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Hammitt, Inc. – ‘1-K’ for 12/31/21 – ‘PART II’

On:  Thursday, 4/28/22, at 6:10am ET   ·   For:  12/31/21   ·   Accession #:  1104659-22-51516

5 References:   By:  Hammitt, Inc. – ‘1-SA’ on 9/22/22 for 6/30/22 By:  Hammitt, Inc. – ‘253G2’ on 7/18/22 By:  Hammitt, Inc. – ‘253G2’ on 5/3/22 To:  Hammitt, Inc. – ‘1-A/A’ on 9/3/21 To:  Hammitt, Inc. – ‘1-A’ on 8/18/21 

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 4/28/22  Hammitt, Inc.                     1-K        12/31/21    4:969K                                   Toppan Merrill/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 1-K         Annual Report or Special Financial Report --        HTML      4K 
                primary_doc.xml                                                  
 2: PART II     Annual Report - Part II                             HTML    341K 
 4: EX1K-6 MAT CTRCT  Exhibit 6.10                                  HTML      9K 
 3: EX1K-6 MAT CTRCT  Exhibit 6.9                                   HTML     19K 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-K

ANNUAL REPORT

ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933

For the fiscal year ended December 31, 2021

HAMMITT, Inc.

(Exact name of issuer as specified in its charter)

TABLE OF CONTENTS

In this annual report, the term “Hammitt,” “we,” “us” “our” or “the Company” refers to Hammitt, Inc., a California corporation.

THIS ANNUAL REPORT MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE ANNUAL REPORT, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH CONSTITUTE FORWARD LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE OR UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.  

Item 1. Business

SUMMARY

Company Overview

Hammitt, Inc. was organized in the State of California on August 12, 2008. In 2008, a small team of Californians began shaping a new, client-focused initiative to create a handbag Company where fashion meets function. Using what we believe to be only the highest quality materials, our experienced design team began creating products where comfort and style reign supreme. Since then, we have committed our design efforts to surprise and delight our clients through innovation and evolving functionality.

Each style starts with an idea to solve a problem – making our clients’ lives easier and also more colorful. Our designs come to life through carefully selected materials and thoughtful development and testing. Over the years, our unique, eye-catching handbags with our signature rivets have developed a loyal and passionate following. We are also happy to report that we believe we have been successful in growing the brand without sacrificing quality or compromising our clients’ needs.

In 2019 and 2020, Hammitt won the Design Excellence Award from the North American Accessories Council in New York.

The Hammitt Difference: Business Model

We believe the following factors set us apart from our competition:

The highest quality materials (lifetime guarantee) and functionality is a top priority in our designs. Digital media and direct-to-consumer is a huge focus. We believe this sets us apart from our competitors.

BEST SELLING BAG - DANIEL LRG  

Market Overview

There is a large growing U.S. market for women’s handbags - $22 billion in 2021 increasing by $1.43 billion annually resulting in a projected market volume of $27.3 billion by 2025. Buyers usually must choose between a very expensive, European designer handbag or settle for lower quality, heavily discounted American brand. Hammitt offers a quality, luxury U.S. product.

Legacy brands are focused on their wholesale business. Most have less than 15% of their sales online. Hammitt has more than 65% of revenues online (DTC).

According to Statista, as of February 2020, 30% of online buyers are 25 to 34 years old. Hammitt is focused on 28- to 55-year-old buyers.

Products

The Company sells luxury handbags and accessories. The products aim to be functional and fashionable and are typically adorned with our signature rivets. We are known for our functional fresh approach to the modern handbag and our lifetime promise of repairs free of charge.

Handbag styles change, but as of the date of this report the Company sells this current product mix of handbags:

In addition to handbags, the Company also sells various accessories, including but not limited to the following:

Store Locations

Currently, Hammitt has two store locations with a third due to open Fall 2022. One store is located in Manhattan Beach, California, another located in Costa Mesa, California with the new third store opening in La Jolla California. Our stores offer the fullest expression of our brand, are located in tourist-heavy, densely populated cities in California. The stores carry an assortment of products depending on their size, location and customer preferences. As the Company grows, we intend to open additional retail stores in locations which we believe will further our loyal customer base and continue to support and drive our DTC business.

When contemplating opening additional facilities, the Company looks as the following factors to determine whether the location is suited for the Company:

Direct to Consumer

Our Direct-to-Consumer business accounts for more than 60% of our revenues. In the last 3 years, DTC sales have grown from 24% (in 2018) to 60.4% as of December 31, 2021. We believe the following factors have contributed to this growth:

Due to the aforementioned factors, digital traffic to our website reached 4.9 million visits for the year ended December 31, 2021.

We have grown the DTC business by tracking data and success factors in regard to our digital campaigns. Additionally, our software ecosystem has allowed us to focus on the proper key performance indicators needed to accelerate our DTC growth, such as:

From a digital marketing perspective, we are continuously informed of what is working for us and what needs tweaking.

We believe our exceptional customer experience sets us apart. Virtually, we strive to replicate in-person customer service via virtual personal styling appointments, a professional graphics/digital team and live customer service representatives.

Wholesale Customers

In addition to selling Direct to Consumers, the Company also sells its products wholesale. Pursuant to the Company’s wholesale model, it obtains products from its third-party manufacturer and then sells the products to a third-party business, usually in bulk. This third-party is often a retail business who then sells to the buying public. As of December 31, 2021, the Company maintains a wholesale relationship with the following entities:

We work closely with our wholesale partners to ensure a clear and consistent product presentation. We custom tailor our assortments through wholesale product planning and allocation processes to match the attributes of our department store consumers in each local market. We continue to closely manage inventories in this channel given the current highly promotional environment at point-of-sale.

In addition, the Company sells its products to boutiques across the country on a wholesale basis. As of December 31, 2021, the Company maintains over 400 wholesale relationships with boutiques. Many of these boutiques are located inside luxury hotels. The Company intends to grow this wholesale boutique model as it can track demand for product without the capital investment of brick-and-mortar store fronts. The wholesale business for Hammitt comprised approximately 40% of total segment net sales for fiscal 2021.

Target Audience

The Company’s target audience consists of the following characteristics:

Manufacturer and Supplier

The majority of the Company’s products are manufactured in China with additional capacity in India and Europe. Our main factory in China is an investor in the Company, MGI Enterprises LTD. The Company has not entered into any agreements with third parties to manufacturer or supply products.

Fulfillment Facilities

We rely on third parties to operate and distribute finished products from our fulfillment facilities located in California. We also utilize third-party logistics providers, such as G-Global to warehouse and distribute finished products from their warehouse locations in the United States and Mexico. We regularly evaluate our distribution infrastructure and consolidate or expand our distribution capacity as we believe appropriate for our operations and to meet anticipated needs.

The Company has not entered into any agreements with third parties to operate and distribute finished products from fulfillment facilities or third party logistic providers to warehouse and distribute finished products from their warehouse locations in the United States.

Competition

The global premium women's handbag, and accessories categories are highly competitive. The Company competes primarily with European and American luxury and accessible luxury brands as well as private label retailers. Over the last several years these industries have grown, encouraging the entry of new competitors as well as increasing the competition from existing competitors. This increased competition drives interest in these brand loyal categories.

The Company believes that the brands below are Hammitt’s top competitors:

Employees

The Company currently has 38 full-time employees and 10 part-time employees. The Company has entered into employment agreements with two executives. The employment agreements are filed as exhibits to this report.

Information Systems

The Company relies on the following information systems:

In addition, our manufacturers are linked to our design and ERP system, NetSuite. All customers are linked to our ERP through Shopify, NuOrder or EDI systems. Payments to vendors are made by ACH, wire or by check.

Regulation

Most of the Company's imported products are subject to duties, indirect taxes, quotas and non-tariff trade barriers that may limit the quantity of products that we may import into the United States and other countries or may impact the cost of such products. The Company is not materially restricted by quotas or other government restrictions in the operation of its business; however customs duties do represent a component of total product cost. To maximize opportunities, the Company operates complex supply chains through foreign trade zones, bonded logistic parks and other strategic initiatives such as free trade agreements.

Intellectual Property

The Company relies on its intellectual property. As of December 31, 2021, the Company has the following patents or trademarks granted or pending:

HAMMITT, INC.

WORLDWIDE TRADEMARK STATUS REPORT

HAMMITT, INC.

WORLDWIDE TRADEMARK STATUS REPORT

HAMMITT, INC.

WORLDWIDE TRADEMARK STATUS REPORT

HAMMITT, INC.

WORLDWIDE TRADEMARK STATUS REPORT

HAMMITT, INC.

WORLDWIDE TRADEMARK STATUS REPORT

HAMMITT, INC.

WORLDWIDE TRADEMARK STATUS REPORT

HAMMITT, INC.

WORLDWIDE TRADEMARK STATUS REPORT

HAMMITT, INC.

WORLDWIDE TRADEMARK STATUS REPORT

Litigation

The Company has no material litigation pending and the management team is not aware of any pending or threatened material legal action relating to the Company’s business, intellectual property, conduct or other business issues.

THE COMPANY’S PROPERTY

The Company has entered into the following lease agreements:

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 1-K. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ significantly from those discussed in the forward-looking statements. Unless otherwise indicated, the latest results discussed below are as of December 31, 2021.

The 2020 financial statements have been restated to correct a misstatement. During the year ended December 31, 2021, management determined as part of the Company’s adoption of Topic 606 all deferred advertising costs should be expensed beginning in the year December 31, 2020. In addition, as the Direct-to-Consumer business has grown, management determined it was necessary to record a reserve for refunds. These changes also resulted in an update to the Company’s income tax provision. These changes impacted the 2020 financials statements.

Overview

The Company designs, markets and sells luxury handbags and accessories. The Company’s products are sold direct to consumer (“DTC”) online and through our own boutiques as well as traditional wholesale channels, including specialty stores, resorts and select Department Stores.

Results of Operations

Factors Affecting Operating Results

We generate revenue from DTC sales and wholesale sales of handbags and accessories. Revenue is influenced by advertising, discounts and promotions, merchandising, packaging, and in the wholesale channel, the availability of display space at retailers, all of which have a significant impact on consumers’ buying decisions.

We deduct promotional discounts and refunds expected to be issued to determine net revenue. Customers who receive a damaged product or are dissatisfied with a product may receive a full or partial refund, full or partial credit against future purchase, or replacement, at our sole discretion. Continued growth of net revenues and profits will depend, substantially, on the continued popularity of new and existing products, the ability to effectively manage the sales channels, and the ability to maintain sufficient product supply to meet expected growth in demand. We may periodically provide promotional offers, including discounts, such as percentage discounts off current purchases and other similar offers. These offers are treated as a reduction to the purchase price of the related transaction and are reflected as an adjustment to arrive to net revenues. Such offers are discretionary, and we expect incentive offers to vary from period to period as a percentage of sales for the foreseeable future.

The cost of goods sold relates to the cost of materials, manufacturing, inbound shipping, receiving and import duty costs.

Operating expenses largely consist of selling, marketing, advertising, retail operations, and general and administrative expenses.

Other income and expense consist primarily of interest expense associated with a $4 million line of credit and three loans totaling $2,000,000. One of the loans is with one of our manufacturer partners and the second loan is with the Shannon Christiansen Seare Trust and the third loan is with Black Oak-Hammitt-Convertible Debt, LLC. See “Recent offerings of Securities and Outstanding Debt” below.

During the year ended December 31, 2021, management determined as part of the Company’s adoption of Topic 606 all deferred advertising costs should be expensed beginning in the year ended December 31, 2020. In addition, management determined it was necessary to record a reserve for refunds. See “Note 20 – Restatement” of the Company’s financial statements for further details.

Year Ended December 31, 2021, Compared to Year Ended December 31, 2020

Statements of Operations For the Years Ended December 31, 2021 and 2020

Revenue

Revenue for the year ended December 31, 2021, was $32,180,455, an increase of 83% from revenue of $17,568,252 for the year ended December 31, 2020. Revenue from DTC or online sales increased 78%%, to $19,511,710 for the year ended December 31, 2021, from $10,941,513 for the year ended December 31, 2020. This was primarily driven by the increase in new customers and existing customer sales. Order volumes increased as the Company continued its planned pivot to a DTC focus Company and was helped as states and localities-imposed shelter-in-place orders in connection with the coronavirus (“COVID-19”) pandemic discussed further below.

Revenues from wholesale sales increased by 92%, to $12,668,745 for the year ended December 31, 2020, from $6,565,683 including shipping charges made to wholesalers. The increase relates to the re-opening of department stores and boutiques after the COVID-19 related shutdown.

Cost of Goods Sold

Cost of revenues for the year ended December 31, 2021, was $11,557,658 compared to $6,964,749 for the year ended December 31, 2020, an increase of 66%. The increase in cost of goods sold relates to the increase in revenues.

Accordingly, our gross profit increased 94% to $20,622,797 for the year ended December 31, 2021, from $10,603,503 for the year ended December 31, 2020 and our gross margins increased to 64% for 2021 from 60% in 2020.

Operating Expenses

Operating expenses is comprised of selling expenses and general and administrative expenses. Operating expense increase 60% to $20,429,782 for the year ended December 31, 2021, from 10,691,544 for the year ended December 31, 2021. Selling expenses increased by 67% to $17,848,933 for the year ended December 31, 2021, from $10,691,544 for the year ended December 31, 2020. During this period the amount spent on advertising increased by 70% to $8,104,210 in 2021 from $4,764,495 for the period ended December 31, 2020. The increase in advertising was primarily driven by increased spending with Facebook and Google to acquire new customers.

General and administrative expenses increased by 25% to $ $2,580,849 from $2,072,530 as the Company added staff to support the Company’s continued growth.

Other Expenses (Income)

Other expenses were $619,598 for the year ended December 31, 2021, compared with other income of $76,537 for the year ended December 31, 2020. The 2020 Other Income includes a $484,43 gain from forgiveness of a PPP loan for the period ended December 31, 2020. Excluding the loan forgiveness, other expenses increased for the year ending December 31, 2021 to $619,598 compared to $407,956 for the year ended December 31, 2020, due to increased borrowings to support the Company’s growth.

Tax Benefit

The Company recognizes an income tax benefit related to operating losses. The Company’s income tax benefit decreased to $278,090 for the year ended December 31, 2021, from $531,212 for the year ended December 31, 2020, primarily due to reduced losses.

Net Loss 

The Company’s net loss decreased to $148,493 for the year ended December 31, 2021, from $1,552,822 for the year ended December 31, 2020.

Liquidity and Capital Resources

Our operations have been financed to date by a combination of cash generated from operations, debt, and investment capital. Our primary cash needs have been to fund working capital requirements (primarily marketing to increase growth and inventory to support that growth), debt service payments (interest and principal payments), and operating expenses.

As of December 31, 2021, we had cash on hand of $1,032,639, inventory of $5,630,236, and accounts receivable (net) of $2,602,005 and total liabilities of $15,014,928. The Company maintains a $4,000,000 line of credit with Assembled Brands Capital Funding LLC with $3,895,922 drawn down as of December 31, 2021, see “—Line of Credit” (below).

We expect that our liquidity needs for the next twelve months will be met by continued use of operating cash flows, our line of credit and funds generated from this offering. We believe that we will be able to continue to operate our business for the foreseeable future.

Recent offerings of Securities and Outstanding Debt

On September 10, 2021, the Company commenced a Regulation A offering.  As of April 24, 2022, the Company sold 824,549 shares of Class B Common Stock for net proceeds of $907,004.

Indebtedness

Commitments

The Company leases office, warehouse and retail space under noncancelable operation leases which expire between April 2023 and September 2026. Operating lease expense totaled $269,814 and $125,000 for the years ended December 31, 2021, and December 31, 2020, respectively. The $144,814 increase was due to the new lease for the Manhattan Beach retail store and a new sales showroom in Los Angeles.

Trend Information

Our Company primarily operates in the U.S. luxury leather handbag market This market is estimated by management, based on industry data reports, including from Statista, at $12 billion a year and is expected in grow at 5% per annum for the next five years. The market is fragmented with few barriers to entry.

Within this market, leather bags, the main product of the Company, dominate and account for 48.5% share of the revenue by offering better durability, dustproof, and crack-proof properties. This durability associated with this product attracts consumers to spend on these luxury products. (Grandview Research 2017)

It’s reported by “thatFashion,” clothing and accessories were the leading online shopping category with 71% of women buying a product in the category in the last 3 months and, unlike footwear or apparel, handbags do not face the same challenges of size and fit. Therefore, the Company plans to continue its focus on selling direct to consumers online.

COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. There is uncertainty around the duration and impact of the pandemic. COVID-19 has been a highly disruptive economic and societal event that has affected our business and has had a significant impact on consumer shopping behavior. To serve our customers while also providing for the safety of our team members, we have adapted aspects of our logistics, transportation, supply chain, and purchasing processes. On March 15, 2020, the Company issued a shelter-in-place order to its employees based in our Los Angeles headquarters. As the Company qualified as an essential business as defined by state regulations, we continued to operate our Pennsylvania and California fulfillment centers with approximately 80% occupancy to maintain social distancing. The reduced manpower in warehouses, together with increased DTC orders, led to minor delivery delays but we have not experienced any significant disruptions in our supply chain or any carrier interruptions or delays.

Since late March 2020, we have experienced a significant increase in demand primarily as a result of changes to consumer behaviors resulting from the various stay-at-home restriction orders. While wholesale sales declined in April and May 2020, they have since returned to pre-COVID-19 levels and have not had a material effect on the Company’s revenue.

We cannot predict the duration or severity of the economic impact of the COVID-19 pandemic or its ultimate impact on our wholesale operations. The ultimate impact on the Company’s future operating results and consolidated financial statements cannot be reasonably estimated at this time. However, as of the date of this report, the Company has experienced increased overall demand for its products and it does not expect this matter will have a material negative impact on its business, results of operations, or financial position.

Subsequent Events

Going Concern

The Company’s independent auditor, Squire & Company, P.C. audited the Company’s consolidated financial statements as of December 31, 2021, assuming that the Company will continue as a going concern.

Item 3.

DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

The table below sets forth the officers and directors of the Company as of the date of qualification of this Offering Statement.

Anthony Drockton, Founder, Chairman of the Board of Directors, Secretary

Anthony Drockton has been Chairman and Secretary of Hammitt, Inc. since 2008. As Founder and “Chief Cheerleader,” he is passionate about the business and culture he has created at Hammitt. A lifelong entrepreneur, Tony spent the early part of his career starting and building successful businesses in the construction, real estate and finance sectors before discovering his calling in high fashion. In 2008, Tony founded the Company after recognizing the potential of the handbags designed by Stephanie Hammitt. Tony's vision, leadership, and eye for design and craftsmanship has elevated Hammitt Los Angeles from a regional boutique brand to a digital and retail phenomenon. The integration of his creative skills and management expertise, is a powerful, rare amalgam forming the core of Tony's extraordinary insight and abilities. Tony earned his BA and MBA from Bowling Green State University.

Andrew Forbes, CEO, CFO, Treasurer and Director

Andrew Forbes was appointed CEO, CFO and Treasurer of Hammitt, Inc. in January 2018. He provides operational leadership while guiding all corporate initiatives, managing employees and consulting teams, and overseeing financial reporting. Prior to Hammitt, Andrew spent 20 years as CFO of Vidal Sassoon Salons and Schools. From 1997-2004, he served as founding COO of Jimmy Choo North America where he led the iconic brand through record growth. Andrew then went on to have similar successes as CEO of Taryn Rose International and Jupi Corporation (Kardashian Fashion Brands). From 2014-2017, he was COO at Evolution Footwear Inc. (BED|STU). Andrew has a proven track record of growing retail, e-commerce and wholesale consumer fashion brands through the application of strategic planning, performance metrics, financial reporting and operational controls. He is a Fellow of the Institute of Chartered Accountants of England and Wales, a Member of the Massachusetts Society of Certified Public Accountants and received his MBA from Pepperdine University.

Tracy Jankowski, VP Marketing, Advertising and DTC Sales

Tracy Jankowski has led Hammitt’s sales, marketing and advertising initiatives across various customer touchpoints for both the digital and retail sales channels since January 2018. As VP of Direct-to-Consumer, she has been integral to the tremendous growth Hammitt has experienced in that channel over the last 3 years. Previously, from 2015-2018, she served as Director of Marketing at BED|STU. From 2010-2015, she was Global Marketing Director at Chinese Laundry and Head of Marketing at Taryn Rose International from 2005-2010. Her expertise in executing creative, unique and distinctive strategies have successfully distinguished brands in the marketplace and captured consumer interest. Tracy earned her BA in Business Administration from The University of New Mexico.

Hsuan Pai, Director Production and Development

Hsuan Pai has been Director of Production and Development at Hammitt, Inc. since January 2018. Before joining Hammitt, from 2012-2015, Hsuan was Product Director and VP of Accessories at Jupi Corporation. Prior to that, she served as Director of Product Development at both Charles David and Taryn Rose International. In 2014, she co-founded a progressive footwear brand, Wal and Pai. Fluent in Mandarin and with an elite education in fashion and apparel design, Hsuan maximizes efficiency in Hammitt’s day-to-day operations while creating a unique edge in the Company’s design efforts. Hsuan earned her Associates Degree from FIDM.

Kenneth Deemer, Director

Kenneth Deemer has served as a Member of the Board of Directors of the Company with since January 2019. Kenneth is an executive coach who works with leaders to help them build high performing organizations. He has more than 25 years of experience as a venture capitalist, investing in and serving on the boards of several dozen high-growth companies. His experience includes leadership and mentorship as well as strategic planning, finance, governance and technology. Since 1985, he has been employed by Interven Partners, Inc. (DBA Growth Leaders Group). In addition to the Company’s Board, Kenneth currently sits on the board of Environmental Charter Schools and Los Angeles Center of Photography. He earned a SB in Physics and Electrical Engineering from MIT and MBA from Carnegie Mellon University.

Gregory Seare, Director

Gregory Seare has served as a Member of the Board of Directors of the Company since September 2021. Mr. Seare is the co-founder and managing director of Black Oak Capital (BOC) since February 2008.  In this role, he leads overall strategy formulation and fundraising, while overseeing deal sourcing, due diligence, and new investments.  BOC has invested over $100 million in senior debt, mezzanine debt, and preferred equity financings.  Prior to BOC, Mr. Seare was a founder and managing director at Seare Marriott & Co, a middle-market investment banking firm with offices in Salt Lake City, Utah and Richmond, Virginia.  Mr. Seare previously worked at BB&T and Virginia Capital Markets in Richmond, Virginia where he had over $2 billion of transaction experience spanning multiple industries.  Mr. Seare received an MBA and MPP from William & Mary (where he was a Jefferson Fellow) and a BS in Political Science from the University of Utah.  Mr. Seare was an active Scout Leader for more than a decade and serves as a board member for the Guadalupe Charter School.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

For the fiscal year ended December 31, 2021, we compensated our executive officers and directors as follows.

⁽¹⁾ This value is based on Black-Scholes Model.

The Company did not compensate its directors in their capacity as directors for the year ended December 31, 2021. There are four directors in this group.

Item 4:

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS

The following table sets out, as of December 31, 2021, Hammitt’s voting securities that are owned by its executive officers, directors and other persons holding more than 10% of the Company’s voting securities.

Item 5:

INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

Management Agreement

In December 2018, the Company entered into a management agreement with a stockholder, BCOM. BCOM agrees to provide certain management, strategic and financial consulting services to the Company as long as BCOM owns preferred shares equal to at least 13.33% of the voting stock of the Company. The agreement calls for monthly payments in the amount of $6,250. The Company paid $75,000 and $75,000 for these services for the years ended December 31, 2021 and 2020, respectively.

Stockholder Note Receivable

The Company entered into a $131,713 note receivable to Anthony J Drockton. The note bears interest at 4% and is due upon demand and is unsecured. Interest earned totaled $3,951 for the years ended December 31, 2021 and 2020. Interest receivable for the note was $11,973 and $5,869 at December 31, 2021 and 2020 respectively. The balance of the stockholder note receivable was $131,713 at December 31, 2021 and 2020.

Stockholder Notes Payable

Stockholder Loan Agreement and Note Payable

In January 2020, the Company entered into an agreement with MGI Enterprises LTD converting $1,500,000 of accounts payable to a note payable. The note was entered into to allow more time to finalize a stock purchase agreement between the Company and the vendor. The note is interest free and is not collateralized. In accordance with the loan agreement, all unpaid principal and interest shall be repaid either through the conversion of the note into preferred stock or through monthly payments beginning December 31, 2020 through December 31, 2021. No principal or interest was paid during 2020 and the note was subsequently converted to Series B Preferred Stock in March 2021. Accordingly, the balance of $1,500,000 has been classified as a long-term obligation at December 31, 2021 and 2020.

Item 6.

OTHER INFORMATION

Item 7.

FINANCIAL STATEMENTS 

HAMMITT, INC.

FINANCIAL STATEMENTS

Years Ended December 31, 2021 and 2020 (Restated)

INDEPENDENT AUDITOR'S REPORT

To the Stockholders of

Hammitt, Inc.

Opinion

We have audited the financial statements of Hammitt, Inc., which comprise the balance sheets as of December 31, 2021 and 2020, and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes to the financial statements.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Hammitt, Inc. as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Hammitt, Inc. and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

2020 Financial Statements Restated

As discussed in Note 20 to the financial statements, the 2020 financial statements have been restated to correct a misstatement. Our opinion is not modified with respect to this matter.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Hammitt, Inc.’s ability to continue as a going concern for one year after the date that the financial statements are issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with GAAS, we:

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.

Orem, Utah

April 26, 2022

HAMMITT, INC.

BALANCE SHEETS

December 31, 2021 and 2020 (Restated)

The accompanying notes are an integral part of these financial statements.

HAMMITT, INC.

STATEMENTS OF OPERATIONS  

Years Ended December 31, 2021 and 2020 (Restated)      

⁽¹⁾ Prior period amounts have been retroactively adjusted to reflect the six-for-one stock split in August 24, 2021.  See Note 15 for details.                

The accompanying notes are an integral part of these financial statements.

HAMMITT, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

Years Ended December 31, 2021 and 2020 (Restated)

⁽¹⁾ Prior period amounts have been retroactively adjusted to reflect the six-for-one stock split in August 24, 2021.  See Note 15 for details.

The accompanying notes are an integral part of these financial statements.

HAMMITT, INC.

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2021 and 2020 (Restated)      

The accompanying notes are an integral part of these financial statements.

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Organization and Purpose

Hammitt, Inc. was organized in the state of California on August 12, 2008. The Company designs, markets and sells luxury handbags and accessories. The Company’s products are sold through traditional retail sales channels and online direct to consumer.

During the year ended December 31, 2021, the board of directors approved a Regulation A+ Tier II offering of up to $25 million shares of Class B Common Stock.

This summary of significant accounting policies of Hammitt, Inc. (the Company) is presented to assist in the understanding of the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the presentation of the financial statements.

Accounts Receivable

Accounts receivable are recorded at the invoiced amounts and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience. The Company reviews its allowance for doubtful accounts annually. All account balances are reviewed on an individual basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Trade accounts receivable is presented net of an allowance for doubtful accounts of $6,577 and $42,971 at December 31, 2021 and 2020, respectively.

Inventories

Inventories are stated at the lower of cost or net realizable value using the first-in first-out method. The Company reviews inventory for indicators of impairment and records an allowance as deemed necessary. The Company has recorded a reserve for obsolete and slow moving inventories of $25,000 at December 31, 2021 and 2020.

Prepaid Expenses

The Company has made payments for trade shows and other consumables that will be received, consumed or used in a future period.

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives:

Expenditures for maintenance and repairs are expensed when incurred, and betterments which extend the economic useful life of an asset are capitalized. Gains and losses on the disposal of property and equipment are recorded in other income.

Intangible Assets

The Company’s intangible assets consist of certain capitalized costs associated with software and trademarks. Website upgrades and software upgrades are being amortized over their estimated economic life of 3 years. The trademarks have an infinite life and are not being amortized.

Revenue Recognition

Revenue is recognized when obligations under the terms of a contract (purchase orders) with customers are satisfied; generally, this occurs with the transfer of control of our products. Revenue is measured as the amount of consideration we expect to receive in exchange for the transferring of goods. The Company records amounts billed to customers related to shipping and handling as revenue. Shipping and handling costs are recognized in cost of sales. The Company recognizes revenue as of a point in time when the products have been shipped or at point-of-sale at physical store locations. Revenues are recorded net of estimated returns. The Company records a reserve obligation for estimated returns and an associated right of return asset. The reserve for refunds liability is included on a separate line of the balance sheet and the right of return asset is included in “prepaid expenses and other current assets” on the balance sheet (see Note 4). Returns are estimated by developing an expected value based on historical experience.

Adoption of New Accounting Standard

On January 1, 2020, the Company adopted the Financial Accounting Standards Board Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. The Company adopted Topic 606 using the modified retrospective transition method only with respect to contracts not completed at the date of adoption. We have developed the additional expanded disclosures required.

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

The cumulative effect of the changes made to our Consolidated Balance Sheet as of January 1, 2020, for the adoption of Topic 606, were as follows (see Note 20):

The Company adopted ASU No. 2016-02 Leases (Topic 842) as of January 1, 2020, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the application date. In addition, the Company elected the available practical expedients permitted under the transaction guidance within the new standard. During the year ended December 31, 2020, no significant leases existed. The adoption of the new standard did not have a material impact on the Company’s balance sheets, statements of operations, changes in stockholders’ deficit, and cash flows as of January 1, 2020.

Recently Issued Accounting Pronouncements

The Company has considered all new accounting pronouncements and have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition or cash flows based on current information.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances in making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statement and tax basis of assets and liabilities as measured by the currently enacted tax rates in effect for the years in which those differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in other income in the statements of operations.

The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits in progress for any tax periods. Management believes it is no longer subject to selection for income tax examinations for years prior to 2018.

Stock-based Compensation

The Company issues equity-settled, stock-based payments to certain employees. Equity-settled, stock-based payments are measured at the fair value of the equity instruments at the date of grant. Stock-based awards are expensed on a straight-line basis over the vesting period, based on estimates of the number of instruments expected to vest.

NOTE 2 – FAIR VALUE MEASUREMENTS

The Company reports its fair value measures using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy, established by generally accepted accounting principles, requires that entities maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:

Level 1. Quoted prices for identical assets or liabilities in active markets to which the Company has access at the measurement date.

Level 2. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3. Unobservable inputs for the asset or liability. Unobservable inputs should be used to measure fair value to the extent that observable inputs are not available.

The primary uses of fair value measures in the Company’s financial statements relate to stock-based compensation. Stock-based compensation is valued using Level 3 fair value inputs.

NOTE 3 – INVENTORIES

Inventories consist of the following at December 31, 2021 and 2020:

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following at December 31, 2021 and 2020:

NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2021 and 2020:

Depreciation expense totals $138,417 and $118,322 for the years ended December 31, 2021 and 2020, respectively.

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 6 – INTANGIBLE ASSETS

The gross carrying amount and associated accumulated amortization of intangible assets is as follows at December 31, 2021 and 2020:

Amortization expense for each of the years ended December 31, 2021 and 2020, totaled $129,598 and $37,309, respectively. Software development in the amount of $166,543 had not been implemented at December 31, 2021, and amortization has not begun. Estimated amortization for future years is as follows:

NOTE 7 – ACCRUED EXPENSES

Accrued expenses consist of the following at December 31, 2021 and 2020:

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 8 – LINE OF CREDIT

The Company maintains a $4,000,000 line of credit with a financial institution with an interest rate of 10.8%. Advances on the line of credit can be made up to 85% of eligible accounts receivable and 70% of eligible finished goods inventory. The carrying amount of accounts receivable that served as collateral totaled $2,602,005 and $1,538,242 at December 31, 2021 and 2020, respectively. The carrying amount of accounts receivable and finished goods inventory that served as collateral totaled $5,630,236 and $2,499,496 at December 31, 2021 and 2020, respectively. The line of credit requires monthly payments of accrued interest and a lump sum payment of principal and interest at maturity. The line of credit matures November 20, 2023. The Company had an outstanding balance on the line of credit of $3,895,922 and $2,166,031 at December 31, 2021 and 2020, respectively.

In conjunction with the line of credit, the Company issued warrants. The warrants are exercisable for 545,454 shares of Class B Common Stock at an exercise price of $0.3667 per share. The warrants, which expire November 20, 2025, were assigned a value of $9,769, estimated using the Black-Scholes valuation model. The following assumptions were used to determine the fair value of the warrants using the Black-Scholes valuation model:

Management determined the value of warrants was insignificant and amortized the full amount to interest expense during 2021 in the amount of $9,769. In 2022, the Company refinanced the line of credit. The warrant obligations were not impacted by the refinance.

NOTE 9 – SHORT-TERM NOTE PAYABLE

In March 2020, the Company entered into a $500,000 note payable with a vendor. The note bears interest at 10% and is not collateralized. Equal monthly interest payments began in January 2021. The note matures in January 2023.

NOTE 10 – LONG-TERM OBLIGATIONS

In January 2020, the Company entered into an agreement with a vendor converting $1,500,000 of accounts payable to a note payable. The note was entered into to allow more time to finalize a stock purchase agreement between the Company and the vendor. The note bore interest at 10% and was not collateralized. In accordance with the loan agreement, all unpaid principal and interest shall be repaid either through the conversion of the note into preferred stock or through monthly payments beginning December 31, 2020 through December 31, 2021. No principal or interest was paid during 2020 and the note was converted to Series B Preferred Stock in March 2021. Accordingly, the balance of $1,500,000 has been classified as a long-term obligation at December 31, 2020.

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 11 – SMALL BUSINESS ADMINISTRATION’S “PAYCHECK PROTECTION PROGRAM” (PPP)

In April 2020, the Company received a $484,493 loan via the Small Business Administration’s “Paycheck Protection Program” (PPP). The loan was intended to help the Company continue to fund payroll, rent, and utility payments for a twenty-four-week period. As per the rules of the PPP, the funds used for the previously mentioned expenses could become forgivable and would not need to be repaid. On December 3, 2020, the Company received forgiveness of all principal and interest payments for the PPP loan.

NOTE 12 – INCOME TAXES

Income tax (expense) benefit for the years ended December 31, 2021 and 2020, consist of the following:

Deferred tax assets consist of the following at December 31, 2021 and 2020:

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 13 – EQUITY

The equity of the Company is comprised of classes of equity divided into Class A Common Stock, Class B Common Stock, Class C Common Stock, Class A Preferred Stock, and Class B Preferred Stock.

Common Stock

Common Stock has Class A Common Stock, Class B Common Stock and Class C Common Stock. Except as otherwise required by law, the Class A Common Stock, Class B Common Stock, and Class C Common Stock have identical rights, powers and preferences, including rights to dividends and in liquidation. Class A Common Stock have the right to one vote per share whereas Class B Common Stock does not have any voting rights. Class C Common Stock have the right to three votes per share and are not assignable or transferable without first converting into Class A Common Stock, except by will or by the laws of descent and distribution. Each share of Class A Common Stock is convertible, at the option of the holder thereof, into one fully paid and non-assessable share of Class B Common Stock. Each share of Class C Common Stock is convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into one fully paid and non-assessable share of Class A Common Stock.

Preferred Stock

Class A Preferred Stock and Class B Preferred Stock are convertible, at the option of the holder, at any time without payment of additional consideration into the number of shares of Class A Common Stock as determined by the original issue price by the Class A conversion price in effect at the time of conversion, adjusted for the effects of any dilution. The Class A Conversion Price is equal to $0.1320. The Class B Conversion Price is equal to $0.2203. Conversion Prices and the rate at which shares of Preferred Stock may be converted into shares of Class A Common Stock is subject to adjustment. Preferred stockholders are entitled to the number of votes and dividends equal to the number of common shares into which the preferred stock is convertible. Preferred stock does not carry an annual dividend obligation. Preferred stock has preference over common stock in the case of liquidation. Preferred stock is required to receive or simultaneously receive a dividend on each outstanding share of Preferred Stock in an amount at least equal to any dividend on shares of any other class or series of capital stock of the Company.

Stock Split

On August 17, 2021, the Company’s board of directors approved the adoption of the Company’s Fourth Amended and Restated Articles of Incorporation, which increased the total number of shares of common stock and preferred stock that the Company is authorized to issue as follows:

HAMMITT, INC.

NOTES TO FINANCIAL STATEMENTS

The Fourth Amended and Restated Articles of Incorporation became effective on August 24, 2021. Effective August 24, 2021, the Company’s board of directors authorized a six-for-one split of the common stock and preferred stock. Accordingly, all references to numbers of common and preferred shares and per-share data in the financial statements have been adjusted to reflect the stock split on a retroactive basis. At the same time as the stock split, the board of directors authorized more shares of Class B Common Stock equal to the number of shares shown above.

NOTE 14 – STOCK-BASED COMPENSATION

Stock Option Grants

The Company’s Board of Directors has approved stock option grants to key employees to acquire the Company’s common stock. The awards vest over a 3-year period and have a grant date contractual life of 10 years. Compensation cost is recognized on a straight-line basis over the vesting period.

The following represents stock option activity during the years ended December 31, 2021 and 2020: