iPower Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) should be read in conjunction with our unaudited financial statements and the related notes thereto included elsewhere herein. This MD&A contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. We undertake no obligation to publicly update or revise any forward- looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Overview Driven by technology and data, iPower Inc. (“iPower,” “we,” “us,” or “the Company”) is an online supplier of consumer goods, including hydroponics equipment, general gardening supplies and consumer home goods. Through the operations of our e-commerce platforms and channel partners, and our combined 121,000 sq. ft. of fulfillment centers in Rancho Cucamonga and Los Angeles, California, we believe we are one of the leading marketers, distributors and retailers in the consumer gardening and home goods categories, based on management’s estimates. Our core strategy continues to focus on expanding our geographic reach across the United States and internationally through organic growth, both in terms of expanding customer base as well as brand and product development. iPower has developed a set of methodologies driven by proprietary data formulas to effectively bring products to market and sales. We are actively developing our in-house branded products and through supply chain partners, which to date include the iPower and Simple Deluxe brands and more, some of which have been designated as Amazon best seller product leaders and Amazon Choice products, among others. Trends and Expectations Product and Brand Development We plan to increase investments in product and brand development. We actively evaluate potential acquisition opportunities of companies and product brand names that can complement our product catalog and improve our existing products and supply chain efficiencies. Global Economic Disruption While at present the majority of our products are sourced either in the United States or China, the military conflicts between Russia and Ukraine and Israel and Hamas may nonetheless increase the likelihood of supply chain disruptions and hinder our ability to find the materials we need to make our products. Thus far, as a result of the general global economic disruptions, we have experienced a decrease in the speed with which we are able to purchase new inventory, as well as an increase in costs due to delays in shipping, as well as a resulting increase in time with which products remain in our warehouse facilities, thus resulting in reduced profits. In addition, supply chain disruptions may make it harder for us to find favorable pricing and reliable sources for the materials we need, putting upward pressure on our costs and increasing the risk that we may be unable to acquire the materials and services we need to continue to make certain products. 36 Regulatory Environment Among our suite of products, we sell hydroponic gardening products to end users that may use such products in new and emerging industries or segments, including the growing of cannabis. The demand for hydroponic gardening products depends on the uncertain growth of these industries or segments due to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. Demand for our products could be impacted by changes in the regulatory environment with respect to such industries and segments. RESULTS OF OPERATIONS For the three months ended December 31, 2024 and 2023 The following table presents certain unaudited condensed consolidated statement of operations information and presentation of that data as a percentage of change from period to period. Three Months Ended December 31, 2024 Three Months Ended December 31, 2023 Variance Revenues – product sales $ 17,606,889 $ 16,800,122 4.8% Revenues – service income 1,465,682 – 19,072,571 16,800,122 13.5% Cost of revenues – product costs 9,461,119 9,481,882 (0.2% ) Cost of revenues – service costs 1,221,566 – – 10,682,685 9,481,882 12.7% Gross profit 8,389,886 7,318,240 14.6% Operating expenses 7,706,279 9,870,587 (21.9% ) Operating income (loss) 683,607 (2,552,347 ) 126.8% Other expenses 347,432 54,575 536.6% Income (loss) before income taxes 336,175 (2,606,922 ) 112.9% Income tax expenses (benefit) 120,511 (688,939 ) 117.5% Net income (loss) 215,664 (1,917,983 ) 111.2% Non-controlling interest (3,155 ) (3,155 ) 0.0% Net income (loss) attributable to iPower Inc. 218,819 (1,914,828 ) 111.4% Other comprehensive income (loss) 156,130 (160,255 ) 197.4% Comprehensive income (loss) attributable to iPower Inc. $ 374,949 (2,075,083 ) 118.1% Gross profit % of revenues 44.0% 43.6% Operating income (loss) % of revenues 3.6% (15.2% ) Net income (loss) % of revenues 1.1% (11.4% ) 37 Revenues Revenues for the three months ended December 31, 2024 increased 13.5% to $19,072,571 as compared to $16,800,122 for the three months ended December 31, 2023. While pricing remained stable and with the additional logistics service income, the increase mainly resulted from an increase in sales volume during the three months ended December 31, 2024 as compared to the three months ended December 31, 2023. This was further enhanced by growth in the Company’s SuperSuite supply chain offerings. Costs of Goods Sold Costs of goods sold for the three months ended December 31, 2024 increased 12.7% to $10,682,685 as compared to $9,481,882 for the three months ended December 31, 2023. The increase was primarily due to the combination of an increase in the costs related to the logistics service income and a decrease in freight costs and lowered product costs resulted from management’s efforts on supply chain management . Gross Profit Gross profit for the three months ended December 31, 2024 was $8,389,886 as compared to $7,318,240 for the three months ended December 31, 2023. The gross profit ratio of the product sales revenues increased to 44.0 % for the three months ended December 31, 2024 from 43.6 % for the three months ended December 31, 2023 . The increase in the gross profit ratio was mainly driven by the decrease in freight costs and lowered product costs resulted from management’s efforts on supply chain management during the three months ended December 31, 2024 , as discussed above. Operating Expenses Operating expenses for the three months ended December 31, 2024 decreased 21.9% to $7,706,279 as compared to $9,870,587 for the three months ended December 31, 2023 . The decrease was mainly due to the combination of a decrease in selling and fulfillment expenses of $2.3 million as a result of decreased costs related to advertising, merchant fees, rental expenses and delivery fees, and an increase in general and administrative expenses of $0.1 million, which included payroll expenses, stock-based compensation expense, insurance expenses, travel expenses and other operating expenses. Specifically the decrease in merchant fees was resulted from sales to different amazon vendor account mix. However, we cannot guarantee that this trend will continue. Income (Loss) from Operations Income (loss) from operations was $683,607 for the three months ended December 31, 2024 as compared to $(2,552,347) for the three months ended December 31, 2023 . The increase in income was resulted from the combination of the increase in gross profit and the decrease in operating expenses. Other Expenses Other expenses consist of interest expense and other non-operating income (expenses). Other expenses for the three months ended December 31, 2024 was $347,432 as compared to $54,575 for the three months ended December 31, 2023 . The increase in other expenses was mainly due to the combination of an increase in other non-operating expenses of $334,796, including a foreign currency exchange loss of 45,580, and a decrease in interest, including amortization of debt discount, on the revolving loan of $41,940 during the three months ended December 31, 2024 resulted from the decreasing loan balance. Net Income (Loss) Attributable to iPower Inc. Net income (loss) attributable to iPower Inc. for the three months ended December 31, 2024 was $218,819 as compared to $ ( 1,914,828) for the three months ended December 31, 2023 , representing an increase in net income of $2,133,647. The increase was primarily due to the combination of a decrease in the operating expenses and an increase in gross profit ratio as discussed above. 38 Comprehensive Income (Loss) Attributable to iPower Inc. Comprehensive income (loss) attributable to iPower Inc. for the three months ended December 31, 2024 was $374,949 as compared to $(2,075,083) for the three months ended December 31, 2023, representing an increase in comprehensive income of $2,450,032. The increase was due to the reasons discussed above, along with an increase in other comprehensive income of $316,384 as a result of foreign currency translation adjustments resulting from the translation of RMB, the functional currency of our VIE in the PRC, to USD, the reporting currency of the Company. For the six months ended December 31, 2024 and 2023 The following table presents certain unaudited condensed consolidated statement of operations information and presentation of that data as a percentage of change from period to period. Six Months Ended December 31, 2024 Six Months Ended December 31, 2023 Variance Revenues – product sales $ 35,882,301 $ 43,308,496 (17.1% ) Revenues – service income 2,198,791 – – 38,081,092 43,308,496 (12.1% ) Cost of revenues – product costs 19,378,567 24,231,411 (20.0% ) Cost of revenues – service costs 1,824,742 – – 21,203,309 24,231,411 (12.5% ) Gross profit 16,877,783 19,077,085 (11.5% ) Operating expenses 18,940,610 22,898,109 (17.3% ) Operating loss (2,062,827 ) (3,821,024 ) (46.0% ) Other expenses 269,627 351,131 (23.2% ) Loss before income taxes (2,332,454 ) (4,172,155 ) (44.1% ) Income tax benefit (516,001 ) (964,821 ) (46.5% ) Net loss (1,816,453 ) (3,207,334 ) (43.4% ) Non-controlling interest (5,991 ) (5,991 ) 0.0% Net loss attributable to iPower Inc. (1,810,462 ) (3,201,343 ) (43.4% ) Other comprehensive (loss) income 101,076 (160,962 ) 162.8% Comprehensive loss attributable to iPower Inc. $ (1,709,386 ) $ (3,362,305 ) (49.2% ) Gross profit % of revenues 44.3% 44.0% Operating loss % of revenues (5.4% ) (8.8% ) Net loss % of revenues (4.8% ) (7.4% ) 39 Revenues Revenues for the six months ended December 31, 2024 decreased 12.1% to $38,081,092 as compared to $43,308,496 for the six months ended December 31, 2023. While pricing remained stable and with the additional logistics service income, the decreased revenue mainly resulted from a decrease in sales volume during the six months ended December 31, 2024 as the Company offered less promotions and clearance activities due to lower inventory level as compared to the six months ended December 31, 2023. This was partially offset by growth in the Company’s SuperSuite supply chain offerings. Costs of Goods Sold Costs of goods sold for the six months ended December 31, 2024 decreased 12.5% to $21,203,309 as compared to $24,231,411 for the six months ended December 31, 2023. The decrease was primarily due to a combination of the costs related to the logistics service income and the decrease in sales, freight costs, and lowered product costs resulted from management’s efforts on supply chain management. Gross Profit Gross profit was $16,877,783 for the six months ended December 31, 2024 as compared to $19,077,085 for the six months ended December 31, 2023. The gross profit ratio of the product sales revenues increased to 46.0% for the six months ended December 31, 2024 from 44.0 % for the six months ended December 31, 2023 . The increase in the gross profit ratio was mainly driven by the decrease in costs of goods sold during the six months ended December 31, 2024 , as discussed above. Operating Expenses Operating expenses for the six months ended December 31, 2024 decreased 17.3% to $18,940,610 as compared to $22,898,109 for the six months ended December 31, 2023 . The decrease was mainly due to the combination of a decrease in selling and fulfillment expenses of $6.5 million as a result of decreased costs related to advertising, merchant fees, rental expenses and delivery fees, and an increase in general and administrative expenses of $2.5 million, which included payroll expenses, stock-based compensation expense, insurance expenses, allowance for credit losses, travel expenses and other operating expenses. The increase in general and administrative expenses was mainly due to the expansion of our vendor network and development of the SuperSuite platform and an increased allowance for credit loss and inventory reserves of $1.8 million. Loss from Operations Loss from operations was $2,062,827 for the six months ended December 31, 2024 as compared to $3,821,024 for the six months ended December 31, 2023 . The decrease in loss from operations resulted from the decrease in operating expenses being greater than the decrease in gross profit with the improved gross profit ratio. Other Expenses Other expenses for the six months ended December 31, 2024 was $ 269,627 as compared to $ 351,131 for the six months ended December 31, 2023 . The decrease in other expenses was mainly due to the decrease in other non-operating income of $48,944, and the decrease in interest expenses, including amortization of debt discount, on the revolving loan of $130,343 during the six months ended December 31, 2024 as a result of the decreasing balance on the revolving loan. 40 Net Loss Attributable to iPower Inc. Net loss attributable to iPower Inc. for the six months ended December 31, 2024 was $1,810,462 as compared to $3,201,343 for the six months ended December 31, 2023 , representing a decrease in net loss of $1,390,881. The decrease was primarily due to the decrease in operating expenses being greater than the decrease in gross profit resulting in the improved gross profit ratio as discussed above. Comprehensive Loss Attributable to iPower Inc. Comprehensive loss attributable to iPower Inc. for the six months ended December 31, 2024 was $1,709,386 as compared to $3,362,305 for the six months ended December 31, 2023, representing a decrease in comprehensive loss of $1,652,919. The decrease was due to the reasons discussed above, along with an increase in other comprehensive income of $262,037 as a result of foreign currency translation adjustments resulting from the translation of RMB, the functional currency of our VIE in the PRC, to USD, the reporting currency of the Company. LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity During the six months ended December 31, 2024, we primarily funded our operations with cash and cash equivalents generated from operations, as well as through borrowing under our credit facility from JPMorgan Chase Bank (“JPM”). Additionally, on June 18, 2024, we closed on a registered direct offering of 2,083,334 shares of common stock (the “Shares”) and a concurrent private placement of warrants to purchase up to 2,083,334 shares of common stock (the “Warrants”), which Shares and Warrants were sold for aggregate gross proceeds of $5,000,002. As of December 31, 2024, we had cash and cash equivalents of $2,877,457, representing a $4,500,380 decrease from $7,377,837 in cash as of June 30, 2024. The cash decrease was primarily due to the result of cash used in operating activities and financing activities resulting from our payments to pay down the short-term loans - related party and the JPM revolving line of credit. Based on our current operating plans, we believe that our existing cash and cash equivalents and cash flows from operations will be sufficient to finance our operations during the next 12 months. Our cash requirements consist primarily of day-to-day operating expenses and obligations with respect to warehouse leases. We lease all of our office and warehouse facilities. We expect to make future payments on existing leases from cash generated from operations. We have credit terms in place with our major suppliers, however as we bring on new suppliers, we are often required to prepay our inventory purchases from them. This is consistent with our historical operating model which allowed us to operate using only cash generated by the business. Beyond the next 12 months we believe that our cash flow from operations should improve as supply chain operations normalize and new suppliers we are bringing online transition to credit terms more favorable to us. In addition, we plan to increase the size of our in-house product catalog, which will have a net beneficial impact to our margin profile and ability to generate cash. Currently, we have approximately $11.0 million in unused credit under the revolving line with JPM. Given our current working capital position and available funding from our revolving credit line and proceeds from our June registered direct offering, we believe we will be able to work through the current challenges by managing payment terms with customers and vendors. 41 Working Capital As of December 31, 2024 and June 30, 2024, our working capital was $13.8 million and $11.2 million, respectively. The historical seasonality in our business during the year can cause cash and cash equivalents, inventory and accounts payable to fluctuate, resulting in changes in our working capital. We anticipate that past historical trends to remain in place through the balance of the fiscal year with working capital remaining near this level for the foreseeable future. Cash Flows Operating Activities Our largest source of cash provided by operations is from sales of products. Our primary uses of cash from operating activities include payments to suppliers for products, to employees for compensation, and other general expenses. Net cash (used in) provided by operating activities for the six months ended December 31, 2024 and 2023 was $(1,387,926) and $5,045,731, respectively. The decrease in cash provided by operating activities mainly resulted from a decrease in cash received from customers and an increase in cash paid for costs of revenues and operating expenses. Investing Activities Net cash used in investing activities for the six months ended December 31, 2024 and 2023 was $(664,366) and $0, respectively. The increase was due to the prepayments made for software developments during the six months ended December 31, 2024. Financing Activities Net cash used in financing activities was $2,558,389 and $7,175,000, respectively, for the six months ended December 31, 2024 and 2023. The decrease in net cash used in financing activities was primarily due to a decrease in payments on the revolving loan. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP, and pursuant to the rules and regulations of the SEC. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition and results of operations will be affected. We base our estimates on experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies, which we discuss further below. While our significant accounting policies are more fully described in Note 2 to our unaudited condensed consolidated financial statements, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our unaudited condensed consolidated financial statements. 42 Revenue recognition The Company recognizes revenues from service and product sales, net of promotional discounts and return allowances, when the following revenue recognition criteria are met: a contract has been identified, separate performance obligations are identified, the transaction price is determined, the transaction price is allocated to separate performance obligations and revenue is recognized upon satisfying each performance obligation. The Company transfers the risk of loss or damage upon shipment or completion of service, therefore, revenue from product sales is recognized when it is shipped to the customer and the revenue from services is recognized upon completion of services. Return allowances, which reduce product revenue by the Company’s best estimate of expected product returns, are estimated using historical experience. The Company evaluates the criteria of ASC 606 - Revenue Recognition Principal Agent Considerations in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when the Company is primarily responsible for fulfilling the promise to provide a specified good or service and the Company has discretion in establishing the price, revenue is recorded at gross. Payments received prior to the delivery of goods to customers are recorded as customer deposits. The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction. Sales discounts are recorded in the period in which the related sales are recorded. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses. Accounts receivable, net During the ordinary course of business, the Company extends unsecured credit to its customers. Accounts receivable are stated at the amount the Company expects to collect from customers, which includes the amount withheld by sales channel partners and refundable to the Company. Based on historical an expected loss rate and status of negotiations with the sales channel partner, management reviews its accounts receivable balances each reporting period to determine if an allowance for credit loss is required. The Company evaluates the creditworthiness of all of its customers individually before accepting them and continuously monitors the recoverability of accounts receivable. If there are any indicators that a customer may not make payment, the Company may consider making provision for non-collectability for that particular customer. At the same time, the Company may cease further sales or services to such customer. The following are some of the factors that the Company develops allowance for credit losses: · the customer fails to comply with its payment schedule; · the customer is in serious financial difficulty; · a significant dispute with the customer has occurred regarding job progress or other matters; · the customer breaches any of its contractual obligations; · the customer appears to be financially distressed due to economic or legal factors; · the business between the customer and the Company is not active; and · other objective evidence indicates non-collectability of the accounts receivable. 43 Accounts receivable are recognized and carried at carrying amount less an allowance for credit losses, if any. The Company maintains an allowance for credit losses resulting from the inability of its customers to make required payments based on contractual terms. The Company reviews the collectability of its receivables on a regular and ongoing basis. The Company has also included in calculation of allowance for credit losses the potential impact of overall economic conditions on our customers’ industry and businesses and their ability to pay our accounts receivable. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also considers external factors to the specific customer, including current conditions and forecasts of economic conditions, including the potential impact of the COVID-19 pandemic. In the event we recover amounts previously written off, we will reduce the specific allowance for credit losses. In late October 2024, the Company determined that the collectability of certain refundable amount withheld by sales channel partners was remote so the Company recorded additional allowance for credit losses of $41,346 and $1,516,940 for the three and six months ended December 31, 2024. Inventory, net Inventory consists of finished goods ready for sale and is stated at the lower of cost or market. The Company values its inventory using the weighted average costing method. The Company’s policy is to include as a part of inventory and costs of goods sold any freight incurred to ship the product from its vendors to warehouses. Outbound freight costs related to shipping costs to customers are considered period costs and reflected in selling and fulfillment expenses. The Company regularly reviews inventory and considers forecasts of future demand, market conditions and product obsolescence. If the estimated realizable value of the inventory is less than cost, the Company makes provisions in order to reduce its carrying value to its estimated market value. The Company also reviews inventory for slow moving and obsolescence and records allowance for obsolescence. Variable interest entities On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia and its subsidiaries, including Daheshou (Shenzhen) Information Technology Co., Ltd., a company organized under the Laws of the PRC (“DHS”). Pursuant to the terms of the agreements, the Company does not have direct ownership in DHS but is actively involved in DHS’s operations as the sole manager to direct the activities and significantly impact DHS’s economic performance. DHS’s operational funding is provided by the Company after February 15, 2022. During the term of the agreements, which run for a term of 10 years from February 2022 to February 2032, the Company bears all the risk of loss and has the right to receive all of the benefits from DHS. As such, based on the determination that the Company is the primary beneficiary of DHS, in accordance with ASC 810-10-25-38A through 25-38J, DHS is considered a variable interest entity (“VIE”) of the Company and the financial statements of DHS have been consolidated from the date such control existed, February 15, 2022. Goodwill Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill under ASC Topic 350, Intangibles-Goodwill and Other . Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. The Company’s review for impairment includes an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill, a quantitative goodwill impairment test is performed, which compares the fair value of the reporting unit with its carrying amounts, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. During the six months ended December 31, 2024 and 2023, the Company performed a qualitative goodwill impairment analysis following the steps laid out in ASC 350-20-35-3C and noted no goodwill impairment. As of December 31, 2024 and June 30, 2024, the goodwill balance amounted to $3,034,110. 44 Intangible Assets, net Finite life intangible assets at December 31, 2024 include a covenant not to compete, supplier relationships and software recognized as part of the acquisition of Anivia. Intangible assets are recorded at the estimated fair value of these items at the date of acquisition, February 15, 2022. Intangible assets are amortized on a straight-line basis over their estimated useful life as follows: Useful Life Covenant Not to Compete 10 years Supplier relationship 6 years Software 5 years The Company reviews the recoverability of long-lived assets, including intangible assets, when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations. As of December 31, 2024 and 2023, there were no indicators of impairment. Stock-based Compensation The Company applies ASC No. 718, “Compensation-Stock Compensation,” which requires that share-based payment transactions with employees and nonemployees upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period. In addition to the requisite service period, the Company also evaluates the performance condition and market condition under ASC 718-10-20. For an award that contains both a performance and a market condition, and where both conditions must be satisfied in order for the award to vest, the market condition is incorporated into the fair value of the award, and that fair value is recognized over the employee’s requisite service period or nonemployee’s vesting period if it is probable that the performance condition will be met. If the performance condition is ultimately not met, compensation cost related to the award should not be recognized (or should be reversed) because the vesting condition in the award has not been satisfied. The Company will recognize forfeitures of such equity-based compensation as they occur. Income taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized. 45 The Company has analyzed filing positions in each of the federal and state jurisdictions where the Company is required to file income tax returns, as well as open tax years in such jurisdictions. The Company has identified the U.S. federal jurisdiction, and the states of Nevada and California, as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized. The Company believes that our income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740, Income Taxes. The Company’s policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes. Recently issued accounting pronouncements Other than as set forth under Note 2 to the unaudited condensed consolidated financial statements under “Recently issued accounting pronouncements,” the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company,” we are not required to provide the information required by this Item.