SRX Global Inc. annual report, FY2019

Filing and reporting period

Entity discrepancy: The supplied filing is Better Choice Company Inc.’s Form 10-K for the fiscal year ended December 31, 2019; it does not identify SRX Global Inc. as the registrant. The company changed its fiscal year end from August 31 to December 31 in 2019. Results are not directly comparable: 2018 reflects TruPet alone, while 2019 includes TruPet for the full year, Bona Vida from May 6, and Halo from December 19.

Financial performance and liquidity

Revenue rose 5%, but cost of goods sold increased 30%; management attributed the margin decline in part to a shift toward higher-cost food and toppers, inventory reserves, and Houndog-related costs. Halo contributed $0.7 million of revenue after acquisition. About 89% of 2019 revenue was DTC and 11% Retail; management expected the mix to shift toward Retail following Halo’s acquisition.

The reported net loss included a $147.4 million loss on the May acquisitions, which were accounted for as asset acquisitions, as well as $10.3 million of share-based compensation and an $0.9 million impairment of the Houndog license. The loss from operations was $36.3 million. Interest expense was $0.7 million; no income tax provision was recorded, principally because of a valuation allowance against deferred tax assets.

At December 31, cash and cash equivalents were $2.4 million, with $0.2 million restricted. Current assets were $17.6 million and current liabilities $33.0 million, a working-capital deficit of approximately $15.4 million. Reported debt carrying value was $37.3 million, including a $20.5 million term loan, $5.0 million revolving borrowing, and subordinated convertible notes. The term loan and revolving facility were due December 19, 2020, or earlier on lender demand; the facilities were secured by substantially all company and domestic subsidiary assets. The 10% notes mature in 2021 and 2023. The company reported covenant compliance at year-end.

Material changes, outlook and risks

• Acquisitions: Halo was acquired for approximately $38.2 million, including $20.5 million cash, $15.0 million seller notes, shares and warrants. Its results were included only from December 19. The May acquisitions generated the $147.4 million accounting loss described above.
• Funding and going concern: The auditor and management cited recurring losses, a working-capital deficiency and substantial doubt about the company’s ability to continue as a going concern. Management planned cost savings through manufacturer consolidation, shipping and warehousing optimization, overhead reductions, and focus on more profitable channels; additional financing or successful execution of those plans was not assured.
• Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing material weaknesses in segregation of duties, documented accounting procedures, the financial close and subsidiary systems integration, and sales-tax controls. Halo’s controls, representing about 85% of consolidated assets at year-end, were excluded from the assessment.
• Regulatory and supply risks: The FDA stated that CBD-added animal food is prohibited under its interpretation of federal law, while the regulatory pathway remained unsettled. GenCanna, the company’s sole CBD supplier, filed for bankruptcy in February 2020. Three vendors accounted for more than 75% of product volume, and one vendor represented approximately 74% of inventory purchases in 2019.
• COVID-19: As of mid-April 2020, management had not seen a material sales decline or product-supply reduction, but could not estimate the pandemic’s future effects on demand, suppliers, logistics, operations or liquidity.
• Other unusual items: The company accrued $1.2 million of sales taxes and disclosed a $0.7 million understatement of 2018 sales taxes, corrected in 2019 and considered immaterial. It terminated the Houndog license in January 2020, with additional cash, share, note and warrant obligations. A $0.4 million Paycheck Protection Program loan was received in April 2020.
• Outlook: The filing provides no quantified revenue, earnings or cash-flow guidance. It describes plans for Retail and international expansion, product launches, and cost reduction, subject to significant execution, financing, regulatory and integration risks.

Investor verification priorities

1. Confirm the issuer identity: this filing names Better Choice Company Inc., not SRX Global Inc.
2. Review current liquidity, lender demand and maturity terms, covenant status, and financing available after year-end; the filing reports substantial doubt about going concern.
3. Assess post-acquisition operating results and whether Halo integration, cost savings and the anticipated Retail-channel contribution materialized.
4. Track remediation of material weaknesses and the effect of the sales-tax accrual and any further tax assessments.
5. Verify CBD product compliance and replacement sourcing after GenCanna’s bankruptcy, alongside exposure to concentrated manufacturers and suppliers.
6. Evaluate dilution and obligations from convertible notes, warrants, preferred stock and equity compensation, including subsequent issuances and amendments.