Stran & Company, Inc. — Q2 2023 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2023, compared with the same 2022 periods. Stran provides outsourced marketing solutions, including branded merchandise, e-commerce, fulfillment, and loyalty programs. Most revenue comes from product sales; program clients represented 81.6% of Q2 sales and 81.1% of first-half sales.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $17.47 million | $14.81 million | $33.25 million | $27.07 million |
| Gross profit / margin | $5.08 million / 29.1% | $3.76 million / 25.4% | $9.77 million / 29.4% | $6.98 million / 25.8% |
| Operating loss | $1.27 million | $0.47 million | $2.66 million | $1.28 million |
| Net loss | $0.84 million | $0.45 million | $1.53 million | $0.99 million |
| Basic and diluted loss per share | $0.05 | $0.02 | $0.08 | $0.03 |
For the six months, cash from operating activities was $2.33 million, versus cash used of $2.24 million in 2022. Investing activities used $1.72 million, primarily for acquisitions, investments, and property and equipment; financing activities used $0.59 million, mainly for contingent earn-out payments. Cash increased by $17,443 to $15.27 million.
At June 30, 2023, cash was $15.27 million and current investments were $10.28 million. Current assets were $49.63 million and current liabilities $19.49 million. Total assets were $63.11 million and stockholders’ equity was $37.97 million. The company reported no borrowings on its $7 million revolving line of credit. It had a $162,358 Wildman note payable and approximately $8.07 million in current and long-term contingent earn-out liabilities. The line is secured by substantially all company assets, bears interest at prime plus 0.5% (8.75% at quarter-end), and is payable on demand.
Changes and business developments
- Sales rose 18.0% in Q2 and 22.8% in the first half. Management attributed growth to higher spending by existing customers, new customers, and acquisitions.
- Management-defined recurring organic sales grew 11.1% in Q2 and 13.9% in the first half. Acquired businesses contributed approximately $3.1 million of Q2 sales and $5.5 million of first-half sales.
- Gross margin improved year over year in both periods, with lower cost of sales as a percentage of revenue.
- General and administrative expense increased 50.1% in Q2 and 50.6% in the first half. Management cited acquired-business costs, T R Miller closing and integration expenses, NetSuite ERP implementation, public-company costs, lead generation, and organic growth. Operating losses and net losses consequently increased.
- The June 2023 T R Miller asset acquisition had an aggregate purchase price of $6.67 million, including $2.12 million paid in cash and a $4.55 million contingent earn-out liability. Its acquired customer list is amortized over ten years.
Outlook, commentary, and risks
Management stated that available cash should meet anticipated operating needs and payment obligations for the 12 months ending June 30, 2024, and for the longer term. It noted that expansion, acquisitions, or changing business conditions could require additional funding; equity financing could dilute shareholders, while borrowing could increase obligations and constrain operations. No specific revenue or earnings guidance was provided. Management expects the effective tax rate to remain near the 21% federal rate, subject to state apportionment and discrete events.
Other items to monitor include customer and program-client concentration, the company’s dependence on acquisitions and customer retention, contingent earn-out payments, and the demand nature and covenants of the secured credit line. Two customers together generated approximately 21.4% of first-half revenue. The company reported no legal proceedings believed likely to have a material adverse effect, no material changes in internal control during the quarter, and effective disclosure controls. No repurchases occurred in Q2; $6.67 million remained under the authorized repurchase program. Management reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether margin gains can persist and whether G&A growth, acquisition integration, and ERP costs moderate enough to improve operating profitability.
- The acquired businesses’ subsequent revenue and gross profit, and the assumptions underlying earn-out liabilities, customer-list valuations, amortization, and impairment assessments.
- Cash available after considering the $8.88 million rewards-program liability, unearned revenue, lease payments, and acquisition-related obligations.
- The credit-line borrowing base, financial covenants, lender demand rights, and the company’s ability to access additional financing if needed.
- The potential dilution from outstanding warrants and stock options; the filing reports 10,074,195 warrants outstanding and describes potential downward exercise-price adjustments for PIPE warrants.
- The sustainability of customer concentration and program-client revenue, and the assumptions supporting deferred tax assets and management’s liquidity assessment.