Perfect Moment Ltd. 10-Q

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except number of countries, style count and share and per share data) Overview Perfect Moment is a luxury lifestyle brand offering high-performance skiwear and complementary apparel categories that merge technical functionality with fashion-led design. We develop collections for women, men, and children that reflect a combination of technical integrity, elevated aesthetics, and versatility across seasons and use cases. We design all products in-house and rely on a network of manufacturing partners across Europe and Asia, including China. Our merchandise is sold in over 60 countries through a combination of direct-to-consumer ecommerce, wholesale partnerships with premium retailers, select concession formats, and licensed international wholesalers. We are focused on generating long-term, brand-right growth and improving profitability. During the three months ended June 30, 2025, we continued to scale our direct-to-consumer business, launched a new spring/summer capsule, and increased our annual style count from approximately 75 to over 200. We also implemented a tiered pricing architecture across key categories to support value perception and drive margin enhancement. We intend to grow our business over time by expanding our digital and retail footprint, diversifying our product portfolio, enhancing international reach, and pursuing selective collaborations. Our marketing efforts—both brand-building and performance-driven—are designed to increase awareness, strengthen customer engagement, and support customer acquisition and retention. 15 Recent Developments On July 21, 2025, the representative of the underwriters partially exercised the over-allotment option for an additional 313,128 shares of the Company’s common stock, generating net proceeds of approximately $87, after deducting underwriting discounts and commissions and estimated offering expenses. On July 21, 2025, in connection with the underwriters’ exercise of the over-allotment option, the Company additionally issued the representative of the underwriters a warrant to purchase up to 15,656 shares of the Company common stock at an exercise price of $0.38 (the “July 2025 Warrant”). The July 2025 Warrant is exercisable beginning on the date of issuance and expires five years thereafter. Comparability of Financial Information Our historical operations and statements of assets and liabilities may not be comparable to our operations and statements of assets and liabilities as a result of completing our IPO in February 2024 and becoming a public company. Results of Operations The following table sets forth our results of operations for the: Three months ended June 30, 2025 Three months ended June 30, 2024 Change Revenue, net $ 1,472 $ 974 $ 498 Cost of goods sold 583 618 (35 ) Gross profit 889 356 533 Gross margin (1) 60.3 % 36.6 % Operating expenses: Selling, general and administrative expenses 3,415 3,298 117 Marketing and advertising expenses 529 453 76 Total operating expenses 3,944 3,751 193 Loss from operations (3,055 ) (3,395 ) 340 Total other (expense) income, net (764 ) 7 (771 ) Net loss $ (3,819 ) $ (3,388 ) $ (431 ) Other comprehensive losses Foreign currency translation losses (133 ) (14 ) (119 ) Comprehensive loss $ (3,952 ) $ (3,402 ) $ (550 ) (1) Gross margin is defined as gross profit as a percentage of revenue, net Non-GAAP Measures We analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total net sales, net loss, and other results under GAAP, the following information includes key operating metrics and non-GAAP financial measures that we use to evaluate our business. We believe that these measures are useful for period-to-period comparisons of the Company’s performance. We have included these non-GAAP financial measures in this Quarterly Report because they are key measures management uses to evaluate our operational performance, produce future strategies for our operations, and make strategic decisions, including those relating to operating expenses and the allocation of our resources. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. 16 Adjusted EBITDA Three months ended June 30, 2025 Three months ended June 30, 2024 Net loss, as reported $ (3,819 ) $ (3,388 ) Adjustments: Interest expense 779 5 Stock compensation expense 134 370 Amortization of stock-based services 199 - Depreciation and amortization 131 106 Adjusted EBITDA $ (2,576 ) $ (2,907 ) Adjusted EBITDA is a non-GAAP financial measure that displays our net loss from continuing operations, adjusted to eliminate the effect of certain items as described below. We define Adjusted EBITDA as net loss excluding interest expense, income tax benefit (expense), depreciation and amortization and stock-based compensation expense. Adjusted EBITDA is a measure that is not defined in US GAAP. We believe that it is useful to exclude these expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations in that period. We present adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA in developing our internal budgets, forecasts, and strategic plan; in analyzing the effectiveness of our business strategies; in evaluating potential acquisitions; in making compensation decisions; and in communications with our board of directors concerning our financial performance. The $331 improvement in Adjusted EBITDA for the three months ended June 30, 2025 compared to the same period in 2024 was primarily driven by a $533 increase in gross profit, reflecting higher revenue and an increase in gross margin from 36.6% to 60.3%. The margin expansion was largely attributed to the contribution from our partnership revenue stream, which had not been in effect during the three months ended June 30, 2024, as well as improved channel and product mix. Selling, general and administrative (SG&A) expenses increased $117 during the quarter, with key drivers including the $199 amortization of stock-based services, increased legal and professional fees in connection with public company fundraising efforts, higher payroll and related costs to support operational expansion, and incremental spending across key areas such as IT, insurance, travel, and retail operations. While these investments contributed to higher SG&A, they were necessary to support the Company’s transition and strategic objectives for growth. Additionally, a $76 increase in marketing and advertising expense, primarily from agency fees and promotional activities, further supported brand awareness and sales efforts. The improvement in Adjusted EBITDA demonstrates operating leverage on higher revenue and margin despite ongoing investments in infrastructure and brand development. Non-GAAP financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following: ● employee stock awards and common stock purchase options expense has been, and will continue to be for the foreseeable future, a significant recurring expense for the Company and an important part of our compensation strategy; ● the assets being depreciated or amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; ● non GAAP measures do not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; ● non-GAAP measures do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; ● non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs; and ● other companies, including companies in our industry, may calculate their non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures. 17 Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our net loss and our other financial results presented in accordance with GAAP. You are encouraged to evaluate the above adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Revenue Total revenue for the three months ended June 30, 2025 was $1,472, compared to $974 for the same period in 2024, an increase of $498, or 51.1%. Growth was primarily driven by contributions from new revenue streams, including collaboration revenue. Wholesale and ecommerce channels also contributed modest growth year-over-year. The year-over-year increase in revenue reflects the Company’s strategic efforts to diversify its sales channels and expand into new geographies while strengthening brand presence through collaborations and flagship retail exposure. Cost of goods sold Cost of goods sold for the three months ended June 30, 2025 was $583, compared to $618 for the same period in 2024, a decrease of $35, or 5.6%. The decrease was primarily driven by improved inventory efficiency and disciplined cost management. The Company continues to focus on optimizing its supply chain and sourcing practices to support long-term margin expansion. Gross profit and gross margin Gross profit for the three months ended June 30, 2025 was $889, compared to $356 for the same period in 2024, an increase of $533, or 149.7%. Gross margin improved to 60.3%, up from 36.6% in the prior-year period. This increase reflects the favorable impact of channel mix, particularly growth in higher-margin revenue streams, and the Company’s ongoing focus on disciplined pricing and supply chain reengineering. The margin expansion demonstrates progress toward achieving improved profitability while continuing to scale the business. Selling, general and administrative expenses (“SG&A”) SG&A expenses for the three months ended June 30, 2025 were $3,415, compared to $3,298 for the same period in 2024, an increase of $117, or 3.5%. The increase reflects strategic investments to support the Company’s growth trajectory. Key contributors included amortization of stock-based services, professional fees related to fundraising activities, and higher payroll and personnel costs (due to timing). The Company also incurred targeted increases across areas such as technology, compliance, and insurance to support operations and future scalability. Importantly, SG&A expenses remained relatively flat as a percentage of revenue, highlighting enhanced operating leverage and improved cost discipline. Marketing and advertising expense Marketing and advertising expenses for the three months ended June 30, 2025 were $529, compared to $453 for the same period in 2024, an increase of $76, or 16.7%. The increase reflects the Company’s continued investment in brand visibility and customer engagement initiatives. Higher spend was primarily driven by increased agency support and event-based activations aimed at driving growth across both direct-to-consumer and wholesale channels. The Company remains focused on maintaining marketing efficiency while building global brand awareness and desire. Seasonality and Quarterly Trends Our business is seasonal with revenue concentrated in northern hemisphere countries. Revenue is elevated in the quarters ending September 30, December 31 and March 31 driven by sales of ski and outerwear through the fall and winter months. In the quarter ending June 30 sales are driven by swimwear and activewear. Our growth rate fluctuates quarter-on-quarter as a result of the seasonality of our business. We expect this fluctuation to continue. In addition to seasonality, quarter-on-quarter results are expected to be impacted by the timing of goods production and delivery, promotional activities and the addition of new products and geographies as the business grows. The business is also subject to the impact of economic cycles that influence retail apparel trends. Liquidity and Capital Resources As of June 30, 2025, we had cash and cash equivalents of $2,986, including an accumulated deficit of $68,735. Historically, we have generated negative cash flows from operations and have primarily financed our operations through sales of equity securities, issuance of debt instruments and working capital finance facilities. We expect operating losses and negative cash flows from operations to continue into the foreseeable future as we continue to invest in growing our business and expanding our infrastructure. Our primary uses of cash include personnel and marketing expenditures, inventory, capital investment and expenditures in technology and incremental expenses arising from distribution center operating costs to support our operations and our growth. As a result of the seasonality of our business, we typically draw down on our finance facilities during summer, fall and early winter to meet a large proportion of the cost of goods associated with the manufacture of our fall/winter collection. Finance and debt factoring facilities support our working capital cycle through to the late fall/winter season when wholesale receivables are paid and ecommerce revenues increase. 18 Our ability to fund inventory purchases, capital expenditures, and growth will depend on our ability to generate cash in the future. Our future ability to generate cash from operations is, to a certain extent, subject to general economic, financial, competitive, regulatory and other conditions. Based on our current level of operations, we believe our existing cash balances and expected cash flows from operations, alongside the continuance of our existing financing arrangements, will be sufficient to meet our operating requirements for at least the next 12 months, excluding financing to support production (i.e. timing of working capital). We may seek additional or alternative debt and equity financing to that set out above. If we raise equity financing, our shareholders may experience significant dilution of their ownership interests. If we conduct additional debt financing, the terms of such debt financing may be similar or more restrictive that the terms of our current financing arrangements and we would have additional debt service obligations. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be harmed. See the sections included in our annual report filed on Form 10-K titled “Risk Factors – Risks Related to Ownership of Our Common Stock – Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our 2021 Equity Incentive Plan, could result in additional dilution of the percentage ownership of our stockholders” and “Risk Factors – Risks Related to Our Business, Our Brand, Our Products and Our Industry – We have a history of losses, expect to continue to incur losses in the near term and may not achieve or sustain profitability in the future, and as a result, our management has identified and our auditors reported that there is a substantial doubt about our ability to continue as a going concern.” Cash Flow Activities The following table shows summary cash flow information for the periods presented: Three months ended June 30, 2025 Three months ended June 30, 2024 Condensed consolidated statements of cash flow data: Net cash used in operating activities $ (3,892 ) $ (3,880 ) Net cash used in investing activities - (64 ) Net cash used in financing activities $ (466 ) $ - Cash Flows Used in Operating Activities During the three months ended June 30, 2025, operating activities used $3,892 in cash and cash equivalents and restricted cash, primarily resulting from a net loss of $3,819, an adjustment to add back non-cash charges of $1,249 and a net cash outflow from changes in operating assets and liabilities of $1,322. Net cash used by changes in operating assets and liabilities during the three months ended June 30, 2025 consisted primarily of an outflow of cash from a decrease in accrued expenses of $1,824, a decrease in trade payables of $272, and an increase in prepaid and other current assets of $260, partially offset by an inflow of cash from an increase in deferred revenue of $542 and a decrease in inventory of $228. During the three months ended June 30, 2024, operating activities used $3,880 in cash and cash equivalents and restricted cash, primarily resulting from a net loss of $3,388, an adjustment to add back non-cash charges of $398 and a net cash outflow from changes in operating assets and liabilities of $890. Net cash used by changes in operating assets and liabilities during the three months ended June 30, 2024 consisted primarily of an outflow of cash from a $1,645 increase in prepaid expenses and other current assets related to supplier deposits and a $857 decrease in accrued deferred revenue and an $375 decrease in inventories. Cash Flows Used in Investing Activities There was no cash used in investing activities for the three months ended June 30, 2025 as compared to the $64 that was used for the three months ended June 30, 2024 as we did not have requirement to purchase any property and equipment during the current period. 19 Cash Flows Provided by Financing Activities During the three months ended June 30, 2025, financing activities used $466 in cash and cash equivalents, primarily attributed to $2,538 of net proceeds from the sale of our common stock, $1,330 of net proceeds from short term borrowings, and $500 of net proceeds related to the issuance of a note payable to a related party, offset by a $2,241 repayment of short term borrowings, $2,495 repayment of trade finance facilities, and $98 payment of dividends on our Series AA Convertible Preferred Stock. There were no cash flows associated with financing activities during the three months ended June 30, 2024. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of significant judgment. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies, estimates, and judgements are as follows, and see Note 2. Summary of Significant Accounting Policies included in Item 8 of Part II for additional information: Revenue reserves The amount of consideration we receive and recognize as revenue, net across both wholesale and DTC channels varies with changes in sales returns and other accommodations and incentives we offer to our customers. When we give our customers the right to return products or provide other accommodations such as chargebacks and markdowns, we estimate the expected sales returns and miscellaneous claims from customers and record sales reserves to reduce revenue, net. As of March 31, 2025, our sales-related reserves were $0.6 million compared to $0.3 million as of March 31, 2024. The most significant variable affecting these reserve balances is sales levels. As a percentage of Net sales, the sales reserves balances were 2.8% as of March 31, 2025 compared to 1.3% as of March 31, 2024. The reserve for returns from customers is the component of our sales-related reserves most susceptible to estimation uncertainty. These estimates are based on 1) historical rates of product returns and claims; and 2) events and circumstances that indicate changes to such historical rates are warranted, such as our customers’ inventory positions and their anticipated sell-through rates. However, actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. As a result, we adjust our estimates of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the amount of consideration becomes fixed. If actual or expected future returns and claims are significantly different than the sales reserves established, we record an adjustment to Net sales in the period in which such determination was made. Accounts Receivable and Credit Losses We make ongoing estimates relating to the collectability of accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider historical levels of credit losses and significant economic developments within the retail environment that could impact the ability of our customers to pay outstanding balances and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine a smaller or larger reserve is appropriate, we would record a benefit or charge to selling, general and administrative expenses in the period in which such a determination was made. Inventory Reserves The Company periodically reviews its inventory for potential excess, obsolescence, or slow-moving items and records reserves as necessary to reflect inventory at the lower of cost or net realizable value. This assessment is inherently judgmental and considers multiple factors including current inventory levels, historical and projected sales trends, seasonality, planned markdowns, and liquidation history. Management places particular focus on unsold units from prior seasons and styles that have been carried forward, taking into account their performance over time and expected sell-through. Inventory is tracked at the SKU level, and the Company’s provision methodology involves a cross-functional process with the merchandising and planning teams to identify items at risk of non-recovery. This includes analysis of aged inventory by collection season, unit sales velocity, and margin erosion. Provisions are updated quarterly and recorded in the period in which such assessments are made. 20 Warrants We account for warrants as either equity- classified or liability classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing liabilities from equity (“ASC 480”), and ASC 815. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of our control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance, modification, and as of each subsequent quarterly period end date while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the liability-classified warrants are recognized as a non-cash gain or loss on the accompanying consolidated statements of operations and comprehensive loss. We assess the classification of our warrants at each reporting date to determine whether a change in classification between equity and liability is required. Stock-based compensation We account for share-based payments that involve the issuance of shares of our common stock to employees and non-employees and meet the criteria for share-based awards as stock-based compensation expense based on the grant-date fair value of the award. We estimate forfeitures and apply that to the stock-based compensation expense to be recognized over the period an award vests. We recognize compensation expense for awards with only service conditions on a straight-line basis over the requisite service period for the entire award. If factors change, and we utilize different assumptions including the probability of achieving performance conditions, share-based compensation cost on future award grants may differ significantly from share-based compensation cost recognized on past award grants. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate any remaining unearned share-based compensation cost or incur incremental cost. Share-based compensation cost affects our compensation and benefits expenses. In addition to the below, see Note 11 – Stock Based Compensation to our audited consolidated financial statements for additional detail. For periods prior to the IPO, we issued stock option awards and restricted stock units to employees and non-employees under the 2021 Equity Incentive Plan (the “2021 Plan”). The fair value of each award is estimated on the date of the grant using the Black-Scholes option-pricing model in order to measure the compensation cost associated with the award. This model incorporates the following assumptions for inputs: the expected volatility in the market value of the underlying common stock, the expected term of the contractual option, the risk-free interest rate based upon quoted market yields for United State Treasury instruments with terms that were consistent with the expected term of the stock options and the expected dividend yield of the underlying common stock. The fair value of the stock awards issued to employees and nonemployees under the 2021 Plan prior to the IPO was estimated at each grant date using the Black-Scholes model which requires the input of the following subjective assumptions: (a) length of time grantees will retain their vested stock options before exercising them for employees and the contractual term of the option for nonemployees (“expected term”), (b) The volatility of our common stock price over the expected term, (c) expected dividends, (d) risk-free interest rate over the option’s expected term, and estimated forfeiture rate. A summary of our significant assumptions for the pre-IPO stock awards is as follows: ● Expected term: For employees, the expected term is determined using the “simplified” method, as prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate on a formula basis the expected term of the Company’s employee stock options, which are considered to have “plain vanilla” characteristics. For nonemployees, the expected term represents the contractual term of the option. ● Expected volatility: The expected volatility was determined by examining the historical volatilities of a group of industry peers, as the Company did not have any trading history for our common stock prior to the IPO. ● Expected dividend yield: The expected dividend yield was based on our history and management’s current expectation regarding future dividends. ● Risk-free interest rate: The risk-free interest rate was based upon quoted market yields for the United States Treasury instruments with terms that were consistent with the expected term of the stock options. ● Estimated forfeiture rate: The expected forfeiture rate was based on our history and management’s expectation regarding future forfeitures. If factors change, and we utilize different assumptions, share-based compensation cost on future award grants may differ significantly from share-based compensation cost recognized on past award grants. Higher volatility and longer expected terms result in an increase to share-based compensation determined at the date of grant. Future share-based compensation cost will increase to the extent that we grant additional share-based awards to employees and non-employees. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate any remaining unearned share-based compensation cost or incur incremental cost. Share-based compensation cost affects our selling, general and administrative expenses. In future periods, we expect share-based compensation to increase, due in part to our existing unrecognized share-based compensation and as we issue additional share-based awards to continue to attract and retain employees. 21 Income Taxes We make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and our uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect our ability to utilize our net operating loss carryforwards. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred tax assets to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, which could materially affect our financial position, results of operations or cash flows. Our assumptions, judgement and estimates relative to uncertain tax positions take into account whether a tax position is more likely than not to be sustained upon examination by the relevant taxing authority based on the technical merits of the position and the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect our ability to utilize our net operating loss carryforwards. Contingencies We are involved in legal proceedings regarding contractual and employment relationships and a variety of other matters. We record contingent liabilities when a loss is assessed to be probable and its amount is reasonably estimable. If it is reasonably possible that a material loss could occur through ongoing litigation, we provide disclosure in the footnotes to our financial statements. Assessing probability of loss and estimating the amount of probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Should we experience adverse court judgments or should negotiated outcomes differ to our expectations with respect to such ongoing litigation it could have a material adverse effect on our results of operations, financial position, and cash flows. Recent Accounting Pronouncements For recent accounting pronouncements, see Note 2 of our audited consolidated financial statements included in this Annual Report. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business. These risk primarily include: Interest rate risk The fair value of our cash equivalents, held primarily in cash deposits, have not been significantly impacted by increases or decreases in interest rates to date, due to the short-term nature of these instruments. The interest expense associated with our letter of credit trade finance facility is composed of a fixed spread over HIBOR or SOFR. The interest rate associated with our short-term borrowings is a fixed rate also. We are exposed to interest rate risk where the interest expense associated with our financing arrangements is depending upon HIBOR or SOFR, a floating reference rate, or in the event that the fixed interest rate associated with our financing arrangements is increased upon roll-over of the financing arrangement at its contractual maturity. Fluctuations in interest rates have not been significant to date. We do not expect that interest rates will have a material impact on our results of operations, owing to the size and short-term nature of the floating rate financing arrangements. Inflation risk We are beginning to observe increases in our costs of goods sold, in particular, transportation costs. If these cost increases are sustained and we become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability to do so could harm our business, results of operations or financial condition. Foreign exchange risk To date, revenue has primarily been generated in U.S. dollar, U.K. pound sterling and euro. As a result, our revenue may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in U.K. pound sterling and euros relative to the U.S. dollar. Our foreign exchange risk is less pronounced for our cost of sales as our cost of goods sold is predominantly U.S. dollar denominated. Our selling, general and administrative expenses are primarily made up of U.S. dollar, Hong Kong dollar, U.K. pound sterling and euro amounts. Although a portion of our non-U.S. dollar costs offset non-U.S. dollar revenue, a currency mismatch arises as to the amount and timing of our different currency cash flows. To date, we have not hedged our foreign currency exposure. We will continue to monitor the impact of foreign exchange risk and review whether to implement a hedging strategy to minimize this risk in future accounting periods. Hedging strategies where implemented are unlikely to completely mitigate this risk. To the extent that foreign exchange risk is not hedged it may result in harm to our business, results of operations and financial condition. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For quantitative and qualitative disclosures regarding market risks in our portfolio, see, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk” above. 22