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 nine months ended December 31, 2025, we continued to scale our direct-to-consumer business, launched a new spring/summer capsule, opened a new European distribution hub in the Netherlands as part our global logistics transformation, 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. Recent Developments During January 2026, the shareholders holding a majority of the voting power of the Company entitled to vote as of the record date of January 14, 2026 approved a number of corporate matters. These actions included authorizing certain issuances of common stock and warrants, amending the Certificate of Incorporation to increase authorized shares, approving the ELOC, and authorizing an additional reverse stock split of the common stock at a ratio to be determined by the Company’s board of directors During January 2026, we issued 11,458,306 shares of our common stock upon conversion of all outstanding shares of Series AA Preferred Stock at a reduced conversion price of $0.46822 per share, as approved by our shareholders. 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. 20 Results of Operations The following tables set forth our results of operations for the: Three months ended December 31, 2025 Three months ended December 31, 2024 Change Revenue, net $ 11,656 $ 11,658 $ (2) Cost of sales 4,148 5,269 (1,121 ) Gross profit 7,508 6,389 1,119 Gross margin (1) 64.4 % 54.8 % Operating expenses: Selling, general and administrative expenses 5, 639 6,649 (1,010 ) Marketing and advertising expenses 1,286 1,034 252 Total operating expenses 6,925 7,683 (758 ) Income (loss) from operations 583 (1,294 ) 1,877 Total other expense, net (490 ) (1,188 ) 698 Net income (loss) $ 93 $ (2,482 ) $ 2,575 Other comprehensive income (loss) Foreign currency translation income (loss) 89 (28 ) 117 Comprehensive income (loss) $ 182 $ (2,510 ) $ 2,692 Nine months ended December 31, 2025 Nine months ended December 31, 2024 Change Revenue, net $ 17,891 $ 16,466 $ 1,425 Cost of sales 6,674 7,647 (973 ) Gross profit 11,217 8,819 2,398 Gross margin (1) 62.7 % 53.6 % Operating expenses: Selling, general and administrative expenses 12,649 13,871 (1,222 ) Marketing and advertising expenses 2,177 2,192 (15 ) Total operating expenses 14,826 16,063 (1,237 ) Loss from operations (3,609 ) (7,244 ) 3,635 Total other (expense) income, net (1,957 ) (1,370 ) (587 ) Net loss $ (5,566 ) $ (8,614 ) $ 3,048 Other comprehensive loss Foreign currency translation loss (45 ) (21 ) (24 ) Comprehensive loss $ (5,611 ) $ (8,635 ) $ 3,024 (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 income (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. Adjusted EBITDA Three months ended December 31, Nine months ended December 31, 2025 2024 2025 2024 Net income (loss), as reported $ 93 $ (2,482 ) $ (5,566 ) $ (8,614 ) Adjustments: Interest expense 455 1,046 1,963 1,241 Stock compensation expense 145 386 391 1,098 Amortization of stock-based marketing services 116 308 455 419 Depreciation and amortization 73 71 272 282 Total EBITDA adjustments 789 1,811 3,081 3,040 Adjusted EBITDA $ 882 $ (671 ) $ (2,485 ) $ (5,574 ) Adjusted EBITDA is a non-GAAP financial measure that displays our net income (loss) from continuing operations, adjusted to eliminate the effect of certain items as described below. We define Adjusted EBITDA as net income (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 $1,553 improvement in Adjusted EBITDA for the three months ended December 31, 2025, compared to the same period in 2024, was primarily driven by a $1,119 increase in gross profit. This increase was largely attributable to improvements in gross margin, which rose from 54.8% to 64.4%, reflecting enhancements in the Company’s operating model and logistics execution. During the period, the Company benefited from continued optimization of its supply chain and fulfillment processes, including improved warehouse efficiency, more effective shipping flows, and better cost control across distribution activities. In addition, growth in partnership revenue contributed to the overall margin improvement, with partnership revenue increasing to $239 for the three months ended December 31, 2025, from $91 in the prior-year period. 21 Selling, general and administrative (SG&A) expenses decreased by $1,010 during the three months ended December 31, 2025, compared to the same period in 2024, reflecting continued cost discipline and reduced discretionary spending across most categories. The decrease was primarily driven by a reduction in stock-based compensation expense following the restructuring of our employee equity compensation program and the redundancy plan implemented in the fourth quarter of the prior fiscal year. Partially offsetting these savings were higher legal and professional fees associated with ongoing public company compliance and fundraising activities, as well as costs to support operational expansion. The Company also incurred incremental spending across key functional areas including information technology, insurance, travel, and retail operations, which were necessary to support its transition and long-term growth initiatives. Marketing and advertising expenses increased by $252 during the three months ended December 31, 2025, compared to the same period in 2024, primarily due to the timing of marketing spend. The Company increased activation and promotional activities in the quarter to support the AW25 launch relative to the prior-year period. The $3,089 improvement in Adjusted EBITDA for the nine months ended December 31, 2025, compared to the same period in 2024, was primarily driven by a $2,398 increase in gross profit, reflecting higher revenue and an increase in gross margin from 53.6% to 62.7%. The improvement in gross margin was mainly attributable to enhancements in the Company’s operating model and logistics execution, including more efficient supply chain and fulfillment processes and improved cost control. In addition, growth in partnership revenue contributed positively to gross margin, with partnership revenue increasing to $375 during the nine months ended December 31, 2025, from $91 in the prior-year period, alongside a more favorable channel and product mix. Selling, general and administrative (SG&A) expenses decreased by $1,222 for the nine months ended December 31, 2025, compared to the same period in 2024, which was primarily driven by a reduction in stock-based compensation expense following the restructuring of our employee equity program and the redundancy plan implemented in the fourth quarter of the prior fiscal year. Partially offsetting these savings were higher legal, professional, and payroll costs associated with ongoing public company compliance and fundraising activities, as well as costs to support operational expansion. Marketing and advertising expenses decreased by $15 for the nine months ended December 31, 2025, compared to the same period in 2024, primarily due to the timing of marketing spend. While the Company incurred higher activation and promotional costs in the third quarter to support the AW25 product launch, these increases were offset by lower spending in other periods, resulting in a decrease in marketing and advertising expenses on a year-to-date basis. 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. Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our net income (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 December 31, 2025 was $11,656, compared to $11,658 for the same period in 2024, a decrease of $2, or 0.0% and for the nine months ended December 31, 2025 was $17,891, compared to $16,466 for the same period in 2024, an increase of $1,425, or 8.7%. Growth for both periods was primarily driven by contributions from the new partnership channel. The year-over-year increase in revenue was primarily driven by a stronger wholesale order book and improved operational execution, which enabled more efficient fulfillment and shipment timing compared to the prior year. These enhancements reflect the Company’s ongoing focus on operational discipline and supply chain optimization, positioning it to capture additional sales opportunities over the remainder of the season. 22 Cost of sales Cost of sales for the three months ended December 31, 2025 was $4,148, compared to $5,269 for the same period in 2024, a decrease of $1,121, or 21.3% and for the nine months ended December 31, 2025 was $6,674, compared to $7,647 for the same period in 2024, a decrease of $973, or 12.7%. The decrease was primarily driven by improved inventory efficiency and disciplined cost management. We continue to focus on optimizing our supply chain and sourcing practices to support long-term margin expansion. Gross profit and gross margin Gross profit for the three months ended December 31, 2025 was $7,508, compared to $6,389 for the same period in 2024, an increase of $1,119, or 17.5%. Gross margin improved to 64.4%, up from 54.8% for the same period in 2024. This increase reflects the favorable impact of channel mix, particularly growth in higher-margin revenue streams, and our ongoing focus on disciplined pricing and supply chain reengineering. Gross profit for the nine months ended December 31, 2025 was $11,217, compared to $8,819 for the same period in 2024, an increase of $2,398, or 27.2%. Gross margin improved to 62.7%, up from 53.6% for the same period in 2024. This increase reflects the favorable impact of channel mix, particularly growth in higher-margin revenue channels, and our 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 December 31, 2025 were $5,639, compared to $6,649 for the same period in 2024, a decrease of $1,010, or 15.2%. For the nine months ended December 31, 2025, SG&A expenses were $12,649, compared to $13,871 for the same period in 2024, a decrease of $1,222, or 8.8%. The decreases primarily reflect continued cost discipline and reduced discretionary spending, including lower stock-based compensation following the restructuring of our employee equity program and redundancy plan implemented in the fourth quarter of the prior fiscal year. These savings were partially offset by higher legal and professional fees related to public company compliance and fundraising activities, as well as increased payroll and operational costs to support expansion initiatives. The Company also incurred targeted increases across technology, compliance, and insurance to strengthen its operating infrastructure and scalability. Overall, SG&A expenses decreased as a percentage of revenue—improving to 48.4% from 57.0% for the three-month period and to 70.7% from 84.2% for the nine-month period—reflecting enhanced operating leverage, improved cost efficiency, and the early benefits of management’s ongoing efforts to align the cost base with revenue growth. Marketing and advertising expense Marketing and advertising expenses for the three months ended December 31, 2025 were $1,286, compared to $1,034 for the same period in 2024, an increase of $252, or 24.4 %. For the nine months ended December 31, 2025, marketing and advertising expenses were $2,177, compared to $2,192 for the same period in 2024, a decrease of $15, or 0.7%. These fluctuations primarily reflect the timing of marketing initiatives as the Company continues to better align and phase its brand and promotional activities throughout the year, rather than concentrating spend during the first half. In addition, management implemented permanent cost-saving measures through optimized agency support, improved event planning, and a greater focus on in-house capabilities, resulting in a more efficient allocation of marketing resources. 23 We remain focused on maintaining marketing efficiency while continuing to strengthen global brand awareness and customer engagement through targeted and data-driven campaigns that support both direct-to-consumer and wholesale channels. 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 Through December 31, 2025, we have funded our operations with proceeds from the sale of common stock from the initial public offering, a public offering during December 2025, and other sales of common stock; the sale of preferred stock, alongside existing trade, invoice and shareholder financing arrangements. We have incurred recurring losses, including a net loss of $5,566 for the nine months ended December 31, 2025 and used cash in operations of $8,882 during that period. As of December 31, 2025, the Company had an accumulated deficit of $70,482. These factors raise substantial doubt about our ability to continue as a going concern for at least twelve months from the date these condensed consolidated financial statements were available to be issued. Our ability to continue as a going concern is dependent upon management of its expenses and its ability to obtain necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations. As of December 31, 2025, we had cash and cash equivalents of $1,567. 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. 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 than 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 shareholders” 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.” 24 Cash Flow Activities The following table shows summary cash flow information for the periods presented: Nine months ended December 31, 2025 2024 Consolidated statement of cash flow data: Net cash used in operating activities $ (8,882 ) $ (8,780 ) Net cash used in investing activities $ (204 ) $ (287 ) Net cash provided by financing activities $ 3,275 $ 5,321 Cash Flows Used in Operating Activities During the nine months ended December 31, 2025, operating activities used $8,882 in cash and cash equivalents and restricted cash, primarily resulting from a net loss of $5,566, non-cash adjustments totaling $3,323, and a net cash outflow from changes in operating assets and liabilities of $6,639. Net cash used in changes in operating assets and liabilities was driven primarily by an increase in inventory of $3,191, an increase in accounts receivable of $4,518, and an increase in other non-current assets of $83, and a decrease in accrued expenses of $477. These outflows were partially offset by an increase in trade payables of $1,060 and a decrease in prepaid and other current assets of $454. The increase in inventory reflects higher stock purchases to support the upcoming winter season and expanded sales channels and also improved inventory planning and purchasing timing, designed to enhance availability and support stronger sell-through performance in the second half of the fiscal year. During the nine months ended December 31, 2024, operating activities used $8,780 in cash and cash equivalents and restricted cash, primarily resulting from a net loss of $8,614, non-cash adjustments totaling $2,798 and a net cash outflow from changes in operating assets and liabilities of $2,964. Net cash used by changes in operating assets and liabilities during the nine months ended December 31, 2024 consisted primarily of an increase in inventory of $2,039, reflecting higher stock purchases to support the upcoming winter season, as well as an increase in accounts receivable of $1,740, offset by an increase in accrued expenses of $750. Cash Flows Used in Investing Activities During the nine months ended December 31, 2025, investing activities used $204 in cash and cash equivalents and restricted cash, compared to $287 for the same period in 2024, a decrease of $83, or 28.9%. The current period capital expenditures related to the opening of the new pop-up store in Verbier and preparatory investments for additional pop-up locations planned for the third quarter. These investments are consistent with the Company’s strategy to enhance brand visibility and expand its retail presence in key markets while maintaining disciplined capital allocation. Cash Flows Provided by Financing Activities During the nine months ended December 31, 2025, financing activities provided $3,275 in cash and cash equivalents, primarily attributed to $4,050 of net proceeds from the sale of our common stock, $1,330 of net proceeds from short term borrowings, and $5,590 of net proceeds from the issuance of notes payable to related parties, offset by a $4,725 repayment of short term borrowings, $2,495 repayment of trade finance facility, and $475 payment of dividends on our Series AA Convertible Preferred Stock. During the nine months ended December 31, 2024, financing activities provided $5,321 in cash and cash equivalents and restricted cash, primarily attributed to $4,604 of net proceeds from short term borrowings, $2,849 of net proceeds from trade finance facilities, and $2,000 proceeds from a convertible note, offset by a $3,846 repayment of short term borrowings, $139 payment of deferred offering costs and a $147 repayment of trade finance facilities. 25 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 December 31, 2025, our sales-related reserves were $0.9 million compared to $0.6 million as of March 31, 2025. The most significant variable affecting these reserve balances is sales levels. As a percentage of net revenue, sales-related reserves were 4.8% as of December 31, 2025, compared to 2.8% as of March 31, 2025. The reserve for customer returns is the component of our sales-related reserves most susceptible to estimation uncertainty. December 31, 2025 represents the period with the highest return reserves, reflecting the seasonality of our business and the concentration of sales in the winter period. A significant portion of revenue in December is generated through our eCommerce channel, which historically experiences higher return rates than other channels, resulting in elevated return reserves at quarter-end. 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. 26 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. 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. 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. 27 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 Quarterly Report and Note 2 of our unaudited condensed consolidated financial statements included in this Form 10-Q. 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. 28