Stran & Company, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Stran provides outsourced marketing solutions, including branded merchandise, e-commerce, fulfillment, and loyalty programs. Results are unaudited and consolidated.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Sales | $12.26 million | $7.54 million |
| Gross profit / margin | $3.22 million / 26.3% | $2.29 million / 30.4% |
| Operating loss | $806,053 | $353,749 |
| Net loss | $545,814 | $290,085 |
| Operating cash flow | $7.10 million | $38,670 |
| Cash at period end | $40.00 million | $514,104 |
- Cost of sales was $9.04 million, or 73.7% of sales, versus 69.6% a year earlier. G&A was $4.02 million, or 32.8% of sales, compared with $2.65 million, or 35.1%.
- Cash included approximately $10.0 million of reward-program deposits restricted to program obligations; management described approximately $30.0 million as available for other uses.
- The company had no borrowings on its $7.0 million secured, demand line of credit. It reported $162,358 due under a Wildman seller note, contingent earn-out liabilities totaling about $3.06 million, and lease liabilities totaling about $1.02 million.
Changes versus the prior comparable period
- Sales increased 62.5%. Management attributed growth to higher spending by existing customers, new customers, and the January 2022 G.A.P. Promotions asset acquisition. The acquisition contributed approximately $0.9 million of Q1 sales; management reported organic recurring sales growth of 50.8%.
- Gross margin declined by about 4.1 percentage points as purchases and freight costs grew faster than sales. Management cited higher input costs, freight expense, and supply-chain constraints.
- Operating expenses rose 52.1%, driven by acquisition-related costs, implementation of a NetSuite ERP system, public-company expenses, and organic growth. The net loss widened to $545,814.
- Operating cash flow rose sharply, but included a $10.0 million increase in the reward-program liability. Cash flow therefore should not be read as solely reflecting earnings or freely available cash.
Outlook, risks, and unusual items
- Management said it expected reopening, in-person events, and pent-up demand to support sales, while expecting pandemic-related effects, elevated freight and raw-material costs, and supply-chain challenges to continue through the remainder of 2022. No quantified revenue or earnings guidance was provided.
- Management believes cash resources will cover anticipated operating needs and obligations through 2022 and beyond, but notes that expansion, acquisitions, or changing conditions could require additional financing.
- The January 2022 G.A.P. acquisition had an aggregate purchase price of approximately $3.25 million, funded with cash, restricted stock, and contingent consideration. Earn-out payments and the secured line’s demand feature and covenants are relevant obligations and constraints.
- There were 10.07 million warrants outstanding at quarter-end. Certain private-placement warrants have downward exercise-price adjustment provisions that could reduce the price to $1.00 per share if applicable, creating potential dilution.
- COVID-19 effects, freight and supply-chain disruption, customer demand, and customer concentration are identified risks. One customer accounted for approximately 12.3% of Q1 sales and 16.8% of accounts receivable.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and no material changes in internal control over financial reporting; management said disclosure controls were effective. It qualifies as an emerging growth company and uses the extended transition period for accounting standards.
Important facts for investors to verify
- Reconcile the reported diluted loss per share of $0.02 with basic loss per share of $0.03 and the weighted-average share counts. The filing reports a larger diluted share count despite a net loss; review the EPS calculation and warrant/option treatment.
- Assess how much of the reported $40.0 million cash balance is restricted for customer reward programs and the timing and terms of those obligations.
- Track whether margin pressure from product costs and freight persists, and whether the G.A.P. acquisition contributes as expected after integration costs.
- Review earn-out estimates and payment terms for both acquisitions, the line-of-credit covenants and demand provisions, and potential dilution from outstanding warrants and equity awards.
- Monitor the effects of customer concentration, supply-chain conditions, and COVID-related demand changes; the filing provides no quantified forward guidance.