Better Choice Company Inc. — Form 10-Q Summary
Entity note: The supplied filing identifies the registrant as Better Choice Company Inc., not SRX Global Inc. The report covers the quarter ended June 30, 2019 and was signed October 9, 2019. Financial statements are unaudited. TruPet is the accounting acquirer in the May 6 acquisitions; periods before that date largely reflect TruPet, so comparisons are not fully like-for-like with the combined company.
Business context and reporting period
Better Choice describes itself as a pet wellness company selling food, treats, supplements, dental products and accessories, including hemp-derived CBD products. Sales are primarily direct-to-consumer, with additional online retail and specialty-store channels. On May 6, 2019, it completed all-stock acquisitions of TruPet and Bona Vida; Bona Vida and Better Choice were treated as asset acquisitions, while TruPet was the accounting acquirer. The company changed its fiscal year to the calendar year effective 2019.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales, 2019 | $4.084 million | $7.635 million |
| Net sales, 2018 | $3.817 million | $7.064 million |
| Gross profit, 2019 | $1.663 million | $3.553 million |
| Gross margin, 2019 | 41% | 47% |
| Gross margin, 2018 | 64% | 53% |
| Operating loss, 2019 | $11.263 million | $13.981 million |
| Net loss, 2019 | $161.506 million | $164.286 million |
Quarterly sales rose 7% and six-month sales rose 8% year over year. The net losses include a $149.988 million acquisition loss and, for the six-month period, $4.212 million of share-based compensation. Loss per share was $5.27 for the quarter and $7.75 for the six months, versus $0.06 and $0.21, respectively, in 2018.
Six-month operating cash outflow was $8.481 million, compared with $2.026 million in 2018. Investing activities provided $1.870 million, chiefly reflecting cash acquired in the merger; financing activities provided $13.927 million, primarily from a $15.676 million private placement. Cash, cash equivalents and restricted cash totaled $11.262 million at June 30, including $6.243 million restricted under the bank facility; unrestricted cash was $5.019 million.
At June 30, total assets were $16.478 million and total liabilities were $14.434 million. Working capital was reported as $0.6 million. A $6.2 million revolving credit facility was due May 6, 2020, carried a stated 3.7% interest rate and was secured by company assets; the company was required to maintain $6.2 million on deposit, with withdrawals reducing available credit. Redeemable Series E preferred stock was $13.007 million, and the warrant derivative liability was $2.304 million.
Material changes versus the prior comparable period
- Revenue increased modestly, while gross profit and margins declined. Management attributed margin pressure to a product mix shift from dental products to food and toppers, discounting discontinued products, and a $0.2 million quarterly inventory reserve.
- Operating expenses rose substantially: six-month general and administrative expense was $6.004 million, share-based compensation $4.212 million, and sales and marketing $5.597 million. Management cited public-company infrastructure and staffing, acquisition-related awards, and increased customer-acquisition advertising.
- Cash used in operations increased to $8.481 million from $2.026 million. Financing proceeds, including the PIPE, supported the increase in cash and refinancing of existing debt.
- The $149.988 million acquisition loss and post-acquisition capital structure make reported earnings and balance-sheet comparisons with 2018 especially difficult.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no numerical revenue or earnings guidance. Management expects online retail-partner sales to improve in the second half of 2019 as sales efforts are rebalanced, and expects research costs on acquired CBD research agreements during the second half of 2019. It also expects continued investment in customer acquisition and commercial infrastructure.
- Going concern: Management disclosed substantial losses and accumulated deficit that create uncertainty about the company’s ability to continue as a going concern for twelve months. It cited limited working capital, forecasts, stakeholder support and expense monitoring, but warned that additional capital may not be available on acceptable terms.
- Acquisition accounting: The acquisition loss reflects preliminary purchase-price allocations and includes charges attributed to Better Choice and Bona Vida. The filing states losses of $38.2 million for Better Choice assets and $107.0 million for Bona Vida assets; estimates and allocations may be revised.
- Operating risks: One vendor supplied approximately 83% of inventory purchases in the first half of 2019. The filing also describes prior product recalls related to salmonella, dependence on contract manufacturers, and elevated customer-acquisition and product costs.
- Controls: Disclosure controls were concluded to be ineffective due to material weaknesses involving accounting policies and procedures and limited accounting staff and segregation of duties. Remediation was underway.
- Subsequent events: In September, warrant exercises generated $4.0 million. The company also agreed to issue 1 million shares for $5 million of future advertising media, subject to usage commitments. The co-CEO resigned, and the company entered a consulting arrangement involving warrants for Bruce Linton. These events occurred after quarter-end.
- The filing reports no known legal proceedings believed likely to have a material adverse effect and no off-balance-sheet arrangements likely to have a material effect.
Important facts for investors to verify
- Confirm the correct issuer: the supplied 10-Q is for Better Choice Company Inc., although the request metadata names SRX Global Inc.
- Review the acquisition accounting, including the preliminary $149.988 million acquisition loss and the resulting reported losses.
- Assess liquidity using unrestricted cash rather than total cash and restricted cash; verify the $6.2 million deposit requirement, facility maturity and refinancing options.
- Evaluate the going-concern uncertainty, operating cash burn, and the company’s ability to raise additional capital.
- Track gross margins, inventory reserves, customer-retention economics, and supplier and manufacturer concentration.
- Monitor remediation of material weaknesses, preferred-stock conversion and redemption provisions, and potential dilution from warrants, options and later share issuances.