ChronoScale Holdings Corp

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Forward-Looking Statements

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This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. You can identify these forward-looking statements through our use of words such as “will,” “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions, or state other “forward-looking” information.

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These statements are based on our management’s beliefs and assumptions, which are based on currently available information. Our actual results, and the assumptions on which we relied, could prove materially different from our expectations. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:

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•our ability to raise additional capital or borrow funds in a timely manner, on acceptable terms, or at all;

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•our ability to comply with our obligations under the Microsoft Agreement in a timely manner, or at all

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•conditions in the debt and equity capital markets, including the availability and costs of financing to fund our current operations and the growth and expansion of our business;

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•customer concentration (including an inability to renew existing customer agreements) and the impact that the loss of, or a material reduction in business from, any significant customer could have on our business, financial condition and results of operations;

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•limitations on our ability to attract and retain key personnel, including our executive officers and members of the Board of Directors of the Company (the "Board");

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•changes in operational and capital plans;

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•higher than expected costs and expenses;

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•unexpected future capital expenditures;

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•economic and competitive conditions;

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•the success of our risk management activities, including any failure by the Company to implement and maintain effective internal controls;

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•litigation, including the potential litigation concerning the Business Combination;

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•our ability to realize the expected benefits of focusing our operations on our Cloud Business;

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•cash flow and access to capital; and

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•uncertainties related to market conditions.

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You should carefully review the risks described in Part I – Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended May 31, 2026, which was filed with the SEC on August 19, 2026, as well as any other cautionary language in this Quarterly Report on Form 10-Q, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

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Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time, and it is not possible for our management to predict all risk factors and uncertainties, nor are we able to assess the impact of all of these risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements. These risks are not exhaustive.

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Business Overview

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We operate our business through ChronoScale Corporation, a Nevada corporation and a wholly-owned subsidiary of the Company (f/k/a Applied Digital Cloud Corporation, a Nevada corporation) (“Cloud”). Following the Holding Company

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Transaction (as defined and described below), Applied Digital Cloud Corporation changed its name to ChronoScale Corporation. All references to “Cloud” prior to the Holding Company Transaction are to Applied Digital Cloud Corporation and after the Holding Company Transaction, to ChronoScale Corporation. Through Cloud, we provide graphics processing unit (“GPU”) computing solutions that enable customers to execute artificial intelligence (“AI”), machine learning (“ML”), rendering and other high-performance computing workloads using company-owned equipment at third-party colocation centers in Colorado, Minnesota and Utah (the “Cloud Business”). As of August 31, 2026, we had deployed 6,144 NVIDIA H100 GPUs across these locations and provided one GPU capacity customer with dedicated access to infrastructure at all three locations. Customers pay a fixed, per-GPU, per-hour rate, subject to change, with fees billed and paid monthly. Beginning in the first quarter of fiscal year 2027, we also provided certain one-time resale arrangements involving AI infrastructure hardware and ancillary support and maintenance services, which, as of August 31, 2026, served one additional customer. We maintain additional deployable capacity at each location and intend to offer this capacity to existing and prospective customers through dedicated GPU infrastructure services and our Token Factory managed inference offering, under which customers consume compute on a usage-based, per-token basis. For the three months ended August 31, 2026, the Cloud Business accounted for approximately 94.1% of our total revenue. Subsequent to the fiscal quarter ended August 31, 2026, we completed the sale of the Legacy Ekso Business.

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Holding Company Transaction

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On July 1, 2026, we completed a holding company formation transaction (the “Holding Company Transaction”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of July 1, 2026, by and among ChronoScale Corporation, ChronoScale Holdings Corporation (“ChronoScale Holdings”), and CHRN Merger Sub Inc. (“Merger Sub”). The Holding Company Transaction was effected as a corporate restructuring under Section 92A.134 of the Nevada Revised Statutes. As part of the Holding Company Transaction, ChronoScale Corporation contributed all of the outstanding equity interests of its wholly-owned subsidiary, Cloud, to ChronoScale Holdings pursuant to a contribution agreement, resulting in Cloud becoming a direct, wholly-owned subsidiary of ChronoScale Holdings. Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into ChronoScale Corporation, with ChronoScale Corporation continuing as the surviving corporation and a wholly owned direct subsidiary of ChronoScale Holdings. As a result of the Holding Company Transaction, ChronoScale Holdings became the public company parent of and successor issuer to ChronoScale Corporation, and ChronoScale Corporation subsequently converted from a Nevada corporation to a Nevada limited liability company and changed its name to “ChronoScale Intermediate LLC.” In addition, Applied Digital Cloud Corporation changed its name to “ChronoScale Corporation.” The holding company structure better reflects our individual operating businesses, allows for and can accommodate future growth from internal operations and generally provides for greater administrative and operational flexibility.

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Business Updates

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Strategic Partnership Agreements

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Microsoft Strategic Partnership

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On August 6, 2026, we entered into a GPU Services Agreement with Microsoft Corporation, which was amended effective as of August 21, 2026 (as amended, the "Microsoft Agreement"). Under the Microsoft Agreement, we will provide Microsoft with dedicated GPU services at a data center facility in Texas, over an approximately three-year service term, supporting approximately 50 MW of AI compute capacity. The GPU services will be made available to Microsoft in two tranches of NVIDIA GB300 GPUs, with the respective deliveries expected to occur in February and March of 2027 (subject to extension in certain circumstances). The GPU quantity and contract value are expected to be approximately equal across both tranches. The deployment is subject in part to our ability to obtain financing and to satisfy customary development, construction and operational conditions and milestones.

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The Microsoft Agreement may be terminated by Microsoft under certain circumstances, for which cure rights may be available. Upon certain terminations, we are required to refund the upfront payments in full for any tranche not yet accepted and on a pro rata basis for any accepted tranche. Our termination rights are more limited, and neither party may terminate for convenience. The Microsoft Agreement also contains other customary provisions for an agreement of this nature, including service level commitments, excluded delays, delay credits, governance reporting, representations and warranties, force majeure, indemnities, limitations of liability and change of control restrictions. For a discussion of the risks related to the Microsoft Agreement, see Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the fiscal year ended May 31, 2026.

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Nutanix Strategic Partnership

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On August 18, 2026, we announced a strategic partnership with Nutanix, Inc. ("Nutanix") to jointly deliver enterprise-ready AI infrastructure. The partnership is expected to enable enterprises to extend Nutanix on-premises environments into our GPU-as-a-Service capacity, access pre-paid inference through ChronoScale Token Factory (as defined above), and deploy ChronoScale Foundry for agentic AI workflows within their own environments. The framework includes joint go-to-market, solution development, and technical integration, and is expected to be implemented through one or more definitive agreements.

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Baseten Strategic Partnership

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On August 28, 2026, we entered into a three-year strategic partnership with Baseten Labs, Inc. ("Baseten") to support the planned deployment of approximately four megawatts of AI compute capacity. Upon projected completion in the first calendar quarter of 2027, the deployment is expected to expand our available compute capacity and further strengthen our position as a provider of high-performance digital infrastructure supporting AI and cloud computing applications. The deployment is subject to our ability to obtain financing on favorable terms and satisfy customary development, construction and operational conditions and milestones. Failure to satisfy these conditions or meet these milestones could result in penalties or entitle our counterparty to credits.

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We intend to pursue similar strategic partnerships globally over time to extend the reach of our platform and accelerate enterprise AI adoption worldwide.

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Change of Principal Place of Business

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On August 6, 2026, we changed our principal place of business to 2440 Sand Hill Road, Suite 400, Menlo Park, California 94025.

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Management Update

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On September 18, 2026, Rajasekar Jegannathan, our Chief Technology Officer since June 2026, notified us of his intention to resign from his position, effective October 2, 2026. We have initiated a search for his successor.

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On September 30, 2026, and in connection with the Legacy Ekso Business sale, Jason Jones was terminated from his position as the Chief Operating Officer of Ekso. In connection with the sale of the Legacy Ekso Business, Scott Davis, a member of the Board and Chief Executive Officer of Ekso, resigned from his position as a member of the Board, effective as of October 3, 2026.

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Prepayments under Customer Contracts

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In this Quarterly Report on Form 10-Q for the quarter ended March 31, 2026 (this "Quarterly Report"), the “Company”, “we”, “its” and “our” refers to Ekso Bionics Holdings, Inc. and its wholly-owned subsidiaries. The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, which is incorporated herein by reference (the “Annual Report”).

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This Quarterly Report contains forward-looking statements. These forward-looking statements include statements other than statements of historical facts contained or incorporated by reference in this Quarterly Report, including statements regarding (i) the plans and objectives of management for future operations, including those relating to the design, development, distribution and commercialization of exoskeleton products for humans, including for Nomad and BalanceTutor, (ii) the manufacturing of our products and strengthening of our supply chain, and potential opportunities for strategic partnerships, (iii) beliefs regarding the regulatory path for our products, including potential approvals required and timing of approvals, (iv) our future financial performance, including any such statement contained in a discussion and analysis of our financial condition by management or in our results of operations, (v) our beliefs regarding the potential for commercial opportunities, including for exoskeleton technology and our exoskeleton products, and for strategic partnerships, (vi) our beliefs regarding potential clinical and other health benefits of our medical devices, (vii) the actions we will take in seeking reimbursements from Centers for Medicare and Medicaid Services ("CMS") and the success of such actions, (viii) the timing and amounts of CMS reimbursement, (ix) our ability to grow and expand our Ekso Indego Personal Health market as we work to grow revenue in light of Medicare reimbursement from CMS of the Ekso Indego Personal, (x) our ability to obtain insurance coverage beyond CMS, (xi) our ability to obtain additional indications for products that cover the Ekso Indego Personal, (xii) the timing of executing large sales contracts, (xiii) our expectations regarding the timing and impact of impairment charges on the value of certain of our assets in future periods, (xiv) the impact and effects of the other risk factors on our business, results of operations or prospects, (xv) our evaluation of one or more strategic transactions, (xvi) statements regarding the Business Combination (as defined below), including the Closing (as defined below), the timing of the Business Combination and the structure of the Business Combination, (xvii) statements regarding ChronoScale (as defined below), including our intention to change our fiscal year to May 31 st, and (xviii) the assumptions underlying or relating to any statement described in points (i) through (xvii) above. The words “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and similar expressions (including the negative of any of the foregoing) are intended to identify forward-looking statements.

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The following factors, among others, including those described in the section titled “Risk Factors” included in our Annual Report, as updated and supplemented in this Quarterly Report under the heading “Part II – Item 1A. Risk Factors,” could cause our future results to differ materially from those expressed in the forward-looking information:

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Although we believe that the assumptions underlying the forward-looking statements and forward-looking information contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, such statements and information included in this Quarterly Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements and forward-looking information included herein, the inclusion of such statements and information should not be regarded as a representation by us or any other person that the results or conditions described in such statements and information or that our objectives and plans will be achieved. Such forward-looking statements speak only as of the date of this Quarterly Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

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Overview

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Our Business

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We design, develop, and market exoskeleton and complementary products that augment human strength, endurance, and mobility. The primary end market for our exoskeleton technology is healthcare, where our technology primarily serves people with physical disabilities or impairments in both physical rehabilitation and mobility. The majority of our sales are generated from our Enterprise Health products, which include the sales of products and services related to neurorehabilitation in clinical settings. We also provide products and services from our Personal Health market to individual users.

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In addition to our current products and services, we continue to explore business development initiatives to fuel growth and long-term value in our existing markets.

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Enterprise Health Market

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Our sales priority for Enterprise Health customers involves the education of clinical and executive stakeholders on the economic and clinical value of our robotic exoskeleton portfolio, including the EksoNR and the Ekso Indego Therapy devices. In tandem, we continue to leverage our EksoNR and Ekso Indego customer base to educate and mentor strategic target centers that specialize in stroke, traumatic brain injury ("TBI"), multiple sclerosis ("MS"), and spinal cord injury ("SCI") rehabilitation and treatment in specific geographies.

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Within our Enterprise Health market we also sell our EVO product to commercial and industrial companies that are focused on solving ergonomic challenges for their workers. These challenges range from injury prevention, fatigue reduction, and/or improved worker productivity. Sales of EVO are focused on applications that involve repetitive work at shoulder height and above. While EVO is a general-purpose product, we currently target specific vertical markets, including aerospace, automotive, general manufacturing, and certain construction trades.

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Starting in late 2025, we began marketing the MediTouch BalanceTutor to our Enterprise Health customers under an exclusive distribution agreement with MediTouch. The BalanceTutor rehabilitation system includes a patented multidirectional perturbation treadmill and multiple force and movement sensors that allow patients impacted by impaired balance to react to unanticipated disturbances while standing or walking. We believe that the BalanceTutor offers treatment options that are complementary to our rehabilitation exoskeletons and that the two can be used in combination for many patients. We expect to begin the sales and distribution of the BalanceTutor in the second quarter of 2026.

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Personal Health Market

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Within the Personal Health market, we serve individual users with the Ekso Indego Personal, which is intended to provide overground ambulation in community and home settings. The primary use case for Ekso Indego Personal is for users with SCI. For this user population, confinement to a wheelchair can cause severe physical and psychological deterioration. As a result, the secondary medical consequences of paralysis can include difficulty with bowel and urinary tract function, osteoporosis, loss of lean mass, gain in fat mass, insulin resistance, diabetes, and heart disease. The cost of treating these conditions is substantial.

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On April 11, 2024, CMS approved a payment level of approximately $91,000 for Medicare reimbursement of the Ekso Indego Personal, which took effect on April 1, 2024. CMS reimbursement creates the possibility that we will see increased demand for this device as we are able to more economically serve the larger U.S. patient population suffering from SCI. Specifically, as of December 31, 2025, according to the National Spinal Cord Injury Statistical Center ("NSCISC") in their 2026 SCI Data Sheet, approximately, an estimated 312,000 individuals are currently living with SCI and another 18,000 suffer from new SCI injuries each year. According to the NSCISC in their SCI Model Systems 2024 Annual Statistical Report, approximately 57% of individuals with SCI are enrolled in Medicare or Medicaid within five years post-injury.

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With Medicare reimbursement approved, we began selling products to individuals in this market through Durable Medical Equipment suppliers ("DMEs"). DMEs typically resell products from DME manufacturers, like us, to individual users. DMEs are responsible for the Medicare reimbursement process, which requires a physician’s prescription and evidence of medical necessity to be submitted to and approved by Medicare before reimbursement is provided.

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Throughout 2025 and early 2026, we continued to make progress on developing the go-to-market program for our Personal Health products. Users of this technology are individuals living with an SCI who will either self-pay, or work through the currently established reimbursement programs involving worker’s compensation, VA, or Medicare. As in previous years, VA and worker’s compensation claims are well defined but traditionally are lower volumes. For Medicare, we have continued to develop our channel partner program consisting of O&P and DME partners, and through the three months ended March 31, 2026, our partners continue to work through the claims process with both existing and new submissions. To date, most reimbursements have involved an appeals process, and our partners continue to refine their programs to best meet the feedback learned through the appeals process. As this category of product is relatively new within CMS, we continue to take a measured approach with respect to the volume and timing of CMS reimbursement submissions, focusing on continued refinement and improvement of our candidate screening and submission documentation. The improvements in this process have resulted in an initial increase in our partners' CMS reimbursement submissions. In support of this effort, to date we have signed agreements with National Seating & Mobility for selling exclusivity into the Complex Rehabilitation Technology segment, with Bionic Prosthetics & Orthotics Group, a respected O&P provider serving 14 states, and with Ottobock Patient Care, a national provider of O&P services, and we continue to explore partnerships and pilots with other regional and national O&P suppliers that we believe will bear fruit in 2026 and beyond. In addition to this work, our expanded direct marketing efforts continue to develop a sales pipeline for the Ekso Indego Personal device. As of March 31, 2026, we had over 50 individuals who we believe qualify for potential reimbursement. We anticipate that many of these individuals will have their claims submitted to CMS by our partners over the next 12 months, though we expect our processes and procedures to continue to be refined as we continue to scale this sales channel over time. Given this ramp, we expect the majority of our revenue in 2026 will continue to come from Enterprise Health sales, but with Personal Health product sales contributing more quarter over quarter.

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Another key part of our growth strategy is seeking insurance coverage beyond CMS and seeking additional indications of use for our products. Longer term, we believe that sales of our Personal Health products have the potential to be a significant growth driver for us as we work to gain coverage by other insurance providers, expand the products' indications of use beyond SCI and optimize our reimbursement submission processes.

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Nomad is currently for sale in limited volumes in the Personal Health market for use in a non-Company-sponsored single clinical study. Subject to clinical and patient feedback from clinical trials, we expect to begin the general commercialization process for Nomad in late 2026.

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Subject to the satisfaction or waiver of the conditions set forth in the Contribution Agreement, Contributor will contribute all of its right, title and interest in and to 1,200 shares of the common stock of Cloud, constituting 100% of the issued and outstanding equity of Cloud, to us in exchange for 138,216,820 newly issued shares of our common stock (the “Exchanged Shares”). As a result of and upon the consummation of the Business Combination, Contributor is expected to own approximately 97% of the combined company’s outstanding equity before giving effect to the other transactions contemplated by the Contribution Agreement.

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The Contribution Agreement provides that the Closing is subject to certain conditions, including, among other things: (i) no order or law shall have been entered, adopted, enacted, issued, promulgated or enforced, in each case, by a governmental entity that prevents, enjoins, prohibits, restrains or makes illegal the consummation of the Business Combination or the other transactions contemplated by the Contribution Agreement; (ii) all requisite approvals or waivers as required by the terms of the Contribution Agreement shall have been obtained; (iii) we shall have cash and cash equivalents equal to at least $15,000,000; and (iv) our Second Amended and Restated Articles of Incorporation (the “Second Restated Articles”) shall have been duly adopted by all necessary corporate action on our part, filed with the Secretary of State of the State of Nevada, and shall be in full force and effect as of immediately prior to the Closing.

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The obligation of each party to consummate the Business Combination is also conditioned upon (i) performance and compliance by the other party in all material respects with its pre-Closing obligations and covenants under the Contribution Agreement; (ii) the accuracy of the representations and warranties of the other party as of the Closing (subject to customary materiality qualifiers); (iii) in both Cloud’s and our case, the absence of a continuing material adverse effect with respect to the other party; (iv) in Cloud’s case, that (a) a private placement transaction for gross proceeds of an amount to be determined by APLD Intermediate and on terms acceptable to APLD Intermediate, shall have been consummated concurrently with the Closing (the securities to be issued in such private placement transaction, the “PIPE Securities”), (b) certain third-party consents as required by the terms of the Contribution Agreement shall have been obtained, (c) the Nasdaq listing application shall have been submitted and approved, (d) the Investor Rights Agreement (the “Investor Rights Agreement”) between us and Contributor shall be in full force and effect at Closing, and (e) certain tail insurance policies as described in the Contribution Agreement have been bound, paid for and in effect. See “Part I—Item 1A. Risk Factors,” specifically the risks under the heading “Risks Related to the Proposed Business Combination,” for more information.

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We are continuing to explore one or more strategic transactions with certain third parties with respect to our medical device business. There can be no assurances that any such transaction will occur.

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Economic and Industry Trends

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Our revenue is highly dependent on market demand for our exoskeleton products. This market demand is influenced by many factors including the level of awareness of robotic exoskeleton rehabilitation among the rehabilitation clinics with significant stroke, ABI, and SCI populations, the levels of reimbursements our customers will be able to receive, the level of reimbursement we will able to receive from Medicare on claims related to our Ekso Indego Personal, as well as conditions relating to overall economic growth and general business activity. Difficult and challenging economic conditions, including an increasingly inflationary environment and federal funding and policy changes, have led to increased price-based competition. In particular, the effects of such increasing price-based competition have had an especially significant impact on certain products that we offer, including the EksoNR and Ekso Indego Therapy in the United States, which have a lengthy sale and purchase order cycle because they are major capital expenditure items and generally require the approval of senior management at purchasing institutions. The timing of executing sales contracts with large hospital networks can be unpredictable, which has and may continue to impact the timing and amounts of device sales. Furthermore, we do business in the Americas, EMEA and APAC, which results in our business being impacted by changes in the strength of the local currencies relative to the U.S. Dollar.

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See “Part I—Item 1A. Risk Factors,” specifically the risk titled “Coverage policies and reimbursement levels of third-party payers, including Medicare or Medicaid, may impact sales of our products” in our Annual Report for more information.

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Critical Accounting Estimates

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Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our estimates form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our most critical accounting estimates include:

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Standalone Selling Prices

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Our device sales arrangements contain multiple products and services, most often including the device(s) and service, both of which we have identified as distinct performance obligations. Revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable, then we estimate the standalone selling prices considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer, and gross margin targets. Changes in the relative standalone selling price between devices and service can have an impact on how transaction prices are allocated between revenue and deferred revenue.

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In connection with equity financings, we generally account for convertible preferred stock as temporary equity and warrants as a component of equity (for additional information see Note 11.Capitalization and Equity Structure in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report). The fair values of these financial instruments have been determined using the Binomial Lattice model (the "Lattice Model"). The Lattice Model provides for assumptions regarding expected volatility, expected term, exercise price, risk-free interest rates, the value of the underlying security, and the probability of and likely timing of a specific event within the period to redemption or maturity. These values are subject to a significant degree of judgment. In addition to the aforementioned inputs, the Company’s common stock price represents a significant input that affects the valuation of such convertible preferred stock and warrants.

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Provision for Credit Losses on Accounts Receivable

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We carry accounts receivable at invoiced amounts less an allowance (or "provision") for credit losses. We review accounts receivables for collectability and determine an allowance for credit losses. The allowance for credit losses on accounts receivables reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance based on historical bad debt expense, the aging of the accounts, known troubled accounts, customer payment history, and other currently available evidence.

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Inventory Valuation

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Inventory is stated at the lower of cost or net realizable value. Cost is computed using the standard cost method which approximates actual cost on a first-in, first-out basis. The cost basis of our inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse effect on the results of our operations.

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Deferred Tax Asset

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We estimate a valuation allowance in consideration of the realizability of our net deferred tax assets, primarily based on our assessment of the timing, likelihood and amounts of potential future income during which such items become deductible. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes and estimate future amounts. Management does not believe it is more likely than not that we will generate future income in a timeframe and amount sufficient to realize our net deferred tax assets. Changes in management's estimate of future income in the timeframe during which the temporary differences and carryforwards comprising our deferred tax assets become deductible could result in a material impact to our financial position including the recognition of a net deferred tax asset.

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Future Warranty Costs

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Sales of devices generally include an initial warranty for parts and services for one year in the Americas, two years in EMEA, and one to three years in the APAC region. A liability for the estimated cost of product warranty is established at the time revenue is recognized based on the historical experience of known product failure rates and expected material and labor costs to provide warranty services. Specific additional warranty accruals may be made if unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than the actual amounts necessary, a portion of the liability may be reversed in future periods. At the end of each reporting period, we estimate our future warranty costs related to products sold during the period. This liability represents our best estimate of the costs we will incur to fulfill warranty obligations for products sold during the period. At least annually, we review and update our estimates based on actual warranty claims experience.

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Accounting for Leases

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Useful Lives Assigned to Long-Lived Assets