Stran & Company, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited. Stran provides outsourced marketing solutions, including branded merchandise, e-commerce, fulfillment, print, and loyalty services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $10.95 million | $8.36 million | $27.08 million | $28.46 million |
| Gross profit | $3.72 million | $2.17 million | $8.16 million | $8.72 million |
| Gross margin | 34.0% | 25.9% | 30.1% | 30.6% |
| Operating income (loss) | $1.04 million | $0.09 million | $(0.17) million | $2.00 million |
| Net income (loss) | $0.72 million | $(0.23) million | $0.26 million | $1.55 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1.89) million | $(0.32) million |
Q3 sales increased 30.9% year over year; management attributed growth to higher spending by existing customers, new customers, and $1.9 million of Wildman acquisition sales. Management’s “recurring organic sales” measure rose 91.8% to $8.9 million. For the nine-month period, sales fell 4.9%, while management’s recurring organic sales measure increased 40.4% to $20.6 million. The company reported no major customers for the 2021 nine-month period.
Q3 gross margin improved substantially, but nine-month gross margin edged down. Freight costs rose 123.4% in Q3 and 92.9% year to date compared with the prior-year periods. Nine-month general and administrative expenses increased 23.6%, contributing to an operating loss.
Liquidity, debt and cash flow
- At September 30, cash was $797,428; current assets were $13.11 million and current liabilities were $12.99 million, leaving approximately $125,000 of working capital. Accounts receivable was $7.27 million and inventory was $3.91 million.
- Nine-month operating cash use was $1.89 million, investing cash use was $314,448, and financing provided $2.36 million. Cash increased by $150,193 from year-end 2020. Management attributed operating cash use in part to increased receivables and inventory.
- At September 30, the company had drawn $3.5 million on its Bank of America line of credit, which was due on demand and secured by substantially all assets. Long-term debt was $149,900, comprising the EIDL loan; the PPP loan was forgiven in full in June 2021. The company also reported $1.85 million in Wildman contingent earn-out liabilities and a $162,358 Wildman inventory note.
- Management reported $500,000 due to a stockholder, accruing interest at 5% compounded monthly; the company said it repaid the principal and accrued interest on November 22, 2021.
Material developments, outlook and risks
- Drivers and comparability: Nine-month 2020 sales included $10.1 million from the U.S. Census program and $3.7 million from personal protective equipment (PPE). In 2021 those sources contributed less than $2,000 and less than $200,000, respectively. Wildman contributed $6.3 million in 2021 nine-month sales. These items make reported year-over-year sales comparisons less representative of underlying demand.
- Unusual income: Nine-month other income of $776,440 primarily reflected forgiveness of the approximately $770,000 PPP loan. The Q3 discussion attributes other income in part to a gain relating to the Wildman contingent earn-out. The filing also reports a reduction in the earn-out payment obligation.
- Management outlook: Management cited increased customer inquiries and expected reopening and pent-up demand to support recovery, but provided no quantified revenue or earnings guidance. It warned of higher freight and raw-material costs, port congestion, supply-chain delays, and uncertainty from COVID-19 and customer spending.
- Post-period financing: The November 2021 IPO sold 4,987,951 shares and 4,987,951 warrants, generating approximately $18.75 million in net proceeds. On November 22, the company replaced its prior facility with a Salem Five demand revolver of up to $7 million, subject to borrowing-base limits, lender demand rights, financial covenants and restrictions, and a first-priority lien on company assets. The company stated it expected available cash, with or without IPO proceeds, to cover anticipated needs for at least 12 months.
- Other developments: The company disclosed substantial executive compensation arrangements and post-IPO equity grants, including 1,339,000 options and 80,568 restricted shares granted under its equity plan in November 2021. These awards and outstanding warrants may dilute shareholders. The filing reports effective disclosure controls and no material legal proceedings known to management.
Important facts for investors to verify
- The cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months; verify the reason and whether any filing obligations were overdue.
- Reconcile the balance sheet’s classification of the $500,000 stockholder payable as current with the note’s description of it as long-term, and confirm the reported November repayment.
- Assess the quality and sustainability of earnings, including the PPP forgiveness, Wildman earn-out adjustments, acquisition contribution, and management’s non-GAAP-style recurring organic sales comparisons.
- Review the Salem Five revolver’s borrowing-base availability, demand feature, financial covenants and collateral provisions, particularly against the company’s low period-end cash and working capital.
- Evaluate freight and supply-chain cost exposure, working-capital requirements, and potential dilution from IPO warrants, representative warrants, and equity awards.