INTELLIGENT BIO SOLUTIONS INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In addition to historical information, this discussion contains forward-looking statements based upon management’s current expectations that are subject to risks and uncertainties which may cause our actual results to differ materially from plans and results discussed herein. We encourage you to review the risks and uncertainties discussed in the sections entitled Item 1A. “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included at the beginning of this Annual Report on Form 10-K. 62 We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Overview Intelligent Bio Solutions Inc. (formerly known as GBS Inc.), and its wholly owned Delaware subsidiary, GBS Operations Inc. were each formed on December 5, 2016, under the laws of the state of Delaware. Our Australian subsidiary Intelligent Bio Solutions (APAC) Pty Ltd (formerly known as Glucose Biosensor Systems (Greater China) Pty Ltd) was formed on August 4, 2016, under the laws of New South Wales, Australia and was renamed to Intelligent Bio Solutions (APAC) Pty Ltd on January 6, 2023. On October 4, 2022, INBS acquired Intelligent Fingerprinting Limited (IFP), a company registered in England and Wales (the IFP Acquisition). Our headquarters are in New York, New York. We are a medical technology company focused on developing and delivering non-invasive, rapid and pain free innovative testing and screening solutions. We operate globally with the objective of providing intelligent, pain-free, and accessible solutions that improve the quality of life. Our current product portfolio includes: ● Intelligent Fingerprinting Platform - Our proprietary portable platform analyzes fingerprint sweat using a one-time (recyclable) cartridge and portable handheld reader. Our flagship product from this platform, which is commercially available in certain countries outside of the United States, is the Intelligent Fingerprinting Drug Screening System (the “IFP System” or “IFP Products”), a two-part system that consists of non-invasive, sweat-based fingerprint diagnostic testing products designed to detect drugs of abuse including opioids, cocaine, methamphetamines, benzodiazepines, cannabis, methadone, and buprenorphine. The system comprises a small, tamper-evident drug screening cartridge onto which ten fingerprint sweat samples are collected in under a minute, before the portable analysis unit provides an on-screen result in under ten minutes. Samples collected with our confirmatory kits can also be sent to a third-party laboratory service provider to perform confirmation testing. Customers include safety-critical industries such as construction, transportation and logistics firms, manufacturing, engineering, drug treatment organizations in the rehabilitation sector, and judicial organizations. ● The Biosensor Platform – Our “Biosensor Platform” consists of a small, printable modified organic thin-film transistor strip that we license across the Asia Pacific Region from Life Science Biosensor Diagnostics Pty Ltd (“LSBD” or “Licensor”). The Biosensor Platform, which is designed to detect multiple biological analytes by substituting the Glucose Oxidase (“GOX”) enzyme with a suitable alternative for each analyte, is currently in the development stage. Our flagship product candidate based on the Biosensor Platform technology is the Saliva Glucose Biosensor (“SGB” and, together with a software app that interfaces the SGB with the Company’s digital information system, the Saliva Glucose Test or “SGT”), a Point of Care Test (POCT) expected to complement the finger pricking invasive blood glucose monitoring test for diabetic patients. Our products based on the SGT are referred to herein as the “SGT products.” These platform technologies have the potential to develop a range of POCT including the modalities of clinical chemistry, immunology, tumor markers, allergens, and endocrinology. 63 Highlights of Achievements Our major highlights of achievements for the fiscal year 2023: ● On June 28, 2023, the Company announced it had received guidance from the United States Food and Drug Administration (the “FDA”) regarding the regulatory classification of its Intelligent Fingerprinting Drug Screening Cartridge. The FDA provisionally determined that the cartridge falls within 21 CFR 862.3650, Opiate Test System, a Class II type device that requires the submission of a pre-market notification 510(k) and the FDA’s clearance prior to marketing. The preliminary assessment, in response to the Company’s March 2023 513(g) request for product classification, provides a clear regulatory pathway for INBS as part of the Company’s expansion strategy into the United States. The Company intends to submit a 510(k) pre-market notification for its proprietary Intelligent Fingerprinting Drug Screening Cartridge. ● In June 2023, the Company concluded its study on the Correlation of Glucose and Cortisol between Oral Fluid and Blood Compartments. The study aimed to determine the degree of correlation between saliva and blood glucose and cortisol levels in subjects with and without diabetes. The results of the study indicate that saliva sampling and analysis has potential use in various applications, including as an aid in screening for diabetes in unhygienic environments where blood sampling is risky, and in point-of-care or at-home cortisol tests where characterizing early morning levels and daily variation is important. The Company intends to compile a white paper summarizing the findings as it determines the next phase of development. ● On May 2, 2023, the Company announced the recruitment of its Australian sales force and the addition of a new distribution hub and office facility to manage sales and operations, significantly expanding its ability to service customers throughout the Asia Pacific region. ● On March 15, 2023, the Company announced that it has selected Human and Supplement Testing Australia (“HASTA”), Australia’s largest independent sports drug testing laboratory, as its preferred drug testing specialist in Australia to complete lab-based confirmation testing. ● On February 16, 2023, the Company announced that it has filed a 513(g) submission with the United States Food and Drug Administration (FDA) for its Intelligent Fingerprinting Drug Screening Cartridge. The submission will allow Intelligent Bio Solutions to determine the most suitable FDA regulatory pathway as part of the Company’s strategy for expansion into the U.S. market. 64 ● On January 23, 2023, the Company published the results of Milestone 7, a phase of its biosensor platform development at the University of Newcastle, Australia, that included testing time-to-result (TTR), sensitivity, and reproducibility. The results showed a record 4x improvement in TTR, enabling the biosensor to return test results in under one minute. ● During the year, the Company continued to expand its customer base by entering into sales contracts with Haulier, Eastern Airways, Hozelock, Boughey Distribution, A&F Sprinklers and Dodman Limited. ● The Company completed the acquisition of Intelligent Fingerprinting Limited (IFP), a company registered in England and Wales and on October 4, 2022 (the IFP Acquisition). IFP owns a portfolio of intellectual property for diagnostic tests and associated technologies including drug testing through the analysis of fingerprint sweat. The acquisition of IFP has expanded the Company’s platform of rapid, non-invasive diagnostic testing technologies. ● On July 13, 2022, INBS completed Institutional Review Board (IRB) approved clinical studies at the Diabetes Research Institute of Sutter Health’s Mills-Peninsula Medical Center (MPMC) in San Mateo, California. The study design was intended to support the clinical development of its next-generation Saliva Glucose Biosensor. A total of 40 adult subjects with type 2 diabetes were recruited for the study. Nearly 1,400 samples of blood and oral fluids were collected and analyzed. The subsequent statistical analysis of the correlation of glucose levels among these sample types will act as foundation for building a robust portfolio of prospective clinical evidence, forming the backbone for future regulatory submissions. Results of Operations: Comparison of the Years Ended June 30, 2023 and 2022 Year Ended June 30, 2023 2022 Revenue $ 1,256,872 $ - Cost of revenue (exclusive of amortization shown separately below) (930,204 ) - Gross profit 326,668 - Other income: Government support income 737,628 437,146 Operating expenses: Selling, general and administrative expenses (8,026,703 ) (4,920,103 ) Development and regulatory approval expenses (507,424 ) (3,853,919 ) Depreciation and amortization (966,732 ) - Goodwill impairment (4,158,670 ) - Total operating expenses (13,659,529 ) (8,774,022 ) Loss from operations (12,595,233 ) (8,336,876 ) Other income (expense): Interest expense (223,534 ) (7,539 ) Realized foreign exchange loss (9,829 ) (3,987 ) Fair value gain on revaluation of financial instruments 2,154,365 - Interest income 9,676 14,426 Total other income 1,930,678 2,900 Net loss (10,664,555 ) (8,333,976 ) Net loss attributable to non-controlling interest (32,835 ) (27,925 ) Net loss attributable to Intelligent Bio Solutions Inc. $ (10,631,720 ) $ (8,306,051 ) Other comprehensive income (loss), net of tax: Foreign currency translation income (loss) $ 212,639 $ (126,875 ) Total other comprehensive income (loss) 212,639 (126,875 ) Comprehensive loss (10,451,916 ) (8,460,851 ) Comprehensive loss attributable to non-controlling interest (32,835 ) (27,925 ) Comprehensive loss attributable to Intelligent Bio Solutions Inc. $ (10,419,081 ) $ (8,432,926 ) Net loss per share, basic and diluted* $ (10.58 ) $ (11.33 ) Weighted average shares outstanding, basic and diluted* 1,004,593 733,263 * Common Shares and per share amount have been retroactively adjusted to reflect the decreased number of shares resulting from a 1 for 20 reverse stock split, throughout this Annual Report on Form 10-K, unless otherwise stated. 65 Results of Operations: Comparison of the Years Ended June 30, 2023, and 2022 Revenue Sales of goods   Revenue from sales of goods increased by $1,256,872 to $1,256,872 from $0 for the year ended June 30, 2023, compared to same period in 2022. This is due to the acquisition of IFP in October 2022, whose results of operations are consolidated and launch of fingerprint drug testing in APAC region via Intelligent Bio Solutions (APAC) Pty Ltd. The acquisition provided the Company with access to commercially available Fingerprinting drug testing system which is currently being marketed in Europe and Asia Pacific Region. Revenue from the IFPG segment relates to the sale of readers, cartridges and accessories and is summarized as follows: Year Ended June 30, 2023 2022 Sales of goods - cartridges $ 724,304 $ — Sales of goods - readers 335,863 — Other sales 196,705 — Total revenue $ 1,256,872 $ — Cost of revenue   Cost of revenue increased by $930,204 to $930,204 from $0 for the year ended June 30, 2023, compared to same period in 2022. Cost of revenue relates to the direct labor, direct material costs and direct overhead costs incurred in the production of the goods. Gross profit   Gross profit increased by $326,668 to $326,668 from $0 for the year ended June 30, 2023, compared to same period in 2022. This is due to the acquisition of IFP in October 2022.   The gross profit is primarily attributable to the IFPG segment. Government support income Government support income increased by $300,482 to $737,628 from $437,146 for the year ended June 30, 2023, compared to same period in 2022. This increase was primarily attributable to qualifying research and development expenditures incurred during the current period including the completion of Milestone 7, a phase of its biosensor platform development at the University of Newcastle, Australia. The grant support income is primarily attributable to INBS’s subsidiary companies recognizing an R&D tax refund as the Company believes that it is probable that the certain amount will be recovered in full through a future claim (see Note 3 to our consolidated financial statements appearing elsewhere in our Annual Report on Form 10-K for further information and disclosures relating R&D tax refund). Operating expenses Selling, general and administrative expenses Selling, general and administrative expenses increased by $3,106,600 to $8,026,703 from $4,920,103 for the year ended June 30, 2023, compared to the same period in 2022. This is largely due to the acquisition of IFP which added approximately 32 staff to our FTE headcount, and the results of operations of IFP which are consolidated in the current period from the date of acquisition. As the Company’s operating activities increase, we expect its selling, general and administrative costs will include additional costs in overhead contribution, consultancy, as well as an increase in employee related costs associated with a higher headcount. 66 Development and regulatory expenses Development and regulatory expenses decreased by $3,346,495 to $507,424 from $3,853,919 for the year ended June 30, 2023, compared to the same period in 2022. This decrease is primarily driven by expensing of the prepaid R&D contribution of $2,600,000 during the same period in 2022 and decrease in the R&D activities related to COVID-19, as the demand for Covid testing products decreased significantly and we redirected our resources and efforts away from developing products related to Covid testing. As the Company’s operating activities increase, we expect its development and regulatory expenses to increase in future periods. Depreciation and amortization  Depreciation and amortization increased by $966,732 to $966,732 from $0 for the year ended June 30, 2023, compared to same period in 2022. This is due to the acquisition of IFP and primarily related to the amortization of acquired Intangibles during the current period. Goodwill Impairment   The goodwill impairment expenses increased by $4,158,670 to $4,158,670 from $0 for the year ended June 30, 2023, compared to the same period in 2022. Refer to note 3 of our consolidated financial statements appearing elsewhere in our Annual Report on Form 10-K. Other income and expenses Interest expense Interest expense increased by $215,995 to $223,534 from $7,539 for the year ended June 30, 2023, as compared to the same period in 2022. This increase was attributable to the interest expense recorded for convertible notes after the acquisition of IFP. Realized foreign exchange loss Realized foreign exchange loss increased by $5,842 to $9,829 from $3,987 for the year ended June 30, 2023, compared to the same period in 2022. The increase in loss was largely attributable to the Company’s settled translations in currencies other than its functional currencies. Fair value gain on revaluation of financial instruments The fair value gain increased by $2,154,365 to $2,154,365 from $0 for the year ended June 30, 2023, as compared to the same period in 2022. This increase is due to the revaluation gains on the convertible notes and contingent consideration for holdback shares resulting from the acquisition of IFP. Interest income Interest income decreased by $4,750 to $9,676 from $14,426 for the year ended June 30, 2023, as compared to the same period in 2022. This decrease was attributable to the lower bank balance during the current period due to the amount spent on operating and development activities. For additional information regarding the conversion of the convertible notes, see “ Item 1. Business – Conversion of Convertible Debt and Preferred Stock .” Income tax (expense) benefit There was no income tax expense for the year ended June 30, 2023, and 2022, respectively, as the Company has established a full valuation allowance for all its deferred tax assets. 67 Other comprehensive income   Foreign currency translation gain/(loss)   Unrealized foreign currency translation gain increased by $339,514 to a gain of $212,639 from a loss of $126,875 for the year ended June 30, 2023, compared to the same period in 2022. It is calculated based on the Company’s unsettled transactions in currencies other than its functional currency and translation of assets and liabilities of foreign subsidiaries in reporting currency. Net loss Net loss attributable to INBS increased by $2,325,669 to $10,631,720 from $8,306,051 for the year ended June 30, 2023, compared to the same period in 2022. This increase is primarily driven by impairment of goodwill $4,158,670 offset by a recognition of fair value gain on revaluation of convertible notes and holdback Series C Preferred Stock during the current period of $2,154,365. Liquidity and Capital Resources We use working capital and cash measures to evaluate the performance of our operations and our ability to meet our financial obligations. We define Working Capital as current assets less current liabilities. This measure should not be considered in isolation or as a substitute for any standardized measure under GAAP. This information is intended to provide investors with information about our liquidity. Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure. Since our inception, our operations have primarily been financed through the issuance of our common stock, redeemable convertible preferred stock, and the incurrence of debt. As of June 30, 2023, we had $1,537,244 in cash and cash equivalents and a working capital deficit of $2,021,124. The Company expects that its cash and cash equivalents as of June 30, 2023, will be insufficient to allow the Company to fund its current operating plan through at least the next twelve months from the issuance of these financial statements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of at least one year from the date these financial statements are issued. The Company is currently evaluating raising additional funds through private placements and or public equity financing. However, there can be no assurance that, in the event that the Company requires additional financing, such financing will be available on terms which are favorable to us, or at all. Accordingly, these factors raise substantial doubt about the Company’s ability to continue as a going concern. 68 In the event we require additional capital, there can be no assurances that we will be able to raise such capital on acceptable terms, or at all. Failure to generate sufficient revenues or raise additional capital through debt or equity financings, or through collaboration agreements, strategic alliances or marketing and distribution arrangements, could have a material adverse effect on our ability to meet our long-term liquidity needs and achieve our intended long-term business plan. Our failure to obtain such funding when needed could create a negative impact on our stock price or could potentially lead to a reduction in our operations or the failure of our company. Accordingly, these factors raise substantial doubt about the Company’s ability to continue as a going concern. Extended Transition Period for “Emerging Growth Companies” We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. Because our financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Critical Accounting Estimates The preparation of our consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that impact the amounts reported in our consolidated financial statements and accompanying notes that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Note 3 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, and incorporated herein by reference, describes the Company’s accounting policies. The following discussion should be read in conjunction with Note 3, as it presents uncertainties involved in applying the accounting policies and provides insight into the quality of management’s estimates and variability in the amounts recorded for these critical accounting estimates. While all accounting policies impact the consolidated financial statements, certain policies may be viewed to be critical. Management believes that the accounting policies which involve more significant judgments and estimates used in the preparation of our consolidated financial statements include research and development tax refunds. We believe our most critical accounting policies and estimates relate to the following: Revenue recognition Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by delivering the promised goods or service deliverables to the customers. A good or service deliverable is transferred to a customer when, or as, the customer obtains control of that good or service deliverable. 69 Grant income Accounting for the grant income does not fall under ASC 606, Revenue from Contracts with Customers , as the Australian Government will not benefit directly from our manufacturing facility. As there is no authoritative guidance under U.S. GAAP on accounting for grants to for-profit business entities, we applied International Accounting Standards 20 (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance by analogy when accounting for the Australian Government grant to the Company. The Australian Government grant proceeds, which will be used to reimburse construction costs incurred, meet the definition of grants related to assets as the primary purpose for the payments is to fund the construction of a capital asset. Under IAS 20, government grants related to assets are presented in the statement of financial position either by setting up the grant as deferred income that is recognized in the statement of operation on a systematic basis over the useful life of the asset or by deducting the grant in arriving at the carrying amount of the asset. Either of these two methods of presentation of grants related to assets in financial statements are regarded as acceptable alternatives under IAS 20. The Company has elected to record the grants received initially as deferred income and deducting the grant proceeds received from the gross costs of the assets or construction in progress (“CIP”) and the deferred grant income liability. Under IAS 20, government grants are initially recognized when there is reasonable assurance the conditions of the grant will be met, and the grant will be received. As of June 30, 2021, management concluded that there was reasonable assurance the grant conditions will be met, and all milestone payment received. The total grant value of $4.7 million was recognized as both a grant receivable and deferred grant income on the grant effective date. The Company received payments of $1.4 million and $2.1 million during the years ended June 30, 2023 and 2022, respectively. The project has been delayed due to global shortages of semiconductors that are used in manufacturing equipment and global supply chain disruption due to Covid-19 pandemic in the preceding year. As of June 30, 2023, the Company has only completed 4 of the 8 milestones in the grant agreement. There is uncertainty regarding the potential extension of the grant agreement past its original end of March 28, 2024. Therefore, management concluded that there was no reasonable assurance that the remaining grant receivable would be received. After initial recognition, under IAS 20, government grants are recognized in earnings on a systematic basis in a manner that mirrors the manner in which the Company recognizes the underlying costs for which the grant is intended to compensate. Further, IAS 20 permits recognition in earnings either separately under a general heading such as other income, or as a reduction of the cost of the asset. The Company has elected to recognize government grant income separately within other income for operating expenditures. Similarly, for capital expenditures, the carrying amount of assets purchased or constructed out of the grant funds are presented net by deducting the grant proceeds received from the gross costs of the assets or CIP and deferred grant income liability. A total of $127,944 and $51,258 deferred grant income was recognized within other income during the years ended June 30, 2023, and 2022, respectively. Inventories Inventories are stated at the lower of cost or net realizable value. Cost comprises direct materials and, where applicable, other costs that have been incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Impairment of Long-lived Assets and Goodwill Long-lived assets consist of property and equipment, right-of-use assets and other intangible assets. We assess impairment of assets groups, including intangible assets at least annually or more frequently if there are any indicators for impairment. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination. We perform an annual impairment test on goodwill in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. We may first assess qualitative factors, such as general economic conditions, market capitalization, the Company’s outlook, market performance and forecasted financial performance to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is not necessary. If an impairment test is necessary, we estimate the fair value of a related reporting unit. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired, and we will record an impairment charge equal to the excess of the carrying value over the related fair value of the reporting unit. If we determine it is more likely than not that goodwill is not impaired, a quantitative test is not necessary. During the year ended June 30, 2023, the Company’s market capitalization significantly declined and recurring cash burn of the reporting unit and continuous cash support from the parent entity led management to reassess whether an impairment had occurred considering these qualitative factors. Management’s evaluation indicated that the goodwill related to its IFPG reporting unit was potentially impaired. The Company then performed a quantitative impairment test by calculating the fair value of the reporting unit and comparing that amount to it’s carrying value. Significant assumptions inherent in the valuation methodologies include, but were not limited to prospective financial information, growth rates, terminal value and discount rate. The Company determined the fair value of the reporting unit utilizing the discounted cash flow model. The fair value of the reporting unit was determined to be less than its carrying value. The Company recognized an impairment charge of $ 4.2 million in the IFPG segment, which is related to the goodwill associated with the IFP Acquisition. 70 Business Combinations The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of the acquisition. The Company uses the acquisition method of accounting and allocates the purchase price to the identifiable assets and liabilities of the relevant acquired business at their acquisition date fair values. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. The allocation of the purchase price in a business combination requires the Company to perform valuations with significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. Transaction costs associated with business combinations are expensed as incurred and are included in selling, general and administrative expense in the consolidated statements of operations. R&D tax Refund The Company measures the research and development grant income and receivable by taking into account the time spent by employees on eligible research and development activities and research and development costs incurred to external service providers. The research and development tax refund receivable is recognized as the Company believes that it probable that the amount will be recovered in full through a future claim. Intellectual property acquired for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) are expensed in research and development costs at the time the costs are incurred. In certain circumstances, the Company may be required to make advance payments to vendors for goods or services that will be received in the future for use in R&D activities. In such circumstances, the non-refundable advance payments are deferred and capitalized, even when there is no alternative future use for the R&D, until the related goods or services are provided. In circumstances where amounts have been paid in excess of costs incurred, the Company records a prepaid expense. Recently issued Accounting Pronouncements For the impact of recently issued accounting pronouncements on the Company’s consolidated financial statements, see Note 3 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K and incorporated herein by reference. ITEM 7A. 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 otherwise required under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements required pursuant to this item are included in Part IV, Item 15 of this Annual Report on Form 10-K, beginning on page F-1, and incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. None.