Item 7. Management’s Discussion and Analysis
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of the Company’s historical performance and financial condition should be read together with the consolidated
financial statements and related notes in “ Item 8. Financial Statements and Supplemental Data ” of this Report. This discussion
contains forward-looking statements based on the views and beliefs of our management, as well as assumptions and estimates made by our
management. See “ Cautionary Statement Regarding Forward-Looking Information ” above. These statements by their nature are
subject to risks and uncertainties and are influenced by various factors. As a consequence, actual results may differ materially from
those in the forward-looking statements. See “ Item 1A. Risk Factors ” of this report for the discussion of risk factors. For
all periods presented, the consolidated statements of income and consolidated balance sheet data have been adjusted for the reclassification
of discontinued operations information, unless otherwise noted. All references to years relate to the calendar year ended December 31
of the particular year.
54
Our
Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “ MD&A ”) is provided
in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations,
financial condition, and cash flows. MD&A is organized as follows:
●
Plan
of Operations . Summary of the Company’s plan of operations for the next 12 months.
●
Sources
of Revenue . Summary of the main sources of Company revenue during the reported periods.
●
Results
of Operations . An analysis of our financial results comparing the twelve months ended December 31, 2021, and 2020.
●
Liquidity
and Capital Resources . An analysis of changes in our balance sheets and cash flows and discussion of our financial condition.
●
Critical
Accounting Policies and Estimates . Accounting policies and estimates that we believe are important to understanding the assumptions
and judgments incorporated in our reported financial results and forecasts.
●
Recently
Issued Accounting Standards . A summary of recently issued accounting standards affecting the Company, if any.
Plan
of Operations
We
had working capital of $3,448,218 as of December 31, 2021, compared to $8,379,060 as of December 31, 2020. The decrease in working
capital of $4,930,842 was related to write off of other receivables of $1,087,675 and inventory write-offs of $376,348, and
spend on research and development expenses of $1,367,895. With our current cash on hand, expected revenues, and based on our current
average monthly expenses, we do not anticipate the need for additional funding in order to continue our operations at their current
levels, and to pay the costs associated with being a public company, for the next 12 months. We may require additional funding in
the future to expand or complete acquisitions. The sources of this capital are expected to be equity investments and notes payable.
Our plan for the next twelve months is to continue development of the information technology used in the Company subsidiaries, which
it is anticipated that current cash on hand is able to fund and continue providing a quality product with excellent customer service
while also seeking to expand our operations organically or through acquisitions as funding and opportunities arise. As our business
continues to grow, customer feedback will be integral in making small adjustments to improve the product and overall customer
experience. In the event we require additional funding, we plan to raise that through the sale of debt or equity, which may not be
available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to
access additional capital moving forward, it may hurt our ability to grow and to generate future revenues.
Novel
Coronavirus (COVID-19)
In
December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The
World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020, and
a global pandemic on March 11, 2020. In March and April 2020, many U.S. states and local jurisdictions began issuing ‘stay-at-home’
orders. For example, the state of Florida, where the Company’s principal business operations are, issued a ‘stay-at-home’
order effective on April 1, 2020, which remained in place, subject to certain exceptions, through June 2020, when the order was gradually
lifted until September 2020, when the order was completely lifted. The U.S. in general and Florida specifically, has recently
seen decreases in total new COVID-19 infections (after sharp increases in infections in mid-to-late January 2022), as vaccines and boosters
are now widely available and the number of individuals who have received vaccines has increased, and the pool of persons who do not have
natural or vaccine immunity have declined; however, it is unknown whether such decreases will continue, new strains of the virus will
cause current vaccines to be less effective or whether infection numbers will increase, and/or whether the state of Florida, or other
jurisdictions in which we operate, will issue new or expanded ‘stay-at-home’ orders, or how those orders, or others, may
affect our operations or whether such locations will see increases in infection rates, hospitalizations and deaths.
55
To
date, we have been deemed an essential healthcare technology provider under applicable governmental orders based on the critical nature
of the products we offer and the community we serve. As such, our business operations were not materially impacted by the prior restrictions
put in place by the State of Florida to slow the spread of COVID-19, which have since expired. Additionally, as shown in our results
of operations below, we have to date, not experienced any significant material negative impact to our operations, revenues or gross profit
due to COVID-19. We have however been adversely affected by reductions to, and interruptions in, the delivery of supply chain pharmaceuticals
that have had a negative impact on our wholesalers, certain technology outsourcing in India and the Philippines and finding qualified
staff due to the pandemic, which may become more frequent or material in the future. We are carefully managing our inventory supply network
while we work to overcome these hopefully temporary challenges. As a result of the above, the full extent of the impact of COVID-19 on
our business and operations currently cannot be estimated and will depend on a number of factors including the continued scope and duration
of the global pandemic.
Since
the start of the pandemic, we have taken steps to prioritize the health and safety of our employees. The Company’s employees started
working remotely around March 17, 2020, and our corporate office was closed through December 31, 2021. The office reopened for our management
team on January 3, 2022, while our remaining employees will continue to work remotely until further notice.
Currently
we believe that we have sufficient cash on hand and will generate sufficient cash through operations and potential future equity sales,
to support our operations for the foreseeable future; however, we will continue to evaluate our business operations based on new information
as it becomes available and will make changes that we consider necessary in light of any new developments regarding the ongoing pandemic.
We may also raise additional funding in the future through sales of debt or equity.
Sources
of Revenue
We
currently have three main revenue streams:
(1)
Trxade, Inc., our wholly-owned subsidiary, provides an online web-based buying and selling platform for licensed pharmaceutical wholesalers
(“ Suppliers ”) to sell products and services to licensed pharmacies (“ Customers ”). The Company charges
Suppliers a transaction fee, a percentage of the purchase price of the prescription drugs and other products sold through its website
service. The Company holds no inventory and assumes no responsibility for the shipment or delivery of any products or services from our
website. The Company considers itself an agent for this revenue stream and as such, reports revenue as net.
(2)
Integra Pharma Solutions, LLC, our wholly-owned subsidiary, is a licensed wholesaler of brand, generic and non-drug products to Customers.
The Company takes orders for products, creates invoices for each order and recognizes revenue at the time the Customer receives the product.
Customer returns, to date, have not been material.
(3)
Community Specialty Pharmacy, LLC, our wholly-owned subsidiary, is a licensed retail pharmacy. The Company fills prescriptions for drugs
written by a doctor and recognizes revenue at the time the patient confirms delivery of the prescription. Customer returns, to date,
have not been material.
56
Results
of Operations
For
the Year Ended December 31, 2021, compared to the Year Ended December 31, 2020
The
following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the
notes to these statements included in “ Item 8. Financial Statements and Supplemental Data ” of this Report. For all years
presented, the consolidated statements of income and consolidated balance sheet data set forth in this Form 10-K have been adjusted
for the reclassification of discontinued operations information, unless otherwise noted.
Fiscal Year Ended
Percentage
December 31, 2021
December 31, 2020
Change
Change
Revenues
$ 9,889,433
$ 17,122,520
(7,233,087 )
(42.2 )%
Cost of Sales
5,143,468
11,415,198
(6,271,730 )
(54.9 )%
Gross Profit
4,745,965
5,707,322
(961,357 )
(16.8 )%
Operating Expenses:
Loss on Inventory Investment
1,226,426
-
1,226,426
100.0 %
Technology, Research & Development
1,367,895
662,726
705,169
106.4 %
Loss on Impairment of Goodwill
-
725,973
(725,973 )
(100.0 )%
Other General and Administrative
7,053,861
4,962,237
2,091,624
42.2 %
Warrants and Options Expense
390,076
1,863,048
(1,472,972 )
(79.1 )%
Total Operating Expense
10,038,258
8,213,984
1,824,274
22.2 %
Interest Expense
(23,590 )
(29,389 )
5,799
(19.7 )%
Income (Loss) from Operations
$ (5,315,883 )
$ (2,536,051 )
(2,779,832 )
(109.6 )%
Operations
Our
revenues during the years ended December 31, 2021, and 2020 were mainly from the Trxade Inc. platform, Community Specialty Pharmacy and
Integra Pharma Solutions. Revenues decreased by $7,233,087 for the 2021 year, compared to the prior year’s period. In Trxade, Inc.,
revenue decreased by $622,731 or 11% to $4,924,015, compared to $5,546,746, for the years ended December 31, 2021, and 2020, which is
attributable to larger amounts of personal protective equipment (PPE) items being sold on the platform in 2020 than in 2021 as
a result of the COVID-19 Pandemic and more brand pharmaceutical product being sold through the platform at a lower transaction
fee than generic pharmaceutical products with a higher transaction fee. Integra Pharma Solutions revenue decreased by $6,626,506,
which is attributable to non-recurring sales of personal protective equipment (PPE) items that were needed in large quantities in 2020
as a result of the COVID-19 Pandemic, and which line of products the Company did not continue in during 2021. The Trxade, Inc. platform
is a secondary marketplace for pharmaceuticals and medical supplies with consistent growth year over year. We see a trend that whenever
there is a supply shortage on the primary market, the platform being a secondary market, will see increase in traffic or sales. Therefore,
extraordinary events such as COVID-19 will results in larger increases in addition to the normal growth year over year.
Cost
of Sales was 5,143,468 and gross profit was $4,745,965, for the year ended December 31, 2021, compared to $11,415,198 and $5,707,322,
for the year ended December 31, 2020. As sales for PPE decreased in 2021, the cost of sales decreased.
Gross
profit as a percentage of sales was 48% for the year ended December 31, 2021, compared to 33% for the year ended December 31, 2020. The
reason for the increase in gross profit as a percentage of sales was a result of a larger percentage of our revenue being from the Trxade
Platform, which carries no cost of sales in 2021, while in 2020, a larger percentage of our revenue was related to orders of PPE related
product, which include a relatively high cost of sales.
57
Technology,
research and development expenditures increased to $1,367,895 for 2021, compared to $662,726 for 2020, as the Company continued to develop
apps for customers.
General
and administrative expenses (less stock-based compensation expense, technology, research and development, loss on inventory investments)
increased for the year ended December 31, 2021, to $7,053,861, compared to $4,962,237 for the comparable period in 2020. The increase
was mainly due to increases in employee compensation in order to complete in the current challenging labor market, legal expenses
related to historically disclosed lawsuits, and research and development expenses as a result of expanding and developing the newer business
units.
Total
stock-based compensation expense decreased by 79% for the year ended December 31, 2021, compared to the prior year’s period due
to the Company not granting warrants and bonus shares to executives in 2021, as described in greater detail under “ Item 8. Financial Statements and Supplemental Data ”– “ Note 4 – Stockholders’ Equity ”.
We
had $1,226,426 of loss on inventory investment for the year ended December 31, 2021, in connection with our write-down of our the Bonum
Health Hubs after we determined that the Hubs could not be assembled and placed into service to generate revenue without requiring further
investments and our write-down of other receivables related to inventory deposits we made to suppliers that were not refunded to us when
the suppliers could not fulfill our purchase order as described in greater detail under NOTE - 8 OTHER RECEIVABLES .
We
had $725,973 of loss on impairment of goodwill for the year ended December 31, 2020, in connection with the acquisition of
Community Specialty Pharmacy, LLC. In 2020, we performed a qualitative and quantitative assessment to determine the impairment of goodwill
and found that due to the decrease in patient prescription post acquisition and COVID-19 uncertainties that the company may have likely
overpaid for the acquisition and impaired goodwill to zero.
We
had interest expense of $23,590 for the year ended December 31, 2021, compared to interest expense of $29,389 for the year ended December
31, 2020, which decreased due to decreases in the amount of outstanding debt the Company had to $0 from $225,000 at the years ended December
31, 2021, and 2020, respectively.
Net
loss increased by $2,779,832, to a net loss of $5,315,883 for the year ended December 31, 2021, compared to net loss of $2,536,051
for the year ended December 31, 2020, mainly due to the increase in general and administrative expenses associated with research and
development cost for our new business units and write-off of other receivables related to inventory deposits as explained above
(see NOTE - 8 OTHER RECEIVABLES ).
Liquidity
and Capital Resources
Cash
and Cash Equivalents
Cash
and cash equivalents were $3,122,578 at December 31, 2021. We expect that our future available capital resources will consist primarily
of cash generated from operations, remaining cash balances, borrowings, and any additional funds raised through sales of debt and/or
equity.
Liquidity
Cash
and cash equivalents, current assets , current liabilities, short term debt and working capital at the end of each period were
as follows:
December 31, 2021
December 31, 2020
Cash
$ 3,122,578
$ 5,919,578
Current assets (excluding cash)
1,251,666
3,301,720
Current liabilities (excluding short term debt)
926,026
617,238
Short term debt*
-
225,000
Working Capital
3,448,218
8,379,060
*
Short term notes payable – related parties.
58
Our
principal sources of liquidity during the years ended December 31, 2021, and 2020 have been cash provided by operations (internal source),
and during 2020, equity capital and borrowings under various debt arrangements (external source). Our principal uses of cash have been
for operating expenses and research and development of our newer business units. We anticipate these uses will continue to be our principal
uses of cash in the future in addition to any necessary business acquisitions. We currently, do not have any material unused sources
of liquid assets.
Cash
and other current assets decreased by $2,797,000 and $2,050,054 respectively. The decrease in cash and cash equivalents was primarily
due to amounts spent on research and development expenses related to our newer business units. The decrease in our current assets was
primarily due to the write off other receivables related to inventory deposits to suppliers that we did not get refunded when the suppliers
could not fulfill our purchase order (see NOTE - 8 OTHER RECEIVABLES ).
Current
liabilities increased by $83,788. The increase is primarily due to an increase in operating accounts payable not being paid until January
4, 2022, after the account payable balance was recorded for the year ended December 31, 2021.
Liquidity
Outlook cash explanation
Cash
Requirements
Our
primary objectives for 2022 are to continue the development of the Trxade Platform, DelivMeds and Bonum Health and work to increase our
client base and operational revenue. As a result of our cash generated through operations and cash on hand, we believe we have sufficient
cash to support our operations for the foreseeable future. There can be no assurance that our operations will generate significant positive
cash flow, or that additional funds will be available to us, through borrowings or otherwise, on favorable terms if required in the future,
or at all.
We
estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows:
Projected Expenses for 2022
Amount
General and administrative (1)
$ 7,100,000
Total
$ 7,100,000
(1)
Includes
wages and payroll, legal and accounting, marketing, rent and technology development.
We
have historically funded our operations primarily through debt and equity capital raises and operational revenue. In 2021, common stock
was sold for net proceeds of $16,822 in connection with the exercise of warrants and stock options previously awarded. In
2020, common stock was sold for net proceeds of $5,262,068.
We
may require additional funding in the future to expand or complete acquisitions. The sources of this capital are expected to be equity
investments and notes payable. Our plan for the next twelve months is to continue using the same marketing and management strategies
and continue providing a quality product with excellent customer service while also seeking to expand our operations organically or through
acquisitions, as funding and opportunities arise. As our business continues to grow, customer feedback will be integral in making small
adjustments to improve our products and overall customer experience. In the event we require additional funding, we plan to raise that
through the sale of debt or equity, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution
to existing stockholders. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate
future revenues.
We
believe that we have adequate cash to implement our plan to operate a business-to-business web-based marketplace focused on the United
States pharmaceutical industry. Our core service is designed to bring the nation’s independent pharmacies and accredited national
suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.
59
Cash
Flows
The
following table summarizes our Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2021, and 2020:
December 31, 2021
December 31, 2020
Change
Percent Change
Net Loss
$ (5,315,883 )
$ (2,536,051 )
$ (2,716,347 )
(107.11 )%
Net Cash Provided by (used in):
Operating Activities
(2,566,226 )
(2,214,786 )
(409,958 )
(18.51 )%
Investing Activities
(22,596 )
(37,505 )
294,747
195.78 %
Financing Activities
(208,178 )
5,300,175
(5,508,353 )
(103.93 )%
Net increase (decrease) in cash
$ (2,797,000 )
$ 3,047,884
$ (5,844,885 )
$ (191.77 )%
Cash used
by operations for the fiscal year ended December 31, 2021, was $2,566,226. This compared to $2,214,786 of cash used by operating activities
for the fiscal year ended December 31, 2020. The increase was primarily due to spending for research & development related to the
development MedCheks Health Passport Application, the development of DelivMeds Application, legal expenses related to outstanding lawsuits,
repayment of related party loan, and employee payroll. For additional information refer to Notes to Consolidated Financial Statements.
Cash
used by investing activities for the fiscal year ended December 31, 2021, was $22,596. This compared to $37,505 of cash used in investing
activities for the fiscal year ended 2020. In 2021, the cash was used to purchase a single delivery vehicle for Community Specialty Pharmacy,
LLC. In 2020, the cash was used to purchase a single forklift to the Integra Pharmacy Solution, LLC warehouse.
Cash
used by financing activities for the fiscal year ended December 31, 2021, was $208,178, which $225,000 was used to repay a related party
loan and $16,822 was received from the exercise of warrants and options. This compared to $5,994,424 of proceeds and $5,300,175 of cash
to the Company after expenses, and the exercise of warrants and options which generated cash of $38,107 for the fiscal year ended December
31, 2020.
Known
Contractual and Other Obligations & Commitments
In
addition to our long-term debt obligations to our various lenders, we have certain other known contractual working capital obligations,
including contractual purchase obligations related to various supply contracts, lease obligations, and other liabilities.
60
The
following table summarizes our contractual obligations as of December 31, 2021:
Payments due by Period
Contractual Obligations
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Operating lease obligations
1,629,125
294,932
907,746
320,916
105,531
Total Contractual obligations
$ 1,629,125
294,932
907,746
320,916
105,531
Off-Balance
Sheet Arrangements
We
had no outstanding off-balance sheet arrangements as of December 31, 2021.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses for each
period. We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters that were uncertain
at the time the accounting estimate was made and if different estimates that we reasonable could have used in the current period, or
changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial
condition or results from operations. Below are the estimates that we believe are critical to the understanding of our operation results
and financial condition. Other accounting policies are described in Financial NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .
Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Allowance
for Doubtful Accounts
We
provide short-term credit and other customer financing arrangements to customers who purchase our products. We estimate the receivables
for which we do not expect full collection based on historical collection rates and specific knowledge regarding the current creditworthiness
of our customers and record an allowance in our consolidated financial statements for these amounts.
We
consider historical experience, the current economic environment, customer credit ratings or bankruptcies, and reasonable and supportable
forecasts to develop its allowance for doubtful accounts. Management reviews these factors quarterly to determine if any adjustments
are needed to the allowance.
Reserve
methodologies are assessed annually based on historical losses and economic, business and market trends. In addition, reserves are reviewed
quarterly and updated if unusual circumstances or trends are present. We believe the reserves maintained and expenses recorded in 2021
are appropriate and consistent in the context of historical methodologies employed, as well as assessment of trends currently available.
Allowance
for Doubtful Accounts
In
determining whether an inventory valuation allowance is required, we consider various factors including estimated quantities of slow-moving
inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. Shifts in market trends and conditions,
changes in customer preferences due to the introduction of generic drugs or new pharmaceutical products or the loss of one or more significant
customers are factors that could affect the value of our inventories. We write down inventories which are considered excess and obsolete
as a results of these revies. These factors could make our estimate of inventory valuation differ from actual results.
Business
Combinations
We
account for business combinations using the acquisition method of accounting whereby the identifiable assets and liabilities of the acquired
business, as well as any noncontrolling interest in the acquired business, are recorded at their estimated fair value as the date that
we obtain control of the acquired business. Any purchase consideration in excess of the fair values of the net assets acquired is recorded
as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.
Several
valuation methods may be used to determine the fair value of the assets acquired and liabilities assumed. For intangible assets, we typically
use a method that is a form of variation of the income approach, whereby a forecast of future cash flows attributable to the asset are
discounted to present value using a risk-adjusted discount rate. Some of the more significant estimates and assumptions inherent in the
income approach include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent
in the future cash flows and the assessment of the asset’s expected useful life.
61
Goodwill
We
perform an impairment test on goodwill balances annually in the third quarter and more frequently if indicators for potential impairment
exist. Indicators that are considered include significant declines in performance relative to expected operating results, significant
changes in the use of the assets, significant negative industry or economic trends, or a significant decline in the Company’s stock
price and/or market capitalization for a sustained period of time.
Goodwill
impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or a component, one level
below our operating segment, for which discrete financial information is available and segment management regularly reviews the operating
results of the reporting unit.
To
estimate the fair value of our reporting units, we generally use a combination of the market approach and the income approach. Under
the market approach, we estimate fair value by comparing the business to similar business, or guideline companies whose securities are
actively traded in public markets. Under the income approach, we use a discounted cash flow (“DCF”) model in which cash flows
anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using
an appropriate rate that is commensurate with the risk inherent within the reporting unit. In addition, we compare the aggregate of the
reporting units’ fair values to our market capitalization as further corroboration of the fair values.
Estimates
of fair value result from a complex series of judgements about future events and uncertainties and rely heavily on estimates and assumptions
at a point in time. Judgements made in determining an estimate of fair value may materially impact our results of operations. The valuations
are based on information available as of the impairment testing date and are based on expectations and assumptions that have been deemed
reasonably by management. Any material changes in key assumptions, including failure to meet business plans, negative changes in government
reimbursement rates, deterioration in the U.S. and global financial markets, an increase in interest rates or an increase in the cost
of equity financing by market participants within the industry or other unanticipated events and circumstances, may decrease the projected
cash flows or increase the discount rate and could potentially result in an impairment charge. Under the market approach, significant
estimates and assumptions also include the selection of appropriate guideline companies and the determination of appropriate valuation
multiples to apply to the reporting unit. Under the income approach, significant estimates and assumptions also include the determination
of discount rates. The discount rates represent the weight-average cost of capital measuring the reporting unit’s cost of debt
and equity financing, which are weighted by the percentage of debt and percentage of equity in a company’s target capital structure.
Included in the estimate of the weight-average cost of capital is the assumption of an unsystematic risk premium to address the incremental
uncertainty related to the reporting units’ future cash flow projections. An increase in the unsystematic risk premium increases
the discount rate.
Valuation
of Equity Method Investments
We
evaluate our investments for other-than-temporary impairments when circumstances indicate those assets may be impaired. When the decline
in value is deemed to be other than temporary, an impairment is recognized to the extent that the fair value is less than the
carrying value of the investment. We consider various factors in determining whether a loss in value of investment is other than temporary
including: the length of time and the extent to which the fair value has been below the cost, the financial condition of the investees,
and our intent and ability to retain the investment for a period of time sufficient to allow for recovery of value. Management makes
certain judgments and estimates in its assessment including but not limited to: identifying if circumstances indicate a decline in value
is other than temporary, expectations about the business operations of investees, as well as industry, financial, and market factors.
Any significant changes in assumptions or judgments in assessing impairments could result in an impairment charge.
62
Income
Taxes
Our
income tax expenses, and deferred tax assets and liabilities reflect management’s best assessment of estimated current and future
taxes to be paid. We are subject to income taxes in the U.S. Significant judgments and estimates are required in determining the
consolidated income tax provision and in evaluating income tax uncertainties. We review our tax positions at the end of each quarter
and adjust the balances as new information becomes available.
Deferred
income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating
our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating
results, the existence of cumulative net operating losses in the most recent years, and our forecast of future taxable income. In estimating
the future taxable income, we develop assumptions including the amount of future federal operating income, the reversal of temporary
differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about
the forecasts of future taxable income and are consistent with the plans and estimate we use to manage the underlying businesses.
Changes
in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Should tax laws change, our tax expense
and cash flows could be materially impacted.
Loss
Contingencies
We
may be subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations
relating to laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probably
and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of
a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a
range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third
party that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over
many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the
likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a material loss is reasonably
possible or probably, but a reasonable estimate cannot be made, disclosure of the proceeding is provided. Legal fees are recognized as
incurred when the legal services are provided.
We
review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable
estimate of the potential loss or range of the loss can be made. As discussed above, development of a meaningful estimate of loss or
a range of potential loss is complex when the outcome is directly dependent on future negotiations with our decision by third parties,
such as regulatory agencies, the court system and other interest parties.
Stock-Based
Compensation
We
account for stock-based compensation to employees in accordance with ASC 718, “ Compensation-Stock Compensation ”. ASC
718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock
options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is
required to provide service in exchange for the award, usually the vesting period. Stock option forfeitures are recognized at the date
of employee termination. Effective January 1, 2019, the Company adopted ASU 2018-07 for the accounting of share-based payments granted
to non-employees for goods and services.
Recently
Issued Accounting Standards
For
more information on recently issued accounting standards, see “ Note 2 - Summary of Significant Accounting Policies ” ,
to the Notes to Consolidated Financial Statements included herein under “ Item 8. Financial Statements and Supplemental Data ”.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant
to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as
it is a “ smaller reporting company, ” as defined by Rule 229.10(f)(1).
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