VerifyMe, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Management’s Discussion and Analysis of Financial Condition and Results of Operation and other parts of this Report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Report are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. The following should be read in conjunction with our annual financial statements contained elsewhere in this Report. 22 Table of Contents Overview VerifyMe, Inc. (“VerifyMe”) together with its subsidiaries PeriShip Global, LLC (“PeriShip Global”) and Trust Codes Global Limited (“Trust Codes Global”), (together the “Company,” “we,” “us,” or “our”), is a software driven predictive analytics logistics provider of high-touch end-to-end logistics management, which represents most of our current revenue stream. In addition, VerifyMe technologies provide product traceability, brand protections services, and consumer engagement solutions. Our operations are split into two segments: PeriShip Global Solutions and VerifyMe Solutions. Through our PeriShip Global Solutions segment we provide a value-added service for time and temperature sensitive parcel management driven by a proprietary software platform that provides predictive analytics from key metrics such as flight-tracking, weather, and traffic, all delivered to customers via a secure portal. The portal provides real-time visibility into shipment transit and last-mile events, with dynamic dashboards. All aspects of the of the shipping journey is managed by a dedicated call center. Using our proprietary logistics solution, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. Through our VerifyMe Solutions segment, our technologies provide unit level traceability, brand protection, and consumer engagement solutions allowing brand owners to gather business intelligence, cross-sell products, monitor product diversion through the supply chain and build brand loyalty through interaction utilizing our unique dynamic codes which are read by consumers with their smart phones. Further information regarding our business segments is discussed below: PeriShip Global Solutions: The PeriShip Global Solutions segment specializes in predictive analytics through its proprietary software platform for optimizing delivery of time and temperature sensitive perishable products. We manage complex industry-specific shipping logistic processes that require critical time, temperature control and handling to prevent spoilage and extended delivery times. Utilizing predictive analytics from multiple data sources including weather, traffic, flight data, major carrier feeds, and time of day data, we provide our clients an end-to-end vertical approach for their most critical service delivery needs. Using the IT platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. Through our proprietary PeriTrack ® customer dashboard, we provide an integrated tool that gives our customers an in-depth look at their shipping activities and allows them access to critical information in support of the specific needs of the supply chain stakeholders. In addition, we provide proactive alerts to address on-coming weather issues to make changes in scheduling to meet critical deadlines for shipments. We offer post-delivery services such as customized reporting for trend analysis, system performance reports, power outage maps, and other tailored reports. PeriShip Global generates revenue from three business service models. · Proactive Service – PeriShip Global clients pay us directly for carrier service coupled with our proactive logistics assistance. · Direct Premium Service –PeriShip Global clients pay us directly for carrier service coupled with our complete white-glove shipping monitoring and predictive analytics service. This service includes the customer web portal access, weather monitoring, temperature control, full call center support and last mile resolution. · Indirect Premium Service – Our carrier partner also offers a “white label” version of our Premium Service to its customers and pays us a fixed contractual fee. PeriShip Service Products: The PeriShip Global Solutions segment includes the following bundled services as part of our service offerings to our customers: · PeriTrack ® : Our proprietary PeriTrack® customer dashboard was developed utilizing our extensive logistics operational knowledge. This integrated web portal tool gives our customers an in-depth look at their shipping activities and alerts based on real-time data. The PeriTrack® dashboard was designed to provide critical information in support of the specific needs of supply chain stakeholders and gives our customer resolution specialists a 360° view of shipping activity. PeriTrack® features tools tailored for shippers of perishable goods, which includes the In-Transit Shipment Tracker. This tool provides details on the unique shipper’s in-transit shipments, with the ability to select and analyze data on individual shipments. · Call Center Service : PeriShip Global has assembled a team of customer resolution specialists based in the U.S. This human intervention service team resolves shipping problems on behalf of our customers. The call center acts as a help desk and monitors shipping to delivery for our customers. · Pre-Transit Service : PeriShip Global helps clients prepare their products for shipments by advising clients on packaging requirements for various types of perishable products. Each product type requires its own particular packaging to protect it during the shipment, and we utilize our extensive knowledge and research to provide our customers with packaging recommendations to meet their unique needs. 23 Table of Contents · Post-Delivery : PeriShip Global provides customized reporting for trend analysis, system performance reports, power outage maps, and many other reports to help our customers improve their processes and customer service outcomes. · Weather/Traffic Service : PeriShip Global has full-time meteorologists on staff to monitor weather. A package may experience a variety of weather conditions between the origin and destination, and our team actively monitors these conditions to minimize the changes of timely and safe transit of shipments. Similarly, traffic and construction also create unpredictable delays which our team works diligently to mitigate. If delays or other issues occur the PeriShip team informs clients and works with them to pro-actively resolve such shipment issues. VerifyMe Solutions : The VerifyMe Solutions segment specializes in traceability to connect brands with consumers through their product. Through VerifyMe technologies brand inspectors can authenticate product with visible and invisible unique to product serialized codes. Brand owners have the ability to gather business intelligence while engaging directly with their consumers and can receive programmable alerts related to counterfeit products or if their products are in unexpected geographical markets. Consumers can authenticate products with their smart phone prior to usage and engage with the brand in unique and innovative ways. Engagement can come in many forms such as free giveaways, product specifications, seed to table tracking, cross-selling of products, contests, videos, and recipes. VerifyMe Products : VerifyMe has a custom suite of products that offer clients traceability and consumer engagement. These products are combined with “software as a service” or “SAAS” which is stored in the cloud and accessed through the internet. · VerifyMe Engage™ for consumer engagement allowing the brand owner to gather business intelligence and engage with their customers · VerifyMe Authenticate™ using rare earth-based ink taggants for instant authentication of labels, packages and products · VerifyMe Track & Trace™ for unit level traceability and supply chain control PeriShip Global and VerifyMe Synergies: We believe that PeriShip Global and our VerifyMe solutions have synergistic product centric technology platforms and combined have a compelling technology offering for brand owners. For example, currently PeriShip Global ships vaccines for major pharmaceutical companies. With the addition of VerifyMe technology, PeriShip Global can add unit level traceability and authentication to protect clients’ vaccines from product diversion and sub-standard counterfeits. In addition, VerifyMe’s consumer engagement solutions could give PeriShip Global food and beverage clients the ability to gather rich business intelligence, turn “unknown consumers” into “known consumers” and build customer loyalty with engagement functions like videos, discounts, contests, etc. PeriShip Global Opportunities According to a 2023 report entitled, “Perishable Goods Transportation Market in the US 2023-2027”, written by Infiniti research Limited, the Perishable Goods logistics market size was $4.0 billion in 2022 and is estimated to be $4.3 billion in 2023 and is expected to grow to $5.9 billion by 2027. That represents a compound average market acceleration with a growth rate of approximately 8% per year. This report is based on perishable product segments including meat, poultry, seafood, dairy, fruits and vegetables, and bakery and confectionary. PeriShip Global services all of these product segments Currently most shipping businesses utilize the carrier’s data platform for tracking which generally informs the shipping enterprise, and their customers, when a package is in transit, when a package has been delivered, and some level of detail of the path which a package traveled. We believe taking the data feeds from a carrier and adding real-time visibility with predictive analytics and the human intervention factor of PeriShip Global’s call center gives us a major competitive advantage against other third-party platforms that solely rely on the carrier’s data feeds. PeriShip Global utilizes a variety of input sources beyond just the carrier’s data feed. PeriShip Global’s proprietary “Predictive Analytics” technology is fed real-time meteorology data, traffic and road construction data, and power grid information to help predict issues before they happen. If an alert is created the shipper and our call center will work to address the issue and save the perishable product from spoiling, saving the shipper significant costs and reducing the need to replace products that are no longer viable. PeriShip Global has two meteorologists on staff that track world-wide weather patterns to address predicted issues before they happen. We believe the Pharmaceutical and healthcare industries represent the biggest areas of opportunity and we are focusing our PeriShip Global sales emphasis on those industries. In addition, we feel that combining VerifyMe’s solutions into the product offering for PeriShip Global clientele, including food and beverage and healthcare industries, gives PeriShip Global a competitive advantage to generate revenue by enhancing PeriShip Global’s clients’ ability to grow revenue, gain business intelligence and build brand loyalty. 24 Table of Contents The current global logistics industry worldwide is facing an economic slowdown. We believe this represents an opportunity for PeriShip Global since major global carriers are cutting internal staff and are reducing research and development investments. To maintain their credibility in the market, these carriers will need to ensure they meet their customers’ demands for time and temperature sensitive shipments, while maintaining their overheads. We believe outsourcing this function to PeriShip Global provides the ideal solution for all parties involved. Building logistics infrastructure is a capital-intensive process as the investment is locked in for a considerably long period. Due to the current economic downturn, we believe several companies will opt to outsource their logistics services to reduce their operational costs and maintain cash flows. The outsourcing of supply chain related and other logistics operations to service providers such as PeriShip Global which allows companies to improve the efficiency of their businessed by focusing their resources on core competencies. VerifyMe Opportunities We believe VerifyMe’s products have applications in many areas. Currently, we are aggressively marketing opportunities in the following areas: · Food and Beverage – Food safety is becoming more common as supply chains become more global and as imaging and manufacturing technology become more accessible. Food traceability, sustainability and carbon neutral production is becoming a significant consideration for brand and governments. We believe our unit level traceability and authentication solutions can help brands tell their story about sustainability and battle against tainted or substandard foods and beverages. · Pharmaceuticals/nutraceuticals – We believe counterfeit prescription pharmaceuticals and nutraceuticals are a growing problem, widely recognized as a public health risk and a serious concern to public health officials, private companies, and consumers. Counterfeiting can apply to both branded and generic products and counterfeit pharmaceuticals may include products with the correct ingredients but fake packaging, with the wrong ingredients, without active ingredients or with insufficient active ingredients. The United States enacted legislation requiring the implementation of a comprehensive system designed to combat counterfeit, diluted or falsely labelled pharmaceuticals, referred to as serialization or electronic pedigree (e-Pedigree). Our consumer facing visible codes and unique pigments embedded in the ink of a unique serialized barcode can provide a layered security foundation for a customer solution in this market. We are seeking to expand our business in this market and believe that as additional pharmaceutical companies seek to comply with the legislation, our products will provide attractive alternatives to address the need for product identifiers. · Consumer Products –We believe our technology solutions are particularly suited for the cosmetics, health and beauty and apparel industries. We give the consumer the ability to test a product’s authenticity instantly with a smartphone. We can protect brand owners from liability litigation, product diversion and lost financial sales with our consumer facing visible codes and unique ink pigments which can be incorporated in dyes and used by manufacturers in these industries to combat counterfeiting and piracy of actual physical goods. Our pigments expressed as inks can also be used on packaging, as well as to track products that have been lost in transit, whether misplaced or stolen. In addition, in each of these markets, our SaaS software allows brand owners and consumers to track the products and will alert the consumer or brand owner of product diversion with 24/7 monitoring. As each product has a unique code, this allows consumers and brand owners to authenticate the product in real time and link directly to the brand owner’s website for additional product information, discounts, and more. Results of Operations Comparison of the Years Ended December 31, 2022, and 2021 The following discussion analyzes our results of operations for the years ended December 31, 2022, and 2021. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto. Revenue Twelve Months Ended December 31, 2022 2021 (In thousands) (In thousands) PeriShip Global Solutions $ 18,190 - VerifyMe Solutions 1,386 867 Total Revenue $ 19,576 $ 867 25 Table of Contents Consolidated revenue for the year ended December 31, 2022, was $19,576 thousand, a 2,158% increase compared to $867 thousand, for the year ended December 31, 2021. The increase in revenue primarily relates to the acquisition of the PeriShip Global business on April 22, 2022, which contributed $18,190 thousand for the twelve months ended December 31, 2022. VerifyMe Solutions segment increased revenue by $519 thousand, a 60% increase, primarily driven by growth in our agriculture segment. Gross Profit Twelve Months Ended December 31, 2022 2021 (In thousands) % of Revenue (In thousands) % of Revenue PeriShip Global Solutions 5,505 30 % - - VerifyMe Solutions 983 71 % 599 69 % Total Gross Profit $ 6,488 33 % $ 599 69 % Consolidated gross profit for the years ended December 31, 2022, and 2021, was $6,488 thousand and $599 thousand, respectively. The resulting gross margin was 33% for the year ended December 31, 2022, compared to 69% for the year ended December 31, 2021. The decrease in our gross margin is due to the acquisition of the PeriShip Global business which has significantly lower margins than the VerifyMe Solutions segment. General and Administrative Expenses General and administrative expenses were $8,428 thousand for the year ended December 31, 2022, compared to $4,216 thousand for the year ended December 31, 2021, an increase of $4,212 thousand. The increase related to the acquisition of the PeriShip Global business, and primarily made up of salaries and related expenses for approximately 35 employees in the IT and operations department. Research and Development Research and development expenses increased by $38 thousand to $89 thousand for the year ended December 31, 2022, from $51 thousand for the year ended December 31, 2021. The increase related to the acquisition of the PeriShip Global business and research and development related to their IT platform. Sales and Marketing Sales and marketing expenses for the year ended December 31, 2022, were $1,718 thousand compared to $1,163 thousand for the year ended December 31, 2021, an increase of $555 thousand. The increase is related to the acquisition of the PeriShip Global business, primarily consisting of salaries and related expenses for four employees. Net Income (Loss) Our net loss for the year ended December 31, 2022, was $14,398 thousand, compared to net income of $3,612 thousand for the year ended December 31, 2021. The decrease was primarily due to the impairment of the SPAC of $10,932 thousand during 2022 compared to an unrealized gain on the SPAC of $8,371 in 2021, partially offset by a gain on extinguishment of debt of $326 thousand and the changes discussed above for the acquisition of the PeriShip Global business. The resulting consolidated loss per diluted share for the year ended December 31, 2022, was $1.70 compared to a consolidated income per diluted share of $0.49 for the year ended December 31, 2021. Liquidity and Capital Resources Our operations used $2,551 thousand of cash during the year ended December 31, 2022, compared to $3,254 thousand during the year end December 31, 2021. The decrease in cash used from operations is due to a net change in non-cash addbacks to net income and the acquisition of PeriShip Global, which generates cash, that occurred during the year ended December 31, 2022. Net cash used in investing activities was $7,884 thousand for the year ended December 31, 2022, compared to $2,851 thousand for the year ended December 31, 2021. During the year ended December 31, 2022, $7,500 thousand was used for the acquisition of the PeriShip Global business. The use of cash in 2021 relates primarily to the acquisition of sponsor units in the SPAC of $2,593 thousand. 26 Table of Contents Net cash provided by financing activities for the year ended December 31, 2022, was $4,424 thousand compared to $7,588 thousand for the year ended December 31, 2021, related to proceeds from debt and offerings of our common stock in 2022 and 2021. On April 12, 2022, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the selling stockholder and certain directors, providing for the issuance and sale to purchasers therein of an aggregate of 880,208 shares of our common stock, pre-funded warrants to purchase up to 675,000 shares of our common stock, and warrants to purchase up to 1,555,208 shares of our common stock, for gross proceeds to us of approximately $5.0 million and net proceeds of $4.6 million. The pre-funded warrant was exercisable immediately and terminated when fully exercised and had an exercise price of $0.001 per share. The pre-funded warrant was fully exercised in August 2022, with an exercise price of $0.001, and as a resulted, 675,000 shares of our common stock were issued. The warrants are exercisable for a period of five years commencing six months from the date of issuance and have an exercise price of $3.215 per share. The warrants contain price adjustment provisions which may, under certain circumstances, reduce the applicable exercise price. The transaction closed on April 14, 2022. On September 22, 2022, we entered into the PNC Facility with PNC Bank, National Association. The PNC Facility includes a $1 million RLOC with a term of one-year, expiring in September 2023. The RLOC has no scheduled payments of principal until maturity, and bears interest per annum at a rate equal to the sum of Daily SOFR plus 2.85% with monthly interest payments. The PNC Facility also includes a four-year Term Note for $2 million which matures in September of 2026 and requires equal quarterly payments of principal and interest. The Term Note incurs interest per annum at a rate equal to the sum of Daily SOFR plus 3.1%. The RLOC and Term Note are guaranteed by the Company and secured by the assets of PeriShip and the Company. The PNC Facility includes a number of affirmative and restrictive covenants applicable to PeriShip, including, among others, a financial covenant to maintain a fixed charge coverage ratio of at least 1.10 to 1.00 at the end of each fiscal year, affirmative covenants regarding delivery of financial statements, payment of taxes, and establishing primary depository accounts with PNC Bank, and restrictive covenants regarding dispositions of property, acquisitions, incurrence of additional indebtedness or liens, investments and transactions with affiliates. PeriShip is also restricted from paying dividends or making other distributions or payments on its capital stock if an event of default (as defined in the PNC Facility) has occurred or would occur upon such declaration of dividend. We were in compliance with all affirmative and restrictive covenants under the PNC Facility at December 31, 2022. Effective October 17, 2022, we entered into an interest rate swap agreement, with a notional amount of $1,958 thousand, effectively fixing the interest rate on our outstanding debt at 7.602%. Of the proceeds of $2.0 million, we used $1.8 million to settle debt outstanding issued in connection with the PeriShip Global acquisition, including the redemption of 61,000 shares of our common stock. As of December 31, 2022, our short-term debt outstanding under the Term Note was $0.5 million and total long-term debt outstanding under the Term Note was $1.4 million. We believe that our cash and cash equivalents, together with the net proceeds from the April 12, 2022, offering and proceeds from debt issued, will fund our operations for the next 12 months. In June 2022, we announced a new $1.5 million share repurchase program to repurchase shares of the Company’s common stock commencing July 1, 2022, for a period of 12 months. This new repurchase program replaces our existing share repurchase program that was due to expire in August 2022 and is now terminated. To date, 158,906 shares have been purchased for a total of $215 thousand and a remaining $1,285 thousand may be purchased under the program. We expect to grow our business organically and through key acquisitions that will help accelerate the growth of our business. We expect to continue to fund our operations primarily through utilization of our current financial resources and future revenue and may issue additional debt or equity. Critical Accounting Policies and Estimates Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management. We have identified that the estimates used in the valuation of the assets of the PeriShip acquisition are critical and require significant judgment. We believe estimates and assumptions related to these accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial position, results of operations or cash flows. Revenue Recognition We recognize revenue based on the principals established in ASC Topic 606, “ Revenue from Contracts with Customers .” Revenue recognition is made when our performance obligation is satisfied at a point in time of delivery of the service. Over 90% of our revenue is derived from logistics management for time and temperature sensitive packages with the remaining from our traceability solutions. Our terms vary based on the solutions we offer and are examined on a case-by-case basis. For licensing of our VerifyInk TM technology we depend on the integrity of our clients’ reporting. 27 Table of Contents The timing of revenue recognition, billings and cash collections results in billed accounts receivable, and unbilled revenue when billings occur after the end of the month (contract assets) on the consolidated balance sheets. Amounts charged to our clients become billable when the performance obligation has been met at a point in time. Unbilled amounts will generally be billed and collected within 30 days but typically no longer than 60 days. These assets are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract assets increased significantly as of December 31, 2022, compared to December 31, 2021, due to the business combination. No other factors materially impacted the balances. Business Combinations Accounting for business combinations requires management to make significant estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the acquisition date. Although we believe the assumptions and estimates we have made in relation to the acquisition of the PeriShip business are appropriate, they are based, in part, on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows including revenue growth rate assumptions from product sales, customer contracts and acquired technologies, estimated royalty rates used in valuing technology related intangible assets, and discount rates. The discount rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital (“WACC”) analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results. We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired, based on their estimated fair values at acquisition date. The excess of the fair value of the purchase price over the fair values of these net tangible and intangible assets acquired is recorded as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which will not exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the conclusion of the measurement period or final determination of the fair value of the purchase price of our acquisitions, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations… Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. Goodwill We have recorded goodwill as part of our acquisition of the PeriShip business, which represents the excess of purchase price over the fair value of net assets acquired in the business combinations. Pursuant to ASC 350, the Company will test goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment test. The assessment considers factors such as, but not limited to, macroeconomic conditions, data showing other companies in the industry and our share price. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price. For our annual goodwill impairment test as of December 31, 2022, we performed a qualitative assessment as permitted by ASU 2017-04 for our reporting unit PeriShip Global and determined that it was more likely than not that the fair value exceeded their respective carrying value. Stock-based Compensation We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model include risk-free interest rates, expected volatility and expected life of the stock options. Changes in these assumptions can materially affect estimates of fair value stock-based compensation, and the compensation expense recorded in future periods. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line method. For RSUs with stock price appreciation targets, we applied a lattice approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the RSU’s contractual life based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial. We recognize compensation expense on a straight-line basis over the performance period and there is no ongoing adjustment or reversal based on actual achievement during the period. 28 Table of Contents We account for stock-based compensation awards to non-employees in accordance with ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if we had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured, and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed. Recently Adopted Accounting Pronouncements Recently adopted accounting pronouncements are discussed in Note 1 – Summary of Significant Accounting Policies in the notes accompanying the financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable for smaller reporting companies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements required to be filed pursuant to this Item 8 are appended to this Report beginning on page F-1 located immediately after the signature page and incorporated by reference in this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.