Note 2 – Basis of Presentation and Liquidity

Interim Financial Information

The accompanying unaudited condensed interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. The condensed balance sheet as of December 31, 2025 was derived from the Company’s audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying unaudited condensed interim financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of September 30, 2026, and its results of operations and changes in stockholders’ equity for the three and nine months ended September 30, 2026 and 2025, and its cash flows for the nine months ended September 30, 2026 and 2025. Results as of and for the nine months ended September 30, 2026 are not necessarily indicative of the results that may be expected for the year ending December 31, 2026.

The condensed interim financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

Segment Reporting

The Company operates in only one business segment from which the Company’s chief operating decision maker evaluates the financial performance of the Company.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions 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 amount of revenues and expenses, during the reporting period. Actual results could differ materially from those estimates. Included in these estimates are assumptions about the collection of accounts receivable, value of inventories, useful life of fixed assets and intangible assets, the assessment of expected cash flows used in evaluating goodwill and other long-lived assets, the assessment of the ability to continue as a going concern and assumptions used in determining stock compensation such as expected volatility and risk-free interest rate.

Liquidity

Management has evaluated the Company’s projected cash flows, existing cash balances and expected obligations for the twelve-month period following the date these financial statements are issued. Based on this evaluation, management believes that the Company’s existing cash balances and projected cash flows from operations will be sufficient to fund its current operating plan and meet its obligations as they become due for at least twelve months from the date these financial statements are issued. The Company’s projections are dependent on, among other matters, continued revenue growth, customer collections, inventory management and control of operating expenses. Actual results may differ from management’s projections, and adverse changes in these factors could reduce the Company’s available liquidity.

The Company generated net income for the three and nine months ended September 30, 2026 and the full year December 31, 2025. The Company used cash in operating activities during the three and nine months ended September 30, 2026 primarily due to increases in inventory and accounts receivable and a decrease in accounts payable. The Company generated cash from operations in the three and nine months ended September 30, 2025. In addition, the company generated cash from operations in the twelve months ended December 31, 2025 of $1.6 million. The Company has an accumulated deficit of $141.3 million as of September 30, 2026. The increase in inventory during the first nine months of 2026 primarily reflected purchases made to support revenue growth, improve availability of fast-selling products and accommodate the timing of purchases ahead of our primary supplier’s annual summer shutdown. As of September 30, 2026, management believes current inventory levels are sufficient to support anticipated near-term growth. Accordingly, we expect the rate of inventory purchases to moderate as we sell through existing inventory, which, together with continued customer collections, is expected to improve working capital and cash flows from operations. The Company continues to focus on growth in sales and managing expenses with the goal of returning to positive cash flow from operations.

Recent Accounting Pronouncements, Not Yet Effective

In November 2024, the FASB issued ASU 2024-03, “ASC 220- Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures,” which requires entities, in the notes to financial statements, to disclose specified information about certain costs and expenses. The guidance is effective for the Company’s annual periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its financial statements.

In December 2025, the FASB issued ASU 2025-11, “Interim Reporting (Topic 270): Narrow-Scope Improvements” (“ASU 2025-11”). ASU 2025-11 is intended to update the guidance in Topic 270 by improving navigability of the required interim disclosures, clarifying when that guidance is applicable and adding a principle that requires entities to disclose events since the end of the last annual reporting period that have a material impact on the entity. ASU 2025-11 will be effective for the interim reporting periods within annual reporting periods beginning after December 15, 2027, with the option to early adopt at any time prior to the effective date and should be applied either prospectively to financial statements issued for reporting periods after the effective date or retrospectively to any or all prior periods presented in the financial statements. The Company is assessing the impact of adopting this guidance on its financial statements.

Concentration of Credit Risk

The Company deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. To date, the Company has not experienced any impairment losses on its cash. The Company also limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary.

Major Customers

For the three months ended September 30, 2026, and 2025, the following customers accounted for the following percentages of the Company’s revenues, respectively:

Schedule of Revenues and Accounts Receivable Percentage of Major Customers  

For the nine months ended September 30, 2026, and 2025, the following customers accounted for the following percentages of the Company’s revenues, respectively:

As of September 30, 2026 and December 31, 2025, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:

Accounts Receivable

The Company recognizes an allowance that reflects a current estimate of credit losses expected to be incurred over the life of a financial asset, including trade receivables. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The allowance for credit losses reflects the best estimate of expected credit losses of the accounts receivable portfolio determined by considering current information, forecasts of future economic conditions, industry knowledge and to some extent the Company’s historical experience. The Company determines its allowance by pooling receivable balances at the customer level and considering various factors, including individual credit risk associated with each customer, the current and future condition of the general economy and industry knowledge. These credit risk factors are monitored on a quarterly basis and updated as necessary. The Company writes off accounts receivable when they are determined to be uncollectible. The Company had no allowance for credit losses as of September 30, 2026 or December 31, 2025.

IEEPA Tariff Refunds

On February 20, 2026, the U.S. Supreme Court ruled that the International Emergency Economic Powers Act (“IEEPA”) does not authorize the President to impose tariffs, thereby invalidating prior IEEPA-based tariff programs previously announced by the current U.S. presidential administration. Following the decision, the President issued an executive order directing that the collection of such IEEPA-based duties end “as soon as practicable.” Although the Supreme Court ruling may allow importers to claim refunds of such previously paid IEEPA-related duties, and recovery may require administrative proceedings or litigation, with timing and outcomes uncertain. On the same date, the U.S. Administration announced new temporary global tariffs under Section 122 of the Trade Act of 1974 to take effect February 24, 2026. Subsequently, the U.S. Court of International Trade ruled that the collected IEEPA tariffs in question must be refunded in accordance with the law. The U.S. Customs and Border Protection (“CBP”) has issued an official notice and launched a special tariff refund program to facilitate such refunds.

In the absence of specific GAAP applicable to tariff refunds, the Company applied the loss-recovery model in ASC 410-30 by analogy and evaluated whether recovery was probable under ASC 450-20. Any future recovery of tariff refund claims will be recognized as a receivable when the claim becomes probable and will be reflected as a reduction of cost of goods sold for inventory previously sold, or as a reduction of inventory for goods that remain unsold.

During the second quarter of 2026, the Company received notification from its customs broker, who acts as the Company’s liaison with CBP, that previously paid IEEPA tariffs of approximately $647,000 had been approved for refund. The Company subsequently received the refund proceeds during the third quarter of 2026. The Company applied the loss recovery model and determined that recovery of the previously paid IEEPA tariff was probable and reasonably estimable. Accordingly, the Company recognized a refund receivable during the second quarter of 2026. During the third quarter of 2026, the Company received the approved refund, and the related receivable was fully settled. The cash received was classified as an operating cash inflow in the statements of cash flows, consistent with the classification of the original tariff payment.

The accounting for the IEEPA tariff refund reflects the original treatment of the underlying tariff costs. During the nine months ended September 30, 2026, the Company recognized a total reduction in cost of goods sold of approximately $636,000, consisting of $624,000 recognized during the six months ended June 30, 2026, and an additional $12,000 recognized during the three months ended September 30, 2026. These amounts represent the recovery of previously expensed IEEPA tariffs associated with inventory sold to customers since the tariffs were imposed in February 2025. Additionally, the Company recognized an $11,000 reduction in the carrying value of inventories on hand on the Company’s balance sheet as of September 30, 2026, for IEEPA tariffs previously capitalized as cost of inventory. The Company will apply this policy consistently to any future tariff refunds. The Company received approximately $22,000 of statutory interest in connection with the refund. Because the interest does not represent recovery of previously recognized tariff costs, the Company accounts for it as a gain contingency under ASC 450-30. During the three months ended September 30, 2026, the Company received the interest payment and recognized the amount in other income.

Management concluded that the IEEPA tariff refund, and receipt thereof, does not have any impact on its contracts with customers. The tariff imposed on Company products did not impact its pricing with customers, as the Company did not pass the tariff costs through to customers, and its customer contracts do not contain tariff pass-through or refund provisions. Accordingly, the Company did not recognize a customer refund liability or contract modification related to the tariff recovery.

Goodwill

The Company has one operating segment and one reporting unit for purposes of goodwill impairment testing. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. In accordance with ASC Topic 350, Intangibles-Goodwill and Other, the Company does not amortize goodwill but tests it for impairment annually on October 1^st of each fiscal year or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company operates as one reporting unit. When testing goodwill for impairment, the Company may first perform an optional qualitative assessment. The qualitative factors evaluated by the Company include macro-economic conditions of the business environment, overall financial performance, and other entity-specific factors as deemed appropriate. If under such qualitative analysis the Company determines that it is not more likely than not that the reporting unit’s fair value is less than its carrying amount, then no further analysis is necessary. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of the Company’s reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill. No goodwill impairment was recorded for the three and nine months ended September 30, 2026 and 2025.