Business context and reporting period
This Form 10-Q covers the three months ended March 31, 2020; it was signed June 25, 2020. The filing identifies the registrant as Better Choice Company Inc., not SRX Global Inc.—verify that this is the intended filing. Better Choice sells pet food and wellness products under brands including Halo and TruDog. Halo was acquired in December 2019, so the 2020 quarter includes Halo while the 2019 comparison does not; results are not directly comparable.
Financial results and liquidity
Amounts below are in millions of U.S. dollars unless indicated otherwise.
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $12.226 | $3.551 |
| Gross profit / margin | $4.157 / 34% | $1.890 / 53% |
| Operating expenses | $12.689 | $4.604 |
| Operating loss | $(8.532) | $(2.714) |
| Net loss | $(9.454); $(9.488) available to common stockholders | $(2.776) |
| Loss per share, basic and diluted | $(0.20) | $(0.24) |
| Cash used in operating activities | $(1.159) | $(1.368) |
| Cash and restricted cash, March 31 | $1.867 | $2.534 at Dec. 31, 2019 |
Gross margin fell primarily because Halo’s reported product margin was 27%, versus 54% for TruPet, and Q1 included $0.9 million of noncash inventory purchase-accounting amortization. Halo contributed $9.0 million of sales. Reported sales rose 244%, but the acquisition makes the year-over-year comparison substantially acquisition-driven.
At March 31, current assets were $15.814 million and current liabilities $32.917 million, a working-capital deficit of approximately $17.1 million. Total debt was $39.948 million, including a $17.023 million short-term loan and $5.366 million line of credit, net of discounts. The short-term loan and line mature December 19, 2020 or may be payable earlier on lender demand; stated interest is Bank of Montreal Prime plus 8.05%. The company also had $10.566 million of redeemable Series E preferred stock. It reported compliance with debt covenants and no defaults.
Material changes, outlook and risks
- General and administrative expense rose to $8.056 million, including $2.484 million of share-based compensation. Interest expense increased to $2.301 million from less than $0.1 million.
- Management cited cost-reduction plans, including consolidating contract manufacturers, optimizing shipping and warehousing, and reducing overhead, while prioritizing more profitable channels. No quantified earnings or revenue guidance was provided.
- The filing states that recurring losses, accumulated deficit and outstanding debt create substantial doubt about the company’s ability to continue as a going concern for twelve months from issuance. Continued operations depend on financing and execution of cost savings and strategic plans.
- COVID-19’s impact was uncertain; management said it had not seen a material sales decline as of May 2020, but warned of possible adverse effects on operations, cash flows and consumer spending.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2020. Management said remediation of previously reported material weaknesses was ongoing.
- Unusual items included a $1.1 million cost to terminate the Houndog license, a $1.379 million noncash gain from a reduction in warrant derivative liability, and significant equity-based compensation. Four customers represented 70% of gross sales; two customers represented 79% of receivables.
- Subsequent events: subsidiaries received two PPP loans of approximately $0.4 million each in April and May 2020. On June 24, the company issued $1.5 million of convertible notes and 2.0 million warrants, and amended certain existing note and warrant terms. These occurred after quarter-end.
Important facts for investors to verify
- Confirm the filing’s registrant identity: Better Choice Company Inc., rather than SRX Global Inc.
- Assess near-term liquidity, lender demand rights and the December 2020 maturity against the going-concern warning; verify financing availability and subsequent funding.
- Separate organic performance from Halo’s acquisition contribution and assess whether margins can recover after the purchase-accounting inventory charge.
- Review dilution exposure from convertible debt, warrants, preferred stock and equity compensation.
- Track customer concentration, COVID-19 effects and remediation of ineffective disclosure controls.