Business context and reporting period
The filing is Better Choice Company Inc.’s annual report for the fiscal year ended December 31, 2020, comparing results with 2019. The request metadata names SRX Global Inc., but the filing identifies Better Choice Company Inc. as the registrant. Better Choice sells premium pet food, treats and supplements, principally under the Halo and TruDog brands, through e-commerce, direct-to-consumer, brick-and-mortar and international channels. Halo was acquired in December 2019, so 2020 includes a full year of Halo results while 2019 includes only results from the acquisition date.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $42.6 million | $15.6 million |
| Gross profit / margin | $16.1 million / 38% | $5.9 million / 38% |
| Operating loss | $27.3 million | $36.3 million |
| Net loss | $59.3 million | $184.5 million |
| Net cash used in operating activities | $7.5 million | $21.0 million |
| Cash and restricted cash at year-end | $4.0 million | $2.5 million |
| Total debt, net carrying amount | $32.6 million | $37.3 million |
Revenue grew 173%, but the comparison largely reflects the full-year inclusion of Halo; management attributed a $29.6 million increase to Halo, partly offset by a $2.8 million decline in TruPet sales. Cost of goods sold was 62% of sales in both years. Halo’s reported gross margin was 32%, compared with 53% for TruPet.
Year-end current assets were $17.6 million and current liabilities were $54.6 million, a working-capital deficit of approximately $37.0 million. Current liabilities include a $39.9 million warrant liability. The company reported a $24.9 million expense from the change in fair value of that liability. Interest expense was $9.2 million, up from $0.7 million in 2019. No income tax expense was recorded; deferred tax assets were fully offset by a valuation allowance.
Financing activities provided $9.1 million in 2020, including approximately $18.1 million of gross proceeds from the Series F financing, $1.5 million from convertible notes, PPP loan proceeds and revolving-credit activity. Proceeds were partly offset by a $12.5 million term-loan repayment. Investing activities used $0.2 million, primarily for property and equipment.
Material changes versus 2019
- Sales shifted from being predominantly TruDog direct-to-consumer in 2019 to a more diversified channel mix in 2020: e-commerce 34%, DTC 25%, brick-and-mortar 21% and international 20%.
- Operating loss narrowed by $9.0 million, while net loss declined substantially from 2019. The comparison is affected by the 2019 $147.4 million acquisition loss; 2020 results include a $24.9 million noncash warrant fair-value expense.
- Operating cash use improved by $13.5 million. Management cited higher revenue following the Halo acquisition and lower sales and marketing and customer service/warehousing expenses.
- Debt declined from $37.3 million to $32.6 million at carrying value. The company raised Series F capital and repaid $12.5 million of its term loan during 2020.
Outlook, risks and unusual items
- Going concern: Management and the auditor state that recurring losses, a working-capital deficit and outstanding debt raise substantial doubt about the company’s ability to continue as a going concern. The financial statements were prepared on a going-concern basis and include no adjustments for a possible inability to continue operations. The auditor issued an unqualified opinion but highlighted the going-concern uncertainty.
- Financing after year-end: In January 2021, the company entered a Wintrust facility comprising a $6.0 million term loan and $6.0 million revolving line, each scheduled to mature in 2024; proceeds and balance-sheet cash were used to repay prior facilities. The new facility includes a minimum 1.25 fixed-charge coverage covenant. The company also reported approximately $4.1 million raised in a January 2021 private placement and approximately $1.3 million from a March 2021 warrant exercise offer.
- Management plans and outlook: No quantified company revenue or earnings guidance is provided. Management plans to pursue cost savings through logistics and manufacturer consolidation, shipping optimization and overhead reductions, while prioritizing more profitable channels. Management noted Halo’s international growth and China’s opportunity, but future performance remains uncertain.
- COVID-19: The company reported no significant adverse effect on its business, financial condition or cash flows through 2020, but warned that continuing disruption could affect consumer demand, suppliers, manufacturing and distribution.
- Concentration and operating risks: Three vendors supplied approximately 76% of 2020 inventory receipts, and three co-manufacturers represented more than 75% of product volume. Two customers represented 38% of gross sales; two customers accounted for 72% of year-end receivables.
- Other unusual items: A 2019 Elvis Presley-related license was terminated in January 2020, with termination costs of approximately $1.1 million. Management reported that previously identified material weaknesses in internal control were remediated and concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020.
Important facts for investors to verify
- Confirm the identity of the intended company: this 10-K is for Better Choice Company Inc. (OTCQX symbol BTTR), not the company named in the request metadata.
- Review the going-concern disclosure, working-capital deficit, cash runway and the terms and covenant headroom of the January 2021 Wintrust facility.
- Assess dilution and potential share-price effects from the Series F preferred stock, warrants, convertible notes and subsequent 2021 financings.
- Examine whether Halo’s growth can offset the decline in TruPet sales and improve margins, given the reported difference between their gross margins.
- Evaluate dependence on a concentrated supplier and manufacturing base, key customers and international markets, alongside the company’s stated regulatory, product-quality and supply-chain risks.