NOTE 12 INCOME TAX

U.S. Federal Corporate Income Tax

The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:

 SCHEDULE OF RECONCILIATION OF STATUTORY INCOME TAX RATES AND EFFECTIVE TAX RATE

Temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and tax credit and operating loss carryforward that create deferred tax assets and liabilities are as follows:

 SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES

A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. The Company has reviewed its positive and negative evidence and has concluded that it is more likely than not that the net deferred tax assets will not be realized due to the cumulative losses incurred since inception; therefore, the Company continues to maintain a valuation allowance. The valuation allowance increased by $0.6 million and $0.8 million during the years ended December 31, 2025 and 2024, respectively.

The Company’s valuation allowance includes both federal and state deferred tax assets, including California net operating loss carryforwards, because management concluded that sufficient positive evidence does not exist to support realization of those attributes as of December 31, 2025.

Pursuant to the Internal Revenue Code of 1986, as amended (“IRC”), specifically Sections 382 and 383, the Company’s ability to use tax attribute carryforwards to offset future taxable income is limited if the Company experiences a cumulative change in ownership of more than 50% within a three-year testing period. The Company has not completed an ownership change analysis pursuant to IRC Section 382 therefore the ability to offset taxable income in the future may be impacted by ownership changes occurring prior to December 31, 2025. If ownership changes within the meaning of IRC Section 382 occur in the future, the amount of remaining tax attribute carryforwards available to offset future taxable income and income tax expense in future years may be significantly restricted or eliminated. Further, the Company’s deferred tax assets associated with such tax attributes could be significantly reduced or eliminated upon realization of an ownership change within the meaning of IRC Section 382. If eliminated, the related asset would be removed from the deferred tax asset schedule, with a corresponding reduction in the valuation allowance. Additionally, limitations on the utilization of the Company’s tax attribute carryforwards can increase the amount of taxable income and current income tax expense recognized. Due to the existence of the valuation allowance, ownership change limitations that are not significant may not impact the Company’s effective tax rate.

As of December 31, 2025, the Company had U.S. federal net operating loss carryforwards for income tax purposes of approximately $4.8 million. In general, U.S. federal net operating losses arising in taxable years beginning after December 31, 2020 may be carried forward indefinitely, subject to applicable utilization limitations, including the 80% of taxable income limitation and any limitations imposed by IRC Sections 382 and 383.

As of December 31, 2025, the Company also had state net operating loss carryforwards for income tax purposes of approximately $4.8 million, substantially all of which relate to California. State net operating loss carryforwards are subject to jurisdiction-specific carryforward, utilization, and suspension rules. For California, the net operating loss deduction is suspended for certain taxpayers for taxable years 2024 through 2026, and the carryover period for suspended losses is extended.

Subsequent to the issuance of the Company’s previously issued consolidated financial statements, management identified an error in the presentation of the deferred tax asset disclosure related to net operating loss carryforwards. Specifically, the deferred tax asset inventory was presented using gross net operating loss carryforward amounts rather than tax-effected deferred tax asset amounts. As a result, the deferred tax asset table did not appropriately reflect deferred tax assets measured using the applicable enacted tax rates.

Accordingly, the Company revised the deferred tax asset disclosure to present deferred tax assets related to net operating loss carryforwards on a tax-effected basis. This revision affected only the presentation of the deferred tax footnote disclosure and did not impact the Company’s previously reported net loss, total assets, total liabilities, stockholders’ equity, or cash flows for any period presented, as the Company maintained a full valuation allowance against its net deferred tax assets in all periods presented. Management concluded that the revision was not material to any previously issued financial statements and, therefore, revised the prior-period disclosure in these consolidated financial statements.