NOTE 3. INVENTORIES

Inventories consist of the following:

The movements of inventory reserve were as follows:

The Company maintains an inventory reserve for excess, slow-moving, and obsolete inventory based on historical usage, forecasted demand, inventory aging, and product life cycle considerations. As of June 30, 2026 and December 31, 2025, our recorded reserve for obsolete inventory was $500,000 and $500,000, respectively. The reserve reflects historical accounting treatment and estimation methodologies established in prior fiscal periods under ASC 330 and SEC Staff Accounting Bulletin (SAB) Topic 5.BB. Under SAB Topic 5.BB, an inventory write-down establishes a new cost basis that cannot subsequently be written back up, regardless of subsequent operational improvements or changes in forward demand expectations. While the recorded allowance of $500,000 is maintained on the Condensed Consolidated Balance Sheet to satisfy GAAP accounting requirements regarding prior cost-basis adjustments, management continuously evaluates the underlying economic exposure of its inventory population. The Company will derecognize the associated carrying reserves as underlying inventory units are sold, consumed, or otherwise disposed of in the ordinary course of business. If actual demand for our products differs materially from our forecasts, or if future changes in our product offerings render existing inventory obsolete, additional write-downs may be required.