SRX Global Inc 10-Q, filed Nov 14, 2023
SRX Global Inc. (SRXH)
About this 10-Q
SRX Global Inc filed this 10-Q on November 14, 2023, covering the quarter ended September 30, 2023.
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $13.12M
- up 10.6% from $11.87M a year earlier
- Net loss
- $1.62M
- compared with a net loss of $6.55M a year earlier
- Diluted EPS
- -$0.05
- compared with -$0.22 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
Or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) (Zip Code) | (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files.)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ☐ Accelerated filer ☐
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date was: shares of $0.001 par value common stock outstanding as of November 13, 2023.
Better Choice Company Inc.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “should,” “will,” “would,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including, but not limited to, those summarized below:
| ● | our ability to continue as a going concern; |
| ● | the impact of damage to or interruption of our information technology systems due to cyber-attacks or other circumstances beyond our control; |
| ● | the continued impact of the actual or perceived effects of the COVID-19 pandemic, including as a result of any additional variants of the virus or the efficacy and distribution of vaccines, on the global pet health and wellness industry, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations; |
| ● | business interruptions resulting from geopolitical actions, including war and terrorism; |
| ● | our ability to successfully implement our growth strategy; |
| ● | failure to achieve growth or manage anticipated growth; |
| ● | our ability to achieve or maintain profitability; |
| ● | the loss of key members of our senior management team; |
| ● | our ability to generate sufficient cash flow or raise capital on acceptable terms to run our operations, service our debt and make necessary capital expenditures; |
| ● | our dependence on our subsidiaries for payments, advances and transfers of funds due to our holding company status; |
| 3 |
| ● | our ability to successfully develop additional products and services or successfully market and commercialize such products and services; |
| ● | competition in our market; |
| ● | our ability to attract new and retain existing customers, suppliers, distributors or retail partners; |
| ● | allegations that our products cause injury or illness or fail to comply with government regulations; |
| ● | our ability to manage our supply chain effectively; |
| ● | our or our co-manufacturers’ and suppliers’ ability to comply with legal and regulatory requirements; |
| ● | the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require, whether as a result of the continued actual or perceived effects of the COVID-19 pandemic or broader geopolitical and macroeconomic conditions, including the military conflict between Russia and Ukraine; |
| ● | our ability to develop and maintain our brand and brand reputation; |
| ● | compliance with data privacy rules; |
| ● | our compliance with applicable regulations issued by the U.S. Food and Drug Administration (“FDA”), the U.S. Federal Trade Commission (“FTC”), the U.S. Department of Agriculture (“USDA”), and other federal, state and local regulatory authorities, including those regarding marketing pet food, products and supplements; |
| ● | risk of our products being recalled for a variety of reasons, including product defects, packaging safety and inadequate or inaccurate labeling disclosure; |
| ● | risk of shifting customer demand in relation to raw pet foods, premium kibble and canned pet food products, and failure to respond to such changes in customer taste quickly and effectively; |
| ● | the other risks identified in this Quarterly Report including, without limitation, Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 1A “Risk Factors” as such factors may updated from time to time in our other public filings; and |
| ● | Per section 9.3(H) of the WinTrust Credit Facility referenced in Note 8, Halo is restricted on its ability to pay dividends and make payments to the Company as defined in the loan and security agreement. This impacts the Company’s ability to pay dividends to its shareholders, as the Company depends on its subsidiaries for transfers of funds to support professional fees and its holding company status. |
NOTE REGARDING TRADEMARKS
We own or have rights to use the trademarks and trade names that we use in conjunction with the operation of our business. Each trademark or trade name of any other company appearing in this Quarterly Report on Form 10-Q is, to our knowledge, owned by such other company. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.
| 4 |
PART I
ITEM 1. FINANCIAL STATEMENTS
Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expenses: | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of warrants liabilities | ||||||||||||||||
| Total other expense, net | ( | ) | ( | ) | ||||||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ||||||||||||||||
| Net loss available to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares outstanding, basic | ||||||||||||||||
| Weighted average number of shares outstanding, diluted | ||||||||||||||||
| Net loss per share available to common stockholders, basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share available to common stockholders, diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
Better Choice Company Inc.
Unaudited Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Fixed assets, net | ||||||||
| Right-of-use assets, operating leases | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities & Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued and other liabilities | ||||||||
| Line of credit, net | ||||||||
| Warrants liabilities | ||||||||
| Operating lease liability | ||||||||
| Total Current Liabilities | ||||||||
| Non-current Liabilities | ||||||||
| Line of credit, net | ||||||||
| Term loan, net | ||||||||
| Operating lease liability | ||||||||
| Total Non-current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Common Stock, $ par value, shares authorized, & shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 6 |
Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Dollars in thousands, except shares)
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance as of December 31, 2022 | $ | | $ | $ | ( | ) | $ | | ||||||||||||
| Share-based compensation | ||||||||||||||||||||
| Share issuance | — | ( | ) | |||||||||||||||||
| Net loss available to common stockholders | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of March 31, 2023 | ( | ) | ||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||
| Net loss available to common stockholders | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of June 30, 2023 | ( | ) | ||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||
| Net loss available to common stockholders | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of September 30, 2023 | ( | ) | ||||||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance as of December 31, 2021 | $ | | $ | $ | ( | ) | $ | | ||||||||||||
| Share-based compensation | ||||||||||||||||||||
| Net loss available to common stockholders | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of March 31, 2022 | ( | ) | ||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||
| Net loss available to common stockholders | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of June 30, 2022 | ( | ) | ||||||||||||||||||
| Beginning balance | ( | ) | ||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||
| Net loss available to common stockholders | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of September 30, 2022 | ( | ) | ||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 7 |
Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
| 2023 | 2022 | |||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flow from Operating Activities: | ||||||||
| Net loss available to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance costs | ||||||||
| Share-based compensation expense | ||||||||
| Amortization of prepaid assets | ||||||||
| Change in fair value of warrants liabilities | ( | ) | ||||||
| Inventory reserve | ( | ) | ||||||
| Loss on disposal of assets | ||||||||
| Other | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued and other liabilities | ( | ) | ||||||
| Cash Used in Operating Activities | $ | ( | ) | $ | ( | ) | ||
| Cash Flow from Investing Activities: | ||||||||
| Capital expenditures | $ | ( | ) | $ | ( | ) | ||
| Cash Used in Investing Activities | $ | ( | ) | $ | ( | ) | ||
| Cash Flow from Financing Activities: | ||||||||
| Proceeds from revolving lines of credit | ||||||||
| Payments on revolving line of credit | ( | ) | ( | ) | ||||
| Proceeds from Alphia Facility | ||||||||
| Payment of loan issuance costs | ( | ) | ( | ) | ||||
| Proceeds from warrant liabilities | ||||||||
| Payments on term loans | ( | ) | ||||||
| Cash (Used in) Provided by Financing Activities | $ | ( | ) | $ | ||||
| Net decrease in cash and cash equivalents and restricted cash | $ | ( | ) | $ | ( | ) | ||
| Total cash and cash equivalents and restricted cash, beginning of period | ||||||||
| Total cash and cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid during the quarter for: | ||||||||
| Interest | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 8 |
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Nature of business and summary of significant accounting policies
Nature of the business
Better Choice Company Inc. (the “Company”) is a pet health and wellness company focused on providing pet products and services that help dogs and cats live healthier, happier and longer lives. The Company has a broad portfolio of pet health and wellness products for dogs and cats sold under its Halo brand across multiple forms, including foods, treats, toppers, dental products, chews and supplements. The products consist of kibble and canned dog and cat food, freeze-dried raw dog food and treats, vegan dog food and treats, oral care products and supplements.
Basis of presentation
The Company’s condensed consolidated financial statements are prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reports and accounting principles generally accepted in the U.S. (“GAAP”). Accordingly, the Condensed Consolidated Balance Sheet as of December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements. Results of operations for interim periods may not be representative of results to be expected for the full year.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company’s Annual Report for the year ended December 31, 2022, filed with the SEC.
Consolidation
The condensed financial statements are presented on a consolidated basis and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of the condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results may differ from these estimates.
In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations for the three and nine months ended September 30, 2023 and 2022, the financial position as of September 30, 2023 and December 31, 2022 and the cash flows for the nine months ended September 30, 2023 and 2022.
Going concern considerations
The Company is subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of its products, the successful protection of its proprietary technologies, ability to grow into new markets, and compliance with government regulations. The Company has continually incurred losses and has an accumulated deficit. Our continued operating losses raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date these condensed consolidated financial statements are issued. The Company does not currently expect it will be able to generate sufficient cash flow from operations to maintain sufficient liquidity to meet the required financial covenant in certain periods prior to maturity giving the lender the right to call the debt. The Company will need to either raise additional capital or obtain additional financing, and/or secure future waivers or amendments from its lenders, or accomplish some combination of these items to maintain sufficient liquidity. There can be no assurance that the Company will be successful in raising additional capital, securing future waivers and/or amendments from its lenders, renewing or refinancing its existing debt or securing new financing. If the Company is unsuccessful in doing so, it may need to reduce the scope of its operations, repay amounts owed to its lenders or sell certain assets.
| 9 |
The Company is continuing to implement plans to achieve operating profitability, as well as implementing other strategic objectives to address liquidity. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.
Summary of significant accounting policies
For additional information, please refer to the most recently filed Annual Report regarding the Company’s summary of significant accounting policies.
Cash and cash equivalents
Cash
and cash equivalents include demand deposits held with banks and highly liquid investments with original maturities of ninety days or
less at acquisition date. Cash and cash equivalents are stated at cost, which approximates fair value because of the short-term nature
of these instruments. The Company’s cash equivalents are held in government money market funds and at times may exceed federally
insured limits. For purposes of reporting cash flows, the Company considers all cash accounts that are not subject to withdrawal restrictions
or penalties to be cash and cash equivalents. At December 31, 2022, the Company had $
Restricted cash
The
Company was required to maintain a restricted cash balance of $
Advertising
The
Company charges advertising costs to expense as incurred and such charges are included in SG&A expense. The Company’s advertising
expenses consist primarily of online advertising, search costs, email advertising and radio advertising. In addition, the Company reimburses
its customers and third parties for in store activities and record these costs as advertising expenses. Advertising costs were $
Reclassification
Certain prior period amounts within the condensed consolidated statements of operations related to share-based compensation, previously presented as a separate line item, have been reclassified into selling, general and administrative expense to conform with current period presentation. All share-based compensation in the current and prior periods is a selling, general and administrative expense.
New Accounting Standards
Recently adopted
ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
In June 2016, the FASB issued ASU 2016-13, a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard was effective for the Company on January 1, 2023. The new standard did not have a material impact on the condensed consolidated financial statements for the three and nine months ended September 30, 2023.
| 10 |
Note 2 – Revenue
The Company records revenue net of discounts, which primarily consist of trade promotions, certain customer allowances and early pay discounts.
The Company excludes sales taxes collected from revenues. Retail-partner based customers are not subject to sales tax.
The Company’s direct-to-consumer (“DTC”) loyalty program enables customers to accumulate points based on their spending. A portion of revenue is deferred at the time of sale when points are earned and recognized when the loyalty points are redeemed.
Revenue channels
The
Company groups its revenue channels into
Information about the Company’s net sales by revenue channel is as follows (in thousands):
Schedule of Information about Revenue Channels
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| E-commerce (1) | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| Brick & Mortar (2) | % | % | % | % | ||||||||||||||||||||||||||||
| DTC | % | % | % | % | ||||||||||||||||||||||||||||
| International (3) | % | % | % | % | ||||||||||||||||||||||||||||
| Net Sales | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| (1) | |
| (2) | |
| (3) |
Note 3 - Inventories
Inventories are summarized as follows (in thousands):
Schedule of Inventories
| September 30, 2023 | December 31, 2022 | |||||||
| Food, treats and supplements | $ | $ | ||||||
| Inventory packaging and supplies | ||||||||
| Total Inventories | ||||||||
| Inventory reserve | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
| 11 |
Note 4 – Prepaid expenses and other current assets
Prepaid expenses and other current assets are summarized as follows (in thousands):
Schedule of Prepaid Expenses and Other Current Assets
| September 30, 2023 | December 31, 2022 | |||||||
| Total Prepaid expenses and other current assets | $ | $ | ||||||
Note 5 - Fixed assets
Fixed assets consist of the following (in thousands):
Schedule of Fixed Assets
| Estimated Useful Life | September 30, 2023 | December 31, 2022 | ||||||||
| Equipment | $ | $ | ||||||||
| Furniture and fixtures | ||||||||||
| Computer software, including website development | ||||||||||
| Computer equipment | ||||||||||
| Total fixed assets | ||||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||||
| Fixed assets, net | $ | $ | ||||||||
Depreciation
expense was $
Note 6 – Intangible assets
Intangible assets
The Company’s intangible assets (in thousands) and related useful lives (in years) are as follows:
Schedule of Intangible Assets
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||
| Estimated useful life | Gross carrying amount | Accumulated amortization | Net carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
| Trade name | ( | ) | ( | ) | ||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Amortization
expense was $
The
estimated future amortization of intangible assets over the remaining weighted average useful life of
Schedule of Future Amortization of Intangible Assets
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
The Company assesses intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable. If impairment indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to these long-lived assets to their carrying value. There were no indicators of impairment of the intangible assets as of September 30, 2023.
| 12 |
Note 7 – Accrued and other liabilities
Accrued and other liabilities consist of the following (in thousands):
Schedule of Accrued and Other Liabilities
| September 30, 2023 | December 31, 2022 | |||||||
| Accrued taxes | $ | $ | ||||||
| Accrued payroll and benefits | ||||||||
| Accrued trade promotions and advertising | ||||||||
| Accrued interest | ||||||||
| Accrued commissions | ||||||||
| Deferred revenue | ( | ) | ||||||
| Short-term financing | ||||||||
| Licenses and permits | ||||||||
| Other | ||||||||
| Total accrued and other liabilities | $ | $ | ||||||
Note 8 – Debt
The components of the Company’s debt consist of the following (in thousands):
Schedule of Components of Debt
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Amount | Rate | Maturity date | Amount | Rate | Maturity date | |||||||||||
| Term loan, net | $ | (2) | 6/21/2026 | $ | ||||||||||||
| Line of credit, net | $ | (3) | 6/21/2025 | $ | (1) | 10/31/2024 | ||||||||||
| Less current portion | ||||||||||||||||
| Total long-term debt | $ | $ | ||||||||||||||
| (1) | |
| (2) | |
| (3) | Interest
at a variable rate of the daily U.S. Federal Funds Rate plus |
Wintrust Term Loan and Line of Credit
On
January 6, 2021, Halo entered into a credit facility with Old Plank Trail Community Bank, N.A., an affiliate of Wintrust Bank, N.A. (“Wintrust”)
consisting of a $
| 13 |
The
Wintrust Credit Facility subjected the Company to certain financial covenants, including the maintenance of a fixed charge coverage ratio
of no less than
The Wintrust Credit Facility is secured by a general guaranty and security interest on the assets, including the intellectual property, of the Company and its subsidiaries. The Company has also pledged all of the capital stock of Halo held by the Company as additional collateral. Furthermore, the Wintrust Credit Facility was supported by a collateral pledge by a member of the Company’s board of directors; as a result of the First Wintrust Amendment described below, this collateral pledge was terminated and released.
On
August 13, 2021, Halo entered into the first amendment to the Wintrust Credit Facility (the “First Wintrust Amendment”) to
increase the revolving line of credit from $
As part of the Third Wintrust Amendment described above, Halo used a portion of the increased revolving credit facility to repay and retire the outstanding term loan portion of the Wintrust Credit Facility.
On
June 21, 2023, the Company paid off the entire balance in the sum of $
As
of September 30, 2023, there was
Wintrust Receivables Credit Facility
On
June 21, 2023, the Company entered into an account purchase agreement with Wintrust Receivables Finance (AP Agreement), a division of
Wintrust Bank N.A. (“Wintrust”) pursuant to which Wintrust will purchase, at its discretion, eligible customer invoices and
advance up to
| 14 |
The Wintrust Receivables Credit Facility limits or restrict the ability of the Company to incur additional indebtedness; incur additional liens; make dividends and other restricted payments; make investments; sell, assign, transfer or dispose of certain assets; make optional prepayments of other indebtedness; engage in transactions with affiliates; and enter into restrictive agreements. The Wintrust Receivables Credit Facility does not include any financial covenants and if an event of default occurs, Wintrust is entitled to accelerate the advances made thereunder and exercise rights against the collateral.
Borrowing
under the Wintrust Receivables Credit Facility are classified as current debt as a result of a required lockbox arrangement and a subjective
acceleration clause. During the three and nine months ended September 30, 2023, the Company sold receivables having an aggregate face
value of $
Alphia Term Loan Facility
On
June 21, 2023, the Company entered into a term loan credit agreement (the “Term Loan Agreement”) with Alphia Inc. (“Alphia”),
a custom manufacturer of super-premium pet food in the U.S. Pursuant to the Term Loan Agreement, Alphia made a term loan to the Company
in the original principal amount of $
The
Term Loan bears an interest rate of
The Term Loan is secured by a general security interest on the assets, including the intellectual property, of the Company and Halo pursuant to (i) that certain Term Loan Security Agreement, dated June 21, 2023, made by the Company and Halo in favor of Alphia (the “Security Agreement”) and (ii) that certain Intellectual Property Security Agreement, dated as of June 21, 2023 of the Company and Halo in favor of Alphia (the “Intellectual Property Security Agreement”). The Company has also pledged all of the capital stock of Halo held by the Company as additional collateral for the Term Loan.
The term Loan is guaranteed by Halo pursuant to that certain Term Loan Guaranty, dated as of June 21, 2023, by and between Halo and Alphia (the “Term Loan Guaranty”).
As
of September 30, 2023, our indebtedness on the Alphia Term Loan Facility is $
Future Debt Maturities
Future debt maturities as of September 30, 2023 and for succeeding years are as follows (in thousands):
Schedule of Future Debt Maturities
| Year ending December 31: | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total | $ | |||
| 15 |
Note 9 - Fair Value Measurements
The carrying amounts of cash and cash equivalents, trade accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value because of the short-term nature of these financial instruments. The carrying amounts of borrowings under credit facilities approximates fair value as variable interest rates on these instruments approximates current market rates.
The Company estimates the fair value of the term loan based on a discounted cash flow method and the warrants liabilities (measured at fair value on a recurring basis) are based on a risk-neutral Monte Carlo simulation approach. The carrying value of the term loan was based on an accounting entry where proceeds from the loan were first allocated to the warrants liabilities. The following table presents the carrying amount and fair value of the Company’s term note, line of credit and warrants liabilities by hierarchy level:
Schedule of Carrying Amount and Fair Value
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||
Fair Value Hierarchy |
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||
| Term loan | Level 3 | (2) | $ | $ | $ | $ | |||||||||||||
| Line of credit | Level 2 | (1) | $ | $ | $ | $ | |||||||||||||
| Warrants liabilities | Level 3 | (2) | $ | $ | $ | $ | |||||||||||||
| (1) |
| (2) |
Note 10 – Commitments and contingencies
The
Company has manufacturing agreements with its vendors that provides for the company to make its commercial best efforts to purchase minimum
quantities in the ordinary course of business. There are
The Company may be involved in legal proceedings, claims, and regulatory, tax, or government inquiries and investigations that arise in the ordinary course of business resulting in loss contingencies. The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in SG&A expenses. The Company does not accrue for contingent losses that are considered to be reasonably possible, but not probable; however, the Company discloses the range of such reasonably possible losses. Loss contingencies considered remote are generally not disclosed.
Litigation is subject to numerous uncertainties and the outcome of individual claims and contingencies is not predictable. It is possible that some legal matters for which reserves have or have not been established could result in an unfavorable outcome for the Company and any such unfavorable outcome could be of a material nature or have a material adverse effect on the Company’s consolidated financial condition, results of operations and cash flows. Management is not aware of any claims or lawsuits that may have a material adverse effect on the consolidated financial position or results of operations of the Company.
| 16 |
Note 11 – Warrants
The following summarizes the Company’s outstanding warrants to purchase shares of the Company’s common stock as of and for the years ended September 30, 2023 and December 31, 2022:
Schedule of Outstanding Warrants
| Warrants | Weighted Average Exercise Price | |||||||
| Warrants outstanding as of December 31, 2022 | $ | |||||||
| Issued | $ | |||||||
| Exercised | $ | |||||||
| Terminated/Expired | $ | |||||||
| Warrants outstanding as of March 31, 2023 | $ | |||||||
| Issued | $ | |||||||
| Exercised | $ | |||||||
| Terminated/Expired | $ | |||||||
| Warrants outstanding as of June 30, 2023 | $ | |||||||
| Issued | $ | |||||||
| Exercised | $ | |||||||
| Terminated/Expired | $ | |||||||
| Warrants outstanding as of September 30, 2023 | $ | |||||||
The
warrants shown in the table above outstanding as of March 31, 2023 and December 31, 2022, are equity classified warrants issued between
May 2019 and January 2021. There was
In
conjunction with the Alphia Term Loan Facility mentioned in Note 8 - Debt, the Company issued to Alphia (i) a warrant (the “First
Tranche Warrant”) to purchase
Additionally,
in conjunction with the Term Loan, the Company entered into a Side Letter Agreement with Alphia (the “Side Letter”) pursuant
to which Alphia was granted a right of first refusal on any of the following relating to the Company or any of its subsidiaries and to
the extent such transactions constitute a change of control: (i) any transfer, sale, lease or encumbrance of all or any portion of the
capital stock or assets (other than the sale of inventory in the ordinary course of business), (ii) any merger, consolidation or other
business combination, (iii) any recapitalization, reorganization or any other extraordinary business transaction, (iv) or any equity
issuance or debt incurrence. Alphia’s right of first refusal is effective so long as the Term Loan remains outstanding and for
a period of
The
Company evaluated the Alphia warrant liabilities under ASC 815-40, Derivatives and Hedging-Contracts in Entity’s Own Equity (“ASC
815-40”), and concluded they do not meet the criteria to be classified in shareholders’ equity. Specifically, there are contingent
exercise provisions and settlement provisions that exist, including provisions where the number of shares available under the warrants
may be adjusted based on a percentage of equity. Because the number of outstanding common shares is not a fair value input to a fixed-for-fixed
model, this provision violates indexation guidance. Therefore, the warrants are not indexed to the Company’s stock. The Alphia
warrant liabilities will be remeasured at fair value each reporting period until provisions precluding equity classification lapse and
the Company reassess the warrants classification. The total value of the consideration received in connection with the Alphia Term Loan
Agreement was first allocated to warrants liabilities at fair value, with the remainder allocated to the Alphia Term Loan Agreement.
Accordingly, the Company recorded a discount of $
| 17 |
The Alphia warrant liabilities are determined using a risk-neutral Monte Carlo simulation based approach, a Level 3 valuation. The significant inputs to the warrant liabilities are as follows:
Schedule of Fair Value Measurement Inputs
| September 30, 2023 | ||||||||
First Tranche Warrant | Second Tranche Warrant | |||||||
| Exercise price | $ | $ | ||||||
| Stock price | $ | $ | ||||||
| Volatility | % | % | ||||||
| Time to maturity | ||||||||
| Risk-free rate | % | % | ||||||
| Dividend yield | % | % | ||||||
The following table summarizes the Alphia warrant liability activity for three and nine months ended September 30, 2023:
Schedule of Warrant Liability Activity
| Fair value of warrant liabilities as of March 31, 2023 | $ | |||
| Warrant liabilities incurred | ||||
| Loss (gain) in change of fair value of warrant liabilities | ||||
| Fair value of warrant liabilities as of June 30, 2023 | $ | |||
| Warrant liabilities incurred | ||||
| Loss (gain) in change of fair value of warrant liabilities | ( | ) | ||
| Fair value of warrant liabilities as of September 30, 2023 | $ |
The
change in fair value related to the Alphia warrant liabilities was $(
During the three months ended September 30, 2023 and September 30, 2022, the Company recognized $ million and $ million, respectively, of share-based compensation expense. During the nine months ended September 30, 2023 and September 30, 2022, the Company recognized $ million and $ million, respectively, of share-based compensation expense.
On November 11, 2019, the Company received shareholder approval for the Amended and Restated 2019 Incentive Award Plan (the “Amended 2019 Plan”). The Amended 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock or cash-based awards or a dividend equivalent award. The Amended 2019 Plan authorized the issuance of shares of common stock which was increased to after the Halo acquisition; the Amended 2019 Plan also provides for an annual increase on the first day of each calendar year beginning on January 1, 2020 and ending on and including January 1, 2029, equal to the lesser of (A) of the shares of common stock outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares of common stock as determined by the Board; provided, however, not more than shares of common stock shall be authorized for issuance. The authorized shares for issuance was increased to on January 1, 2021, increased to on January 1, 2022 and again increased to on January 1, 2023.
| 18 |
Stock options
Schedule of Options Granted and Outstanding
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||
| Options outstanding as of December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited/Expired | ( | ) | ||||||||||||||
| Options outstanding as of March 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited/Expired | ( | ) | ||||||||||||||
| Options outstanding as of June 30, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited/Expired | ( | ) | $ | |||||||||||||
| Options outstanding as of September 30, 2023 | $ | $ | ||||||||||||||
| Options exercisable as of September 30, 2023 | $ | $ | ||||||||||||||
Options granted under the Amended 2019 Plan vest over a period of to . All vested options are exercisable and may be exercised through the -year anniversary of the grant date (or such earlier date described in the applicable award agreement).
Restricted Stock Awards
In February 2022, the Company granted shares of restricted common stock to members of its board of directors under the Amended 2019 Plan as compensation for annual board service. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of $ million upon issuance.
During the fourth quarter of 2022, the Company granted shares of restricted common stock to a member of its board of directors for service as interim CEO. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of less than $ million upon issuance.
In January 2023, the Company granted shares of restricted common stock to members of its board of directors under the Amended 2019 Plan as compensation for annual board service. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of $ million upon issuance.
In January 2023, the Company granted shares of restricted common stock to certain executives and employees under the Amended 2019 Plan as performance bonus compensation totaling $ million. These restricted stock awards were issued on the grant date with a one year cliff vesting condition and the Company will recognize the expense over the vesting period.
During the first quarter of 2023, the Company granted shares of restricted common stock to a member of its board of directors for service as interim CEO. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of less than $ million upon issuance.
During the third quarter of 2023, the Company granted shares of restricted common stock to two members of its board of directors. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of less than $ million upon issuance.
| 19 |
Note 13 – Employee benefit plans
The
Company has a qualified defined contribution 401(k) plan, which covers substantially all of its employees. Participants are entitled
to make pre-tax and/or Roth post-tax contributions up to the annual maximums established by the IRS. The Company matches participant
contributions pursuant to the terms of the plan, which contributions are limited to a percentage of the participant’s eligible
compensation. The Company made contributions related to the plan and recognized expense of less than $
Note 14 – Related party transactions
Director Fees
The
Company pays quarterly board of director fees. As of December 31, 2022, $
Marketing Support Services
On
March 7, 2023, the Company entered into an agreement with Believeco to provide marketing support services for an interim period. A member
of the Company’s board of directors is a partner at Believeco. As of September 30, 2023 marketing expense related to Believeco
totaled $
Note 15 – Income taxes
For
the three and nine months ended September 30, 2023 and September 30, 2022, the Company recorded income tax provision of less
than $
Note 16 – Concentrations
Major suppliers
The
Company sourced approximately
Major customers
Accounts
receivable from three customers represented
Credit risk
As of September 30, 2023 and December 31, 2022, the Company’s cash and cash equivalents were deposited in accounts at several financial institutions and may maintain some balances in excess of federally insured limits. The Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk. The Company has not experienced any losses historically in these accounts and believes it is not exposed to significant credit risk in its cash and cash equivalents.
| 20 |
The Company presents loss per share on a basic and diluted basis. Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding (“WASO”) during the period. For the three and nine months ended September 30, 2023 and 2022, the Company’s basic and diluted net loss per share attributable to common stockholders are the same as the Company generated a net loss and common stock equivalents are excluded from diluted net loss per share as they have an anti-dilutive impact.
For
the three and nine months ended September 30, 2023, potentially dilutive securities not included in the calculation of diluted net
loss per share, because to do so would be anti-dilutive, are as follows: of stock equivalent warrants;
.
Schedule of Basic and Diluted Net Loss Per Share Attributable to Common Stockholders
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three
Months Ended September 30, | Nine
Months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Adjusted net loss available to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Basic WASO | ||||||||||||||||
| Dilutive common stock equivalents | ||||||||||||||||
| Diluted WASO | ||||||||||||||||
| Net loss per share attributable to common stockholders, basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share attributable to common stockholders, diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Note 18 – Subsequent events
In
October 2023, the Company borrowed an additional $
| 21 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. The financial condition, results of operations and cash flows discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of Better Choice Company Inc. and its consolidated subsidiaries, collectively, the “Company,” “Better Choice Company,” “we,” “our,” or “us”. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. A description of material factors known to us that may cause our results to vary or may cause management to deviate from its current plans and expectations, is set forth under “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.” The following discussion should also be read in conjunction with our audited consolidated financial statements including the notes thereto appearing elsewhere in this filing. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview and Outlook
Better Choice is a pet health and wellness company committed to leading the industry shift toward pet products and services that help dogs and cats live healthier, happier and longer lives. Our mission is to become the most innovative premium pet food company in the world, and we are motivated by our commitment to making products with integrity and treating pets and their parents with respect. We believe that our broad portfolio of pet health and wellness products are well positioned to benefit from the trends of growing pet humanization and an increased consumer focus on health and wellness, and have adopted a laser focused, channel specific approach to growth that is driven by new product innovation.
We sell our premium and super-premium products (which we believe generally includes products with a retail price greater than $0.20 per ounce) under the Halo brand umbrella, including Halo Holistic™, Halo Elevate® and the former TruDog brand, which has been rebranded and successfully integrated under the Halo brand umbrella during the third quarter of 2022. Our core products sold under the Halo brand are made with high-quality, thoughtfully sourced ingredients for natural, science based nutrition. Each innovative recipe is formulated with leading veterinary and nutrition experts to deliver optimal health. Our diverse and established customer base has enabled us to penetrate multiple channels of trade, which we believe enables us to deliver on core consumer needs and serve pet parents wherever they shop. We group these channels of trade into four distinct categories: E-commerce, which includes the sale of product to online retailers such as Amazon and Chewy; Brick & Mortar, which primarily includes the sale of product to Pet Specialty retailers such as Petco, Pet Supplies Plus and neighborhood pet stores, as well as to select grocery chains; Direct to Consumer (“DTC”) which includes the sale of product through our website halopets.com; and International, which includes the sale of product to foreign distribution partners and to select international retailers.
The Global Pet Food and Treat Market
The U.S. represents the largest and most developed market for pet food globally, with food and treats accounting for approximately $58 billion, or 42% of the total U.S. pet care market in 2022. According to the American Pet Product Association, between 66% of all households in the U.S. own a pet, equating to a total pet population of more than 130 million companion animals and an average of 1.7 pets per household. Pet spending represents a significant portion of household spend on consumer products, as this translates to an average annual spend on pet care of more than $1,500 per pet owning household, with $460 of this spend attributed to pet food and treats.
Historically, consumer spending on pets grew at an approximately 3% CAGR in the decade leading up to the COVID-19 pandemic, driven by steady annual increases in household pet ownership of approximately 1%, the continued premiumization of the category and the humanization of pets. This surge in pet acquisition has led to an increase in the forecasted growth of the pet care industry over the next ten years. The U.S. pet food industry is expected to grow at a 4.96% CAGR between 2023 and 2028 (Statistica).
| 22 |
From a demographic perspective, younger pet owners are more likely to spend a higher percentage of their income on pets, treat their pet as an important member of the family and to purchase products from pet specialty and online retailers rather than from grocery stores. Along these lines, women are 3.2 times more interested in purchasing pet food than men, and are 2.4 times more likely to engage with search ads than men. Taken holistically, these traits suggest a preference to purchase more premium and super-premium pet food and treats from brands like Halo, with a tendency to purchase products in the channels where we compete.
Globally, Asia is the second largest market for pet products, with China representing the largest market opportunity for growth. Like the U.S., growth in the Asian pet care industry has been driven by dramatic increases in household pet ownership. We believe that growth in Asia is fueled by increasing levels of economic financial status and demand for premium, western manufactured products as a result of product quality concerns. This demand has been supported by a rapidly growing middle class in China, where a McKinsey report estimated that in 2018 roughly 730 million people in urban areas fell into the income categories of “aspirants” and “affluents,” with the Brookings group estimating that approximately 60 million people are added to these income categories each year. We believe that this growth drove the increase in the number of dog-owning Chinese households as measured by Euromonitor, which increased from 12% in 2015 to 20% in 2020, according to Euromonitor. According to Euromonitor, the Chinese market for premium dry dog and cat food is anticipated to grow at a 20% CAGR and 28% CAGR, respectively, from 2015 through 2025, suggesting that the Chinese pet market has significant room for growth in the foreseeable future. We are focused on targeting Chinese pet owners with the highest willingness to pay, which tend to be urban dwelling millennial and Gen-Z women. In 2021, 80% of our products were purchased online, and approximately 50% of our end-consumers were born after 1990.
Our Growth Strategy
| ● | Strong Innovation Pipeline. We have a robust and growing pipeline of new products, and believe our size is an advantage as we are nimble enough to quickly bring new products to market, but large enough to benefit from strong existing customer relationships and established economies of scale with our co-manufacturers. |
| ● | Ability to Leverage Differentiated Omni-Channel Strategy for Growth. We believe that we can leverage our differentiated omni-channel strategy to design and sell products purpose-built for success in specific channels while maintaining our ability to leverage marketing and sales resources cross-channel. We believe that this strategy will allow us to deliver on core consumer needs, maximize gross margin and respond to changing channel dynamics that have accelerated in recent years. |
| ● | Capitalize on Continuing Trends of Humanization of Pets. We believe our combination of innovative products designed specifically for certain channels can assist our growth to become a leader in the premium and super-premium categories across dog and cat food. |
| ● | Well Positioned to Capitalize on a Once-in-a-Generation Demographic Shift in Asia. We believe that Asia represents the largest macro-growth opportunity in the global pet food industry. In China, the number of households that own a pet has doubled in the last five years, with younger pet owners leading growth. |
Recent Corporate Developments
On September 13, 2022, we announced that Scott Lerner was stepping down from his role as Chief Executive Officer (“CEO”), effective September 14, 2022. Also on September 13, 2022, we announced that Lionel F. Conacher was appointed as Interim CEO, effective September 14, 2022.
On March 2, 2023, we announced that Robert Sauermann was resigning from his role as Chief Operating Officer (“COO”), effective March 17, 2023. On March 21, 2023, we announced that Sharla Cook was resigning from her role as Chief Financial Officer (“CFO”), effective April 3, 2023. Also on March 21, 2023, we announced that Carolina Martinez was appointed as Interim CFO, effective April 3, 2023.
| 23 |
On May 11, 2023, we announced that Lionel F. Conacher was resigning from his role as Interim CEO of the Company, effective May 22, 2023. Mr. Conacher will still continue to serve on the Board as a Director. On May 11, 2023, we announced that Kent Cunningham was appointed as Chief Executive Officer of the Company, effective May 22, 2023.
On August 2, 2023, we announced that Carolina Martinez was appointed as Chief Financial Officer, Treasurer and Secretary of the Company, effective August 7, 2023. On August 28, 2023, we announced that Donald Young, was resigning from his role as Chief Sales Officer of the Company, effective September 8, 2023.
Results of Operations for the three and nine months ended September 30, 2023 and 2022
The following table sets forth our consolidated results for the periods presented (in thousands):
| Three
Months Ended September 30, | Change | Nine
Months ended September 30, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||
| Net sales | $ | 13,117 | $ | 11,865 | $ | 1,252 | 11 | % | $ | 32,890 | $ | 45,394 | $ | (12,504 | ) | (28 | )% | |||||||||||||||
| Cost of goods sold | 8,681 | 7,700 | 981 | 13 | % | 21,625 | 31,795 | (10,170 | ) | (32 | )% | |||||||||||||||||||||
| Gross profit | 4,436 | 4,165 | 271 | 7 | % | 11,265 | 13,599 | (2,334 | ) | (17 | )% | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Selling, general and administrative | 7,052 | 10,569 | (3,517 | ) | (33 | )% | 19,721 | 28,225 | (8,504 | ) | (30 | )% | ||||||||||||||||||||
| Total operating expenses | 7,052 | 10,569 | (3,517 | ) | (33 | )% | 19,721 | 28,225 | (8,504 | ) | (30 | )% | ||||||||||||||||||||
| Loss from operations | (2,616 | ) | (6,404 | ) | 3,788 | 59 | % | (8,456 | ) | (14,626 | ) | 6,170 | 42 | % | ||||||||||||||||||
| Other expenses: | ||||||||||||||||||||||||||||||||
| Interest expense, net | (344 | ) | (142 | ) | (202 | ) | (142 | )% | (952 | ) | (324 | ) | (628 | ) | 194 | % | ||||||||||||||||
| Change in fair value of warrants liabilities | 1,339 | — | 1,339 | — | % | 1,339 | — | (1,339 | ) | — | % | |||||||||||||||||||||
| Total other expense, net | 995 | (142 | ) | 1,137 | 801 | % | 387 | (324 | ) | 711 | (219 | )% | ||||||||||||||||||||
| Net loss before income taxes | (1,621 | ) | (6,546 | ) | 4,925 | 75 | % | (8,069 | ) | (14,950 | ) | 6,881 | 46 | % | ||||||||||||||||||
| Net loss available to common stockholders | $ | (1,621 | ) | $ | (6,547 | ) | $ | 4,926 | 75 | % | $ | (8,069 | ) | $ | (14,954 | ) | $ | 6,885 | 46 | % | ||||||||||||
Net sales
We sell our products through online retailers, pet specialty retailers, our online portal directly to our consumers and internationally to foreign distribution partners (transacted in U.S. dollars). Generally, our sales transactions are single performance obligations that are recorded at the time the product is shipped from our distribution centers and when control transfers. We offer a variety of trade promotions, discounts and incentives to our customers, which impacts the transaction price of our products and our net sales accordingly. DTC net sales include revenue derived from shipping fees and are net of loyalty points earned (a portion of revenue is deferred at the time of the sale as points are earned and not recognized until the redemption of the points, estimated based on historical experience). We record a revenue reserve based on historical return rates to account for customer returns.
| 24 |
Information about our revenue channels is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| E-commerce (1) | $ | 3,180 | 24 | % | $ | 3,530 | 30 | % | $ | 10,330 | 32 | % | $ | 11,035 | 24 | % | ||||||||||||||||
| Brick & Mortar (3) | 2,249 | 17 | % | 1,342 | 11 | % | 5,669 | 17 | % | 9,632 | 21 | % | ||||||||||||||||||||
| DTC | 1,298 | 10 | % | 1,371 | 12 | % | 4,316 | 13 | % | 5,066 | 11 | % | ||||||||||||||||||||
| International (2) | 6,390 | 49 | % | 5,622 | 47 | % | 12,575 | 38 | % | 19,661 | 44 | % | ||||||||||||||||||||
| Net Sales | $ | 13,117 | 100 | % | $ | 11,865 | 100 | % | $ | 32,890 | 100 | % | $ | 45,394 | 100 | % | ||||||||||||||||
| (1) | The Company’s E-commerce channel includes two customers that amounted to greater than 10% of the Company’s total net sales for the three and nine months ended September 30, 2023, and 2022, respectively. These customers had $3.1 million and $10.0 million of net sales for the three and nine months ended September 30, 2023 and $3.3 million and $10.6 million of net sales during the three and nine months ended September 30, 2022, respectively. |
| (2) | The Company’s Brick & Mortar channel includes $4.3 million of net sales from one customer that amounted to greater than 10% of the Company’s total net sales for the three and nine months ended September 30, 2022. None of the Company’s Brick & Mortar customers represented greater than 10% of net sales during the three months ended September 30, 2023 or during the three and nine months ended September 30, 2023. |
| (3) | One of the Company’s International customers that distributes products in China amounted to greater than 10% of the Company’s total net sales during the three months and nine months ended September 30, 2023 represented $6.0 million and $11.0 million of net sales, respectively. One of the Company’s International customers that distributes products in China amounted to greater than 10% of the Company’s total net sales during the three months and nine months ended September 30, 2022 represented $5.3 million and $16.6 million of net sales, respectively. |
Net sales increased $1.3 million, or 11%, to $13.1 million for the three months ended September 30, 2023 compared to $11.9 million for the three months ended September 30, 2022. Net sales decreased $(12.5) million, or (28)%, to $32.9 million for the nine months ended September 30, 2023 compared to $45.4 million for the nine months ended September 30, 2022. We experienced an increase in net sales for the three months ended September 30, 2023 , with the growth realizing within our International channel and Amazon platform. The decrease in net sales for the nine months ended September 30, 2023 is primarily attributable to supply chain constraints and the downstream impact it has on our business. We experienced significant production delays from our dry kibble co-manufacturing partner stemming from short-term shortages in raw materials, labor constraints, and capacity constraints. The inconsistency in supply created material out-of-stocks which resulted in less-than-optimal fill rates of our Halo Elevate® product line, sold primarily in our Brick & Mortar channel. Since closing the Alphia Term Loan, we have fully transitioned our dry kibble manufacturing to Alphia which, albeit a very positive change needed for stabilizing supply and for long-term sustainability, has had a short-term impact to our International channel as it created registration delays in certain foreign markets, in turn delaying ordering and product launches.
Key factors that we expect to affect our future sales growth include new product innovation and launches, our expansion strategy in each of the sales channels and our key supplier relationships.
Gross profit
Cost of goods sold consists primarily of the cost of product obtained from co-manufacturers, packaging materials, freight costs for shipping inventory to the warehouse, as well as third-party warehouse and order fulfillment costs. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on this analysis, we record inventories at the lower of cost or net realizable value, with any reduction in value expensed as cost of goods sold.
Our products are manufactured to our specifications by our co-manufacturers using raw materials. We work with our co-manufacturers to secure a supply of raw materials that meet our specifications. In addition to procuring raw materials that meet our formulation requirements, our co-manufacturers manufacture, test and package our products. We design our packaging for our co-manufacturers and the packaging is shipped directly to them.
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Our gross profit has been and will continue to be affected by a variety of factors, primarily product sales mix, volumes sold, discounts offered to newly acquired and recurring customers, the cost of our manufactured products, and the cost of freight from the manufacturer to the warehouse.
During the three months ended September 30, 2023, gross profit increased $0.2 million, or 7%, to $4.4 million compared to $4.2 million during the three months ended September 30, 2022. During the nine months ended September 30, 2023, gross profit decreased $(2.3) million, or (17)%, to $11.3 million compared to $13.6 million during the nine months ended September 30, 2022.
Gross margin decreased 128 basis points to 34% for the three months ended September 30, 2023 compared to 35% for the three months ended September 30, 2022. Gross margin increased 429 basis points to 34% for the nine months ended September 30, 2023 compared to 30% for the nine months ended September 30, 2022. The decrease in gross margin for the three months ended September 30, 2023 is primarily attributable to selling excess inventory at a discount. As a result, revenue increased at a rate lower than the rate at which cost of goods sold (“COGS”) increased. The increase in gross margin for the nine months ended September 30, 2023 is primarily attributable to a decrease in revenue at a rate lower than the rate at which cost of goods sold (“COGS”) decreased. For the nine months ended September 30, 2023, the average price per pound cost $1.83, versus $1.89 for the nine months ended September 30, 2022. Due to the increased production run sizes for the International channel, we were able to achieve minimum order quantity price breaks which included orders over 100,000 pounds receiving approximately a 6% price break on COGS. We also implemented a 7% price increase across our Halo Holistic™ and Halo masterbrand wet product lines in August 2022, and a 12.5% sales price increase on our Halo Elevate® products in the first nine months of 2023.
We continue to actively work with our co-manufacturing and freight partners to generate future cost savings and realize improved gross margins in future periods. We could see continued margin variability due to the current economic environment and pricing pressures due to inflationary costs for both transportation and raw materials. We will continue to refine and optimize our overall pricing strategy as we evaluate the future impact of inflation and align ourselves with the market.
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Operating expenses
Our Selling, general and administrative (“SG&A”) expenses consist of the following:
| ● | Sales and marketing costs, for specific customer promotional programs, paid media, content creation expenses and our DTC selling platform. Marketing costs are geared towards customer acquisition and retention and building brand awareness. During the three months ended September 30, 2023, sales and marketing costs decreased approximately $(2.5) million or (47)%, to $2.8 million from $5.4 million during the three months ended September 30, 2022. During the nine months ended September 30, 2023, sales and marketing costs decreased approximately $(5) million or (41)%, to $7.0 million from $11.9 million during the nine months ended September 30, 2022. The decrease was driven primarily by lower marketing and advertising agency fees related to the Halo brand renovation and migration from the former TruDog brand, as well as increased marketing spend in our International sales channel during 2022. | |
| ● | Employee compensation and benefits decreased approximately $(0.4) million or (21)% during the three months ended September 30, 2023 to $1.5 million from $1.9 million during the three months ended September 30, 2022. Employee compensation and benefits decreased approximately $(1.3) million or (22)% during the nine months ended September 30, 2023 to $4.7 million from $6.1 million during the nine months ended September 30, 2022. The decrease was primarily related to a reduction in employee headcount, partially offset by higher severance costs during the first half of 2022. | |
| ● | Share-based compensation includes expenses related to equity awards issued to employees and non-employee directors. During the three months ended September 30, 2023, Share-based compensation decreased $(0.1) million or (15)% to $0.5 million compared to $0.6 million for the three months ended September 30, 2022. During the nine months ended September 30, 2023, Share-based compensation decreased by $(0.8) million, or (34)%, to $1.6 million, as compared to share-based compensation of $2.5 million during the nine months ended September 30, 2022. The decrease is driven by reduction of senior management headcount resulting in cancellations of options during 2023, partially offset by common stock issued for board service and accelerated vesting of a certain stock option grant during 2022, interim CEO service compensation and additional option grants. | |
| ● | Freight, which is primarily related to the shipping of DTC orders to customers, remained consistent at $0.3 million during the three months ended September 30, 2023 and September 30, 2022. Freight decreased $(0.3) million or (20)% during the nine months ended September 30, 2023 to slightly less than $1.0 million from $1.2 million during the nine months ended September 30, 2022. Freight costs are generally decreasing due to lower DTC sales as described above. | |
| ● | Non-cash charges including depreciation, amortization, disposal or sale of assets and bad debt expense decreased slightly by $(0.1) million or (21)% to $0.4 million during the three months ended September 30, 2023 from $0.5 million during the three months ended September 30, 2022. Non-cash charges were $1.3 million and $1.4 million during the nine months ended September 30, 2023 and September 30, 2022, respectively. The decrease was driven by disposals of certain assets during 2023, offset by additional capital expenditures throughout 2022. | |
| ● | Other general and administrative costs for various general corporate expenses, including professional services, information technology, insurance, travel, costs related to merchant credit card fees, product development costs, rent, and certain tax costs. During the three months ended September 30, 2023, other general and administrative costs decreased $(0.5) million, or (26)% to $1.4 million compared to $1.9 million during the three months ended September 30, 2022. During the nine months ended September 30, 2023, other general and administrative costs decreased $(1.2) million, or (23)% to $4.0 million compared to $5.2 million during the nine months ended September 30, 2022. The decrease was driven by commission fees related to sales in our International channel, and lower professional fees related to investor relations. |
Interest expense, net
During the three months ended September 30, 2023, interest expense increased by $0.2 million, or 174% to $0.4 million from $0.1 million for the three months ended September 30, 2022. During the nine months ended September 30, 2023, interest expense increased by $0.7 million, or 208% to $1.0 million from $0.3 million for the nine months ended September 30, 2022. Interest expense for the three and nine months ended September 30, 2023 is comprised of interest on our Wintrust Credit Facility and the amortization of debt issuance costs which was refinanced during 2022. The increase in interest expense for the three and nine months ended September 30, 2023 is related to the acceleration of debt issuance costs charged to interest expense due to the payoff of the Wintrust credit facility.
Income taxes
Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for any allowable credits, deductions and uncertain tax positions as they arise. During the three and nine months ended September 30, 2023 and September 30, 2022, we recorded income tax benefit of less than $0.1 million, which relates to indefinite-lived assets. The effective tax rate for the three and nine months ended September 30, 2023 and 2022 was less than 1%, respectively, which differs from the U.S. Federal statutory rate of 21% primarily because our losses have been fully offset by a valuation allowance due to uncertainty of realizing the tax benefit of NOLs.
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Liquidity and capital resources
Historically, we have financed our operations primarily through the sales of shares of our common stock, warrants, preferred stock, and loans. In connection with our IPO, we issued and sold 8,000,000 shares of common stock at a price of $5.00 per share. On July 1, 2021 we received total net proceeds of approximately $36.1 million from the IPO, after deducting underwriting discounts and commissions of $2.8 million, and offering costs of approximately $1.1 million. On September 30, 2023 and December 31, 2022, we had cash and cash equivalents and restricted cash of $3.8 million and $9.5 million, respectively.
We are subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of our products, the successful protection of our proprietary technologies, ability to grow into new markets, and compliance with government regulations. As of September 30, 2023, we have not experienced a significant adverse impact to our business, financial condition or cash flows resulting from the COVID-19 pandemic, geopolitical actions or threat of cyber-attacks. However, we have seen adverse impacts to our gross margin from time to time due to inflationary pressures in the current economic environment. Uncertainties regarding the continued economic impact of inflationary pressures, the COVID-19 pandemic, geopolitical actions and threat of cyber-attacks are likely to result in sustained market turmoil, which could negatively impact our business, financial condition, and cash flows in the future.
We have historically incurred losses and expect to continue to generate operating losses and consume cash resources in the near term. These conditions raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the date these interim condensed consolidated financial statements are issued, meaning that we may be unable to generate sufficient operating cash flows to pay our short-term obligations. We have implemented and 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 our pricing strategy and ingredient profiles, and new product innovation.
Our ability to raise additional capital may be adversely impacted by the potential worsening of global economic conditions, including inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and geopolitical tensions. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all. If we are unable to raise the necessary funds when needed or achieve planned cost savings, or other strategic objectives are not achieved, we may not be able to continue our operations, or we could be required to modify our operations that could slow future growth.
A summary of our cash flows is as follows (in thousands):
| Nine Months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows (used in) provided by: | ||||||||
| Operating activities | $ | (894 | ) | $ | (17,972 | ) | ||
| Investing activities | (10 | ) | (198 | ) | ||||
| Financing activities | (4,769 | ) | 1,843 | |||||
| Net decrease in cash and cash equivalents | $ | (5,673 | ) | $ | (16,327 | ) | ||
Cash flows from operating activities
Cash used in operating activities decreased by $17.1 million, or 95%, during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in cash was primarily driven by significant fluctuations in our working capital, including a comparative increase in our inventory balance of $4.1 million, or 35%, as we built inventory during 2022 to support the Halo Elevate® launch and the rebranding of TruDog and Halo Holistic™. Additionally, a comparative decrease in accounts receivable balances of $1.1 million due to timing of sales and collections and a comparative increase in accounts payable of $4.4 million due to inventory rebuild in 2023.
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Cash flows from investing activities
Cash used in investing activities was less than $0.0 million during the nine months ended September 30, 2023 and $0.2 million during the nine months ended September 30, 2022. The cash used in investing activities is related to capital expenditures.
Cash flows from financing activities
Cash used in financing activities was $(4.8) million, during the nine months ended September 30, 2023 and cash provided by financing activities was $1.8 million during the nine months ended September 30, 2022. The cash used in financing activities for the nine months ended September 30, 2023 was related to payment of the Wintrust revolving line of credit of $2.9 million and payments on term loans of $13.4 million, offset by proceeds from the Wintrust revolving line of credit of $6.8 million and $2.8 million from the Alphia facility and proceeds of $2.2 million from warrant liabilities. The cash provided by financing activities for the nine months ended September 30, 2022 was related to net proceeds from the revolving lines of credit of $7.5 million, partially offset by payments on the term loan of $(0.7) million and payments on the revolving line of credit of $(5.0) million.
Wintrust Credit Facility
On January 6, 2021, Halo entered into a credit facility with Old Plank Trail Community Bank, N.A., an affiliate of Wintrust, consisting of a $6.0 million term loan and a $6.0 million revolving line of credit, each scheduled to mature on January 6, 2024. The Wintrust Credit Facility is secured by a general guaranty and security interest on the assets, including the intellectual property of us and our subsidiaries. We have also pledged all of the capital stock of Halo held by us as additional collateral.
On March 25, 2022, we entered into the second amendment to the Wintrust Credit Facility, which removed the financial covenant to maintain a fixed charge coverage ratio and included a new financial covenant to maintain a minimum liquidity, as well updated the rate at which the Wintrust Credit Facility bore interest.
On October 24, 2022, we entered into the third amendment to the Wintrust Credit Facility which provided for an increase to the revolving line of credit, set the amount of Halo’s obligation to pledge a deposit account with Wintrust to a fixed amount throughout the remainder of the term and provided updates to the interest rate, maturity date and minimum liquidity amount associated with the financial covenant.
On June 21, 2023, the Company paid off the entire balance in the sum of $13.5 million of the Wintrust Credit Facility removing any covenant requirements to be met at September 30, 2023.
As of September 30, 2023, there was no outstanding balance related to the Wintrust Credit Facility.
Wintrust Receivables Credit Facility
On June 21, 2023, the Company entered into an account purchase agreement with Wintrust Receivables Finance, a division of Wintrust Bank N.A. (“Wintrust”) pursuant to which Wintrust will purchase, at its discretion, eligible customer invoices and advance up to 75% of the face amount of all purchased amounts up to $4,750,000. Each advance under the AP Agreement will bear interest at the U.S. prime rate, plus 2.5%. The AP Agreement has an initial term of two years and will automatically renew annually unless terminated by the Company on at least 60 days’ notice. The Wintrust Receivables Credit Facility is secured by a general security interest in the assets of the Company. The Wintrust Receivables Credit Facility is guaranteed secured by the Company pursuant to that certain Unlimited Continuing Guaranty Agreement dated as of June 21, 2023.
As of September 30, 2023, the balance outstanding on the Wintrust Receivables Credit Facility amounted to $1.9 million.
Alphia Term Loan
On June 21, 2023, the Company entered into a term loan credit agreement with Alphia Inc., a leading custom manufacturer of super-premium pet food in the U.S. Pursuant to the Term Loan Agreement, Alphia made a term loan to the Company in the original principal amount of $5,000,000 (the “Term Loan”). The Term Loan is also evidenced by that certain Term Note dated as of June 21, 2023 issued by the Company to Alphia (the “Term Note”). The proceeds of the Term Loan, together with a portion of the Company’s cash on hand, were used to retire all of the outstanding obligations of Halo, Purely for Pets, Inc. (“Halo”), a wholly-owned subsidiary of the Company, under Halo’s long-term credit facility with Old Plank Trail Community Bank, N.A., an affiliate of Wintrust Bank, N.A.
The Term Loan will bear interest at a rate of 10% per annum, compounded quarterly, and will mature on June 21, 2026. Accrued interest on the Term Loan is payable quarterly in cash or, at the election of the Company, in-kind by capitalizing such interest and adding it to the then-outstanding principal amount of the Term Loan. The Term Loan Agreement and Term Note provide for customary financial covenants and customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the Term Loan at any time upon written notice to Alphia and subject to a prepayment penalty if such prepayment occurs prior to June 21, 2025.
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The Term Loan is secured by a general security interest on the assets, including the intellectual property, of the Company and Halo pursuant to (i) that certain Term Loan Security Agreement, dated June 21, 2023, made by the Company and Halo in favor of Alphia (the “Security Agreement”) and (ii) that certain Intellectual Property Security Agreement, dated as of June 21, 2023 of the Company and Halo in favor of Alphia (the “Intellectual Property Security Agreement”). The Company has also pledged all of the capital stock of Halo held by the Company as additional collateral for the Term Loan.
The term Loan is guaranteed by Halo pursuant to that certain Term Loan Guaranty, dated as of June 21, 2023, by and between Halo and Alphia (the “Term Loan Guaranty”).
In conjunction with the Term Loan, the Company issued to Alphia (i) a warrant (the “First Tranche Warrant”) to purchase 6,545,338.45 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a price of $0.26 per share, and (ii) a warrant (the “Second Tranche Warrant” and together with the First Tranche Warrant, the “Warrants”) to purchase 8,222,787 shares of Common Stock at a price of $0.26 per share. Unless exercised, the Warrants expire on June 21, 2028. Alphia’s exercise of the Second Tranche Warrant is subject to the approval of the Company’s stockholders. The Warrants contain certain anti-dilution provisions in favor of Alphia in connection with any equity offering consummated by the Company prior to December 21, 2023 and equity issuances below the exercise price of the Warrants. The Warrants also contain a cashless exercise option at the election of Alphia.
Additionally, in conjunction with the Term Loan, the Company entered into a Side Letter Agreement with Alphia (the “Side Letter”) pursuant to which Alphia was granted a right of first refusal on any of the following relating to the Company or any of its subsidiaries and to the extent such transactions constitute a change of control: (i) any transfer, sale, lease or encumbrance of all or any portion of the capital stock or assets (other than the sale of inventory in the ordinary course of business), (ii) any merger, consolidation or other business combination, (iii) any recapitalization, reorganization or any other extraordinary business transaction, (iv) or any equity issuance or debt incurrence. Alphia’s right of first refusal is effective so long as the Term Loan remains outstanding and for a period of 12 months thereafter. The Side Letter also provides Alphia with certain Board observer rights.
As of September 30, 2023, our indebtedness on the Alphia Term Loan Facility amounted to $2.8 million net of debt issuance costs of $0.2 million. For details about the terms, covenants and restrictions contained in the Alphia Term Loan Facility, see “Note 8 - Debt” to our interim condensed consolidated financial statements included in this Quarterly Report.
Contractual Commitments and Obligations
We are contractually obligated to make future cash payments for various items, including debt arrangements, certain purchase obligations, as well as the lease arrangement for our office. See “Note 8 - Debt” to our interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information about our debt obligations. Our purchase obligations include certain ongoing marketing projects, software subscriptions as well as in-transit or in-production purchase orders with our suppliers, for which amounts vary depending on the purchasing cycle. The majority of our software subscriptions are not under long-term contracts, and we do not have long-term contracts or commitments with any of our suppliers beyond active purchase orders. These purchase obligations were not material as of the date of this Quarterly Report on Form 10-Q.
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Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgements that affect the reported amounts of assets, liabilities, net sales, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies described in our Annual Report for the year ended December 31, 2022 have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting estimates. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. There have been no material changes to our critical accounting estimates compared to the descriptions in our Annual Report for the year ended December 31, 2022.
Share-Based Compensation
Share-based compensation expense is measured based on the estimated fair value of awards granted to employees, directors, officers and consultants on the grant date. Forfeitures are accounted for as they occur, therefore there are no forfeiture related estimates required.
The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model, which requires the development of input assumptions, as described in “Note 12 - Share-based compensation”. Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires the input of the subjective assumptions described in “Note 12 - Share-based compensation”. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our interim chief executive officer (our principal executive officer) and our interim chief financial officer (our principal financial officer) evaluated the effectiveness of our disclosure controls and procedures as of the quarter ended September 30, 2023. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective due to the material weaknesses discussed below. Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
In July 2023, the Company became aware of a cybersecurity incident via email compromise. Management is investigating the matter internally and has engaged a third-party forensics expert to facilitate a full investigation to determine the exact nature, timing, and magnitude of the breach. The investigation is still ongoing as of the date of this report. Management determined that although there was a control that was designed and implemented, it did not prevent the cybersecurity breach. Management has thus determined that there is a material weakness related to the failure to maintain controls that should have been operating effectively as of September 30, 2023.
Our disclosure controls and procedures were not effective as of June 30, 2023, due a material weakness in analyzing complex financial instruments, including the proper classification of warrants as liabilities and the related financial statement disclosures. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our condensed consolidated financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this report present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.
To address the material weakness associated with failure to maintain controls over the operating effectiveness of IT general controls, we have planned to (i) transition to a new outsourced managed IT service provider with an appropriate level of knowledge and technical experience to design and maintain IT general controls, (ii) establish policies and procedures for the design and operation of IT general controls, (iii) implement an IT general controls framework, and (iv) where necessary, we have identified, implemented, and documented IT general controls. We continue to evaluate the appropriate controls to design and maintain effective controls supporting financial systems relevant to our financial reporting processes. We continue to evaluate staffing requirements and technology improvement opportunities to further address and achieve remediation.
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To address the material weakness in internal controls related to the accounting for complex financial instruments, we are in the process of implementing further controls over the review of complex financial instruments, which may include engaging outside advisors with specialist knowledge of GAAP and valuation.
Changes in Internal Control Over Financial Reporting
Other than the material weaknesses described above, there has not been any change in our internal controls over financial reporting identified in connection with the Evaluation that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, those controls.
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to litigation and other proceedings that arise in the ordinary course of our business. Subject to the inherent uncertainties of litigation and although no assurances are possible, we believe that there are no pending lawsuits or claims that, individually or in the aggregate, will have a material adverse effect on our business, financial condition or our yearly results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors described under the heading “Risk Factors” in our Annual Report filed on March 28, 2023. While we believe there have been no material changes from the risk factors previously disclosed, you should carefully consider, in addition to the other information set forth in this report, the risk factors discussed in our Annual Report that could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks facing our Company. In addition to risks and uncertainties inherent in forward-looking statements contained in this Quarterly Report, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed herewith.
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EXHIBIT INDEX
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| † | Indicates a management contract or any compensatory plan, contract or arrangement. |
| * | Filed or furnished herewith. |
| # | Certain schedules and similar attachments to this agreement have been omitted in accordance with Item 601(b)(5) of Regulation S-K. The Company will furnish copies of any schedules or similar attachments to the SEC upon request. |
| *** | Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such excluded information is not material and would likely cause competitive harm to the registrant if publicly disclosed. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BETTER CHOICE COMPANY INC. | ||
| Date: November 13, 2023 | By: | /S/ KENT CUNNINGHAM |
| Kent Cunningham | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 13, 2023 | By: | /S/ CAROLINA MARTINEZ |
| Carolina Martinez | ||
| Interim Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /
RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Lionel F. Conacher, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2023 of Better Choice Company Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 13, 2023 | |
| /s/ KENT CUNNINGHAM | |
| Kent Cunningham | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /
RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Carolina Martinez, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2023 of Better Choice Company Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 13, 2023 | |
| /s/ CAROLINA MARTINEZ | |
| Carolina Martinez | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATIONS OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Better Choice Company Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: November 13, 2023 | |
| /s/ KENT CUNNINGHAM | |
| Kent Cunningham | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ CAROLINA MARTINEZ | |
| Carolina Martinez | |
| Chief Financial Officer | |
| (Principal Financial Officer) |