10-K: Better Choice Company Inc. Reports Full Year 2023 Results, Navigates Supply Chain Challenges and Strategic Shifts

Better Choice Company Inc. reported a decrease in net sales for 2023, impacted by supply chain issues and strategic channel exits, while also highlighting a focus on profitability and digital-first strategy.

Summary

• Better Choice Company Inc. reported net sales of $38.6 million for the year ended December 31, 2023, a decrease of 29% compared to $54.7 million in 2022.
• The company experienced a gross profit of $11.8 million, a decrease of 23% compared to $15.3 million in 2022, however gross profit margin increased to 31% from 28% in the prior year.
• Operating expenses decreased by 39% to $33 million, primarily due to lower marketing costs and reduced headcount.
• The company incurred a net loss of $22.8 million for 2023, compared to a net loss of $39.3 million in 2022.
• E-commerce sales accounted for 35% of net sales, while international sales also contributed 35%, with brick and mortar and direct-to-consumer channels making up the remaining 30%.
• The company strategically exited Petco and Pet Supplies Plus stores in December 2023 and plans to exit its direct-to-consumer channel in Q2 2024 to improve profitability.
• The company faced supply chain constraints, including production delays from a dry kibble co-manufacturer, which impacted sales and inventory levels.
• The company transitioned its dry kibble manufacturing back to Alphia, which caused short-term delays in international registrations and product launches.
• The company has a term loan with Alphia with an outstanding balance of $2.9 million as of December 31, 2023, and a receivables credit facility with Wintrust with an outstanding balance of $1.7 million.
• The company had cash and cash equivalents of $4.5 million as of December 31, 2023, compared to $9.5 million in 2022.

Sentiment

Score: 3

Explanation: The document presents a mixed picture with significant challenges. While there are some positive aspects like improved gross margin and cost reductions, the substantial decrease in sales, supply chain issues, and going concern uncertainty weigh heavily on the overall sentiment. The strategic shifts are a positive, but the execution and impact are yet to be seen.

Positives

• Gross profit margin increased to 31% in 2023, indicating improved profitability per unit sold.
• Operating expenses decreased by 39%, showing a focus on cost management.
• The company is shifting to a digital-first strategy, which may improve efficiency and reach a broader customer base.
• The company is actively working with co-manufacturing and freight partners to generate future cost savings and improve gross margins.
• The company has a robust and growing pipeline of new products.

Negatives

• Net sales decreased by 29% year-over-year, indicating a significant decline in revenue.
• The company experienced significant production delays from its dry kibble co-manufacturing partner.
• The company strategically exited Petco and Pet Supplies Plus stores, which may impact future sales.
• The company plans to exit its direct-to-consumer channel, which may impact future sales.
• The company has a history of recurring losses and has a significant accumulated deficit.
• The company failed to meet certain financial covenants as of December 31, 2023.

Risks

• The company's ability to continue as a going concern is in doubt due to recurring losses and failure to meet financial covenants.
• The company is dependent on a limited number of third-party suppliers, which could lead to supply disruptions and price fluctuations.
• The company faces intense competition in the pet health and wellness industry.
• The company's ability to manage its supply chain effectively is critical to meeting customer demand.
• The company's intellectual property rights may be inadequate to protect its business.
• The company relies heavily on third-party commerce platforms, which could be disrupted.
• The company may face difficulties as it expands into new markets.
• The company is subject to extensive governmental regulation and may be subject to enforcement if it is not in compliance with applicable requirements.
• The company's level of indebtedness and related covenants could limit its operational and financial flexibility.
• The company's common stock may be deemed to be a penny stock, which could adversely affect its market price.
• The company's failure to meet the continued listing requirements of NYSE American could result in a delisting of its common stock.
• The company's common stock prices may be volatile.

Future Outlook

The company expects to continue to generate operating losses and consume cash resources in the near term. The company is implementing plans to achieve operating profitability, including various margin improvement initiatives, the consolidation of and introduction of new co-manufacturers, the optimization of its pricing strategy and ingredient profiles, and new product innovation. The company plans to exit its direct-to-consumer channel in Q2 2024 to improve profitability.

Management Comments

• Management shifted from a Brick & Mortar channel focus to a digital first strategy as a result of its annual operating plan process.
• Management has implemented and continues to implement plans to achieve operating profitability, including various margin improvement initiatives, the consolidation of and introduction of new co-manufacturers, the optimization of our pricing strategy and ingredient profiles, and new product innovation.

Industry Context

The pet food industry is experiencing growth due to increased pet ownership and humanization of pets. The company is focusing on the premium and super-premium segments, which are expected to grow at a higher rate. The company is also targeting the Asian market, particularly China, which represents a significant growth opportunity.

Comparison to Industry Standards

• The company's gross profit margin of 31% is within the range of other premium pet food companies, but the decrease in net sales is concerning compared to industry growth trends.
• The company's shift to a digital-first strategy aligns with the broader trend of increasing e-commerce penetration in the pet food market, but the exit from brick and mortar stores may impact sales.
• The company's focus on the Asian market, particularly China, is consistent with the industry's recognition of the region's growth potential, but the company's international sales declined by 37% in 2023.
• The company's reliance on a limited number of co-manufacturers is a common practice in the industry, but the supply chain issues experienced in 2023 highlight the risks associated with this model.
• The company's debt levels and financial covenants are similar to other companies in the industry, but the company's failure to meet certain covenants raises concerns about its financial stability.

Management Changes

Corporate Governance

Legal Proceedings

• On March 25, 2024, Better Choice Company, Inc. (BTTR) initiated a legal action to enforce a right of first refusal (ROFR) option exercised by Alphia, Inc. (Alphia).

Related Party Transactions

• The company has a marketing support services agreement with Believeco, where a member of the company's board of directors is a partner.

Stakeholder Impact

• Shareholders may be concerned about the company's financial performance and ability to continue as a going concern.
• Employees may be affected by the company's cost-cutting measures and strategic shifts.
• Customers may experience changes in product availability and distribution channels.
• Suppliers may be impacted by the company's supply chain issues and strategic shifts.
• Creditors may be concerned about the company's ability to meet its debt obligations.

Next Steps

• The company plans to exit its direct-to-consumer channel in Q2 2024.
• The company will continue to implement plans to achieve operating profitability, including various margin improvement initiatives, the consolidation of and introduction of new co-manufacturers, the optimization of its pricing strategy and ingredient profiles, and new product innovation.
• The company will continue to evaluate the appropriate controls to design and maintain effective controls supporting financial systems relevant to its financial reporting processes.
• The company will continue to evaluate staffing requirements and technology improvement opportunities to further address and achieve remediation.
• The company will engage outside advisors with specialist knowledge of GAAP and valuation as it relates to its complex financial instruments.
• The company will continue to evaluate the appropriate controls to design and maintain effective controls supporting revenue recognition and are in the process of enhancing certain controls over revenue, including adding resources and training programs addressing the design, implementation, and documentary evidence requirement of control procedures over revenue recognition for appropriate personnel.

Key Dates

Keywords

pet food, pet health, e-commerce, supply chain, financial results, Halo, premium pet food, digital strategy, international sales, direct-to-consumer