We believe our acquisition strategy will allow us to acquire small brands using a combination of shares of our common stock, cash and other consideration, such as earn-outs. Most likely beginning in the third quarter of 2018, we intend to use our acquisition strategy in order to acquire ten or more small brands per year for the next three years. In situations where we deem that a brand is not a “fit” for acquisition or partnership, we may provide the brand with certain manufacturing or consulting services that will assist the brand to achieve its goals.
In pursuit of this acquisition strategy, on February 26, 2018, we entered into a strategic partnership agreement with Edison Nation, LLC, a consumer product development consulting firm that helps first-time entrepreneurs to commercialize their ideas and inventions, which includes a non-binding provision that allows us to negotiate for the acquisition of substantially all of the membership interests of Edison Nation, LLC. As we have not begun to negotiate the terms of such acquisition, there can be no assurances as to when or if we will consummate the acquisition of such membership interests.
Manufacturing and Materials
To provide greater flexibility in the manufacture and delivery of products, and as part of a continuing effort to reduce manufacturing costs, SRM has concentrated production of most of its products in third-party manufacturers located in China and Hong Kong. Products are also purchased from unrelated entities that design, develop, and manufacture those products. Fergco manufactures all of its products at its Alpha, New Jersey facility.
We base our production schedules on customer orders and forecasts, taking into account historical trends, results of market research, and current market information. Actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or excess inventory in a particular product line.
The majority of our raw materials are available from numerous suppliers but may be subject to fluctuations in price.
Competition and Industry Background
In terms of our toy products business, competition is intensifying due to trends towards shorter life cycles for the development, production and saleability of toy products. Competition is also intensifying due to the availability of online-only distributors, including Amazon.com, which are able to promote a wide variety of toys and represent a wide variety of toy manufacturers, and, with limited overhead, do so at a lower cost. In North America, we compete with several large toy companies, including Hasbro, Jakks Pacific, Just Play Products, Lego, MGA Entertainment, Moose Toys, Spin Master, and VTech, as well as many smaller toy companies, and manufacturers of video games and consumer electronics. Internationally, we compete with global toy companies including Famosa, Giochi Preziosi, Lego, MGA Entertainment, Ravensburger, Simba, Spin Master, and VTech, as well as many smaller toy companies, and manufacturers of video games and consumer electronics.
In terms of our packaging business, we compete against a large number of packaging manufacturers in North America, such as AEP Industries, Inc., Avery Dennison, Graphic Packaging Holding Company, Packaging Corporation of America and Westrock Company. As a custom box manufacturer and a logistics provider, we believe that we offer a differentiated, cost efficient, outsourced, “back-end” to deliver product for emerging companies and brands that struggle to deliver efficiently to customers, and/or to scale as demand for product grows. We believe this value-added fulfillment is a significant component of the future of the packaging industry, and have not observed competitors focusing on this niche.
Packaging industry volumes have historically been directly influenced by the volume of non-durable goods production. As the toy business is highly seasonal, with consumers making a large percentage of all toy purchases during the traditional holiday season, seasonality has significant impact on us. These seasonal purchasing patterns and requisite production lead times create risk to our business associated with the