Algorhythm Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to view the Company from management’s perspective, considering items that would have a material impact on future operations. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this quarterly report. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See Part II, Item 1A, “Risk Factors “). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Statements included in this quarterly report that do not relate to present or historical conditions are called “forward-looking statements.” Such forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations, and intentions. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” “expects,” “plans,” “should,” “could,” “will,” and similar expressions are intended to identify forward-looking statements. Our ability to predict or project future results or the effect of events on our operating results is inherently uncertain. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Important factors to consider in evaluating such forward-looking statements include, but are not limited to: (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) the effects of adverse general economic conditions, both within the United States and globally, (v) vendor price increases and decreased margins due to competitive pricing during the economic downturn (vi)various competitive market factors that may prevent us from competing successfully in the marketplace and (vii) other factors described in the risk factors section of our Annual Report on Form 10-K, this Quarterly Report on 10-Q, or in our other filings made with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. OVERVIEW The Singing Machine Company, Inc., a Delaware corporation (the “Company,” “SMC”, “The Singing Machine”), and wholly-owned subsidiaries SMC (Comercial Offshore De Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMCL”), SMC-Music, Inc. (“SMCM”) and SMC (HK) Limited (“SMH”), are primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories and musical recordings. The products are sold directly to distributors and retail customers. Our products are sold throughout North America, Europe and Australia primarily through major mass merchandisers and warehouse clubs, on-line retailers and to a lesser extent department stores, lifestyle merchants, direct mail catalogs and showrooms, music and record stores, and specialty stores. Representative customers include Amazon, Best Buy, BJ’s Wholesale, Costco, Sam’s Club, Target, and Wal-Mart. Our business has historically been subject to seasonal fluctuations causing our revenues to vary from quarter to quarter and between the same periods in different fiscal years. Our products are manufactured for the most part based on the purchase indications of our customers. We are uncertain of how significantly our business would be harmed by a prolonged economic recession, but we anticipate that continued contraction of consumer spending would negatively affect our revenues and profit margins. Sales of consumer electronics and toy products in the retail channel are highly seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season, which includes Christmas. A substantial majority of our sales occur during the second quarter ending September 30 and the third quarter ending December 31. Sales in our second and third quarter, combined, accounted for approximately 81% and 86% of net sales in fiscal 2022 and 2021, respectively. Recent Developments Controlled Company As of the date of this report, Ault Lending, LLC (“Ault Lending ”) beneficially owns and BitNile Holdings, Inc. (“BitNile Holdings”) and Milton C. Ault, III (“Ault,” and collectively with Ault Lending and BitNile Holdings, “BitNile”) may be deemed to beneficially own an aggregate of 1,787,200 shares of our common stock or approximately 57.4% of our outstanding shares. Ault Lending is a wholly owned subsidiary of BitNile Holdings. Mr. Ault is the Executive Chairman of BitNile Holdings. 21 As longs as BitNile continues to hold more than 50% of the voting power of our Company, we will be a “controlled company” as defined under Nasdaq Marketplace Rules. For so long as we are a controlled company under Nasdaq Marketplace Rules, we are permitted to elect to rely on certain exemptions from corporate governance rules, including: ● an exemption from the rule that a majority of our board of directors must be independent directors; ● an exemption from the rule that the compensation of our CEO must be determined or recommended solely by independent directors; and ● an exemption from the rule that our director nominees must be selected or recommended solely by independent directors. Appointment of New Directors Effective July 27, 2022, the Board of Directors (the “Board”) of the Company increased the number of directors to eight and appointed Messrs. Bernardo Melo, James Turner and Kenneth Cragun as directors. Messrs. Melo, Turner and Cragun will serve as members of the Board until the next annual meeting of the Company’s stockholders, and until their successors are elected and qualified or until their earlier death, resignation or removal. Messrs. Turner and Cragun were recommended for nomination by BitNile, the Company’s majority stockholder, and evaluated and nominated by the Company’s Nominating and Corporate Governance Committee. Credit and Security Agreement with Fifth Third Bank, National Association On October 14, 2022 the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with Fifth Third Bank, National Association, as Lender (“Fifth Third”) replacing the Company’s credit facilities with Crestmark Bank and Iron Horse Credit that were terminated by the Company on October 13, 2022 . The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased to $7,500,000 during the period of January 1 through July 31 of each year. The Credit Agreement matures on October 14, 2025. COVID-19 UPDATE In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community. The WHO declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future. We continue to experience various degrees of manufacturing cost pressures due to raw material and electronic component shortages as well as inflationary price increases. Although we regularly monitor the financial health and operations of companies in our supply chain, and use alternative suppliers when necessary and available, financial hardship or government restrictions on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products and adversely affect our operations. During Fiscal 2022, as consumer demand improved and economic activity increased, we experienced supply chain challenges, including increased lead times, port closures in China and delays in Los Angeles, global container shortages, as well as inflation of logistics and labor costs due to availability constraints and high demand. We expect these inflationary trends to continue throughout the remainder of the fiscal year. We may also experience logistical issues with when we receive inventory and the timing of customer demand which could result in potential reductions in profit margins and/or the need for additional inventory reserves. Due to these supply chain challenges, during the fourth quarter of Fiscal 2022, we experienced late delivery of inventory that missed the holiday season 2021. We note that this trend was widespread throughout the consumer products and retail categories causing a significant stockpile of consumer product inventory throughout retail channels. As a result of this excess inventory stockpile, we might be expected to discount our inventory or help participate in the funding of marking down our customers’ inventory which could result in reductions in profit margins and/or the need for additional inventory reserves. The extent of the COVID-19 pandemic’s effect on our operational and financial performance in the future will depend on future developments, including the duration, geographic location and intensity of the pandemic, the impact of virus variants, the rate of vaccinations, our continued ability to manufacture and distribute our products, as well as any future actions that may be taken by governmental authorities or by us relating to the pandemic. For more information regarding factors and events that may impact our business, results of operations and financial condition as a result of the COVID-19 pandemic, see “Risk Factors” included in Item 1A. “Risk Factors” in our 2022 Annual Report on Form 10-K. 22 HIGH INFLATION, RISING INTEREST RATES, AND UNFAVORABLE ECONOMIC CONDITIONS COULD NEGATIVELY AFFECT OUR OPERATIONS AND RESULTS. Unfavorable global or regional economic conditions may be triggered by numerous developments beyond our control, including inflation, rising interest rates, geopolitical events, health crises such as the COVID-19 pandemic, and other events that trigger economic volatility on a global or regional basis. Those types of unfavorable economic conditions could adversely affect our business and financial results. In particular, a significant deterioration in economic conditions, including economic slowdowns or recessions, increased unemployment levels, inflationary pressures or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, thus reducing consumer demand for our products. For example, in 2021 and continuing into 2022, the United States has experienced a rapid increase in inflation levels of over 9%, which is now at a 40-year historic high. While we have experienced a significant decrease in container costs for inbound containers due to decreased demand in general, we are continuing to see increases in drayage costs due to cost of fuel increases as well as significant charges from the Port of Los Angeles such as “port congestion fees” and other surcharges due to inflation. The cost of labor, employee benefits, pallets and warehouse supplies and other logistics related costs continue to increase at record rates. Such heightened inflationary levels and higher consumer credit borrowing rates may negatively impact consumer disposable income and discretionary spending and, in turn, reduce consumer demand for our products and increase our costs. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items related to our consolidated statements of income as a percentage of net sales for the three and six months ended September 30, 2022 and 2021: For Three Months Ended For the Six Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Net Sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of Goods Sold 76.8 % 80.8 % 75.2 % 79.1 % Gross Profit 23.2 % 19.2 % 24.8 % 20.9 % Operating Expenses Selling expenses 5.3 % 4.2 % 5.2 % 5.6 % General and administrative expenses 14.1 % 10.2 % 16.6 % 13.6 % Depreciation and amortization 0.0 % 0.4 % 0.0 % 0.6 % Total Operating Expenses 19.4 % 14.8 % 21.8 % 19.8 % Income from Operations 3.8 % 4.4 % 3.0 % 1.1 % Other (Expenses) Income Gain - related party 0.0 % 0.0 % 0.0 % 0.0 % Gain from extinguishment of PPP loan forgiveness 0.0 % 0.0 % 0.0 % -0.9 % Gain from settlement of accounts payable 0.0 % 0.0 % 0.0 % -0.1 % Interest expense -1.1 % 1.4 % 0.0 % Finance costs 0.0 % -0.6 % -1.2 % Total Other (Expenses) Income, net -1.1 % 0.8 % -1.2 % -1.0 % Income Before Income Tax Provision 2.7 % 5.2 % 1.8 % 0.1 % Income Tax Provision -0.6 % -1.0 % -0.3 % -0.6 % Net Income 2.1 % 4.2 % 1.4 % -0.5 % QUARTER ENDED SEPTEMBER 30, 2022 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2021 NET SALES Net sales for the three months ended September 30, 2022 decreased to approximately $17,113,000 from approximately $17,369,000, a decrease of approximately $256,000 as compared to the three months ended September 30, 2021. While the net sales for the three months ended September 30, 2022 remained relatively flat compared to the same period in the prior year there was a significant increase in net sales to two of our largest customers and a similar reduction in two other major customers who ended the prior holiday season with excess inventory and reduced current year purchases. GROSS PROFIT Gross profit for the three months ended September 30, 2022 increased to approximately $3,964,000 from approximately $3,327,000 an increase of approximately $637,000 as compared to the three months ended September 30, 2021 primarily due to an increase in gross profit margin. Gross profit margin for the three months ended September 30, 2022 was 23.2% compared to 19.2% for the three months ended September 30, 2021. There was a reduction in component costs in one major customer’s promotional item that contributed approximately 1.8 margin points of the increase with the remaining margin increase primarily due to a decrease in landed product cost due to a significant decrease in inbound container costs and price increases to customers. 23 OPERATING EXPENSES During the three months ended September 30, 2022, total operating expenses increased to approximately $3,379,000 compared to approximately $2,577,000 during the three months ended September 30, 2021. This represents an increase in total operating expenses of approximately $802,000 from the three months ended September 30, 2021 primarily due to an increase in general and administrative expenses of approximately $640,000 and an increase in selling expenses of approximately $166,000. Selling expenses increased to approximately $900,000 during the three months ended September 30, 2022 compared to approximately $734,000 during the three months ended September 30, 2021, an increase of approximately $166,000. There was an increase in commission and royalty expense of approximately $76,000, an increase of approximately $49,000 in discretionary marketing expense with the remaining increase related to freight costs. General and administrative expenses increased to approximately $2,417,000 during the three months ended September 30, 2022 compared to approximately $1,777,000 during the three months ended September 30, 2021, an increase of approximately $640,000. There was an increase in one-time legal, professional, investor relations and stock transfer costs of approximately $303,000 primarily related to the public offering, Nasdaq up-listing, change in control matters, regulatory filings and preparation costs relating to the Credit Agreement with Fifth Third. There was an increase in compensation of approximately $239,000 primarily due to compensation for new members of the board of directors, and officers’ and employee incentive compensation as well as merit increases. There was an increase in pallet expenses, warehouse supplies and expense and temporary labor at our California facility of approximately $98,000 due to inflation related cost increases in pallets, temporary labor and supplies. INCOME FROM OPERATIONS There was income from operations of approximately $585,000 for the three months ended September 30, 2022 compared to income from operations of approximately $750,000 for the three months ended September 30, 2021. The decrease in income from operations of approximately $165,000 was primarily due to the increase in gross profit offset by the increase in operating expenses as explained above. OTHER (EXPENSES) INCOME Other expenses increased by approximately $302,000 to approximately $186,000 in other expenses for the three months ended September 30, 2022 compared to approximately $116,000 in other income, net for the three months ended September 30, 2021. During the three months ended September 30, 2022, there was an increase in interest expense of approximately $76,000 as the Company had outstanding borrowings of $2,500,000 on the IHC inventory financing facility during the three months ended September 30, 2022 compared to borrowings of approximately $365,000 outstanding during the three months ended September 30, 2021. During the three months ended September 30, 2021 there was a gain from the settlement of accounts payable with one of our factories of $236,000. INCOME TAXES For the three months ended September 30, 2022 and 2021, the Company recognized an income tax provision of approximately $102,000 and $174,000, respectively, due to management’s best estimate of the Company’s full year effective U.S. federal tax rate of approximately 21.2% and 20.1%, respectively. SIX MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2021 NET SALES Net sales for the six months ended September 30, 2022 increased to approximately $28,806,000 from $23,435,000 an increase of approximately $5,371,000 as compared to the same period ended September 30, 2021. There was an increase in net sales of approximately $6,100,000 primarily due to a top-five customer that opted to receive product via direct import, accelerated their delivery schedule and increased their assortment of product offerings. This increase in net sales was offset by a decrease in net sales of approximately $2,316,000 to two major customers who ended the prior holiday season with excess inventory and reduced current year purchases. The remaining variance was primarily due to an increase in net sales due to new product set in one major customer’s consumer electronics department. GROSS PROFIT Gross profit for the six months ended September 30, 2022 increased to approximately $7,144,000 from approximately $4,905,000 an increase of approximately $2,339,000 as compared to the same period in the prior year. The increase in net sales as indicated in Net Sales contributed approximately $1,123,000 to the increase in gross profit. The remaining increase was primarily due to an increase in gross profit margin of approximately 3.9 points on products sold. 24 Gross profit margin for the six months ended September 30, 2022 was 24.8% compared to 20.9% for the six months ended September 30, 2021. There was a reduction in component costs in one major customer’s promotional item that contributed approximately 1.6 margin points of the increase with the remaining margin increase primarily due to a decrease in landed product cost due to a significant decrease in inbound container costs and price increases to customers. OPERATING EXPENSES During the six months ended September 30, 2022, total operating expenses increased to approximately $6,413,000 compared to approximately $4,645,000 during the six months ended September 30, 2021. This represents an increase in total operating expenses of approximately $1,768,000 from the six months ended September 30, 2021 primarily due to an increase in general and administrative expenses of approximately $1,590,000 and an increase in selling expenses of approximately $194,000. Selling expenses increased to approximately $1,505,000 during the six months ended September 30, 2022 compared to approximately $1,311,000 during the six months ended September 30, 2021, an increase of approximately $194,000. There was an increase in commission expense of approximately $104,000 commensurate with the increase in net sales and an increase of approximately $77,000 in discretionary marketing expense with the remaining increase related to other variable selling expenses. General and administrative expenses increased to approximately $4,788,000 during the six months ended September 30, 2022 compared to approximately $3,198,000 during the six months ended September 30, 2021, an increase of approximately $1,590,000. There was an increase in legal, professional, investor relations and stock transfer costs of approximately $443,000 primarily related to the public offering, Nasdaq up-listing, change in control issues, regulatory filings and preparation costs relating to the Credit Agreement with Fifth Third. There was an increase in compensation of approximately $394,000 primarily due to compensation for new members of the board of directors, and officers’ and employee incentive compensation, new hires as well as merit increases. There was an increase in pallet expenses, warehouse supplies and expense and temporary labor at our California facility of approximately $376,000 due to inflation related cost increases.. There were increases of approximately $102,000 related to a firmware upgrade of one of our products, an increase in travel expenses of approximately $87,000, expenses associated with ERP system projects of approximately $79,000 with the remaining increase due to other general variable expenses that have increased due to inflation. INCOME FROM OPERATIONS There was income from operations of approximately $731,000 for the six months ended September 30, 2022 compared to income from operations of approximately $260,000 for the six months ended September 30, 2021. The increase in income from operations of approximately $471,000 was primarily due to the increase in gross profit offset by an increase in operating expenses as explained above. OTHER (EXPENSES) INCOME Other expenses increased by approximately $813,000 to approximately $354,000 in other expense for the six months ended September 30, 2022 compared to approximately $459,000 in other income, net for the same period ended September 30, 2021. During the six months ended September 30, 2022, there was an increase in interest expense of approximately $136,000 as the Company had outstanding borrowings of $2,500,000 on the IHC inventory financing facility during the three months ended September 30, 2022 compared to borrowings of approximately $2,000,000 outstanding during the six months ended September 30, 2021. Interest rates on the Crestmark Credit Facility increased commensurate with federal interest rate hikes. During the six months ended September 30, 2021 there was a gain from the forgiveness of the Payroll Protection Plan loan of approximately $448,000 and a gain from the settlement of accounts payable with one of our factories of $236,000. INCOME TAXES For the six months ended September 30, 2022 and 2021 the Company recorded an income tax provision of approximately $97,000 and an income tax provision of approximately $146,000, respectively, due to management’s best estimate of the Company’s full year effective U.S. federal tax rate of approximately 21.2% and 20.1%, respectively. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2022, the Company had cash on hand of approximately $2,979,000 as compared to cash on hand of approximately $3,338,000 on September 30, 2021. We had working capital of approximately $12,709,000 as of September 30, 2022. Net cash used in operating activities was approximately $3,580,000 for the six months ended September 30, 2022. During the six months ended September 30, 2022 there was an increase in accounts receivable of approximately $8,011,000 due to a seasonal increase in net sales and a seasonal increase in inventories of approximately $1,767,000. There was an increase in cash due from Crestmark Bank of approximately $976,000 held in anticipation of the imminent closing of the new Credit Agreement with Fifth Third Bank. These decreases in net cash used in operating activities were offset by an increase in accounts payable and accrued expenses of approximately $5,554,000 due to seasonal purchases of product for the peak season. There was a seasonal increase in reserves for sales returns of approximately $701,000. 25 Net cash used in operating activities was approximately $576,000 for the six months ended September 30, 2021. There was an increase in accounts receivable of approximately $9,410,000 due to a seasonal increase in sales and a seasonal increase in inventories of approximately $13,722,000 due to in-transit and receipt of inventory for peak season. These increases in net cashed used in operating activities were offset by an increase in in accounts payable of approximately $16,409,000 due to seasonal purchases of product for the peak season. There was a decrease in amounts due from Crestmark Bank of approximately $4,557,000 as cash collected in excess of amounts due on the revolving credit during the first quarter was used to pay for the seasonal increase in inventory. There was a seasonal increase in reserve for sales returns of approximately $904,000. Net cash used in investing activities for the six months ended September 30, 2022 was approximately $88,000 as compared to approximately $78,000 used in investing activities for the same period ended a year ago and consisted primarily of purchases of molds and tooling for new products. Net cash provided by financing activities for the six months ended September 30, 2022 was approximately $4,321,000 compared to cash provided by financing activities of approximately $3,595,000 for the same period ended of the prior year. In May 2022, we received net proceeds of approximately $3,363,000 from the public offering we executed in conjunction with our up-listing to Nasdaq as summarized in the next two paragraphs. In addition, during the six-months ended September 30, 2022, we received proceeds of approximately $1,034,000 from the exercise of pre-funded and common stock warrants. All proceeds were used for working capital. On May 23, 2022, the “Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., who acted as the sole underwriter (the “Underwriter”), in a firm commitment underwritten public offering (the “Offering”) pursuant to which the Company sold to the Underwriter 1,000,000 shares (the “Shares”) of common stock, par value $0.01 per share (the “Common Stock”) for gross proceeds of $4,000,000 prior to deducting underwriting discounts and commissions and other estimated offering expenses of approximately $637,000. The price to the public in the Offering was $4.00 per Share, before underwriting discounts and commissions. The offering closed on May 26, 2022. The Company received net proceeds of approximately $3,363,000 which was used for working capital. On May 24, 2022, the Company’s Common Stock was approved to list on the Nasdaq Capital Market under the symbol “MICS” and began trading on the Nasdaq Capital Market on May 24, 2022. Net cash provided by financing activities for the six months ended September 30, 2021 was approximately $3,595,000. We borrowed approximately $1,977,000 from our Crestmark Facility and IHC Facility for working capital. In August 2021, the Company received net proceeds of approximately $1,838,000 from the execution of private placement and stock redemption agreements. These financing activities were offset by a payment of $150,000 on the subordinated note payable, payment of deferred finance charges associated with the closing of the Crestmark and IHC Facilities of approximately $38,000 with the remaining difference used to pay scheduled installments on installment notes and finance leases. We currently have an Intercreditor Revolving Credit Facility with Crestmark Bank for a $10.0 million facility (decreasing to $5.0 million in off-peak season) on eligible accounts receivable under an evergreen arrangement that terminates upon written notice by the Company and is subject to a termination fee if terminated by the Company anytime other than the annual renewal date of June 11. We also have a $2.5 million facility on eligible inventory with Iron Horse Credit that was to expire on June 11, 2022. However, absent any termination notice given by the Company to IHC, the current financing arrangement automatically renewed for another twelve-month term and is subject to a termination fee if terminated by the Company prior to the twelve-month renewal date. On October 14, 2022 the Company entered into the Credit Agreement with Fifth Third, as Lender replacing the Company’s credit facilities with Crestmark Bank and Iron Horse Credit that were terminated by the Company on October 13, 2022 . The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15,000,000 decreased to $7,500,000 during the period of January 1 through July 31 of each year. The Credit Agreement matures on October 14, 2025. As of the date of this filing, there are no amounts due on the new Credit Agreement and we have approximately $4,000,000 currently available from this credit facility based on eligible accounts receivable and inventory. We believe that our cash on hand, working capital (net of cash), cash expected to be generated from our operating forecast, along with the availability of cash from our credit facilities (See Note 7 –FINANCING) will be adequate to meet the Company’s liquidity requirements for at least twelve months from the filing of this report. CRITICAL ACCOUNTING POLICIES The Company’s interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions have not materially changed from those identified in the Company’s 2022 Annual Report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for small reporting companies. 26