable, prepaid assets and other current assets, accounts payable and accrued expenses, other current liabilities and other liabilities approximate fair value based due to their short maturities. The carrying value of loans payable approximates its fair market value because the effective yield on this debt, which includes contractual interest rates as well as other finance charges, is comparable to rates of returns for instruments of similar credit risk. Commitment and Contingencies We follow ASC No.450-20, Loss Contingencies , to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Stock-Based Compensation The Company recognizes stock-based compensation expense for equity awards granted to employees, directors and certain consultants. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period. Stock-based compensation expense for share-based payment awards is recognized using the straight-line single-option method. Recent Accounting Pronouncements In May 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options . ASU 2021-04 addresses the accounting for certain modifications or exchanges of freestanding equity-classified written call options. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021 (January 1, 2022 for us) and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of this update to have a significant impact on our financial statements. In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842) – Lessors - Certain Leases with Variable Lease Payments, which amends the lessor classification guidance to introduce additional criteria when classifying leases with variable lease payments that do not depend on a reference index or a rate. This guidance is effective for annual periods beginning after December 15, 2021 (January 1, 2022 for us), with early adoption permitted. We do not expect the adoption of this update to have a significant impact on its financial statements. 69 Table of Contents ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Under SEC rules and regulations, as a smaller reporting company we are not required to provide the information otherwise required by this item. ITEM 8. Financial Statements and Supplementary Data See “Index to Consolidated Financial Statements” on page F-1 for a listing of the Consolidated Financial Statements filed with this Annual Report on Form 10-K. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.