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.
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, 2022, and 2021.
●
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 negative working capital of $53,668 as of December 31, 2022, compared to working capital of $3,448,218 as of December 31, 2021. The
decrease in working capital of $3,501,886 is related to decreases in cash and increases in liabilities. Below are reasons
for the decrease in working capital.
●
Cash decreased
approximately $2.0 million for the periods ending December 31, 2022 and December 31, 2021. The reasons for the decrease are as follows:
○
$275,000 cash
investment into SOSRx joint venture in February of 2022;
○
$225,000 settlement paid
related to the legal matter of Jain et. al. in February of 2022;
○
$875,000 cash paid for
COVID-19 Test Kits in May of 2022,
○
$315,464 paid
for interest expense related to the sale of future accounts receivable in June of 2022 and again in September of 2022
●
Increases in
current liabilities of approximately $1.2 million from the periods ending December 31, 2021 to 2022 were driven by the
following main factors:
○
$588,533 warrant
liability related to Private Placement Warrants;
○
$108,036 balance due at
December 31, 2022 on the sale of future accounts receivable which was paid in full in January 2023;
○
$166,667 note payable balance
due to Exchange Health related to the SOSRx joint venture, and a
○
$252,125 increase in accounts
payable balance at December 31, 2022 compared to the comparable period.
55
With
our current cash on hand, expected revenues, and based on our current average monthly expenses, we 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. As our business continues to grow, customer feedback will be integral in making small adjustments
to improve the product and overall customer experience. We will 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.
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 has 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.
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.
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.
56
(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.
Results
of Operations
For
the Year Ended December 31, 2022, compared to the Year Ended December 31, 2021
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 December 31,
Percentage
2022
2021
Change
Change
Revenues
$ 11,448,265
$ 9,889,433
1,558,832
15.8 %
Cost of sales
5,997,049
5,143,468
853,581
16.6 %
Gross profit
5,451,216
4,745,965
705,251
14.9 %
Operating expenses:
Loss on inventory investment
875,250
1,226,426
(351,176 )
(29 %)
Impairment of intangible asset
792,500
-
792,500
100 %
Technology, research & development
1,160,856
899,705
261,151
29.0 %
Wages and salary
3,941,475
3,846,522
94,953
2.5 %
Accounting and legal
830,355
697,825
132,530
19.0 %
Professional fees
519,642
1,094,917
(575,275 )
(52.5 %)
Other general and administrative (less stock-based compensation expense)
1,422,149
1,904,427
(482,278 )
(25.3 %)
Warrants and options expense
333,284
368,436
(35,152 )
(9.5 %)
Total operating expenses
9,875,511
10,038,258
(162,747 )
(1.6 %)
Change in fair value of warrant liability
825,544
-
825,544
100 %
Interest, net
(315,217 )
(23,590 )
(291,627 )
1236.2 %
Gain on disposal of asset
4,100
-
4,100
100 %
Income from operations
$ (3,909,868 )
$ (5,315,883 )
$ 1,406,015
26.45 %
Net loss attributable to TRxADE Health, Inc.
(3,472,099 )
(5,315,883 )
1,843,784
(35 %)
Net loss attributable to non-controlling interests
(437,769 )
-
(437,769 )
100.00 %
57
Operations
Our
revenues during the years ended December 31, 2022, and 2021 were mainly from the Trxade Inc. platform, Community Specialty Pharmacy and
Integra Pharma Solutions. Revenues increased by $1,558,832 for the 2022 year, compared to the prior year’s revenue of $9,889,433.
Trxade, Inc., revenue increased by $511,799 or 10% to $5,435,814, compared to $4,924,015, for the years ended December 31, 2022, and
2021, which is attributable to a 21% increase in sales volume on the platform in 2022. Integra Pharma Solutions’ revenue increased
by $1,503,506, or 46%, which is attributable to increased sales volume and pricing changes. 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 an increase in traffic or sales.
Cost
of Sales was $5,997,049 and gross profit was $5,451,216, for the year ended December 31, 2022, compared to 5,143,468 and $4,745,965,
for the year ended December 31, 2021. The increase in cost of sales is attributed to the increased sales volume of Integra Pharma Solutions,
Trxade, Inc does not have cost of sales as it is a software platform. However, our Integra Pharma Solutions is a wholesale business with
variable cost of sales that will increase as sales volume increases.
Gross
profit as a percentage of sales was 47.6% for the year ended December 31, 2022, compared to 48% for the year ended December 31, 2021.
The reason for the decrease in gross profit as a percentage of sales was a result of increased sales volume of Integra Pharma Solutions
and the cost of sales associated with this line of business compared to our Trxade, Inc platform revenue that does not have cost of sales.
Technology,
research and development expenditures decreased to $1,160,856 for 2022, compared to $1,367,895 for 2021, as the Company continued to develop
apps for customers and make improvements to our platform technology.
Professional
fees decreased for Fiscal 2022 by $575,275 to $519,642 compared to $1,094,917 for Fiscal 2021. The decrease
in professional fees for the year ended December 31, 2022 related to lower board fee expenses, research and development consulting, and
contractor expense.
General
and administrative expenses (less stock-based compensation expense) decreased for the year ended December 31, 2022, to $1,422,149 compared
to $1,904,427 for the comparable period in 2021. The decrease is largely driven by approximately $247,000 of bad debt expense related
to other receivables from GSG. In June 2022, the Company received a $100,000 payment from GSG and recorded a credit to Bad Debt Expense,
additional monthly payments made by GSG were also recorded as a credit to the Bad Debt Expense less applicable interest and recovered
legal fees. In the three-month period ended September 30,2021 there was $630,000 of bad debt expense recorded related to the same GSG
receivable. These events decreased general and administrative expenses in 2022 and significantly increased these expenses in 2021.
Total
stock-based compensation expense decreased by 9.5% or $35,152 to $333,284 from $368,436 for the year ended December 31, 2022, compared
to the prior year’s period. The decrease was due to no stock options being issued in 2022.
We
had $875,520 of loss on inventory investment for the year ended December 31, 2022, in connection with COVID-19 test kits that were purchased
and could not be resold due to issues with the FDA. We had a loss on inventory investment of $1,225,141 in 2021 in connection with inventory
deposits made to vendors that were not refunded to us when the suppliers could not fulfill our purchase orders, as described in greater
detail under NOTE - 8 OTHER RECEIVABLES . At June 30, 2021 the Company recorded a loss on inventory investments in the amount of $1,081,250
for Integra Pharma Solutions and $143,891 for Bonum Health related to the Bonum Health Hubs after we determined that the Hubs could be
assembled and placed into service due to the COVID-19 pandemic.
We
had $792,000 of loss on impairment of intangible assets for the year ended December 31, 2022, in connection with the SOSRx, LLC joint
venture agreement. In 2022, we performed a qualitative and quantitative assessment to determine the impairment of the intangible asset
contributed in the JV agreement for SOSRx and found that due to the lack of revenue generated from these assets that they were determined
to be impaired and that the company needed to write the asset down to zero.
58
We
had interest expense, net, of $315,217 for the year ended December 31, 2022, compared to interest expense of $23,590 for the year ended
December 31, 2021, increased interest expense is driven by two funding agreements where the Company agreed to sell future receivables.
As part of the agreement the Company paid weekly interest.
Change
in warrant liability due to fair value remeasurement at December 31, 2022 is recorded as a positive adjustment in the amount of $825,544.
Net
loss decreased by $1,406,015, to a net loss of $3,909,868 for the year ended December 31, 2022, compared to net loss of $5,315,883 for
the year ended December 31, 2021, this variance is driven by several key factors, as listed below.
●
Increase in
revenue of approximately $1.6 million,
●
Increased gross profit
of approximately $0.7 million,
●
Decreased year over year
loses on inventory investments of approximately $0.4 million,
●
Decreased general and administrative
expenses of approximately $0.5 million,
●
Decreased professional
fees of approximately $0.6 million; and
●
A positive adjustment related
to the remeasurement of the fair value of warrant liability – approximately $0.8 million,
Liquidity
and Capital Resources
Cash
and Cash Equivalents
Cash
and cash equivalents were $1,133,633 at December 31, 2022. 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,
current assets , current liabilities, short term debt and working capital at the end of each period were as follows:
December 31, 2022
December 31, 2021
Cash
$ 1,133,633
$ 3,122,578
Current assets (excluding cash)
959,490
1,251,666
Current liabilities (excluding short term debt)
1,980,124
926,026
Short term debt*
166,667
-
Working deficit
(53,668 )
3,448,218
*
Short term notes payable – related parties.
Our
principal sources of liquidity during Fiscal 2022 and Fiscal 2021 have been cash provided by operations (internal source). During Fiscal
2022, equity capital and borrowings under various debt arrangements (external source) and a stock placement deal of 920,000
shares. 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 $1,988,945 and $292,176 respectively. The decrease in cash 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 of $875,000 related to inventory deposits to suppliers that we did not get refunded when the inventory could not be
sold.
59
Current
liabilities increased by $1,220,765 from $926,026 to $2,146,791 for the year ended December 31, 2022. The increase is primarily due
to an increase in notes payable that was related to the joint venture with SOSRx, two accounts receivable advances with Agile that
will be repaid by the end of January 2023, and $588,533 warrant liability related to Private Placement Warrants.
Liquidity
Outlook cash explanation
Cash
Requirements
Our
primary objectives for 2023 are to continue the development of the Trxade Platform, Integra Pharma Solutions, and Bonum Health and work
to increase our client base and operational revenue. We have limited financial resources and we will need to raise additional capital
or secure debt funding to support ongoing operations. 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 2023
Amount
General and administrative (1)
$ 6,000,000
Total
$ 6,000,000
(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 2022, common stock
was sold for net proceeds of approximately $1.3 million in connection with the exercise of warrants and the stock placement of 920,000
shares with a purchase price of $1.15 per share.
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.
Cash
Flows
The
following table summarizes our Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2022, and 2021:
December 31, 2022
December 31, 2021
Change
Percent Change
Net Loss
$ (3,909,868 )
$ (5,315,883 )
$ 1,406,015
26 %
Net Cash Provided by (used in):
Operating Activities
(1,525,929 )
(2,566,226 )
1,040,297
41 %
Investing Activities
(427,845 )
(22,596 )
(405,249 )
(1793 )%
Financing Activities
(35,171 )
(208,178 )
173,007
(83 )%
Net increase (decrease) in cash
$ (1,988,945 )
$ (2,797,000 )
$ 808,055
$ 29 %
60
Cash
used by operations for the fiscal year ended December 31, 2022, was $1,525,929. This compared to $2,566,226 of cash used by operating
activities for the fiscal year ended December 31, 2021. The decrease was due to various things that include the recovery of bad debt
related to the GSG settlement of approximately $0.25 million and a $1.4 million decrease in net losses for December 31, 2022 compared
to 2021.
Cash
used by investing activities for the fiscal year ended December 31, 2022, was $427,845. This compared to $22,596 of cash used in investing
activities for the fiscal year ended 2021. In 2022, the cash was used for an investment in capitalized software for Delivmeds. In 2021,
the cash was used to purchase a single delivery vehicle for Community Specialty Pharmacy, LLC.
Cash
used by financing activities for the fiscal year ended December 31, 2022, was $35,171, which $716,964 was used to repay two accounts
receivable advances and $1,545,855 was received from the exercise of warrants and a stock placement. This compared to $208,178
of cash used by operating activities for the fiscal year ended December 31, 2021. In 2021, the cash was used to repay a short-term related
party promissory note of $225,000 offset by exercise of stock warrants and options of $16,822.
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.
The
following table summarizes our contractual obligations as of December 31, 2022:
Payments due by Period
Contractual Obligations
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Operating lease obligations
1,347,045
296,539
619,774
323,772
106,959
Total Contractual obligations
$ 1,347,045
296,539
619,774
323,772
106,959
Off-Balance
Sheet Arrangements
We
had no outstanding off-balance sheet arrangements as of December 31, 2022.
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 reasonably 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.
61
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 2022
are appropriate and consistent in the context of historical methodologies employed, as well as assessment of trends currently available.
Inventory
Costs
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 result of these reviews. 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.
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
reasonable 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.
62
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.
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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