Stran & Company, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Stran provides outsourced marketing solutions, including branded merchandise, e-commerce, fulfillment, and loyalty services. Comparisons below are with Q1 2022 unless otherwise noted.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $15.78 million | $12.26 million |
| Gross profit / margin | $4.69 million / 29.8% | $3.22 million / 26.3% |
| Operating loss / margin | $1.39 million / 8.8% | $0.81 million / 6.6% |
| Net loss / diluted loss per share | $0.69 million / $0.04 | $0.55 million / $0.03 |
| Operating cash flow | $(3.59) million | $7.10 million |
- Revenue rose 28.7%. Management attributed growth to higher spending by existing clients, new customers, and acquisitions. Excluding G.A.P., Trend, and Premier, recurring organic sales increased 17.7% to approximately $13.4 million.
- Cost of sales was 70.2% of revenue, down from 73.7%; freight expense declined as a share of revenue, which management attributed to improved supply chains and lower freight rates. Gross margin expanded by 3.5 percentage points.
- General and administrative expense increased 51.1% to $6.08 million, outpacing sales growth. It included acquisition-related costs, TRM due diligence, NetSuite ERP implementation, public-company expenses, lead generation, and organic growth. The operating loss widened; net loss also increased.
- Other income was $326,604, including $131,885 in unrealized investment gains and $138,082 in interest income. The tax line was a $364,000 benefit, primarily deferred; the company reported a net operating loss carryforward of approximately $4.14 million.
Financial position and liquidity
- At March 31, 2023, cash was $10.60 million and current investments were $10.27 million. Current assets were $41.52 million and current liabilities $8.40 million.
- Total assets were $49.15 million; stockholders’ equity was $38.70 million. Cash declined $4.66 million from year-end 2022. Cash and investments together totaled approximately $20.87 million.
- Operating cash use was $3.59 million, compared with $7.10 million provided in Q1 2022. The main cash-flow factors included a $6.0 million reduction in the rewards-program liability, partly offset by collections of receivables and inventory reduction. The prior-year period included a $10.0 million increase in that liability.
- Investing cash use was $0.68 million, mainly for investments and property and equipment. Financing cash use was $0.38 million, primarily contingent earn-out payments.
- The company reported no borrowings under its $7.0 million secured, demand line of credit. The line bears interest at prime plus 0.5% (8.5% at March 31), is due on demand, and is secured by substantially all company assets. Availability is subject to borrowing-base limits and other covenants.
- Reported liabilities included $3.77 million of contingent earn-out liabilities, a $162,358 Wildman note payable, and $775,742 of lease liabilities. The company said it expected to pay the Wildman note in full during 2023.
Changes, outlook, and notable matters
- Revenue growth and improved gross margin were offset by sharply higher overhead; the company remained loss-making. Management cited integration, system implementation, and growth-related spending as expense drivers.
- Management stated that current cash was expected to cover anticipated operating needs and payment obligations for the 12 months ending March 31, 2024 and beyond. It also noted that expansion, acquisitions, or changing conditions could require additional financing; equity issuance could dilute shareholders, and debt could add servicing costs and restrictive covenants. No specific earnings or revenue guidance was provided.
- Management described lingering risks from supply-chain disruption, raw-material costs, freight, customer demand, and COVID-19-related effects, while noting improved freight conditions and potential support from reopening and in-person events.
- Customer-list intangible assets included accumulated impairment of $469,000 for the G.A.P. acquisition at March 31, versus none at December 31, 2022. The filing’s cash-flow presentation reports an “Intangible Asset Impairment, Net” adjustment of $(55,687); the relationship between that cash-flow adjustment and the accumulated impairment disclosure is not clearly explained in the filing text.
- The January 2023 TRM Corp. asset-purchase agreement remained subject to closing conditions as described in the filing. Consideration includes $1.0 million at closing, inventory cost, scheduled installment payments, assumed liabilities, and earn-outs. The agreement specified an outside date of May 25, 2023, subject to its terms.
- After quarter-end, the company entered into a CFO employment agreement and amended consulting arrangements, with base or consulting compensation and performance-linked cash or equity awards. These were reported as April 2023 developments.
- No common-stock repurchases were made in Q1; $6.67 million remained under the $10 million authorization. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material legal proceeding was identified.
Most important facts for investors to verify
- Whether revenue growth—especially organic growth—continues and translates into sustained gross-margin improvement.
- Whether G&A growth moderates and the company can return to operating and net profitability.
- Whether operating cash flow improves, including the effects of rewards-program balances, customer deposits, receivables, and inventory.
- The amount, timing, and assumptions behind acquisition earn-outs and customer-list impairment assessments, including the G.A.P. impairment disclosure.
- The status and final economics of the TRM transaction, including closing conditions and cash, installment, and earn-out obligations.
- Liquidity and covenant headroom under the secured demand credit line, and potential dilution from outstanding warrants and equity awards.