Stran & Company, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Stran provides outsourced marketing solutions, including branded merchandise, e-commerce, fulfillment, and loyalty services. The unaudited statements are presented on a consolidated basis.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $13.58 million | $10.95 million | $40.64 million | $27.08 million |
| Gross profit | $4.25 million | $3.72 million | $11.23 million | $8.16 million |
| Gross margin | 31.3% | 34.0% | 27.6% | 30.1% |
| Operating income (loss) | ($0.65 million) | $1.04 million | ($1.93 million) | ($0.17 million) |
| Net income (loss) | ($0.69 million) | $0.72 million | ($1.68 million) | $0.26 million |
| Basic EPS | ($0.03) | $0.07 | ($0.09) | $0.03 |
- Cash flow: For the first nine months, operating cash flow was negative $6.52 million, investing cash flow was negative $10.82 million, and financing cash flow was negative $2.59 million. Cash decreased $19.93 million to $12.30 million.
- Balance sheet and liquidity: At September 30, cash was $12.30 million and short-term investments were $9.68 million; current assets were $40.69 million versus current liabilities of $6.60 million. Accounts receivable was $10.30 million and inventory was $7.12 million.
- Debt and obligations: No borrowings were outstanding on the $7 million secured, demand line of credit. The company had a $162,358 Wildman note payable, $3.98 million of contingent earn-out liabilities, and $864,050 of operating lease liabilities. The line is subject to borrowing-base limits, covenants, and lender demand rights.
- Investments: Short-term investments had a reported unrealized loss of $231,214 for the quarter and nine-month period.
Changes versus prior comparable periods
- Revenue grew 24.0% in Q3 and 50.1% for the first nine months. Management attributed the increase to stronger spending by existing customers, new customers, and the G.A.P. Promotions and Trend acquisitions. Excluding those acquisitions, reported recurring organic sales rose 8.4% in Q3 and 33.5% year to date.
- Gross margin declined 2.7 percentage points in Q3 and 2.5 points year to date. Purchases and freight costs rose, with management citing higher purchase costs and supply-chain pressures.
- General and administrative expense increased 82.1% in Q3 and 57.8% year to date. The company cited acquisition and integration costs, implementation of an Oracle NetSuite ERP system, public-company expenses, lead generation, and business growth.
- Results shifted from Q3 profit to loss and from a small year-to-date profit to a loss. Higher operating costs and weaker gross margins contributed; the nine-month 2021 comparison also included $776,440 of other income, primarily from PPP loan forgiveness.
Outlook, commentary, and risks
- Management expects recovering demand associated with reopening, in-person events, and customer spending to support sales, while noting that higher raw-material costs and supply-chain challenges may continue through the remainder of 2022. The filing provides no quantified revenue or earnings guidance.
- Management stated that available cash should cover anticipated operating needs and payment obligations for the 12 months ending September 30, 2023 and beyond, but noted possible future financing needs for growth, acquisitions, or other investments.
- COVID-19-related uncertainty, port congestion, freight and materials costs, customer demand, and acquisition integration are identified as business risks. One customer represented approximately 10.4% of nine-month revenue and 13.8% of receivables.
- The company acquired G.A.P. Promotions in January 2022 and Trend Brand Solutions in August 2022. Earn-out payments depend partly on acquired customer-list gross profit; customer-list intangible assets are subject to amortization and impairment assessment.
- During the first nine months, Stran repurchased 1,667,545 shares for approximately $3.18 million under its $10 million authorization; $6.82 million remained available at September 30. Management’s repurchase timing depends on cash needs, market conditions, and other considerations.
- The company reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during Q3. It reported no legal proceedings believed likely to have a material adverse effect and no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether organic sales growth persists and acquired businesses deliver expected revenue and gross profit.
- Whether gross margins recover as purchase, freight, and other supply-chain costs change.
- Cash conversion and working-capital trends, particularly receivables, inventory, and payables, given negative operating cash flow.
- Liquidity under the secured demand line’s borrowing-base, covenant, and lender-demand provisions, alongside upcoming earn-out and lease obligations.
- Acquisition earn-out assumptions, customer-list valuation and impairment exposure, and integration costs.
- Potential share dilution from warrants and options, including private-placement warrants with possible exercise-price adjustments, and the continued pace of repurchases.