NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of accounting policies for Capstone Companies, Inc. (“CAPC, “Company, “we, “our or “us), a Florida corporation and its wholly owned subsidiaries is presented to assist in understanding the Companys consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP) and have been consistently applied in the preparation of the consolidated financial statements.

Organization and Basis of Presentation

The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Companys financial position as of June 30, 2022, and results of operations, stockholders equity and cash flows for the three months and six months ended June 30, 2022, and 2021. All material intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC) relating to interim financial statements and in conformity with U.S. GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Companys Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report) filed with the SEC on March 31, 2022.

The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.

Effects of COVID-19 Pandemic

The Companys top priority has been to take appropriate actions to protect the health and safety of our employees as a result of the COVID-19 pandemic. We have adjusted standard operating procedures within our business operations to ensure the continued safety of our employees and we continually monitor evolving health guidelines to ensure ongoing compliance and protection of our employees. These procedures include expanded and more frequent cleaning within facilities, implementation of appropriate social distancing programs, requiring use of certain personal protective equipment, screening protocols and work from home programs.

In response to COVID-19 pandemic and Centers for Disease Control (‘CDC) guidelines, the Company has practiced the following actions since March 2020:

As of the filing of this Form 10-Q Report, the Company continues to adhere to local government practices and mandates. With government mandated restrictions in Thailand and parts of China resulting from the upsurge in various mutant variants, the Company restrictions on business travel remains in effect. While all the above-referenced steps are appropriate considering COVID-19 pandemic, they have impacted the Companys ability to operate the business in its ordinary and traditional course. Our personnel is limited to management with a limited number of employees in Florida and we rely on contractors and consulting services in Thailand and Hong Kong for production, inventory and distribution of our products. As such, our COVID-19 pandemic measures do not remediate fully the impact of COVID-19 pandemic on all operations affecting our business and financial condition.

Our business operations and financial performance for the three and six months ended June 30, 2022, continued to be adversely impacted by COVID-19 pandemic, which, also contributed to the poor performance of our traditional LED product line in 2021 and the lack of revenues from the new Connected Surface products. In Thailand, mutant variants including Omnicron mutant of COVID-19 pandemic has recently surged which disrupted our overseas OEMs and delayed some of the Smart Mirror certification testing in 2021. This resulted in shipment delays of the companys critical Connected Surface devices. The Company reported a net loss of approximately $611 thousand and $575 thousand for the three months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, respectively, the Company reported a net loss of approximately $1.073 million and $1.074 million, respectively. The Smart Mirror inventory started shipping to the U.S. in January 2022.

The Company has been investing in its infrastructure to transition into the online retail business by developing an e-commerce website and has invested in developing a social media presence over the last year and these systems are ready to launch and ship the Smart Mirror product. Prior to 2021, the Companys wholesale business relied on brick-and-mortar retail for sale of its products to consumers and sought to piggyback off retailers e-commerce websites as well as dedicated online retailers like Amazon. As the Company focuses its effort on social media driven e-commerce, the Companys online strategy is projected to deliver future growth and reduce reliance on big box retail. The gross margin is more favorable on the e-commerce business which translates to better returns on lower revenues. The Company does not have extensive experience in conducting its own e-commerce business and the Companys e-commerce efforts may not produce results that compensate for any lack of robust sales from brick-and-mortar sales. During the quarter ended March 31, 2022, the Company introduced the Smart Mirror on its Capstone Connected website.

The fact that the COVID-19 pandemic adversely impacted our Company at the same time as we were implementing a major shift in product line, from the mature LED products to new Connected Surfaces products, amplified the financial impact of COVID-19 pandemic by disrupting development and production of new Connected Surfaces products in Thailand and China. This delay in launching the new product line coupled with the decline in sales of the LED product line adversely impacted the Company and creates uncertainty about the ongoing viability of the current product lines of the Company.

As of June 30, 2022, management determined that sufficient indicators existed to trigger the performance of an interim goodwill impairment analysis. The analysis concluded that the Companys fair value of its single reporting unit exceeded the carrying value and a goodwill impairment charge was not required in the quarter ended June 30, 2022, as the fair value of the reporting unit exceeded the carrying amount based on the Companys market capitalization.

The extent to which COVID-19 pandemic will continue to impact the Companys results will depend primarily on future developments, including the severity and duration of the crisis, the acceptance and effectiveness of the national vaccine inoculation program, potential mutations of COVID-19 pandemic, and the impact of future actions that will be taken to contain COVID-19 pandemic or treat its impact.

These future developments are highly uncertain and cannot be predicted with confidence, especially if mutations of the COVID-19 virus become widespread and prove resistant to vaccines. The Omnicron variant of COVID-19 recent resurgence in Asia, has caused sporadic regional lockdowns and initially resulted in delays in finalizing certain Smart Mirror certifications, production of the initial Smart Mirror inventory and a major logistics backlog. The Company has now received in the United States inventory from its manufacturing suppliers for the initial inventory rollout which will now support the 2022 sales program.

Liquidity and Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

The COVID-19 pandemics resurgence globally and in many states or emergence of new vaccine-resistant strains of the virus could have a continuing negative impact on the brick-and-mortar retail sector, with consumers unwilling to visit retail stores, causing reduced consumer foot traffic and consumer spending. However, with a successful relaunch of the Smart Mirror portfolio using the online retail platform, the Company will not be as dependent on brick-and-mortar and e-commerce sites of Big Box retailers for our revenue streams as in previous years.

As of June 30, 2022, the Company had working capital of approximately $469 thousand, an accumulated deficit of approximately $7.5 million, a cash balance of $726 thousand, related party long term notes payable of $605 thousand and $1.5 million of current liabilities for related party current term notes payable, accounts payable and accrued liabilities. These liquidity conditions in the short -term raise substantial doubt about the Companys ability to continue as a going concern.

The Company has been in discussions with alternate funding sources that offer programs that are more in line with the Companys future business model, particularly a facility that provides funding options that are more suitable for the e-commerce business. The borrowing costs associated with such financing are dependent upon market condition and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future.

On April 5, 2021, the Company entered into five separate securities purchase agreements (“SPAs) whereby the Company privately placed an aggregate of 2,496,667 shares of Common Stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement). The five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited investors (under Rule 501(a)Regulation D under the Securities Act of 1933, as amended, (“Securities Act). The $1,498,000 in proceeds from the Private Placement was used mostly to purchase start up a inventory for the Companys new Smart Mirror product line, and the remainder for advertising and working capital.

On July 2, 2021, the Board of Directors (“Board) resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror business. The Board resolved that certain Directors could negotiate the terms of a Purchase Order Funding Agreement for up to $1,020,000 with Directors S. Wallach, J. Postal and E. Fleisig, a natural person. This agreement was finalized, and the Company received the $1,020,000 funding under this agreement on October 18, 2021. As of June 30^th, 2022 the amount due on this loan is $1,055,629 including accrued interest.

On May 1, 2022 the Company negotiated three $200,000 each, working capital funding agreements, to provide funding for daily operations. The Board resolved that certain Directors could negotiate the terms of a Working Capital Funding Agreement for up to a total of $600,000, with Directors S. Wallach (Group Nexus), J. Postal and Mouhaned Khoury, a natural person. On May 1^st the three individual agreements became effective. The terms are for 18 months with a simple interest rate of 5 percent per annum. These loans may be prepaid in full or partially without any penalty The Company received the $600,000 funding under these agreements on May 5, 9 and 11, 2022. Management is closely monitoring its operations, liquidity, and capital resources and is actively working to minimize the current and future impact of this unprecedented situation. As of June 30, 2022, the amount due on these loans is $605,013 including accrued interest.

Based on past performances and current expectations, Management believes that with the $1,393,000 equity investment and in 2022, the $1,020,000 purchase order funding facility and with the negotiated $600,000 working capital line, collectively this cash insertion provides adequate liquidity to meet the Company’s cash needs for our daily operations, capital expenditures and procurement of the Smart Mirror inventory for the short-term. However, we will need to continue seeking additional funding through either debt or equity to continue meeting our current financial obligations which consists of approximately $377,000 of accounts payable and accrued expenses, $1,055,629 note payable with related parties and accrued interest that becomes due in April 2023 and $605,013 of principle and accrued interest on the new working capital loan, until the Company is able to generate sufficient operating cash flows from the sale of the Smart Mirror inventory.

Nature of Business

Capstone Companies, Inc. is headquartered in Deerfield Beach, Florida.

Since the beginning of fiscal year 2007, the Company through CAPI has been primarily engaged in the business of developing, marketing, and selling home LED products (“Lighting Products) through national and regional retailers in North America and in certain overseas markets. The Companys products are targeted for applications such as home indoor and outdoor lighting and have different functionalities to meet consumers needs. The development of the smart interactive mirror or “Smart Mirrors is part of the Companys strategic effort to find new product lines to replace or supplement existing products that are nearing or at the end of their product life cycle. These products are offered under the Capstone brand. The Smart Mirror launch was announced in February 2021, but because of operational delays and regional lockdowns resulting from the upsurge in variants of COVID-19 in Thailand, the product shipments were delayed and only started to ship in the first quarter 2022.

The Companys products are typically manufactured in Thailand and China by contract manufacturing companies. The Companys future product development effort is focused on the Smart Mirrors category because the Company believes, based on Companys management understanding of the industry, the Smart Mirrors have the potential for greater profit margin than the Companys historical LED consumer products. Technological developments and changes in consumer tastes could alter the perceived potential and future viability of Smart Mirrors as a primary product. Aggressive marketing and pricing by larger competitors in the smart mirror market could also adversely impact the Companys efforts to establish Smart Mirrors as its core product line. The Company may change its product development strategies and plans as economic conditions and consumer tastes change, which condition and changes may be unforeseeable by the Company or may be beyond the ability of the Company to timely or at all adjust its strategic and product development plans.

The Companys operations consist of one reportable segment for financial reporting purposes: Lighting Products.

Accounts Receivable

For wholesale product revenue, the Company invoices its customers at the time of shipment for the sales value of the product shipped. Accounts receivables are recognized at the amount expected to be collected and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers.

As of June 30, 2022, outstanding accounts receivable in the United States has been collateralized against the May 1^st 2022 working capital loans of $200 thousand each until the loan and accumulated interest have been paid off in full (see Note 5).

Allowance for Doubtful Accounts

 The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair a specific customers ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and the Companys historical payment experience. An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.

As of June 30, 2022, and December 31, 2021, management determined that accounts receivable is fully collectible. As such, management has not recorded an allowance for doubtful accounts.

 Inventories

The Companys inventory, which consists of finished Thin Cast Smart Mirror products for resale to consumers by Capstone, is recorded at the lower of landed cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when the expected realizable value of a specific inventory item falls below its original cost.

Management regularly reviews the Companys investment in inventories for such declines in value. The write-downs are recognized as a component of cost of sales. Management did not feel a reserve was necessary was of June 30, 2022 or December 31, 2021 based on its analysis. As of June 30, 2022, and December 31, 2021, the inventory was valued at $1,025,911 and $508,920, respectively. Approximately $517 thousand of the inventory increase is the result of the buildup of the Connected Surfaces inventory to support the new online sales program in 2022.

Goodwill

On September 13, 2006, the Company entered into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (“Capstone). Capstone was incorporated in Florida on May 15, 1996 and is engaged primarily in the business of wholesaling technology inspired consumer products to distributors and retailers in the United States.

Under the Stock Purchase Agreement, the Company acquired 100% of the issued and outstanding shares of Capstones common stock, and recorded goodwill of $1,936,020. Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired.

Goodwill is tested for impairment on December 31 of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the carrying amount exceeds its fair value, an impairment loss is recognized. Goodwill is not amortized. The Company estimates the fair value of its single reporting unit relative to the Companys market capitalization.

As a result of the economic uncertainties caused by the COVID-19 pandemic and decline in revenue during the quarter ended June 30, 2022, management determined sufficient indicators existed to trigger the performance of an interim goodwill impairment analysis for the three months ended June 30, 2022. The analysis concluded that the Companys fair value exceeded the carrying value of its single reporting unit and a goodwill impairment charge was not required.

The Company estimates the fair value of its single reporting unit relative to the Companys market capitalization which utilizes level 1 inputs.

 Fair Value Measurement

The accounting guidance under Financial Accounting Standards Board (“FASB) Accounting Standards Codification (“ASC), “Fair Value Measurements and Disclosures (ASC 820-10) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are as follows:

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

Level 3: Significant unobservable inputs.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of Common Stock outstanding as of June 30, 2022, and 2021. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into common stock. For calculation of the diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. For the three and six months ended June 30, 2022, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 2,087,921 which was comprised of 888,288 stock options, 199,733 warrants and 15,000 of Preferred B-1 stock convertible into 999,900 of common stock, as compared to 980,000 stock options for the three months ended June 30, 2021.

Revenue Recognition

The Company generates wholesale revenue from developing, marketing, and selling consumer lighting products through national and regional retailers. The Companys products are targeted for applications such as home indoor and outdoor lighting and have different functionalities. Capstone currently operates in the consumer lighting products category in the United States and in certain overseas markets. These products may be offered either under the Capstone brand or licensed brands.

A sales contract occurs when the customer-retailer submits a purchase order to buy a specific product, a specific quantity, at an agreed-fixed price, within a ship window, from a specific location and on agreed payment terms.

The selling price in all of our customers orders has been previously negotiated and agreed to including any applicable discount prior to receiving the customers purchase order. The stated unit price in the customers order has already been determined and is fixed at the time of invoicing.

 The Company recognizes product revenue when the Companys performance obligations as per the terms in the customers purchase order have been fully satisfied, specifically, when the specified product and quantity ordered has been manufactured and shipped pursuant to the customers requested ship window, when the sales price as detailed in the purchase order is fixed, when the product title and risk of loss for that order has passed to the customer, and collection of the invoice is reasonably assured. This means that the product ordered and to be shipped has gone through quality assurance inspection, customs and commercial documentation preparation, the goods have been delivered, title transferred to the customer and confirmed by a signed cargo receipt or bill of lading. Only at the time of shipment when all performance obligations have been satisfied will the judgement be made to invoice the customer and complete the sales contract.

With the Company launching the Smart Mirror program, these orders are sold initially through e-commerce platforms. The Company will only bill the customer and recognize revenue upon the customer obtaining control of the Smart Mirror order which will generally occur upon delivery.

The Company may also sell the Smart Mirror program through independent retailers. The Company will only bill the customer and recognize revenue upon the customer obtaining control of the Smart Mirror order which will generally occur upon order shipment.

The following table presents net revenue by geographic location which is recognized at a point in time:

  Schedule of Net Revenue by Major Source

We provide our wholesale customers with limited rights of return for non-conforming product warranty claims. As a policy, the Company does not accept product returns from customers, however occasionally as part of a customers in store test for new product, we may receive back residual inventory.

Customer wholesale orders received are not long-term orders and are typically shipped within six months of the order receipt, but certainly within a one-year period. Our payment terms may vary by the type of customer, the customers credit standing, the location where the product will be picked up from and for international customers, which country their corporate office is located. The term between invoicing date and when payment is due may vary between 30 days and 90 days depending on the customer type. In order to ensure there are no payment issues, overseas customers or new customers may be required to provide a deposit or full payment before the order is delivered to the customer.

 The Company selectively supports retailers initiatives to maximize sales of the Companys products on the retail floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to the customer. The Company recognizes these incentives at the time they are offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to cost of sales, or marketing expenses depending on the type of sales incentives. Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period when the related revenue is recorded. The reduction of accrued allowances is included in net revenues and amounted to $1.3 thousand and a $0 for the three months ended June 30, 2022, and 2021, respectively and $2.3 thousand and $7.6 thousand for the six months ended June 30, 2022 and 2021, respectively.

Warranties

The Company provides the end user with limited rights of return as a consumer assurance warranty on all products sold, stipulating that the product will function properly for the warranty period. The warranty period for all products is one year from the date of consumer purchase.

Certain retail customers may receive an off invoice-based discount such as a defective/warranty allowance, that will automatically reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the cost of any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances are charged to cost of sales at the time the order is invoiced. For those customers that do not receive a discount off-invoice, the Company recognizes a charge to cost of sales for anticipated non-conforming returns based upon an analysis of historical product warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.

For the new online Smart Mirror customers the product has a One Year Limited Warranty. The purchaser must register the product within 30 days from date of purchase with specific product information to activate the warranty. Capstone warrants the product to be free from defects in workmanship and materials for the warranty period. If the product fails during normal and proper use within the warranty period, Capstone at its discretion, will repair or replace the defective parts of the product, or the product itself.  

Advertising and Promotion

Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing expenses. Advertising and promotion expense was $39,110 and $3,573 for the three months ended June 30, 2022 and 2021, and $160,484 and $7,583 for the six months ended June 30, 2022 and 2021, respectively. The approximate $152 thousand increase over last year was mainly the result of the Companys attendance at the Consumer Electronics Show (CES) in January 2022 which was cancelled in 2021 because of the COVID-19 pandemic and promotional activities connected with the Smart Mirror products in social media.

 Product Development

Our research and development consultants located in Hong Kong working with our designated contractor factories, are responsible for the design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All research and development costs are charged to results of operations as incurred. With the reduction of revenue resulting from the impact of the COVID-19 pandemic and combined with the transfer of manufacturing to Thailand, the CIHK operation was closed down in March 2022 and the Company will remain registered in Hong Kong in a dormant status. Two key management were retained as consultants to support product development and sales operations.

Product development expenses were $44,708 and $52,153, for the three months ended June 30, 2022, and 2021, respectively and $96,268 and $79,045 for the six months ended June 30, 2022 and 2021, respectively.

Accounts Payable and Accrued Liabilities

The following table summarizes the components of accounts payable and accrued liabilities as of June 30, 2022 and December 31, 2021, respectively

Schedule of Components of Accounts Payable and Accrued Liabilities

Income Taxes

The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions.

The Company accounts for income taxes under the provisions of ASC 740 Income Taxes. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries file consolidated income tax returns. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant judgement to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities generally for a period of 3 years from the later of each return due date or date filed.

On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years.

If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be recorded as a component of income tax expense.

Stock Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Companys condensed consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense. The Company accounts for forfeitures as they occur. Stock-based compensation expense recognized during the three months ended June 30, 2022, and 2021 was $3,362 and $4,200, respectively and $6,724 and $8,400 for the six months ended June 30, 2022 and 2021, respectively.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, periodic impairment tests, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Historically, past changes to these estimates have not had a material impact on the Companys financial statements. However, circumstances could change, and actual results could differ materially from those estimates.

Recent Accounting Standards

In June 2016, the FASB issued Accounting Standards Update (“ASU) 2016-13, “Financial Instruments – Credit Losses. This ASU sets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In November 2019, the effective date of this ASU was deferred until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is in the process of determining the potential impact of adopting this guidance on its consolidated financial statements.

Adoption of New Accounting Standards

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740). The amendments in ASU 2019-12 seek to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplify GAAP in other areas of Topic 740. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of ASU 2019-12 did not have a material effect on the Company’s consolidated financial statements.

The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Companys consolidated financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Companys consolidated financial statements properly reflect the change.