Simply Better Brands ($SBBC.V) FINS Review (From the archive)

Q2 (2 / 5) * originally posted Sept, 2023

Nov 19, 2024

Another ticker that I thought had a great chance in 2023. It started off well, nearly tripling from late December lows to it's YTD high in May from 19 to 56 cents, but I must say I've been pretty lukewarm on it since they started reporting financials in May. Sold my position after their annuals and took a smaller position after their Q1. Their last five set of financials have seen ratings in the 2 - 2.5 range. Let's see how Q2 fared.

Balance Sheet:

Due to not meeting financial covenants on their largest loan relating back to their acquisition of PureKanna (PK), their balance sheet has looked like trash for over a year now. After a slight improvement in their current ratio in Q1, their current ratio has regressed back closer to where it was at the end of 2022, to a worrisome .67 that consists of $3.94M in cash, $2.18M in receivables, $4.54M in prepaids and $3.35M worth of inventory over a gigantic $21.5M in liabilities (deferred revenue excluded) due over the course of the next year. In fairness, the total of the $10.37M PK loan will not actually be due within the next twelve months, but they are indeed on the hook for 15% of the amount owning at the end of the year, and YTD has incurred more interest than principal paid. Long term debts of just over $1M from a combination of pricey promissory and convertible debentures.

Cash Flow:

After achieving a nice milestone in Q1 with $1M of operational cash flow, Q2 went the other way where they burned about $300k, so their OCF through six months sits at just over $700k. I think it is not as good as it looks due to working capital adjustments, as there is $1M in deferred revenue and they have over collected on A/R YTD by over $2.3M which will not continue to trend this way. During the year, they received nearly $5M through their PP and paid down their net debt by $3.86M. Overall through 2023, they have improved their cash position by 68%.

Share Capital:

71.7M shares outstanding, 129% dilution from the same time last year
2.3M warrants, with 1.8M just ITM
1.37M options, about half just ITM
18.5% insider ownership (per Yahoo Finance)
No open market buying since Feb, but with the amount of RSU's being handed out, I don't foresee any

Income Statement:

Revenue of $23.56M, up 39.5% from last year but more importantly, down 4.3% QoQ. The shine is starting to come off early here. Through six months, revenues are up 66% to $48.2M. Gross profit as expected is down significantly due to the balance of sale shift within their product lines, down 1100 basis points in the quarter and roughly the same YTD. 57% vs 67.8%. On over $48M of sales, that's over a $5M hit to the GP line.

During a quarter where the company went backwards QoQ by over 4% in revenue, total expenses were up by over 24%, and on a YTD basis are up 38%. This one is pretty unforgivable IMO, and what makes it worse is they spent over $3M more or 29% QoQ in marketing costs to deliver 4% less revenue. When I was a junior VP with a modest (compared to my peers) marketing budget, I asked for additional dollars and I was told "Marketing is a drug", by a senior VP whom I needed to approve those dollars. That statement which I didn't think much of then surely rings true with these guys. SBBC's marketing expense in Q2 of 2022 made up 70.6% of their gross profit dollars, and I called it out THEN for being ridiculously high and wondered myself how they would get themselves off of that "drug". This latest quarter, marketing spend was over 98% of gross profit dollars. That's grotesque. Now a big chunk of the increase is related to national promotions with Costco for TruBar, but you need to find that expense from elsewhere, and instead it appears they doubled down and spent more on online advertising for PK as well. So with all of that said, Total expenses were through $33.2M two quarters , over $9M more than last year. Losses before other items was up 33% to $5.7M vs $4.3M. Tack on a more than doubling of finance expense due to their debt and a loss on remeasured warrants, and their Net loss grew by 66% to $9M, up from $5.4M.

Overall:

After some encouraging metrics in Q1, this is a pretty big step backwards for me. QoQ sales erosion, monumental drop in GP rate, and a major increase in spending is the trifecta of shitting the bed. Simply has some really attractive brands, but management appears inept at being able to grow these brands profitably. If you dig deep, there are some potentially encouraging things within the MD&A, but as long as their marketing expense is this much of a percentage of gross profit dollars, it doesn't matter. Add in their debt issues and it's an even bigger factor that they are running the business this poorly. The $700k in OCF YTD, I think is a bit of a mirage - it's not as good as it looks. Tack on the fact that there is lump sum principal payments due on their largest loan, and it wouldn't shock me to see another raise by the end of the year. Stock price has slid as a result of these financials, and I believe deservedly so. As of yet, the company has not come off of their $80M sales projection for the year, which would mean a significant drop from where they are today. After you just experienced your first QoQ sales decline in years, you think you would get on that if you believed you would do better. At a sub $20M MC, the potential is there, but I'm starting to think the potential is in a buyout, not with these guys running the show. Downgrading to 2 stars.

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Disclaimer:

My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements. I do not accept compensation of any kind from companies I review.

Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.