ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis summarizes
the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented
below. The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto
included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as
well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed
in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report,
particularly in the sections titled Item 1A. “Risk Factors” and “Introductory Notes – Note Regarding
Forward-Looking Statements.”
Overview
We are an outsourced marketing solutions provider
that sells branded products to customers. We purchase products and branding through various third-party manufacturers and decorators and
resell the finished goods to customers.
In addition to selling branded products, we offer
clients custom sourcing capabilities; a flexible and customizable e-commerce solution for promoting branded merchandise and other promotional
products, managing promotional loyalty and incentives, print collateral, and event assets, order and inventory management, and designing
and hosting online retail popup shops, fixed public retail online stores, and online business-to-business service offerings; creative
and merchandising services; warehousing/fulfillment and distribution; print-on-demand; kitting; POS 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 ended December 31, 2024 and 2023,
program clients accounted for 83.3% and 81.4% 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 8.8% year-over year in 2024 compared
to 2023, which we believe was primarily due to higher spending from existing clients
as well as business from new customers. Additionally, we benefited from the acquisition of the assets of T
R Miller in June 2023, and the Gander Group Assets in August 2024, respectively.
As of December 31, 2024,
we had approximately $55.1 million of total assets with approximately $31.6 million of total stockholders’ equity.
Recent Developments
Lease Agreement
On January 10, 2025, the Company entered into
a seven-year lease agreement for new office space in North Quincy, Massachusetts. The Company’s existing lease agreement for its office
space expires May 31, 2025. The new lease term begins on June 1, 2025 and expires on May 31, 2032 with an option to extend the lease an
additional five years. The lease contains an initial base rent of approximately $21 thousand per month with 2.2% - 2.5% annual escalations,
plus a percentage of taxes and operating expenses incurred by the lessor in connection with the ownership and management of the property.
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Emerging Growth Company and Smaller Reporting
Company
We qualify as an “emerging growth company”
under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely
on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
In addition, Section 107 of the JOBS Act also
provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can delay
the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take
advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies
that comply with such new or revised accounting standards.
We will remain an emerging growth company until
the earliest of (i) the last day of the fiscal year following the fifth anniversary of the Company’s initial public offering, (ii) the
last day of the first fiscal year in which our total annual gross revenues are $1.07 billion or more, (iii) 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 $700.0 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 $1.0 billion
in non-convertible debt during the preceding three year period.
To the extent that we continue to qualify as a
“smaller reporting company,” as such term is defined in Rule 12b-2 under the Exchange Act, after we cease to qualify as an
emerging growth company, certain of the exemptions and accommodations available to us as an emerging growth company may continue to be
available to us as a smaller reporting company, including as to: (i) the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley
Act; (ii) scaled executive compensation disclosures; (iii) presenting three years of audited financial statements; and (iv) compliance
with certain greenhouse gas emissions disclosure and related third-party assurance requirements.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by
the following factors:
● our ability to acquire new customers or retain existing customers;
● our ability to offer competitive product pricing;
● our ability to broaden product offerings;
● industry demand and competition;
● our ability to leverage technology and use and develop efficient processes;
● our ability to attract and retain talented employees;
● market conditions and our market position.
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Results of Operations
Comparison of Years Ended December 31, 2024
and 2023
The following table sets forth key components
of our results of operations during the years ended December 31, 2024 and 2023 both in dollars and as a percentage of our revenues.
Years Ended December 31,
Amount (in thousands) % of Revenues Amount (in thousands) % of Revenues
SALES
COST OF SALES:
Cost of sales - related parties 354 0.4 % 656 0.9 %
OPERATING EXPENSES:
Goodwill impairment — — % 810 1.1 %
OTHER INCOME:
Change in fair value of contingent earn-out liability 208 0.3 % 65 0.1 %
LOSS BEFORE INCOME TAXES (4,135 ) (5.0 )% (344 ) (0.5 )%
Provision for income taxes 5 — % 41 0.1 %
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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. Sales by segment and in total were as follows (in thousands):
Year Ended Year Ended Increase / (Decrease)
Our total
sales increased 8.8% to approximately $82.7 million
for the year ended December 31, 2024, from approximately $76.0 million
for the year ended December 31, 2023. Sales by our Stran segment decreased to
approximately $72.7 million for the year ended December 31, 2024 from approximately $76.0 million for the year ended December 31,
2023. Sales by our SLS segment (which consists of the former Gander Group business) increased to
approximately $9.9 million for the year ended December 31, 2024 from $0 for the year ended December 31, 2023. For the Stran segment,
the decrease in sales was primarily due to lower spending from new and existing clients. For the SLS segment, the increase in sales was
due to the acquisition of the Gander Group Assets in August 2024.
Cost
of Sales
Cost of sales by segment and in total were as
follows (in thousands):
Year Ended Year Ended Increase / (Decrease)
Our total
cost of sales increased 11.1% to approximately $56.8 million
for the year ended December 31, 2024, from approximately $51.1 million
for the year ended December 31, 2023. As a percentage of sales, total cost of sales increased
to 68.8% for the year ended December 31, 2024 from 67.3% for the year ended December
31, 2023. Cost of sales by our Stran segment decreased to approximately $49.0 million for
the year ended December 31, 2024 from approximately $51.1 million for the year ended December 31, 2023. Cost of sales
by our SLS segment increased to approximately $7.9 million for the year ended December 31, 2024 from $0 for the year ended December
31, 2023. The increase in the dollar amount of total cost of sales was primarily due to the increase in sales of 8.8% from period to period.
For the Stran segment, the decrease was primarily due to a decrease in sales of approximately $3.3
million for the reasons described above. For the SLS segment, the increase was due to the
acquisition of the Gander Group Assets in August 2024.
Gross
Profit
Gross profit and gross margin percentages by segment
and in total were as follows (in thousands):
Year Ended Year Ended Increase / (Decrease)
Gross profit
consists of sales less total cost of sales. Our total gross profit increased 3.9% to approximately
$25.8 million, or 31.2% of sales, for
the year ended December 31, 2024, from approximately $24.9 million,
or 32.7% of sales, for the year ended December 31, 2023.
Gross profit of our Stran segment decreased to approximately $23.7 million for the year ended December 31, 2024 from approximately
$24.9 million for the year ended December 31, 2023. Gross profit of our SLS segment increased to
approximately $2.1 million for the year ended December 31, 2024 from $0 for the year ended December 31, 2023. The
increase in the dollar amount of total gross profit was primarily due to the acquisition
of the Gander Group Assets in August 2024. For the Stran segment, the decrease in the dollar amount of gross profit was due to a decrease
in sales of approximately $3.3 million for the reasons described above, which was partially
offset by a decrease in cost of sales of approximately $2.2 million for the reasons described
above. For the SLS segment, the increase in the dollar amount of gross profit was
due to the acquisition of the Gander Group Assets in August 2024. The decrease in total gross profit
margin to 31.2% for the year ended December 31, 2024 compared to 32.7% for the year ended December 31, 2023 was primarily due to
the acquisition of the Gander Group Assets in August 2024, which operates at a lower gross margin than the Stran segment. The
gross profit margin for the Stran segment remained unchanged at 32.7% for the years ended December 31, 2024 and 2023. The
gross profit margin for the SLS segment was 20.8% for the year ended December 31, 2024.
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Operating
Expenses
Operating expenses by segment and in total were
as follows (in thousands):
Year Ended Year Ended Increase / (Decrease)
Operating
expenses consist of general and administrative expenses. Our total operating expenses increased 17.6% to
approximately $30.7 million for the year ended December 31, 2024,
from approximately $26.1 million for the year ended December 31, 2023.
Operating expenses of our Stran segment increased to approximately $27.6 million for the year ended December 31, 2024 from approximately
$26.1 million for the year ended December 31, 2023. Operating expenses of our SLS segment increased
to approximately $3.1 million for the year ended December 31, 2024 from $0 for the year ended December 31, 2023. As
a percentage of sales, operating expenses increased to 37.2% for the year ended December 31, 2024,
from 34.4% for the year ended December 31, 2023. As a percentage of sales, operating expenses
of our Stran segment increased to 37.9% for the year ended December 31, 2024 from 34.4% for the year ended December 31, 2023. As
a percentage of sales, operating expenses of our SLS segment were 31.4% for the year ended December 31, 2024. For
the Stran segment, the increase in the dollar amount of operating expenses was primarily due to expenses related to Stran’s NetSuite enterprise
resource planning system implementation, acquisition and integration of the Gander Group Assets, and legal and accounting expenses related
to the re-audit of historical financial statements. For the SLS segment, the increase in the dollar amount of operating expenses
was due to the acquisition of the Gander Group Assets in August 2024.
Other
Income
Other income
consists of other income, interest income, change in fair value of contingent earn-out liability, and realized gain on investments. Our
other income, net was approximately $38 thousand for the year ended December 31, 2024,
compared to approximately $186 thousand for the year ended December 31, 2023. This
change was primarily due to an increase in noncash accretion expense in 2024 relative to 2023, related to certain installment payment
liabilities. Our interest income was approximately $305 thousand
for the year ended December 31, 2024, compared to approximately $570 thousand
for the year ended December 31, 2023. This change was primarily due to a decrease in interest
generated from investments. Our change in fair value of contingent earn-out liability was approximately $208 thousand for the year
ended December 31, 2024, compared to approximately $65 thousand for the year ended December 31, 2023. This change was primarily due to
an update to the estimated fair value of the remaining contingent earn-out liabilities related to business combinations. Our realized
gain on investments was approximately $208 thousand for the year ended December 31, 2024, compared to
approximately $103 thousand for the year ended December 31, 2023. This change was primarily
due to the sale of investments above their initial value.
Income Tax Provision
Income tax provision reflects statutory tax rates
in the jurisdictions in which we operate adjusted for permanent book/tax differences.
Income tax provision for the year ended December
31, 2024 was approximately $5 thousand compared to income tax provision of approximately $41 thousand for the year ended December 31,
2023. Income tax provision for the year ended December 31, 2024 accounted for 0.1% of loss before income taxes of approximately $4.1 million.
Income tax provision for the year ended December 31, 2023 accounted for 11.9% of income before income taxes of approximately $0.3 million.
As of December 31, 2024 and 2023, the Company recorded an income tax provision comprised of state income taxes and a valuation allowance
against its net deferred tax assets. The Company recorded a valuation allowance due to a cumulative loss over a three-year period.
Based on management’s expectations of future
earnings and recognition of a valuation allowance, we anticipate that our effective tax rate will remain similar to the rate recorded
in 2024.
Net Loss
Our net loss for the year ended December 31, 2024
was approximately $4.1 million, compared to approximately $0.4 million for the year ended December 31, 2023. This change was primarily
due to the increase in operating expenses along with the decrease in gross profit for the reasons described above.
Liquidity and Capital Resources
As of December 31,
2024, we had cash and cash equivalents of approximately $9.4 million
and investments of approximately $8.9 million. We have financed our operations primarily
through cash generated from our initial public offering of common stock and warrants to purchase common stock in November 2021, our private
placement of common stock and warrants to purchase common stock in December 2021, and operations.
We believe that our current levels of cash will
be sufficient to meet our anticipated cash needs for our operations and cash payment obligations for both the 12 months ended December
31, 2025 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.
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Summary of Cash Flows
The following table provides detailed information
about our net cash flows for the years ended December 31, 2024 and 2023.
Years Ended December 31,
Net cash provided by (used in) operating activities $ 2,760 $ (2,550 )
Net cash used in investing activities (533 ) (3,736 )
Net cash used in financing activities (928 ) (909 )
Net increase (decrease) in cash 1,299 (7,195 )
Cash and cash equivalents - beginning 8,059 15,254
Cash and cash equivalents - ending $ 9,358 $ 8,059
Net cash provided by operating activities was
approximately $2.8 million for the year ended December 31, 2024, as compared to net cash used in operating activities of approximately
$2.6 million for the year ended December 31, 2023. The change was primarily due to an increase in rewards program liability.
Net cash used in investing activities was approximately
$0.5 million for the year ended December 31, 2024, as compared to net cash used in investing activities of approximately $3.7 million
for the year ended December 31, 2023. The change was primarily due to increased proceeds from the sale of investments, partially offset
by increased purchases of investments.
Net cash used in financing activities was approximately $0.9 million
for the year ended December 31, 2024, as compared to approximately $0.9 million for the year ended December 31, 2023. The increase in
net cash used in financing activities was primarily due to reduced payments of contingent earn-out liabilities of approximately $0.6 million
and increased payments of installment payment liabilities of approximately $0.6 million.
Debt
On November
22, 2021, we entered into the Revolving Demand Line of Credit Loan Agreement, dated as of November 22, 2021 (the “Initial
Loan Agreement”), between the Company and Salem Five Cents Savings Bank, a Massachusetts savings bank (“Salem Five
Cents”), for a revolving line of credit (the “Revolving Line of Credit”), consisting
of aggregate loans of up to $7.0 million, evidenced by the Revolving Demand Line of Credit Note, dated November 22, 2021, by the
Company in favor of Salem Five Cents (the “Demand Note”).
The Revolving Line of Credit and the Demand Note were secured by a first priority security interest in all assets and property of the
Company, as provided in the Security Agreement, dated November 22, 2021, between Salem Five Cents and the Company (the “Security
Agreement”), and as described below. Under a Commercial Loan Modification Agreement, dated as of February 12, 2024, between
Salem Five Cents and the Company (the “Loan Modification Agreement”), certain
terms of the Initial Loan Agreement were modified as of February 12, 2024, as described below
(as amended, the “Loan Agreement” and together with the Security Agreement and the Demand
Note, the “Loan Documents”).
The amount
available under the Revolving Line of Credit was the lesser of $7.0 million or the sum of (x) eighty percent (80.0%) of the then-outstanding
amount of Eligible Accounts (as defined below), plus (y) fifty percent (50.0%) of Eligible Inventory (as defined below); minus one hundred
(100.0%) percent of the aggregate amount then drawn under the Revolving Line of Credit for the account of the Company. In addition, advances
based upon Eligible Inventory were required to be capped at all times at $2.0 million. “Eligible Accounts” was defined as
accounts that meet a number of requirements, including, unless otherwise approved by Salem Five Cents, 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 was 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 were 90 or more days past invoice date; or otherwise not deemed acceptable by Salem Five Cents in accordance with its
normal credit policies. “Eligible Inventory” was defined as all finished goods, work in progress and raw materials and component
parts of inventory owned by the Company. Eligible Inventory did not include any inventory held on consignment or not otherwise owned by
the Company; any inventory which had been returned by a customer or was damaged or subject to any legal encumbrances other than a first
priority security interest held by the Company; any inventory which was not in the possession of the Company; any inventory which was
held by the Company on property leased by the Company unless Salem Five Cents had received a Landlord’s Waiver and Consent from
the lessor of such property satisfactory to Salem Five Cents; any inventory which was not located within the United States; any inventory
which Salem Five Cents reasonably deemed to be obsolete or non-marketable; and any inventory not subject to a first priority fully perfected
lien held by Salem Five Cents.
48
The Revolving
Line of Credit was subject to interest at the prime rate plus 0.5% per annum. The Company was required to repay interest on the Revolving
Line of Credit proceeds on a monthly basis. The Revolving Line of Credit continued indefinitely, subject to Salem Five Cents’ demand
rights and the Company’s ongoing affirmative and other obligations under the Loan Documents, as summarized below.
The Company
could freely draw upon the Revolving Line of Credit subject to Salem Five Cents’ right to demand complete repayment of the Revolving
Line of Credit at any time. Late payments were subject to a late payment charge of 5.0%. In the event of failure to repay the loan after
Salem Five Cents made demand for full repayment, the interest rate would increase by 10.0%. The Demand Note could be prepaid at any time
without penalty. Salem Five Cents could assign the Demand Note without the Company’s consent.
Under the
Security Agreement and the other Loan Documents, the Company granted Salem Five Cents a first priority security interest in all of its
assets, including both assets owned as of the date of the Revolving Line of Credit and afterwards, as collateral for full repayment of
the Revolving Line of Credit. Salem Five Cents had the right to 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 Revolving Line of Credit, Salem Five Cents could accelerate repayment of the Revolving 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 was required to pay for all of Salem Five Cents’s reasonable legal fees and expenses incurred to
enforce its rights under the Loan Documents.
Under the
Initial Loan Agreement, the Company was required to continue its current business of outsourced marketing solutions, and, without the
prior consent of Salem Five Cents, the Company could not acquire in whole or in part any other company or business or engage in any other
business or open any other locations. The Company was required to use the proceeds of the Revolving Line of Credit only in connection
with the general and ordinary operations of its business and for the following purpose: general working capital for accounts receivable
and inventory purchases.
The Revolving
Line of Credit was also subject to ongoing affirmative obligations of the Company, including: Making punctual repayment of the Revolving
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 Salem Five Cents; allowing Salem Five Cents to inspect its accounting books and records; furnishing audited,
quarterly, monthly and other financial statements to Salem Five Cents; prior to the date of the Loan Modification Agreement, making payment
of Salem Five Cents’ reasonable expenses for a field exam in 2022; and following the date of the Loan Modification Agreement, making
payment of Lender’s reasonable expenses for a field exam in 2024; allowing Salem Five Cents 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 Salem Five
Cents as Mortgagee/Loss Payee; causing management contracts for the Company’s properties to be subordinated to the rights of Salem
Five Cents; and allowing no change of property management company without the prior written consent of Salem Five Cents.
Prior to
the date of the Loan Modification Agreement, the Revolving Line of Credit was further subject to the following financial requirements:
(a) Debt Service Coverage Ratio: 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 thresholds: The Company was required to meet the following minimum
net worth thresholds: $2,000,000 at December 31, 2021, $2,750,000 at December 31, 2022, and $3,500,000 at December 31, 2023.
49
Following the date of the Loan Modification Agreement,
the Revolving Line of Credit was no longer subject to the Company’s compliance with the Debt Service Coverage Ratio and the Minimum
Net Worth terms described above. Instead, the Company was required to meet the following financial requirements:
The Company
also could 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. After the
date of the Loan Modification Agreement, any future contingent earn-out obligations were required to be subordinated to the Loan Documents.
In connection
with the Initial Loan Agreement, on November 22, 2021, the Company, Salem Five Cents 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 Salem Five Cents (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 Salem Five Cents’ enforcement of its rights in the Collateral. The Warehouse Provider further agreed to provide notice to Salem
Five Cents of any default by the Company of its obligations as to the Warehouse Provider, and to give Salem Five Cents at least 30 days
to exercise its rights, which period could be extended by Salem Five Cents up to 60 days upon its payment of the per-diem rental amount.
After that period, unless the default had been cured by Salem Five Cents, the Warehouse Provider could dispose of such Collateral as it
deemed fit. Upon the receipt of written notice from Salem Five Cents and until such notice was rescinded, the Warehouse Provider was required
to honor only instructions from Salem Five Cents with respect to the Collateral, including, any direction from Salem Five Cents to dispose
of all or any portion of the Collateral at any time, without any further consent or instruction from Company.
On August 23, 2024, Stran Loyalty Solutions entered
into a factoring arrangement to provide accounts receivable financing to Stran Loyalty Solutions. In connection with the factoring arrangement,
the Company provided a secured guarantee of Stran Loyalty Solutions’ obligations under the factoring arrangement. In discussions
with Salem Five Cents prior to the establishment of the factoring arrangement, Salem Five Cents indicated that it would terminate the
Revolving Line of Credit because of a policy which prohibited it from agreeing to subordination of its security interest in the Company’s
assets.
Accordingly, on September 9, 2024, Salem Five
Cents delivered a letter (the “Termination Letter”) to the Company that stated that, effective August 26, 2024 (the “Termination
Date”), Salem Five Cents terminated all obligations under the Loan Agreement and the Demand Note. The Termination Letter further
stated that the Loan Agreement and the Demand Note and the Loan Documents shall no longer be considered in force or effect. The Company
had no funds drawn on the Revolving Line of Credit on the Termination Date.
As of December
31, 2024, the Revolving Line of Credit had been terminated. As of December 31, 2023, we had
not drawn any funds from the Revolving Line of Credit.
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Acquisition of Gander Group Assets
On August 23, 2024, Stran Loyalty Solutions entered
into a Secured Party Sale Agreement, dated as of August 23, 2024 (the “Sale Agreement”), between Stran Loyalty Solutions and
Sallyport Commercial Finance, LLC, a Delaware limited liability company (“Secured Party”), pursuant to which Stran Loyalty
Solutions agreed to purchase, on an as-is basis, all of the rights and interests of Gander Group, in and to the Gander Group Assets from
Secured Party as a private sale pursuant to Article 9 of the Uniform Commercial Code (the “Gander Group Transaction”).
Under the Sale Agreement, the aggregate consideration
for the Gander Group Assets consisted of (a) cash payments by Stran Loyalty Solutions to Secured Party of approximately $1.1 million (the
“Cash Purchase Price”), and (b) the assumption by Stran Loyalty Solutions of certain liabilities totaling approximately $5.5
million (the “Gander Group Assumed Liabilities”), subject to adjustment, at and following the Gander Group Transaction Closing
(as defined below), including the payment at the Gander Group Transaction Closing of $150 thousand to Warson Capital Partners, LLC, an
investment banking firm retained by Gander Group, for its fees and expenses with respect to the Gander Group Transaction, including the
marketing for sale of the Gander Group Assets (the “Transaction Expense Payment”).
At the consummation of the transactions contemplated
by the Sale Agreement (the “Gander Group Transaction Closing”), Stran Loyalty Solutions paid the Cash Purchase Price, including
the payment of the Transaction Expense Payment, and assumed the Gander Group Assumed Liabilities. As a result of the Gander Group Transaction
Closing, the Company indirectly acquired the Gander Group Assets, including all of the equity of Gander Group Louisiana, which became
a wholly-owned subsidiary of Stran Loyalty Solutions.
In addition, Stran Loyalty Solutions entered into
a Release Agreement, dated as of August 23, 2024, between Gander Group and Stran Loyalty Solutions (the “Release Agreement”).
Under the Release Agreement, Gander Group granted a full and complete waiver and release of Stran Loyalty Solutions and its affiliates
of any non-competition, non-solicitation, or similar restrictive covenants of any parties owed to Gander Group or any of its affiliates.
The Sale Agreement and the Release Agreement included
provisions for indemnification, reimbursement for returned items, handling of assets and liabilities during Gander Group’s wind-down,
and certain other matters.
Contractual Obligations
Property Leases
The following is a schedule by years of future
minimum lease payments (in thousands):
Total future non-cancelable minimum lease payments $ 800
Lease cost for the years ended December 31, 2024
and 2023 totaled approximately $0.7 million and $0.5 million, 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. As of December 31, 2024 and December
31, 2023, the Company had net deposits totaling approximately $6.0 million and $0.9 million, respectively.
Our other principal cash payment obligations have
consisted principally of obligations under the Revolving Line of Credit. As stated above, as of December 31, 2024 and December 31, 2023,
we had not drawn any funds from the Revolving Line of Credit under the Loan Documents.
Critical Accounting Estimates
We prepare our financial statements in accordance
with U.S. GAAP. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing
basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between
our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows
will be affected.
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We believe that the assumptions and estimates
associated with the valuation of goodwill and intangible assets have the greatest potential impact
on our financial statements. Additionally, when we acquire a business, we allocate the purchase price to the identifiable assets acquired
and liabilities assumed at their estimated fair values as of the respective acquisition date. The fair values of acquired intangible assets,
including customer relationships and trade names are determined using various valuation techniques, primarily utilizing various income-based
approaches. Significant assumptions used in these models include projected revenue growth rates, discount rates, customer retention rates
and royalty rates. These estimates require management’s judgment and are considered to be critical accounting estimates. Therefore,
we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies,
see the notes to our financial statements beginning on page F-1 of this Annual Report on Form 10-K.
Valuation of Goodwill and Intangible Assets
We perform an annual impairment review of our
goodwill during the fourth fiscal quarter of each year, and more frequently if we believe indicators of impairment exist. The process
of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. To review for impairment, we
first assess qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not
that the fair value of our reporting unit is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill,
whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific
factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions; (iii) current,
historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our
net book value. After assessing the totality of events and circumstances, if we determine that it is more likely than not that the fair
value of our reporting unit to which goodwill is assigned is greater than its carrying amount, no further assessment is performed. If
we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we calculate
the fair value of that reporting unit and compare the fair value to the reporting unit’s net book value.
Determining the fair value of a reporting unit
involves the use of significant estimates and assumptions. Our goodwill impairment test uses both the income approach and the market approach
to estimate a reporting unit’s fair value. The income approach is based on the discounted cash flow method that uses the reporting unit
estimates for forecasted future financial performance, including revenues, operating expenses, and taxes, as well as working capital and
capital asset requirements. These estimates are developed as part of our long-term planning process based on assumed market segment growth
rates and our assumed market segment share, estimated costs based on historical data and various internal estimates. Projected cash flows
are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost
of capital, as well as any risk unique to the subject cash flows. The market approach is based on weighting the financial multiples of
comparable companies and applying a control premium. A reporting unit’s carrying value represents the assignment of various assets and
liabilities, excluding certain corporate assets and liabilities, such as cash and debt.
We assess the impairment of long-lived assets,
including purchased property and equipment, right-of-use assets, and intangible assets, whenever events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review
include: (i) significant underperformance relative to historical or projected future operating results, (ii) significant changes in the
manner of our use of the acquired assets or the strategy for our overall business, or (iii) significant negative industry or economic
trends. The process of evaluating the potential impairment of long-lived assets under the accounting guidance on property and equipment
and intangible assets is also highly subjective and requires significant judgment. In order to estimate the fair value of long-lived assets,
we typically make various assumptions about the future prospects of our business or the part of our business to which the long-lived assets
relate. We also consider market factors specific to the business and estimate future cash flows to be generated by the business, which
requires significant judgment as it is based on assumptions about market demand for our products over a number of future years. Based
on these assumptions and estimates, we determine whether we need to take an impairment charge to reduce the value of the long-lived assets
stated on our consolidated balance sheets to reflect their estimated fair value. Assumptions and estimates about future values and remaining
useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors, such as the real
estate market, industry and economic trends, and internal factors, such as changes in our business strategy and our internal forecasts.
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, changes in assumptions
and estimates could materially impact our reported financial results.
Recent Accounting Pronouncements
For a discussion of recently adopted accounting
pronouncements, see Recently Issued Accounting Pronouncements in Note A.27 to our financial statements beginning on page F-1 of
this Annual Report on Form 10-K.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The full text of our audited consolidated financial
statements begins on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management,
with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) prior to the filing of this Annual Report on Form 10-K. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual
Report on Form 10-K, our disclosure controls and procedures were not effective due to the restatement of our previously issued
financial statements and corresponding material weaknesses described below.
Management’s Annual Report on Internal
Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f)
of the Exchange Act. Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation
of financial statements for external purposes in accordance with generally accepted account principles. All internal control systems,
no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the internal control
system are met.
Management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2024. In making this assessment, management
used the framework set forth in the report entitled Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal
control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication,
and (v) monitoring.
During this
assessment, management identified material weaknesses in our internal control over financial reporting that are discussed further below.
As a result of the material weaknesses, management concluded that our internal control over financial reporting was not effective as of
December 31, 2024.
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A material
weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented
on a timely basis. The following material weaknesses were identified:
Plan of Remediation of Material Weaknesses
in Internal Control Over Financial Reporting
As reported in this Annual Report on Form 10-K
for the fiscal year ended December 31, 2024, following the identification and communication of the material weaknesses described above,
management commenced remediation actions relating to these material weaknesses beginning in the fourth quarter of fiscal year 2024, as
follows:
The material weaknesses identified above will
not be considered fully remediated until these additional controls and procedures have operated effectively for a sufficient period of
time and management has concluded, through testing, that these controls are effective. Our management will monitor the effectiveness of
our remediation plans and will make changes management determines to be appropriate. If not remediated, these material weaknesses could
result in material misstatements to our annual or interim consolidated financial statements that may not be prevented or detected on a
timely basis or result in a delayed filing of required periodic reports. If we are unable to assert that our internal control over financial
reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our
common stock could be adversely affected, and we could become subject to litigation or investigations by Nasdaq, the SEC, or other regulatory
authorities, which could require additional financial and management resources.
This Annual
Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting. Pursuant to Item 308(b) of Regulation S-K, management’s report is not subject to attestation by our independent
registered public accounting firm because the Company is neither an “accelerated filer” nor a “large accelerated filer”
as those terms are defined by the SEC.
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Changes in Internal Control over Financial
Reporting
There were no changes in our internal control
over financial reporting during the quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting, except as described above.
Inherent Limitation on the Effectiveness of Internal Control
The effectiveness of any system of internal control
over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing,
operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of
internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not
absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you
that such improvements will be sufficient to provide us with effective internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
We have no information to disclose that was required to be disclosed
in a report on Form 8-K during the fourth quarter of fiscal year 2024 but was not reported.
None of our directors or “officers,”
as defined in Rule 16a-1(f) under the Exchange Act, adopted or terminated a Rule 10b5-1 trading plan or arrangement or a non-Rule 10b5-1
trading plan or arrangement, as defined in Item 408(c) of Regulation S-K, during the fiscal quarter ended December 31, 2024.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following sets forth information about our
directors and executive officers:
Name Age Position
Andrew Stranberg 53 Executive Chairman, Treasurer, Secretary, and Director
Andrew Shape 52 President, Chief Executive Officer and Director
David Browner 37 Chief Financial Officer
John Audibert 38 Vice President of Growth and Strategic Initiatives
Ian Wall 53 Chief Information Officer
Travis McCourt 41 Director
Alan Chippindale 66 Director
Alejandro Tani 52 Director
Ashley Marshall 40 Director
Andrew Stranberg co-founded the
Company and has served as our Executive Chairman since 1995. From 1995 to January 2020, Mr. Stranberg was also our Chief Executive Officer.
In 1995, Mr. Stranberg founded Stran Capital LLC, a family office, and has since been its Chief Executive Officer. From 1997 to 2016 Mr.
Stranberg served as Chairman of STRAN Technologies IT Services, LLC. From 2012 to November 2019, Mr. Stranberg was the founder and manager
of Stran Maritime LLC for a joint venture with Atlas Maritime Ltd., an international shipping company. Mr. Stranberg is a graduate of
the University of New Hampshire Peter T. Paul College of Business and Economics. We believe that Mr. Stranberg is qualified to serve on
our board of directors due to his deep knowledge of Stran and his long executive and board experience with us since his co-founding of
the Company.
Andrew
Shape is our co-founder and since 1996 has served as our President and director, and as our Chief Executive Officer since January
2020. From July 2018 to February 2021, Mr. Shape also served as the Chief Executive Officer and President and a director of Long Blockchain
Corp. (formerly OTC Pink: LBCC), in connection with a business co-managed with us for its subsidiary Stran Loyalty Group Inc., a Delaware
corporation. From June 2018 through December 2021, Mr. Shape served as a director for Naked Brand Group Limited (formerly Nasdaq: NAKD)
until the closing of its business combination with Cenntro Electric Group Limited (Nasdaq: CENN). Prior to forming Stran, from August
1995 to September 1996, Mr. Shape worked at Copithorne & Bellows Public Relations (a Porter Novelli company) as an Account Executive.
Mr. Shape holds a BA degree from the University of New Hampshire. We believe that Mr. Shape is qualified to serve on our board of directors
due to his deep knowledge of Stran, his industry expertise, and his experience as a director on other Nasdaq-listed companies.
David
Browner has been our Chief Financial Officer since March 2023 and was our Interim Chief Financial Officer from July 2022 to March
2023. From July 2021 to July 2022, Mr. Browner was our Controller. From November 2015 to July 2021, Mr. Browner was the Company’s
Accounting Manager. From July 2012 to November 2015, Mr. Browner was a staff accountant for the Company. Mr. Browner has a Master of Business
Administration in Accounting and a Bachelor of Business Administration from the University of Massachusetts Lowell.
John Audibert has been our Vice
President of Growth and Strategic Initiatives since March 2020. Mr. Audibert has over 12 years of investment banking, corporate finance
and strategy consulting experience. He has been the President of Josselin Capital Advisors, Inc., a company wholly-owned by John Audibert
(“JCA”), since October 2019, which provides consulting services to high-growth businesses. He was formerly President of Woodland
Way Advisors, Inc., a consulting firm, from January 2015 through December 2020. Mr. Audibert previously worked in the investment banking
group of Sandler O’Neill + Partners, L.P. where he provided merger and acquisition advisory as well as capital raising services
to middle-market clients. Prior to joining Sandler O’Neill, he was a strategic consultant at Putnam Associates. Mr. Audibert received
a bachelor’s degree with a concentration in finance from the Carroll School of Management at Boston College. Mr. Audibert was an
employee of the Company from March 2020 to May 2021, and since then has continued acting in his current capacity as an independent contractor.
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Ian
Wall has been our Chief Information Officer since January 2024. From April 2021 to November 2023, Mr. Wall was Senior Vice President
of Digital Transformation and Service Delivery at Digital Radius. From November 2019 to January 2021, Mr. Wall held several positions
at Bentley University, as Interim Vice President and Chief Information Officer from May 2020 to January 2021, and as Executive Director
from November 2019 to May 2020. From February 2016 to May 2020, Mr. Wall was Director, Enterprise Applications at Tufts University. From
September 2014 to November 2015, Mr. Wall was Director, Enterprise Business Intelligence at Vertex Pharmaceuticals. Mr. Wall received
a Masters in Science and Engineering Management from Tufts University Gordon Institute and a Bachelor of Arts in Liberal Arts from University
of Massachusetts Amherst.
Travis
McCourt has been a member of our board of directors since November 2021. In June 2014, he founded Conchoid Capital Fund where
he still serves as a principal. From May 2012 to December 2014, he was a Principal at the investment firm McCourt. From November 2007
to May 2012, he was the Vice President of Alternative Capital Markets at Goldman Sachs (NYSE: GS). From November 2004 to December 2007,