ITEM 1A. RISK FACTORS.
An investment in our securities involves a
high degree of risk. You should carefully read and consider all of the risks described below, together with all of the other information
contained or referred to in this report, before making an investment decision with respect to our securities. If any of the following
events occur, our financial condition, business and results of operations (including cash flows) may be materially adversely affected.
In that event, the market price of our shares could decline, and you could lose all or part of your investment.
Risks Related to Our Business and
Industry
Our business has been materially adversely
impacted by the COVID-19 pandemic and could be materially adversely impacted by future COVID-19 pandemic surges, new COVID-19 variants,
or other pandemics.
COVID-19 was declared a pandemic by the World
Health Organization and the Centers for Disease Control and Prevention in March of 2020. We believe that the global spread of COVID-19
has created significant volatility and uncertainty and economic disruption. We believe the extent to which the COVID-19 pandemic, including
new surges or COVID-19 variants, or any other pandemic ultimately impacts our business, financial condition, results of operations or
cash flows will depend on numerous factors that continue to evolve and which we may not be able to accurately predict, including,
without limitation: the duration and scope of the pandemic; the success of efforts to deliver effective vaccines on
a timely basis to a number of people sufficient to prevent or substantially lower the severity of incidents of infection or variants; the
duration and scope of governmental, business and individuals’ actions that have been and will be taken in response to the pandemic
(including restrictions on travel and transport and workforce pressures); the effect on our suppliers and customers and customer demand
for our core products and services within certain industries such as the restaurant, transportation, hospitality and entertainment industries;
the effect on our sources of supply; the impact of the pandemic on economic activity and actions taken in response; closures of our and
our suppliers’ and customers’ offices and facilities; the ability of our customers to pay for our products and services; financial
market volatility; commodity prices; and the pace of recovery from the pandemic.
On September 9, 2021, U.S. President Biden announced
a proposed new rule which would mandate the COVID-19 vaccine or weekly testing for most U.S. employees, which would include
our employees. That executive proposal was struck down by the U.S. Supreme Court on January 13, 2022. However, the Biden Administration
may seek to impose alternative vaccine mandates and other governmental authorities have imposed more targeted vaccine and testing orders
and regulations, and may continue to do so in the future. If a new mandate is ultimately issued and implemented, we
expect there may be further disruptions to our operations, such as inability to maintain adequate staffing at our facilities,
difficulties in replacing disqualified employees with temporary employees or new hires, and increased compliance burdens, including
financial costs, diversion of administrative resources, and increased downtimes to accommodate for any required ongoing COVID-19 testing,
which may result in logistical delays in supplying customers’ orders and negatively impact our future sales levels and ongoing customer relationships.
20
In addition, COVID-19 has led and may continue
to lead to changes in customer purchasing patterns. We believe we have seen disruptions in our customers’ businesses, including,
but not limited to, our customers’ willingness and ability to spend, layoffs and furloughs of our customers’ employees, and
temporary or permanent closures of businesses that consume our products and services. Prolonged periods of difficult conditions could
have material adverse impacts on our business, financial condition, results of operations and cash flows.
We believe that U.S. promotional products spending
was severely impacted by the COVID-19 pandemic. According to ASI, promotional product distributor sales decreased nearly 20% from $25.8
billion in 2019 to $20.7 billion in 2020. The return of in-person events, businesses aggressively marketing themselves and 40-year-high
inflation resulted in promotional products distributor sales increasing 12.1% in 2021 to $23.2 billion and 11.2% in 2022 to $25.8 billion,
matching the last full year prior to the COVID-19 pandemic. However, distributors have also experienced higher costs of supplies of product
materials due to continued increases in expenses, especially higher freight charges and raw material costs, and a more challenging supply
chain from issues such as trucking shortages and port congestion.
We
believe that the COVID-19 pandemic has impacted Stran’s operational and financial performance. Although we were able to capitalize
on the demand for personal protective equipment in 2020 such as masks, hand sanitizer, and gowns, these sales did not significantly offset
the overall decreased demand for promotional products in 2021 and are not expected to do so in the foreseeable future. Additionally, as
was typical for other firms in the promotional products industry, from March 2020 through the end of 2022, we believe that our revenues
were adversely affected by the economic impact of the pandemic, including decreased demand for promotional products and services such
as ours due to a lack of in-person events, businesses not being fully reopened and staffed, and customers’ decreased marketing budgets.
Likewise, we believe the pandemic’s effects on the global economy caused us to experience higher costs of supplies of product materials
due to continued increases in expenses, especially higher freight charges and raw material costs, and a more challenging supply chain
from issues such as trucking shortages and port congestion. Much of the increase in costs, supply chain disruption, and other continuing
disruptions in operations is believed to be due to ongoing outbreaks of COVID-19. We
expect some or all of these effects to continue in 2023. For example,
the recent shift in customer buying habits to e-commerce, which has the effect of increasing demand for shipping capacity from
Asia, is leading to capacity constraints and may cause significant supply chain
difficulties well into 2023.
We believe the potential effects of COVID-19 also
could continue to impact us in a number of other ways, including, but not limited to, reductions to our revenue and profitability, costs
associated with complying with new or amended laws and regulations affecting our business, declines in the price of our securities, reduced
availability and less favorable terms of future borrowings, reduced creditworthiness of our customers, and potential impairment of the
carrying value of goodwill or other indefinite-lived intangible assets.
Any of these events could materially adversely
affect our business, financial condition, results of operations and cash flows.
Shortages of supply of merchandise from
suppliers, interruptions in our manufacturing, and local conditions in the countries in which we source goods and materials could adversely
affect our results of operations.
Along with many companies
that source goods and raw materials from abroad, we are currently experiencing continued supply disruptions and delays due to a variety
of reasons. These changes are partially driven by interruptions in global supply chains (including as a result of port congestion and
trucking shortages) and partially by a shift in customer buying habits to e-commerce, which has the effect of increasing demand for shipping
capacity from Asia, leading to capacity constraints. Both factors have increased shipping times as well as the price of shipping,
whether by sea, air, rail, or vehicle. Shipping delays combined with significant increases in orders for our products have recently
created, and are expected to continue to create, inventory pressure for us.
As a distributor, we buy merchandise both from
multiple supply sources and from a network of factories in which we have developed direct relationships around the globe over the past
27 years. However, an unexpected interruption in any of the sources or facilities may temporarily adversely affect our results of operations
until alternate sources or facilities can be secured. We rely on the supply of different types of raw materials as well as textiles, including
plastic, glass, fabric and metal for our promotional products. Further, our suppliers generally source or manufacture finished goods in
parts of the world that may be affected by economic uncertainty, political unrest, labor disputes, health emergencies, or the imposition
of duties, tariffs or other import regulations by the United States.
21
Increases in the price of merchandise and
raw materials used to manufacture our products could materially increase our costs and decrease our profitability.
The principal components in our promotional products
are plastic, glass, fabric and metal. The prices we pay for these fabrics and components and our merchandise are dependent on the market
price for the raw materials used to produce them, primarily cotton and chemical components of synthetic fabrics including raw materials
such as chemicals and dyestuffs. These finished goods and raw materials are subject to price volatility caused by weather, supply conditions,
government regulations, economic and political climate, currency exchange rates, labor costs, and other unpredictable factors. Fluctuations
in petroleum prices also may influence the prices of related items such as chemicals, dyestuffs and polyester yarn.
During the years ended December 31, 2021 and 2022,
many promotional products companies saw increases in the cost of finished goods and raw materials purchased, as well as in the average
cost of finished goods and raw materials purchased, as compared to the prior year, driven by rising inflation rates and challenges in
the supply chain which continue to persist. The challenges in the supply chain, which include shipping and logistics issues, also delayed
the arrival of product that many promotional products companies could sell; this challenge also persists.
Our shipping costs for importing raw materials
from overseas have increased significantly since the emergence of COVID-19. Any increase in raw material prices or shipping costs increases
our cost of sales and can decrease our profitability unless we are able to pass the costs on to our customers in the form of higher prices.
In addition, if one or more of our competitors is able to reduce their production costs by taking advantage of any reductions in raw material
prices or favorable sourcing agreements, we may face pricing pressures from those competitors and may be forced to reduce our prices
or face a decline in revenues, either of which could have a material adverse effect on our business, results of operations and financial
condition.
Furthermore, significant or sustained inflation
could have an adverse impact on our operating and general and administrative expenses. During inflationary periods, these costs could
increase at a rate higher than our ability to offset them via customer-facing pricing adjustments, alternative supply sources or other
measures. Inflation could also have an adverse effect on consumer spending, which could adversely impact demand for our products and services.
If our operating and other expenses increase faster than anticipated due to inflation, our financial condition, results of operations
and cash flow could be materially adversely affected.
Climate change impacts including supply
chain disruptions, operational impacts, and geopolitical events may impact our business operations.
We source a large number of raw materials from
third-party suppliers globally. These products include both natural and synthetic materials derived from plants, animal products, and
organic and petroleum-based raw materials. Disruptions to the global supply chain due to climate-related impacts or geopolitical events
are possible and exist as external risk factors that the Company can respond to but not control. These events could limit the supply of
key raw materials to the Company, or could have significant impacts to pricing. We work with multiple raw material suppliers to mitigate
lack of availability from a single supplier, however in some cases products with limited numbers of suppliers may become difficult to
obtain.
Some of our vendors have manufacturing operations
in areas vulnerable to coastal storms which may increase in magnitude and impact due to climate change. Increasingly large and unprecedented
weather events may pose a risk to business operations in vulnerable areas. Storms could cause business interruptions, incur additional
restoration costs, and impact product availability and pricing.
Our customers may cancel or decrease the
quantity of their orders, which could negatively impact our operating results.
Sales to many of our customers are on an order-by-order
basis. If we cannot fill customers’ orders on time, orders may be cancelled and relationships with customers may suffer, which could
have an adverse effect on us, especially if the relationship is with a major customer. Furthermore, if any of our customers experience
a significant downturn in their business, or fail to remain committed to our programs or brands, the customer may reduce or discontinue
purchases from us. The reduction in the amount of our products purchased by customers could have a material adverse effect on our business,
results of operations or financial condition.
In addition, some of our customers have experienced
significant changes and difficulties, including consolidation of ownership, increased centralization of buying decisions, buyer turnover,
restructurings, bankruptcies and liquidations. A significant adverse change in a customer relationship or in a customer’s financial
position could cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to that customer’s
receivables or limit our ability to collect amounts related to previous purchases by that customer, all of which could have a material
adverse effect on our business, results of operations or financial condition.
22
We may be unable to identify or to complete
acquisitions or to successfully integrate the businesses we acquire.
We have evaluated, and may continue to evaluate,
potential acquisition transactions. We attempt to address the potential risks inherent in assessing the attractiveness of acquisition
candidates, as well as other challenges such as retaining the employees and integrating the operations of the businesses we acquire. Integrating
acquired operations involves significant risks and uncertainties, including maintenance of uniform standards, controls, policies and procedures;
diversion of management’s attention from normal business operations during the integration process; unplanned expenses associated
with integration efforts; and unidentified issues not discovered in due diligence, including legal contingencies. Acquisition valuations
require us to make certain estimates and assumptions to determine the fair value of the acquired entities (including the underlying assets
and liabilities). If our estimates or assumptions to value the acquired assets and liabilities are not accurate, we may be exposed to
losses, and/or unexpected usage of cash flow to fund the operations of the acquired operations that may be material.
Even if we are able to acquire businesses on favorable
terms, managing growth through acquisition is a difficult process that includes integration and training of personnel, combining facility
and operating procedures, and additional matters related to the integration of acquired businesses within our existing organization. Unanticipated
issues related to integration may result in additional expense and disruption to our operations, and may require a disproportionate amount
of our management’s attention, any of which could negatively impact our ability to achieve anticipated benefits, such as revenue
and cost synergies. Growth of our business through acquisition generally increases our operating complexity and the level of responsibility
for both existing and new management personnel. Managing and sustaining our growth and expansion may require substantial enhancements
to our operational and financial systems and controls, as well as additional administrative, operational and financial resources. We
may be required to invest in additional support personnel, facilities and systems to address the increased complexities associated with
business or segment expansion. These investments could result in higher overall operating costs and lower operating profits for the business
as a whole. There can be no assurance that we will be successful in integrating acquired businesses or managing our expanding operations.
In addition, although we conduct due diligence
investigations prior to each acquisition, there can be no assurance that we will discover or adequately protect against all material liabilities
of an acquired business for which we may be responsible as a successor owner or operator. The failure to identify suitable acquisitions,
successfully integrate these acquired businesses, successfully manage our expanding operations, or to discover liabilities associated
with such businesses in the diligence process, could adversely affect our business, results of operations or financial condition.
In order to finance such acquisitions, we may
need to obtain additional funds either through public or private financings, including bank and other secured and unsecured borrowings
and/or the issuance of equity or debt securities. There can be no assurance that such financings would be available to us on reasonable
terms. Any future issuances of equity securities or debt securities with equity features may be dilutive to our stockholders.
If our information technology systems suffer
interruptions or failures, including as a result of cyberattacks, our business operations could be disrupted and our reputation could
suffer.
We rely on information technology systems to process
transactions, communicate with customers, manage our business and process and maintain information. The measures we have in place to monitor
and protect our information technology systems might not provide sufficient protection from catastrophic events, power surges, viruses,
malicious software (including ransomware), attempts to gain unauthorized access to data or other types of cyber-based attacks. As cyber-attacks
become more frequent, sophisticated, damaging and difficult to predict, any such event could negatively impact our business operations,
such as by product disruptions that result in an unexpected delay in operations, interruptions in our ability to deliver products and
services to our customers, loss of confidential or otherwise protected information, corruption of data and expenses related to the repair
or replacement of our information technology systems. Compromising and/or loss of information could result in loss of sales or legal or
regulatory claims which could adversely affect our revenues and profits or damage our reputation.
We rely on software and services from other
parties. Defects in or the loss of access to software or services from third parties could increase our costs and adversely affect the
quality of our products.
We rely on technologies from third parties to operate critical functions of our business, including cloud infrastructure services, payment
processing services, certain aspects of distribution center automation and customer relationship management services. Our business would
be disrupted if any of the third-party software or services we utilize, or functional equivalents thereof, were unavailable due to extended
outages or interruptions or because they are no longer available on commercially reasonable terms or prices. In each case, we would be
required to either seek licenses to software or services from other parties and redesign our business and marketplace to function with
such software or services or develop these components ourselves, which would result in increased costs and could result in delays in the
launch of new offerings on our marketplace until equivalent technology can be identified, licensed or developed, and integrated into our
business and marketplace. Furthermore, we might be forced to limit the features available in our current or future products. These delays
and feature limitations, if they occur, could harm our business, results of operations and financial condition.
23
Failure to comply with data privacy and
security laws and regulations could adversely affect our operating results and business.
In the ordinary course of our business, we might
collect and store in our internal and external data centers, cloud services and networks sensitive data, including our proprietary business
information and that of our customers, suppliers and business collaborators, as well as personal information of our customers and employees.
The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. The number
and sophistication of attempted attacks and intrusions that companies have experienced from third parties has increased over the past
few years. Despite our security measures, it is impossible for us to eliminate this risk.
A number of U.S. states have enacted data privacy
and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal, and protection of personal
information, such as social security numbers, financial information and other sensitive personal information. For example, all 50 states
and several U.S. territories now have data breach laws that require timely notification to affected individuals, and at times regulators,
credit reporting agencies and other bodies, if a company has experienced the unauthorized access or acquisition of certain personal information.
Other state laws, such as the California Consumer Privacy Act, as amended (“CCPA”), among other things, contain disclosure
obligations for businesses that collect personal information about residents in their state and affords those individuals new rights relating
to their personal information that may affect our ability to collect and/or use personal information. Moreover, on January 28, 2022, the
California Attorney General announced that certain consumer loyalty programs are subject to the CCPA, which may affect some of our customers
who use our loyalty program services if they are found not to comply with the CCPA’s requirements. The Virginia Consumer Data Protection
Act (“CDPA”) also establishes rights for Virginia consumers to control how companies use individuals’ personal data.
The CDPA dictates how companies must protect personal data in their possession and respond to consumers exercising their rights, as prescribed
by the law, regarding such personal data. The CDPA went into effect on January 1, 2023. Effective January 1, 2023, we also became subject
to the California Privacy Rights Act, which expands upon the consumer data use restrictions, penalties and enforcement provisions under
the California Consumer Privacy Act. Effective July 1, 2023, we will also become subject to the Colorado Privacy Act and Connecticut’s
An Act Concerning Personal Data Privacy and Online Monitoring, which are also comprehensive consumer privacy laws. Effective December
31, 2023, we will also become subject to the Utah Consumer Privacy Act, regarding business handling of consumers’ personal data.
Meanwhile, several other states and the federal government have considered or are considering privacy laws like the CCPA. We will continue
to monitor and assess the impact of these laws, which may impose substantial penalties for violations, impose significant costs for investigations
and compliance, allow private class-action litigation and carry significant potential liability for our business.
Outside of the U.S., data protection laws, including
the GDPR, also might apply to some of our operations or business collaborators. Legal requirements in these countries relating to the
collection, storage, processing and transfer of personal data/information continue to evolve. The GDPR imposes, among other things, data
protection requirements that include strict obligations and restrictions on the ability to collect, analyze and transfer EU personal data/information,
a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances, and possible substantial
fines for any violations (including possible fines for certain violations of up to the greater of 20 million Euros or 4% of total company
revenue). Other governmental authorities around the world have enacted or are considering similar types of legislative and regulatory
proposals concerning data protection.
The interpretation and enforcement of the laws
and regulations described above are uncertain and subject to change, and may require substantial costs to monitor and implement and maintain
adequate compliance programs. Failure to comply with U.S. and international data protection laws and regulations could result in government
enforcement actions (which could include substantial civil and/or criminal penalties), private litigation and/or adverse publicity and
could negatively affect our operating results and business.
24
The Consumer Product Safety Improvement
Act and other existing or future government regulation could harm our business or may cause us to incur additional costs associated
with compliance.
We are subject to various federal, state and local
laws and regulations, including but not limited to, laws and regulations relating to labor and employment, U.S. customs and consumer product
safety, including the CPSIA. The CPSIA created more stringent safety requirements related to lead and phthalates content in children’s
products. The CPSIA regulates the future manufacture of these items and existing inventories and may cause us to incur losses if we offer
for sale or sell any non-compliant items. Failure to comply with the various regulations applicable to us may result in damage to our
reputation, civil and criminal liability, fines and penalties and increased cost of regulatory compliance. These current and any future
laws and regulations could harm our business, results of operations and financial condition.
We are subject to international, federal,
national, regional, state, local and other laws and regulations, and failure to comply with them may expose us to potential liability.
We are subject to international, federal, national,
regional, state, local and other laws and regulations affecting our business, including those promulgated under the Occupational Safety
and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the rules and
regulations of the Consumer Products Safety Commission, the Food, Drug, and Cosmetic Act, the rules and regulations of the Food and Drug
Administration, the FCPA, various securities laws and regulations including but not limited to the Securities Act, the Exchange Act, the
Nasdaq Listing Rules, various labor, workplace and related laws, and environmental laws and regulations. Failure to comply with such laws
and regulations may expose us to potential liability and have an adverse effect on our results of operations.
Implementation of technology initiatives
could disrupt our operations in the near term and fail to provide the anticipated benefits.
As our business grows, we continue to make significant
investments in our technology, including in the areas of warehouse management, enterprise risk management and product design. The costs,
potential problems and interruptions associated with the implementation of technology initiatives could disrupt or reduce the efficiency
of our operations in the near term. They may also require us to divert resources from our core business to ensure that implementation
is successful. In addition, new or upgraded technology might not provide the anticipated benefits, might take longer than expected to
realize the anticipated benefits, might fail or might cost more than anticipated.
Inability to attract and retain key management
or other personnel could adversely impact our business.
Our success is largely dependent on the skills,
experience and efforts of our senior management and other key personnel, such as our Chief Executive Officer and President, Andrew Shape,
our Executive Chairman, Andrew Stranberg, our Executive Vice President, Randolph Birney, our Chief Financial Officer, David Browner, our
Chief of Staff, Stephen Paradiso, our Chief Technology Officer, Jason Nolley, our Chief Operating Officer, Sheila Johnshoy, and our Vice
President of Growth and Strategic Initiatives, John Audibert. If, for any reason, one or more senior executives or key personnel were
not to remain active in our company, or if we were unable to attract and retain senior management or key personnel, our results of operations
could be adversely affected.
Failure to preserve positive labor relationships
with our employees could adversely affect our results of operations.
Our operations rely heavily on our employees,
and any labor shortage, disruption or stoppage caused by poor relations with our employees could reduce our operating margins and income.
While we believe that our employee relations are good, have no knowledge of any employees as subject to collective bargaining agreements,
and unions have not traditionally been active in the U.S. marketing industry, unionization of our workforce could increase our operating
costs or constrain our operating flexibility.
We are exposed to the risk of non-payment
by our customers on a significant amount of our sales.
We allow many of our customers to pay us within
30 days of service, also known as net 30 credit terms. For certain customers who are considered low credit risks, we have extended the
credit term to 90 days, though in such cases we may also request a personal guaranty of payment from the principal owner of the customer
business. Our extension of credit involves considerable judgment and is based on an evaluation of each customer’s financial condition
and payment history. We monitor our credit risk exposure by periodically obtaining credit reports and updated financials on our customers.
We generally see a heightened amount of bankruptcies by our customers during economic downturns and financial crises. We also believe
that the COVID-19 pandemic, and its impact on our customers, could have a negative impact on our collection efforts. While we maintain
an allowance for doubtful receivables for potential credit losses based upon our historical trends and other available information, in
times of economic turmoil, there is heightened risk that our historical indicators may prove to be inaccurate. The inability to collect
on sales to significant customers or a group of customers could have a material adverse effect on our results of operations.
25
There is a risk of dependence on one or
a group of customers or market expectations of unsustainable growth.
During 2020, we were engaged by a Washington,
D.C.-based advertising and marketing contractor as subcontractor on a nationwide awareness-generating initiative for the 2020 U.S. Census.
During this period, this contract represented approximately 27.1% of our overall revenues for 2020. This customer is not expected to renew
its engagement with us due to the U.S. Census only occurring once every ten years. As a result, these nonrecurring revenue increases have
not recurred, are not expected to recur, and do not represent our long-term growth expectations. Although we do not have a concentration
of business in any particular customer or group of customers and do not view the revenues from these contracts to characterize our long-term
steady growth expectations, the additional revenues cannot be excluded from our revenues under United States Generally Accepted Accounting
Principles, or GAAP, and investors that are unsophisticated or otherwise unaware of the likely moderating effect on our future income,
may have an expectation of much faster revenue growth. If we are unable to meet these expectations by finding new major customers or gain
major new engagements from existing customers to replace these nonrecurring contracts, there may be material adverse effects on the price
of our securities due to the reactions of disillusioned investors, negative media coverage, damage to our reputation, and other effects
that may have a material adverse effect on our financial condition or results of operations. If on the other hand we successfully source
major new contracts, the risk that we may become dependent on one or a few customers may increase. This potential dependency could threaten
the sustainability of our growth and have a material adverse effect on our financial condition or results of operations if we are unable
to retain such major contracts or replace them with similarly major contracts on a regular basis.
Our business incurs significant freight
and transportation costs. Any changes in our shipping arrangements or any interruptions in shipping could harm our business, results of
operations and financial condition.
We incur transportation expenses to ship our products
to our customers. Significant increases in the costs of freight and transportation could have a material adverse effect on our results
of operations, as there can be no assurance that we could pass on these increased costs to our customers. Government regulations can and
have impacted the availability of drivers, which will be a significant challenge to the industry. Costs to employ drivers have increased
and transportation shortages have become more prevalent.
If we are not able to negotiate acceptable pricing
and other terms with these vendors or they experience performance problems or other difficulties, such as the increased volume of deliveries
due to shelter-in-place orders associated with the COVID-19 pandemic, it could negatively impact our business and results of operations
and negatively affect the experiences of our customers, which could affect the degree to which they continue to do business with us. Disruption
to delivery services due to inclement weather could result in delays that could adversely affect our reputation, business and results
of operations. If our products are not delivered in a timely fashion or are damaged or lost during the supply or the delivery process,
our customers could become dissatisfied and cease doing business with us, which could adversely affect our business and results of operations.
Our business may be impacted by unforeseen
or catastrophic events, including the emergence of pandemics or other widespread health emergencies, terrorist attacks, extreme weather
events or other natural disasters and other unpredicted events.
The occurrence of unforeseen or catastrophic events,
such as the emergence of pandemics or other widespread health emergencies (or concerns over the possibility of such pandemics or emergencies),
terrorist attacks, extreme weather events or other natural disasters or other unpredicted events, could create economic and financial
disruptions, and could lead to operational difficulties (including travel limitations) that could impair our ability to source and supply
products and services and manage our businesses, and could negatively impact our customers’ ability or willingness to purchase our
products and services.
For example, our corporate headquarters is located
in Massachusetts, which does have earthquakes and experiences other less frequent natural hazards such as flooding, coastal erosion and
an occasional nuisance landslide; should any of these unforeseen or catastrophic events occur, the possibly resulting infrastructure damage
and disruption to the area could negatively affect our company, such as by damage to or total destruction of our headquarters, surrounding
transportation infrastructure, network communications and other forms of communication. Some of our other locations and those of our suppliers,
such as those located in the U.S. and Central America, also are exposed to hurricanes, earthquakes, floods and other extreme weather events;
the damage that such events could produce could affect the supply of our products and services.
26
Additionally, while the extent of the impact on
our business and financial condition is unknown at this time, we believe we have been negatively affected by actions taken to address
and limit the spread of COVID-19, such as travel restrictions and limitations affecting the supply of labor and the movement of raw materials
and finished products. Although we have not experienced any significant shortage or delay in obtaining raw materials or finished product,
our shipping costs for importing raw materials from overseas have increased significantly since the emergence of COVID-19. We believe
further reduced manufacturing capacity or increased freight costs as a result of COVID-19 could have an increased negative affect
on the timely supply and pricing of finished products and have a material adverse effect on our results of operations.
We face intense competition within our industry
and our revenue and/or profits may decrease if we are not able to respond to this competition effectively.
Customers in the promotional products, uniforms,
tradeshow and event marketplace, loyalty and program management business process outsourcing industries choose distributors primarily
based upon the quality, price and breadth of products and services offered. We encounter competition from a number of companies in the
geographic areas we serve. The majority of our revenue is derived from the sale of promotional products. Our major competitors for our
promotional products business include companies such as 4Imprint Group plc, Brand Addition Limited (The Pebble Group plc), BAMKO LLC (Superior
Group of Companies, Inc.), Staples Promotional Products (Staples, Inc.), Boundless Network, Inc. (Zazzle Inc.), Custom Ink, Cimpress plc
and HALO Branded Solutions, Inc. We also compete with a multitude of foreign, regional and local competitors that vary by market. If our
existing or future competitors seek to gain or retain market share by reducing prices, we may be required to lower our prices, which would
adversely affect our operating results. Similarly, if customers or potential customers perceive the products or services offered
by our existing or future competitors to be of higher quality than ours or part of a broader product mix, our revenues may decline, which
would adversely affect our operating results.
We face intense competition to gain market
share, which may lead some competitors to sell substantial amounts of goods at prices against which we cannot profitably compete.
Our marketing strategy is to differentiate ourselves
by providing quality service and quality products to our customers. Even if this strategy is successful, the results may be offset by
reductions in demand or price declines due to competitors’ pricing strategies or other micro- or macroeconomic factors. We face
the risk of our competition following a strategy of selling its products at or below cost in order to cover some amount of fixed costs,
especially in stressed economic times.
Global, national or regional economic slowdowns,
high unemployment levels, fewer jobs, changes in tax laws or cost increases might have an adverse effect on our operating results.
Our primary products within our promotional products
are used by workers and, as a result, our business prospects are dependent upon levels of employment and overall economic conditions on
a global, national and regional level, among other factors. Our revenues are impacted by our customers’ opening and closing of locations
and reductions and increases in headcount, including from voluntary turnover and increased automation, which affect the quantity of uniform
orders on a per-employee basis. If we are unable to offset these effects, such as through the addition of new customers, the penetration
of existing customers with a broader mix of product and service offerings, or decreased production costs that can be passed on in the
form of lower prices, our revenue growth rates will be negatively impacted. Likewise, increases in tax rates or other changes in tax laws
or other regulations can negatively affect our profitability.
While we do not believe that our exposure is greater
than that of our competitors, we could be adversely affected by increases in the prices of fabric, natural gas, gasoline, wages, employee
benefits, insurance costs and other components of product cost unless we can recover such increases through proportional increases in
the prices for our products and services. Competitive and general economic conditions might limit our ability and that of our competitors
to increase prices to cover any increases in our product cost.
27
The promotional products, uniforms, trade
show and events marketplace, loyalty and program management business industries are subject to pricing pressures that may cause us to
lower the prices we charge for our products and services that adversely affect our financial performance.
Many of our competitors also source their product
requirements from developing countries to achieve a lower cost operating environment, possibly with lower costs than our offshore facilities,
and those manufacturers may use these cost savings to reduce prices. Some of our competitors have more purchasing power than we do, which
may enable them to obtain products at lower costs. To remain competitive, we may adjust our product and service prices and margins from
time-to-time in response to these industry-wide pricing pressures. Additionally, increased customer demands for allowances, incentives
and other forms of economic support could reduce our margins and affect our profitability. Our financial performance will be negatively
affected by these pricing pressures if we are forced to reduce our prices and we cannot reduce our product costs proportionally or if
our product costs increase and we cannot increase our prices proportionally.
Changes to trade regulation, quotas, duties,
tariffs or other restrictions caused by the changing U.S. and geopolitical environments or otherwise, such as those with respect to China,
may materially harm our revenue and results of operations, such as by increasing our costs and/or limiting the amount of products that
we can import.
Our operations are subject to various international
trade agreements and regulations, such as the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR), Caribbean Basin
Trade Partnership Act (CBTPA), Haitian Hemispheric Opportunity through Partnership Encouragement Act, as amended (HOPE), the Food Conservation
and Energy Act of 2008 (HOPE II), the Haiti Economic Lift Program of 2010 (HELP), the African Growth and Opportunity Act (AGOA), the Middle
East Free Trade Area Initiative (MEFTA) and the activities and regulations of the World Trade Organization (WTO). Generally, these trade
agreements and regulations benefit our business by reducing or eliminating the quotas, duties and/or tariffs assessed on products manufactured
in a particular country. However, trade agreements and regulations can also impose requirements that have a material adverse effect on
our business, revenue and results of operations, such as limiting the countries from which we can purchase raw materials, limiting the
products that qualify as duty free, and setting quotas, duties and/or tariffs on products that may be imported into the United States
from a particular country. Certain inbound products to the United States are subject to tariffs assessed on the manufactured cost
of goods at the time of import. As a result, we have had to increase prices for certain products and may be required to raise those prices
further, or raise our prices on other products, which may result in the loss of customers and harm our operating performance. In response,
in part, to tariffs levied on products imported from China we have shifted some production out of China and may seek to shift additional
production out of China, which may result in additional costs and disruption to our operations.
The countries in which our products are manufactured
or into which they are imported may from time-to-time impose new quotas, duties, tariffs and requirements as to where raw materials must
be purchased to qualify for free or reduced duty. These countries also may create additional workplace regulations or other restrictions
on our imports or adversely modify existing restrictions. Adverse changes in these costs and restrictions could harm our business. We
cannot assure that future trade agreements or regulations will not provide our competitors an advantage over us or increase our costs,
either of which could have a material adverse effect on our business, results of operations or financial condition. Nor can we assure
that the changing geopolitical and U.S. political environments will not result in a trade agreement or regulation being altered which
adversely affects our company. The U.S. government may decide to impose or alter existing import quotas, duties, tariffs or other
restrictions on products or raw materials sourced from those countries, which include countries from which we import raw materials or
in which we manufacture our products. Any such quotas, duties, tariffs or restrictions could have a material adverse effect on our
business, results of operations or financial condition.
The apparel industry, including uniforms
and corporate identity apparel, is subject to changing fashion trends and if we misjudge consumer preferences, the image of one or more
of our brands may suffer and the demand for our products may decrease.
The apparel industry, including uniforms and corporate
identity apparel for promotional products, is subject to shifting customer demands and evolving fashion trends and our success is also
dependent upon our ability to anticipate and promptly respond to these changes. Failure to anticipate, identify or promptly react to changing
trends or styles may result in decreased demand for our products, as well as excess inventories and markdowns, which could have a material
adverse effect on our business, results of operations and financial condition. In addition, if we misjudge consumer preferences, our brand
image may be impaired. We believe our products are, in general, less subject to fashion trends compared to many other apparel manufacturers
because the majority of what we manufacture and sell are uniforms, scrubs, corporate identity apparel and other accessories.
28
Our success depends upon the continued protection
of our intellectual property rights and we may be forced to incur substantial costs to maintain, defend, protect and enforce our intellectual
property rights.
Our owned intellectual property and certain of
our licensed intellectual property have significant value and are instrumental to our ability to market our products. We cannot assure
that our owned or licensed intellectual property or the operation of our business does not infringe on or otherwise violate the intellectual
property rights of others. We cannot assure that third parties will not assert claims against us on any such basis or that we will be
able to successfully resolve such claims. In addition, the laws of some foreign countries do not allow us to protect, defend or enforce
our intellectual property rights to the same extent as the laws of the United States. We could also incur substantial costs to defend
legal actions relating to use of our intellectual property or prosecute legal actions against others using our intellectual property,
either of which could have a material adverse effect on our business, results of operations or financial condition. There also can be
no assurance that we will be able to negotiate and conclude extensions of existing license agreements on similar economic terms or at
all.
Climate change and increased focus by governments,
stockholders and customers on sustainability issues, including those related to climate change, may have a material adverse effect on
our business and operations.
Federal, state and local governments, as well
as some of our vendors and customers, are beginning to respond to climate change issues. This increased focus on sustainability may result
in new legislation or regulations and vendor and customer requirements that could negatively affect us as we may incur additional costs
or be required to make changes to our operations in order to comply with any new regulations or vendor, customer, or stockholder requirements.
Legislation or regulations that potentially impose restrictions, caps, taxes, or other controls on emissions of greenhouse gases such
as carbon dioxide, a by-product of burning fossil fuels such as those used in the trucks of our logistics vendors, may have a material
adverse effect on our business and operations. For example, if the logistics vendors we contract with become subject to increasingly restrictive
laws protecting the environment, including those relating to climate change, we expect that they would incur increased shipment costs
and may pass such costs on to us, which could have a material adverse effect on our business. If our customers or stockholders were
to require us to use vendors that source, manufacture, or supply their products in accordance with certain sustainability standards, we
expect that such standards would likewise force us to incur additional costs and we may fail to pass such additional costs on to our customers,
which could also have a material adverse effect on our business.
In addition, on March 21, 2022,
the SEC proposed new rules requiring a range of climate-related disclosure that would be applicable to all companies that are
required to file annual reports or that file registration statements with the SEC, including the Company. The proposed climate-related
disclosure framework is modeled in part on the Task Force on Climate Related Financial Disclosures’ recommendations, and also draws
upon the Greenhouse Gas (“GHG”) Protocol (“GHG Protocol”). In particular, the proposed rules would require a registrant
to disclose information about: The oversight and governance of climate-related risks by the registrant’s board and management; how
any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated
financial statements, which may manifest over the short-, medium-, or long-term; how any identified climate-related risks have affected
or are likely to affect the registrant’s strategy, business model, and outlook; the registrant’s processes for identifying,
assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management
system or processes; the impact of climate-related events (severe weather events and other natural conditions as well as physical risks
identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of
a registrant’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions
impacted by such climate-related events and transition activities; “Scope 1” and “Scope 2” (as defined by the
SEC’s proposed rule) GHG emissions metrics, separately disclosed, expressed both by disaggregated constituent greenhouse gases and
in the aggregate, and in absolute and intensity terms; “Scope 3” (as defined by the SEC’s proposed rule) GHG emissions
and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions;
and the registrant’s climate-related targets or goals, and transition plan, if any. The proposed rules would be subject to certain
accommodations and phase-in periods. For example, companies meeting the definition of “smaller reporting company” in Rule
12b-2 of the Exchange Act, which currently includes the Company (see below,
“—We are a ’smaller reporting company’ within the meaning of the Exchange Act, and
if we take advantage of certain exemptions from disclosure requirements available to smaller reporting companies, this could make our
securities less attractive to investors and may make it more difficult to compare our performance with other public companies.”
and “As a ’smaller reporting company,’ we may at some time
in the future choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public
stockholders.”), would be exempt from the Scope 3 emissions disclosure requirement. The proposed rules would also require
an attestation report provided by a third-party attestation service provider that satisfies a minimum level of attestation services for
a company that meets the definition of “accelerated filer” or “large accelerated filer” in Rule 12b-2 of the Exchange
Act, including: (1) limited assurance for Scopes 1 and 2 emissions disclosure that scales up to reasonable assurance after a specified
transition period; (2) minimum qualifications and independence requirements for the attestation service provider; and (3) minimum requirements
for the accompanying attestation report. A company that is not an “accelerated filer” or “large accelerated filer”,
which currently includes the Company, would not be subject to this attestation requirement (see also “—As a non-accelerated
filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act.” and “—We
are subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not emerging
growth companies and our stockholders could receive less information than they might expect to receive from more mature public companies.”).
29
Although we cannot predict the costs of implementation
or any potential adverse impacts resulting from the proposed rule, the SEC estimated that compliance costs for a “smaller reporting
company” in the first year of compliance would be $490,000 ($140,000 for internal costs and $350,000 for outside professional costs),
while annual costs in the subsequent five years were estimated to be $420,000 ($120,000 for internal costs and $300,000 for outside professional
costs). For non-“smaller reporting company” registrants, the costs in the first year of compliance were estimated to be $640,000
($180,000 for internal costs and $460,000 for outside professional costs), while annual costs in the subsequent five years were estimated
to be $530,000 ($150,000 for internal costs and $380,000 for outside professional costs). To the extent that this rule is finalized as
proposed, we could therefore incur significant increased costs relating to the assessment and disclosure of climate-related matters.
These potential additional costs, forced changes in operations, or
loss of revenues may have a material adverse effect on our business and operations.
General Risk Factors
Adverse developments affecting the financial
services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions
or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and
results of operations.
Actual events involving limited liquidity, defaults, non-performance or
other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services
industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have
in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”),
was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation
(the “FDIC”), as receiver. Similarly, on March 12, 2023, Signature Bank Corp. (“Signature”), and Silvergate
Capital Corp. were each swept into receivership. Although a statement by the Department of the Treasury, the Federal Reserve and the FDIC indicated
that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured
deposit accounts, borrowers under credit agreements, letters of credit and certain other financial instruments with SVB, Signature or
any other financial institution that is placed into receivership by the FDIC may be unable to access undrawn amounts thereunder.
Although we are not a borrower under or party to any material letter of credit or any other such instruments with SVB, Signature or any
other financial institution currently in receivership, if we enter into any such instruments and any of our lenders or counterparties
to such instruments were to be placed into receivership, we may be unable to access such funds. In addition, if any of our customers,
suppliers or other parties with whom we conduct business are unable to access funds pursuant to such instruments or lending arrangements
with such a financial institution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements
requiring additional payments to us could be adversely affected. In this regard, counterparties to credit agreements and arrangements
with these financial institutions, and third parties such as beneficiaries of letters of credit (among others), may experience direct
impacts from the closure of these financial institutions and uncertainty remains over liquidity concerns in the broader financial services
industry. Similar impacts have occurred in the past, such as during the 2008-2010 financial crisis.
Inflation and rapid increases in interest rates
have led to a decline in the trading value of previously-issued government securities with interest rates below current market interest
rates. Although the U.S. Department of Treasury, FDIC and Federal Reserve Board have announced a program to provide up to $25
billion of loans to financial institutions secured by certain of such government securities held by financial institutions to mitigate
the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of
financial institutions for immediately liquidity may exceed the capacity of such program.
Our access to funding sources and other credit
arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly
impaired by factors that affect us, any financial institutions with which we enter into credit agreements or arrangements directly, or
the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints
or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions
or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies
in the financial services industry. These factors could involve financial institutions or financial services industry companies with which
we have financial or business relationships, but could also include factors involving financial markets or the financial services industry
generally.
30
The results of events or concerns that involve
one or more of these factors could include a variety of material and adverse impacts on our current and projected business operations
and our financial condition and results of operations. These risks include, but may not be limited to, the following:
● inability to enter into credit facilities or other working capital resources;
In addition, investor concerns regarding the U.S.
or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs
and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more
difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity
resources could, among other risks, adversely impact our ability to meet our operating expenses or other obligations, financial or otherwise,
result in breaches of our financial and/or contractual obligations, or result in violations of federal or state wage and hour laws. Any
of these impacts, or any other impacts resulting from the factors described above or other related or similar factors, could have material
adverse impacts on our liquidity and our current and/or projected business operations and financial condition and results of operations.
In addition, any further
deterioration in the economy or financial services industry could lead to losses or defaults by our customers, service providers, vendors,
or suppliers, which in turn, could have a material adverse effect on our current and/or projected business operations and results of operations
and financial condition. For example, a customer may fail to make payments when due, default under their agreements with us, become insolvent
or declare bankruptcy, or a service provider, vendor, or supplier may determine that it will no longer deal with us as a customer. In
addition, a service provider, vendor or supplier could be adversely affected by any of the liquidity or other risks that are described
above as factors that could result in material adverse impacts on us, including but not limited to delayed access or loss of access to
uninsured deposits or loss of the ability to draw on existing credit facilities involving a troubled or failed financial institution.
The bankruptcy or insolvency of any customers, service providers, vendors, or suppliers, or the failure of any customer to make payments
when due, or any breach or default by a customer, service provider, vendor, or supplier, or the loss of any significant supplier relationships,
could cause us to suffer material losses and may have a material adverse impact on our business.
Some of the products
that we design or otherwise assist customers with producing create exposure to potential product liability, warranty liability or
personal injury claims and litigation.
Some of the products
that we design or otherwise assist customers with producing are used in applications and situations that involve risk of personal
injury and death. Our services expose us to potential product liability, warranty liability, and personal injury
claims and litigation relating to the use or misuse of our products including allegations of defects in manufacturing, defects
in design, a failure to warn of dangers inherent in the product or activities associated with the product, negligence and
strict liability. If successful, such claims could have a material adverse effect on our business.
Defects in the products
that we design or otherwise assist customers with producing could reduce demand for our products and result in a decrease
in sales and market acceptance and damage to our reputation.
Although we carry certain standard commercial
insurance, including products-completed operations coverage, we do not currently maintain separate product liability insurance,
and we may not be able to obtain and maintain such insurance on acceptable terms, if at all, in the future. Even if we have
purchased product liability insurance in the future, product liability claims may exceed the amount of our insurance coverage.
In addition, our reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity
about our products.
We are subject to periodic litigation in
both domestic and international jurisdictions that may adversely affect our financial position and results of operations.
From time to time we may be involved in legal
or regulatory actions regarding product liability, employment practices, intellectual property infringement, bankruptcies and other litigation
or enforcement matters. These proceedings may be in jurisdictions with reputations for aggressive application of laws and procedures against
corporate defendants. We are impacted by trends in litigation, including class-action allegations brought under various consumer protection
and employment laws. Due to the inherent uncertainties of litigation in both domestic and foreign jurisdictions, we cannot accurately
predict the ultimate outcome of any such proceedings. These proceedings could cause us to incur costs and may require us to devote resources