Stran & Company, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Stran provides outsourced marketing solutions, including branded products, e-commerce, fulfillment, and loyalty programs. Financial statements are unaudited.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $14.81 million | $8.58 million | $27.07 million | $16.13 million |
| Gross profit | $3.76 million | $2.14 million | $6.98 million | $4.44 million |
| Gross margin | 25.4% | 25.0% | 25.8% | 27.5% |
| Operating loss | $(0.47) million | $(0.85) million | $(1.28) million | $(1.21) million |
| Net loss | $(0.45) million | $(0.17) million | $(0.99) million | $(0.46) million |
| Cash from operating activities | Not presented quarterly | $(2.61) million | $(1.22) million |
For the six months, cost of sales rose to 74.2% of revenue from 72.5%, contributing to lower gross margin. General and administrative expenses increased 46.3% to $8.26 million, though they declined as a share of sales to 30.5% from 35.0%. Management attributed the increase to G.A.P. acquisition and integration costs, NetSuite ERP implementation, public-company costs, and business growth.
At June 30, cash was $28.20 million, including $3.92 million associated with customer reward programs and restricted to program obligations; management cited approximately $24.3 million as available for other uses. Current assets were $46.91 million and current liabilities $10.47 million. Total assets were $52.53 million and stockholders’ equity $40.20 million. The company had no borrowings on its $7 million secured, demand line of credit; a $162,358 Wildman seller note and acquisition earn-out liabilities remained outstanding.
Changes, liquidity, and capital
- Sales increased 72.5% in Q2 and 67.8% for the first half. Excluding G.A.P. Promotions, management reported organic sales growth of 49.4% for Q2 and 50.0% for the first half. G.A.P. contributed $2.0 million and $2.9 million of sales, respectively.
- Despite revenue growth, the first-half net loss more than doubled year over year. Operating loss widened modestly; prior-year results included $770,062 of PPP loan forgiveness recorded as other income, while 2022 included customer-list impairment and earn-out adjustments.
- First-half operating cash use increased to $2.61 million, principally reflecting higher receivables and inventory, lower accounts payable, and working-capital movements. Investing cash use was $0.73 million, including customer-list and equipment/software additions. Financing used $0.69 million, including share repurchases, partly offset by warrant-exercise proceeds. Cash declined $4.02 million from year-end.
- During Q2, the company repurchased 1 million shares at a reported average $1.96 per share. The $10 million authorization was suspended as of June 30; $8.04 million remained available at that date.
Outlook, risks, and notable events
No quantified revenue or earnings guidance is provided. Management said cash should meet anticipated needs for the next 12 months and longer term, while noting that acquisitions, growth, or changing conditions could require additional financing. Management expected demand to benefit from business reopening and returning in-person events, but anticipated continued pressure from freight, raw-material costs, and supply-chain disruption. It also described COVID-19-related uncertainty, including possible effects on customer spending, supply chains, and delivery timing.
- The Salem Five credit line is secured by substantially all company assets, due on demand, and subject to borrowing-base limits, financial covenants, and restrictions that include acquiring another business without lender consent.
- Customer concentration is material: one customer represented approximately 11% of first-half revenue and 13% of receivables.
- G.A.P. Promotions was acquired in January 2022 for an aggregate purchase price of $3.25 million, including contingent earn-out consideration. A Trend Brand Solutions asset purchase agreement was signed July 13, 2022; its consideration includes cash, stock, installments, and potential earn-outs, and closing remained subject to conditions.
- The CFO resigned effective July 29, 2022; the company’s Controller became interim CFO. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter. The company reported no known legal proceeding expected to have a material adverse effect and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sales growth and customer retention continue, and whether gross margins recover amid purchasing, freight, and supply-chain costs.
- Cash conversion and working-capital needs, particularly receivables, inventory, and cash held for reward-program obligations.
- The terms, payments, and performance assumptions underlying Wildman and G.A.P. earn-outs, and the completion and economics of the Trend transaction.
- Availability of the demand line under its borrowing-base and covenant requirements, notwithstanding the reported zero balance.
- Potential dilution from warrants and options: 10.07 million warrants and 1.64 million options were outstanding at June 30. The filing reports diluted EPS and weighted-average diluted shares that investors may wish to reconcile with the loss-period share-count treatment.
- The filing reports repurchase costs/value in different places using differing amounts; confirm the final cash and equity accounting for the Q2 buyback.