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 years ended December 31, 2023, and 2022.
●
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 a working capital deficit of $8,803,293 as of December 31, 2023, compared to working capital deficit of $53,668 as of December
31, 2022. The decrease in working capital of $8,749,625 is related to decreases in cash and increases in liabilities. Below are
reasons for the decrease in working capital.
●
Cash
decreased approximately $943,000 from December 31, 2022 to December 31, 2023. The reasons for the
decrease are as follows:
○
$250,000
repayments of debt, net of new debt issuances; and
○
$733,694
paid for interest expense related to the sale of future accounts receivable.
●
Increases
in current liabilities of approximately $9,409,564 from December 31, 2022 to December 31, 2023 were driven by the following main
factors:
○
$1,554,070
increase in accounts payable balance as of December 31, 2023 compared to the comparable period;
○
$1,138,310
increase in the balance due on the sale of future accounts receivable as of December 31, 2023 compared to the comparable period;
○
$6,363,333
increase in the current portion of notes payable balance; and a
○
$350,000
increase in purchase price payable balance as of December 31, 2023 compared to the comparable period.
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 may seek 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.
46
Sources
of Revenue
During
2023 we had four 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. Subsequent to December 31,
2023, we divested substantially all of our assets previously owned and operated by Trxade, Inc.
(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. In August 2023 we sold our entire interest in Community Specialty Pharmacy, LLC.
(4)
The Urgent Company, Inc., our wholly-owned subsidiary, is a retail and distribution provider of prepackaged, prepared foods. Subsequent to December 31, 2023, we divested our interest in The Urgent
Company, LLC.
Results
of Operations
For
the Year Ended December 31, 2023, compared to the Year Ended December 31, 2022
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
2023
2022
Change
Change
Revenues
$ 8,272,214
$ 10,250,168
(1,977,954 )
(19.3 %)
Cost of sales
5,673,957
4,730,897
943,060
19.9 %
Gross profit
2,598,257
5,519,271
(2,921,014 )
(52.9 %)
Operating expenses:
Loss on inventory investment
-
875,250
(875,250 )
(100 %)
Technology, research & development
1,376,908
993,185
383,723
38.6 %
Wages and salary
2,698,178
3,581,089
(882,911 )
(24.7 %)
Accounting and legal
1,534,377
829,751
704,626
84.9 %
Professional fees
1,466,567
466,735
999,832
214.2 %
Other general and administrative (less stock-based compensation expense)
2,498,123
1,355,946
1,142,177
84.2 %
Warrants and options expense
287,510
333,284
(45,774 )
(13.7 %)
Total operating expenses
9,861,663
8,435,240
1,426,423
16.9 %
Change in fair value of warrant liability
(148,420 )
825,544
(973,964 )
(118.0 %)
Interest, net
(1,194,148 )
(315,217 )
(878,931 )
278.8 %
Goodwill impairment
(5,129,115 )
-
(5,129,115 )
(100.0 %)
Gain on disposal of asset
-
2,200
(2,200 )
(100.0 %)
Other income
14,543
-
14,543
100.0 %
Net loss from operations
$ (13,720,546 )
$ (2,403,442 )
$ (11,317,104 )
470.9 %
Loss on discontinued operations
(4,123,028 )
(1,506,426 )
(2,616,602 )
173.7 %
Net loss attributable to TRxADE Health, Inc.
(17,843,574 )
(3,472,099 )
(14,371,475 )
413.9 %
Net loss attributable to non-controlling interests
-
(437,769 )
437,769
(100.0 %)
47
Operations
Our
revenues during the years ended December 31, 2023, and 2022 were mainly from the Trxade Inc. platform, Integra Pharma Solutions, and The Urgent Company. Revenues decreased $1,977,954 for fiscal year 2023, compared to the prior year’s
revenue of $10,250,168. Trxade, Inc., revenue increased by $852,933 or 16% to $6,200,334, compared to $5,347,401, for the years ended
December 31, 2023, and 2022, which is attributable to a 16% increase in sales volume on the platform in 2023. Integra Pharma Solutions’
revenue decreased by $3,390,237, or 71%, which is attributable to decreased sales volume and pricing changes. The Trxade, Inc. platform
is a secondary marketplace for pharmaceuticals and medical supplies with consistent growth year over year.
Cost
of sales was $5,673,957 and gross profit was $2,598,257, for the year ended December 31, 2023, compared to $4,730,897 and
$5,519,271, respectively, for the year ended December 31, 2022. The increase in cost of sales is attributed to the inventory costs
and inventory write-downs associated with The Urgent Company.
Gross
profit as a percentage of sales was 31.4% for the year ended December 31, 2023, compared to 53.8% for the year ended December 31, 2022.
The reason for the decrease in gross profit as a percentage of sales was a result of increased inventory and cost of sales associated
with The Urgent Company.
Technology,
research and development expenditures increased to $1,376,908 for the year ended December 31, 2023, compared to $993,185 for the
year ended December 31, 2022, as the Company continued to develop apps for customers and make improvements to our platform
technology.
Professional
fees increased for the year ended December 31, 2023 by $999,832 to $1,466,567 compared to $466,735 for the year ended December 31,
2022. The increase in professional fees for the year ended December 31, 2023 related to the merger with Superlatus and purchase of
The Urgent Company.
General and
administrative expenses (less stock-based compensation expense) increased for the year ended December 31, 2023 to $2,498,123
compared to $1,355,946 for the year ended December 31, 2022. The increase is largely driven by amortization expense related to
intangible assets acquired through the Sapientia Technologies acquisition.
Total
stock-based compensation expense decreased by 13.7% or $45,774 to $287,510 from $333,284 for the year ended December 31, 2023, compared
to the prior year’s period. The decrease was due to less common stock issued for services during the year ended December 31, 2023 compared to the year ended December
31, 2022.
The
Company recognized a loss on inventory investment of $875,520 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.
48
The
Company had interest expense, net, of $1,194,148 for the year ended December 31, 2023, compared to interest expense of $315,217 for the
year ended December 31, 2022. The increased interest expense is driven by the increases in the contingent funding liability due to additional
accounts receivable advances during the year ended December 31, 2023.
During
the year ended December 31, 2023, the Company recognized a loss from the change in the fair value of warrants of $148,420. During
the year ended December 31, 2022, the Company recognized a gain from the change in the fair value of warrants of $825,544.
The Company recognized a goodwill impairment loss of $5,129,115 for the year ended December 31, 2023. The goodwill resulted from the
acquisition of Superlatus and was subsequently determined to be impaired based on the facts and circumstances surrounding the sale of
Superlatus on March 5, 2024.
Net
loss from operations increased $11,317,104 to a net loss of $13,720,546 for the year ended December 31, 2023, compared to a net loss
of $2,403,442 for the year ended December 31, 2022. The increase in net loss is mainly due to the write-down of inventory due to
spoilage, increases in spending related to the merger transaction with Superlatus and purchase of TUC and goodwill impairment charges.
Net
loss from discontinued operations increased $2,616,602 to a net loss of $4,123,028 for the year ended December 31, 2023, compared to
a net loss from discontinued operations of $1,506,426 for the year ended December 31, 2022.
Liquidity
and Capital Resources
Cash
and Cash Equivalents
Cash
and cash equivalents were $151,908 as of December 31, 2023. We expect that our future available capital resources will consist primarily
of cash generated from operations, remaining cash balances, proceeds from potential asset divestitures or strategic transactions, 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,
2023
December 31,
2022
Cash
$ 151,908
$ 1,094,894
Current assets (excluding cash)
2,601,154
998,229
Current liabilities (excluding short term debt)
5,026,355
1,980,124
Short term debt
6,530,000
166,667
Working deficit
(8,803,293 )
(53,668 )
Our
principal sources of liquidity during the years ended December 31, 2023 and 2022 have been cash provided by operations (internal source). During
the year ended December 31, 2023, sales of future receivables provided a principal source of liquidity. During the year ended December 31, 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
decreased by $942,986 and other current assets increased by $1,602,925. The decrease in cash was primarily due to interest expense
associated with the sale of future receivables and net repayments of debt as well as the professional fees and accounting and legal expenses associated with the merger with Superlatus and
the acquisition of The Urgent Company. The increase in other current assets was primarily due
to a note receivable and other receivables from the sale of APS and CSP.
49
Current liabilities
(excluding short term debt) increased by $3,046,231 from $1,980,124 to $5,026,355 for the year ended December 31, 2023. The
increase is primarily due to an increase in accounts payable and contingent
funding liabilities from the sale of future receivables.
Liquidity
Outlook cash explanation
Cash
Requirements
Our
primary objectives for 2024 are to continue the development and operational expansion of Integra Pharma Solutions and to explore
strategic transactions, relationships or acquisitions to grow or operations whether in our legacy industry or outside of that
general industry. 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 2024
Amount
General and administrative (1)
$ 4,800,000
Total
$ 4,800,000
(1)
Includes
wages and payroll, legal and accounting, marketing, rent and technology development.
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
to promote our Integra Pharma Solutions assets and operations, exploring strategic transactions involving our corporate assets, 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, 2023, and 2022:
December 31,
2023
December 31,
2022
Change
Percent Change
Net loss from continuing operations
$ (13,720,546 )
$ (2,403,442 )
$ (11,317,104 )
470.9 %
Net cash provided by (used in):
Net cash (used in) operating activities from continuing operations
(1,592,424 )
(199,020 )
(1,393,404 )
700.1 %
Net cash (used in) operating activities from discontinued operations
(481,177 )
(1,365,648 )
884,471
(64.8 %)
Operating activities
(2,073,601 )
(1,564,668 )
(508,933 )
32.5 %
Net cash (used in) investing activities from continuing operations
(344,454 )
(427,845 )
83,391
(19.5 %)
Net cash provided by (used in) investing activities from discontinued operations
68,737
-
68,737
100.0 %
Investing activities
(275,717 )
(427,845 )
152,128
(35.6 %)
Net cash provided by (used in) financing activities from continuing operations
1,906,332
(35,171 )
1,941,503
(5,520.2 %)
Net cash provided by (used in) financing activities from discontinued operations
(500,000 )
-
(500,000 )
100.0 %
Financing activities
1,406,332
(35,171 )
1,441,503
(4,098.6 %)
Net change in cash
$ (942,986 )
$ (2,027,684 )
$ 1,084,698
(53.5 %)
50
Cash
used in operations for the fiscal year ended December 31, 2023 was $2,073,601. This compared to $1,564,668 of cash used in
operating activities for the fiscal year ended December 31, 2022. The increase in cash used in operations was mainly due to
increased professional fees and accounting and legal expense for the comparable period as a result of the merger with Superlatus and
the purchase of The Urgent Company, partially offset by decreased wages and salary expense due to the departure of two members of
management during 2023.
Cash
used in investing activities for the year ended December 31, 2023 was $275,717. This compared to $427,845 of cash used in investing
activities for the year ended December 31, 2022. In 2023, the net cash used mainly related to net cash exchanged in acquisition and
disposals. During the year ended December 31, 2022, the cash was used for an investment in capitalized software for
Delivmeds.
Cash
provided by financing activities for the year ended December 31, 2023 was $1,406,332 and cash used in financing activities
for the year ended December 31, 2022, was $35,171. The increase was mainly due to proceeds from the sale of future receivables.
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, 2023:
Payments due by Period
Contractual Obligations
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Operating lease obligations
651,528
187,935
356,634
106,959
-
Total Contractual obligations
$ 651,528
187,935
356,634
106,959
-
Off-Balance
Sheet Arrangements
We
had no outstanding off-balance sheet arrangements as of December 31, 2023.
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.
51
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 during the year ended December 31, 2023
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.
52
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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