KIDPIK CORP. Management’s Discussion and Analysis of the Financial Position and Results of Operations (Form 10-Q)

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General



You should read the following discussion and analysis of our financial condition
and results of operations together with the condensed interim financial
statements and related notes that are included elsewhere in this Quarterly
Report on Form 10-Q and the audited financial statements and the notes to those
financial statements for the fiscal year ended January 2, 2021 which are
included in the prospectus dated November 10, 2021, which we filed with the
Securities and Exchange Commission on November 15, 2021 (the "Prospectus")
pursuant to Rule 424(b)(4). The following discussion contains forward-looking
statements regarding future events and the future results of the Company that
are based on current expectations, estimates, forecasts, and projections about
the industry in which the Company operates and the beliefs and assumptions of
the management of the Company. See also "Cautionary Statement Regarding
Forward-Looking Information", above. Words such as "expects," "anticipates,"
"targets," "goals," "projects," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words, and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
only predictions and are subject to risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. Factors that
might cause or contribute to such differences include, but are not limited to,
those discussed elsewhere in this Quarterly Report, particularly under "Risk
Factors," and in other reports we file with the SEC. The Company undertakes no
obligation to revise or update publicly any forward-looking statements for any
reason, except as otherwise provided by law. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this Quarterly Report on Form 10-Q and in our other filings with the SEC.



The following discussion is based upon our financial statements included
elsewhere in this Quarterly Report, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingencies. In the course of operating our business, we
routinely make decisions as to the timing of the payment of invoices, the
collection of receivables, the shipment of products, the fulfillment of orders,
the purchase of supplies, and the building of inventory, among other matters.
Each of these decisions has some impact on the financial results for any given
period. In making these decisions, we consider various factors including
contractual obligations, customer satisfaction, competition, internal and
external financial targets and expectations, and financial planning objectives.
On an on-going basis, we evaluate our estimates, including those related to
sales returns, allowance for doubtful accounts, impairment of long-term assets,
especially goodwill and intangible assets, assumptions used in the valuation of
stock-based compensation, and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.



Kidpik Corp. (the "Company") uses a 52-53-week fiscal year ending on the
Saturday nearest to December 31 each year. The years ended January 2, 2021 and
December 28, 2019 were 53- and 52-week years, respectively. These years are
referred to herein as fiscal "2020" and "2019", respectively. The Company's
fiscal quarters are generally 13 weeks in duration. When the Company's fiscal
year is 53 weeks long, the corresponding fourth quarter is 14 weeks in duration.
References to the third quarter of fiscal 2021 and the third quarter of fiscal
2020, refer to the 13 weeks ended October 2, 2021 and September 26, 2020,
respectively.



Certain capitalized terms used below but not otherwise defined, are defined in,
and shall be read along with the meanings given to such terms in, the notes to
the unaudited financial statements of the Company for the 13 and 39 weeks ended
October 2, 2021 and September 26, 2020, above.



References to our websites and those of third parties below are for informational purposes only and, except as expressly stated below, we do not intend to incorporate by reference in this report any information from such websites.



Unless the context otherwise requires, references in this Report to "we," "us,"
"our," the "Registrant", the "Company," "kidpik" and "Kidpik Corp." refer to
Kidpik Corp.



4







In addition:


? “Active subscriptions” means individuals Who are programmed to receive in the future

boxes;

? “Boxes” means the boxes of clothing, footwear and subscription accessories of the Company;

? “Customers” means any person Who received at least one shipment via

subscription, direct or indirect sale of the Company;

? “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

? “Members” means the customers Who registered at least one subscription;

? “NASDAQ” means the NASDAQ Capital Market;

? “SEC” or “Commission” refers to the United States Securities and exchange

    Commission;
  ? "Securities Act" refers to the Securities Act of 1933, as amended; and
  ? "Subscriptions" mean orders for recurring box shipments.




Overview



We began operations in 2016 as a subscription-based e-commerce company on the
proposition of making shopping easy, convenient, and accessible for parents by
delivering fashionable and personalized outfits in a box, that their kids will
love to wear. kidpik provides kids clothing subscription boxes for girls and
boys (sizes 2T-16) that include mix-&-match coordinated outfits that are
personalized based on each member's style preferences. We focus on providing
entire outfits from head-to-toe (including shoes) by designing each seasonal
collection in house from concept to box.



Staying ahead in an emerging industry requires constant innovation in product
and services. After launching with our girls' subscription box for sizes 4-14 in
2016, we have continued to expand our product offering and marketing channels.
We expanded into boys' clothes, added larger sizes up to 16 for apparel and 6
youth for shoes, added toddler sizes down to 2T and 3T for apparel and 7 and 8
toddler shoes, launched shop.kidpik.com, where we sell individual apparel items
and shoes, pre-styled outfit gift boxes and gift cards, and expanded to sell on
Amazon.com, as well as Fulfilled by Amazon (FBA) and Fulfilled by Merchant (FBM)
for pre-packs and individual items.



We launched our toddler collection in the first quarter of 2021, introducing
sizes 2T and 3T apparel sizes, and added sizes 7 and 8 toddler shoes for boys
and girls which we began to ship in April 2021. We also introduced an "add-on"
for all members pursuant to which they can add additional pieces of their
choosing to their next box order. We plan to increase the number of add-on item
selections offered in an effort to increase the box transaction size and gross
margin dollars per box.


We provide e-commerce services only within 48 we State and Army Post Offices (APOs) and Fleet Post Offices (FPOs).



Moving forward, funding permitting, we plan to research and start initiatives to
expand our offerings into newborn sizes, husky and plus sizes, and tweens.
Additionally, we may open up availability of our subscription boxes to Canada.
We plan to continue to analyze the marketplace for interest in new products and
may invest in expanding our current lines.



Over the next 12 months, we plan to continue investing in our marketing by
spending on our current marketing channels such as Facebook and Instagram Ads,
Google Ads and YouTube Ads, as well as launching new channels such as TikTok and
Connected TV and others with the goal of increasing new member growth.



Initial Public Offering



In November 2021, the Company completed an initial public offering (the "IPO"),
in which the Company issued and sold 2,117,647 shares of its authorized common
stock for $8.50 per share for net proceeds of $16.1 million, after deducting
underwriting discounts and commissions, and offering costs.



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Key Performance Indicators



Key performance indicators that we use to evaluate our business, measure our
performance, identify trends affecting our business, formulate financial
projections and make strategic decisions include gross margin, shipped items,
and average shipment keep rate, each described in greater detail below.



We also use the following metrics to assess our business progress, make decisions about the allocation of capital, time and technology investments, and assess the short and long term performance of our business.


Gross Margin



Gross profit is equal to our net sales (revenues, net) less cost of goods sold.
Gross profit as a percentage of our net sales is referred to as gross margin.
Cost of sales consists of the purchase price of merchandise sold to customers
and includes import duties and other taxes, freight in, defective merchandise
returned from customers, receiving costs, inventory write-offs, and other
miscellaneous shrinkage.



                                  For the 13 weeks ended                        For the 39 weeks ended
                           October 2,                                    October 2,
                              2021             September 26, 2020           2021             September 26, 2020

Gross margin                       58.2 %                     59.3 %             59.8 %                     58.9 %




Shipped Items



We define shipped items as the total number of items shipped in a given period
to our customers through our active subscription, Amazon and online website
sales.



                                    For the 13 weeks ended                         For the 39 weeks ended
                                        (In thousands)                                 (In thousands)
                           October 2,                                      October 2,
                              2021              September 26, 2020            2021             September 26, 2020

Shipped Items                        559                        470               1,680                      1,139



Average retention rate of consignments

The average shipment retention rate is calculated as the total number of items retained by our customers divided by the total number of items shipped in a given time period.



                                      For the 13 weeks ended                        For the 39 weeks ended
                               October 2,                                    October 2,
                                  2021             September 26, 2020           2021             September 26, 2020
Average Shipment Keep Rate             68.8 %                     68.2 %             68.5 %                     67.0 %



Factors affecting our future performance



We believe that our performance and future success depend on several factors
that present significant opportunities for us, but also pose risks and
challenges, including those discussed below and in the section of this Report
titled "Risk Factors."



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Overall Economic Trends



The overall economic environment and related changes in consumer behavior have a
significant impact on our business. In general, positive conditions in the
broader economy promote customer spending on our sites, while economic weakness,
which generally results in a reduction of customer spending, may have a more
pronounced negative effect on spending on our sites. Macroeconomic factors that
can affect customer spending patterns, and thereby our results of operations,
include employment rates, business conditions, changes in the housing market,
the availability of credit, interest rates and fuel and energy costs. In
addition, during periods of low unemployment, we generally experience higher
labor costs.


Growth in brand awareness and site visits

We intend to continue investing in our brand marketing efforts. Since 2016 we
have made significant investments to strengthen the "kidpik" brand through
expansion of our social media presence. If we fail to cost-effectively promote
our brand or convert impressions into new customers, our net sales growth and
profitability would be adversely affected.



Acquisition of new subscriptions



Our ability to attract new subscriptions is a key factor for our future growth.
To date we have successfully acquired new subscriptions through marketing and
the development of our brand. As a result, revenue has increased since our
launch. If we are unable to acquire sufficient new subscriptions in the future,
our revenue might decline. New subscriptions could be negatively impacted if our
marketing efforts are less effective in the future. Increases in advertising
rates could also negatively impact our ability to acquire new subscriptions cost
effectively. Consumer tastes, preferences, and sentiment for our brand may also
change and result in decreased demand for our products and services. Laws and
regulations relating to privacy, data protection, marketing and advertising, and
consumer protection are evolving and subject to potentially differing
interpretations. These requirements may be interpreted and applied in a manner
that is inconsistent from one jurisdiction to another or may conflict with other
rules or our practices and procedures.



Retention of existing subscribers



Our ability to retain subscribers is a also key factor in our ability to
generate revenue growth. Most of our current subscribers purchase products
through subscription-based plans, where subscribers are billed and sent products
on a recurring basis. The recurring nature of this revenue provides us with a
certain amount of predictability for future revenue. If customer behavior
changes, and customer retention decreases in the future, then future revenue
will be negatively impacted.



Inventory Management



To ensure sufficient availability of merchandise, we generally enter into
purchase orders well in advance and frequently before apparel trends are
confirmed by client purchases. As a result, we are vulnerable to demand and
pricing shifts and to suboptimal selection and timing of merchandise purchases.
We incur inventory write-offs and changes in inventory reserves that impact our
gross margins. Because our merchandise assortment directly correlates to client
success, we may at times optimize our inventory to prioritize long-term client
success over short-term gross margin impact. Moreover, our inventory investments
will fluctuate with the needs of our business. For example, entering new
categories or adding new fulfillment centers will require additional investments
in inventory.



Investments in Growth



We expect to continue to focus on long-term growth through investments in
product offerings and the kids and kids' parent experience. We expect to make
significant investments in marketing to acquire new subscribers and customers.
Additionally, we intend to continue to invest in our fulfillment and operating
capabilities. In the short term, we expect these investments to increase our
operating expenses in the future and cannot be certain that these efforts will
grow our customer base or be cost-effective; however, in the long term, we
anticipate that these investments will positively impact our results of
operations.



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Components of the results of operations



Note that our classification of the various items making up cost of goods sold,
shipping and handling, payroll and related costs and general and administrative
costs may vary from other companies in our industry and as such, may not be
comparable to a competitor's.



Revenue



We generate revenue in two categories: 1) the sale items in our subscription
boxes, and 2) the sale of one-time purchases via shop.kidpik.com, and other
marketplaces. Going forward we will refer to revenue classification as
"Subscription boxes" and "one-time purchases", respectively. Net revenue is
revenue less promotional discounts, actual customer credits and refunds as well
as customer credits and refunds expected to be issued, and sales tax. When we
use the term revenue in this Report, we are referring to net revenue, unless
otherwise stated. We also recognize revenue resulting upon the use of gift
cards. Customers who decide to return some or all of the merchandise they
receive in each kidpik box, may return such items within 10 days of receipt of
the box. Customers are charged for subscription merchandise which is not
returned, or which is accepted and are charged for general merchandise
(non-subscription) when they purchase such merchandise; however, they are able
to receive a refund on returned merchandise.



Cost of Goods Sold



Cost of goods sold consists of the costs of manufacturing merchandise and the
expenses of shipping and importing (duty payments) such merchandise to our
warehouse for distribution, and inventory write-offs, offset by the recoverable
cost of merchandise estimated to be returned.



Shipping and Handling


Shipping and handling includes the costs of shipping the goods to our customers and back to us, as well as the costs of completing and processing returns, and the materials used for packaging.


Payroll and Related Costs


Payroll and related costs represent employee salaries, taxes, benefits and charges from our payroll provider.

General and administrative expenses

General and administrative expenses mainly include marketing, Amazon selling expenses, bad debts, credit card fees, and business expenses, among others.

Depreciation and amortization

Depreciation charges consist of depreciation charges for leasehold improvements and equipment.


Interest Expense


Interest expense is primarily comprised of interest expense related to our lines of credit, outstanding notes payable and amortization of deferred charges related to our line of credit.


Other Non-Operating Income


Other non-operating income related to the cancellation of the previous paycheck protection loan.


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Provision for Income Taxes



Our provision for income taxes is an estimate of federal and state income taxes based on prevailing federal and state tax rates, adjusted for qualifying credits, deductions, uncertain tax positions, and changes in l ” valuation of our assets net of federal and state deferred taxes.


Results of Operations



Novel Coronavirus (COVID-19)



In December 2019, a novel strain of coronavirus, which causes the infectious
disease known as COVID-19, was reported in Wuhan, China. The World Health
Organization declared COVID-19 a "Public Health Emergency of International
Concern" on January 30, 2020 and a global pandemic on March 11, 2020. In March
and April 2020, many U.S. states and local jurisdictions began issuing
"stay-at-home" orders. The U.S. has recently seen decreases in total new
COVID-19 infections; however, those numbers are currently trending back up and
it is unknown whether such decreases will continue in the future, new strains of
the virus will cause numbers to increase, currently projected vaccine efficacy
numbers will hold, boosters will continue to be widely available and/or whether
individuals will continue to take booster shots, or whether new strains of the
virus will become dominate in the future (which may be more infectious or cause
greater health issues), and/or whether jurisdictions in which we operate, will
issue new or expanded stay-at-home orders, mask orders, or how those orders, or
others, may affect our operations.



During the majority of March and April 2020, we closed our California warehouse
due to stay-at-home orders which were issued in the State of California. We
resumed shipping April 17, 2020, following safety protocols and Centers for
Disease Control and Prevention (CDC) guidelines, which we strictly adhered to.
On aggregate basis we lost about two weeks of potential revenue during this
period where we were unable to ship products. For the months of March and April
2020, our new member acquisitions were reduced dramatically. Beginning in early
May 2020, through the month of June 2020, our new member acquisitions grew
significantly, most likely due to stay-at-home orders when consumers shifted to
shopping online, before leveling off to expected growth numbers. The full extent
of the impact of COVID-19 on our business and operations currently cannot be
estimated and will depend on a number of factors including the scope and
duration of the global pandemic.



Since the start of the pandemic, we have taken steps to prioritize the health
and safety of our employees. Most of our employees continue to work remotely as
a result of the COVID-19 pandemic. Currently we believe that we have sufficient
cash on hand through funds raised in the IPO, and will generate sufficient cash
through operations, to support our operations for the near term; however, we
will continue to evaluate our business operations based on new information as it
becomes available and will make changes that we consider necessary in light of
any new developments regarding the ongoing pandemic.



Although COVID-19 has had a major impact on businesses around the world, during
March and April 2020, our warehouse was shut down. Since then, our warehouse
returned to working at full capacity; however, the full extent to which COVID-19
will ultimately impact us depends on future unknowable developments, including
the duration and spread of the virus, as well as potential new seasonal
outbreaks, virus mutations, the efficacy of vaccines and boosters, and the
willingness of individuals to take such vaccines and boosters, all of which are
uncertain and cannot be predicted.



We have, however, recently experienced shipping delays to and from our customers
as a result of our shipping vendors' challenges fulfilling higher eCommerce
shipping demand, which may negatively impact our results of operations. We also
have been affected by, and expect to continue to be affected by, COVID-related
freight delays and difficulties sourcing materials. Additionally, we may be
negatively impacted if consumers shift back to traditional brick-and-mortar
apparel retailers following the pandemic.



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RESULTS OF OPERATIONS


Comparison of the thirteen and thirty-nine weeks completed October 2, 2021 and
September 26, 2020


Revenue


Our income for the 13 completed weeks October 2, 2021, increased by 20.3% for
$ 5,574,099, compared to $ 4,634,529 for the 13 completed weeks September 26, 2020, an augmentation of $ 939,570 from the previous period. The breakdown of income by sales channel for the 13 completed weeks October 2, 2021 and September 26, 2020, is summarized in the tables below:


                                                  13 weeks ended
                             13 weeks ended        September 26,
                            October 2, 2021            2020             Change ($)      Change (%)
Revenue by channel
Subscription boxes          $      4,745,933     $       4,016,696     $    729,237            18.2 %
Amazon sales                         568,947               485,599           83,348            17.2 %
Online website sales                 259,219               132,234          126,985            96.0 %
Total revenue               $      5,574,099     $       4,634,529     $    939,570            20.3 %



Our income for the 39 completed weeks October 2, 2021, increased from 49.5% to
$ 16,562,579, compared to $ 11,076,010 for the 39 completed weeks September 26, 2020, an augmentation of $ 5,486,569 from the previous period. The distribution of income by channel for the 39 completed weeks October 2, 2021 and September 26, 2020, is summarized in the tables below:


                                                  39 weeks ended
                             39 weeks ended       September 26,
                            October 2, 2021            2020           Change ($)      Change (%)
Revenue by channel
Subscription boxes          $     14,163,217     $      9,712,382     $ 4,450,835            45.8 %
Amazon sales                       1,893,814            1,064,678         829,136            77.9 %
Online website sales                 505,548              298,950         206,598            69.1 %
Total revenue               $     16,562,579     $     11,076,010     $ 5,486,569            49.5 %



The revenue from subscription boxes for the 39 weeks ended October 2, 2021 and
September 26, 2020, was generated from active subscriptions recurring boxes
revenue and new subscriptions first box revenue, as summarized in the tables
below:



                                                  39 weeks ended
                             39 weeks ended        September 26,
                            October 2, 2021            2020            Change ($)      Change (%)
Subscription boxes
revenue from
Active subscriptions -
recurring boxes             $     11,474,502     $       7,371,851     $ 4,102,652            55.7 %
New subscriptions - first
box                                2,688,715             2,340,531         348,183            14.9 %
Total subscription boxes
revenue                     $     14,163,217     $       9,712,382     $ 4,450,835            45.8 %




The increase in revenue was primarily driven by an increase in sales of girls'
apparel and new merchandise offering of (a) boys' clothing beginning in June
2020, and (b) toddler collections, beginning in March 2021. The revenue
breakdown by product line for the 13 and 39 weeks ended October 2, 2021 and
September 26, 2020, are summarized in the tables below:



                                                  13 weeks ended
                             13 weeks ended        September 26,
                            October 2, 2021            2020             Change ($)      Change (%)
Revenue by product line
Girls' apparel              $      4,189,538     $       3,941,463     $    248,075             6.3 %
Boys' apparel                      1,111,509               693,066          418,443            60.4 %
Toddlers' apparel                    273,052                     -         
273,052             n/a %
Total revenue               $      5,574,099     $       4,634,529     $    939,570            20.3 %




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The number of items shipped to our customers increased by 18.9% from approximately 470,000 for the 13 weeks completed September 26, 2020, to approximately 559,000 for the 13 weeks completed October 2, 2021. Average retention rate of shipments increased to 68.8% in the 13 weeks completed October 2, 2021, compared to 68.2% in the 13 weeks completed September 26, 2020.


                                                  39 weeks ended
                             39 weeks ended       September 26,
                            October 2, 2021            2020           Change ($)       Change (%)
Revenue by product line
Girls' apparel              $     12,647,081     $     10,374,374     $ 2,272,707             21.9 %
Boys' apparel                      3,341,419              701,636       2,639,783            376.2 %
Toddlers' apparel                    574,079                    -         574,079              n/a %
Total revenue               $     16,562,579     $     11,076,010     $ 5,486,569             49.5 %



The number of items shipped to our customers increased by 47.7% from approximately 1,139,000 for the 39 completed weeks September 26, 2020, to approximately 1,682,000 for the 39 completed weeks October 2, 2021. Average retention rate of shipments increased to 68.5% in the completed 39 weeks October 2, 2021, compared to 67.0% over the 39 completed weeks September 26, 2020.


Cost of Goods Sold



Our cost of goods sold increased by 23.5% to $2,327,335 for the 13 weeks ended
October 2, 2021, compared to $1,884,898 for the 13 weeks ended September 26,
2020, an increase of $442,437.



Our cost of goods sold increased by 46.2% to $6,659,012 for the 39 weeks ended
October 2, 2021, compared to $4,553,832 for the 39 weeks ended September 26,
2020, an increase of $2,105,180.



The increase in cost of goods sold for the 13 and 39 weeks ended October 2,
2021, compared to the same periods in fiscal 2020, was primarily attributable to
the increase in the volume of goods purchased associated with the increase in
our subscription box Amazon sales, and online website sales as discussed above.



Gross profit and gross profit as a percentage of income

Our gross profit was $ 3,246,764 for the 13 completed weeks October 2, 2021, compared to the gross margin of $ 2,749,631 for the 13 completed weeks September 26, 2020.

Our gross profit was $ 9,903,567 for the 39 completed weeks October 2, 2021, compared to the gross margin of $ 6,522,178 for the 39 completed weeks September 26, 2020.

The increase in gross margin for 13 and 39 weeks has ended October 2, 2021, compared to the same periods in fiscal 2020, is mainly attributable to the increase in our subscription box sales.

Gross margin as a percentage of sales was 58.2% for the 13 weeks ended October 2, 2021, compared to 59.3% for the 13 weeks completed September 26, 2020. The decrease in gross margin as a percentage of sales for the 13 weeks ended
October 2, 2021, compared to the same period of fiscal 2020 is mainly attributable to an increase in discounts and promotions.

Gross margin as a percentage of sales was 59.8% for the 39 completed weeks October 2, 2021, compared to 58.9% for the 39 completed weeks September 26, 2020. The increase in gross margin as a percentage of revenue for the 39 completed weeks
October 2, 2021, compared to the same periods of fiscal 2020 is mainly attributable to the decrease in discounts and promotions.


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Operating Expenses


Our operating expenses for the 13 and 39 weeks ended October 2, 2021 and
September 26, 2020, are summarized in the tables below:


                                                      13 weeks ended
                                 13 weeks ended        September 26,
                                October 2, 2021            2020            Change ($)       Change (%)
Expenses
Shipping and handling           $      1,451,065     $       1,047,097     $   403,968             38.6 %
Payroll and related costs              1,023,241               753,222         270,019             35.8 %
General and administrative             2,169,283             1,790,401         378,882             21.2 %
Depreciation and amortization              5,226                13,770     
    (8,544 )          (62.0 )%
Total expenses                  $      4,648,815     $       3,604,490     $ 1,044,325             29.0 %




                                                      39 weeks ended
                                 39 weeks ended        September 26,
                                October 2, 2021            2020            Change ($)       Change (%)
Expenses
Shipping and handling           $      4,543,341     $       2,693,062     $ 1,850,279             68.7 %
Payroll and related costs              2,953,993             2,045,415         908,578             44.4 %
General and administrative             6,318,183             4,301,533       2,016,650             46.9 %
Depreciation and amortization             21,355                58,063     
   (36,708 )          (63.2 )%
Total expenses                  $     13,836,872     $       9,098,073     $ 4,738,799             52.1 %




Our operating expenses include general and administrative expenses, salaries and
benefits, shipping and handling, and depreciation and amortization, as shown in
the tables above. Our operating expenses for the 13 weeks ended October 2, 2021,
increased by $1,044,325 or 29.0% to $4,648,815, compared to $3,604,490 for the
13 weeks ended September 26, 2020. This increase was mainly a result of (i) an
increase in shipping and handling of $403,968, which increase was due to a FedEx
surcharge and minimum hourly rate increase in our California warehouse - our
shipping and handling expenses were 26.0% of total revenue in the current
period, compared to 22.6% of total revenue in the previous period, (ii) an
increase in payroll and related costs of $270,019, mainly due to new hires as a
result of our organic growth, and increases in salaries, and (iii) a $378,882
increase in general and administrative expenses, mainly due to an increase in
marketing expenses and an increase in third party fees due to increased sales.



Our operating expenses for the 39 weeks ended October 2, 2021, increased by
$4,738,799 or 52.1% to $13,836,872, compared to $9,098,073 for the 39 weeks
ended September 26, 2020. This increase was mainly a result of (i) an increase
in shipping and handling of $1,850,279, which increase was due to increased
sales and a FedEx surcharge and minimum hourly rate increase in our California
warehouse - our shipping and handling expenses were 27.4% of total revenue
compared to 24.3% of total revenue in the previous period, (ii) an increase in
payroll and related costs of $908,578, mainly due to new hires as a result of
our organic growth, and increases in salaries, and (iii) a $2,016,650 increase
in general and administrative expenses, mainly due to an increase in marketing
expenses and an increase in third-party fees due to increased sales.



Loss from Operations



Loss from operations increased from $854,859 for the 13 weeks ended September
26, 2020, to $1,402,051 for the 13 weeks ended October 2, 2021. The increase in
loss from operations was largely due to the increase of $378,882 in general and
administrative expenses, the increase of $403,968 in shipping and handling
costs, the increase of $270,019 in payroll and related cost, and the increase in
cost of goods sold of $442,437, partially offset by the $939,570 increase in net
sales, each as discussed above.



Loss from operations increased from $2,575,895 for the 39 weeks ended September
26, 2020, to $3,933,305 for the 39 weeks ended October 2, 2021. The increase in
loss from operations was largely due to the increase of $2,016,650 in general
and administrative expenses, the increase of $1,850,279 in shipping and handling
costs, the increase of $908,578 in payroll and related cost, and the $2,105,180
increase in cost of goods sold, partially offset by the $5,486,569 increase in
net sales, each as discussed above.



12







Other Expenses



Total other expenses were ($212,695) and $122,567 for the 13 weeks ended October
2, 2021 and September 26, 2020, respectively, and $155,421 and $318,153 for the
39 weeks ended October 2, 2021 and September 26, 2020, respectively. The
decrease in other expenses for the 13 and 39 weeks ended October 2, 2021,
compared to the same periods in fiscal 2020, was related to the forgiveness of
debt relating to the forgiveness of our prior Paycheck Protection Loan in the
amount of $442,352, offset by interest expense, which increased by $107,090 and
$276,313, for the 13 and 39 weeks ended October 2, 2021 and September 26, 2020,
respectively. The increase in interest expense was due to the increase in our
debt balance and related increases in interest expense associated therewith.



Provision for Income Taxes


We had minimal or no provision for income taxes during the 13 and 39 weeks ended October 2, 2021, and September 26, 2020.


Net Loss



We had a net loss of $1,189,356 for the 13 weeks ended October 2, 2021, compared
to a net loss of $978,251 for the 13 weeks ended September 26, 2020, an increase
in net loss of $211,105 or 21.6%. The increase in net loss was primarily due to
the increase of $378,284 in general and administrative expenses, the increase of
$403,968 in shipping and handling costs, the increase of $270,019 in payroll and
related cost, and the $442,437 increase in cost of goods sold, partially offset
by the $939,570 increase in net sales, each as discussed in greater detail
above.



We had a net loss of $4,090,058 for the 39 weeks ended October 2, 2021, compared
to a net loss of $2,895,170 for the 39 weeks ended September 26, 2020, an
increase in net loss of $1,194,888. The increase in net loss was primarily due
to the increase of $2,016,052 in general and administrative expenses, the
increase of $1,850,279 in shipping and handling costs, the increase of $908,578
in payroll and related cost, and the $2,105,180 increase in cost of goods sold,
partially offset by the $5,486,569 increase in net sales, each as discussed
in
greater detail above.


LIQUIDITY AND CAPITAL RESOURCES



                   October 2, 2021       January 2, 2021       Change ($)       Change (%)
Cash              $         204,877     $         133,484     $     71,393             53.5 %
Working Capital   $         185,644     $       2,105,270     $ (1,919,626 )          (91.2 )%
Debt*             $       3,200,000     $       2,474,470     $    725,530             29.3 %



* Line of credit, loan payable and long-term debt.

At October 2, 2021, we have had $ 204,877 money on hand compared to $ 133,484 cash in hand that we had to January 2, 2021.



As of October 2, 2021, the Company had total current liabilities of $10,260,840,
consisting mainly of accounts payable of $2,837,075, accounts payable to related
party of $1,219,038, accrued expenses of $507,985, advance payable of $1,196,742
(discussed below), short-term debt from related party of $1,300,000 and line of
credit of $3,200,000 (discussed below).



From October 2, 2021, we have had $ 10,446,484 in total current assets, $ 10,260,840
in total current liabilities, working capital of $ 185,644 and a total cumulative deficit of $ 32,061,695.



Through October 2, 2021, we have mainly relied on loans from Ezra Dabah, our
Chief Executive Officer and Chairman, and his family (which have all, other than
$900,000, been converted into equity on May 11, 2021), notes payable (including
from Nina Footwear Corp. which is 86.36% owned by Ezra Dabah and his family
including Moshe Dabah, and which entity Mr. Dabah serves as Chief Executive
Officer and member of the Board of Directors of ("Nina Footwear", a related
party) and our line of credit and Cash Advance Agreements (each discussed
below), as well as revenue generated through our operations, to support our
operations since inception. We have primarily used our available cash to pay
operating expenses (salaries and other expenses), and for merchandise inventory
costs, shipping costs and marketing expenditures. We do not have any material
commitments for capital expenditures.



13







We have experienced recurring net losses since inception and negative operating
cash flows. We believe that we will continue to incur substantial operating
expenses in the foreseeable future as we continue to invest to attract new
customers, expand the product offerings and enhance technology and
infrastructure. These efforts may prove more expensive than we anticipate, and
we may not succeed in increasing the net revenue and margins sufficiently to
offset these expenses. Accordingly, we may not be able to achieve profitability,
and we may incur significant losses for the foreseeable future. Our independent
registered public accounting firm included an explanatory paragraph in its
report on our financial statements as of, and for the year ended, January 2,
2021, describing the existence of substantial doubt about our ability to
continue as a going concern as of May 17, 2021, the date of their report.



To support our existing operations or any future expansion of business,
including the ability to execute our growth strategy, we must have sufficient
capital to continue to make investments and fund operations. We have plans to
pursue an aggressive growth strategy for the expansion of operations through
increased marketing to attract new members and refine the marketing strategy to
strategically prioritize customer acquisition channels that we believe will be
more successful at attracting new customers and members. We plan to launch new
divisions and product lines to help attract new members and retaining existing
members. We launched a new boys' apparel division in the summer of 2020 and a
toddler division at the end of March 2021. We also have plans to increase
efficiency in distribution and fulfillment capabilities to reduce costs
associated with subscription box sales. Our founding and majority stockholder,
Ezra Dabah, our Chief Executive Officer and Chairman, has provided his written
intent to provide continued financial support to the Company for at least one
year and a day from September 3, 2021, the terms of which indicate that funding
is expected to be in similar form as to the funding previously provided by Mr.
Dabah, provided that Mr. Dabah is under no contractual or other obligation to
provide such funding and the ultimate terms of such funding are unknown.



In November 2021, we completed our IPO in which we issued and sold 2,117,647
shares of authorized common stock for $8.50 per share, for net proceeds of $16.1
million, after deducting underwriting discounts and commissions, and offering
costs.



We intend to use the net proceeds from this offering to repay debt, increase our
capitalization and financial flexibility, and create a public market for our
common stock, and facilitate our future access to the capital markets. We also
plan to use a portion of the net proceeds for marketing expenses and for working
capital. We used a portion of the net proceeds from the offering to pay all or a
portion of our debt outstanding as of October 28, 2021, which included (i) the
repayment of amounts owed to Crossroads totaling approximately $3.2 million
(which amount was repaid in full, together with accrued interest and a
termination fee in the amount of $24,498, on November 15, 2021); (ii) amounts
owed under a short-term, unsecured promissory note, with Nina Footwear in the
amount of $0.4 million, which is noninterest-bearing and due on December 31,
2021 (of which $0.4 million was paid on November 16, 2021); (iii) amounts owed
to related party in the amount of $1.3 million (which do not have a stated
maturity date and which do no accrue interest); (iv) amounts owed in connection
with vendors payable of approximately $1.2 million; and (v) amounts due under
unsecured promissory notes with Ezra Dabah, our Chief Executive Officer and
other related party stockholders, which are trusts controlled by family members
of Ezra Dabah in the amount of $2.6 million, which are due on January 15, 2022,
and which do not accrue interest.



We expect to continue to generate net losses for the foreseeable future as we
make investments to grow our business. We believe that the existing balances of
cash and cash equivalents following the IPO will be sufficient to meet our
anticipated cash requirements for at least twelve months from the date that
these financial statements are issued. However, should our current cash and cash
equivalents not be sufficient to support the development of our business to the
point at which it has positive cash flows from operations, we plan to meet our
future needs for additional capital through equity financings, debt financings
or other capital sources, including collaborations with other companies or other
strategic transactions. Equity financings may include sales of common stock.
Such financing may not be available on terms favorable to us or at all. The
terms of any financing may adversely affect the holdings or rights of our
stockholders. If we unable to obtain adequate financing or financing on terms
satisfactory to it when required, our ability to continue to support our
business growth, scale its infrastructure, and to respond to business challenges
could be significantly impaired.



14







Cash Flows



                               39 weeks ended          39 weeks ended
                               October 2, 2021       September 26, 2020
Cash provided by (used in):
Operating activities          $      (5,637,368 )   $         (2,385,563 )
Investing activities                          -                   (7,683 )
Financing activities                  5,306,217                1,914,613
Net decrease in cash          $        (331,151 )   $           (478,633 )




Net cash used in operating activities increased to $5,637,368 for the 39 weeks
ended October 2, 2021, compared to $2,385,563 of cash used in operating
activities during the 39 weeks ended September 26, 2020. The increase in our
cash used in operating activities of approximately $3.3 million was primarily
due to an increase in the net loss in the amount of approximately $1.2 million,
as discussed in greater detail above, adjusted for non-cash items totaling $0.2
million, and the negative impact from changes in operating assets and
liabilities in the amount of approximately $1.9 million. The negative change in
our net operating assets and liabilities was mainly driven by the change in
inventories of $0.6 million, due to increases in the boys' apparel division, the
change in accounts payable of $0.8 million, and the change in accounts
receivable of $0.4 million, for the 39 weeks ended October 2, 2021, compared to
the 39 weeks ended September 26, 2020.



There was no net cash used in investing activities during the 39 weeks ended
October 2, 2021, compared to $7,683 of cash used in investing activities during
the 39 weeks ended September 26, 2020, which was related to purchases of
leasehold improvements and equipment.



Net cash provided by financing activities increased to $5,306,217 for the 39
weeks ended October 2, 2021, compared to net cash provided by financing
activities of $1,914,613 for the 39 weeks ended September 26, 2020, mainly as a
result of $2.0 million in convertible notes sold during the current period
compared with $1.0 million in the comparable period, proceeds from issuance of
common stock of $0.5 million, an increase in line of credit of $1.2 million and
the increase in advance payable in amount of $0.3 million, compared to a
decrease in advance payable of $0.3 million in the prior period, relating to our
financing transactions.



Line of Credit



On September 5, 2017, we entered into a Loan and Security Agreement (as amended,
the "Loan Agreement") with Crossroads Financial Group, LLC ("Crossroads"). The
Loan Agreement had an initial term of two years, and renews thereafter for
additional one-year periods automatically, unless Crossroads has provided the
Company at least 30 days' notice of its intent to not renew prior to such
applicable automatic renewal date. The Loan Agreement allows the Company to
request advances from Crossroads up to $3,200,000. The advances are limited to
the lower of (i) 70% of the Company's inventory cost at the time of request, or
(ii) 75% of net orderly liquidation value, when applied to eligible inventory.
The advances bear interest at a rate of 1.42% per month (17.04% per annum) and
mature on November 20, 2021. The amounts owed under the Loan Agreement are
personally guaranteed by Ezra Dabah, our Chief Executive Officer, President and
Chairman, and his wife Renee. The amounts owed to Crossroads are also secured by
a security interest in substantially all of our assets. The Loan Agreement
includes an early termination fee equal to 5% of the maximum amount available if
the agreement is terminated during the first year of the agreement and 3%
thereafter, provided that such fee is waived if we sell equity in order to repay
amounts owed under the Loan Agreement. The Loan Agreement includes customary
covenants and events of default, including if Ezra Dabah, our Chief Executive
Officer and Chairman, and his family cease being the direct or indirect
beneficial owner of more than 50% of our voting stock, or if any other person or
entity shall become the direct or indirect owner of over 45% of our voting stock
or if Mr. Dabah or Adir Katzav our Executive Vice President and Chief Financial
Officer cease to be employed by the Company. On November 15, 2021, we terminated
the loan and security agreement, and paid in full the outstanding loan amount of
$3,200,000 and related outstanding interest and fee in amount of $24,498, with
funds raised through the IPO.



15







As of October 2, 2021, outstanding advances amounted to $3,200,000. Interest
expense amounted to $326,656 and $231,359 for the 39 weeks ended October 2, 2021
and September 26, 2020, respectively. Interest expense amounted to $136,317 and
$76,836 for the 13 weeks ended October 2, 2021 and September 26, 2020,
respectively.



From October 2, 2021, deferred financing costs, net of accumulated amortization, total $ 0. The amortization of these costs amounts to $ 70,803 and
$ 32,723 for the 39 completed weeks October 2, 2021 and September 26, 2020, respectively.



Cash Advance Agreements



From time to time, we have been party to cash advance agreements with financial
institutions whereby such institutions purchased receivables or advanced cash
for us to inventory. Those include the following transactions:



On February 1, 2021, the Company entered into a new cash advance agreement with
a financial institution and was advanced cash totaling $360,000 to be used for
the purchase of inventory. In accordance with the agreement, the Company agreed
to repay $381,600, plus interest, by depositing future receivables with the
lender. The cash advance bears interest at a rate of 7% per annum for the first
121 days and 12% per annum thereafter until the advance is fully repaid.



On March 10, 2021, the Company entered into a new cash advance agreement with a
financial institution and was advanced cash totaling $100,000 to be used for the
purchase of inventory. In accordance with the agreement, the Company agreed to
repay the advanced cash plus $311,953 previously owed to the financial
institution (totaling $411,953), plus interest, by depositing future receivables
with the lender in total amount of $417,954. The cash advance bears interest at
a rate of 7% per annum for the first 121 days and 12.50% per annum thereafter
until the advance is fully repaid.



On March 10, 2021, the Company also entered into a new cash advance agreement
with a financial institution. Pursuant to the agreement, the financial
institution purchased $1,137,666 of receivables from the Company for $1,062,666,
which included $437,666 owed under the previous agreement. The Company will
deliver 12.5% of the future collections of receivables to the financial
institution until $1,137,666 has been paid. In the event no event of default has
occurred under the agreement and the Company remains in compliance with its
terms, the financial institution will provide a 6% discount on the receivables
purchased.


On May 7, 2021, the Company also entered into a new cash advance agreement with
a financial institution. Pursuant to the agreement, the financial institution
purchased $461,316 of receivables from the Company for $446,316, which included
$196,316 owed under the previous agreement. In accordance with the agreement,
the Company agreed to repay $461,316, plus interest, by depositing future
receivables with the lender. The cash advance bears interest at a rate of 7.5%
per annum for the first 121 days and 12% per annum thereafter until the advance
is fully repaid.


On June 4, 2021, the Company entered into a new cash advance agreement with a
financial institution and was advanced cash totaling $125,000 to be used for the
purchase of inventory. In accordance with the agreement, the Company agreed to
repay the advanced cash plus $355,598 previously owed to the financial
institution (totaling $480,598), plus interest, by depositing future receivables
with the lender in total amount of $488,098. The cash advance bears interest at
a rate of 7.5% per annum for the first 121 days and 12.50% per annum thereafter
until the advance is fully repaid.



On June 4, 2021, the Company also entered into a new cash advance agreement with
a financial institution. Pursuant to the agreement, the financial institution
purchased $1,196,055 of receivables from the Company for $1,124,055, which
included $524,055 owed under the previous agreement. The Company will deliver
12.5% of the future collections of receivables to the financial institution
until $1,196,055 has been paid. In the event no event of default has occurred
under the agreement and the Company remains in compliance with its terms, the
financial institution will provide a 6% discount on the receivables purchased.



16






On July 9, 2021, the Company entered into a new cash advance agreement with a
financial institution. Pursuant to the agreement, the financial institution
purchased $495,902 of receivables from the Company for $488,402, which included
advanced cash totaling $125,000 to be used for the purchase of inventory and
$363,402 owed under the previous agreement. In accordance with the agreement,
the Company agreed to repay $495,902, plus interest, by depositing future
receivables with the lender. The cash advance bears interest at a rate of 7.5%
per annum for the first 121 days and 12.5% per annum thereafter until the
advance is fully repaid.



On August 10, 2021, the Company entered into a new cash advance agreement with a
financial institution and was advanced cash totaling $185,000 to be used for the
purchase of inventory. In accordance with the agreement, the Company agreed to
repay the advanced cash plus $390,169 previously owed to the financial
institution (totaling $575,169), plus interest, by depositing future receivables
with the lender in the total amount of $586,269. The cash advance bears interest
at a rate of 7.5% per annum for the first 121 days and 12.50% per annum
thereafter until the advance is fully repaid.



On August 10, 2021, the Company also entered into a new cash advance agreement
with a financial institution. Pursuant to the agreement, the financial
institution purchased $1,182,318 of receivables from the Company for $1,136,718,
which included $756,718 owed under the previous agreement. The Company will
deliver 12.5% of the future collections of receivables to the financial
institution until $1,182,318 has been paid. In the event no event of default has
occurred under the agreement and the Company remains in compliance with its
terms, the financial institution will provide a 6% discount on the receivables
purchased.



As of October 2, 2021 and January 2, 2021, the cash advance outstanding,
including interest, amounted to $1,196,742 and $829,030, respectively. For the
39 weeks ended October 2, 2021 and September 26, 2020, interest expense related
to the advances totaled $121,411 and $18,626, respectively. For the 13 weeks
ended October 2, 2021 and September 26, 2020, interest expense related to the
advances totaled $18,574 and $23,925, respectively.



After October 2, 2021, we have entered into additional cash advance arrangements, as further described in “Note 16: Post-maturity events” of the notes to the unaudited financial statements above.


SBA Loan



As a response to the COVID-19 pandemic, Congress passed the Coronavirus Aid,
Relief and Economic Security Act ("CARES Act") to aid businesses through the
current economic conditions. The CARES Act provided businesses with loans from
the Small Business Administration ("SBA") based on a calculation provided by the
SBA. In 2020, the Company received $442,352 in funding from these loans. The
CARES Act provides a provision allowing all or a portion of the loan to be
forgiven by the SBA based on certain criteria. Any unforgiven portion will be
repaid over a two-year period with a 10-month deferral on payments yielding 1%
interest. The Company applied for forgiveness and on August 2, 2021, we received
notification and confirmation that our loan, including related accrued interest,
was forgiven in its entirety by the SBA. The forgiveness amount was recorded in
other income.


Convertible bonds and related party loans

In 2020 and 2019, the Company entered into unsecured convertible promissory
notes with related party stockholders in the amount of $1,770,000 and
$3,300,000, respectively. These notes were noninterest bearing. Prior to the
maturity, the notes were converted to equity at a value of 125% of the trailing
12 months of net sales.



In January, February and March 2021, the Company entered into unsecured
convertible promissory notes with related party stockholders in the amount of
$2,000,000. In May 2021, prior to the maturity, the notes in the amount of
$2,000,000 were converted into an aggregate of 339,526 shares of the Company
(valued at $5.89 per share). Subsequently, the Company borrowed an additional
$300,000 from related party stockholders and entered into unsecured convertible
promissory notes with such related party stockholders in the amount of $300,000
to evidence such loans. The convertible promissory notes are due on January 15,
2022, and were to convert automatically into equity securities offered by the
Company in a future fund raising, provided that on August 25, 2021, the parties
agreed to amend the terms of the previously convertible notes, to remove the
conversion rights provided for therein and clarify that no interest accrues
on
the convertible notes.



17







In April and June 2021, the Company entered into various short-term, unsecured
promissory notes with Nina Footwear in the amount of $400,000. The notes are
noninterest-bearing and due on December 31, 2021. On November 16, 2021 we paid
in full the outstanding loans amount of $400,000.



In September, 2021, the Company borrowed $600,000 from Ezra Dabah, who is our
Chief Executive Officer and Chairman. The notes are unsecured,
noninterest-bearing and the principal is fully due and payable on January 15,
2022 or earlier, at the rate of 110% of such note amount, upon a sale of the
Company (including a change of 50% or more of the voting shares).



From October 2, 2021 and January 2, 2021, there was $ 1,219,038 and $ 599,811 due to a related party, respectively.



In October and November 2021, the Company borrowed $1,900,000 from Ezra Dabah,
our Chief Executive Officer and Chairman. The notes are unsecured,
noninterest-bearing and the principal is fully due and payable on January 15,
2022 or earlier, at the rate of 110% of such note amount, upon a sale of the
Company (including a change of 50% or more of the voting shares).



Subsequent to October 2, 2021, we have entered into additional related party
loans, as described in greater detail to "Note 16: Subsequent Events", to the
notes to the unaudited financial statements included above.



Need for Future Funding



As discussed above, our current capital resources, combined with the net
proceeds from the IPO, are expected to be sufficient for us to fund operations
for the next 12 months. We may need funding in addition to the funding raised in
this offering, to support our operations in the future. We may also seek to
acquire additional businesses or assets in the future, which may require us to
raise funding. We currently anticipate such funding, if required, being raised
through the offering of debt or equity. Such additional financing, if required,
may not be available on favorable terms, if at all. If debt financing is
available and obtained, our interest expense may increase and we may be subject
to the risk of default, depending on the terms of such financing. If equity
financing is available and obtained it may result in our stockholders
experiencing significant dilution. If such financing is unavailable, we may be
forced to curtail our business plan, which may cause the value of our securities
to decline in value.


Off-balance sheet provisions

We have not entered into any off-balance sheet arrangements and do not hold any interests in variable interest entities.

Critical accounting conventions and estimates



Our financial statements and the related notes thereto included elsewhere in
this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reporting values of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. The more significant estimates and assumptions are those used
in determining the recoverability of long-lived assets and inventory
obsolescence. Accordingly, actual results could differ from those estimates. To
the extent that there are differences between our estimates and actual results,
our future financial statement presentation, financial condition, results of
operations and cash flows will be affected.



Our critical accounting policies are described under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Estimates" in the Prospectus and the
notes to the audited financial statements appearing elsewhere in the Prospectus.
During the 13 weeks ended October 2, 2021, there were no material changes to our
critical accounting policies from those discussed in our Prospectus.



18






JOBS Act and recent accounting statements

The JOBS Act provides that an "emerging growth company" can take advantage of
the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act, for complying with new or revised accounting standards. In other words, an
"emerging growth company" can delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. We have
elected to take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act, for complying with new or revised accounting
standards that have different effective dates for public and private companies
until the earlier of the date we (i) are no longer an emerging growth company or
(ii) affirmatively and irrevocably opt out of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act.



We have implemented all new accounting pronouncements that are in effect and may
impact our financial statements and we do not believe that there are any other
new accounting pronouncements that have been issued that might have a material
impact on our financial position or results of operations.



Recent accounting positions

Refer to “Note 2: Summary of Significant Accounting Policies” to our unaudited financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently issued and not yet adopted accounting pronouncements.

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