FiEE, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors” in Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that these forward-looking statements be subject to the safe harbor created by those provisions. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” “future,” “potential,” “target,” “seek,” “continue,” “if” or other similar words. Forward-looking statements include statements regarding our strategies as well as (1) our ability to predict revenue and reduce costs related to our products or service offerings, (2) our ability to effectively manage our sales channel inventory and product mix to reduce excess inventory and lost sales, (3) our ability to forecast product sales volumes and accordingly manufacture and manage inventory, (4) our ability to generate sales of Motorola brand products sufficient to make that portion of our business profitable, and retain the Motorola brand license for the Motorola brand product we produce, (5) fluctuations in the level or quality of inventory, (6) the sufficiency of our capital resources and the availability of debt and equity financing, (7) the continuing impact of uncertain global economic conditions on the demand for our products, (8) our ability to maintain and scale adequate and secure software platform infrastructure, (9) the impact of competition on demand for our products and services and (10) our competitive position. The following discussion should be read in conjunction with the attached Unaudited Condensed Consolidated Financial Statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2022, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023. Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Part II, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise that may arise after the date of this Quarterly Report on Form 10-Q. Overview We deliver a comprehensive WiFi as a Service platform to make everyone’s connected home safe and supportive for life and work. We believe the home router must go the way of the mobile phone. Today’s routers are simple, single-purpose devices that rarely receive firmware updates and have underdeveloped management applications, making them the #1 target in residential cybersecurity attacks. It can be so much more. The router must offer frequent security updates, helpful apps, extensive personalization options and a delightful interface. That is what Minim delivers— not just the router or just an app, but WiFi as a Service. Technically, it’s composed of an intelligent router managed by a smart operating system that leverages cloud computing and AI to analyze and optimize the smart home, combined with intuitive applications to engage with it. We continually seek to improve our product designs and manufacturing approach to elevate product performance and reduce our costs. We pursue a strategy of outsourcing rather than internally developing our hardware product chipsets, which are application-specific integrated circuits that form the technology base for our modems. By outsourcing the chipset technology, we are able to concentrate our research and development resources on modem system design, leverage the extensive research and development capabilities of our chipset suppliers, and reduce our development time and associated costs and risks. As a result of this approach, we are able to quickly develop new products while maintaining a relatively low level of research and development expense as a percentage of net sales. We also outsource aspects of our manufacturing to contract manufacturers as a means of reducing our costs of production, and to provide us with greater flexibility in our production capacity. 18 Generally, our gross margin for a given product depends on a number of factors, including the type of customer to whom we are selling. The gross margin for products sold to retailers tends to be higher than for some of our other customers; but the sales, support, returns, and overhead costs associated with products sold to retailers also tend to be higher. Minim’s sales to certain countries are currently handled by a single master distributor for each country that handles the support and marketing costs within the country. Gross margin for sales to these master distributors tends to be low, since lower pricing to these distributors helps them to cover the support and marketing costs for their country. Our cash and cash equivalents balance on September 30, 2023 was $0.5 million compared to $0.5 million on December 31, 2022. On September 30, 2023, we had $0.9 million of outstanding borrowings on our asset-based credit line with availability of $0 thousand and working capital of $(0.3) million. The Company’s ability to maintain adequate levels of liquidity depends in part on our ability to sell inventory on hand, increasing SaaS sales, and collect related receivables. The Company continues to experience losses, which in part is due to declining revenues. In the three and nine months ended September 30, 2023 and 2022, we generated net sales of $6.7 million and $13.8 million, respectively, and $24.6 million and $40.0 million, respectively. As reported in Form 8-K filed with the SEC on August 28, 2023, the Company has continued to experience material liquidity pressures as it has attempted to manage its negative cash-flow position due to supply disruptions from its principal manufacturing partners as a result of the Company’s inability to pay past expenses, which has severely impacted revenue and its cash position. The Company has conducted two reductions in force and made other changes to lower operating expenses. However, these reductions did not fully offset the Company’s lack of continual revenue from normal operations. As such, substantial doubt exists about our ability to continue as a going concern, and we will require additional liquidity to continue operations. Our most recent Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 31, 2023 provides additional information about our business and operations. Recent Accounting Standards See Note 2 Summary of Significant Accounting Policies, in Notes to Unaudited Consolidated Financial Statements in Item 1 of Part 1 of this Report on 10-Q, for a full description of recent accounting standards, include the expected dates of adoption and estimated effects on the financial condition and results of operations, which are hereby incorporated by reference. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis. Our critical accounting policies and estimates, which are revenue recognition, product returns, inventory valuation and costs of goods sold, and valuation of deferred tax assets are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022. For the nine months ended September 30, 2023, there have been no significant changes in our critical accounting policies and estimates. 19 Results of Operations The following table sets forth certain financial data derived from our condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022 presented in absolute dollars and as a percentage of net sales, with dollars and percentage change period over period: Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 $ Change % Change September 30, 2023 September 30, 2022 $ Change % Change (In thousands, except percentage data) Net sales $ 6,696 $ 13,833 $ (7,137 ) (51.6 )% 24,643 $ 39,996 $ (15,353 ) (38.4 )% Cost of goods sold 9,694 10,750 (1,056 ) (9.8 ) 24,546 30,183 (5,637 ) (18.7 ) Gross profit (2,998 ) 3,083 (6,081 ) (197.2 ) 97 9,813 (9,716 ) (99.0 ) Operating expenses: Selling and marketing 2,074 3,803 (1,729 ) (45.5 ) 9,386 11,286 (1,900 ) (16.8 ) General and administrative 963 1,922 (959 ) (49.9 ) 3,460 4,992 (1,532 ) (30.7 ) Research and development 687 1,310 (623 ) (47.6 ) 3,358 4,227 (869 ) (20.6 ) Total operating expenses 3,724 7,035 (3,312 ) (47.1 ) 16,204 20,505 (4,301 ) (21.0 ) Operating loss (6,722 ) (3,952 ) (2,770 ) 70.1 (16,107 ) (10,692 ) (5,415 ) 50.6 Total other expense (99 ) (94 ) (5 ) 5.3 (356 ) (262 ) (94 ) 35.9 Total other income (expense) (99 ) (94 ) (5 ) 5.3 (356 ) (262 ) (94 ) 35.9 Loss before income taxes (6,821 ) (4,046 ) (2,775 ) 68.6 (16,463 ) (10,954 ) (5,509 ) 50.3 Income taxes (benefit) (1 ) 16 (17 ) (106.3 ) 24 73 (49 ) (67.1 ) Net loss $ (6,820 ) $ (4,062 ) $ (2,758 ) 67.9 % $ (16,487 ) $ (11,027 ) $ (5,460 ) 49.5 % Comparison of the three months ended September 30, 2023 to the three months September 30, 2022 The following table sets forth our revenues by product and the changes in revenues for the three and nine months ended September 30, 2023, as compared to the three months ended September 30, 2022: Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 $ Change % Change September 30, 2023 September 30, 2022 $ Change % Change (In thousands, except percentage data) Cable modems & gateways $ 6,449 $ 13,363 $ (6,914 ) (51.7 )% $ 23,911 $ 38,462 $ (14,551 ) (37.8 )% Other network products 244 234 10 4.1 568 1,009 (441 ) (43.7 ) SaaS 3 236 (233 ) (98.4 ) 164 525 (361 ) (68.9 ) Total $ 6,696 $ 13,833 $ (7,137 ) (51.6 )% $ 24,643 $ 39,996 $ (15,353 ) (38.4 )% The majority of the Company’s revenues by geographic area are earned in North America for the three and nine months ended September 30, 2023 and 2022. 20 Net Sales Our total net sales decreased year-over-year by $7.1 million or 51.6% in the three months ended September 30, 2023 and by $15.4 million or 38.4% in the nine months ended September 30, 2023. The decrease in net sales is directly attributable to decreased sales of Motorola branded cable modems and gateways. In both 2023 and 2022, we primarily generated our sales by selling cable modems and gateways. Sales related to SaaS offerings decreased by $233 thousand or 98.4% in the three months ended September 30, 2023 and decreased by $361 thousand or 68.9% during the nine months ended September 30, 2023. The increase and decrease in the other category of $10 thousand and $441 thousand in the three and nine months ended 2023 compared to 2022 is primarily due to a reduction in DSL products and MoCA products due to a refocus on new product introductions. Generally, our lower sales outside North America reflect the fact that cable modems are sold successfully through retailers in the U.S. but not in most countries outside the U.S., due primarily to variations in government regulations. Cost of Goods Sold and Gross Margin Cost of goods sold consists primarily of the following: the cost of finished products from our third-party manufacturers; overhead costs, including purchasing, product planning, inventory control, warehousing and distribution logistics; third-party software licensing fees; inbound freight; import duties/tariffs; warranty costs associated with returned goods; write-downs for excess and obsolete inventory; amortization of certain acquired intangibles and software development costs; and costs attributable to the provision of service offerings. The decrease in gross profit was attributable to sales growth of Motorola branded cable modems and gateways, including intelligent networking products that include Minim software. We outsource our manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product costs and gross margin. Our gross margin can be affected by a number of factors, including fluctuation in foreign exchange rates, sales returns, changes in average selling prices, end-user customer rebates and other channel sales incentives, changes in our cost of goods sold due to fluctuations and increases in prices paid for components, overhead costs, inbound freight and duty/tariffs, conversion costs, and charges for excess or obsolete inventory. The following table presents net sales and gross margin, for the periods indicated: Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 $ Change % Change September 30, 2023 September 30, 2022 $ Change % Change (In thousands, except percentage data) Net sales $ 6,696 $ 13,833 $ (7,137 ) (51.6 )% $ 24,643 $ 39,996 $ (15,353 ) (38.4 )% Gross margin (44.8 )% 22.3 % 0.4 % 24.5 % Gross profit and gross margin decreased in the three months ended September 30, 2023, compared to the three months ended in the prior fiscal year period, primarily due to insufficient sales levels necessary to cover fixed costs and certain variable costs. For the remainder of fiscal 2023, we expect gross margin to be subject to similar variabilities experienced in the first half of 2023 and in 2022. We experienced meaningful increases in costs of freight, materials, and components for our products. Although freight and certain component costs have reduced, we will not realize improvements to margins until we are able to work through inventory obtained when freight and component costs were elevated. We may continue to experience disruptions from the pandemic, with manufacturing partners being affected by factory uptime and scarcity of materials and components. These disruptions could increase the length of time taken between order to production and transportation of inventory. If such disruptions become widespread, they could significantly affect our ability to fulfill the demand for our products. Forecasting gross margin percentages is difficult, and there are several risks related to our ability to maintain or improve our current gross margin levels. Our cost of goods sold as a percentage of net sales can vary significantly based upon factors such as: uncertainties surrounding revenue volumes, including future pricing and/or potential discounts as a result of the economy, competition, the timing of sales, and related production level variances; import customs duties and imposed tariffs; changes in technology; changes in product mix; expenses associated with writing off excessive or obsolete inventory; fluctuations in freight costs; manufacturing and purchase price variances; and changes in prices on commodity components. 21 Selling and Marketing Selling and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, product marketing expenses, outbound freight costs, amortization of certain intangibles, personnel expenses for sales and marketing staff, technical support expenses, and facility allocations. The following table presents sales and marketing expenses, for the periods indicated: Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 $ Change % Change September 30, 2023 September 30, 2022 $ Change % Change (In thousands, except percentage data) Selling and marketing $ 2,074 $ 3,803 $ (1,729 ) (45.5 )% $ 9,386 $ 11,286 $ (1,900 ) (16.8 )% Selling and marketing expenses decreased in the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to decreases in personnel expenses of $0.4 million and marketing program campaigns of $1.3 million, partially offset by increases in Motorola royalty fees of $63 thousand. Selling and marketing expenses decreased in the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to a decrease in personnel expenses of $0.9 million, marketing program campaigns of $1.1 million, professional fees of $0.1 million, partially offset by increases in Motorola royalty fees of $0.2 million. For the remainder of fiscal 2023, we expect our selling and marketing expenses as a percentage of net sales in fiscal 2023 to be similar to fiscal 2022 levels. Expenses may fluctuate depending on sales levels achieved as certain expenses, such as commissions, are determined based upon the net sales achieved. Forecasting selling and marketing expenses is highly dependent on expected net sales levels and could vary significantly depending on actual net sales achieved in any given quarter. Marketing expenses may also fluctuate depending upon the timing, extent and nature of marketing programs. General and Administrative General and administrative expenses consist of salaries and related expenses for executives, finance and accounting, human resources, information technology, professional fees, including legal costs associated with defending claims against us, allowance for doubtful accounts, facility allocations, and other general corporate expenses. The following table presents general and administrative expenses, for the periods indicated: Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 $ Change % Change September 30, 2023 September 30, 2022 $ Change % Change (In thousands, except percentage data) General and administrative $ 963 $ 1,922 $ (959 ) (49.9 )% $ 3,460 $ 4,992 $ (1,532 ) (30.7 )% General and administrative expenses decreased in the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to decreases in personnel expenses of $0.6 million, professional fees of $0.1 million, and director fees of $0.3 million. General and administrative expenses decreased in the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022 primarily due to decreases in personnel expenses of $0.8 million, professional fees of $0.4 million, and director fees of $0.3 million. Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, and other factors. 22 Research and Development Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, prototypes, IT, and other consulting fees. Research and development expenses are recognized as they are incurred. Our research and development organization is focused on enhancing our ability to introduce innovative and easy-to-use products and services. The following table presents research and development expenses, for the periods indicated: Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 $ Change % Change September 30, 2023 September 30, 2022 $ Change % Change (In thousands, except percentage data) Research and development $ 687 $ 1,310 $ (623 ) (47.6 )% $ 3,358 $ 4,227 $ (869 ) 20.6 % Research and development expenses decreased in the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to personnel expenses of $0.5 million and professional fees of $0.1 million. Research and development expenses decreased in the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to personnel expenses of $0.7 million and professional fees of $0.1 million. We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products and services. We continue to invest in research and development to expand our hardware product offerings focused on premium WiFi 6E, WiFi 6, and software solutions. For the remainder of fiscal 2023, we expect research and development expenses as a percentage of net sales in fiscal 2023 to be in line with or slightly above fiscal 2022 levels. Research and development expenses may fluctuate depending on the timing and number of development activities and could vary significantly as a percentage of net sales, depending on actual net sales achieved in any given year. Liquidity and Capital Resources Our principal sources of liquidity are cash and cash equivalents and borrowings under our SVB line-of-credit. As of September 30, 2023, we had cash and cash equivalents of $0.5 million as compared to $0.5 million on December 31, 2022. On September 30, 2023, we had $0.9 million of borrowings outstanding and $0 thousand available on our $10.0 million SVB line-of-credit and working capital of $(0.3) million. We have funded our operations and investing activities primarily through borrowings on our line of credit, the sale of assets and the sale of our common stock. Our historical cash outflows have primarily been associated with: (1) cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development infrastructure and other working capital needs; (2) expenditures related to increasing our manufacturing capacity and improving our manufacturing efficiency; (3) capital expenditures related to the acquisition of equipment; (4) cash used to repay our debt obligations and related interest expense; and (5) cash used for acquisitions. Fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements also impact our cash inflows and outflows. Our consolidated financial statements as of September 30, 2023 were prepared under the assumption that we will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt exists about our ability to continue as a going concern, and we will require additional liquidity to continue operations beyond the next 12 months. 23 Our consolidated financial statements as of September 30, 2023, do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if we were unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or part of their investment. Cash Flows The following table presents our cash flows for the periods presented: Nine Months ended September 30, 2023 2022 Cash provided by (used in) operating activities $ 3,710 $ (11,463 ) Cash used in investing activities (382 ) (599 ) Cash provided by (used in) financing activities (3,892 ) 929 Net increase (decrease) in cash and cash equivalents $ (564 ) $ (11,133 ) Cash Flows from Operating Activities. Cash provided by operating activities of $3.7 million during the nine months ended September 30, 2023 reflected our net loss of $16.5 million, adjusted for non-cash expenses, consisting primarily of $0.3 million of stock-based compensation expense and $0.4 million in depreciation and amortization expense. Uses of cash included a decrease in accounts receivable of $0.1 million and accrued expenses of $3.0 million. Sources of cash included primarily a decrease of inventories of $14.9 million, increase in accounts payable of $7.4 million, increase in prepaid expenses of $0.2 million, and increase in deferred revenue of $0.2 million. Cash used in operating activities of $11.5 million for 2022 reflected our net loss of $11.0 million, adjusted for non-cash expenses, consisting primarily of $0.6 million of depreciation and amortization and $1.0 million of stock-based compensation expense. Uses of cash includes an increase of accounts receivables of $1.4 million and a decrease in accounts payable of $5.5 million. Sources of cash included a decrease of inventories of $2.7 million, decrease of other assets of $0.3 million, increase in accrued expenses of $0.3 million, and increases in deferred revenue of $0.5 thousand. Cash Flows from Investing Activities. During the nine months ended September 30, 2023, $162 thousand was used to purchase equipment and $220 thousand was used for certification costs. During the nine months ended September 30, 2022, $0.3 million was used to purchase equipment and $0.3 million was used for certification costs. Cash Flows from Financing Activities. Cash used in financing activities during the nine months ended September 30, 2023 consisted of repayment of $3.9 million on the borrowings under our SVB line-of-credit. Cash provided by financing activities in during the three months ended September 30, 2022 consisted of a source of cash of $0.7 million from borrowings under our SVB line-of-credit, and $0.2 million in proceeds from the exercise of common stock options. 24 Future Liquidity Needs Our primary short-term needs for capital, which are subject to change, include expenditures related to: ● the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities; ● upgrades to our information technology infrastructure to enhance our capabilities and improve overall productivity; ● support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources; ● the continued advancement of research and development activities. Our capital expenditures are largely discretionary and within our control. We expect that our product sales and the resulting operating loss as well as the status of each of our product development programs, will significantly impact our cash management decisions. At September 30, 2023, we believe our current cash and cash equivalents, other working capital and borrowings under our SVB line-of-credit will not be sufficient to fund working capital requirements, capital expenditures and operations during the next twelve months. Our ability to continue as a going concern will depend on our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce or contain expenditures and increase revenues. Based on these factors, management determined that there is substantial doubt regarding our ability to continue as a going concern. During 2023, the Company has implemented cost reduction plans to align its cost structure to its sales and increase its liquidity. The Company will continue to monitor its costs in relation to its sales and adjust its cost structure accordingly. Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of any future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our sales growth, funds required to service our debt, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, our need for infrastructure to support our sales growth, the continuing acceptance of our products in the marketplace, competing technologies and changes in the market and regulatory environment. Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control—See “Risk Factors—We may require significant additional capital to pursue our growth strategy, and our failure to raise capital when needed could prevent us from executing our growth strategy.” Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us, if at all. At September 30, 2023, we have Federal and state net operating loss carry forwards of approximately $62.0 million and $37.3 million, respectively, available to reduce future taxable income. A valuation allowance has been established for the full amount of deferred income tax assets as management has concluded that it is more-likely than-not that the benefits from such assets will not realize the benefits of our deferred tax assets. As a result, as of September 30, 2023 and December 31, 2022, we recorded a full valuation allowance against our net deferred tax assets. Commitments and Contractual Obligations During the nine months ended September 30, 2023, except as otherwise disclosed in this Form 10-Q, there were no material changes to our capital commitments and contractual obligations from those disclosed in our Form 10-K for the year ended December 31, 2022. Off-Balance Sheet Arrangements We did not have any material off-balance sheet arrangements as of September 30, 2023. See Note 7 to the accompanying consolidated financial statements for additional disclosure. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.