UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to
_____________
Commission File Number: 001-41038
STRAN & COMPANY, INC. |
(Exact name of registrant as specified in its charter) |
Nevada | | 04-3297200 |
(State or other jurisdiction
of incorporation) | | (I.R.S. Employer
Identification No.) |
2 Heritage Drive, Suite 600, Quincy, MA | | 02171 |
(Address of principal executive offices) | | (Zip Code) |
800-833-3309 |
(Registrant’s telephone number, including area code) |
|
(Former name or former address, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | | SWAG | | The NASDAQ Stock Market LLC |
Warrants, each warrant exercisable for one share of Common Stock at an exercise price of $4.81375 | | SWAGW | | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No
☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | | Smaller reporting company | ☒ |
| | | | Emerging growth company | ☒ |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 14, 2023, there were 18,420,264
shares of the registrant’s common stock outstanding.
STRAN & COMPANY, INC.
Quarterly Report on Form 10-Q
Period Ended June 30, 2023
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
STRAN & COMPANY, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STRAN & COMPANY, INC.
BALANCE SHEETS
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
| |
(unaudited) | | |
| |
ASSETS | |
| |
CURRENT ASSETS: | |
| | |
| |
Cash | |
$ | 15,271,199 | | |
$ | 15,253,756 | |
Investments | |
| 10,277,690 | | |
| 9,779,355 | |
Accounts Receivable, Net | |
| 13,958,984 | | |
| 14,442,626 | |
Deferred Income Taxes | |
| 1,542,000 | | |
| 841,000 | |
Inventory | |
| 5,820,887 | | |
| 6,867,564 | |
Prepaid Corporate Taxes | |
| 87,459 | | |
| 87,459 | |
Prepaid Expenses | |
| 695,711 | | |
| 386,884 | |
Deposits | |
| 1,976,439 | | |
| 910,486 | |
| |
| 49,630,369 | | |
| 48,569,130 | |
| |
| | | |
| | |
PROPERTY AND EQUIPMENT, NET: | |
| 1,294,568 | | |
| 1,000,090 | |
| |
| | | |
| | |
OTHER ASSETS: | |
| | | |
| | |
Intangible Assets - Customer Lists, Net | |
| 10,711,939 | | |
| 6,272,205 | |
Right of Use Asset - Office Leases | |
| 1,470,140 | | |
| 784,683 | |
| |
| 12,182,079 | | |
| 7,056,888 | |
| |
$ | 63,107,016 | | |
$ | 56,626,108 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDER’S EQUITY | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Current Portion of Contingent Earn-Out Liabilities | |
$ | 3,186,825 | | |
$ | 1,809,874 | |
Current Portion of Lease Liability | |
| 676,036 | | |
| 324,594 | |
Accounts Payable and Accrued Expenses | |
| 3,012,379 | | |
| 4,051,657 | |
Accrued Payroll and Related | |
| 997,008 | | |
| 608,589 | |
Unearned Revenue | |
| 2,290,639 | | |
| 633,148 | |
Rewards Program Liability | |
| 8,875,000 | | |
| 6,000,000 | |
Sales Tax Payable | |
| 291,438 | | |
| 365,303 | |
Note Payable - Wildman | |
| 162,358 | | |
| 162,358 | |
| |
| 19,491,683 | | |
| 13,955,523 | |
| |
| | | |
| | |
LONG-TERM LIABILITIES: | |
| | | |
| | |
Long-Term Contingent Earn-Out Liabilities | |
| 4,883,265 | | |
| 2,845,944 | |
Long-Term Lease Liability | |
| 762,946 | | |
| 460,089 | |
| |
| 5,646,211 | | |
| 3,306,033 | |
| |
| | | |
| | |
STOCKHOLDERS’ EQUITY: | |
| | | |
| | |
Common Stock, $.0001 Par Value; 300,000,000 Shares Authorized, 18,540,834 and 18,475,521 Shares Issued and Outstanding as of June 30, 2023 and December 31, 2022, respectively | |
| 1,855 | | |
| 1,848 | |
Additional Paid-In Capital | |
| 38,416,582 | | |
| 38,279,151 | |
Retained Earnings | |
| (449,315 | ) | |
| 1,083,553 | |
| |
| 37,969,122 | | |
| 39,364,552 | |
| |
$ | 63,107,016 | | |
$ | 56,626,108 | |
The accompanying notes are an integral part
of these unaudited financial statements.
STRAN & COMPANY, INC.
STATEMENTS OF EARNINGS (LOSS) AND RETAINED EARNINGS
THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND
2022
(UNAUDITED)
| |
Three Months Ended June 30, 2023 | | |
Three Months Ended June 30, 2022 | | |
Six Months Ended June 30, 2023 | | |
Six Months Ended June 30, 2022 | |
| |
| | |
| | |
| | |
| |
SALES | |
$ | 17,470,106 | | |
$ | 14,806,904 | | |
$ | 33,246,353 | | |
$ | 27,066,487 | |
| |
| | | |
| | | |
| | | |
| | |
COST OF SALES: | |
| | | |
| | | |
| | | |
| | |
Purchases | |
| 10,810,268 | | |
| 9,497,551 | | |
| 20,833,814 | | |
| 17,454,167 | |
Freight | |
| 1,582,917 | | |
| 1,549,163 | | |
| 2,641,665 | | |
| 2,633,965 | |
| |
| 12,393,185 | | |
| 11,046,714 | | |
| 23,475,479 | | |
| 20,088,132 | |
| |
| | | |
| | | |
| | | |
| | |
GROSS PROFIT | |
| 5,076,921 | | |
| 3,760,190 | | |
| 9,770,874 | | |
| 6,978,355 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
General and Administrative Expenses | |
| 6,351,174 | | |
| 4,232,170 | | |
| 12,430,269 | | |
| 8,256,388 | |
| |
| 6,351,174 | | |
| 4,232,170 | | |
| 12,430,269 | | |
| 8,256,388 | |
| |
| | | |
| | | |
| | | |
| | |
EARNINGS (LOSS) FROM OPERATIONS | |
| (1,274,253 | ) | |
| (471,980 | ) | |
| (2,659,395 | ) | |
| (1,278,033 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME AND (EXPENSE): | |
| | | |
| | | |
| | | |
| | |
Other Income (Expense) | |
| 15,092 | | |
| (23,781 | ) | |
| 71,729 | | |
| (27,461 | ) |
Interest Income (Expense) | |
| 146,177 | | |
| 6,108 | | |
| 284,259 | | |
| 92,972 | |
Unrealized Gain (Loss) on Investments | |
| (33,303 | ) | |
| - | | |
| 98,582 | | |
| - | |
| |
| 127,966 | | |
| (17,673 | ) | |
| 454,570 | | |
| 65,511 | |
| |
| | | |
| | | |
| | | |
| | |
EARNINGS (LOSS) BEFORE INCOME TAXES | |
| (1,146,287 | ) | |
| (489,653 | ) | |
| (2,204,825 | ) | |
| (1,212,522 | ) |
| |
| | | |
| | | |
| | | |
| | |
PROVISION FOR INCOME TAXES | |
| (307,957 | ) | |
| (42,210 | ) | |
| (671,957 | ) | |
| (219,265 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET EARNINGS (LOSS) | |
| (838,330 | ) | |
| (447,443 | ) | |
| (1,532,868 | ) | |
| (993,257 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET EARNINGS (LOSS) PER COMMON SHARE | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
$ | (0.05 | ) | |
$ | (0.02 | ) | |
$ | (0.08 | ) | |
$ | (0.03 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | |
| | | |
| | | |
| | | |
| | |
Basic and Diluted | |
| 18,540,834 | | |
| 19,971,552 | | |
| 18,540,834 | | |
| 19,971,552 | |
The accompanying notes are an integral part
of these unaudited financial statements.
STRAN & COMPANY, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY |
THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND
2022
(UNAUDITED) |
| |
Common Stock | | |
Additional Paid in | | |
Retained | | |
Total Stockholders | |
| |
Shares | | |
Value | | |
Capital | | |
Earnings | | |
Equity | |
Balance, January 1, 2022 | |
| 19,753,852 | | |
$ | 1,976 | | |
$ | 39,747,649 | | |
$ | 1,861,994 | | |
$ | 41,611,619 | |
IPO Warrants Exercised | |
| 271,589 | | |
| 27 | | |
| 1,307,335 | | |
| - | | |
| 1,307,362 | |
Asset Acquisition | |
| 46,083 | | |
| 5 | | |
| 99,995 | | |
| - | | |
| 100,000 | |
Stock-Based Compensation | |
| 56,264 | | |
| 6 | | |
| 118,686 | | |
| - | | |
| 118,692 | |
Net Earnings (Loss) | |
| - | | |
| - | | |
| - | | |
| (545,814 | ) | |
| (545,814 | ) |
Balance, March 31, 2022 | |
| 20,127,788 | | |
| 2,014 | | |
| 41,273,665 | | |
| 1,316,180 | | |
| 42,591,859 | |
Stock-Based Compensation | |
| 11,542 | | |
| 1 | | |
| 48,290 | | |
| - | | |
| 48,291 | |
Stock Repurchase Program | |
| (1,000,000 | ) | |
| (100 | ) | |
| (1,993,510 | ) | |
| - | | |
| (1,993,610 | ) |
Net Earnings (Loss) | |
| - | | |
| - | | |
| - | | |
| (447,443 | ) | |
| (447,443 | ) |
Balance, June 30, 2022 | |
| 19,139,330 | | |
$ | 1,915 | | |
$ | 39,328,445 | | |
$ | 868,737 | | |
$ | 40,199,097 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, January 1, 2023 | |
| 18,475,521 | | |
$ | 1,848 | | |
$ | 38,279,151 | | |
$ | 1,083,553 | | |
$ | 39,364,552 | |
Stock-Based Compensation | |
| 7,813 | | |
| 1 | | |
| 27,382 | | |
| - | | |
| 27,383 | |
Net Earnings (Loss) | |
| - | | |
| - | | |
| - | | |
| (694,538 | ) | |
| (694,538 | ) |
Balance, March 31, 2023 | |
| 18,483,334 | | |
| 1,849 | | |
| 38,306,533 | | |
| 389,015 | | |
| 38,697,397 | |
Stock-Based Compensation | |
| 57,500 | | |
| 6 | | |
| 110,049 | | |
| - | | |
| 110,055 | |
Net Earnings (Loss) | |
| - | | |
| - | | |
| - | | |
| (838,330 | ) | |
| (838,330 | ) |
Balance, June 30, 2023 | |
| 18,540,834 | | |
$ | 1,855 | | |
$ | 38,416,582 | | |
$ | (449,315 | ) | |
$ | 37,969,122 | |
The accompanying notes are an integral part
of these unaudited financial statements.
STRAN & COMPANY, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(UNAUDITED)
| |
2023 | | |
2022 | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net Earnings (Loss) | |
$ | (1,532,868 | ) | |
$ | (993,257 | ) |
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: | |
| | | |
| | |
Deferred Income Taxes (Credit) | |
| (701,000 | ) | |
| (273,700 | ) |
Depreciation and Amortization | |
| 654,038 | | |
| 309,482 | |
Intangible Asset Impairment, Net | |
| (67,712 | ) | |
| (46,561 | ) |
Stock-Based Compensation | |
| 110,049 | | |
| 166,983 | |
Unrealized Gain on Investments | |
| (98,582 | ) | |
| - | |
Changes in Operating Assets and Liabilities: | |
| | | |
| | |
Accounts Receivable, Net | |
| 483,642 | | |
| (2,354,665 | ) |
Inventory | |
| 1,046,677 | | |
| (727,349 | ) |
Prepaid Expenses | |
| (308,827 | ) | |
| (10,807 | ) |
Deposits | |
| (1,065,953 | ) | |
| (4,097 | ) |
Accounts Payable and Accrued Expenses | |
| (1,039,278 | ) | |
| (3,195,114 | ) |
Accrued Payroll and Related | |
| 388,419 | | |
| (56,930 | ) |
Unearned Revenue | |
| 1,657,491 | | |
| 904,537 | |
Rewards Program Liability | |
| 2,875,000 | | |
| 3,875,000 | |
Sales Tax Payable | |
| (73,865 | ) | |
| 164,637 | |
| |
| 2,327,231 | | |
| (2,241,841 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Asset Acquisition, Net of Cash Acquired | |
| (741,109 | ) | |
| (540,290 | ) |
Additions to Property and Equipment | |
| (578,792 | ) | |
| (189,543 | ) |
Purchase of Investments | |
| (403,524 | ) | |
| - | |
| |
| (1,723,425 | ) | |
| (729,833 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Debt Reduction: | |
| | | |
| | |
Contingent Earn-Out Liabilities | |
| (586,363 | ) | |
| (366,840 | ) |
Stock Repurchase | |
| - | | |
| (1,993,610 | ) |
Proceeds from Warrants Exercised | |
| - | | |
| 1,307,362 | |
| |
| (586,363 | ) | |
| (1,053,088 | ) |
| |
| | | |
| | |
NET INCREASE (DECREASE) IN CASH | |
| 17,443 | | |
| (4,024,762 | ) |
| |
| | | |
| | |
CASH - BEGINNING | |
| 15,253,756 | | |
| 32,226,668 | |
CASH - ENDING | |
$ | 15,271,199 | | |
$ | 28,201,906 | |
The accompanying notes are an integral part
of these unaudited financial statements.
STRAN & COMPANY, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(UNAUDITED)
(CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
| |
2023 | | |
2022 | |
Cash Paid During The Period For: | |
| | |
| |
Interest | |
$ | - | | |
$ | 3,731 | |
Income Taxes | |
$ | 29,043 | | |
$ | 76,073 | |
| |
| | | |
| | |
Non-Cash G.A.P. Promotions LLC Asset Acquisition | |
$ | - | | |
$ | 1,735,000 | |
| |
| | | |
| | |
Non-Cash T R Miller Co., Inc. Asset Acquisition | |
$ | 4,551,095 | | |
$ | - | |
| |
| | | |
| | |
Reduction in Contingent Earnout Liabilities | |
$ | 550,460 | | |
$ | 70,406 | |
Reduction in Intangible Asset Associated With Contingent Earnout Liabilities | |
| (550,460 | ) | |
| (70,406 | ) |
| |
$ | - | | |
$ | - | |
The accompanying notes are an integral part
of these unaudited financial statements.
Stran
& Company, Inc.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
| A. | ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
| 1. | Organization - Stran & Company, Inc., (the “Company”) was incorporated under the laws
of the Commonwealth of Massachusetts and commenced operations on November 17, 1995. The Company re-incorporated under the laws of the
State of Nevada on May 24, 2021. |
| 2. | Operations - The Company is an outsourced marketing solutions provider that sells branded products to
customers. The Company purchases products and branding through various third-party manufacturers and decorators and resells the finished
goods to customers. |
In addition to selling branded products,
the Company offers 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.
| 3. | Method of Accounting - The Company’s financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the United States of America. (“U.S. GAAP”). |
| 4. | Emerging Growth Company - The Company is an “emerging growth company,” as defined in Section
2(a) of the Securities Act, of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups
Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are
applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive
compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote
on executive compensation and approval of any golden parachute payments not previously approved. Further, Section 102(b)(1) of the JOBS
Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies
(that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered
under the Securities Exchange Act of 1934 (the “Exchange Act”)) are required to comply with the new or revised financial accounting
standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements
that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of
such extended transition period which means that when a standard is issued or revised and it has different application dates for public
or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies
adopt the new or revised standard. This may make comparison of the Company’s unaudited consolidated financial statements with another
public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition
period difficult or impossible because of the potential differences in accounting standards used. |
| 5. | Cash and Cash Equivalents - For purposes of the statement of cash flows, the Company considers all highly
liquid investments with an initial maturity of three months or less to be cash equivalents. |
| 6. | Fair Value Measurements and Fair Value of Financial Instruments - The carrying value of certain financial
instruments, including cash, investments, accounts receivable, accounts payable and accrued expenses, and contingent earnout liabilities
are carried at historical cost basis, which approximates their fair values because of the nature of these instruments. |
The Company analyzes all financial instruments
with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting
standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The Company did not identify any assets or liabilities that are required
to be presented on the balance sheet at fair value in accordance with the FASB Accounting Standards Codification (“ASC”) Topic
820.
ASC 825-10 “Financial Instruments”,
allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value
option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent
reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
| 7. | Investments - Our investments consist of U.S. treasury bills, corporate bonds, mutual funds, 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 balance
sheet. |
| 8. | Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable and deposits in excess of federally insured limits. These risks are managed by
performing ongoing credit evaluations of customers’ financial condition and by maintaining all deposits in high quality financial
institutions. |
| 9. | Inventory – 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. |
| 10. | Property and Equipment - Property and equipment are recorded at cost. Maintenance and repairs are charged
to expense as incurred whereas major betterments are capitalized. Depreciation is provided using straight-line and accelerated methods
over five years. |
| 11. | Intangible Asset - 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.
| 12. | Revenue Recognition - In May 2014, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which is aimed
at creating common revenue recognition guidance for GAAP and the International Financial Reporting Standards (“IFRS”). This
new guidance provides a comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue guidance issued by the FASB. ASU 2014-09 also requires both qualitative and quantitative disclosures, including descriptions
of performance obligations. |
On January 1, 2019, the Company adopted
ASU 2014-09 and all related amendments (“ASC 606”) and applied its provisions to all uncompleted contracts using the modified
retrospective basis. The application of this new revenue recognition standard resulted in no adjustment to the opening balance of retained
earnings.
Performance Obligations - Revenue from
contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring goods or services
to customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance
obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied at a point in time is recognized
at the point in time that the company determines the customer has obtained control over the promised good or service. The amount of revenue
recognized reflects the consideration of which the Company expects to be entitled in exchange for the promised goods or services.
The following provides detailed information
on the recognition of the Company’s revenue from contracts with customers:
Product Sales - The Company
is engaged in the development and sale of promotional programs and products. Revenue on the sale of these products is recognized after
orders are shipped.
Reward Card Program -
The Company facilitates a reward card program for a customer and receives a transaction fee when the customer issues or replenishes a
new reward card. Revenue is recognized when cards are issued or replenished.
All performance obligations are satisfied at a
point in time.
| 13. | Freight - The Company includes freight charges as a component of cost of goods sold. |
| 14. | Uncertainty in Income and Other Taxes - The Company adopted the standards for Accounting for Uncertainty
in Income Taxes (income, sales, use, and payroll), which required the Company to report any uncertain tax positions and to adjust its
financial statements for the impact thereof. As of June 30, 2023 and 2022, the Company determined that it had no tax positions that did
not meet the “more likely than not” threshold of being sustained by the applicable tax authority. The Company files tax and
information returns in the United States Federal, Massachusetts, and other state jurisdictions. These returns are generally subject to
examination by tax authorities for the last three years. |
| 15. | Income Taxes - Income taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes. Deferred taxes are provided for differences between the basis of assets
and liabilities for financial statements and income tax purposes. The Company has historically utilized accelerated tax depreciation to
minimize federal income taxes. |
| 16. | Earnings/ Loss per Share - Basic earnings per share (“EPS”) is computed based on the weighted
average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of
shares of common stock plus the effect of dilutive potential shares of common stock outstanding during the period using the treasury stock
method. Dilutive potential common shares include the issuance of potential shares of common stock for outstanding stock options and warrants. |
| 17. | Stock-Based Compensation - The Company accounts for its stock-based awards in accordance with FASB ASC 718, Compensation - Stock Compensation. ASC 718 requires all stock-based payments to employees to be recognized in the consolidated statements of operations based on their fair values. The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. The Company is recognizing compensation costs only for those stock-based awards expected to vest after considering expected forfeitures. Cumulative compensation expense is at least equal to the compensation expense for vested awards. Stock-based compensation is recognized on a straight-line basis over the service period of each award. The Company records compensation cost as an element of general and administrative expense in the accompanying statements of operations. |
| 18. | Stock Option and Warrant Valuation - Stock option and warrant valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices for comparable entities. For warrants and stock options issued to non- employees, the Company accounts for the expected life based on the contractual life of the warrants and stock options. For employees, the Company accounts for the expected life of options in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options. |
| 19. | Sales Tax - Sales tax collected from customers is recorded as a liability, pending remittance to the taxing
jurisdiction. Consequently, sales taxes have been excluded from revenues and costs. The Company remits sales, use, and GST taxes to Massachusetts,
other state jurisdictions, and Canada, respectively. |
| 20. | Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates. |
| 21. | Recent Accounting Pronouncements - Management does not believe that any recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on its financial statements. |
| 22. | Subsequent Events - Management has evaluated events occurring after the balance sheet date through August
14, 2023, the date in which the financial statements were available to be issued. |
The Company’s investments consisted
of the following as of June 30, 2023:
| |
Cost | | |
Unrealized Gain (Loss) | | |
Fair Value | |
Money Market Fund | |
$ | 76,646 | | |
$ | - | | |
$ | 76,646 | |
Corporate Bonds | |
| 4,553,498 | | |
| (138,810 | ) | |
| 4,414,688 | |
Mutual Funds | |
| 740,188 | | |
| 2,032 | | |
| 742,220 | |
US Treasury Bills | |
| 5,051,133 | | |
| (6,997 | ) | |
| 5,044,136 | |
| |
$ | 10,421,465 | | |
$ | (143,775 | ) | |
$ | 10,277,690 | |
The Company’s investments consisted
of the following as of December 31, 2022:
| |
Cost | | |
Unrealized Gain (Loss) | | |
Fair Value | |
Money Market Fund | |
$ | 487,324 | | |
$ | - | | |
$ | 487,324 | |
Corporate Bonds | |
| 4,540,067 | | |
| (136,273 | ) | |
| 4,403,794 | |
Mutual Funds | |
| - | | |
| - | | |
| - | |
US Treasury Bills | |
| 4,931,084 | | |
| (42,847 | ) | |
| 4,888,237 | |
| |
$ | 9,958,475 | | |
$ | (179,120 | ) | |
$ | 9,779,355 | |
| C. | FAIR VALUE MEASUREMENTS: |
We measure certain financial assets
and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous
market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
| ● | Level 1: Observable inputs that
reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2: Observable inputs other
than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally
from or corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3: Unobservable inputs that
are supported by little or no market activity and that are significant to the fair value of the asset or liability. |
We consider an active market to be
one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing
basis, and we consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the
prices are not current, or price quotations vary substantially either over time or among market makers.
As of June 30, 2023 and December 31,
2022, all investments are classified as level 1.
| D. | ALLOWANCE FOR DOUBTFUL ACCOUNTS, NET: |
The Company uses the allowance method
to account for uncollectible accounts receivable balances. Under the allowance method, an estimate of uncollectible customer balances
is made based on the Company’s prior history and other factors such as credit quality of the customer and economic conditions of
the market. Based on these factors, at June 30, 2023 and December 31, 2022, there was an allowance for doubtful accounts of $263,907 and
$264,160, respectively.
Inventory consists of the following
as of:
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Finished Goods (branded products) | |
$ | 5,474,007 | | |
$ | 6,557,040 | |
Goods in Process (un-branded products) | |
| 346,880 | | |
| 310,524 | |
| |
$ | 5,820,887 | | |
$ | 6,867,564 | |
| F. | PROPERTY AND EQUIPMENT: |
Property and Equipment consists of
the following as of:
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Leasehold Improvements | |
$ | 5,664 | | |
$ | 5,664 | |
Office Furniture and Equipment | |
| 536,172 | | |
| 501,395 | |
Software | |
| 2,069,391 | | |
| 1,525,376 | |
Transportation Equipment | |
| 62,424 | | |
| 62,424 | |
| |
| 2,673,651 | | |
| 2,094,859 | |
Accumulated Depreciation | |
| (1,379,083 | ) | |
| (1,094,769 | ) |
| |
$ | 1,294,568 | | |
$ | 1,000,090 | |
| G. | INTANGIBLE ASSET - Customer Lists: |
Wildman Acquisition
The Company has acquired select assets
and the customer list of an entity as discussed in Note J and Note N. The Company, using a Contingent Earn-Out Calculation, made the determination
that the amounts allocated to Intangible Asset - Customer List amounted to $2,253,690. The intangible asset - customer list is amortized
over 10 years. At June 30, 2023 and December 31, 2022, the Company’s evaluation of Intangible Asset - Customer List has resulted
in accumulated impairment of $381,371 and $299,912, respectively.
Amortization expense related to intangible
asset - customer list was $96,777 and $106,110 for the six months ended June 30, 2023 and 2022.
Estimated future amortization expense
for the years:
2023 | |
$ | 187,232 | |
2024 | |
| 187,232 | |
2025 | |
| 187,232 | |
2026 | |
| 187,232 | |
2027 | |
| 187,232 | |
| |
$ | 936,160 | |
G.A.P. Acquisition
The Company has acquired select assets
and the customer list of an entity as discussed in Note J and Note N. The Company, using a Contingent Earn-Out Calculation, made the determination
that the amounts allocated to Intangible Asset - Customer List amounted to $2,275,290. The intangible asset - customer list is amortized
over 10 years. At June 30, 2023 and December 31, 2022, the Company’s evaluation of Intangible Asset - Customer List has resulted
in accumulated impairment of $469,000 and zero, respectively.
Amortization expense related to intangible
asset - customer lists was $94,222 and $94,804 for the six months ended June 30, 2023 and 2022, respectively.
Estimated future amortization expense
for the years:
2023 | |
$ | 180,629 | |
2024 | |
| 180,629 | |
2025 | |
| 180,629 | |
2026 | |
| 180,629 | |
2027 | |
| 180,629 | |
| |
$ | 903,145 | |
Trend Acquisition
The Company has acquired select assets
and the customer list of an entity as discussed in Note J and Note N. The Company, using a Contingent Earn-Out Calculation, made the determination
that the amounts allocated to Intangible Asset - Customer List amounted to $1,659,831. The intangible asset - customer list is amortized
over 10 years. At June 30, 2023 and December 31, 2022, the Company’s evaluation of Intangible Asset - Customer List has resulted
in accumulated impairment of zero.
Amortization expense related to intangible
asset - customer lists was $82,992 and zero for the six months ended June 30, 2023 and 2022, respectively.
Estimated future amortization expense
for the years:
2023 | |
$ | 165,983 | |
2024 | |
| 165,983 | |
2025 | |
| 165,983 | |
2026 | |
| 165,983 | |
2027 | |
| 165,983 | |
| |
$ | 829,916 | |
Premier Acquisition
The Company has acquired select assets
and the customer list of an entity as discussed in Note J and Note N. The Company, using a Contingent Earn-Out Calculation, made the determination
that the amounts allocated to Intangible Asset - Customer List amounted to $1,032,600. The intangible asset - customer list is amortized
over 10 years. At June 30, 2023 and December 31, 2022, the Company’s evaluation of Intangible Asset - Customer List has resulted
in accumulated impairment of zero.
Amortization expense related to intangible
asset - customer lists was $51,630 and zero for the six months ended June 30, 2023 and 2022, respectively.
Estimated future amortization expense
for the years:
2023 | |
$ | 103,260 | |
2024 | |
| 103,260 | |
2025 | |
| 103,260 | |
2026 | |
| 103,260 | |
2027 | |
| 103,260 | |
| |
$ | 516,300 | |
T R Miller Acquisition
The Company has acquired select assets
and the customer list of an entity as discussed in Note J and Note N. The Company, using a Contingent Earn-Out Calculation, made the determination
that the amounts allocated to Intangible Asset - Customer List amounted to $5,292,205 after post-closing adjustments of $258,890. The
intangible asset - customer list is amortized over 10 years. At June 30, 2023 and December 31, 2022, the Company’s evaluation of
Intangible Asset - Customer List has resulted in accumulated impairment of zero.
Amortization expense related to intangible
asset - customer lists was $44,102 and zero for the six months ended June 30, 2023 and 2022, respectively.
Estimated future amortization expense
for the years:
2023 | |
$ | 529,221 | |
2024 | |
| 529,221 | |
2025 | |
| 529,221 | |
2026 | |
| 529,221 | |
2027 | |
| 529,221 | |
| |
$ | 2,646,105 | |
| H. | Accounts Payable and Accrued Expenses: |
Accounts payable and accrued expenses
as of June 30, 2023 and December 31, 2022 consisted of the following:
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Cost of Sales - Purchases | |
$ | 2,409,903 | | |
$ | 3,571,942 | |
Other Payables and Accrued Expenses | |
| 602,476 | | |
| 479,715 | |
| |
$ | 3,012,379 | | |
$ | 4,051,657 | |
| I. | NOTE PAYABLE - LINE OF CREDIT: |
The Company has a $7,000,000 line of
credit with Salem Five Cents Savings Bank at June 30, 2023 and December 31, 2022, borrowings on this line of credit amounted to zero.
The line bears interest at prime rate plus .5% per annum. At June 30, 2023 and December 31, 2022, the interest rate was 8.75% and 8.00%,
respectively. The line is reviewed annually and is due on demand. This line of credit is secured by substantially all assets of the Company.
| J. | contingent earn-out liabilities: |
Wildman Acquisition
In connection with the asset acquisition,
as discussed in Note N, the customer list was purchased using a Contingent Earn-Out Calculation. The purchase price is equal to fifteen
percent (15%) of the gross profit earned from the sale of product to the customer list for years 1 and thirty percent (30%) for years
2 and 3. Payments are due on the first anniversary date of the purchase and then quarterly thereafter. At June 30, 2023 and December 31,
2022, the current portion of the earn-out liability amounted to $255,051 and $742,874, respectively. At June 30, 2023 and December 31,
2022, the long-term portion of the earn-out liability amounted to zero.
G.A.P. Acquisition
In connection with the asset acquisition,
as discussed in Note N, the customer list was purchased using a Contingent Earn-Out Calculation. The purchase price is equal to seventy
percent (70%) of the gross profit over $1,500,000 earned from the sale of product to the customer list for years 1 and 2 in addition to
fixed payments of $180,000 and $300,000 for years 1 and 2, respectively. Payments are due on the anniversary date of the purchase. At
June 30, 2023 and December 31, 2022, the current portion of the earn-out liability amounted to $986,000 and $649,000, respectively. At
June 30, 2023 and December 31, 2022, the long-term portion of the earn-out liability amounted to zero and $986,000, respectively.
Trend Acquisition
In connection with the asset acquisition,
as discussed in Note N, the customer list was purchased using a Contingent Earn-Out Calculation. The purchase price is equal to forty
percent (40%) of the gross profit over $800,000 earned from the sale of product to the customer list for years 1 through 4 in addition
to fixed payments of $37,500 for years 1 and 2 and $25,000 for years 3 and 4, respectively. Payments are due on the anniversary date of
the purchase. At June 30, 2023 and December 31, 2022, the current portion of the earn-out liability amounted to $420,500 and $155,000,
respectively. At June 30, 2023 and December 31, 2022, the long-term portion of the earn-out liability amounted to $949,844 and $1,214,844,
respectively.
Premier Acquisition
In connection with the asset acquisition,
as discussed in Note N, the customer list was purchased using a Contingent Earn-Out Calculation. The purchase price is equal to forty-five
percent (45%) of the gross profit over $350,000 earned from the sale of product to the customer list for years 1 through 3 in addition
to fixed payments of $60,000 for year 1, $40,000 for year 2, and $30,000 for year 3. Payments are due on the anniversary date of the purchase.
At June 30, 2023 and December 31, 2022, the current portion of the earn-out liability amounted to $262,500. At June 30, 2023 and December
31, 2022, the long-term portion of the earn-out liability amounted to $645,100.
T R Miller Acquisition
In connection with the asset acquisition,
as discussed in Note N, the customer list was purchased using a Contingent Earn-Out Calculation. The purchase price is equal to forty-five
percent (45%) of the gross profit over $4,000,000 earned from the sale of product to the customer list for years 1 through 4 in addition
to a fixed payments of $400,000 for year 1, $300,000 for year 2, and $200,000 for years 3 and 4. Payments are due on the anniversary date
of the purchase. At June 30, 2023 and December 31, 2022, the current portion of the earn-out liability amounted to $1,262,774 and zero,
respectively. At June 30, 2023 and December 31, 2022, the long-term portion of the earn-out liability amounted to $3,288,321 and zero,
respectively.
Unearned revenue includes customer
deposits and deferred revenue which represent prepayments from customers. At June 30, 2023 and December 31, 2022, the Company had unearned
revenue totaling $2,290,639 and $633,148, respectively.
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Balance at January 1, | |
$ | 633,148 | | |
$ | 721,608 | |
Revenue Recognized | |
| (33,246,353 | ) | |
| (58,953,467 | ) |
Amounts Collected or Invoiced | |
| 34,903,844 | | |
| 58,865,007 | |
Unearned Revenue | |
$ | 2,290,639 | | |
$ | 633,148 | |
| L. | reward card program liability: |
The Company manages reward card programs
for customers. Under this program, 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 June 30, 2023 and
December 31, 2022, the company had deposits totaling $8,875,000 and $6,000,000, respectively.
| M. | Note Payable - wildman: |
In connection with the asset acquisition
as discussed in Note N, the Company had an amount due to the seller of $162,358 for the inventory purchased. This amount accrues no interest,
and is to be paid “as used” on a quarterly basis through the three years earn-out period as discussed in Note J. At June 30,
2023, the note totaled $162,358. The Company anticipates that the note will be paid in full in 2023, accordingly the note payable has
been classified as current on the balance sheet as of June 30, 2023.
Wildman Acquisition
On September 26, 2020, the Company
closed on an asset purchase agreement to acquire inventory, fixed assets, and a customer list from Wildman Business Group, LLC (WBG).
In accordance with Financial Accounting Standards Board (“FASB” ASC 805), “Business Combinations”, the acquisition
method of accounting is used and recognition of the assets acquired is at fair value as of the acquisition dates. All acquisition costs
are 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 were agreed to by both buyer and seller. The aggregate purchase
price was $2,937,222.
Fair Value of Identifiable Assets Acquired: | |
| |
Inventory | |
$ | 649,433 | |
Property and Equipment | |
| 34,099 | |
Intangible - Customer List | |
| 2,253,690 | |
| |
$ | 2,937,222 | |
| |
| | |
Consideration Paid: | |
| | |
Cash | |
$ | 521,174 | |
Note Payable - Wildman | |
| 162,358 | |
Contingent Earn-Out Liability | |
| 2,253,690 | |
| |
$ | 2,937,222 | |
G.A.P. Acquisition
On January 31, 2022, the Company closed
on an asset purchase agreement to acquire inventory, working capital, and a customer list from G.A.P. Promotions LLC (G.A.P.). In accordance
with Financial Accounting Standards Board (“FASB” ASC 805), “Business Combinations”, the acquisition method of
accounting is used and recognition of the assets acquired is at fair value as of the acquisition dates. All acquisition costs are 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 were agreed to by both buyer and seller. The aggregate purchase price was
$3,245,872.
Fair Value of Identifiable Assets Acquired: | |
| |
Inventory | |
$ | 91,096 | |
Working Capital | |
| 879,486 | |
Intangible - Customer List | |
| 2,275,290 | |
| |
$ | 3,245,872 | |
| |
| | |
Consideration Paid: | |
| | |
Cash | |
$ | 1,510,872 | |
Restricted Stock | |
| 100,000 | |
Contingent Earn-Out Liability | |
| 1,635,000 | |
| |
$ | 3,245,872 | |
Trend Acquisition
On August 31, 2022, the Company closed
on an asset purchase agreement to acquire cash, accounts receivable, inventory, fixed assets, and a customer list from Trend Promotional
Marketing Corporation (Trend). In accordance with Financial Accounting Standards Board (“FASB” ASC 805), “Business Combinations”,
the acquisition method of accounting is used and recognition of the assets acquired is at fair value as of the acquisition dates. All
acquisition costs are 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 were agreed to by both buyer and seller.
The aggregate purchase price was $2,193,166.
Fair Value of Identifiable Assets Acquired: | |
| |
Cash | |
$ | 63,624 | |
Accounts Receivable | |
| 346,822 | |
Inventory | |
| 108,445 | |
Fixed Assets | |
| 14,444 | |
Intangible - Customer List | |
| 1,659,831 | |
| |
$ | 2,193,166 | |
| |
| | |
Consideration Paid: | |
| | |
Cash | |
$ | 1,488 | |
Assumption of Liabilities | |
| 721,334 | |
Restricted Stock | |
| 100,000 | |
Contingent Earn-Out Liability | |
| 1,370,344 | |
| |
$ | 2,193,166 | |
Premier Acquisition
On December 20, 2022, the Company closed
on an asset purchase agreement to acquire cash, accounts receivable, and a customer list from Premier Business Services (Premier). In
accordance with Financial Accounting Standards Board (“FASB” ASC 805), “Business Combinations”, the acquisition
method of accounting is used and recognition of the assets acquired is at fair value as of the acquisition dates. All acquisition costs
are 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 were agreed to by both buyer and seller. The aggregate purchase
price was $1,390,533.
Fair Value of Identifiable Assets Acquired: | |
| |
Cash | |
$ | 13,855 | |
Accounts Receivable | |
| 344,078 | |
Intangible - Customer List | |
| 1,032,600 | |
| |
$ | 1,390,533 | |
| |
| | |
Consideration Paid: | |
| | |
Cash | |
$ | 440,025 | |
Assumption of Liabilities | |
| 17,908 | |
Restricted Stock | |
| 25,000 | |
Contingent Earn-Out Liability | |
| 907,600 | |
| |
$ | 1,390,533 | |
T R Miller Acquisition
On June 1, 2023, the Company closed
on an asset purchase agreement to acquire working capital, fixed assets, and a customer list from T R Miller Co., Inc. (T R Miller). In
accordance with Financial Accounting Standards Board (“FASB” ASC 805), “Business Combinations”, the acquisition
method of accounting is used and recognition of the assets acquired is at fair value as of the acquisition dates. All acquisition costs
are 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 were agreed to by both buyer and seller. The aggregate purchase
price was $6,674,167.
Fair Value of Identifiable Assets Acquired: | |
| |
Working Capital, Net | |
$ | 1,123,072 | |
Intangible - Customer List | |
| 5,551,095 | |
| |
$ | 6,674,167 | |
| |
| | |
Consideration Paid: | |
| | |
Cash | |
$ | 2,123,072 | |
Contingent Earn-Out Liability | |
| 4,551,095 | |
| |
$ | 6,674,167 | |
The following is a summary of the Company’s
right of use assets and lease liabilities as of:
| |
June 30, | | |
December 31, | |
Operating Leases | |
2023 | | |
2022 | |
Right-Of-Use Assets | |
$ | 1,470,140 | | |
$ | 784,683 | |
| |
| | | |
| | |
Lease Liability: | |
| | | |
| | |
Right-Of-Use Asset - Office Leases - Current | |
| 676,036 | | |
| 324,594 | |
Right-Of-Use Asset - Office Leases - Non-Current | |
| 762,946 | | |
| 460,089 | |
| |
$ | 1,438,981 | | |
$ | 784,683 | |
Rent expense for the six months ended
June 30, 2023 and 2022 totaled $220,712 and $221,901, respectively.
The following is a schedule by years
of future minimum lease payments:
2024 | |
$ | 501,393 | |
2025 | |
| 482,074 | |
2026 | |
| 187,115 | |
2027 | |
| 190,854 | |
2028 | |
| 161,960 | |
| |
$ | 1,523,396 | |
As of June 30, 2023, the Company’s
operating leases had a weighted average remaining lease term of 2.5 years and a weighted average discount rate of 4%.
Common Stock
In accordance with the Company’s Articles
of Incorporation dated May 24 2021, the Company is authorized to issue 300,000,000 shares of $.0001 par value common stock, of which 18,540,834
and 19,139,330 shares were issued and outstanding at June 30, 2023 and 2022, respectively. Common stockholders are entitled to one vote
per share and are entitled to receive dividends when, as and if declared by the Board of Directors.
Initial Public Offering
On November 12, 2021, the Company consummated
its Initial Public Offering (the IPO) of 4,987,951 Units at a price of $4.15 per Unit, generating gross proceeds of $20,699,996, with
each Unit consisting of one share of common stock, $0.0001 par value, and one redeemable publicly-traded warrant. IPO proceeds were recorded
net of offering costs of $2,755,344. Offering costs consisted principally of underwriting, legal, accounting and other expenses that are
directly related to the IPO.
Each redeemable publicly-traded warrant
entitles the holder to purchase one share of common stock, at a price of $4.81375 per share as of June 30, 2023, which will expire five
years from issuance.
Simultaneously with the consummation
of the closing of the IPO, the Company issued the underwriters a total of 149,639 warrants that are exercisable beginning six months after
the date of the IPO at an exercise price of $5.19 with a five-year expiration term.
As of June 30, 2023 and 2022, warrant
holders exercised 659,456 warrants. As of June 30, 2023 and 2022, there were 4,478,134 warrants outstanding.
Private Placement
On December 10, 2021, the Company consummated
the sale of 4,371,926 shares of common stock at a price of $4.97 per share in a private placement (the PIPE), generating gross proceeds
of $21,278,472, with each investor also receiving a warrant to purchase up to a number of shares of common stock equal to 125% of the
number of shares of common stock purchased by such investor in the private placement, or a total of 5,464,903 shares, at an exercise price
of $4.97 per share. PIPE proceeds were recorded net of offering costs of $1,499,858. Offering costs consisted principally of placement
agent, legal, accounting and other expenses that are directly related to the PIPE.
Each warrant entitles the holder to
purchase up to 125% of the number of shares of common stock purchased by such investor in the private placement, or a total of 5,464,903
shares which will expire five years from issuance. The warrants have certain downward pricing adjustment mechanisms, including with respect
to any subsequent equity sale that is deemed a dilutive issuance, in which case the warrants will be subject to a floor price of $4.80
per share before shareholder approval is obtained, and after shareholder approval is obtained, such floor price will be reduced to $1.00
per share, as set forth in the warrants. On December 10, 2021, the holders of shares of common stock entitled to vote approximately 65.4%
of the Company’s outstanding voting stock on December 10, 2021 approved the Company’s entry into the private placement. The
Company filed preliminary and definitive information statements on Schedule 14C with the SEC on December 29, 2021 and January 11, 2022,
respectively, and delivered copies of the definitive information statement to shareholders January 12, 2022. On January 31, 2022, the
stockholders’ consent became effective pursuant to Rule 14c-2 under the Exchange Act. As a result, the exercise price of the private
placement warrants may be reduced to as low as $1.00 per share if their downward-pricing adjustment mechanisms become applicable.
Simultaneously with the consummation
of the closing of the PIPE, the Company issued the placement agent a total of 131,158 warrants that are exercisable beginning six months
from the date of the PIPE at an exercise price of $4.97 with a five-year expiration term.
As of June 30, 2023 and 2022 warrant
holders have exercised zero warrants. As of June 30, 2023 and 2022, there were 5,596,061 warrants outstanding.
Stock Purchase Warrants
Stock purchase warrants issued with
the IPO and the PIPE are accounted for as equity in accordance with ASC 480, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
The following table reflects all outstanding
and exercisable warrants at June 30, 2023 and 2022:
| |
Numbers of Warrants | | |
Weighted Average Exercise | | |
Weighted Average Life | |
| |
Outstanding | | |
Price | | |
(Years) | |
Balance January 1, 2022 | |
| 10,345,784 | | |
$ | 4.90 | | |
| 5 | |
Warrants Issued | |
| - | | |
| - | | |
| - | |
Warrants Exercised | |
| (271,589 | ) | |
$ | 4.81 | | |
| - | |
Balance June 30, 2022 | |
| 10,074,195 | | |
$ | 4.91 | | |
| 5 | |
| |
| | | |
| | | |
| | |
Balance January 1, 2023 | |
| 10,074,195 | | |
$ | 4.91 | | |
| 4 | |
Warrants Issued | |
| - | | |
| - | | |
| - | |
Warrants Exercised | |
| - | | |
| - | | |
| - | |
Balance June 30, 2023 | |
| 10,074,195 | | |
$ | 4.91 | | |
| 4 | |
All warrants are exercisable for a
period of five years from the date of issuance.
Stock Repurchase Program
On February 21, 2022, the Board of
Directors of the Company authorized a repurchase of up to $10 million of the Company’s shares from time to pursuant to a stock repurchase
program, or the Repurchase Program. Under the terms of the Repurchase Program, the Company may repurchase shares through open market or
negotiated private transactions. The timing and extent of any purchases depend upon ongoing assessments of the Company’s capital
needs, market conditions and the price of the Company’s common stock, and other corporate considerations, as determined by management,
and are subject to the restrictions relating to volume, price and timing under applicable laws, including but not limited to, Rule 10b-18
promulgated under the Exchange Act.
Below is a table containing information
about purchases made by the company:
Period | |
Total Number of Shares Purchased | | |
Average Price Paid per Share | | |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | |
Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |
April 1, 2022 - December 31, 2022 | |
| 1,777,657 | | |
$ | 1.87 | | |
| 1,777,657 | | |
$ | 6,667,595 | |
No repurchases of our common stock
were made during the six months ended June 30, 2023.
| Q. | STOCK-BASED COMPENSATION: |
In November 2021, the Board of Directors
adopted the Amended and Restated 2021 Equity Incentive Plan (the “2021 Plan”) which provides for the granting of non-qualified
stock options and restricted stock to the Company’s employees, officers, directors, and outside consultants to purchase shares of
the Company’s common stock. The number of shares of common stock available for issuance under the 2021 Plan is 884,568 shares of
common stock.
Stock-based compensation expense included
the following components as of June 30,:
| |
2023 | | |
2022 | |
Stock Options | |
$ | 25,011 | | |
| 55,776 | |
Restricted Stock | |
| 112,427 | | |
| 111,207 | |
| |
| 137,438 | | |
| 166,983 | |
All stock-based compensation expense
is recorded in General and Administrative expense in the Statement of Earnings.
Non-Qualified Stock Options
The fair value of options is estimated
on the date of grant using the Black-Scholes option pricing model using the assumptions noted in the table below. The fair value is amortized
as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period.
The Company uses historical data on employee turnover and terminations to estimate the percentage of options that will ultimately be exercised.
Expected volatility is based on historical volatility from a representative sample of publicly traded companies. The expected term represents
the period of time that the options are expected to be outstanding. The risk-free interest rate is estimated using the rate of return
on U.S. Treasury Notes with a life that approximates the expected life of the option. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual results differ from the estimates. Stock-based compensation is based on awards
that are ultimately expected to vest.
Option awards are generally granted
with an exercise price equal to the fair value of the Company’s stock at the date of grant; those options generally vest based on
four years of continuous service and have 10-years contractual terms.
The Black-Scholes option pricing
model assumptions are as follows:
Risk-Free Interest Rate | |
| 3.58 | % |
Expected Term | |
| 5.5-6.25 years | |
Expected Volatility | |
| 29.24 | % |
Expected Dividends | |
| 0 | % |
A summary of option activity under
the 2021 Plan as of June 30, 2023 and 2022 and changes during the six months then ended is presented below:
Options | |
Shares | | |
Weighted Average Exercise Price | | |
Aggregate Intrinsic Value | |
Outstanding at January 1, 2022 | |
| 1,587,000 | | |
$ | 4.15 | | |
$ | 3,045,700 | |
Granted | |
| 61,000 | | |
$ | 1.80 | | |
| - | |
Forfeited or Expired and Other Adjustments | |
| (10,000 | ) | |
$ | 4.15 | | |
| - | |
Outstanding at June 30, 2022 | |
| 1,638,000 | | |
$ | 4.06 | | |
$ | - | |
Exercisable at June 30, 2022 | |
| 94,850 | | |
$ | 3.97 | | |
$ | - | |
| |
| | | |
| | | |
| | |
Outstanding at January 1, 2023 | |
| 1,558,000 | | |
$ | 4.17 | | |
| | |
Granted | |
| 15,000 | | |
$ | 1.77 | | |
| - | |
Forfeited or Expired and Other Adjustments | |
| (25,834 | ) | |
$ | 3.29 | | |
| - | |
Outstanding at June 30, 2023 | |
| 1,547,167 | | |
$ | 4.14 | | |
$ | - | |
Exercisable at June 30, 2023 | |
| 593,063 | | |
$ | 4.10 | | |
$ | - | |
The weighted-average grant-date
fair value of options granted during the six months ended June 30, 2023 and 2022 was $1.80 and $1.77, respectively. The weighted-average
remaining contractual term for the outstanding options is approximately 9 years and 10 years as of June 30, 2023 and 2022, respectively.
Restricted Stock:
Restricted stock granted under the
2021 Plan generally vest over 3 years, based on continued employment, and are settled upon vesting shares of the Company’s common
stock on a one-for-one basis.
A summary of restricted stock
activity under the 2021 Plan as of June 30, and changes during the six months then ended is presented below:
Restricted Stock | |
Time-Based | |
Outstanding at January 1, 2022 | |
| 154,960 | |
Granted | |
| 125,000 | |
Vested | |
| (167,805 | ) |
Forfeited | |
| (1,250 | ) |
Outstanding at June 30, 2022 | |
| 110,905 | |
| |
| | |
Outstanding at January 1, 2023 | |
| 64,166 | |
Granted | |
| 19,252 | |
Vested | |
| (25,313 | ) |
Forfeited | |
| (2,167 | ) |
Outstanding at June 30, 2023 | |
| 55,938 | |
| R. | earnings (loss) per share: |
The following table presents the computation
of basic and diluted net loss per common share as of June 30,:
| |
2023 | |
2022 |
| |
Net Income | | |
| | |
Shares | | |
Net Income | | |
| | |
Shares | |
Net Earnings (Loss) | |
$ | (1,532,868 | ) | |
| | | |
| 18,540,834 | | |
$ | (993,257 | ) | |
| | | |
| 19,971,552 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic earnings (loss) per share | |
| | | |
$ | (0.08 | ) | |
| | | |
| | | |
$ | (0.03 | ) | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Effect of dilutive securities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants | |
| | | |
| | | |
| - | | |
| | | |
| | | |
| - | |
Stock Options | |
| | | |
| | | |
| - | | |
| | | |
| | | |
| - | |
| |
$ | (1,532,868 | ) | |
| | | |
| 18,540,834 | | |
$ | (993,257 | ) | |
| | | |
| 19,971,552 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Diluted earnings (loss) per share | |
| | | |
$ | (0.08 | ) | |
| | | |
| | | |
$ | (0.03 | ) | |
| | |
For the six months ended June 30, 2023
and 2022, as a result of the net loss for the year, all warrants and stock options have been excluded from the calculation of diluted
earnings per share and, therefore, there was no difference in the weighted average number of common shares for basic and diluted loss
per share as the effect of all potentially dilutive shares outstanding was anti-dilutive. Warrants to purchase 10,074,195 of shares outstanding
and stock options to purchase 453,918 shares of common stock outstanding at June 30, 2023 and 2022 were excluded from the computation
of diluted earnings per share.
The Company computes its provision
for income taxes by applying the estimated annual effective tax rate to pretax income and adjust the provision for discrete tax items
recorded in the period.
The provision for income taxes as of
and for the six months ended June 30, 2023 and 2022 consisted of the following:
| |
2023 | | |
2022 | |
Federal: | |
| | |
| |
Current | |
$ | - | | |
$ | 48,282 | |
Deferred | |
| (503,000 | ) | |
| (203,700 | ) |
Total | |
| (503,000 | ) | |
| (155,418 | ) |
| |
| | | |
| | |
State: | |
| | | |
| | |
Current | |
| 29,044 | | |
| 6,153 | |
Deferred | |
| (198,000 | ) | |
| (70,000 | ) |
Total | |
| (168,956 | ) | |
| (63,847 | ) |
| |
| | | |
| | |
Provision for income taxes | |
$ | (671,956 | ) | |
$ | (219,265 | ) |
The Company has an income tax NOL carryforward
related to continued operations as of June 30, 2023 and 2022 of approximately $3,114,000 and $174,400, respectively. As of June 30, 2023
and 2022, the carryforward is recorded as a deferred tax asset of $1,542,000 and $386,700, respectively. Such deferred tax assets can
be carried forward indefinitely.
The Company follows the policy of charging
the costs of advertising to expense as incurred. For the six months ended June 30, 2023 and 2022, advertising costs amounted to $306,990
and $87,067, respectively.
For the six months ended June 30, 2023,
the Company had two major customers to which sales accounted for approximately 21.4% of the Company’s revenues. The Company had
accounts receivable from these customers amounting to 8.5% of the total accounts receivable balance.
For the six months ended June 30, 2022,
the Company had one major customer to which sales accounted for approximately 11% of the Company’s revenues. The Company had accounts
receivable from this customer amounting to 13% of the total accounts receivable balance.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management’s
discussion and analysis of financial condition and results of operations provides information that management believes is relevant to
an assessment and understanding of our plans and financial condition. The following financial information is derived from our financial
statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein.
Use of Terms
Except as otherwise indicated by the context and
for the purposes of this report only, references in this report to “we,” “us,” “our,” “Stran,”
and the “Company” are to Stran & Company, Inc., a Nevada corporation.
Special Note Regarding Forward-Looking Statements
This report contains forward-looking statements
that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than
statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance
and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied
by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| ● | the expected timing, availability and effects on our stock price and financial condition of our stock
repurchase program; |
| | |
| ● | our goals and strategies; |
| | |
| ● | our business development, financial condition
and results of operations; |
| | |
| ● | expected changes in our revenue, costs or expenditures;
|
| | |
| ● | growth and competition trends in our industry;
|
| | |
| ● | our expectations regarding demand for, and market
acceptance of, our products or services; |
| | |
| ● | our expectations regarding our relationships
with investors, institutional funding partners and other parties with whom we collaborate; |
| | |
| ● | our expectations regarding the availability and
use of financing from our revolving line of bank credit, other credit facilities, or sales of equity or debt securities; |
| | |
| ● | future fluctuations in general economic and business
conditions in the markets in which we operate; and |
| | |
| ● | future relevant government policies and regulations
relating to our industry. |
In some cases, you can identify forward-looking
statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,”
“plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “project” or “continue” or the negative of these terms or other comparable terminology.
These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and
unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results.
Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item
1A “Risk Factors” included in our Annual Reports on Form 10-K filed under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying
assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking
statements. No forward-looking statement is a guarantee of future performance.
In addition, statements that “we believe”
and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available
to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information
may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or
review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to
unduly rely upon these statements.
The forward-looking statements made in this report
relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the
federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, changed circumstances or any other reason.
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 2022 and
2021, program clients accounted for 82.2% and 75.7% of total revenue, respectively. For the three months ended June 30, 2023 and 2022,
program clients accounted for 81.6% and 86.9% of total revenue, respectively, and for the six months
ended June 30, 2023 and 2022, program clients accounted for 81.1% and 85.1% 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 18.0% year-over-year in the
second quarter of 2023 compared to the second quarter of 2022, and increased 22.8%
year-over-year in the first six months of 2023 compared to the first six months of 2022, due to higher spending from existing
customers as well as business from new customers. Additionally, we benefited from the acquisition of the assets of each of G.A.P. Promotions,
LLC, or G.A.P. Promotions, in January 2022, Trend Promotional Marketing Corporation (d/b/a Trend
Brand Solutions), or Trend Brand Solutions, in August 2022, Premier Business Services, or
Premier NYC, in December 2022, and T R Miller Co., Inc., or T R Miller, in June 2023,
respectively.
As of June 30, 2023, we had approximately $63.1 million
of total assets with approximately $38.0 million of total stockholders’ equity.
Emerging Growth 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:
| ● | have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of
the Sarbanes-Oxley Act; |
| ● | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements (i.e., an auditor discussion and analysis); |
| ● | submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay”
and “say-on-frequency;” and |
| ● | disclose certain executive compensation related items such as the correlation between executive compensation
and performance and comparisons of the chief executive officer’s compensation to median employee compensation. |
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 (the “Securities Act”), for complying with new or revised accounting standards. In other words, an
emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private
companies. We have elected to take advantage of the 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 our initial public offering, (ii) the last day
of the first fiscal year in which our total annual gross revenues are $1,235,000,000 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.
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. |
Results of Operations
Comparison of Three Months Ended June 30,
2023 and 2022
| |
Three Months Ended | |
Consolidated Operations Data | |
June 30, 2023 | | |
June 30, 2022 | |
| |
| | |
| |
SALES | |
$ | 17,470,106 | | |
$ | 14,806,904 | |
| |
| | | |
| | |
COST OF SALES: | |
| | | |
| | |
Purchases | |
| 10,810,268 | | |
| 9,497,551 | |
Freight | |
| 1,582,917 | | |
| 1,549,163 | |
| |
| 12,393,185 | | |
| 11,046,714 | |
| |
| | | |
| | |
GROSS PROFIT | |
| 5,076,921 | | |
| 3,760,190 | |
| |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | |
General and Administrative Expenses | |
| 6,351,174 | | |
| 4,232,170 | |
| |
| 6,351,174 | | |
| 4,232,170 | |
| |
| | | |
| | |
EARNINGS (LOSS) FROM OPERATIONS | |
| (1,274,253 | ) | |
| (471,980 | ) |
| |
| | | |
| | |
OTHER INCOME AND (EXPENSE): | |
| | | |
| | |
Other Income (Expense) | |
| 15,092 | | |
| (23,781 | ) |
Interest Income (Expense) | |
| 146,177 | | |
| 6,108 | |
Unrealized Gain (Loss) on Investments | |
| (33,303 | ) | |
| - | |
| |
| 127,966 | | |
| (17,673 | ) |
| |
| | | |
| | |
EARNINGS (LOSS) BEFORE INCOME TAXES | |
| (1,146,287 | ) | |
| (489,653 | ) |
| |
| | | |
| | |
PROVISION FOR INCOME TAXES | |
| (307,957 | ) | |
| (42,210 | ) |
| |
| | | |
| | |
NET EARNINGS (LOSS) | |
| (838,330 | ) | |
| (447,443 | ) |
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 18.0% to approximately
$17.5 million for the three months ended June 30, 2023 from approximately $14.8
million for the three months ended June 30, 2022. The increase was primarily due to higher spending from existing customers as well as
business from new customers. Additionally, the acquisitions of each of G.A.P. Promotions in January 2022, Trend Brand Solutions in August
2022, Premier NYC in December 2022, and T R Miller in June 2023, respectively, accounted for an aggregate of approximately $3.1 million,
or 17.8%, of sales, for the second quarter of 2023, compared to approximately $1.9 million, or 12.6%, of sales, for the second quarter
of 2022 from the acquisition of the G.A.P. Promotions assets in January 2022, as described
in more detail immediately below.
The January 2022 acquisition
of the G.A.P. Promotions assets generated approximately $1.0 million of sales for the three months ended June 30, 2023, compared to approximately
$1.9 million for the three months ended June 30, 2022. The August 2022 acquisition of the Trend Brand Solutions assets generated approximately
$0.6 million of sales for the three months ended June 30, 2023, compared to no sales from such assets for the three months ended June
30, 2022. The December 2022 acquisition of the Premier NYC assets generated approximately $0.3 million of sales for the three months ended
June 30, 2023, compared to no sales from such assets for the three months ended June 30, 2022. The June 2023 acquisition of the T R Miller
assets generated approximately $1.1 million of sales for the three months ended June 30, 2023, compared to no sales from such assets for
the three months ended June 30, 2022. Our recurring organic sales, defined as sales excluding revenue from the acquisitions of the assets
of each of G.A.P. Promotions, Trend Brand Solutions, Premier NYC, and T R Miller, increased 11.1%, or approximately $1.4 million, to approximately
$14.4 million for the three months ended June 30, 2023, compared to approximately $12.9 million for the three months ended June 30, 2022.
Cost of Sales
Cost of sales consists
of the costs of purchasing merchandise and freight charges. Our total cost of sales increased 12.2% to approximately $12.4 million for
the three months ended June 30, 2023, from approximately $11.0 million for the three months ended June 30, 2022. As a percentage of sales,
cost of sales decreased to 70.9% for the three months ended June 30, 2023 from 74.6% for the three months ended June 30, 2022. More specifically,
cost of purchases increased to approximately $10.8 million for the three months ended June 30, 2023, or 13.8%, from approximately $9.5
million for the three months ended June 30, 2022. As a percentage of sales, cost of purchases decreased to 61.9% for the three months
ended June 30, 2023, from 64.1% for the three months ended June 30, 2022. In addition, freight
costs increased to approximately $1.6 million for the three months ended June 30, 2023, or 2.2%, from approximately $1.5 million for the
three months ended June 30, 2022. As a percentage of sales, freight costs decreased to 9.1% for the three months ended June 30, 2023,
from 10.5% for the three months ended June 30, 2022. The increase in the dollar amount of
cost of purchases and freight was primarily due to an increase in sales of 18.0% from period to period.
Gross Profit
Gross profit consists
of sales less total costs of sales. Our gross profit increased 35.0% to approximately $5.1 million, or 29.1% of revenue, for the three
months ended June 30, 2023, from approximately $3.8 million, or 25.4%
of revenue, for the three months ended June 30, 2022. The increase in the dollar amount of gross profit was due to increased sales for
the reasons described above, partially offset by an increase in purchasing and freight costs for the reasons described above.
Operating Expenses
Operating
expenses consist of general and administrative expenses. Our operating expenses increased 50.1%, or approximately $2.1 million,
to approximately $6.4 million for the three months ended June 30, 2023 from approximately $4.2 million for the three months
ended June 30, 2022. As a percentage of sales, operating expenses increased to 36.4% for the three months ended June 30, 2023 from
28.6% for the three months ended June 30, 2022. The increase in the dollar amount of operating expenses was due to an increase in
general and administrative expenses of approximately $2.1 million, or 50.1%, which in turn was primarily due to additional expenses
related to the acquisition of the assets of G.A.P. Promotions, Trend Brand Solutions, Premier NYC, and T R Miller; closing and
integration costs relating to the acquisition of T R Miller’s assets; the implementation of an internal commercial ERP system
on NetSuite ERP’s platform; ongoing public company expenses; lead generation initiatives; and organic growth in our
business.
Other Income and (Expense)
Other income and (expense)
consist of other income (expense), interest income (expense), and unrealized gain (loss) on investments. Our other income (expense) was
$15,092 for the three months ended June 30, 2023, compared to other income (expense) of $(23,781) for the three months ended June 30,
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. Our interest income (expense) was $146,177 for the three months ended June 30, 2023, compared to $6,108 for the three
months ended June 30, 2022. This change was primarily due to interest generated from investments. Our unrealized gain (loss) on investments
was $(33,303) for the three months ended June 30, 2023, compared to zero for the three months ended June 30, 2022. This change was primarily
due to the recording of all investments at estimated fair value.
Provision for Income Taxes
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 three months ended June 30, 2023 was approximately $(0.3) million compared to income tax provision of approximately $(0.04) million
for the three months ended June 30, 2022. Income tax provision for the three months ended June 30, 2023 and 2022 accounted for approximately
26.9% and 8.6% of earnings (loss) before income taxes of approximately $(1.1) million and approximately $(0.5) million for the three months
ended June 30, 2023 and 2022, respectively. For the three months ended June 30, 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.
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 1 of this Quarterly Report on Form 10-Q.
Net Earnings (Loss)
Our net loss for the
three months ended June 30, 2023 was approximately $0.8 million, compared to a net loss of approximately $0.4 million for the three months
ended June 30, 2022. This change was primarily due to the reasons described above for the increase in operating expenses and the increase
in purchasing costs. These factors were partially offset by the increase in sales during the three months ended June 30, 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 $3.1 million
in aggregate, from approximately $1.9 million from the acquisition of the assets of G.A.P. Promotions during the three months ended June
30, 2022, and the increase of approximately $1.4 million from recurring organic sales during the three months ended June 30, 2023 compared
to the three months ended June 30, 2022.
Comparison of Six Months Ended June 30,
2023 and 2022
| |
Six Months Ended | |
Consolidated Operations Data | |
June 30, 2023 | | |
June 30, 2022 | |
| |
| | |
| |
SALES | |
$ | 33,246,353 | | |
$ | 27,066,487 | |
| |
| | | |
| | |
COST OF SALES: | |
| | | |
| | |
Purchases | |
| 20,833,814 | | |
| 17,454,167 | |
Freight | |
| 2,641,665 | | |
| 2,633,965 | |
| |
| 23,475,479 | | |
| 20,088,132 | |
| |
| | | |
| | |
GROSS PROFIT | |
| 9,770,874 | | |
| 6,978,355 | |
| |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | |
General and Administrative Expenses | |
| 12,430,269 | | |
| 8,256,388 | |
| |
| 12,430,269 | | |
| 8,256,388 | |
| |
| | | |
| | |
EARNINGS (LOSS) FROM OPERATIONS | |
| (2,659,395 | ) | |
| (1,278,033 | ) |
| |
| | | |
| | |
OTHER INCOME AND (EXPENSE): | |
| | | |
| | |
Other Income (Expense) | |
| 71,729 | | |
| (27,461 | ) |
Interest Income (Expense) | |
| 284,259 | | |
| 92,972 | |
Unrealized Gain (Loss) on Investments | |
| 98,582 | | |
| - | |
| |
| 454,570 | | |
| 65,511 | |
| |
| | | |
| | |
EARNINGS (LOSS) BEFORE INCOME TAXES | |
| (2,204,825 | ) | |
| (1,212,522 | ) |
| |
| | | |
| | |
PROVISION FOR INCOME TAXES | |
| (671,957 | ) | |
| (219,265 | ) |
| |
| | | |
| | |
NET EARNINGS (LOSS) | |
| (1,532,868 | ) | |
| (993,257 | ) |
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 22.8% to approximately
$33.2 million for the six months ended June 30, 2023 from approximately $27.1
million for the six months ended June 30, 2022. The increase was primarily due to higher spending from existing customers as well
as business from new customers. Additionally, the acquisitions of each of G.A.P. Promotions in January 2022, Trend Brand Solutions in
August 2022, Premier NYC in December 2022, and T R Miller in June 2023, respectively, accounted for an aggregate of approximately $5.5
million, or 16.5%, of sales, for the six months ended June 30, 2023, compared to approximately $2.7 million, or 9.9%, of sales, for the
six months ended June 30, 2022 from the acquisition of the G.A.P. Promotions assets in January 2022,
as described in more detail immediately below.
The January 2022 acquisition
of the G.A.P. Promotions assets generated approximately $2.2 million of sales for the six months ended June 30, 2023, compared to approximately
$2.7 million for the six months ended June 30, 2022. The August 2022 acquisition of the Trend
Brand Solutions assets generated approximately $1.6 million of sales for the six months ended June 30, 2023, compared to no sales from
such assets for the six months ended June 30, 2022. The December 2022 acquisition of the Premier NYC assets generated approximately $0.6
million of sales for the six months ended June 30, 2023, compared to no sales from such assets for the six months ended June 30, 2022.
The June 2023 acquisition of the T R Miller assets generated approximately $1.1 million of sales for the six months ended June 30, 2023,
compared to no sales from such assets for the six months ended June 30, 2022. Our recurring organic sales, defined as sales excluding
revenue from the acquisitions of the assets of each of G.A.P. Promotions, Trend Brand Solutions, Premier NYC, and T R Miller, increased
13.9%, or approximately $3.4 million, to approximately $27.8 million for the six months ended June 30, 2023, compared to approximately
$24.4 million for the six months ended June 30, 2022.
Cost of Sales
Cost
of sales consists of the costs of purchasing merchandise and freight charges. Our total cost of sales increased 16.9% to
approximately $23.5 million for the six months ended June 30, 2023, from approximately $20.1 million for the six months ended June
30, 2022. As a percentage of sales, cost of sales decreased to 70.6% for the six months ended June 30, 2023 from 74.2% for the six
months ended June 30, 2022. More specifically, cost of purchases increased to approximately $20.8 million for the six months ended
June 30, 2023, or 19.4%, from approximately $17.5 million for the six months ended June 30, 2022. As a
percentage of sales, cost of purchases decreased to 62.7% for the six months ended June 30, 2023, from 64.5%
for the six months ended June 30, 2022. In addition, freight costs increased to approximately $2.6 million for the six months ended
June 30, 2023, or 0.3%, from approximately $2.6 million for the six months ended June 30, 2022. As a percentage of sales, freight
costs decreased to 7.9% for the six months ended June 30, 2023, from 9.7% for the six
months ended June 30, 2022. The increase in the dollar amount of cost of purchases and freight was primarily due to an increase in
sales of 22.8% from period to period.
Gross Profit
Gross profit consists
of sales less total costs of sales. Our gross profit increased 40.0% to approximately $9.8 million, or 29.4% of revenue, for the six months
ended June 30, 2023, from approximately $7.0 million, or 25.8%
of revenue, for the six months ended June 30, 2022. The increase in the dollar amount of gross profit was due to increased sales for the
reasons described above, partially offset by an increase in purchasing and freight costs for the reasons described above.
Operating Expenses
Operating expenses consist
of general and administrative expenses. Our operating expenses increased 50.6%, or approximately $4.2 million, to approximately $12.4
million for the six months ended June 30, 2023 from approximately $8.3 million for the six months ended June 30, 2022. As a percentage
of sales, operating expenses increased to 37.4% for the six months ended June 30, 2023 from 30.5%
for the six months ended June 30, 2022. The increase in the dollar amount of operating expenses was due to an increase in general and
administrative expenses of approximately $4.2 million, or 50.6%, which in turn was primarily due to additional expenses related to the
acquisition of the assets of G.A.P. Promotions, Trend Brand Solutions, Premier NYC, and T R Miller; due diligence, closing and integration
costs relating to the acquisition of T R Miller’s assets; the implementation of an internal commercial ERP system on NetSuite ERP’s
platform; ongoing public company expenses; lead generation initiatives; and organic growth in our business.
Other Income and (Expense)
Other income and (expense)
consist of other income (expense), interest income (expense), and unrealized gain (loss) on investments. Our other income (expense) was
$71,729 for the six months ended June 30, 2023, compared to other income (expense) of $(27,461) for the six months ended June 30, 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. Our interest income (expense) was $284,259 for the six months ended June 30, 2023, compared to $92,972
for the six months ended June 30, 2022. This change was primarily due to interest generated from investments. Our unrealized gain (loss)
on investments was $98,582 for the six months ended June 30, 2023, compared to zero for the six months ended June 30, 2022. This change
was primarily due to the recording of all investments at estimated fair value.
Provision for Income Taxes
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 six months ended June 30, 2023 was approximately $(0.7) million compared to income tax provision of approximately $(0.2) million
for the six months ended June 30, 2022. Income tax provision for the six months ended June 30, 2023 and 2022 accounted for approximately
30.5% and 18.1% of earnings (loss) before income taxes of approximately $(2.2) million and approximately $(1.2) million for the six months
ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 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.
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 1 of this Quarterly Report on Form
10-Q.
Net Earnings (Loss)
Our net loss for the
six months ended June 30, 2023 was approximately $1.5 million, compared to a net loss of approximately $1.0 million for the six months
ended June 30, 2022. This change was primarily due to the reasons described above for the increase in operating expenses and the increase
in purchasing costs. These factors were partially offset by the increase in sales during the six months ended June 30, 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 $5.5 million in aggregate,
from approximately $2.7 million from the acquisition of the assets of G.A.P. Promotions during the six months ended June 30, 2022, and
the increase of approximately $3.4 million from recurring organic sales during the six months ended June 30, 2023 compared to the six
months ended June 30, 2022.
Liquidity and Capital Resources
As of June 30, 2023,
we had cash and cash equivalents of approximately $15.3 million and investments of approximately $10.3 million. We have financed our operations
primarily through cash generated from our initial public offering in November 2021, private placement 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 June 30, 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 the six months ended June 30, 2023 and 2022.
| |
Six Months Ended June 30, | |
| |
2023 | | |
2022 | |
Net cash provided by (used in) operating activities | |
$ | 2,327,231 | | |
$ | (2,241,841 | ) |
Net cash provided by (used in) investing activities | |
| (1,723,425 | ) | |
| (729,833 | ) |
Net cash provided by (used in) financing activities | |
| (586,363 | ) | |
| (1,053,088 | ) |
Net increase (decrease) in cash and cash equivalents | |
| 17,443 | | |
| (4,024,762 | ) |
Cash and cash equivalents at beginning of period | |
| 15,253,756 | | |
| 32,226,668 | |
Cash and cash equivalents at end of period | |
$ | 15,271,199 | | |
$ | 28,201,906 | |
Net cash provided by
operating activities was approximately $2.3 million for the six months ended June 30, 2023, as compared to net cash used in
operating activities of approximately $2.2 million for the six months ended June 30, 2022. For the six months ended June 30, 2023,
decreases in accounts receivable, inventory, and accounts payable, as well as increases in deposits, unearned revenue, and rewards
program liability were the primary drivers of the net cash provided by operating activities. For the
six months ended June 30, 2022, increases in accounts receivable, inventory, unearned
revenue and rewards program liability along with a decrease in accounts payable were the primary drivers of the net cash used in
operating activities. The change of net cash provided by operating activities for the
six months ended June 30, 2023 compared to the net cash used in operating activities for the six months ended June 30, 2022 occurred
in the normal course of business due to growth in organic business.
Net cash used in investing activities
was approximately $1.7 million for the six months ended June 30, 2023, as compared to net cash used in investing activities of approximately
$0.7 million for the six months ended June 30, 2022. For the six months ended June 30, 2023, asset acquisitions, purchases of investments
and additions to software-related property and equipment were the primary drivers of the net cash used in investing activities. For the
six months ended June 30, 2022, asset acquisitions and additions to software-related property and
equipment were the primary drivers of the net cash used in investing activities. The increase in net cash used in investing activities
for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to purchases of investments and
additions to software-related property and equipment.
Net cash used in financing activities
was approximately $0.6 million for the six months ended June 30, 2023, as compared to net cash used in financing activities of approximately
$1.1 million for the six months ended June 30, 2022. For the six months ended June 30, 2023, net cash used in financing activities consisted
primarily of payments related to a contingent earn-out liability. For the six months ended June 30, 2022, net cash used in financing activities
consisted primarily of payments related to a contingent earn-out liability and the repurchase of
our common stock under our stock repurchase program offset by net proceeds received from the exercise of our publicly-traded warrants.
The decrease in net cash used in financing activities was primarily due to the non-recurrence of
repurchases of our common stock under our stock repurchase program during the six months ended June 30, 2023.
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 June
30, 2023, we had repurchased a total of 1,777,657 shares of common stock for total payments of $3,332,405, and $6,667,595
remained available under the stock repurchase program for future stock repurchases. During the three
months ended June 30, 2023, we did not repurchase any shares.
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.
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.
The Line of Credit is
also subject to ongoing affirmative obligations of the Company, including: 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; 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 is
further 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.
The Company also may
not 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.
The foregoing summary
of the Line of Credit Agreement, the Note, and the Security Agreement is qualified in its entirety by reference to the full text of the
Line of Credit Agreement, the Note, and the Security Agreement, copies of which are attached as Exhibits 10.1, 10.2 and 10.3 to our Current
Report on Form 8-K filed with the SEC on November 26, 2021.
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 summary
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 10.4 to our Current Report on Form 8-K filed with the SEC on November 26, 2021.
As of June 30, 2023 and
December 31, 2022, we had not drawn any funds from the Line of Credit under the Line of Credit Agreement.
Contractual Obligations
Wildman Imprints Assets Acquisition
On August 24, 2020, we entered into an Asset
Purchase Agreement, or the WBG 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 WBG 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 June 30, 2023 and December
31, 2022, the current portion of the earn-out liability amounted to $255,051 and $742,874, respectively. The foregoing description of
the WBG Asset Purchase Agreement is qualified in its entirety by reference to the full text of the WBG Asset Purchase Agreement, a copy
of which is attached as Exhibit 10.1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
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 June 30,
2023 and December 31, 2022 for the inventory and property and equipment purchased. This amount accrues no interest, and is to be paid
“as used” on a quarterly basis through the three-year earn-out period. The Company anticipates that the note will be paid
in full in 2023, accordingly the note payable has been classified as current on the balance sheet as of June 30, 2023. 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:
Inventory | |
$ | 649,433 | |
Property and Equipment | |
| 34,099 | |
Intangible - Customer List | |
| 2,253,690 | |
Total | |
$ | 2,937,222 | |
Consideration
Paid:
Cash | |
| 521,174 | |
Note Payable - Wildman | |
| 162,358 | |
Contingent Earn-Out Liability | |
| 2,253,690 | |
Total | |
$ | 2,937,222 | |
For
further discussion see Notes J, M and N to our financial statements beginning on page 1 of this Quarterly 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, or 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 of June 30, 2023.
Fair
Value of Identifiable Assets Acquired:
Inventory | |
$ | 91,096 | |
Working Capital | |
| 879,486 | |
Intangible - Customer List | |
| 2,275,290 | |
Total | |
$ | 3,245,872 | |
Consideration
Paid:
Cash | |
| 1,510,872 | |
Restricted Stock | |
| 100,000 | |
Contingent Earn-Out Liability | |
| 1,635,000 | |
Total | |
$ | 3,245,872 | |
For
further discussion relating to this transaction, see Notes J and N to our financial statements beginning on page 1 of this Quarterly
Report on Form 10-Q, Item 1.01 of our Current Report on Form 8-K filed with the SEC on January 26, 2022, and Items 1.01 and 2.01 of our
Current Report on Form 8-K filed with the SEC on February 1, 2022. 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 our Annual Report on Form 10-K for the fiscal year ended December
31, 2022, respectively.
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, or the Trend Asset Purchase Agreement.
The
purchase price included cash payments as follows: $175,000 in cash, plus additional cash
for the 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 of June 30, 2023.
Fair
Value of Identifiable Assets Acquired:
Cash | |
$ | 63,624 | |
Accounts Receivable | |
| 346,822 | |
Inventory | |
| 108,445 | |
Fixed Assets | |
| 14,444 | |
Intangible – Customer List | |
| 1,659,831 | |
Total | |
$ | 2,193,166 | |
Consideration
Paid:
Cash | |
$ | 1,488 | |
Assumption of Liabilities | |
| 721,334 | |
Restricted Stock | |
| 100,000 | |
Contingent Earn-Out Liability | |
| 1,370,344 | |
Total | |
$ | 2,193,166 | |
For
further discussion see Notes J and N to our financial statements beginning on page 1 of this Quarterly Report on Form 10-Q, Item 1.01
of our Current Report on Form 8-K filed with the SEC on July 19, 2022, and Items 1.01 and 2.01 of our Current Report on Form 8-K filed
with the SEC on September 7, 2022. The foregoing description of the Trend Asset Purchase Agreement and assets acquired from Trend Brand
Solutions is qualified in its 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, respectively.
Premier
NYC Assets Acquisition
On
December 20, 2022, the Company closed on an asset purchase agreement, dated as of November 29, 2022, or 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 of June 30, 2023.
Fair
Value of Identifiable Assets Acquired:
Cash | |
$ | 13,855 | |
Restricted Stock | |
| 344,078 | |
Contingent Earn-Out Liability | |
| 1,032,600 | |
Total | |
$ | 1,390,533 | |
Consideration
Paid:
Cash | |
$ | 440,025 | |
Assumption of Liabilities | |
| 17,908 | |
Restricted Stock | |
| 25,000 | |
Contingent Earn-Out Liability | |
| 907,600 | |
Total | |
$ | 1,390,533 | |
For
further discussion see Notes J and N to our financial statements beginning on page 1 of this Quarterly Report on Form 10-Q.
T
R Miller Asset Acquisition Agreement
As
previously reported in our Current Report on Form 8-K filed on January 31, 2023 (the “January 2023 Form 8-K”), 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. As previously reported, 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, as described in the January 2023 Form 8-K.
As
previously reported in our Current Report on Form 8-K filed on June 1, 2023 (the “June 2023 Form 8-K”), 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 Seller 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.
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 which are described in the January 2023 Form 8-K.
Pursuant
to the T R Miller Purchase Agreement, in connection with the T R Miller Closing, the Company, as tenant, and Miller Family Walpole LLC,
as landlord (the “Miller Landlord”), entered into a lease agreement for a warehouse facility used by the T R Miller Business,
dated May 31, 2023 (the “Miller Lease Agreement”). 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 10.1 to the June 2023 Current 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 January 2023 Form 8-K, and to the full text of the agreement attached to the January 2023 Form
8-K as Exhibit 2.1.
There
were no material relationships, other than in respect of the transaction, between T R Miller, the Miller Stockholder, and the Company
or any of the Company’s affiliates, including any director or officer of the Company, or any associate of any director or officer
of the Company.
Property
Leases
The
following is a schedule by years of future minimum lease payments:
2024 | | |
$ | 501,393 | |
2025 | | |
| 482,074 | |
2026 | | |
| 187,115 | |
2027 | | |
| 190,854 | |
2028 | | |
| 161,960 | |
| | |
$ | 1,523,396 | |
Rent
expense for the six months ended June 30, 2023 and 2022 totaled $220,712 and $221,901, respectively. We anticipate no deficiencies in
our ability to make these payments.
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 June 30, 2023 and December 31, 2022, the Company had net deposits totaling $8,875,000 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 June 30, 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 generally accepted accounting principles in the United States (“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
Notes A.3. through A.20. to our financial statements beginning on page 1 of this Quarterly Report on Form 10-Q.
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.
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.
We
input orders based upon receipt of a customer purchase order, confirm pricing through the customer purchase order, validate credit worthiness
through past payment history or other financial data and record revenue upon shipment of goods and when risk of loss and title transfer.
Stock-Based
Compensation
We
account for stock-based compensation under ASC Topic 718, Compensation-Stock Compensation, which requires us to record related
compensation costs in the statement of operations. Calculating the fair value of stock-based compensation awards requires the input of
highly subjective assumptions, including the expected life of the awards and expected volatility of our stock price. Expected volatility
is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities
are based on weighted historical implied volatility. The expected forfeiture rate applied in calculating stock-based compensation cost
is estimated using historical data and is updated annually.
The
assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change
and we use different assumptions, our stock-based compensation expense could change significantly in the future. In addition, if our
actual forfeiture rate is different from our estimate, our stock-based compensation expense could change significantly in the future.
Income
Taxes
We
account for income taxes using the asset and liability method in accordance with ASC Topic 740, Income Taxes, which requires recognition
of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Under this method, we must make estimates and judgments in determining the provision for taxes for financial statement
purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of
certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial
statement purposes, as well as the interest and penalties related to uncertain tax positions. In addition, the Company operates within
multiple tax jurisdictions and is subject to audit in these jurisdictions. Significant changes in these estimates may result in an increase
or decrease to our tax provision in a subsequent period. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
We
assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery
is not determinable beyond a “more likely than not” standard.
The
calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities
for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining
if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not fail to
be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine
the probability of various hypothetical outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation
is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues.
Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would
result in the recognition of a tax benefit or an additional charge to the tax provision in the period in which a change in judgment occurs.
Recent
Accounting Pronouncements
For
a discussion of recently adopted accounting pronouncements, see Recent Accounting Pronouncements in Note A.21. to our financial
statements beginning on page 1 of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures
refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit
under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As
required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision
of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures, as of June 30, 2023. Based upon, and as of the date of this evaluation, our Chief Executive Officer and Chief Financial
Officer determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us
in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in applicable rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
We
regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls
and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities
as implementing new, more efficient systems, consolidating activities, and migrating processes.
There
have been no changes in our internal control over financial reporting during the three months ended June 30, 2023 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II
OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may
harm our business. We are not currently aware of any such legal proceedings or claims that we believe will have a material adverse effect
on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Not
applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Unregistered
Sales of Equity Securities
During
the three months ended June 30, 2023, we did not sell any equity securities that were not registered under the Securities Act and that
were not previously disclosed under Item 3.02 in a Current Report on Form 8-K.
Purchases
of Equity Securities
No
repurchases of our common stock were made during the three months ended June 30, 2023. For a description of the Company’s stock
repurchase program, see “Part I. Financial Information – Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations. – Liquidity
and Capital Resources – Stock Repurchase Program”.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not
applicable.
ITEM 5. OTHER INFORMATION.
We
have no information to disclose that was required to be disclosed in a Current Report on Form 8-K during the three months ended June
30, 2023 but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees
to our board of directors where those changes were implemented after the Company last provided disclosure of such procedures.
ITEM 6. EXHIBITS.
Exhibit
No. |
|
Description |
2.1 |
|
Asset Purchase Agreement, dated as of January 25, 2023, by and among Stran & Company, Inc., T R Miller Co., Inc. and Thomas R. Miller (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on January 31, 2023) |
3.1 |
|
Articles of Incorporation of Stran & Company, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed on October 7, 2021) |
3.2 |
|
Amended and Restated Bylaws of Stran & Company, Inc. (incorporated by reference to Exhibit 3.2 to the Amendment No.1 to Registration Statement on Form S-1 filed on October 22, 2021) |
10.1 |
|
Land and Building Lease Agreement, dated May 31, 2023, between Miller Family Walpole LLC and Stran & Company, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 1, 2023) |
31.1* |
|
Certifications of Principal
Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* |
|
Certifications of Principal
Financial and Accounting Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1** |
|
Certifications of Principal
Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2** |
|
Certifications of Principal
Financial and Accounting Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS* |
|
Inline XBRL Instance Document |
101.SCH* |
|
Inline XBRL Taxonomy Extension
Schema Document |
101.CAL* |
|
Inline XBRL Taxonomy Extension
Calculation Linkbase Document |
101.DEF* |
|
Inline XBRL Taxonomy Extension
Definition Linkbase Document |
101.LAB* |
|
Inline XBRL Taxonomy Extension
Label Linkbase Document |
101.PRE* |
|
Inline XBRL Taxonomy Extension
Presentation Linkbase Document |
104* |
|
Cover Page Interactive
Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date:
August 14, 2023 |
STRAN
& COMPANY, INC. |
|
|
|
/s/ Andrew Shape |
|
Name: |
Andrew Shape |
|
Title: |
Chief Executive Officer and President |
|
|
(Principal
Executive Officer) |
|
|
|
/s/ David Browner |
|
Name: |
David Browner |
|
Title: |
Chief Financial Officer |
|
|
(Principal Accounting and Financial Officer) |
43
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