Filing identity and reporting period
The supplied filing is Better Choice Company Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2020, signed August 14, 2020. It is not identified as a filing by SRX Global Inc.; verify the issuer before relying on this summary. Better Choice sells pet food and wellness products, principally under Halo and TruDog. Halo was acquired in December 2019, so 2020 results include Halo while the comparable 2019 periods do not, limiting comparability.
Financial results and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $9.941m | $4.084m | $22.167m | $7.635m |
| Gross profit / margin | $4.124m / 41% | $1.663m / 41% | $8.281m / 37% | $3.553m / 47% |
| Operating loss | $(12.500)m | $(11.263)m | $(21.032)m | $(13.981)m |
| Net loss | $(18.404)m | $(161.506)m | $(27.858)m | $(164.286)m |
| Loss per share, basic and diluted | $(0.38) | $(5.27) | $(0.57) | $(7.75) |
- Sales rose 143% in Q2 and 190% in the first half. Management attributed much of the increase to Halo: $7.0m of Q2 sales and $15.9m for the first half. TruPet sales declined $1.1m and $1.5m, respectively.
- Q2 gross margin was unchanged year over year, but first-half margin fell to 37% from 47%. Management cited Halo’s lower product margin, inventory-related costs, and a $0.9m first-half non-cash purchase-accounting inventory adjustment.
- Q2 operating expenses were $16.624m, including $11.594m of general and administrative expense. The quarter included a $5.7m expense tied to terminating an advisor agreement and $3.474m of expense from the change in fair value of warrant derivative liabilities.
- First-half operating cash use was $2.168m, versus $8.481m in 2019. Investing used $0.006m and financing provided $3.127m; cash and restricted cash increased $0.953m. Cash and cash equivalents at June 30 were $3.462m, plus $0.025m of restricted cash.
- At June 30, current assets were $16.427m and current liabilities $38.171m, a working-capital deficit of about $21.744m. Total liabilities were $56.776m; reported debt was $42.290m. The $18.157m short-term loan and $5.687m line of credit were due December 19, 2020 or earlier on lender demand.
- Redeemable Series E preferred stock was $10.566m. Stockholders’ deficit was $16.614m. Common shares outstanding were 48,939,708 at June 30 and August 12; the filing also reports substantial potential dilution from options, warrants, preferred stock and convertible notes.
Changes, outlook, and risks
- Year-over-year sales growth reflects the Halo acquisition and should not be read as organic growth. The 2019 comparison also includes a $149.988m acquisition loss, explaining much of the unusually large prior-year net loss.
- Management reported no material sales decline from COVID-19 as of July 2020, but said impacts on sourcing, manufacturing, distribution, consumer spending, financial condition and liquidity remained uncertain. The filing provides no quantitative earnings or revenue guidance.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing recurring losses, cash needs and debt. Management plans cost savings through manufacturing consolidation, shipping and warehousing optimization, overhead reductions, and a focus on more profitable channels.
- After quarter-end, on July 16, 2020, the company obtained a $7.5m asset-backed revolving facility maturing July 5, 2022, intended to repay the existing revolving facility and support general corporate purposes. It is secured by company assets, personally guaranteed by a director, and bears interest at LIBOR plus 250 basis points, subject to a 3.25% floor.
- Disclosure controls and procedures were deemed ineffective at June 30 due to material weaknesses previously described in the annual report; management said remediation was ongoing. The company was in compliance with debt covenants at quarter-end, and reported no known legal proceedings expected to have a material adverse effect.
- Risk concentrations include two customers representing 39% of first-half gross sales and two customers representing 71% of receivables at June 30; three suppliers accounted for approximately 77% of first-half inventory purchases.
Key facts investors should verify
- Confirm that Better Choice Company Inc., rather than SRX Global Inc., is the intended issuer and that this is the intended filing.
- Review the July 2020 credit facility’s terms, collateral, guaranty, covenants and actual use of proceeds, and confirm how the December 2020 lender debt was addressed.
- Assess funding needs and progress against management’s cost-saving plans in light of the going-concern warning, working-capital deficit and recurring losses.
- Separate Halo’s acquired revenue from underlying growth, and track gross margins, inventory reserves and TruPet sales trends.
- Evaluate potential dilution from convertible notes, warrants, options and preferred stock, including the warrant reset features and the June 2020 notes’ conversion terms.
- Track remediation of the disclosed material weaknesses and any changes to customer, supplier or COVID-19 exposure.