Moleculin Biotech, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes thereto included in this Form 10-K. The forward-looking statements included in this discussion and elsewhere in this Form 10-K involve risks and uncertainties, including those set forth under “Cautionary Statement About Forward-Looking Statements.” Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in Item 1A - “Risk Factors.” Our Business Summary We are a clinical stage pharmaceutical company with a growing pipeline, including Phase 2 clinical programs for hard-to-treat cancers and viruses. We have three core technologies, each of which have had one or more drugs successfully complete a Phase 1 clinical trial, based substantially on discoveries made at and licensed from the University of Texas MD Anderson Cancer Center (MD Anderson) in Houston, Texas. Three of our six drug candidates have shown human activity in clinical trials and are currently or have been in Phase 1B/2 or Phase 2 clinical trials. Since our inception, our drugs have completed, are currently in, or have been permitted to proceed in thirteen clinical trials. Annamycin is our lead molecule and is in three Phase 1B/2 clinical trials - one for treating Acute Myeloid Leukemia (AML) and two for treating Soft Tissue Sarcoma metastasized to the lungs (STS lung metastases, STS lung mets, or Advanced STS). One of our core management beliefs is that anthracyclines represent the most important treatment for AML and Advanced STS, and we believe Annamycin may, for the first time ever, allow a majority of these patients to benefit from this treatment. This belief leads us to currently focus mainly on the development of Annamycin. Our Core Technologies Our core technologies consist of the following: a) Annamycin or L-Annamycin is a “next generation” anthracycline (one of the most common classes of chemotherapy), designed to be different than currently approved anthracyclines, which are limited in utility because of cardiotoxicity risks and their susceptibility to multidrug resistance mechanisms. Annamycin was designed to avoid multidrug resistance and to be non-cardiotoxic and has shown no cardiotoxicity in subjects treated in clinical trials to date. Furthermore, we have demonstrated safe dosing beyond the dose limitations imposed by regulatory authorities upon currently prescribed anthracyclines due to their inherent cardiotoxicity. Annamycin is demonstrating efficacy in two of its Phase 1B/2 trials as described further below in subjects with AML and Advanced STS. We believe that Annamycin has potential to fill an unmet need as a second line therapy (2nd line or 2L) in AML and potentially as first line therapy in Advanced STS. As part of our Annamycin clinical trials, we have engaged an independent expert in assessing cardiotoxicity associated with chemotherapy at the Cleveland Clinic (Expert or Independent Expert). The data made available to the Expert includes left ventricular ejection fraction (LVEF) as determined by echocardiograms, and ECHO strain imaging, as well as Troponin levels (a biochemical marker of acute heart damage). “ECHO strain imaging” is a method in echocardiography (medical ultrasound) for measuring regional or global deformation (contraction or beating) of the myocardium (heart muscle). By strain rate imaging, the simultaneous function of different regions can be displayed and measured. Cardiac health biomarkers such as blood Troponin levels are considered an indicator of potential long-term heart damage. The Expert has issued and will continue to issue periodic reports as additional data are provided to him in batches of subject data. Such data include some data which are preliminary and subject to change. In our discussions regarding the lack of Annamycin’s cardiotoxicity, we rely on the Expert’s assessment . Annamycin benefits from a promising advancement in lipid enabled drug delivery developed in collaboration with and exclusively licensed from MD Anderson. The unique patent-pending lipid composition allows us to combine a new concept in chemotherapeutic agents within a lipid structure that helps target the delivery of the payload and reduce the potential for toxicity. In the case of Annamycin, our unique use of lipid technology enables improved tissue/organ distribution and as demonstrated in multiple clinical trials, dramatically reduced toxicity, including cardiotoxicity. 51 Table of Contents b) Our WP1066 Portfolio includes, WP1066, WP1193 and WP1220, three of several Immune/Transcription Modulators in the portfolio designed to inhibit p-STAT3 (phosphorylated signal transducer and activator of transcription) among other transcription factors associated with tumor activity. These also stimulate a natural immune response to tumors by inhibiting the errant activity of Regulatory T-Cells (TRegs). WP1066, in oral formulation, has been in two clinical trials, including compassionate use cases. WP1066 and WP1193 are being tested in preclinical programs in intravenous (IV) formulations. WP1066 and WP1220 have been in clinical trials in a topical formulation. WP1066 and WP1220 have both independently successfully completed Phase 1 clinical trials and have demonstrated efficacy as described further below. c) Our WP1122 Portfolio contains compounds (including WP1122, WP1096, and WP1097) designed to exploit the potential uses of inhibitors of glycolysis such as 2-deoxy-D-glucose (2-DG). We believe such compounds may provide an opportunity to cut off the fuel supply of tumors by taking advantage of their high degree of dependence on glucose in comparison to healthy cells, as well as viruses that also depend upon glycolysis and glycosylation to infect and replicate. WP1122 has completed a Phase 1 clinical study, successfully establishing a Recommended Phase 2 Dose or RP2D. Our Focus We are focused on internally funded development of: 1) Annamycin in combination with Cytarabine (also known as Ara-C, the combination with Annamycin of which is referred to as AnnAraC) for the treatment of AML. 2) Annamycin for the treatment of STS metastasized to the lungs . 3) A better formulation for delivery of a molecule from the WP1066 portfolio to possibly further support future externally funded oncology clinical trials. Such a formulation will require additional preclinical work prior to a clinical trial. We have established an RP2D for WP1122 to potentially enable future externally funded oncology and virology trials. Beyond this, we support development of our core technologies through several externally funded clinical trials and primarily externally funded non-clinical research, with the potential for further studies in the future. Moleculin Biotech, Inc. Results of Operations for the Year Ended December 31, 2023 as Compared to the Year Ended December 31, 2022 The following table is data derived from the Consolidated Statement of Operations (in thousands) and the discussions that follow are in approximate amounts: Year ended December 31, 2023 2022 Revenue $ — $ — Operating expenses: Research and development 19,487 18,968 General and administrative 10,017 11,542 Depreciation and amortization 127 130 Total operating expense 29,631 30,640 Loss from operations (29,631 ) (30,640 ) Other income: (Loss) gain from change in fair value of warrant liability (1,044 ) 1,335 Other income, net 48 40 Interest income, net 1,368 240 Transaction costs allocated to warrant liabilities (510 ) Net loss $ (29,769 ) $ (29,025 ) Research and Development Expense Research and development (R&D) expense w as $19.5 million an d $19.0 million for the years ended December 31, 2023 and 2022, respectively. The increase in R&D of $0.5 million is mainly rela ted to the $1.5 million WPD sublicense termination, which enabled the reacquisition of our intellectual property rights in certain territories, including parts of the European Union. This was offset by $1.0 million in costs related to the timing of costs incurred for clinical trials and sponsored research. General and Administrative Expense General and administrative (G&A) expense was $10.0 million a nd $11.5 million for the years ended December 31, 2023 and 2022, respectively. The decrease in G&A of $1.5 million wa s mainly attributable to a decrease in regulatory and legal services, and consulting & advisory fees. (Loss) Gain from Change in Fair Value of Warrant Liability We recorded a loss of $1.0 million durin g the year ended December 31, 2023 as compared to a gain of $1.3 million, during the year ended December 31, 2022, for the change in fair value on revaluation of our warrant liability associated with our warrants issued in conjunction with our stock offerings. We are required to revalue certain of the warrants at the time of each warrant exercise and at the end of each reporting period and reflect in the statement of operations a gain or loss from the change in fair value of the warrant in the period in which the change occurred. We calculated the fair value of the warrants outstanding using the Black-Scholes model. Generally, a gain results principally from a decline in our share price during the period and a loss results principally from an increase in our share price. 52 Table of Contents Net Loss The net loss for the year ended December 31, 2023 wa s $29.8 million, which included a non-cash loss of $1.0 million on wa rrants in 2023 as compared to a gain of $1.3 million in the prior year and approximatel y $2.0 million o f stock-based compensation expense in 2023 as compared to $2.3 million in 2022. Interest income, net Interest income, net increased by approximately $1.1 million for the comparable period due to rising interest rates during the past year. Liquidity and Capital Resources As of December 31, 2023 , we had cash and cash equivalents of $23.6 million and prepaid expenses and other current assets of $2.7 million. We also had $2.5 million of accounts payable and $4.3 million of accrued expenses and other current liabilities. A significant portion of the accounts payable and accrued expenses are due to work performed in relation to our preclinical activities and our clinical trials. For the years ended December 31, 2023 and 2022, we used approxima tely $24.1 million and $27.6 million of cash in operating activities, respectively, which represents cash outlays for research and development and general and administrative expenses in such periods. The decreased cash outflows in 2023 was primarily due to an overall decrease in expenses, timing of payments, as well as license rights settled in stock . For the year ended December 31, 2023, there were $4.7 million in net proceeds from financing activities. In 2022, there were no net proceeds from financing activities. Cash used in investing activities for the years ended December 31, 2023 and 2022 was approximately$0.1 million. We believe that our cash resources as of December 31, 2023, will be sufficient to fund our planned operations, which include our current Phase 1B/2 clinical programs and preparations for future clinical trials, into the fourth quarter of 2024, without the issuance of additional equity for cash. This takes into account cash outlays for preparations for clinical trials beyond the current active trials. The continuation of our Company as a going concern is dependent upon our ability to obtain necessary financing to continue operations and the attainment of profitable operations. We may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements and delay planned cash outlays or a combination thereof. We cannot provide assurance that such events or a combination thereof can be achieved. In March 2022, we received a subpoena from the SEC requesting information and documents, including materials related to certain individuals (none of which are our officers or directors) and entities, and materials related to the development of and statements regarding our drug candidate for the treatment of COVID-19. We have received, and expect to continue to receive, periodic further requests from the SEC staff with respect to this matter. We are not aware of the specific nature of the underlying investigation by the SEC, and to the extent that this investigation relates to prior public disclosures that we have made, we believe in the accuracy and adequacy of such prior disclosures. The correspondence from the SEC transmitting the subpoena to us states that the SEC is trying to determine whether there have been any violations of federal securities laws, but that its investigation does not mean that the SEC has concluded that anyone has violated the law or that the SEC has a negative opinion of any person, entity, or security. We cannot predict when this matter will be resolved or what, if any, action the SEC may take following the conclusion of the investigation. During the year ended December 31, 2023 and 2022, we have expensed approximately $1.5 and $2.4 million, respectively, in related legal fees and expenses, which has impacted and may continue to impact our liquidity. Stock Offerings In December 2023, the Company entered into a Securities Purchase Agreement with an institutional investor and certain of the Company's executive officers, employees, advisors and a member of its board of directors for the sale by the Company of 240,151 shares (taking into account the reverse stock splits we have completed) of the Company's common stock, and pre-funded warrants to purchase 229,506 shares of common stock (taking into account the reverse stock splits we have completed) in lieu thereof in a registered direct offering. In a concurrent private placement, the Company also sold to the investors unregistered warrants to purchase up to an aggregate of 939,312 shares of common stock ( t aking into account the reverse stock splits we have completed). Subject to certain ownership limitations, each Common Warrant has an exercise price of $9.60 per share ( t aking into account the reverse stock splits we have completed), and expires five years from the date of stockholder approval of the Common Warrants (which occurred February 14,2024). Subject to certain ownership limitations, each Pre-Funded Warrant is exercisable into one share of common stock at a price per share of $0.001 (as adjusted from time to time in accordance with the terms thereof). The combined purchase price of one share of common stock (or pre-funded warrant in lieu thereof) and accompanying Common Warrant was $9.60 ( t aking into account the reverse stock splits we have completed) for the institutional investor, and $10.35 ( t aking into account the reverse stock splits we have completed) for the executive officers, employees, advisors and the member of the Company's board of directors who participated in the offering. The Company received gross proceeds of $4.5 million, before deducting the placement agent's fees and other offering expenses payable by the Company. Lincoln Park Equity Lines In June 2021, we entered into a Purchase Agreement with Lincoln Park Capital Fund (Lincoln Park Agreement). Pursuant to the terms of the Purchase Agreement, Lincoln Park agreed to purchase from us up to $20.0 million of common stock (subject to certain limitations) from time to time during the term of the Purchase Agreement. Pursuant to the terms of the Purchase Agreement, at the time we signed the Purchase Agreement, we issued 7,186 shares of common stock ( t aking into account the reverse stock splits we have completed) to Lincoln Park as an initial fee for its commitment to purchase shares of our common stock under the Purchase Agreement, and have agreed to issue Lincoln Park up to an additional 3,593 shares of common stock ( t aking into account the reverse stock splits we have completed) as commitment shares pro-rata when and if Lincoln Park purchases (at our discretion) the $20.0 million aggregate commitment. During the year ended December 31, 2023, utilizing the Lincoln Park Equity Line, we issued 15,038 shares of common stock ( t aking into account the reverse stock splits we have completed) (including commitment shares), at an average price of $14.10 per share ( t aking into account the reverse stock splits we have completed), resulting in gross proceeds of $0.2 million. In the December 2023 Offering, we agreed not to utilize the Lincoln Park Agreement or any such extension thereof, until after June 26, 2024. 53 Table of Contents The following table sets forth the primary sources and uses of cash for the years indicated (in thousands): For the Year Ended December 31, 2023 2022 Net cash used in operating activities $ (24,101 ) $ (27,639 ) Net cash used in investing activities (124 ) (67 ) Net cash provided by (used in) financing activities 4,651 (23 ) Effect of exchange rate changes on cash and cash equivalents (21 ) (29 ) Net change in cash and cash equivalents $ (19,595 ) $ (27,758 ) As of December 31, 2023, there was $0.3 million of cas h on hand in a bank account in Australia and we know of no related limitations impacting our liquidity in Australia. Cash used in operating activities Net cash used in operating activities was$24.1 million for the year ended December 31, 2023 compared to $27.6 million for the year ended December 31, 2022. This decrease in use of cash for operations was mainly due to an overall decrease in expenses, timing of payments, as well as license rights settled in stock. Cash used in investing activities Net cash used in investing activities w as de minimis f or the years ended December 31, 2023 and December 31, 2022, respectively. Cash provided by financing activities Net cash provided by financing activities was $4.7 million f or the year ended December 31, 2023, consisting of the December 2023 stock offering, as well as shares issued utilizing the Lincoln Park Equity Line. Off-Balance Sheet Transactions We do not engage in off-balance sheet transactions. Recent Accounting Pronouncements We have implemented all new accounting pronouncements that are in effect and may impact our financial statements and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations. Critical Accounting Policies and Significant Judgments and Estimates The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for financial information, and in accordance with the rules and regulations of the SEC. We believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain . Research and Development Costs We record accrued expenses for estimated costs of our research and development activities conducted by third-party service providers, which include the conduct of pre-clinical and clinical trials and preparation for clinical trials and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and we include these costs in accrued liabilities in the balance sheets and within research and development expense in the statement of operations. These costs are a significant component of our research and development expenses. We record accrued expenses for these costs based on the estimated amount of work completed and in accordance with agreements established with these third parties. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. To date, there have been no material differences from our accrued expenses to actual expenses. Impairment of Long-Lived Assets We evaluate the recoverability of our property and equipment and amortizable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable or at a minimum annually during the fourth quarter of the year. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of property and equipment and amortizable intangible assets is not recoverable, the carrying amount of such asset is reduced to fair value. 54 Table of Contents Acquired in-process research and development (IPR&D) assets are considered indefinite lived until the completion or abandonment of the associated research and development efforts. We evaluate the recoverability of our IPR&D assets for possible impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of IPR&D assets is measured by a comparison of the carrying amounts its fair value. If such review indicates that the carrying amount of IPR&D assets is not recoverable, the carrying amount of such asset is reduced to fair value. Components of our Results of Operations, Net Loss and Financial Condition Operating expenses We classify our operating expenses into three categories: research and development, general and administrative and depreciation. Research and development . Research and development expenses consist primarily of: • costs incurred to conduct research, such as the discovery and development of our product candidates; • costs related to production of clinical supplies, including fees paid to contract manufacturers and drug manufacturing costs; • fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations, in preparation for clinical trials and our IND and Orphan Drug applications with the FDA; and • costs related to compliance with drug development regulatory requirements. We recognize all research and development costs as they are incurred. Pre-clinical costs, contract manufacturing and other development costs incurred by third parties are expensed as the contracted work is performed. We expect our research and development expenses to increase in the future as we advance our product candidates into and through clinical trials and pursue regulatory approval of our product candidates in the United States and Europe. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the quality of our product candidates, early clinical data, investment in our clinical program, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent, if any, we will generate revenue from the commercialization and sale of our product candidates. General and administrative General and administrative expense consists of personnel related costs, which include salaries, as well as the costs of professional services, such as accounting and legal, facilities, information technology and other administrative expenses. We expect our general and administrative expense to increase due to the anticipated growth of our business and related infrastructure as well as accounting, insurance, investor relations and other costs associated with being a public company. Depreciation and Amortization. Depreciation and amortization expense consists of depreciation on our property and equipment. We depreciate our assets over their estimated useful life. We estimate leasehold improvements to have a estimated useful life over the term of the lease or the estimated useful life, whichever is shorter; computer equipment to have a 2-year life; software to have a 3-year life, machinery and equipment to have a 2 to 5 year life and furniture and office equipment to have a 2 to 7 year life. Accounting for warrants Upon its issuance of warrants to purchase shares of common stock, the Company evaluates the terms of the warrant issue to determine the appropriate accounting and classification of the warrant issue pursuant to FASB ASC Topic 480, Distinguishing Liabilities from Equity, FASB ASC Topic 505, Equity, FASB ASC 815, Derivatives and Hedging, and ASC 718, Compensation - Stock Compensation. Warrants are classified as liabilities when the Company may be required to settle a warrant exercise in cash and classified as equity when the Company settles a warrant exercise in shares of its common stock. We issued warrants to purchase shares of common stock related to equity transactions in 2017, 2018, 2019, 2020, 2021, 2022, and 2023. We account for our warrants issued in accordance with Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging, guidance applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings for liability classified warrants. Based on this guidance, we determined that certain of our warrants to purchase shares of common stock related to equity transactions in 2017, 2018, 2019, 2020 , and 2023 meet the criteria for classification as a liability. Accordingly, the warrants were classified as a warrant liability and are subject to fair value remeasurement at each transaction and balance sheet date. The fair value was estimated using the Black-Scholes option pricing model, based on the market value of the underlying common stock at the measurement date, the contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock. Proceeds of the December 2023 Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. Our financial instruments consist primarily of non-trade receivables, account payables, accrued expenses, and a warrant liability. The carrying amount of non-trade receivables, accounts payables, and accrued expenses approximates their fair value because of the short-term maturity of such. We have categorized our assets and liabilities that are valued at fair value on a recurring basis into three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). 55 Table of Contents Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs as follows: Level 1 - Unadjusted quoted prices in active markets of identical assets or liabilities. Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 - Unobservable inputs for the asset or liability. Our financial assets and liabilities recorded at fair value on a recurring basis include the fair value of our warrant liability discussed below. The fair value of this warrant liability associated with the February 2017, February 2018, June 2018, March 2019, April 2019, February 2020, and December 2023 Off erings (Offerings) are included in long-term liabilities on the accompanying financial statements as of December 31, 2023 and 2022 respectively. We estimated the fair value of the warrant liability issued in our Offerings under ASC 820 as of their issuance date for financial reporting purposes. We used the Black-Scholes option pricing model (BSM) to determine the fair value of the warrants. The BSM model is acceptable in accordance with GAAP. The BSM requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average term of the warrant. The risk-free interest rate assumption is based upon observed interest rates on zero coupon US Treasury bonds whose maturity period is appropriate for the term of the warrants and is calculated by using the average daily historical stock prices through the day preceding the grant date. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the warrants. Beginning in 2020, only the volatility of our stock was used in the BSM as we now have sufficient historic data in our stock price. Changes in the fair value during the accounting period are shown as other income or expense. Stock-based compensation Stock based compensation transactions are recognized as compensation expense in the statement of operations based on their fair values on the date of the grant, with the compensation expense recognized over the period in which a grantee is required to provide service in exchange for the award. We estimate the fair value of options granted using the Black-Scholes option valuation model, and the fair value of restricted stock units using the closing price of our common stock as reported on the date of grant. The Black-Scholes estimate uses assumptions regarding a number of inputs that require us to make significant estimates and judgments. Beginning in 2020, only the volatility of our stock was used in the BSM as we now have sufficient historic data in our stock price. Income taxes We account for income taxes using ASC 740, Income Taxes. ASC 740 Income Taxes is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, ASC 740 generally considers all expected future events other than enactments of and changes in the tax law or rates. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Valuation allowances are provided if, considering available evidence, it is more likely than not that the deferred tax assets will not be realized. ASC 740 clarifies the criteria that must be met prior to recognition of the financial statement benefit of a position taken in a tax return. ASC 740 provides a benefit recognition model with a two-step approach consisting of “more-likely-than-not” recognition criteria, and a measurement attribute that measures a given tax position as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. ASC 740 also requires the recognition of liabilities created by differences between tax positions taken in a tax return and amounts recognized in the financial statements. Recent accounting pronouncements See Note 2 to the Notes to Consolidated Financial Statements in "Item 8 - Financial Statements and Supplementary Data" in this Annual Report for discussion regarding recent accounting pronouncements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information required under this item.