Business context and reporting period
This is Better Choice Company Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The filing describes a pet health and wellness business selling Halo-branded food, treats, and related products through e-commerce, brick-and-mortar, direct-to-consumer, and international channels. Filing identity discrepancy: the request names SRX Global Inc., but the filing identifies Better Choice Company Inc. (NYSE American: BTTR).
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in thousands unless indicated.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $13.1 million | $11.9 million | $32.9 million | $45.4 million |
| Gross profit | $4.4 million | $4.2 million | $11.3 million | $13.6 million |
| Gross margin | 34% | 35% | 34% | 30% |
| Operating loss | $(2.6) million | $(6.4) million | $(8.5) million | $(14.6) million |
| Net loss | $(1.6) million | $(6.5) million | $(8.1) million | $(15.0) million |
| Basic and diluted loss per share | $(0.05) | $(0.22) | $(0.26) | $(0.51) |
- Cash flow: Nine-month operating cash used was $0.9 million, versus $18.0 million used in 2022. Investing cash use was $0.01 million; financing cash use was $4.8 million. Cash and restricted cash declined $5.7 million to $3.8 million at September 30.
- Liquidity: Current assets were $20.9 million and current liabilities $13.2 million, including $7.8 million of accounts payable. Cash was $3.8 million; the prior year-end’s $6.3 million restricted cash was released after repayment of the Wintrust facility.
- Debt: At quarter-end, the company reported $1.9 million outstanding under a Wintrust receivables facility and a $2.7 million net carrying amount for the Alphia term loan. The term loan’s original principal was $5.0 million; it bears 10% interest, compounded quarterly, and matures June 21, 2026. The receivables facility has a stated maximum of approximately $4.8 million. Alphia debt is secured by company and Halo assets, including intellectual property.
Material changes versus the prior comparable period
- Q3 sales rose 11%, while nine-month sales fell 28%. International sales and Amazon contributed to the quarterly increase; the year-to-date decline was attributed principally to production delays, raw-material and labor shortages, capacity constraints, and resulting product out-of-stocks. Transitioning dry-kibble manufacturing to Alphia also delayed some international registrations and launches.
- Q3 gross margin slipped to 34% from 35%, partly because excess inventory was sold at a discount. Nine-month gross margin improved to 34% from 30%, aided by lower average cost per pound, larger production runs and price increases.
- SG&A declined 33% in Q3 and 30% year to date, reflecting reduced marketing and agency spending, lower headcount, and lower corporate and professional costs. Operating losses narrowed substantially.
- Interest expense increased to $0.95 million for the nine months from $0.32 million, including accelerated amortization of debt issuance costs when the Wintrust credit facility was paid off in June 2023.
Outlook, risks, contingencies, and unusual items
- Going concern: Management states that recurring losses and expected cash use raise substantial doubt about the company’s ability to continue as a going concern for twelve months from issuance. It says additional capital or financing, lender waivers or amendments, or a combination may be needed; success is not assured. Management is pursuing profitability through margin initiatives, supplier and manufacturing changes, pricing optimization, and product innovation. No quantified financial guidance is provided.
- Concentration and operating risks: Three suppliers accounted for approximately 74% of inventory purchases for the first nine months. Three customers represented 63% of gross sales, and three customers held 88% of accounts receivable at quarter-end. A China distributor alone generated $11.0 million of nine-month net sales.
- Debt and dilution: Alphia received warrants for approximately 14.8 million shares at $0.26 per share, expiring in 2028; exercise of the second tranche is subject to shareholder approval. The warrants include anti-dilution provisions and are accounted for as liabilities. The term loan also gives Alphia certain rights of first refusal and board observer rights.
- Controls and cybersecurity: Disclosure controls were deemed ineffective. The company disclosed a material weakness relating to an email-compromise cybersecurity incident discovered in July 2023; a third-party investigation was ongoing. A separate material weakness concerned accounting for complex financial instruments, including warrant classification and disclosures. Management said the financial statements fairly present the company’s position and results and described remediation plans.
- Other items: In October 2023, the company borrowed an additional $0.8 million under the Wintrust receivables facility. The filing reports no known legal claims expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer: the filing is for Better Choice Company Inc. (BTTR), not SRX Global Inc.
- Assess the going-concern warning against available cash, subsequent borrowing, future cash burn, and financing or lender options.
- Review the status and findings of the cybersecurity investigation, and progress remediating both disclosed material weaknesses.
- Verify customer and supplier concentration, the China distributor’s sales, and whether manufacturing and registration delays have eased.
- Evaluate total debt obligations and terms, including the Alphia loan’s original principal versus its discounted carrying amount, and potential warrant dilution.
- Reconcile reported share counts: the balance sheet shows 32,077,148 shares at September 30, while the cover page reports 32,081,148 shares as of November 13, 2023.