Filing summary
Entity and period: The supplied filing is Better Choice Company Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020—not a filing identified as SRX Global Inc. The filing describes an animal health and wellness company selling pet products under brands including Halo and TruDog. Comparisons are affected by the December 2019 Halo acquisition; Halo’s results are included only in 2020.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $11.1 million | $3.9 million | $33.3 million | $11.6 million |
| Gross profit / margin | $4.5 million / 40% | $0.8 million / 21% | $12.7 million / 38% | $4.4 million / 38% |
| Operating loss | $3.3 million | $9.7 million | $24.3 million | $23.7 million |
| Net loss | $1.7 million | $6.0 million | $29.6 million | $170.3 million |
| Net loss per share | $0.04 | $0.14 | $0.61 | $5.95 |
At September 30, 2020, cash and cash equivalents were $0.6 million and restricted cash was $1.5 million, for combined cash of $2.1 million. Total assets were $49.8 million, total liabilities $55.8 million, and stockholders’ deficit $16.6 million; redeemable Series E preferred stock was presented separately at $10.6 million. Debt was reported at $43.5 million, including $19.4 million of short-term loans, $5.0 million under the line of credit, and notes and PPP loans. The company reported $5.0 million outstanding on its $7.5 million ABL facility. Operating cash used was $4.5 million for the nine months, versus $13.2 million in 2019; investing cash used was $0.04 million and financing cash provided was $4.1 million.
Material changes and unusual items
- Revenue rose 183% in Q3 and 188% for the nine-month period, primarily because Halo contributed $8.0 million and $23.9 million, respectively. TruPet sales declined year over year. Retail accounted for 76% of Q3 sales and 75% of nine-month sales, versus 9% and 10% in the comparable 2019 periods.
- Q3 gross margin improved to 40% from 21%, with management citing lower product costs and inventory-reserve charges; the nine-month margin remained 38%. Management reported Halo’s gross margin below TruPet’s, reflecting product-cost differences.
- Q3 operating expenses declined 26%, contributing to a narrower operating loss. For the nine months, operating expenses increased 32%, including higher general and administrative costs and share-based compensation; sales and marketing and customer service/warehousing expenses declined.
- Nine-month net loss in 2019 included a large acquisition loss. The 2020 nine-month loss also reflects $7.3 million of net interest expense. Q3 other income included a $4.2 million favorable change in the fair value of warrant derivative liabilities.
- Non-cash and unusual expenses included $5.7 million recorded in connection with a warrant-related advisor termination agreement, as well as acquisition-related inventory amortization and intangible-asset amortization.
Outlook, risks and contingencies
- No quantified revenue, earnings, or cash-flow guidance is provided. Management said it had not seen a material sales decline from COVID-19 as of October 2020, but future effects on sourcing, manufacturing, distribution, consumer spending, and liquidity remained uncertain.
- The filing states that recurring losses, accumulated deficit, and outstanding debt raise substantial doubt about the company’s ability to continue as a going concern for twelve months from issuance. Management cited planned cost savings from manufacturing consolidation, logistics and warehousing optimization, overhead reductions, and a focus on more profitable channels.
- The ABL facility is secured by company assets, personally guaranteed by a director, and subject to financial covenants beginning December 31, 2020. The company reported covenant compliance and no debt defaults as of September 30, 2020.
- Supplier and customer concentrations are notable: three vendors supplied approximately 78% of inventory purchases in the first nine months of 2020; two customers generated 35% of gross sales, and three customers represented 70% of accounts receivable at quarter-end.
- Management reported disclosure controls and procedures were not effective as of September 30, 2020, pending remediation of material weaknesses. No legal proceedings or claims believed to have a material adverse effect were identified.
- Subsequent event: In October 2020, the company raised approximately $21.7 million gross through a Series F preferred-stock financing, including approximately $11.5 million invested by officers and directors, and exchanged all outstanding Series E preferred stock for Series F units. Series F is convertible into common stock at $0.50 per share and includes warrants exercisable at $0.75. The company also repriced 6.1 million employee stock options to $0.60 per share.
Investor verification priorities
- Confirm the issuer identity: the supplied filing names Better Choice Company Inc., despite the request metadata naming SRX Global Inc.
- Assess liquidity and going-concern risk, including the timing and use of Series F proceeds, short-term loan maturity or demand terms, ABL availability, and upcoming covenant requirements.
- Review potential dilution from Series F conversion, warrants, convertible notes, options, and other reserved share commitments.
- Evaluate the sustainability of sales growth and margins separately from Halo acquisition effects, including the decline in TruPet sales and the different channel mix.
- Review the material weaknesses in disclosure controls and management’s progress toward remediation, as well as supplier and customer concentration exposure.