ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and
cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial
statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are
based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results
could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those
discussed below and elsewhere in this report, particularly in the sections titled “Item 1A. Risk Factors” and “Introductory
Notes – Note Regarding Forward-Looking Statements.”
Overview
We are an outsourced marketing solutions provider
that sells branded products to customers. We purchase products and branding through various third-party manufacturers and decorators and
resell the finished goods to customers.
In addition to selling branded products, we offer
clients custom sourcing capabilities; a flexible and customizable e-commerce solution for promoting branded merchandise and other promotional
products, managing promotional loyalty and incentives, print collateral, and event assets, order and inventory management, and designing
and hosting online retail popup shops, fixed public retail online stores, and online business-to-business service offerings; creative
and merchandising services; warehousing/fulfillment and distribution; print-on-demand; kitting; point of sale displays; and loyalty and
incentive programs.
We earn the majority of our revenue from the sale
of unique, quality promotional products for a wide variety of industries primarily to support marketing efforts. We also derive revenues
from service fees from loyalty programs, event management, print services, fulfillment services, and technology services.
43
The majority of our revenue is derived from program
business, although only a small percentage of our customers are considered programmatic. For the years 2022 and 2021, program clients
accounted for 82.2% and 75.7% of total revenue, respectively. Less than 350 of our more than 2,000 active customers are considered to
be program clients. Our active customers are any organizations, businesses, or divisions
of a parent organization which have purchased directly or indirectly from us within the last two years, and include organizations that
have bought from other organizations for which Stran acts as an established sub-contractor. With a larger sales force and other resources,
we believe we can convert more of our customer base from transactional customers into program clients with much greater revenue potential.
We define transactional customers as customers that place an order with us and do not have an agreement with us covering ongoing branding
requirements. We define program clients as clients that have a contractual obligation for specific ongoing branding needs. Program offerings
include ongoing inventory, use of technology platform, warehousing, creative services, and additional client support. Those program customers
are geared towards longer-lasting relationships that helps secure recurring revenue well into the future.
Our sales increased 48.5% year-over-year in 2022
compared to 2021, which we believe was primarily due to higher spending from existing clients as well as business from new customers.
Additionally, we benefited from the acquisition of the G.A.P. Promotions, LLC, or G.A.P. Promotions, assets in January 2022, the assets
of Trend Brand Solutions in August 2022, and the assets of Premier NYC in December 2022. We expect going forward that pent-up demand from
more widespread immunity to the COVID-19 virus, the return of many significant in-person tradeshows and other industry-related opportunities,
and societal reopening in general may help compensate for lower sales in prior periods. However, these trends are expected to be partially
offset by continued increases in expenses, especially higher raw material costs and a more challenging supply chain. According to the
U.S. Bureau of Labor Statistics, the Producer Price Index for final demand moved up 4.6% for the 12 months ended in February, 2023, on
an unadjusted basis.
We believe that the COVID-19 pandemic has impacted
Stran’s operational and financial performance. As was typical for other firms in the promotional products industry, from March 2020
through the end of 2022, we believe that our revenues were adversely affected by decreased demand for promotional products and services
such as ours due to a lack of in-person events, businesses not being fully reopened and staffed, and customers’ decreased marketing
budgets. We also experienced higher costs of supplies of product materials due to continued increases in expenses, especially higher freight
charges and raw material costs, and a more challenging supply chain from issues such as trucking shortages and port congestion. Much of
the increase in costs, supply chain disruption, and other continuing disruptions in operations is believed to be due to ongoing outbreaks
of COVID-19. We expect some or all of these effects to continue in 2023.
We have also noted that some of our customers
have indicated that a greater number of their employees work from home than in past periods. We believe this increase may be partially
a result of the relatively new risk to office work from the COVID-19 pandemic, and that this trend may continue. As a result, we have
been, and expect to continue to, drop-ship more materials directly to people at their homes than in periods before the advent of the COVID-19
pandemic. We expect that this trend will continue to yield increased freight service fees and fulfillment revenue as well as associated
costs.
For additional discussion, see “—Impact
of COVID-19 Pandemic” below.
As of December 31, 2022, we had $56.6 million
of total assets with $39.4 million of total stockholder equity.
Recent Developments
T R Miller Asset
Purchase Agreement
On January 25, 2023,
we entered into an Asset Purchase Agreement (the “TRM Purchase Agreement”) with TRM Corp., a Massachusetts corporation, and
Thomas R. Miller (“TRM”), pursuant to which the Company agreed to acquire substantially all of the assets of TRM Corp. used
in TRM Corp.’s branding, marketing and promotional products and services business (the “TRM Business”). The TRM Business
has existing operations and has generated revenues.
Under the TRM Purchase
Agreement, the aggregate purchase price (“TRM Purchase Price”) for the TRM Business will consist of cash payments by the Company
to TRM Corp. at and following the TRM Closing (as defined below), subject to adjustments, as described below.
44
At the consummation of
the transactions contemplated by the TRM Purchase Agreement (the “TRM Closing”), the Company will pay TRM Corp. the following
cash components of the TRM Purchase Price: (a) $1,000,000 in cash, subject to a customary working capital adjustment, an adjustment for
any indebtedness of TRM Corp. or the TRM Business as of the date and time of the TRM Closing (the “TRM Closing Date”) that
is not part of the Assumed Liabilities (as defined in the TRM Purchase Agreement), and the TRM Earn Out Payments (as defined below); (b)
the amount paid by TRM Corp. (cost) for Inventory (as defined in the TRM Purchase Agreement) that is on hand and owned by Seller as of
the TRM Closing Date; (c) installment payments (the “TRM Installment Payments”) equal to (i) $400,000 on the first anniversary
of the TRM Closing Date, (ii) $300,000 on the second anniversary of the TRM Closing Date, (iii) $200,000 on the third anniversary of the
TRM Closing Date, and (iv) $200,000 on the fourth anniversary of the TRM Closing Date, with such TRM Installment Payments subject to adjustment
for certain uncollected accounts receivable amounts outstanding after the first 12 months following the TRM Closing; and (d) four annual
earnout payments (collectively, the “TRM Earn Out Payments”), each equal to (i) 45% of annual Gross Profit (as defined in
the TRM Purchase Agreement) of TRM Corp. above $4,000,000 with respect to certain customers of TRM Corp. or primarily resulting from the
efforts of TRM or certain employees or independent contractors of TRM Corp., plus (ii) 25% of the annual Gross Profit above $4,000,000
with respect to customers primarily resulting from the past or future efforts of the Company that are assigned to and primary responsibility
of any employee or independent contractor of TRM Corp. as designated by the TRM Purchase Agreement, for the trailing 12-month period,
as of the first, second, third, and fourth anniversary of the TRM Closing Date, with such TRM Earn Out Payments subject to adjustment
as set forth in the TRM Purchase Agreement.
The timing and manner
of the determination of the TRM Purchase Price and the working capital and TRM Earn Out Payments adjustments or payments, and the resolution
of any disagreements as to such adjustments or payments, will follow the procedures prescribed by the TRM Purchase Agreement.
In addition, as of the
TRM Closing Date, the Company will undertake to perform or otherwise pay, satisfy and discharge as of the TRM Closing the Assumed Liabilities
(as defined in the TRM Purchase Agreement).
During the period between
the date of the TRM Purchase Agreement and the TRM Closing, TRM Corp. and TRM are required to carry on the TRM Business in the ordinary
course and provide the Company with reasonable access to the TRM Business’s books, records, sales representatives and support staff.
In addition, TRM Corp. and TRM agreed to terminate and not engage in any discussions or transactions with any party other than the Company
with respect to any acquisition of a material portion of TRM Corp.’s assets or equity interests. From the date of the TRM Purchase
Agreement until the earlier of the TRM Closing or the termination of the TRM Purchase Agreement, the Company and TRM Corp. will give each
other notice of certain events, or lack thereof, which could have certain adverse effects.
The TRM Purchase Agreement
contains customary representations, warranties, and covenants, including a covenant that TRM Corp. and TRM will not compete with the TRM
Business in the United States, or solicit any customer, supplier or affiliate of the Company, during the period that the Company employs
TRM and the two years following that period.
The TRM Purchase Agreement
also contains mutual indemnification provisions with respect to breaches of representations and warranties as well as to certain third-party
claims, and indemnification by the Company of TRM Corp. and TRM with respect to certain damages with respect to the Assumed Liabilities
(as defined in the TRM Purchase Agreement) and certain other liabilities asserted by a third party arising after the TRM Closing. In the
case of indemnification provided with respect to breaches of certain non-fundamental representations and warranties, the indemnifying
party will only become liable for indemnified losses to the extent that the amount exceeds an aggregate threshold of $25,000. However,
this threshold limitation does not apply to claims by the Company for breaches by TRM Corp. or TRM of certain fundamental representations
and warranties. In addition, the Company’s aggregate remedy with respect to any and all indemnifiable losses may in no event exceed
(i) with respect to claims related to breach of certain fundamental representations, the Final Purchase Price (as defined in the TRM Purchase
Agreement) or (ii) with respect to all other claims, 50% of the Final Purchase Price.
In addition to customary
indemnification procedural and reimbursement provisions for matters involving third parties, the TRM Purchase Agreement provides that
the Company will have the option of recouping all or any part of any indemnified amount by notifying TRM that the Company is reducing
the TRM Installment Payments or TRM Earn Out Payments by the amount of such indemnified amounts.
The representations and
warranties under the TRM Purchase Agreement of TRM Corp. and TRM, and the indemnification rights of the Company with respect to such representations
and warranties, will survive the TRM Closing for 18 months after the TRM Closing, except that certain fundamental representations and
warranties of TRM Corp. and TRM will continue in effect for a period equal to the applicable statute of limitations. The representations
and warranties of the Company, and the indemnification rights of TRM Corp. and TRM with respect to such representations and warranties,
will continue in effect for a period equal to the applicable statute of limitations.
The TRM Closing is subject
to customary closing conditions, including the completion of the Company’s due diligence; the receipt of any required consents of
any third parties or governmental agencies; the release of any applicable security interests by TRM Corp.; completion of a financial audit
of TRM Corp.; delivery of disclosure schedules; execution of a lease agreement with base rent of $179,550.00 in the first year of the
lease and an increase of 2% per annum in each subsequent year; . In addition, the Company must have entered into (i) an employment agreement
with Stacy Miller upon mutually agreeable terms and (ii) a consulting agreement with TRM upon mutually agreeable terms pursuant to which
TRM will provide certain consulting services to the Company for a period of three years following the TRM Closing Date. TRM Corp. and
TRM must also change the name of TRM Corp. to a name that is distinct and dissimilar from, and unlikely to be confused with, “T
R Miller” within ten business days after the TRM Closing Date.
45
The TRM Purchase Agreement
may be terminated at any time prior to the TRM Closing by (i) mutual agreement of the parties; (ii) by any of the parties if there has
been a material misrepresentation or breach of covenant or agreement contained in the TRM Purchase Agreement on the part of the other
and such breach of a covenant or agreement has not been promptly cured after at least 14 days’ written notice is given; (iii) by
the Company if any of TRM Corp. or TRM’s closing conditions set forth in the TRM Purchase Agreement have not been satisfied before
May 25, 2023 (the “Outside Date”); or (iv) by TRM Corp. or TRM if any of the Company’s closing conditions set forth
in the TRM Purchase Agreement have not been satisfied before the Outside Date. The Company may also terminate the TRM Purchase Agreement
if the Company objects to any information contained in any disclosure schedules or updates to the disclosure schedules or the contents
of any accompanying documents within 30 days of delivery of such schedules or within five days of delivery of any updates to such schedules,
and the Company and TRM Corp. cannot agree on mutually satisfactory modifications to them.
The foregoing description
of the TRM Purchase Agreement is qualified in its entirety by reference to the full text of such document which is filed as Exhibit 2.5
to this Annual Report, and which is incorporated herein by reference.
Impact of COVID-19 Pandemic
The current global pandemic of a novel strain
of coronavirus, or COVID-19, and the global measures taken to combat it, have had, and may in the future continue to have, an adverse
effect on our business. Public health authorities and governments at local, national and international levels have announced various measures
to respond to the pandemic. Some measures that directly or indirectly impact our business include voluntary or mandatory quarantines,
restrictions on travel and limiting gatherings of people in public places.
We believe that the COVID-19 pandemic has impacted
Stran’s operational and financial performance and will likely continue to do so. Although sales
of personal protective equipment totaled $4.2 million for 2020, they were
less than $250,000 for both 2022 and 2021. These sales did not significantly offset the overall decreased demand for promotional
products in 2022 and 2021 compared to 2019, and are not expected to do so in the foreseeable future. Additionally, as
was typical for other firms in the promotional products industry, from March 2020 through the end of 2022, we believe that our revenues
were adversely affected by the economic impact of the pandemic, including decreased demand for promotional products and services such
as ours due to a lack of in-person events, businesses not being fully reopened and staffed, and customers’ decreased marketing budgets.
We also experienced higher costs of supplies of product materials due to continued increases in expenses, especially higher freight
charges and raw material costs, and a more challenging supply chain from issues such as trucking shortages and port congestion. Much of
the increase in costs, supply chain disruption, and other continuing disruptions in operations is believed to be due to ongoing outbreaks
of COVID-19. We expect some or all of these effects to continue in 2023.
We have also noted that some of our customers
have indicated that a greater number of their employees work from home than in past periods. We believe this increase may be partially
a result of the relatively new risk to office work from the COVID-19 pandemic, and that this trend may continue. As a result, we have
been, and expect to continue to, drop-ship more materials directly to people at their homes than in periods before the advent of the COVID-19
pandemic. We expect that this trend will continue to yield increased freight service fees and fulfillment revenue as well as associated
costs.
We have responded to the challenges resulting
from the COVID-19 pandemic by developing a clear company-wide strategy and sticking to our hardworking culture and core value of delivering
creative merchandise solutions that effectively promote our customers’ brands. We continue to focus on our core group of customers
while providing additional value-added services, including our e-commerce platform for order processing, warehousing and fulfillment functions,
and propose alternative product offerings based on their unique needs. We also continue to solicit and market ourselves to long-term prospects
that have shown interest in Stran. We have remained committed to providing our customers with more than just products. Below are some
of the specific ways we have responded to the current pandemic:
46
● Successfully applied for and received PPP loans and government assistance.
We believe that we have seen encouraging signs
of recovery from the effects of the COVID-19 pandemic. There has been a significant increase in the amount of requests for proposal and
other customer inquiries since the beginning of 2021, which leads us to believe that companies are preparing to spend at previous or increased
levels. We expect going forward that pent-up demand from more widespread immunity to the COVID-19 virus and societal reopening will help
compensate for lower sales in prior periods. However, significant lingering supply chain issues related to the COVID-19 pandemic continued
to adversely affect our business in 2021 and 2022, and may continue to do so in 2023.
We believe that we have fully complied with all
state and local requirements relating to COVID-19. As described above, we have undertaken various measures in an effort to mitigate the
spread of COVID-19, including encouraging employees to work remotely if possible. We have also enacted business continuity plans, which
may make maintaining our normal level of corporate operations, quality controls and internal controls difficult. Moreover, the COVID-19
pandemic may cause temporary or long-term disruptions in our supply chains and/or delays in the delivery of our inventory. Further, the
COVID-19 pandemic and mitigation efforts may also adversely affect our customers’ financial condition, resulting in reduced spending
for the products we sell.
As events are rapidly changing, we do not know
how long the COVID-19 pandemic and the measures that have been introduced to respond to it will disrupt our operations or the full extent
of that disruption. Further, once we are able to restart normal business hours and operations doing so may take time and will involve
costs and uncertainty. We also cannot predict how long the effects of the COVID-19 pandemic and the efforts to contain it could continue
to impact our business after the pandemic is under control. Governments could take additional restrictive measures to combat the pandemic
that could further impact our business or the economy in the geographies in which we operate. We believe it is also possible that the
impact of the pandemic and response on our suppliers, customers and markets will persist for some time after governments ease their restrictions.
These measures have negatively impacted, and may continue to impact, our business and financial condition as the responses to control
COVID-19 continue.
The extent to which the pandemic may
continue to impact our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of
this report, including new information that may emerge concerning the severity of the pandemic and steps taken to contain the pandemic or
treat its impact, among others. Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future
developments in the global supply chain and other areas present material uncertainty and risk with respect to our performance, financial
condition, results of operations and cash flows.
47
For further discussion, see Item 1A. “Risk
Factors – Risks Related to Our Business and Industry – Our business has been materially adversely impacted by the COVID-19
pandemic and could be materially adversely impacted by future COVID-19 pandemic surges, new COVID-19 variants, or other pandemics.”
Emerging Growth Company
We qualify as an “emerging growth company”
under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely
on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
In addition, Section 107 of the JOBS Act also
provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can delay
the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take
advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies
that comply with such new or revised accounting standards.
We will remain an emerging growth company until
the earliest of (i) the last day of the fiscal year following the fifth anniversary of our initial public offering, (ii) the last day
of the first fiscal year in which our total annual gross revenues are $1.07 billion or more, (ii) the date that we become a “large
accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business
day of our most recently completed second fiscal quarter or (iv) the date on which we have issued more than $1 billion in non-convertible
debt during the preceding three year period.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by
the following factors:
● our ability to acquire new customers or retain existing customers;
● our ability to offer competitive product pricing;
● our ability to broaden product offerings;
● industry demand and competition;
● our ability to leverage technology and use and develop efficient processes;
● our ability to attract and retain talented employees; and
● market conditions and our market position.
48
Results of Operations
The following table sets forth key components
of our results of operations during the years ended December 31, 2022 and 2021, both in dollars and as a percentage of our revenues.
Years Ended December 31,
Amount % of Revenues Amount % of Revenues
Cost of Sales:
Operating Expenses:
Other Income and (Expense):
Unrealized Gain (Loss) on Short-Term Investments (179,120 ) (0.3 )% - - %
Sales
Sales consist primarily
of the selling price of the merchandise, service or outbound shipping and handling charges, less discounts, coupons redeemed, returns
and credits.
Our sales increased 48.5% to $59.0 million
for the year ended December 31, 2022, from $39.7 million for the year ended December 31, 2021. The increase was primarily due to
higher spending from existing clients as well as business from new customers. Additionally, the acquisitions of the G.A.P. Promotions
assets in January 2022, the Trend Brand Solutions assets in August 2022, and the Premier NYC assets in December 2022 accounted for $6.5
million, or 11.0%, of sales, for 2022, compared to none for 2021, as described in more detail immediately below.
The January 2022 acquisition
of the G.A.P. Promotions assets generated $5.4 million of sales for the year ended December 31, 2022, compared to no sales from such assets
for the year ended December 31, 2021. The August 2022 acquisition of the Trend Brand Solutions assets generated $1.1 million of sales
for the year ended December 31, 2022 compared to no sales from such assets for the year ended December 31, 2021. The December 2022 acquisition
of the Premier NYC assets generated no sales for the year ended December 31, 2022, compared to no sales from such assets for the year
ended December 31, 2021. Our recurring organic sales, defined as sales excluding revenue from the G.A.P Promotions, Trend Brand Solutions
and Premier NYC asset acquisitions, increased 32.1%, or $12.8 million, to $52.5 million for the year ended December 31, 2022, from $39.7
million for the year ended December 31, 2021.
Cost of Sales
Cost of sales consists
of the costs of purchasing inventory and freight charges. Our total cost of sales increased 52.1% to $42.4 million for the year
ended December 31, 2022, from $27.9 million for the year ended December
31, 2021. As a percentage of sales, cost of sales increased to 71.9% for the year ended December 31, 2022 from 70.2%
for the year ended December 31, 2021. More specifically, cost of purchases increased to $37.4 million for the year ended December 31,
2022, or 56.0%, from $24.0 million for the year ended December 31, 2021.
As a percentage of sales, cost of purchases increased to 63.4% for the year ended December 31, 2022, from 60.4% for the year ended December
31, 2021. In addition, freight costs increased to $5.0 million for the year ended December 31, 2022, or 28.2%, from $3.9 million for the
year ended December 31, 2021. As a percentage of sales, freight costs decreased to 8.5% for the year ended December 31, 2022, from 9.8%
for the year ended December 31, 2021. The increase in the dollar amount of cost of purchases and freight was primarily due to an increase
in sales of 48.5% from period to period.
49
Gross Profit
Gross profit consists
of sales less total costs of sales. Our gross profit increased 40.0% to $16.6 million, or 28.1% of revenue, for the year ended December
31, 2022, from $11.8 million, or 29.8% of revenue, for the year ended December 31, 2021. The increase in the dollar amount of gross profit
was due to increased sales, partially offset by an increase in purchasing costs.
Operating Expenses
Operating expenses consist
of general and administrative expenses. Our operating expenses increased 47.3%, or $5.8 million, to $18.1 million for the year ended
December 31, 2022, from $12.3 million for the year ended December
31, 2021. As a percentage of sales, operating expenses decreased to 30.7% for the year ended December 31, 2022, from 30.9%
for the year ended December 31, 2021. The increase in the dollar amount of operating expenses was due to an increase in general and administrative
expenses of $5.8 million, or 47.3%, which in turn was primarily due to additional expenses related to the acquisition of the G.A.P. Promotions
assets, the Trend Brand Solutions assets, the Premier NYC assets, the implementation of an internal commercial ERP system on NetSuite
ERP’s platform, ongoing public company expenses, lead generation initiatives and organic growth in our business.
Other Income and Expense
Other income and expense
consist of other income (expense), interest income (expense), and unrealized gain (loss) on short-term investments. Our other income (expense)
decreased $589,773 to $112,507 for the year ended December 31, 2022, from $702,280 for the year ended December 31, 2021. This decrease
was primarily due to an accrual adjustment to certain earn-out paying obligations relating to our acquisition of the assets of WBG and
the forgiveness of the Company’s PPP loan. Our interest income (expense) was $94,680 for the year ended December 31, 2022, compared
to $(136,661) for the year ended December 31, 2021. This change was primarily due to interest generated from short-term investments. Our
unrealized gain (loss) on short-term investments was $(179,120) for the year ended December 31, 2022, compared to none for the year ended
December 31, 2021. This change was primarily due to the recording of all short-term investments at estimated fair value.
Income Taxes Provision
Income tax provision
reflects statutory tax rates in the jurisdictions in which we operate adjusted for permanent book/tax differences.
Income tax provision
for the year ended December 31, 2022 was $0.7 million compared to income tax provision of $0.1 million for the year ended December 31,
2021. Income tax provision for the year ended December 31, 2022 accounted for approximately 47.3% and 84.2% of earnings (loss) before
income taxes of approximately $(1.5 million) and $0.1 million for the years ended December 31, 2022 and 2021, respectively. For 2022 and
2021, the Company recorded an income tax provision comprised substantially of a deferred tax asset in the form of an operating loss carryforward.
No valuation allowance against the deferred tax asset was accounted for due to the indefinite life of the asset.
Our effective tax rate
is directly affected by the relative proportions of revenue and income before taxes in the jurisdictions in which we operate. Based on
management’s expectations of future earnings, we anticipate that our effective tax rate will remain similar to the federal tax rate
of 21%. State income taxes will fluctuate based annually on apportionment of sales by state.
Discrete tax events may cause our effective rate to fluctuate on a
quarterly basis. Certain events, including, for example, acquisitions and other business changes, which are difficult to predict, may
also cause our effective tax rate to fluctuate. We are subject to changing tax laws, regulations, and interpretations in multiple jurisdictions.
Corporate tax reform continues to be a priority in the U.S. and other jurisdictions. Additional changes to the tax system in the U.S.
could have significant effects, positive and negative, on our effective tax rate and our deferred tax assets and liabilities. For further
discussion of changes in the income tax provision, refer to Notes A and R to our financial statements beginning on page F-1 of this Annual
Report.
50
Net Earnings and Losses
Our net loss for the year ended December 31, 2022
was $0.8 million, compared to net earnings of $0.2 million for the year ended December 31, 2021. This change was primarily due to
increased expenses relating to an increase in lead generation initiatives, integration expenses related to the acquisition of the G.A.P.
Promotions assets, Trend Brand Solutions assets and Premier NYC assets, the implementation of an internal commercial ERP system on NetSuite
ERP’s platform, ongoing expenses related to being a public company, higher cost of purchases in 2022, and organic growth in our
business. These factors were only partially offset by the increase in sales during 2022 to $5.4 million and $1.1 million from none during
2021 from the acquisition of the G.A.P. Promotions assets and Trend Brand Solutions assets, respectively, and the increase of $12.8 million
from recurring organic sales during 2022 compared to 2021.
Liquidity and Capital Resources
As of December 31, 2022,
we had cash and cash equivalents of approximately $15.3 million and short-term investments of approximately $9.8 million. Prior to our
initial public offering, we financed our operations primarily through revenue generated from operations and bank borrowings, including
a $3.5 million line of credit held with Bank of America during the year
ended December 31, 2021. Our line of credit agreement with Bank of America was terminated on November 22, 2021 and on the same date was
replaced with a secured revolving demand line of credit with Salem Five Cents Savings Bank for aggregate loans of up to $7.0 million,
subject to a number of asset-related and other financial requirements and other covenants, terms and conditions as described in detail
below under “– Debt”.
We believe that our current levels of cash will
be sufficient to meet our anticipated cash needs for our operations and cash payment obligations for both the 12 months ended December
31, 2023 and in the long-term beyond this period, including our anticipated costs associated with being a public reporting company. We
may, however, in the future require additional cash resources due to changing business conditions, implementation of our strategy to expand
our business, or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy
our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of
additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt
service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may
not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to
us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
Summary of Cash Flow
The following table provides detailed information
about our net cash flow for the period indicated:
Cash Flow
Years Ended December 31,
Net cash used in operating activities
was approximately $2.4 million for the year ended December 31, 2022, as compared to net cash used in operating activities of approximately
$5.3 million for the year ended December 31, 2021. For the year ended December 31, 2022, increases in accounts receivable, inventory,
and rewards program liability along with a decrease in accounts payable were the primary drivers of the net cash used in operating activities.
For the year ended December 31, 2021, increases in accounts receivable, inventory, and prepaid expenses
along with a decrease in accounts payable were the primary drivers of the net cash used in operating activities. The decrease in
net cash used in operating activities for the year ended December 31, 2022 compared to the year ended December 31, 2021 occurred in the
normal course of business due to growth in organic business as well as an increase in rewards program liability.
51
Net cash used in investing activities
was approximately $11.6 million for the year ended December 31, 2022, as compared to net
cash used in investing activities of approximately $0.4 million for the year ended December 31, 2021. For the year ended December 31,
2022, purchases of short-term investments, additions to intangible assets related to customer lists and additions to software-related
property and equipment were the primary drivers of the net cash used in investing activities. For the year ended December 31, 2021, additions
to software-related property and equipment was the primary driver of the net cash used in investing activities. The increase in net cash
used in investing activities for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily due to purchases
of short-term investments and the addition of new intangible assets related to the customer lists acquired in January 2022, August 2022
and December 2022 as part of the G.A.P. Promotions, Trend Brand Solutions and Premier NYC assets acquisitions, respectively.
Net cash used in financing activities
was approximately $2.9 million for the year ended December 31, 2022, as compared to net cash provided by financing activities of approximately
$37.3 million for the year ended December 31, 2021. For the year ended December 31, 2022, net cash used in financing activities consisted
primarily of the repurchase of our common stock under our stock repurchase program offset by net proceeds received from the exercise of
our publicly-traded warrants. For the year ended December 31, 2021, net cash provided by financing activities consisted primarily of net
proceeds received from our initial public offering and private placement offset by borrowings and reductions on our bank line of credit.
The decrease in net cash provided by financing activities for the year ended December 31, 2022 compared to the year ended December 31,
2021 was primarily due to the repurchase of our common stock during the year ended December 31, 2022, offset by the exercise of our publicly-traded
warrants.
On April 15, 2020, we received loan proceeds from
Bank of America in the amount of approximately $770,062 under the PPP implemented by the U.S. Small Business Administration (“SBA”).
The PPP, established as part of the Coronavirus Aid, Relief, and Economic Security Act, provides for loans to qualifying businesses for
amounts up to 2.5 times the average qualifying monthly payroll expenses of the qualifying business. The loans and accrued interest are
forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and
maintains its payroll levels.
We received forgiveness from the SBA of the PPP
loan in full, effective June 24, 2021.
As of December 31, 2020, approximately $149,900
was due under our Economic Injury Disaster Loan, or EIDL, program loan. It was due in monthly installments of $731 including interest
to April 2051. The amount was fully repaid during the year ended December 31, 2021.
November 2021 Initial Public Offering
On November 12, 2021,
under the Underwriting Agreement, we completed the IPO, in which we sold 4,337,349 units, with each unit consisting of one share of common
stock and a publicly-traded warrant to purchase one share of common stock, at a price to the public of $4.15 per unit, before underwriting
discounts and commissions. Initially, the common stock and publicly-traded warrants
had been listed on the Nasdaq Capital Market tier of Nasdaq under the initial ticker symbols “STRN” and “STRNW”,
respectively. Subsequently, we changed the ticker symbols of the shares and publicly-traded warrants to “SWAG” and “SWAGW”,
respectively. The publicly-traded warrants initially had an exercise price per share of $5.1875, equal to 125% of the IPO Price.
Due to our subsequent private placement of common stock and common stock purchase
warrants at a purchase price of $4.97 for one share and 1.25 warrants combined (See “—December 2021 Private Placement”
below), after attributing a warrant value of $0.125, the exercise price per share of the publicly-traded warrants was reduced to $4.81375
as of December 10, 2021. The publicly-traded
warrants were immediately exercisable and expire on the fifth anniversary of the original
issuance date.
We also granted the underwriters
a 45-day over-allotment option to purchase up to an additional 650,602 shares of common stock and/or publicly-traded
warrants to purchase up to 650,602 shares of common stock at the IPO Price less the underwriting discounts, representing 15% of
the units sold in the IPO. At the closing of the IPO, EF Hutton as the representative of the underwriters fully exercised its over-allotment
option to purchase an additional 650,602 shares of common stock and 650,602 publicly-traded
warrants. Therefore, we sold 4,987,951 shares of common stock and 4,987,951 publicly-traded
warrants for total gross proceeds of approximately $20.7 million.
In addition to the underwriter
commissions, discounts and non-accountable expenses of approximately $1.8 million and other offering expenses of approximately $1.0 million,
we agreed to grant the Representative’s Warrants to EF Hutton as the representative of the underwriters or its designees, for the
purchase of a total of 149,639 shares of common stock at an exercise price of $5.1875. The
Representative’s Warrants are exercisable at any time and from time to time, in whole
or in part, during the four-and-a-half-year period commencing May 12, 2022.
52
After deducting underwriter commissions, discounts and non-accountable expenses of approximately $1.8 million and other offering
expenses of approximately $1.0 million, we received net proceeds of approximately $17.9 million at the closing of the IPO. Assuming
the exercise of all of the publicly-traded warrants and Representative’s Warrants,
we would receive additional total proceeds of approximately $21.6 million. As of December 31, 2022, we had received a total of approximately
$3.2 million from the exercise of publicly-traded warrants for the purchase of a total of 659,456 shares of common stock at the adjusted
exercise price per share of $4.81375.
We have not received any proceeds from the exercise of the Representative’s Warrants.
The IPO was conducted
pursuant to the IPO Registration Statement, and our Registration Statement on Form S-1 (File No. 333-260880), which was filed
with the SEC pursuant to Rule 462(b) under the Securities Act, which was effective immediately upon filing on November 8, 2021. On June
10, 2022, the Post-Effective Amendment to IPO Form S-1 was filed to update the IPO Registration Statement’s prospectus to include,
among other things, the information contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 that was filed
with the SEC on March 28, 2022 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 that was filed with
the SEC on May 13, 2022. The Post-Effective Amendment to IPO Form S-1 became effective on June 16, 2022. Prospectus Supplement No. 1 to
the prospectus relating to the Post-Effective Amendment to IPO Form S-1 was filed pursuant to Rule 424(b)(3) under the Securities Act
with the SEC on July 21, 2022 to include the information set forth in our Current Reports on Form 8-K which were filed with the SEC on
July 19, 2022 and July 21, 2022. Prospectus Supplement No. 2 to the prospectus relating to the Post-Effective Amendment to IPO Form S-1
was filed pursuant to Rule 424(b)(3) under the Securities Act with the SEC on August 15, 2022 to include the information in our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2022 which was filed with the SEC on August 15, 2022. Prospectus Supplement No. 3 to
the prospectus relating to the Post-Effective Amendment to IPO Form S-1 was filed pursuant to Rule 424(b)(3) under the Securities Act
with the SEC on September 7, 2022 to include the information in our Current Report on Form 8-K which was filed with the SEC on September
7, 2022. Prospectus Supplement No. 4 to the prospectus relating to the Post-Effective Amendment to IPO Form S-1 was filed pursuant to
Rule 424(b)(3) under the Securities Act with the SEC on November 14, 2022 to include the information in our Quarterly Report on Form 10-Q
which was filed with the SEC on November 14, 2022. Prospectus Supplement No. 5 to the prospectus relating to the Post-Effective Amendment
to IPO Form S-1 was filed pursuant to Rule 424(b)(3) under the Securities Act with the SEC on December 2, 2022 to include the information
in our Current Report on Form 8-K which was filed with the SEC on December 2, 2022. Prospectus Supplement No. 6 to the prospectus relating
to the Post-Effective Amendment to IPO Form S-1 was filed pursuant to Rule 424(b)(3) under the Securities Act with the SEC on January
31, 2023 to include the information in our Current Report on Form 8-K which was filed with the SEC on January 31, 2023.
EF
Hutton acted as lead book-running manager and the representative of the underwriters, and US
Tiger Securities, Inc. acted as joint book-running manager.
Pursuant to the Underwriting
Agreement, on November 8, 2021, we and our officers, directors and stockholders before the offering entered into lock-up agreements that
prevented, subject to certain exceptions, selling or transferring any of our shares of capital stock of the Company for up to six months.
During 2021 and 2022, a stockholder who was subject to these and other lock-up provisions transferred all of its shares to another holder
with the consent of our Executive Chairman Mr. Stranberg, EF Hutton as the representative of the underwriters of our initial public offering,
and the Company, and processed by its transfer agent. The lock-up agreements with EF Hutton expired on May 8, 2022.
The following is our reasonable estimate of the
uses of the proceeds from the IPO from the date of the closing of the IPO on November 12, 2021, until December 31, 2022:
● None was used for construction of plant, building and facilities;
● None was used for the purchase and installation of machinery and equipment;
● None was used for purchases of real estate;
● $2.2 million was used for the acquisition of other businesses;
● $3.5 was used for the repayment of indebtedness;
● $9.2 million was used for working capital; and
● $3.0 million was used for temporary investments.
53
As of December 31, 2022, we had used the entirety
of the proceeds of the IPO, not including amounts received or that may be received from exercises of publicly-traded warrants.
None of the proceeds of the IPO have been used
to make any direct or indirect payments to any of our directors or officers, any of their associates, any persons owning 10% or more of
any class of our equity securities, or any of our affiliates, or any others.
There has not been, and we do not expect, any
material change in the planned use of proceeds from the IPO as described in the Post-Effective Amendment to Form S-1 and the related prospectus.
The foregoing description of certain terms of the Underwriting Agreement
and the Representative’s Warrants is qualified in its entirety by reference to the full text of such documents which are filed hereto
as Exhibit 10.23, Exhibit 10.24, Exhibit 10.25, Exhibit 10.26, and Exhibit 10.27 to this Annual Report, respectively, and which are incorporated
herein by reference.
December 2021 Private Placement
On December 10, 2021,
under an Underwriting Agreement dated November 8, 2021 (the “Underwriting Agreement”), the Company completed a private placement
with several investors, wherein a total of 4,371,926 shares of the Company’s common stock were issued at a purchase price of $4.97
per share, with each investor also receiving a warrant (the “Private Placement Warrant” and collectively the “Private
Placement Warrants”) to purchase up to a number of shares of common stock equal to 125% of the number of shares of common stock
purchased by such investor in the private placement, or 5,464,903 shares of common stock in aggregate,
at an exercise price of $4.97 per share, for a total purchase price of approximately $21.7 million. The Private Placement Warrants were
immediately exercisable on the date of issuance, expire five years from the date of issuance and have certain downward pricing adjustment
mechanisms, including with respect to any subsequent equity sale that is deemed a dilutive issuance, in which case the Private Placement
Warrants were subject to a floor price of $4.80 per share prior to stockholder approval of such subsequent equity sale, and a floor price
of $1.00 per share after such stockholder approval is obtained. On December 10, 2021, the holders of shares of common stock entitled to
vote approximately 65.4% of our outstanding voting stock approved the Company’s entry into the private placement. We filed preliminary
and definitive information statements on Schedule 14C with the SEC on December 29, 2021 and January 11, 2022, respectively, and delivered
copies of the definitive information statement to stockholders on January 12, 2022. On January 31, 2022, the stockholders’ consent
became effective pursuant to Rule 14c-2 under the Exchange Act. As a result, the exercise price of the Private Placement Warrants
may be reduced to as low as $1.00 per share if their downward-pricing adjustment mechanisms become applicable.
The Company engaged EF
Hutton as the Company’s placement agent for the private placement pursuant to the PAA. Pursuant to the PAA, the Company agreed to
pay EF Hutton a cash placement fee equal to 8.0% of the gross proceeds of the Offering, an additional cash fee equal to 0.5% of the gross
proceeds raised by the Company in the offering for non-accountable expenses, and also agreed to reimburse EF Hutton up to $100,000 for
accountable expenses. In addition, EF Hutton’s designees received warrants to purchase an aggregate of 131,158 shares of common
stock, which is equal to 3.0% of the total number of shares issued in the private placement, at an exercise price of $4.97 per share (the
“Placement Agent Warrants”).
The private placement
raised net cash proceeds of approximately $19.8 million (after deducting the placement agent fee and expenses of the private placement).
Assuming the exercise of all of the Private Placement Warrants and
Placement Agent Warrants, we would receive additional total proceeds of approximately $27.8 million. As of December 31, 2022, we had not
received any proceeds from the exercise of the Private Placement Warrants or Placement Agent Warrants. The Company intends to use
the net cash proceeds from the private placement for acquisitions and partnerships, investments in technology and expanding corporate
infrastructure, expansion of its sales team and marketing efforts and for general working capital and administrative purposes.
The private placement
was exempt from the registration requirements of the Securities Act pursuant to the exemption for transactions by an issuer not involving
any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act and in reliance
on similar exemptions under applicable state laws. Each of the investors represented that it was an accredited investor within the meaning
of Rule 501(a) of Regulation D, and was acquiring the securities for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution thereof. The securities were offered without any general solicitation by the Company or its representatives.
54
In connection with the
private placement, the Company entered into a Securities Purchase Agreement (the “Private
Placement Purchase Agreement”) with investors containing customary representations and warranties. The Company and investors
also entered into the a Registration Rights Agreement (the “Registration Rights Agreement”),
pursuant to which the Company was required to file a resale registration statement (the
“Resale Registration Statement”) with the SEC to register for resale the shares of common stock and the shares of common stock
issuable upon exercise of the Private Placement Warrants and Placement Agent Warrants, promptly following the closing date but in no event
later than 15 calendar days after the effective date of the Registration Rights Agreement, and to have such Resale Registration Statement
declared effective by the Effectiveness Date (as defined in the Registration Rights Agreement). The Company would have been obligated
to pay certain liquidated damages to the investors if the Company failed to file the Resale Registration Statement when required, or failed
to file or cause the Resale Registration Statement to be declared effective by the SEC when required, and will become so obligated if
it fails to maintain the effectiveness of the Resale Registration Statement pursuant to the terms of the Registration Rights Agreement.
On December 23, 2021,
the Company filed the Resale Registration Statement with the SEC (File No. 333-261883) and it was declared effective on January 5, 2022.
On June 10, 2022, a post-effective amendment to the Resale Form S-1 (the “Post-Effective Amendment to Resale Form S-1”) was
filed to update the Resale Registration Statement’s prospectus to include, among other things, the information contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2021 that was filed with the SEC on March 28, 2022 and our Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2022 that was filed with the SEC on May 13, 2022. The Post-Effective Amendment
to Resale Form S-1 became effective on June 16, 2022. Prospectus Supplement No. 1 to the prospectus relating to the Post-Effective Amendment
to Resale Form S-1 was filed pursuant to Rule 424(b)(3) under the Securities Act with the SEC on July 21, 2022 to include the information
set forth in our Current Reports on Form 8-K, which were filed with the SEC on July 19, 2022 and July 21, 2022. Prospectus Supplement
No. 2 to the prospectus relating to the Post-Effective Amendment to Resale Form S-1 was filed pursuant to Rule 424(b)(3) under the Securities
Act with the SEC on August 15, 2022 to include the information in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022,
which was filed with the SEC on August 15, 2022. Prospectus Supplement No. 3 to the prospectus relating to the Post-Effective Amendment
to Resale Form S-1 was filed pursuant to Rule 424(b)(3) under the Securities Act with the SEC on September 7, 2022 to include the information
in our Current Report on Form 8-K, which was filed with the SEC on September 7, 2022. Prospectus Supplement No. 4 to the prospectus relating
to the Post-Effective Amendment to Resale Form S-1 was filed pursuant to Rule 424(b)(3) under the Securities Act with the SEC on November
14, 2022 to include the information in our Quarterly Report on Form 10-Q which was filed with the SEC on November 14, 2022. Prospectus
Supplement No. 5 to the prospectus relating to the Post-Effective Amendment to Resale Form S-1 was filed pursuant to Rule 424(b)(3) under
the Securities Act with the SEC on December 2, 2022 to include the information in our Current Report on Form 8-K which was filed with
the SEC on December 2, 2022. Prospectus Supplement No. 6 to the prospectus relating to Resale Form S-1 was filed pursuant to Rule 424(b)(3)
under the Securities Act with the SEC on January 31, 2023 to include the information in our Current Report on Form 8-K which was filed
with the SEC on January 31, 2023.
The foregoing description
of each of the form of Private Placement Purchase Agreement, the PAA, the form of Registration Rights Agreement, the form of Private Placement
Warrant, and the form of Placement Agent Warrant is qualified in its entirety by reference to such documents which have been filed as
Exhibit 10.29, Exhibit 10.30, Exhibit 10.31, Exhibit 10.32, and Exhibit 10.33 to this Annual Report, respectively, and are incorporated
herein by reference.
Stock
Repurchase Program
As
initially announced on February 23, 2022, under our stock repurchase program, we may repurchase up to $10 million of our outstanding shares
of common stock from time to time in the open market, in accordance with all applicable securities laws and regulations, including
Rule 10b-18. Our decision to repurchase our shares, as well as the timing of such repurchases, will depend on a variety of factors that
include ongoing assessments of our capital needs, market conditions and the price of our common stock, and other corporate considerations,
as determined by management. Repurchases will also only be made in accordance with the Company’s insider trading policy. Our insider
trading policy generally permits insider purchases of our stock only during the period beginning on the second business day following
the day of public release of our quarterly or annual earnings and ending on the last day of the then-current quarter. There is no
defined number of shares to be repurchased over a specified timeframe through the life of the stock
repurchase program. The repurchase authorization has no expiration date but may be suspended or discontinued at any time. It
is expected that stock repurchases will be paid using existing and future cash generated by operations.
On May 23, 2022, we announced that we had established
the Trading Plan with B. Riley intended to qualify under Rule 10b-18. The Trading Plan instructs B. Riley to repurchase shares of common
stock for our account in accordance with Rule 10b-18 and our instructions. Repurchases under the Trading Plan are scheduled to terminate
as late as May 2023.
For the
year ended December 31, 2022, we repurchased a total of 1,777,657 shares and returned $3,332,405
in value to stockholders under the Trading Plan.
As of December
31, 2022, $6,667,595 remained available under the stock repurchase program for future stock repurchases.
55
Debt
On November 22, 2021,
we entered into a Revolving Demand Line of Credit Loan Agreement (the “Loan Agreement”), with Salem Five Cents Savings Bank
(the “Lender”), for aggregate loans of up to $7 million (the “Loan” or “Line of Credit”), evidenced
by a Revolving Demand Line of Credit Note, also dated November 22, 2021 (the “Note”). The Line of Credit and Note are secured
by a first priority security interest in all assets and property of the Company, as more fully described in the Security Agreement, also
dated November 22, 2021, between the Lender and the Borrower (the “Security Agreement” and together with the Loan Agreement
and the Note, the “Loan Documents”).
The amount available
under the Line of Credit is the lesser of $7.0 million or the sum of (x) 80% of the then-outstanding amount of Eligible Accounts (as defined
below), plus (y) 50% of Eligible Inventory (as defined below); minus 100% of the aggregate amount then drawn under the Line of Credit
for the account of the Company. In addition, advances based upon Eligible Inventory must be capped at all times at $2,000,000. “Eligible
Accounts” are defined as accounts that meet a number of requirements, including, unless otherwise approved by the Lender, being
less than ninety (90) days from the date of invoice not subject to any prior assignment, claim, lien, or security interest, not subject
to set-off, credit, allowance or adjustment by the account debtor, arose in the ordinary course of the Company’s business, not an
intercompany obligation, not subject to notice of bankruptcy or insolvency of the account debtor, not owed by an account debtor whose
principal place of business is outside the United States, not a government account, not be evidenced by promissory notes, and not one
of the accounts owed by an account debtor 25% or more of whose accounts are 90 or more days past invoice date; or otherwise not deemed