ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and
cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial
statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are
based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results
could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those
discussed below and elsewhere in this report, particularly in the sections titled Item 1A. “Risk Factors” and “Introductory
Notes – Note Regarding Forward-Looking Statements.”
Overview
We are an outsourced marketing solutions provider
that sells branded products to customers. We purchase products and branding through various third-party manufacturers and decorators and
resell the finished goods to customers.
In addition to selling branded products, we offer
clients custom sourcing capabilities; a flexible and customizable e-commerce solution for promoting branded merchandise and other promotional
products, managing promotional loyalty and incentives, print collateral, and event assets, order and inventory management, and designing
and hosting online retail popup shops, fixed public retail online stores, and online business-to-business service offerings; creative
and merchandising services; warehousing/fulfillment and distribution; print-on-demand; kitting; point of sale displays; and loyalty and
incentive programs.
We earn the majority of our revenue from the sale
of unique, quality promotional products for a wide variety of industries primarily to support marketing efforts. We also derive revenues
from service fees from loyalty programs, event management, print services, fulfillment services, and technology services.
The majority of our revenue is derived from program
business, although only a small percentage of our customers are considered programmatic. For the years 2023 and 2022, program clients
accounted for 77.2% and 82.2% of total revenue, respectively. Fewer than 350 of our more than 2,000 active customers are considered to
be program clients. Our active customers are any organizations, businesses, or divisions
of a parent organization which have purchased directly or indirectly from us within the last two years, and include organizations that
have bought from other organizations for which Stran acts as an established sub-contractor. We define transactional customers as customers
that place an order with us and do not have an agreement with us covering ongoing branding requirements. We define program clients as
clients that have a contractual obligation for specific ongoing branding needs. Program offerings include ongoing inventory, use of technology
platform, warehousing, creative services, and additional client support. Those program customers are geared towards longer-lasting relationships
that helps secure recurring revenue well into the future.
Our sales increased 28.7% year-over-year in 2023
compared to 2022, which we believe was primarily due to higher spending from existing clients as well as business from new customers.
Additionally, we benefited from the acquisition of the assets of G.A.P. Promotions in January 2022, the assets of Trend Brand Solutions
in August 2022, the assets of Premier NYC in December 2022, and the assets of T R Miller in June
2023.
As of December 31, 2023, we had $61.6 million
of total assets with $39.5 million of total stockholder equity.
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Recent Developments
Modification of Line of Credit Terms
Under a Commercial Loan Modification Agreement,
dated as of February 12, 2024, between the Lender (as defined in “—Liquidity and Capital Resources – Debt”)
and the Company (the “Loan Modification Agreement”), certain obligations and requirements of the Company under the Line of
Credit Agreement (as defined in “—Liquidity and Capital Resources – Debt”) were modified, superseding the
initial applicable terms, including as follows (as described in “—Liquidity and Capital Resources – Debt”):
The foregoing description of the Loan Modification
Agreement is qualified in its entirety by reference to the full text of the Loan Modification Agreement, a copy of which is attached as
Exhibit 10.42 to this Annual Report, which is incorporated herein by reference.
Annual Executive Bonuses
On February 15, 2024, the Company awarded annual
bonuses for the fiscal year ended December 31, 2023 to Andrew Shape, David Browner, John Audibert, and Sheila Johnshoy. The bonus compensation
is described in Item 11. “Executive Compensation”.
Chief Information Officer Compensation
Effective January 2, 2024, Ian Wall became our
Chief Information Officer. Mr. Wall’s compensation package is described in Item 11. “Executive Compensation – Executive
Officer Employment and Consulting Agreements – Employment Agreement with Ian Wall”.
40
Emerging Growth Company and Smaller Reporting
Company
We qualify as an “emerging growth company”
under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely
on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
In addition, Section 107 of the JOBS Act also
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 of 1933, as amended, 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 benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies
that comply with such new or revised accounting standards.
We will remain an emerging growth company until
the earliest of (i) the last day of the fiscal year following the fifth anniversary of the IPO, (ii) the last day of the first fiscal
year in which our total annual gross revenues are $1.07 billion or more, (ii) the date that we become a “large accelerated filer”
as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if
the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently
completed second fiscal quarter or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding
three year period.
To the extent that we continue to qualify as a
“smaller reporting company,” as such term is defined in Rule 12b-2 under the Exchange Act, after we cease to qualify as an
emerging growth company, certain of the exemptions and accommodations available to us as an emerging growth company may continue to be
available to us as a smaller reporting company, including as to: (i) the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley
Act; (ii) scaled executive compensation disclosures; (iii) presenting three years of audited financial statements; and (iv) compliance
with certain greenhouse gas emissions disclosure and related third-party assurance requirements.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by
the following factors:
● our ability to acquire new customers or retain existing customers;
● our ability to offer competitive product pricing;
● our ability to broaden product offerings;
● industry demand and competition;
● our ability to leverage technology and use and develop efficient processes;
● our ability to attract and retain talented employees; and
● market conditions and our market position.
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Results of Operations
The following table sets forth key components
of our results of operations during the years ended December 31, 2023 and 2022, both in dollars and as a percentage of our revenues.
Years Ended December 31,
Amount % of Revenues Amount % of Revenues
Cost of Sales:
Operating Expenses:
Other Income and (Expense):
Sales
Sales consist primarily
of the selling price of the merchandise, service or outbound shipping and handling charges, less discounts, coupons redeemed, returns
and credits.
Our sales increased 28.7% to
approximately $75.9 million for the year ended December 31, 2023, from approximately $59.0 million for the year ended December
31, 2022. The increase was primarily due to higher spending from existing clients as well as business from new customers.
Additionally, the acquisitions of the G.A.P. Promotions assets in January 2022, the Trend Brand Solutions assets in August 2022, the
Premier NYC assets in December 2022, and the T R Miller assets in June 2023 accounted for approximately $14.7 million, or 19.4%, of
sales, for 2023, compared to approximately $6.5 million, or 11.0%, of sales for 2022, as described in more detail immediately
below.
The January 2022
acquisition of the G.A.P. Promotions assets generated approximately $3.5 million of sales for the year ended December 31, 2023,
compared to approximately $5.4 million from such assets for the year ended December 31, 2022. The August 2022 acquisition of the
Trend Brand Solutions assets generated approximately $3.1 million of sales for the year ended December 31, 2023 compared to
approximately $1.1 million from such assets for the year ended December 31, 2022. The December 2022 acquisition of the Premier NYC
assets generated approximately $1.1 million of sales for the year ended December 31, 2023, compared to no sales from such assets for
the year ended December 31, 2022. The June 2023 acquisition of the T R Miller assets generated approximately $7.0 million of sales
for the year ended December 31, 2023, compared to no sales from such assets for the year ended December 31, 2022. Our recurring
organic sales, defined as sales excluding revenue from the G.A.P Promotions, Trend Brand Solutions, Premier NYC, and T R Miller
asset acquisitions, increased 16.6%, or approximately $8.7 million, to approximately $61.2 million for the year ended December 31,
2023, from approximately $52.5 million for the year ended December 31, 2022.
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Cost of Sales
Cost of sales
consists of the costs of purchasing merchandise and freight charges. Our total
cost of sales increased 20.4% to approximately $51.0 million for the year ended December 31, 2023, from approximately
$42.4 million for the year ended December 31, 2022. As a percentage of sales, cost of sales decreased to 67.2% for the year ended
December 31, 2023 from 71.9% for the year ended December 31, 2022. More specifically, cost of purchases increased to
approximately $45.4 million for the year ended December 31, 2023, or 21.4%, from approximately $37.4 million for the year ended
December 31, 2022. As a percentage of sales, cost of purchases decreased to 59.8% for the year ended December 31, 2023, from 63.4%
for the year ended December 31, 2022. In addition, freight costs increased to approximately $5.6 million for the year ended December
31, 2023, or 12.4%, from approximately $5.0 million for the year ended December 31, 2022. As a percentage of sales, freight costs
decreased to 7.4% for the year ended December 31, 2023, from 8.5% for the year ended December 31, 2022. The increase in the dollar
amount of cost of purchases and freight was primarily due to an increase in sales of 28.7% from period to period.
Gross Profit
Gross profit consists
of sales less total costs of sales. Our gross profit increased 50.2% to approximately $24.9 million, or 32.8% of sales, for the year ended
December 31, 2023, from approximately $16.6 million, or 28.1% of sales, for the year ended December 31, 2022. The increase in the dollar
amount of gross profit was due to an increase in sales of approximately $16.9 million for the reasons described above, partially offset
by an increase in purchasing and freight costs of approximately $8.6 million in aggregate for the reasons described above.
Operating Expenses
Operating expenses consist
of general and administrative expenses. Our operating expenses increased 44.0%, or approximately $8.0 million, to approximately $26.0
million for the year ended December 31, 2023, from approximately $18.1 million for the year ended December 31, 2022. As a percentage
of sales, operating expenses increased to 34.3% for the year ended December 31, 2023, from 30.7% for the year ended December 31, 2022.
The increase in the dollar amount of operating expenses was due to an increase in general and administrative expenses of approximately
$8.0 million, or 44.0%, which in turn was primarily due to aggregate expenses related to the organic growth in our business.
Other Income and Expense
Other income and (expense)
consist of other income, interest income, and unrealized gain (loss) on investments. Our other income was $375,063 for the year ended
December 31, 2023, compared to $112,507 for the year ended December 31, 2022. This change was primarily due to an accrual adjustment to
certain earn-out obligations relating to our acquisition of the assets of Wildman Imprints, Trend Brand Solutions, and Premier NYC. Our
interest income was $570,387 for the year ended December 31, 2023, compared to $94,680 for the year ended December 31, 2022. This change
was primarily due to interest generated from investments. Our unrealized gain (loss) on investments was $269,587 for the year ended December
31, 2023, compared to $(179,120) for the year ended December 31, 2022. This change was primarily due to the recording of all investments
at estimated fair value.
Income Taxes Provision
Income tax provision
reflects statutory tax rates in the jurisdictions in which we operate adjusted for permanent book/tax differences.
Income tax provision
for the year ended December 31, 2023 was approximately $0.03 million compared to income tax provision of approximately $(0.7) million
for the year ended December 31, 2022. Income tax provision for the years ended December 31, 2023 and 2022 accounted for 47.3% and 47.3%
of earnings (loss) before income taxes of approximately $0.1 million and approximately $(1.5) million for the years ended December 31,
2023 and 2022, respectively. For 2023 and 2022, the Company recorded an income tax provision comprised substantially of a deferred tax
asset in the form of an operating loss carryforward. No valuation allowance against the deferred tax asset was accounted for due to the
indefinite life of the asset.
Our effective tax rate
is directly affected by the relative proportions of revenue and income before taxes in the jurisdictions in which we operate. Based on
management’s expectations of future earnings, we anticipate that our effective tax rate will remain similar to the federal tax rate
of 21%. State income taxes will fluctuate based annually on apportionment of sales by state.
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Discrete tax events may
cause our effective rate to fluctuate on a quarterly basis. Certain events, including, for example, acquisitions and other business changes,
which are difficult to predict, may also cause our effective tax rate to fluctuate. We are subject to changing tax laws, regulations,
and interpretations in multiple jurisdictions. Corporate tax reform continues to be a priority in the U.S. and other jurisdictions. Additional
changes to the tax system in the U.S. could have significant effects, positive and negative, on our effective tax rate and our deferred
tax assets and liabilities. For further discussion of changes in the income tax provision, refer to Notes A and S to our financial statements
beginning on page F-1 of this Annual Report.
Net Earnings and Losses
Our net earnings
for the year ended December 31, 2023 was approximately $0.04 million, compared to a net loss of approximately $0.8 million for
the year ended December 31, 2022. This change was primarily due to the increase in sales
during 2023 from the acquisition of the assets of each of G.A.P. Promotions, Trend Brand Solutions, Premier NYC, and T R Miller to
approximately $14.7 million in aggregate, from approximately $6.5 million from the acquisition of the assets of G.A.P. Promotions,
Trend Brand Solutions, and Premier NYC during 2022, and the increase of approximately $8.7 million from recurring organic sales
during 2023 compared to 2022. These factors were partially offset by the reasons
described above for the increase in operating expenses and the increase in purchasing costs.
Liquidity and Capital Resources
As of December 31, 2023,
we had cash and cash equivalents of approximately $8.0 million and investments of approximately $10.5 million. We
have financed our operations primarily through cash generated from the IPO in November 2021, our private placement of common stock and
warrants to purchase common stock in December 2021, operations, and bank borrowings, including a secured revolving demand line of credit
that was opened with Salem Five Cents Savings Bank in November 2021 for aggregate loans of up to $7.0 million, subject to a number of
asset-related and other financial requirements and other covenants, terms and conditions as described in detail below under “–
Debt”.
We believe that our current levels of cash will
be sufficient to meet our anticipated cash needs for our operations and cash payment obligations for both the 12 months ended December
31, 2024 and in the long-term beyond this period, including our anticipated costs associated with being a public reporting company. We
may, however, in the future require additional cash resources due to changing business conditions, implementation of our strategy to expand
our business, or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy
our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of
additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt
service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may
not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to
us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
Summary of Cash Flow
The following table provides detailed information
about our net cash flow for fiscal years ended December 31, 2023 and December 31, 2022:
Cash Flow
Years Ended December 31,
Net cash provided by (used in) investing activities (2,074,559 ) (11,329,536 )
Net cash provided by (used in) financing activities (825,305 ) (2,693,774 )
Net increase (decrease) in cash and cash equivalents (7,264,953 ) (16,972,912 )
Net cash used in operating activities
was approximately $4.4 million for the year ended December 31, 2023, as compared to net cash used in operating activities of approximately
$2.9 million for the year ended December 31, 2022. For the year ended December 31, 2023, increases
in accounts receivable of approximately $6.0 million, accrued payroll and related of approximately
$2.0 million, and unearned revenue of approximately $4.5 million
along with a decrease in rewards program liability of approximately $5.1 million were the
primary drivers of the net cash used in operating activities.For the year ended December
31, 2022, an increase in accounts receivable of approximately $5.5 million, inventory of approximately $1.6 million, and rewards
program liability of approximately $6.0 million were the primary drivers of net cash used in operating activities.
The change in net cash used in operating activities for the year ended December 31, 2023 compared to the year ended December 31, 2022
occurred in the normal course of business due to growth in organic business.
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Net cash used in investing activities
was approximately $2.1 million for the year ended December 31, 2023, as compared to net cash
used in investing activities of approximately $11.3 million for the year ended December 31, 2022. For the years ended December 31, 2023
and 2022, asset acquisitions for net cash outlays totaling approximately $0.7 million and $0.7 million, respectively, additions to software-related
property and equipment totaling approximately $1.0 million and $0.6 million, respectively, and purchases of investments totaling approximately
$0.4 million and $10.0 million, respectively, were the primary drivers of the net cash used in investing activities. The decrease in net
cash used in investing activities for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due
to reduced purchases of investments.
Net cash used in financing activities
was approximately $0.8 million for the year ended December 31, 2023, as compared to net cash provided by financing activities of approximately
$2.7 million for the year ended December 31, 2022. For the year ended December 31, 2023, net cash used in financing activities consisted
primarily of payments related to a contingent earn-out liability of approximately $0.8 million and the repurchase of our common stock
under our stock repurchase program for approximately $0.05 million. For the year ended December 31, 2022, net cash used in financing activities
consisted primarily of payments related to a contingent earn-out liability of approximately $0.7 million and the repurchase of our common
stock under our stock repurchase program for approximately $3.3 million, offset by net proceeds received from the exercise of our publicly-traded
warrants of approximately $1.3 million. The decrease in net cash used in financing activities for the year ended December 31, 2023 compared
to the year ended December 31, 2022 was primarily due to the non-recurrence of proceeds from the exercise of our publicly-traded warrants,
offset by reduced repurchases of our common stock, during the year ended December 31, 2022.
Stock
Repurchase Program
As initially announced
on February 23, 2022, under our stock repurchase program, we may repurchase up to $10 million of our outstanding shares of common stock
from time to time in the open market, in accordance with all applicable securities laws and regulations, including Rule 10b-18. Our decision
to repurchase our shares, as well as the timing of such repurchases, will depend on a variety of factors that include ongoing assessments
of our capital needs, market conditions and the price of our common stock, and other corporate considerations, as determined by management.
Repurchases will also only be made in accordance with the Company’s insider trading policy as if such purchases were made by a person
covered by the policy. Our insider trading policy generally permits insider purchases of our stock only during the period beginning on
the second business day following the day of public release of our quarterly or annual earnings and ending on the last day of the then-current
quarter. There is no defined number of shares to be repurchased over a specified timeframe through the life of the stock repurchase
program. The repurchase authorization has no expiration date but may be suspended or discontinued at any time. Stock repurchases
are paid using cash generated by operations.
In connection with our
stock repurchase program, on May 23, 2022, we announced that we had established a trading plan with B. Riley intended to qualify under
Rule 10b-18. In May 2023, we renewed the trading plan. The trading plan instructs B. Riley to repurchase shares of common stock for our
account in accordance with Rule 10b-18 and our instructions. Repurchases under the trading plan may continue until the trading plan terminates
in June 2024 unless terminated earlier or extended.
As of December 31, 2023,
we had repurchased a total of 1,815,166 shares of common stock for total payments of $3,382,406, and $6,617,594 remained available under
the stock repurchase program for future stock repurchases. During the three months ended December 31, 2023, we repurchased a total of
18,007 shares for aggregate payments of $25,696 under the Trading Plan. See Item 5. “Market For Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities. – Purchases of Equity Securities” for further information
about repurchases of common stock during the three months ended December 31, 2023.
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Debt
On November 22, 2021,
we entered into a Revolving Demand Line of Credit Loan Agreement (the “Line of Credit Agreement”), with Salem Five Cents Savings
Bank (the “Lender”), for aggregate loans of up to $7 million (the “Line of Credit”), evidenced by a Revolving
Demand Line of Credit Note, also dated November 22, 2021 (the “Note”). The Line of Credit and Note are secured by a first
priority security interest in all assets and property of the Company, as provided in the Security Agreement, also dated November 22, 2021,
between the Lender and the Borrower (the “Security Agreement” and together with the Line of Credit Agreement and the Note,
the “Line of Credit Documents”), and as described below. In addition, see “—Recent Developments – Modification
of Line of Credit Terms” as to the recent modification of certain terms of the Line of Credit.
The amount available
under the Line of Credit is the lesser of $7.0 million or the sum of (x) 80% of the then-outstanding amount of Eligible Accounts (as defined
below), plus (y) 50% of Eligible Inventory (as defined below); minus 100% of the aggregate amount then drawn under the Line of Credit
for the account of the Company. In addition, advances based upon Eligible Inventory must be capped at all times at $2,000,000. “Eligible
Accounts” are defined as accounts that meet a number of requirements, including, unless otherwise approved by the Lender, being
less than 90 days from the date of invoice not subject to any prior assignment, claim, lien, or security interest, not subject to set-off,
credit, allowance or adjustment by the account debtor, arose in the ordinary course of the Company’s business, not an intercompany
obligation, not subject to notice of bankruptcy or insolvency of the account debtor, not owed by an account debtor whose principal place
of business is outside the United States, not a government account, not be evidenced by promissory notes, and not one of the accounts
owed by an account debtor 25% or more of whose accounts are 90 or more days past invoice date; or otherwise not deemed acceptable by the
Lender in accordance with its normal credit policies. “Eligible Inventory” means all finished goods, work in progress and
raw materials and component parts of inventory owned by the Company. It does not include any inventory held on consignment or not otherwise
owned by the Company; any inventory which has been returned by a customer or is damaged or subject to any legal encumbrances other than
a first priority security interest held by the Company; any inventory which is not in the possession of the Company; any inventory which
is held by the Company on property leased by the Company unless the Lender has received a landlord lien waiver and collateral access agreement
from the lessor of such property satisfactory to the Lender; any inventory which is not located within the United States; any inventory
which the Lender reasonably deems to be obsolete or non-marketable; and any inventory not subject to a first priority fully perfected
lien held by the Lender.
The Line of Credit is
subject to interest at the prime rate plus 0.5% per annum. The Company must repay interest on Line of Credit proceeds on a monthly basis.
The Line of Credit will continue indefinitely, subject to the Lender’s demand rights and the Company’s ongoing affirmative
and other obligations under the Line of Credit Documents, as summarized below.
The Company may freely
draw upon the Line of Credit subject to the Lender’s right to demand complete repayment of the Line of Credit at any time. Late
payments are subject to a late payment charge of 5%. In the event of failure to repay the Line of Credit after the Lender makes demand
for full repayment, the interest rate will increase by 10%. The Note may be prepaid at any time without penalty. The Lender may assign
the Note without the Company’s consent.
Under the Security Agreement
and the other Line of Credit Documents, the Company granted the Lender a first priority security interest in all of its assets, including
both assets owned as of the date of the Line of Credit and afterwards, as collateral for full repayment of the Line of Credit. The Lender
may file Uniform Commercial Code financing statements with any jurisdiction and with sufficient descriptions of the property to perfect
its security interest in all of the Company’s current and future assets. Upon default of the Line of Credit, the Lender may accelerate
repayment of the Line of Credit, take possession of the Company’s assets, assign a receiver over the Company’s assets, and
enforce other rights as to the Company’s assets as secured creditor. The Company must pay for all of the Lender’s reasonable
legal fees and expenses incurred to enforce its rights under the Line of Credit Documents.
Under the Line of Credit
Agreement, the Company is required to continue its current business of outsourced marketing solutions, and, without the prior consent
of the Lender, the Company may not acquire in whole or in part any other company or business and shall not engage in any other business
or open any other locations. The Company must use the proceeds of the Line of Credit only in connection with the general and ordinary
operations of its business and for the purpose of general working capital for accounts receivable and inventory purchases.
46
The Line of Credit was
also initially subject to the following ongoing affirmative obligations of the Company: Making punctual repayment of the Line of Credit
amount; maintaining proper accounting books and records in accordance with the opinion of LMHS, P.C. or another Certified Public Accountant
acceptable to the Lender; allowing the Lender to inspect its accounting books and records; furnishing audited, quarterly, monthly and
other financial statements to the Lender; making payment of Lender’s reasonable expenses for a field exam in 2022 (see “—Recent
Developments – Modification of Line of Credit Terms” as to the recent modification of this term); allowing the Lender
to communicate with its accountants; maintaining its properties in good repair subject to ordinary wear and tear; obtaining replacement-cost
insurance for its property with the Lender as Mortgagee/Loss Payee; causing management contracts for the Company’s properties to
be subordinated to the rights of the Lender; and allowing no change of property management company without the prior written consent of
the Lender..
The Line of Credit was
also initially subject to the Company meeting the following financial requirements: (a) “Debt Service Coverage Ratio” defined
as cash flow to be calculated on an annual basis of at least 1.20 times EBITDA less cash taxes, distributions, dividends, shareholder
withdrawals in any form, and unfinanced CAPEX divided by all scheduled principal payments on all debt plus cash interest payments made
on all debt; and (b) “Minimum Net Worth” defined as minimum net worth of $2,000,000 at December 31, 2021, $2,750,000 at December
31, 2022, and $3,500,000 at December 31, 2023. See “——Recent Developments – Modification of Line of Credit
Terms” as to the recent modification of these terms.
The Company also may
not, without the prior approval by the Lender, incur any additional indebtedness, secured or unsecured, except in the ordinary course
of business; make loans or advances to others or guarantee others’ obligations except for certain ordinary advances to employees
or ordinary customer credit terms; make investments; acquire any business; make capital expenditures except in the ordinary course of
business; sell any material assets except in the ordinary course of business; or grant any security interests or mortgages in its properties
or assets. See “——Recent Developments – Modification of Line of Credit Terms” as to the recent modification
of these terms.
The foregoing description
of the Loan Agreement, the Note, and the Security Agreement is qualified in its entirety by reference to the full text of the Loan Agreement,
the Note, and the Security Agreement, copies of which are attached as Exhibit 10.19, Exhibit 10.20 and Exhibit 10.21 to this Annual Report,
respectively, which are incorporated herein by reference.
In
connection with the Line of Credit Agreement, on November 22, 2021, the Company, the Lender and Harte Hanks Response Management/Boston,
Inc. (the “Warehouse Provider”), the lessor of certain warehouse facilities to the Company, executed a Warehouseman’s
Waiver in favor of the Lender (the “Warehouseman’s Waiver”). Under the Warehouseman’s Waiver, the Warehouse Provider
disclaimed any interest in the property of the Company stored on the premises (the “Collateral”), and agreed not to interfere
with the Lender’s enforcement of its rights in the Collateral. The Warehouse Provider further agreed to provide notice to the Lender
of any default by the Company of its obligations as to the Warehouse Provider, and to give the Lender at least 30 days to exercise its
rights, which period may be extended by the Lender up to 60 days upon its payment of the per-diem rental amount. After that period, unless
the default has been cured by the Lender, the Warehouse Provider may dispose of such Collateral as it deems fit. Upon the receipt of written
notice from the Lender and until such notice is rescinded, the Warehouse Provider shall only honor instructions from the Lender with respect
to the Collateral, including any direction from the Lender to dispose of all or any portion of the Collateral at any time, without any
further consent or instruction from Company.
The foregoing description
of the Warehouseman’s Waiver is qualified in its entirety by reference to the full text of the Warehouseman’s Waiver, a copy
of which is attached as Exhibit 10.22 to this Annual Report, which is incorporated herein by reference.
As of December 31, 2023
and 2022, we had not drawn any funds from the Loan under the Loan Agreement.
Contractual Obligations
Wildman Imprints Assets Acquisition
On August 24, 2020, we
entered into an Asset Purchase Agreement (the “Wildman Imprints Asset Purchase Agreement”), to acquire inventory, fixed assets,
and a customer list of Wildman Imprints. The acquisition closed on September 26, 2020. In connection with the asset acquisition, the customer
list was purchased in part under the following earn-out payment terms. The required earn-out payments are equal to 15% of the Gross Profit
(as defined by the Wildman Imprints Asset Purchase Agreement) earned from the sale of product to the customer list for the first year
following the date of the agreement and 30% for the second and third years following the date of the agreement. Earn-out payments are
due within 30 days of the anniversary date of the agreement for the first year and within 30 days of each quarter for the second and third
year following the date of the agreement. Any additional Wildman Imprints accounts with a strong history that are purchased will have
the same earn-out terms. Additional payments are due for certain referred accounts in the amount of 5% of sales for the first year following
the referral date, 3% of sales for the second year following the referral date, and 1% of sales for the third year following the referral
date. At December 31, 2023 and December 31, 2022, the current portion of the earn-out liability amounted to $0 and $742,874, respectively.
47
In connection with the
asset acquisition, we also had an amount due to the seller under a note in the amount of $162,358 as of December 31, 2022 for the inventory
and property and equipment purchased. This amount accrued no interest, and was to be paid “as used” on a quarterly basis through
the three-year earn-out period. As of September 30, 2023, the note was forgiven in full. We expect no deficiencies in our ability to make
the payments required under the asset purchase agreement. The aggregate purchase price was $2,937,222, as follows:
Fair Value of Identifiable
Assets Acquired:
Property and Equipment 34,099
Intangible - Customer List 2,253,690
Consideration Paid:
Contingent Earn-Out Liability 2,253,690
For further discussion see Notes J and M to our
financial statements beginning on page F-1 of this Annual Report.
G.A.P. Promotions Assets Acquisition
On January 31, 2022,
the Company closed on an asset purchase agreement, dated as of January 21, 2022, as amended on January 31, 2022, to acquire
inventory, working capital, and a customer list from G.A.P. Promotions (the “G.A.P. Promotions Asset Purchase Agreement”).
The purchase price included
cash payments as follows: $500,000 in cash, subject to adjustment, plus additional cash for the certain inventory on hand at cost; $180,000
due January 31, 2023; and $300,000 due January 31, 2024. The Company also issued 46,083 shares of restricted common stock to the
principal owner of G.A.P. Promotions.
The seller is also entitled
to receive the following earn-out payments to the extent that the acquired business achieves the applicable Gross Profit (as defined by
the G.A.P. Promotions Asset Purchase Agreement) targets: (1) An earn-out payment equal to 70% of annual Gross Profit of the acquired business
to the extent Gross Profit is above $1,500,000 for the trailing 12-month period from the first anniversary of the closing date, subject
to deductions for certain inventory and accounts receivables that are not purchased or paid for by customers; and (2) an earn-out payment
equal to 70% of annual Gross Profit of the acquired business to the extent Gross Profit is above $1,500,000 for the trailing 12-month
period from the second anniversary of the Closing Date. Earn-out payments are due within 30 days from the date on which they are determined
to be owed.
In accordance with Financial
Accounting Standards Board Accounting Standards Codification Topic 805, “Business Combinations” (“FASB ASC 805”),
the acquisition method of accounting has been applied and recognition of the assets acquired has been determined at fair value as of the
acquisition date. All acquisition costs have been expensed as incurred. The consideration paid has been allocated to the assets acquired
based on their estimated fair values at the acquisition date. The estimate of fair values for tangible assets acquired was agreed to by
both buyer and seller. The aggregate purchase price was $3,245,872, as follows:
Intangible - Customer List 2,275,290
Consideration Paid:
Contingent Earn-Out Liability 1,635,000
48
For further discussion relating to this transaction,
see Notes J and N to our financial statements beginning on page F-1 of this Annual Report. The foregoing description of the G.A.P. Promotions
Asset Purchase Agreement and assets acquired from G.A.P. Promotions is qualified in its entirety by the full text of the asset purchase
agreement and amendment thereto, which are filed as Exhibit 2.1 and Exhibit 2.2 to this Annual Report, respectively, and incorporated
by reference herein.
Trend Brand Solutions Assets Acquisition
On August 31, 2022, the
Company closed on an asset purchase agreement, dated as of July 13, 2022, as amended on August 31, 2022, to acquire cash, accounts receivable,
inventory, fixed assets, and a customer list from Trend Brand Solutions (the “Trend Asset Purchase Agreement”).
The purchase price included
cash payments as follows: $175,000 in cash, plus additional cash for certain inventory on hand at cost and the depreciated value of certain
fixed assets, on the closing date; $37,500 within 45 days of August 31, 2023, (ii) $37,500 within 45 days of August 31, 2024, (iii) $25,000
within 45 days of August 31, 2025, and (iv) $25,000 within 45 days of August 31, 2026. These amounts are subject to deductions for certain
outstanding indebtedness and unsold inventory and working capital adjustments. Pursuant to the Trend Asset Purchase Agreement, prior to
closing, the Company also made a short-term loan to the seller of $162,174.66 for the repayment of the seller’s existing loan
to the U.S. Small Business Administration in the same amount (the “SBA Note”). At the closing, the SBA Note was repaid
by deduction from the cash purchase price. The Company also issued 54,642 shares of restricted common stock to the principal stockholder
of Trend Brand Solutions.
The seller is also entitled
to receive up to four annual earn-out payments in an amount equal to 40% of annual Gross Profit (as defined by the Trend Asset Purchase
Agreement) of the acquired business to the extent that Gross Profit is in excess of $800,000, such annual Gross Profit to be determined
based on the immediately trailing 12-month period prior to the applicable closing date anniversary. If the seller is determined to be
entitled to an earn-out payment, such earn-out payment will be paid on the date that is ten days from the date of such determination.
In accordance with FASB
ASC 805, the acquisition method of accounting has been applied and recognition of the assets acquired has been determined at fair value
as of the acquisition date. All acquisition costs have been expensed as incurred. The consideration paid has been allocated to the assets
acquired based on their estimated fair values at the acquisition date. The estimate of fair values for tangible assets acquired was agreed
to by both buyer and seller. The aggregate purchase price was $2,193,166, as follows:
Fair Value of Identifiable
Assets Acquired:
Intangible – Customer List 1,659,831
Consideration Paid:
Assumption of Liabilities 721,334
Contingent Earn-Out Liability 1,370,344
For further discussion see Notes J and N to our
financial statements beginning on page F-1 of this Annual Report. The foregoing description of the Trend Asset Purchase Agreement and
assets acquired from Trend Brand Solutions is qualified in their entirety by the full text of the asset purchase agreement and amendment
thereto, which are filed as Exhibit 2.3 and Exhibit 2.4 to this Annual Report, respectively, and incorporated by reference herein.
49
Premier NYC Acquisition
On December 20, 2022,
the Company closed on an asset purchase agreement, dated as of November 29, 2022 (the “Premier NYC Asset Purchase Agreement”),
to acquire cash, accounts receivable, and a customer list from Premier NYC.
The purchase price included
cash payments as follows: $100,000 in cash, subject to working capital adjustments, on the closing date; $60,000 within 30 days of December
20, 2023, (ii) $40,000 within 30 days of December 20, 2024, and (iii) $30,000 within 30 days of December 20, 2025. These amounts are subject
to deductions for certain outstanding indebtedness.
The seller is also entitled
to receive up to three annual earn-out payments in an amount equal to 45% of annual Gross Profit (as defined by the Premier NYC Asset
Purchase Agreement) of the acquired business to the extent that Gross Profit is in excess of $350,000, such annual Gross Profit to be
determined based on the immediately trailing 12-month period prior to the applicable closing date anniversary. If the seller is determined
to be entitled to an earn-out payment, such earn-out payment will be paid on the date that is ten days from the date of such determination.
In accordance with FASB
ASC 805, the acquisition method of accounting has been applied and recognition of the assets acquired has been determined at fair value
as of the acquisition date. All acquisition costs have been expensed as incurred. The consideration paid has been allocated to the assets
acquired based on their estimated fair values at the acquisition date. The estimate of fair values for tangible assets acquired was agreed
to by both buyer and seller. The aggregate purchase price was $1,390,533, as follows:
Fair Value of Identifiable Assets Acquired:
Contingent Earn-Out Liability 1,032,600
Consideration Paid:
Assumption of Liabilities 17,908
Contingent Earn-Out Liability 907,600
For further discussion, see Notes J and N to our
financial statements beginning on page F-1 of this Annual Report.
T R Miller Asset Acquisition Agreement
On January 25, 2023,
we entered into an Asset Purchase Agreement (the “T R Miller Purchase Agreement”) with T R Miller and Thomas R. Miller (the
“Miller Stockholder”), pursuant to which we agreed to acquire substantially all of the assets of T R Miller used in T R Miller’s
branding, marketing and promotional products and services business (the “T R Miller Business”). The T R Miller Business had
existing operations and generated revenues. The T R Miller Purchase Agreement provided that the aggregate purchase price for the T R Miller
Business would consist of cash payments by the Company to T R Miller at and following the consummation of the transactions contemplated
by the T R Miller Purchase Agreement (the “T R Miller Closing”), subject to certain adjustments.
On June 1, 2023, the
T R Miller Closing was completed. Pursuant to the T R Miller Purchase Agreement, the Company paid T R Miller $2,154,230.21 in cash, reflecting
the purchase price of $1,000,000 as adjusted by a $1,123,071.82 working capital adjustment; no adjustment for indebtedness as of the date
and time of the T R Miller Closing (the “T R Miller Closing Date”) that was not part of the Assumed Liabilities (as defined
in the T R Miller Purchase Agreement); no separate amount for any Inventory (as defined in the T R Miller Purchase Agreement) that was
on hand and owned by T R Miller as of the T R Miller Closing Date, as such amount was included in the working capital adjustment; and
first and last month’s rent under the Miller Lease Agreement (as defined below) of $14,962.50 and $16,195.89, respectively.
50
Following the T R Miller
Closing, the Company will make (a) installment payments equal to (i) $400,000 on the first anniversary of the T R Miller Closing Date,
(ii) $300,000 on the second anniversary of the T R Miller Closing Date, (iii) $200,000 on the third anniversary of the T R Miller Closing
Date, and (iv) $200,000 on the fourth anniversary of the T R Miller Closing Date, each such installment payment subject to adjustment
for certain uncollected accounts receivable amounts outstanding after the first 12 months following the T R Miller Closing; and (b) four
annual earn-out payments, each equal to (i) 45% of the annual Gross Profit (as defined in the T R Miller Purchase Agreement) of T R Miller
above $4,000,000 with respect to certain customers of T R Miller or primarily resulting from the efforts of the Miller Stockholder or
certain employees or independent contractors of T R Miller, plus (ii) 25% of the annual Gross Profit above $4,000,000 with respect to
customers primarily resulting from the past or future efforts of the Company that are assigned to and primary responsibility of any employee
or independent contractor of T R Miller as designated by the T R Miller Purchase Agreement, for the trailing 12-month period, as of the
first, second, third, and fourth anniversary of the T R Miller Closing Date, each such Earn Out Payment subject to adjustment as set forth
in the T R Miller Purchase Agreement.
The timing and manner
of the remaining working capital adjustments or payments and the earn-out payments, and the resolution of any disagreements as to such
adjustments or payments, will follow the procedures provided by the T R Miller Purchase Agreement.
In addition, as of the
T R Miller Closing Date, the Company undertook to perform or otherwise pay, satisfy and discharge as of the T R Miller Closing the Assumed
Liabilities (as defined in the T R Miller Purchase Agreement).
The T R Miller Purchase
Agreement also contained additional representations, warranties, covenants, indemnification provisions and other terms.
Pursuant to the T R Miller
Purchase Agreement, in connection with the T R Miller Closing, the Company, as tenant, and the Miller Landlord, entered into the Miller
Lease Agreement for a warehouse facility in Walpole, Massachusetts. The Miller Lease Agreement provides for base rent of $179,550.00 in
the first year of the lease and an increase of 2% per annum in each subsequent year. We may extend the term for an additional five years
upon the same base rent terms upon 12 months’ notice. We will be responsible for all property and other taxes and expenses related
to the facility except for maintenance of certain structural elements. The initial lease term commenced on June 1, 2023 and terminates
on May 31, 2028. We may assign our rights to the lease and property at the facility as collateral to a lender. The Miller Landlord is
also required to execute a landlord lien waiver and collateral access agreement upon request. The Miller Lease Agreement contains provisions
for minimum insurance, mutual indemnification from certain claims relating to the Miller Lease Agreement, and customary default and related
termination and remedy provisions. The foregoing description of the Miller Lease Agreement is qualified in its entirety by reference to
the full text of the agreement, a copy of which is filed as Exhibit 10.37 to this Annual Report.
In addition, the Company
entered into (i) a consulting agreement with the Miller Stockholder providing for certain consulting services to the Company for a period
of three years following the T R Miller Closing Date and (ii) an employment agreement with Stacy Miller.
The foregoing references
to the terms and conditions of the T R Miller Purchase Agreement do not purport to be complete and are qualified in their entirety by
reference to the full text of the agreement, a copy of which is attached as Exhibit 2.5 to this Annual Report, and incorporated by reference
herein.
Property Leases
The following is a schedule by years of future
minimum lease payments:
Total Future Non-Cancelable Minimum Lease Payments $ 1,403,291
Lease cost for the years ended December 31, 2023
and 2022 totaled $557,687 and $466,895, respectively. We anticipate no deficiencies in our ability to make these payments.
51
Other Cash Obligations
The Company manages reward card programs for clients.
Under these programs, the Company receives cash and simultaneously records a liability for the total amount received. These accounts are
adjusted on a periodic basis as reward cards are funded or reduced at the direction of the customers. At December 31, 2023 and December
31, 2022, the Company had net deposits totaling $875,000 and $6,000,000, respectively.
Our other principal cash payment obligations have
consisted principally of obligations under the Line of Credit described above. As stated above, as of December 31, 2023 and December 31,
2022, we had not drawn any funds from the Line of Credit under the Line of Credit Agreement.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance
with U.S. GAAP. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing
basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between
our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows
will be affected.
We believe that the assumptions and estimates
associated with investments, inventory valuation, intangible assets, revenue recognition, stock-based compensation expense and income
taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies
and estimates. For further information on all of our significant accounting policies, see the notes to our financial statements beginning
on page F-1 of this Annual Report.
Investments
Our investments consist of U.S. treasury bills,
corporate bonds, and money market funds. We classify our investments as available-for-sale and record these investments at fair value.
Investments with an original maturity of greater than three months at the date of purchase and less than one year from the date of the
balance sheet are classified as current and those with maturities of more than one year from the date of the balance sheet are classified
as long-term in the consolidated balance sheet.
Inventory Valuation
Inventory consists of finished goods (branded
products) and goods in process (un-branded products awaiting decoration). All inventory is stated at the lower of cost (first-in, first-out
method) or market value.
Intangible Assets - Customer List
The Company accounts for intangible assets under
the provision of ASC 350-20 “Accounting for Goodwill and Other Intangible Assets.” The provision establishes standards for
valuation and amortization of unidentifiable assets.
Under ASC 350-20-35-1, the cost of unidentifiable
intangible assets is measured by the excess cost over the fair value of net assets acquired. Intangible assets with indefinite useful
lives shall not be amortized until its useful life is determined to be no longer infinite. The intangible assets are evaluated when a
triggering event occurs, at least annually, for potential impairment.
52
Revenue Recognition
In accordance with Accounting
Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), we recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to
be received for those goods or services. The guidance defines a five-step process to achieve this core principle and, in doing so, judgment
and estimates may be required within the revenue recognition process including identifying performance obligations in the contract, estimating
the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance
obligation. Generally, we recognize revenue when there is persuasive evidence that an arrangement exists, title and risk of loss have
passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related
receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment. In limited circumstances where
either title or risk of loss pass upon destination or acceptance or when collection is not reasonably assured, we defer revenue recognition
until such events occur.