SRX Global Inc 8-K/A, filed Feb 18, 2020
SRX Global Inc. (SRXH)
8-K/A
2020-02-18
For: 2019-12-18
View Original
Added on
April 11, 2026
About this 8-K/A
SRX Global Inc filed this 8-K/A on February 18, 2020, reporting on events of December 18, 2019.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 18, 2019
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Better Choice Company Inc.
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(Exact name of registrant as specified in its charter)
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Delaware
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333-161943
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26-2754069
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(State or other jurisdiction of incorporation)
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(Commission File Number)
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(I.R.S. Employer Identification No.)
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164 Douglas Rd E, Oldsmar, Florida
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34677
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code (646) 846-4280
N/A
(Former name or former address, if changed, since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13a-4(c))
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934
(§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by 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. ☐
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading
Symbol(s)
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Name of each exchange on which registered
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N/A
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N/A
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N/A
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EXPLANATORY NOTE
On December 26, 2019, Better Choice Company Inc., a Delaware corporation (the “Company,” “Better Choice,” or “BCC”), filed a Current Report on Form 8-K (the “Initial Form 8-K”), reporting under Item 2.01 of the
Initial Form 8-K that on December 19, 2019 the Company completed the acquisition of Halo, Purely for Pets, Inc., a Delaware corporation (“Halo”) in accordance with the terms of the Amended and Restated Stock Purchase Agreement, dated as of December
18, 2019 (the “Stock Purchase Agreement”), by and among the Company, Halo, Thriving Paws, LLC, a Delaware limited liability company (“Thriving Paws”), HH-Halo LP, a Delaware limited partnership (“HH-Halo” and, together with Thriving Paws, the
“Sellers”) and HH-Halo, in the capacity of the representatives of the Sellers, pursuant to which the Company agreed to acquire 100.0% of the outstanding capital stock of Halo (the “Acquisition”). This Amendment No. 1 on Form 8-K/A is being filed
for the purpose of filing the financial information required by 9.01(a) of Form 8-K and the pro forma financial information required by Item 9.01(b) of Form 8-K.
| Item 9.01. |
Financial Statements and Exhibits.
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(a) Financial statements of businesses acquired
Attached hereto as Exhibit 99.1 and incorporated herein by reference are the audited financial statements of Halo as of and for the years ended June 30, 2019 and June 30, 2018 and the notes related thereto and the
related independent auditor’s report of Warren Averett, LLC. Attached hereto as Exhibit 99.2 and incorporated herein by reference are the unaudited interim financial statements of Halo as of and for the three months ended September 30, 2019 and
September 30, 2018 and the notes related thereto.
(b) Pro forma financial information
Attached hereto as Exhibit 99.3 and incorporated herein by reference are the unaudited pro forma combined financial statements of Better Choice Company Inc. as of and for the nine months ended September 30, 2019 and
for the twelve months ended December 31, 2018 and the related notes thereto.
(d) Exhibits
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Exhibit
No.
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Description
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Audited Financial Statements of Halo, Purely for Pets, Inc. as of and for the years ended June 30, 2019 and June 30, 2018.
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Unaudited Interim Financial Statements of Halo, Purely for Pets, Inc. as of and for the Three Months Ended September 30, 2019 and September 30, 2018.
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Unaudited Pro Forma Combined Financial Statements of Better Choice Company Inc. as of and for the nine months ended September 30, 2019 and for the twelve months ended December 31, 2018.
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2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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Better Choice Company Inc.
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Date: February 18, 2020
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By:
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/s/ Werner von Pein | |
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Name: Werner von Pein
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Title: Chief Executive Officer
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Exhibit 99.1
HALO, PURELY FOR PETS, INC.
FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
HALO, PURELY FOR PETS, INC.
TABLE OF CONTENTS
JUNE 30, 2019 AND 2018
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INDEPENDENT AUDITORS’ REPORT
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1
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FINANCIAL STATEMENTS
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Balance Sheets
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2
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Statements of Operations
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3
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Statements of Changes in Stockholder’s Equity
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4
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Statements of Cash Flows
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5
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Notes to the Financial Statements
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6
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 |
 |
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors Halo, Purely for Pets, Inc.
Report on the Financial Statements
We have audited the accompanying financial statements of Halo, Purely for Pets, Inc. (the “Company”), which comprise the balance sheets as of June 30, 2019 and 2018 and the related statements of operations, changes
in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018 and the results of its operations and its cash
flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Tampa, Florida
August 21, 2019
1
HALO, PURELY FOR PETS, INC.
BALANCE SHEETS
JUNE 30, 2019 AND 2018
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ASSETS
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||||||||
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CURRENT ASSETS
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2019
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2018
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||||||
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Cash
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$
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2,364,436
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$
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1,226,489
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||||
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Accounts receivable, net of allowances of approximately $100,000 and $141,000 as of June 30, 2019 and 2018, respectively
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4,152,779
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4,440,387
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||||||
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Inventories
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3,194,880
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7,065,994
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||||||
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Prepaids and other current assets
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349,491
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487,791
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||||||
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Total current assets
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10,061,586
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13,220,661
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||||||
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PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
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372,962
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650,660
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OTHER ASSETS
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Goodwill
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4,730,655
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4,730,655
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||||||
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Other
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14,650
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13,200
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||||||
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Total other assets
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4,745,305
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4,743,855
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||||||
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$
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15,179,853
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$
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18,615,176
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$
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2,529,480
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$
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3,757,667
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Accrued expenses
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417,199
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618,611
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Accrued payroll liabilities
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520,125
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196,025
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Total current liabilities
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3,466,804
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4,572,303
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LONG-TERM LIABILITIES
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Due to related party
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60,391
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146,898
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Loan payable, net of issuance costs
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3,829,521
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5,247,316
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Total long-term liabilities
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3,889,912
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5,394,214
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STOCKHOLDERS' EQUITY
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Preferred Stock; no par value; 110 shares authorized:
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||||||||
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Series A-1; 36.67 shares issued and outstanding at June 30, 2019
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-
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-
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Series A; 73.33 shares issued and outstanding at June 30, 2019 and 2018
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-
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-
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Common Stock; no par value; 10,000 shares authorized;
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890 and 100 shares issued and outstanding at June 30, 2019 and 2018, respectively
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-
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-
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Additional paid-in capital - Series A-1 Preferred Stock, net of issuance costs
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2,403,125
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-
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Additional paid-in capital - Series A Preferred Stock
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5,000,000
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5,000,000
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Additional paid-in capital - Common Stock
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57,141,157
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57,141,157
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Accumulated deficit
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(56,721,145
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)
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(53,492,498
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)
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Total stockholders' equity
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7,823,137
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8,648,659
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||||||
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$
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15,179,853
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$
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18,615,176
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|||||
See notes to the financial statements.
2
HALO, PURELY FOR PETS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2019 AND 2018
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2019
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2018
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SALES
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$
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31,106,144
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$
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38,359,679
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COST OF SALES
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20,532,995
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24,322,252
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GROSS PROFIT
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10,573,149
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14,037,427
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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13,378,974
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20,297,838
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LOSS ON DISPOSAL OF EQUIPMENT
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73,975
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25,929
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||||||
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LOSS FROM OPERATIONS
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(2,879,800
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)
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(6,286,341
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)
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OTHER (EXPENSE) INCOME
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||||||||
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Interest expense, related party
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-
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(2,106,059
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)
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|||||
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Interest expense, other
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(348,997
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)
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(278,406
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)
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||||
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Interest income
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150
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1,167
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||||||
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Total other expense
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(348,847
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)
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(2,383,298
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)
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||||
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NET LOSS
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$
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(3,228,647
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)
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$
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(8,669,639
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)
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||
See notes to the financial statements.
3
HALO, PURELY FOR PETS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
FOR THE YEARS ENDED JUNE 30, 2019 AND 2018
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Series A-1
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Series A
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Additional Paid-In Capital
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||||||||||||||||||||||||||||||||||||||||||
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Common Stock
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Preferred Stock
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Preferred Stock
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Series A-1
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Series A |
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|||||||||||||||||||||||||||||||||||||||
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Preferred Stock
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Preferred Stock
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Common Stock
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Accumulated
Deficit
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Total
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||||||||||||||||||||||||||||||||||
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BALANCE, JUNE 30, 2017
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100
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$
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-
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-
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$
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-
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- |
$
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-
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$
|
-
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$
|
-
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$
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13,511,905
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$
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(44,822,859
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)
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$
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(31,310,954
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)
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|||||||||||||||||||||||
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Issuance of preferred stock
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73.33
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5,000,000
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5,000,000
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|||||||||||||||||||||||||||||||||||||||||
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Conversion of debt to common stock
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790
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43,629,252
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43,629,252
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|||||||||||||||||||||||||||||||||||||||||
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Net loss
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(8,669,639
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)
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(8,669,639
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)
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||||||||||||||||||||||||||||||||||||||||
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BALANCE, JUNE 30, 2018
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890
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-
|
-
|
-
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73.33
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-
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-
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5,000,000
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57,141,157
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(53,492,498
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)
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8,648,659
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||||||||||||||||||||||||||||||||
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Issuance of preferred stock, net
of stock issuance costs
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36.67
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2,403,125
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2,403,125
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|||||||||||||||||||||||||||||||||||||||||
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Net loss
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(3,228,647
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)
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(3,228,647
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)
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||||||||||||||||||||||||||||||||||||||||
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BALANCE, JUNE 30, 2019
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890
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$
|
-
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36.67
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$
|
-
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73.33
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$
|
-
|
$
|
2,403,125
|
$
|
5,000,000
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$
|
57,141,157
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$
|
(56,721,145
|
)
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$
|
7,823,137
|
||||||||||||||||||||||||
See notes to the financial statements.
4
HALO, PURELY FOR PETS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2019 AND 2018
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CASH FLOWS FROM OPERATING ACTIVITIES
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2019
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2018
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||||||
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Net loss
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$
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(3,228,647
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)
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$
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(8,669,639
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)
|
||
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Adjustments to reconcile net loss to net cash
|
||||||||
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provided by (used in) operating activities:
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||||||||
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Depreciation and amortization
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391,557
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250,351
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||||||
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Loss on disposal of equipment
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73,975
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25,929
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||||||
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(Increase) decrease in:
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||||||||
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Accounts receivable
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287,608
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(2,278,355
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)
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|||||
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Inventories
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3,871,114
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(4,995,647
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)
|
|||||
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Prepaids and other assets
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136,848
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(60,070
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)
|
|||||
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Increase (decrease) in:
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||||||||
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Accounts payable
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(1,228,365
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)
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1,044,126
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|||||
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Accrued expenses
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122,688
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1,319,214
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||||||
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Total adjustments
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3,655,425
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(4,694,452
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)
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|||||
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Net cash provided by (used in) operating activities
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426,778
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(13,364,091
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)
|
|||||
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CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
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Purchases of property and equipment
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(147,654
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)
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(421,886
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)
|
||||
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Net cash used in investing activities
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(147,654
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)
|
(421,886
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)
|
||||
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CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
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Due to related party
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(86,507
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)
|
-
|
|||||
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Proceeds from loan
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9,178,065
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7,863,165
|
||||||
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Loan payments
|
(10,635,860
|
)
|
(3,503,349
|
)
|
||||
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Stock issuance costs
|
(96,875
|
)
|
(112,500
|
)
|
||||
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Proceeds from issuance of Series A-1 Preferred Stock
|
2,500,000
|
5,000,000
|
||||||
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Net cash provided by financing activities
|
858,823
|
9,247,316
|
||||||
|
NET INCREASE (DECREASE) IN CASH
|
1,137,947
|
(4,538,661
|
)
|
|||||
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CASH AT BEGINNING OF YEAR
|
1,226,489
|
5,765,150
|
||||||
|
CASH AT END OF YEAR
|
$
|
2,364,436
|
$
|
1,226,489
|
||||
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES
The Company paid $348,997 and $278,406 in interest on the revolving line of credit during the years ended June 30, 2019 and 2018, respectively.
During the year ended June 30, 2018, the Company reclassified accrued interest of $6,174,385 to principal on the note payable to a related party. Additionally, the note payable and accrued interest to the related party
in the amount of $43,629,252 were converted to 790 shares of no par common stock in December 2017.
See notes to the financial statements.
5
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
| 1. |
DESCRIPTION OF BUSINESS
|
Halo, Purely for Pets, Inc. (the “Company”) was incorporated in the state of Delaware during June 2006. The Company is engaged in the production and distribution of holistic pet food, treats, and supplements derived
from natural ingredients to distributors, retailers, and consumers throughout the United States of America, parts of Asia and Canada. The corporate headquarters is located in Tampa, Florida.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting
|
The financial statements of the Company are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Use of Management Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash
Cash is maintained at major financial institutions and, at times, balances may exceed federally insured limits of $250,000. The Company has never experienced any losses related to these balances. The Company’s deposits in excess of federally
insured limits at June 30, 2019 and 2018 approximated $2,592,000 and $1,347,000, respectively.
Accounts Receivable
Accounts receivable consist of receivables from the sale of products. The Company records a provision for doubtful accounts to allow for any amounts that may not be recoverable, which is based on an analysis of the
Company’s prior collection experience, customer creditworthiness, and current economic trends. The Company also records an allowance against accounts receivable for potential sales returns. Consistent with industry practice, the Company maintains a
return policy that allows certain customers to return products for either a credit against future receivables or a refund. The Company’s estimate of the provision for returns is based on current trends of actual customer returns. Management
believes that an allowance for doubtful accounts and sales returns of approximately $100,000 and $141,000 is considered adequate at June 30, 2019 and 2018, respectively. The Company determines receivables to be past due based on the payment terms
of original invoices. Interest is not typically charged on past due receivables.
Inventories
Inventories are stated at the lower of cost, determined by the weighted average cost method (which approximates the first-in, first-out method), or net realizable value. The Company provides an allowance for loss as
needed for inventories determined to be excessive or obsolete.
6
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated over the estimated useful lives of the assets, ranging generally from 2 to 5 years. Maintenance and repairs are charged to operations when
incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in the statements of
operations. For income tax purposes, the Company uses accelerated methods of depreciation for certain assets.
Long-Lived Assets
Long-lived assets that are subject to depreciation are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. During the years ended June 30, 2019
and 2018, the Company determined that its long-lived assets were not impaired.
Goodwill
Goodwill represents the excess purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of an acquired business. Goodwill is not amortized but is reviewed for
possible impairments at least annually or more frequently upon the occurrence of an event or when circumstances indicate that goodwill may be impaired. Goodwill impairment is identified by comparing the fair value of the reporting unit to its
carrying value. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. During the
years ended June 30, 2019 and 2018, the Company determined that its goodwill was not impaired.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their
respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the period that included the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.
Income Taxes
The Company follows Accounting Standards Codification Topic 740, Income Taxes (“ASC Topic 740”). This standard prescribes a recognition and measurement of tax positions to
be taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Based on management’s evaluation, there are no uncertain tax
positions at June 30, 2019 or 2018.
Other Taxes
Amounts collected on behalf of and remitted to governmental authorities for sales taxes and other similar taxes are reported on a net basis.
7
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Revenue
Revenue is recognized when product is shipped and title transfers to the customers, net of sales discounts. In 2019 and 2018, sales to 4 customers approximated 89% and 87% of total sales, respectively. Accounts
receivable from these customers amounted to approximately $2,864,000 and $4,450,000 of total accounts receivable as of June 30, 2019 and 2018, respectively.
Shipping and Handling Costs
The Company records amounts billed to customers for shipping and handling costs as sales revenue. Costs incurred by the Company for shipping and handling are included in cost of sales.
Purchase Concentrations
Purchases of inventory for 2019 and 2018 from 2 major suppliers approximated 79% and 74% of total inventory purchases, respectively. Accounts payable to these suppliers totaled approximately $1,220,000 and $998,000 at June 30, 2019 and 2018,
respectively.
Advertising Expenses
Advertising expenses are charged to operations as incurred. Advertising expenses for the years ended June 30, 2019 and 2018 amounted to approximately $5,088,000 and $10,526,000, respectively. These amounts represent
primarily customer trade support (retailer advertising and merchandising).
Impact of Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount
of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The revenue guidance is effective for
annual reporting periods beginning after December 15, 2018, with early adoption permitted as of the original effective date. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date
of adoption. The Company is currently in the process of evaluating the impact of adoption of this ASU on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under ASU No. 2016-02, an entity will be required to recognize right-of-use assets and lease
liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose
qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for annual reporting
periods beginning after December 15, 2019, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently in the process of evaluating the impact of
adoption of this ASU on its financial statements.
Subsequent Events
The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through August 21, 2019, the date on which the financial statements were available to be issued.
8
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
3.
|
INVENTORIES
|
|
Inventories consist of:
|
||||||||
|
2019
|
2018
|
|||||||
|
Finished goods
|
$
|
3,501,829
|
$
|
6,689,275
|
||||
|
Raw materials
|
285,574
|
825,220
|
||||||
|
3,787,403
|
7,514,495
|
|||||||
|
Less inventory reserve
|
(592,523
|
)
|
(448,501
|
)
|
||||
|
$
|
3,194,880
|
$
|
7,065,994
|
|||||
|
4.
|
PROPERTY AND EQUIPMENT
|
|
Property and equipment consist of:
|
||||||||
|
|
2019
|
2018
|
||||||
|
Furniture and fixtures
|
$
|
94,771
|
$
|
94,771
|
||||
|
Computer equipment
|
80,666
|
78,898
|
||||||
|
Computer software
|
430,563
|
430,563
|
||||||
|
Equipment
|
380,650
|
483,980
|
||||||
|
Assets not in service:
|
||||||||
|
Computer software
|
-
|
80,123
|
||||||
|
Equipment
|
-
|
1,768
|
||||||
|
|
986,650
|
1,170,102
|
||||||
|
Less accumulated depreciation
|
(613,688
|
)
|
(519,443
|
)
|
||||
|
|
$
|
372,962
|
$
|
650,660
|
||||
Depreciation expense amounted to approximately $352,000 and $250,000 for the years ended June 30, 2019 and 2018, respectively.
| 5. |
LOAN PAYABLE
|
On May 5, 2017, the Company entered into a loan and security agreement. The loan and security agreement provided for a revolving line of credit, not to exceed an aggregate principal amount of $5,000,000 limited to
qualifying receivables and inventories, as defined, and granted a security interest in and lien upon all of the assets of the Company. On October 31, 2017, the Company amended the loan and security agreement to increase the maximum revolving
facility amount to $12,000,000. The outstanding principal under the loan and security agreement accrues interest at prime rate plus 2% (7.50%) as of June 30, 2019. The loan and security agreement contains a financial covenant, which requires the
Company to maintain minimum liquidity of $500,000. The Company was compliant with its financial covenant as of June 30, 2019 and 2018, respectively. The loan and security agreement is secured by substantially all assets of the Company, is
guaranteed by the stockholder, and expires on May 5, 2021. As of June 30, 2019 and 2018, there was approximately $3,903,000 (less issuance costs of approximately $73,000) and $5,361,000 (less issuance costs of approximately $113,000) outstanding on
the revolving line of credit, respectively.
9
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
| 6. |
RELATED PARTY TRANSACTIONS
|
The Company has advances due to a related party totaling approximately $60,000 and $147,000 at June 30, 2019 and 2018, respectively. These advances are unsecured and non-interest bearing, with no specific repayment
terms. The Company has reflected these advances as long-term in the accompanying balance sheets as repayment is not expected until one year after the respective balance sheet dates.
The Company had a related party note payable with a principal member of the Company’s parent with a balance of approximately $37,455,000 at June 30, 2017. Effective July 6, 2017, this note was amended to increase the
principal balance to approximately $41,592,000, which represented the principal balance plus accrued interest as of that date and extended the maturity date to July 6, 2018. Interest expense related to this note amounted to $0 and approximately
$2,106,000 for the years ended June 30, 2019 and 2018, respectively.
In December, 2017, the Company converted all of its $41,592,000 convertible subordinated note and accrued interest of $2,106,000 into approximately 790 shares of no-par common stock.
The terms and amounts of the note were not necessarily indicative of those that would have been incurred or agreed to had comparable transactions been entered into with independent parties.
| 7. |
RETIREMENT PLAN
|
The Company participates in a 401(k) plan (the “Plan”), which is available to all eligible employees. Employer contributions to the Plan are fixed and equal 3% of each qualified employee’s eligible compensation.
Total employer contributions to the Plan were approximately $72,000 and $69,000 for the years ended June 30, 2019 and 2018, respectively.
| 8. |
COMMITMENTS AND CONTINGENCIES
|
The Company rents office space under a non-cancelable operating lease. The lease agreement calls for initial monthly payments averaging approximately $4,657, excluding taxes and common area maintenance charges, and
expires in 2023.
The following is a schedule by year of the future minimum rental payments required under operating leases that have an initial or remaining non-cancelable lease term in excess of one year:
|
Year Ending
June 30,
|
||||
|
2020
|
$
|
62,916
|
||
|
2021
|
$
|
55,882
|
||
|
2022
|
$
|
55,882
|
||
|
2023
|
$
|
32,958
|
||
Rent expense was approximately $80,000 and $68,000 for the years ended June 30, 2019 and 2018, respectively.
10
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
| 8. |
COMMITMENTS AND CONTINGENCIES – CONTINUED
|
Certain key employees are eligible to participate in bonus payments in the event of a sale of the Company, or the sale of all or substantially all of its assets, (the “Transaction”) under Transaction Bonus Plans (the
“Plans”). The Plans automatically terminate on the earlier of (i) the satisfaction by all parties of any obligations relating to a consummated Transaction, regardless of whether the Transaction results in the payment of any bonus to an eligible key
employee, or October 31, 2019.
From time to time, the Company may be involved in various claims or litigation proceedings incidental to the ordinary course of business. In the opinion of management, the ultimate liability, if any, resulting from
any such claims or litigation proceedings would not be material to the Company’s financial position or results of operations.
|
9.
|
INCOME TAXES
|
|
The provision for income taxes consists of:
|
||||||||
|
|
2019
|
2018
|
||||||
|
Deferred
|
$
|
(799,800
|
)
|
$
|
3,656,900
|
|||
|
Change in valuation allowance
|
799,800
|
(3,656,900
|
)
|
|||||
|
Total provision for income taxes
|
$
|
-
|
$
|
-
|
||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are as follows:
|
Deferred tax assets (liabilities):
|
2019
|
2018
|
||||||
|
Net operating loss carryforward
|
$
|
14,513,986
|
$
|
13,673,348
|
||||
|
Goodwill
|
(1,003,396
|
)
|
(925,749
|
)
|
||||
|
Property and equipment
|
(73,366
|
)
|
(100,655
|
)
|
||||
|
Charitable contributions
|
64,793
|
114,854
|
||||||
|
Other
|
245,419
|
185,879
|
||||||
|
13,747,437
|
12,947,677
|
|||||||
|
Less valuation allowance
|
(13,747,437
|
)
|
(12,947,677
|
)
|
||||
|
Total provision for income taxes
|
$
|
-
|
$
|
-
|
||||
11
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
| 9. |
INCOME TAXES – CONTINUED
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. As of June 30, 2019, and 2018, based upon the levels of historical taxable income and projections of future taxable income over which the deferred tax assets are deductible,
the Company believes that it is more likely than not that it will not be able to realize the benefits of a majority of these deductible differences. Accordingly, a valuation allowance of $13,747,437 and $12,947,677 has been provided in the
accompanying financial statements as of June 30, 2019 and 2018, respectively. The 2019 and 2018 net change in the valuation allowance related to deferred tax assets was an increase and a decrease of approximately $799,800 and $3,656,900,
respectively, which was primarily related to the changes in the operating loss carryforwards for those years.
At June 30, 2019 and 2018, the Company has federal tax net operating loss carryforwards of approximately $58,928,000 and $55,515,000, respectively. Federal tax loss carryforwards of approximately $46,160,000 will
expire beginning in the year 2026 unless utilized earlier.
On December 22, 2017 H.R. 1, the Tax Cuts and Jobs Act (“TCJA”) was enacted, which, except for certain provisions is effective for tax years beginning on or after January 1st, 2018. The TCJA’s primary change
affecting the Company in a material way was a reduction in the maximum federal statutory corporate tax rate from 35% to 21% and elimination of the corporate alternative minimum tax. As a result, the 21% rate was used in calculating the deferred
tax assets and liabilities as of June 30, 2019 and 2018. The effect on the company’s income tax expense due to the rate reduction from 35% to 21% was $6,850,190 all of which was recognized in the third quarter of the year ending June 30, 2018. An
adjustment to the company's valuation allowance was recorded in the third quarter of 2018 wholly offsetting the tax expense related to the effects of the rate change.
| 10. |
CUMULATIVE REDEEMABLE PREFERRED STOCK
|
The Company issued 36.67 shares of Series A-1 and 73.33 shares of Series A redeemable preferred stock with no par value for approximately $2,400,000 (net of issuance costs) and $5,000,000 in November 2018 and
December 2017, respectively. The cumulative annual dividend rate of $15% per share (based on an original issue price per share equal to $68,184.92) shall be compounded annually and accrued for upon declaration of such dividends. At June 30, 2019
and 2018 no dividends were declared and the Company is under no obligation to pay such dividends.
The Corporation shall not declare, pay, or set aside any dividends on any other shares of capital stock unless the holders of the Series A-1 and Series A Preferred Stock then outstanding first receive payment in
full in an amount equal to the stated value plus all accrued and unpaid dividends thereon to the date of redemption. The maximum amount the Company could be required to pay to redeem the shares is $1,373,716 as of June 30, 2019. Under the terms
of the Series A and Series A-1 Preferred Stock the Company is not required to set aside funds for meeting preferred stock dividend requirements.
12
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018
|
10.
|
CUMULATIVE REDEEMABLE PREFERRED STOCK – CONTINUED
|
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A-1 Preferred Stock then outstanding shall be entitled to be paid out of the
assets available for distribution to its stockholders, prior and in preference to any distribution of any of the assets of this Corporation to the holders of Series A Preferred Stock or Common Stock.
Consistent with those of Common Stock, the holders of Series A-1 Preferred Stock and Series A Preferred Stock are entitled to one vote for each share of Preferred Stock held at all meetings of stockholders.
13
Exhibit 99.2
HALO, PURELY FOR PETS, INC.
UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
HALO, PURELY FOR PETS, INC.
TABLE OF CONTENTS
|
FINANCIAL STATEMENTS
|
|
|
|
|
Balance Sheets as of September 30, 2019 (unaudited) and June 30, 2019
|
1 |
|
|
|
|
|
|
Statements of Operations (Unaudited)
|
2 |
|
|
|
|
|
|
Statements of Changes in Stockholder’s Equity as of September 30, 2019 and 2018 (unaudited)
|
3 |
|
|
|
|
|
Statements of Cash Flows (Unaudited)
|
4 | |
|
Notes to the Financial Statements (Unaudited)
|
5 | |
HALO, PURELY FOR PETS, INC.
BALANCE SHEETS
As of September 30, 2019 (unaudited) and June 30, 2019
|
As of
|
As of
|
|||||||
|
September 30, 2019
(Unaudited)
|
June 30, 2019
|
|||||||
|
CURRENT ASSETS
|
||||||||
|
Cash
|
$
|
1,611,147
|
$
|
2,364,436
|
||||
|
Accounts receivable, net of allowances of approximately $100,000 and $100,000 as of September 30, 2019 and June 30, 2019, respectively
|
4,640,257
|
4,152,779
|
||||||
|
Inventories
|
3,433,099
|
3,194,880
|
||||||
|
Prepaids and other current assets
|
461,008
|
349,491
|
||||||
|
Total current assets
|
10,145,511
|
10,061,586
|
||||||
|
Property and equipment, net of accumulated depreciation
|
314,071
|
372,962
|
||||||
|
Goodwill
|
4,730,655
|
4,730,655
|
||||||
|
Other
|
14,650
|
14,650
|
||||||
|
Total assets
|
$
|
15,204,887
|
$
|
15,179,853
|
||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable
|
$
|
1,900,140
|
$
|
2,529,480
|
||||
|
Accrued expenses
|
691,710
|
417,199
|
||||||
|
Accrued payroll liabilities
|
197,247
|
520,125
|
||||||
|
Total current liabilities
|
2,789,097
|
3,466,804
|
||||||
|
LONG-TERM LIABILITIES
|
||||||||
|
Due to related party
|
60,391
|
60,391
|
||||||
|
Loan payable, net of issuance costs
|
4,043,255
|
3,829,521
|
||||||
|
Total liabilities
|
6,892,743
|
7,356,716
|
||||||
|
STOCKHOLDERS' EQUITY
|
||||||||
|
Preferred Stock; no par value; 110 shares authorized:
|
||||||||
|
Series A-1; 36.67 shares issued and outstanding
|
-
|
-
|
||||||
|
Series A; 73.33 shares issued and outstanding Common stock; no par value; 10,000 shares authorized; 890 issued and outstanding
|
-
|
-
|
||||||
|
Additional paid-in capital - Series A-1 Preferred Stock, net of issuance costs
|
2,403,125
|
2,403,125
|
||||||
|
Additional paid-in capital - Series A Preferred Stock
|
5,000,000
|
5,000,000
|
||||||
|
Additional paid-in capital - Common Stock
|
57,141,157
|
57,141,157
|
||||||
|
Accumulated deficit
|
(56,232,138
|
)
|
(56,721,145
|
)
|
||||
|
Total stockholders' equity
|
8,312,144
|
7,823,137
|
||||||
|
Total liabilities and stockholders' equity
|
$
|
15,204,887
|
$
|
15,179,853
|
||||
See notes to the financial statements.
1
HALO, PURELY FOR PETS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
|
For the three months ended September 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
SALES
|
$
|
8,442,822
|
$
|
7,607,605
|
||||
|
COST OF SALES
|
5,128,392
|
4,686,922
|
||||||
|
GROSS PROFIT
|
3,314,430
|
2,920,683
|
||||||
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
2,751,162
|
3,594,401
|
||||||
|
LOSS ON DISPOSAL OF EQUIPMENT
|
-
|
10,290
|
||||||
|
INCOME (LOSS) FROM OPERATIONS
|
563,268
|
(684,008
|
)
|
|||||
|
OTHER (EXPENSE) INCOME
|
||||||||
|
Interest expense, other
|
(74,299
|
)
|
(101,554
|
)
|
||||
|
Interest income
|
38
|
38
|
||||||
|
Total other expense
|
(74,261
|
)
|
(101,516
|
)
|
||||
|
NET INCOME (LOSS)
|
$
|
489,007
|
$
|
(785,524
|
)
|
|||
See notes to the financial statements.
2
HALO, PURELY FOR PETS, INC. STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
|
Series A-1
|
Series A
|
Additional Paid-In Capital
|
||||||||||||||||||||||||||||||||||||||||||
|
Common Stock
|
Preferred Stock
|
Preferred Stock
|
Series A-1
|
Series A
|
Accumulated
|
|||||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Preferred
Stock
|
Preferred
Stock |
Common
Stock
|
Deficit
|
Total
|
||||||||||||||||||||||||||||||||||
|
Balance, June 30, 2017
|
100
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
13,511,905
|
$
|
(44,822,859
|
)
|
$
|
(31,310,954
|
)
|
|||||||||||||||||||||||
|
Issuance of preferred stock
|
-
|
-
|
-
|
-
|
73.33
|
-
|
-
|
5,000,000
|
-
|
-
|
5,000,000
|
|||||||||||||||||||||||||||||||||
|
Conversion of debt to common stock
|
790
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
43,629,252
|
-
|
43,629,252
|
|||||||||||||||||||||||||||||||||
|
Net Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(8,669,639
|
)
|
(8,669,639
|
)
|
|||||||||||||||||||||||||||||||
|
Balance, June 30, 2018
|
890
|
-
|
-
|
-
|
73.33
|
-
|
-
|
$
|
5,000,000
|
$
|
57,141,157
|
$
|
(53,492,498
|
)
|
$
|
8,648,659
|
||||||||||||||||||||||||||||
|
Net Loss (Unaudited)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
(785,524
|
)
|
$
|
(785,524
|
)
|
|||||||||||||||||||||||||||||
|
Balance, September 30, 2018 (Unaudited)
|
890
|
-
|
-
|
-
|
73.33
|
-
|
-
|
$
|
5,000,000
|
$
|
57,141,157
|
$
|
(54,278,022
|
)
|
7,863,135
|
|||||||||||||||||||||||||||||
|
Issuance of preferred stock,
|
||||||||||||||||||||||||||||||||||||||||||||
|
net of stock issuance costs
|
-
|
-
|
36.67
|
-
|
-
|
-
|
2,403,125
|
-
|
-
|
-
|
2,403,125
|
|||||||||||||||||||||||||||||||||
|
Net Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,443,123
|
)
|
(2,443,123
|
)
|
|||||||||||||||||||||||||||||||
|
Balance, June 30, 2019
|
890
|
-
|
36.67
|
-
|
73.33
|
-
|
$
|
2,403,125
|
$
|
5,000,000
|
$
|
57,141,157
|
$
|
(56,721,145
|
)
|
$
|
7,823,137
|
|||||||||||||||||||||||||||
|
Net Income (Unaudited)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
489,007
|
489,007
|
|||||||||||||||||||||||||||||||||
|
Balance, September 30, 2019 (Unaudited)
|
890
|
-
|
36.67
|
-
|
73.33
|
-
|
$
|
2,403,125
|
$
|
5,000,000
|
$
|
57,141,157
|
$
|
(56,232,138
|
)
|
$
|
8,312,144
|
|||||||||||||||||||||||||||
See notes to the financial statements.
3
HALO, PURELY FOR PETS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
Unaudited
|
September 30,
2019 |
September 30,
2018 |
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net Income (loss)
|
$
|
489,007
|
$
|
(785,524
|
)
|
|||
|
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
|
||||||||
|
Depreciation & Amortization
|
61,386
|
84,266
|
||||||
|
Loss on disposal of equipment
|
-
|
10,290
|
||||||
|
(Increase) decrease in:
|
||||||||
|
Accounts receivable
|
(487,478
|
)
|
(107,096
|
)
|
||||
|
Inventories
|
(238,220
|
)
|
771,641
|
|||||
|
Prepaids and other assets
|
(101,517
|
)
|
(31,364
|
)
|
||||
|
Increase (decrease) in:
|
||||||||
|
Accounts payable
|
(629,342
|
)
|
(679,703
|
)
|
||||
|
Accrued expenses
|
(48,366
|
)
|
(146,588
|
)
|
||||
|
Total adjustments
|
(1,443,537
|
)
|
(98,554
|
)
|
||||
|
Net cash provided (used) by operating activities
|
(954,530
|
)
|
(884,078
|
)
|
||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Purchases of property and equipment
|
(2,495
|
)
|
(37,947
|
)
|
||||
|
Net cash used by investing activities
|
(2,495
|
)
|
(37,947
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Proceeds from loan
|
-
|
384,958
|
||||||
|
Loan payments
|
203,736
|
-
|
||||||
|
Net cash provided by financing activities
|
203,736
|
384,958
|
||||||
|
NET INCREASE (DECREASE) IN CASH
|
(753,289
|
)
|
(537,067
|
)
|
||||
|
CASH AT BEGINNING OF PERIOD
|
2,364,436
|
1,226,489
|
||||||
|
CASH AT END OF PERIOD
|
$
|
1,611,147
|
$
|
689,422
|
||||
See notes to the financial statements.
4
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
| 1. |
DESCRIPTION OF BUSINESS
|
Halo, Purely for Pets, Inc. (the “Company”) was incorporated in the state of Delaware during June 2006. The Company is engaged in the production and distribution of holistic pet food, treats, and supplements derived
from natural ingredients to distributors, retailers, and consumers throughout the United States of America, parts of Asia and Canada. The corporate headquarters is located in Tampa, Florida.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Accounting
The financial statements of the Company are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Use of Management Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash
Cash is maintained at major financial institutions and, at times, balances may exceed federally insured limits of $250,000. The Company has never experienced any losses related to these balances. The Company’s
deposits in excess of federally insured limits at September 30, 2019 and June 30, 2019 approximated $1,518,000 and $2,592,000, respectively.
Accounts Receivable
Accounts receivable consist of receivables from the sale of products. The Company records a provision for doubtful accounts to allow for any amounts that may not be recoverable, which is based on an analysis of the
Company’s prior collection experience, customer creditworthiness, and current economic trends. The Company also records an allowance against accounts receivable for potential sales returns. Consistent with industry practice, the Company maintains a
return policy that allows certain customers to return products for either a credit against future receivables or a refund. The Company’s estimate of the provision for returns is based on current trends of actual customer returns. Management believes
that an allowance for doubtful accounts and sales returns of approximately $100,000 is considered adequate at both September 30, 2019 and June 30, 2019. The Company determines receivables to be past due based on the payment terms of original
invoices. Interest is not typically charged on past due receivables.
Inventories
Inventories are stated at the lower of cost, determined by the weighted average cost method (which approximates the first-in, first-out method), or net realizable value. The Company provides an allowance for loss as
needed for inventories determined to be excessive or obsolete.
5
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated over the estimated useful lives of the assets, ranging generally from 2 to 5 years. Maintenance and repairs are charged to operations when
incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in the statements of
operations. For income tax purposes, the Company uses accelerated methods of depreciation for certain assets.
Long-Lived Assets
Long-lived assets that are subject to depreciation are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. During the quarter ended September 30,
2019 and year ended June 30, 2019, the Company determined that its long-lived assets were not impaired.
Goodwill
Goodwill represents the excess purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of an acquired business. Goodwill is not amortized but is reviewed for possible
impairments at least annually or more frequently upon the occurrence of an event or when circumstances indicate that goodwill may be impaired. Goodwill impairment is identified by comparing the fair value of the reporting unit to its carrying value.
If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. During the year ended June
30, 2019, the Company determined that its goodwill was not impaired.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their
respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the period that included the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.
Income Taxes
The Company follows Accounting Standards Codification Topic 740, Income Taxes (“ASC Topic 740”). This standard prescribes a recognition and measurement of tax positions to be
taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Based on management’s evaluation, there are no uncertain tax
positions at September 30, 2019 or June 30, 2019.
Other Taxes
Amounts collected on behalf of and remitted to governmental authorities for sales taxes and other similar taxes are reported on a net basis.
6
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Revenue
Revenue is recognized when product is shipped and title transfers to the customers, net of sales discounts. For the three months ended September 30, 2019 and September 30, 2018, sales to four customers approximated 89%
and 82% of total sales, respectively. Accounts receivable from these customers amounted to approximately $3,332,000 and $2,864,000 of total accounts receivable as of September 30, 2019 and June 30, 2019, respectively.
Shipping and Handling Costs
The Company records amounts billed to customers for shipping and handling costs as sales revenue. Costs incurred by the Company for shipping and handling are included in cost of sales.
Purchase Concentrations
Purchases of inventory for the quarter ended September 30, 2019 and year ended June 30, 2019 from two major suppliers approximated 74% and 79% of total inventory purchases, respectively. Accounts payable to these suppliers totaled approximately
$1,182,000 and $1,220,000 at September 30, 2019 and June 30, 2019, respectively.
Advertising Expenses
Advertising expenses are charged to operations as incurred. Advertising expenses for the three months ended September 30, 2019 and September 30, 2018 amounted to approximately $1,216,000 and $1,051,000, respectively.
These amounts represent primarily customer trade support (retailer advertising and merchandising).
Impact of Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount
of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The revenue guidance is effective for
annual reporting periods beginning after December 15, 2018, with early adoption permitted as of the original effective date. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of
adoption. The Company is currently in the process of evaluating the impact of adoption of this ASU on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under ASU No. 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities
on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and
quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for annual reporting periods beginning after
December 15, 2019, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on its
financial statements.
7
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Subsequent Events
The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through February 18, 2020, the date on which the financial statements were available to be issued.
Refer to Note 10 – Subsequent Events for additional information.
|
3.
|
INVENTORIES
|
Inventories consist of:
|
(Unaudited)
|
||||||||
|
September 30,
2019
|
June 30,
2019
|
|||||||
|
Finished goods
|
$
|
3,555,653
|
$
|
3,501,829
|
||||
|
Raw materials
|
434,304
|
285,574
|
||||||
|
3,989,957
|
3,787,403
|
|||||||
|
Less inventory reserve
|
(556,858
|
)
|
(592,523
|
)
|
||||
|
$
|
3,433,099
|
$
|
3,194,880
|
|||||
|
4.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consist of:
|
(Unaudited)
|
||||||||
|
September 30,
2019
|
June 30,
2019
|
|||||||
|
Furniture and fixtures
|
$
|
78,195
|
$
|
94,771
|
||||
|
Computer equipment
|
80,666
|
80,666
|
||||||
|
Computer software
|
430,563
|
430,563
|
||||||
|
Equipment
|
397,226
|
380,650
|
||||||
|
Assets not in service:
|
||||||||
|
Equipment
|
2,495
|
-
|
||||||
|
989,145
|
986,650
|
|||||||
|
Less accumulated depreciation
|
(675,074
|
)
|
(613,688
|
)
|
||||
|
$
|
314,071
|
$
|
372,962
|
|||||
8
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Depreciation expense amounted to approximately $84,000 and $61,000 for the three months ended September 30, 2019 and 2018, respectively.
| 5. |
LOAN PAYABLE
|
On May 5, 2017, the Company entered into a loan and security agreement. The loan and security agreement provided for a revolving line of credit, not to exceed an aggregate principal amount of $5,000,000 limited to
qualifying receivables and inventories (as defined therein). On October 31, 2017, the Company amended the loan and security agreement to increase the maximum revolving facility amount to $12,000,000. The outstanding principal under the loan and
security agreement accrues interest at prime rate plus 2% (7.00%) as of September 30, 2019. The loan and security agreement contains a financial covenant, which requires the Company to maintain minimum liquidity of $500,000. The Company was compliant
with its financial covenant as of September 30, 2019 and June 30, 2019. The loan and security agreement is secured by substantially all assets of the Company, is guaranteed by the stockholder, and expires on May 5, 2021. As of September 30, 2019 and
June 30, 2019, there was approximately $4,107,000 (less issuance costs of approximately $63,000), and approximately $3,903,000 (less issuance costs of approximately $73,000) of indebtedness outstanding, respectively.
| 6. |
RELATED PARTY TRANSACTIONS
|
The Company has advances due to a related party totaling approximately $60,000 at September 30, 2019 and June 30, 2019, respectively. These advances are unsecured and non-interest bearing, with no specific repayment
terms. The Company has reflected these advances as long-term in the accompanying balance sheets as repayment is not expected until one year after the respective balance sheet dates.
| 7. |
RETIREMENT PLAN
|
The Company participates in a 401(k) plan (the “Plan”), which is available to all eligible employees. Employer contributions to the Plan are fixed and equal 3% of each qualified employee’s eligible compensation. Total
employer contributions to the Plan were $14,000 and approximately $72,000 for the three month period ended September 30, 2019 and year ended June 30, 2019, respectively.
| 8. |
COMMITMENTS AND CONTINGENCIES
|
The Company rents office space under a non-cancelable operating lease. The lease agreement calls for initial monthly payments averaging approximately $4,657, excluding taxes and common area maintenance charges, and expires in 2023.
Rent expense was approximately $23,000 and $17,000 for the three months ended September 30, 2019, and 2018, respectively.
Certain key employees are eligible to participate in bonus payments in the event of a sale of the Company, or the sale of all or substantially all of its assets, (the “Transaction”) under Transaction Bonus Plans (the
“Plans”). The Plans automatically terminate on the earlier of (i) the satisfaction by all parties of any obligations relating to a consummated Transaction, regardless of whether the Transaction results in the payment of any bonus to an eligible key
employee, or October 31, 2019.
9
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
From time to time, the Company may be involved in various claims or litigation proceedings incidental to the ordinary course of business. In the opinion of management, the ultimate liability, if any, resulting from any
such claims or litigation proceedings would not be material to the Company’s financial position or results of operations.
|
9.
|
CUMULATIVE REDEEMABLE PREFERRED STOCK
|
The Company issued 36.67 shares of Series A-1 redeemable preferred stock and 73.33 shares of Series A redeemable preferred stock with no par value for approximately $2,400,000 (net of issuance costs) and $5,000,000 in
November 2018 and December 2017, respectively. The cumulative annual dividend rate of 15% (based on an original issue price per share equal to $68,184.92) is compounded annually and accrued for upon declaration of such dividends. At September 30,
2019 and June 30, 2019 no dividends were declared and the Company is under no obligation to pay such dividends.
The Company shall not declare, pay, or set aside any dividends on any other shares of capital stock unless the holders of the Series A-1 redeemable preferred stock and Series A redeemable preferred stock then
outstanding first receive payment in full in an amount equal to the stated value plus all accrued and unpaid dividends thereon to the date of redemption. The maximum amount the Company could be required to pay to redeem the shares is $2,217,466 and
$1,373,716 as of September 30, 2019 and June 30, 2019, respectively. Under the terms of the Series A redeemable preferred stock and Series A-1 redeemable preferred stock the Company is not required to set aside funds for meeting preferred stock
dividend requirements.
10
HALO, PURELY FOR PETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
|
9.
|
CUMULATIVE REDEEMABLE PREFERRED STOCK – CONTINUED
|
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Series A-1 redeemable preferred stock then outstanding shall be entitled to be paid out of
the assets available for distribution to its stockholders, prior and in preference to any distribution of any of the assets of the Company to the holders of Series A redeemable preferred stock or common stock.
Consistent with those of the common stock, the holders of Series A-1 redeemable preferred stock and Series A redeemable preferred stock are entitled to one vote for each share of preferred stock held at all meetings of
stockholders.
|
10.
|
SUBSEQUENT EVENTS
|
On October 15, 2019, the Company (Thriving Paws, LLC, a Delaware limited liability company (“Thriving Paws”), HH-Halo LP, a Delaware limited partnership (“HH-Halo” and, together with Thriving Paws, the “Sellers”) with
HH-Halo, in the capacity of the representative of the Sellers) entered into a Stock Purchase Agreement (“the Agreement”) with Better Choice Company Inc. (BTTR), a Delaware corporation (the “Buyer”). Pursuant to the terms and subject to the conditions
of the Agreement, the Company agreed to sell one hundred percent (100%) of the issued and outstanding capital stock of Halo to the Buyer.
On December 18, 2019, Halo and the Sellers entered into an Amended and Restated Stock Purchase Agreement pursuant to which, among other things, a portion of the consideration for the Acquisition was paid to Werner von
Pein, the chief executive officer of Halo.
Under the terms of the Amended Agreement, the Company completed the Acquisition on December 19, 2019, for approximately $39.4 million pending final valuation of non-cash components issued to the Sellers. The
consideration was subject to customary adjustments for Halo’s net working capital, cash, and indebtedness, and consisted of a combination of (i) cash consideration, (ii) a total of 2,134,390 shares of the Better Choice Company’s common stock, par
value $0.001 per share, and (iii) the value of the Seller Warrants. BTTR also (i) entered into a Subscription Agreement with the Sellers relating to the issuance of the common stock Consideration, (ii) issued convertible subordinated seller notes
(“Seller Notes”), and (iii) issued Seller Warrants on December 19, 2019.
11
Exhibit 99.3
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements of Better Choice Company Inc. (the “Company”) have been prepared to give effect to its December 2019 acquisition (the “Acquisition”) of Halo, Purely For Pets, Inc. (“Halo”) and the accompanying financing transactions more specifically described herein (the “Transactions”).
On December 20, 2019, the Company completed the acquisition of Halo for $39.4 million pursuant to the terms of the Amended and Restated Stock Purchase Agreement, dated as of December 18, 2019 (the “Stock Purchase Agreement”), by and among the Company, Halo, Thriving Paws, LLC, a Delaware
limited liability company (“Thriving Paws”), HH-Halo LP, a Delaware limited partnership (“HH-Halo” and, together with Thriving Paws, the “Sellers”) and HH-Halo, in the capacity of the representatives of the Sellers. The Company paid cash in an
amount equal to $15.9 million, issued 2,134,390 shares of common stock, par value $0.001 per share (the “Common Stock”) and $15 million of subordinated convertible debt to the Sellers
(accompanied by 935,700 stock purchase warrants more specifically discussed herein), and repaid $4.3 million of Halo debt in exchange for 100% of the outstanding common stock of Halo. These pro forma financial
statements reflect adjustments that, among other things, record historical Halo assets and liabilities at their estimated fair value.
The unaudited pro forma combined balance sheet as of September 30, 2019 gives effect to the Transactions as if they had occurred on September 30, 2019. The unaudited pro forma combined
statements of operations and comprehensive loss give effect to the Transactions as if they had occurred on January 1, 2018. The historical financial information is adjusted to give pro forma effect
to events that are (1) directly attributable to the Transactions, (2) factually supportable and (3) with respect to the statement of operations, expected to have a continuing impact on the results of the combined
entity. The unaudited pro forma combined financial statements presented below are based on, and should be read together with, the historical financial statements and accompanying notes of Halo included in this Form 8-K, and the historical financial
statements of the Company included in its Quarterly Report on Form 10-Q for the period ended September 30, 2019 and in its Current Report on Form 8-K/A dated May 6, 2019 and filed with the
Securities and Exchange Commission on July 23, 2019.
The unaudited pro forma adjustments related to the Acquisition have been prepared using the acquisition method of accounting and are based on a preliminary purchase price allocation whereby
the consideration exchanged to acquire Halo was allocated to the assets acquired and the liabilities assumed, based upon their estimated fair values. Actual adjustments will be based on analyses of fair values of identifiable tangible and intangible
assets, deferred tax assets and liabilities and estimates of the useful lives of tangible and amortizable intangible assets, which will be completed after the Company obtains a final third-party valuation, performs its
own assessments and reviews all available data. Differences between the preliminary and final purchase price allocations may have a material impact on the unaudited pro forma combined financials statements and the
Company’s future results of operations and financial position.
The unaudited pro forma combined financial statements do not reflect the realization of potential cost savings, or any related restructuring or integration costs that may result from the integration of the companies.
Although the Company believes that certain cost savings may result from the Acquisition, there can be no assurance that these cost savings will be achieved.
The unaudited pro forma combined financial statements are based on estimates and assumptions, are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results
of operations in future periods or the results that actually would have been realized if the Transactions had been completed as of the dates indicated.
Unaudited Pro Forma Combined Balance Sheet
(Dollars in thousands)
|
Historical
Better Choice
|
Historical Halo
|
Adjustments
|
Ref.
|
Combined Pro
Forma
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Current Assets
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
2,776
|
$
|
1,611
|
$
|
(1,083
|
)
|
A, C, D
|
|
$
|
3,304
|
|||||||||
|
Restricted cash
|
6,225
|
-
|
(6,191
|
)
|
B |
34
|
||||||||||||||
|
Accounts receivable, net
|
269
|
4,640
|
-
|
4,909
|
||||||||||||||||
|
Inventories, net
|
2,358
|
3,433
|
-
|
5,791
|
||||||||||||||||
|
Prepaid expenses and other current assets
|
1,931
|
461
|
-
|
2,392
|
||||||||||||||||
|
Total Current Assets
|
13,559
|
10,145
|
(7,274
|
)
|
16,430
|
|||||||||||||||
|
Property and equipment, net
|
114
|
314
|
-
|
428
|
||||||||||||||||
|
Right-of-use asset, operating lease
|
879
|
-
|
-
|
879
|
||||||||||||||||
|
Intangible assets, net
|
926
|
-
|
21,200
|
C |
22,126
|
|||||||||||||||
|
Goodwill
|
-
|
4,731
|
5,550
|
C |
10,281
|
|||||||||||||||
|
Other assets
|
1,717
|
15
|
1,732
|
|||||||||||||||||
|
Total Assets
|
$
|
17,195
|
$
|
15,205
|
$
|
19,476
|
$
|
51,876
|
||||||||||||
|
Liabilities & Stockholders' Equity (Deficit)
|
||||||||||||||||||||
|
Current Liabilities
|
||||||||||||||||||||
|
Line of credit
|
$
|
6,191
|
$
|
-
|
$
|
(6,191
|
)
|
B |
$
|
-
|
||||||||||
|
Note payable, current portion
|
-
|
-
|
19,549
|
D |
19,549
|
|||||||||||||||
|
Accounts payable
|
1,972
|
1,900
|
-
|
3,872
|
||||||||||||||||
|
Due to related parties
|
34
|
-
|
-
|
34
|
||||||||||||||||
|
Accrued liabilities
|
3,874
|
692
|
-
|
4,566
|
||||||||||||||||
|
Accrued payroll liabilities
|
-
|
197
|
-
|
197
|
||||||||||||||||
|
Deferred revenue
|
238
|
-
|
-
|
238
|
||||||||||||||||
|
Operating lease liability, current portion
|
1,244
|
-
|
-
|
1,244
|
||||||||||||||||
|
Warrant derivative liability
|
293
|
-
|
-
|
293
|
||||||||||||||||
|
Total Current Liabilities
|
13,846
|
2,789
|
13,358
|
29,993
|
||||||||||||||||
|
Operating lease liability
|
619
|
-
|
-
|
619
|
||||||||||||||||
|
Related Party - L/T Liabilities
|
-
|
60
|
-
|
60
|
||||||||||||||||
|
Loan payable, net of issuance costs
|
-
|
4,044
|
10,956
|
A |
15,000
|
|||||||||||||||
|
Total Liabilities
|
14,465
|
6,893
|
24,314
|
45,672
|
||||||||||||||||
|
Redeemable Series E Convertible Preferred Stock, $0.001 par value, 2,900,000 shares authorized, 1,707,920 shares issued and outstanding at September 30, 2019
|
13,007
|
-
|
-
|
13,007
|
||||||||||||||||
|
Stockholders' Equity (Deficit)
|
||||||||||||||||||||
|
Common Stock, $0.001 par value, 88,000,000 shares authorized as of September 30, 2019, 45,427,659 shares issued and outstanding at September 30, 2019
|
45
|
-
|
2
|
A |
47
|
|||||||||||||||
|
Stock Warrants
|
-
|
-
|
5,497
|
A, D
|
|
5,497
|
||||||||||||||
|
Additional paid-in capital
|
176,757
|
64,544
|
(60,662
|
)
|
A, C, E
|
|
180,639
|
|||||||||||||
|
Accumulated deficit
|
(187,079
|
)
|
(56,232
|
)
|
50,325
|
C, E
|
|
(192,986
|
)
|
|||||||||||
|
Total Stockholders' Equity (Deficit)
|
(10,277
|
)
|
8,312
|
(4,838
|
)
|
(6,803
|
)
|
|||||||||||||
|
Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity (Deficit)
|
$
|
17,195
|
$
|
15,205
|
$
|
19,476
|
$
|
51,876
|
||||||||||||
(Dollars in thousands)
|
Historical Better
Choice
|
Historical
Halo
|
Adjustments
|
Ref.
|
Combined Pro Forma
|
||||||||||||||||
|
Net sales
|
$
|
14,785
|
$
|
36,583
|
$
|
-
|
$
|
51,368
|
||||||||||||
|
Cost of goods sold
|
7,489
|
23,189
|
-
|
30,678
|
||||||||||||||||
|
Gross profit
|
7,296
|
13,394
|
-
|
20,690
|
||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
General and administrative
|
5,655
|
9,934
|
1,998
|
F |
17,587
|
|||||||||||||||
|
Share-based compensation
|
831
|
-
|
319
|
G |
1,150
|
|||||||||||||||
|
Sales and marketing
|
4,981
|
7,898
|
-
|
12,879
|
||||||||||||||||
|
Customer service and warehousing
|
987
|
122
|
-
|
1,109
|
||||||||||||||||
|
Loss on disposal of equipment
|
-
|
32
|
-
|
32
|
||||||||||||||||
|
Total operating expenses
|
12,454
|
17,986
|
2,317
|
32,757
|
||||||||||||||||
|
Loss from operations
|
(5,158
|
)
|
(4,592
|
)
|
(2,317
|
)
|
(12,067
|
)
|
||||||||||||
|
Other (expense) income
|
||||||||||||||||||||
|
Interest expense
|
(868
|
)
|
(414
|
)
|
(10,008
|
)
|
H, I, J, K
|
|
(11,290
|
)
|
||||||||||
|
Total other (expense) income
|
(868
|
)
|
(414
|
)
|
(10,008
|
)
|
(11,290
|
)
|
||||||||||||
|
Net and comprehensive loss
|
$
|
(6,026
|
)
|
$
|
(5,006
|
)
|
$
|
(12,325
|
)
|
$
|
(23,357
|
)
|
||||||||
|
Earnings per share, basic and diluted
|
$
|
(0.52
|
)
|
$
|
(1.71
|
)
|
||||||||||||||
|
Weighted average shares, basic and diluted
|
11,524,076
|
13,658,466
|
||||||||||||||||||
(Dollars in thousands)
|
Historical Better
Choice
|
Historical Halo
|
Adjustments
|
Ref.
|
Combined Pro
Forma
|
||||||||||||||||
|
Net sales
|
$
|
11,567
|
$
|
24,323
|
$
|
-
|
$
|
35,890
|
||||||||||||
|
Cost of goods sold
|
7,178
|
16,028
|
-
|
23,206
|
||||||||||||||||
|
Gross profit
|
4,389
|
8,295
|
-
|
12,684
|
||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
General and administrative
|
12,031
|
6,974
|
1,498
|
F |
20,503
|
|||||||||||||||
|
Share-based compensation
|
6,708
|
-
|
239
|
G |
6,947
|
|||||||||||||||
|
Sales and marketing
|
8,453
|
1,857
|
-
|
10,310
|
||||||||||||||||
|
Customer service and warehousing
|
854
|
100
|
-
|
954
|
||||||||||||||||
|
Loss on disposal of equipment
|
-
|
64
|
-
|
64
|
||||||||||||||||
|
Total operating expenses
|
28,046
|
8,995
|
1,737
|
38,778
|
||||||||||||||||
|
Loss from operations
|
(23,657
|
)
|
(700
|
)
|
(1,737
|
)
|
(26,094
|
)
|
||||||||||||
|
Other (expense) income
|
||||||||||||||||||||
|
Interest expense
|
(165
|
)
|
(224
|
)
|
(3,097
|
)
|
J, K
|
|
(3,486
|
)
|
||||||||||
|
Loss on acquisitions
|
(147,376
|
)
|
-
|
-
|
(147,376
|
)
|
||||||||||||||
|
Change in fair value of warrant derivative liability
|
886
|
-
|
-
|
886
|
||||||||||||||||
|
Total other (expense) income
|
(146,655
|
)
|
(224
|
)
|
(3,097
|
)
|
(149,976
|
)
|
||||||||||||
|
Net and comprehensive loss
|
$
|
(170,312
|
)
|
$
|
(924
|
)
|
$
|
(4,834
|
)
|
$
|
(176,070
|
)
|
||||||||
|
Preferred dividends
|
70
|
-
|
-
|
70
|
||||||||||||||||
|
Net and comprehensive loss available to common stockholders
|
$
|
(170,382
|
)
|
$
|
(924
|
)
|
$
|
(4,834
|
)
|
$
|
(176,140
|
)
|
||||||||
|
Earnings per Share, Basic & Diluted
|
$
|
(5.95
|
)
|
|
|
$ |
(5.73
|
) |
||||||||||||
|
Weighted average shares, basic and diluted
|
28,624,230
|
30,758,620
|
||||||||||||||||||
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
| 1. |
Basis of presentation
|
The unaudited pro forma combined financial statements have been compiled from the underlying financial statements of the Company and Halo, each prepared in accordance with U.S. GAAP, and reflects the pro forma effects of the Acquisition using the acquisition method of accounting.
Under the acquisition method of accounting, the assets and liabilities of Halo will be recorded as of the transaction date, at their respective fair values, and combined with those of the
Company. The reported combined financial condition and results of operations of the Company after completion of the transaction will reflect these fair values.
The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates.
The excess of the purchase price over the estimated fair value of identifiable assets and liabilities of Halo as of December 19, 2019, the effective date of the Acquisition, will be
allocated to goodwill. Fair value is defined, in accordance with U.S. GAAP, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The
preliminary purchase price allocations are subject to the Company finalizing its analysis of the fair value of Halo’s assets and liabilities as of the effective date of the Acquisition and will be adjusted upon
completion of the analysis including a third-party valuation. The use of different estimates could yield materially different results.
The unaudited pro forma combined financial statements also do not reflect Halo’s adoption of ASC 606, Revenue Recognition, or ASC 842, Leases. As a private company, Halo was not yet required to adopt these standards.
Additionally, the unaudited pro forma combined balance sheet excludes the tax impacts associated with the assets acquired and liabilities assumed in the Acquisition
as the Company has not completed a preliminary assessment of the tax attributes and as such does not have sufficient data to support adjustments as of the date of this filing. Once the tax impacts for the Acquisition
have been completed, there could be a material change to the tax asset and liability balances which would cause a corresponding adjustment to goodwill.
The unaudited pro forma combined financial statements reflect the purchase price of $39.4 million for the outstanding shares of Halo. For purposes of this pro forma analysis, the purchase
price for Halo has been allocated based on a preliminary estimate of the fair value of assets acquired and liabilities assumed.
| 3. |
Pro forma adjustments
|
The unaudited pro forma combined balance sheet as of September 30, 2019 includes the adjustments summarized below:
A. Purchase accounting for net assets of Halo – purchase price. To reflect the $39.4 million purchase price of Halo.
The consideration paid by the Company included:
| o |
cash of $15.9 million;
|
| o |
the issuance of 937,500 Seller Warrants with a valuation of $0.3 million, that are exercisable for 24 months following the date of the consummation of an IPO (as defined therein) at an exercise price of the greater of (x) $5.00 or (y)
the IPO Price (as defined therein); and
|
| o |
repayment of $4.3 million of Halo debt.
|
A portion of the $4.3 million Halo debt was incurred subsequent to September 30, 2019. As a result, the pro forma adjustment only reflects the repayment of the $4.1 million balance at September 30, 2019. (Additionally,
at the settlement of the debt, the Company wrote off the remaining $0.1 million of deferred financing costs related to the Halo debt.)
The Seller Notes mature on June 30, 2023 (the “Maturity Date”) and accrue interest at 10.00% per annum from December 19, 2019 until the Maturity Date, payable quarterly in arrears in kind on March 31, June 30, September
30 and December 31 of each year. The Seller Notes may be converted into shares of Common Stock at any time prior to the last Business Day immediately preceding the Maturity Date and shall be automatically converted into Common Stock upon an IPO (as
defined in the Seller Notes). The conversion price shall be equal to the lower of (x) $4.00 per share or the IPO Price (as defined in the Seller Notes).
B. Paydown of Franklin Synergy Line of Credit. To reflect the payoff of the approximately $6.2 million credit facility in connection with the Acquisition and the accompanying
financing transactions. This debt was settled with the Company’s restricted cash balance.
C. Allocation of purchase price to net assets acquired
Approximately $8.3 million of the purchase price is allocable to the cost basis of the net assets of Halo acquired (which approximate fair value) with the remaining allocated as follows:
| ◾ |
Trade Names - $11.1 million, amortized over 20-year useful life
|
| ◾ |
Customer Base - $10.1 million, amortized over 7-year useful life
|
| ◾ |
Payoff of Halo debt - $4.3 million (only $4.1 was outstanding at September 30, 2019 offset by $0.1 deferred financing costs)
|
| ◾ |
Goodwill –
|
Additionally, this adjustment reflects approximately $5.8 million of legal fees and other costs that were paid at closing, which are recognized as an expense.
D. Issuance of debt in addition to the Seller Notes to fund the purchase the Acquisition. To reflect the incurrence of debt under a Loan Facilities Agreement that includes a $20.5 million term loan facility and $7.5 million revolving credit facility (together the
“Loan Facilities”), entered into on the date of the closing of the Acquisition. The Company borrowed the full amount of the term loan facility and $5.0 million under the revolving credit facility. The cash proceeds
under the borrowings described in the preceding sentence are net of approximately $0.5 million and $0.2 million of debt issuance costs, respectively. These costs will be recorded as deferred financing costs which is
netted against the debt and amortized to interest expense over the one-year term of the Loan Facilities.
To induce the lender to enter into the Facilities Agreement, certain shareholders of the Company agreed to enter into a Continuing Guaranty (the “Shareholder Guaranty”) guaranteeing the Company’s obligations under the
Facilities Agreement. As consideration for the Shareholder Guaranties, the Company agreed to issue common stock purchase warrants to the Shareholder Guarantors in an amount equal to 0.325 warrants for each dollar of debt under the Facilities
Agreement guaranteed by such Shareholder Guarantor (the “Shareholder Guarantor Warrants”). The Shareholder Guarantor Warrants are exercisable for 24 months from the date of the consummation of an IPO (as defined therein) at an exercise price $1.82
per share. The value of the Shareholder Guarantor Warrants, $5.3 million, will be recorded as a deferred financing cost which is netted against the Loan Facilities and amortized to interest expense over the one-year term of the Loan Facilities.
E. Impact on Halo equity; issuance of Common Stock to Sellers. The balance of Halo’s common stock (no par value), additional paid in
capital ($64.5 million at September 30, 2019) and accumulated deficit ($56.2 million at September 30, 2019) has been reduced to zero as the Company acquired 100% of Halo and the Halo equity balances will not carry forward in the combined company.
The issuance of 2,134,390 shares of Common Stock increased additional paid-in-capital by $3.7 million.
The unaudited pro forma combined statements of operations and comprehensive loss for the twelve month period ended December 31, 2018 and the nine month period ended September 30, 2019
include the adjustments summarized below:
F. Amortization expense – purchase accounting intangibles. To reflect the amortization of trade name and customer base intangible assets recorded as part of purchase accounting. Amortization expense relating to these intangible assets approximate $2.0 million and $1.5 million for the twelve months ended
December 31, 2018 and the nine months ended September 30, 2019, respectively.
G. Stock options granted. To reflect the share-based compensation expense associated with stock options granted to five Halo employees in connection
with the closing of the Acquisition. The share-based compensation expense for the options granted approximates $0.3 million and $0.2 million for the twelve months ended December 31, 2018 and the nine months ended September 30, 2019, respectively.
H. Amortization expense – Loan Facilities deferred financing costs. To reflect the amortization of deferred financing costs associated with the
Loan Facilities entered into on the closing date. As the term of the term loan facility and the revolving credit facility are both less than 1 year, 100% of
the financing costs relating to the term loan facility and the revolving credit facility of approximately $0.5 million and $0.2 million are recognized as interest expense in the twelve months ended December 31, 2018;
none is recognized in the nine months ended September 30, 2019.
I. Amortization expense – Shareholder Guarantor Warrants. To reflect the amortization of the deferred financing costs represented by the fair value of the Shareholder
Guarantor Warrants issued in connection with the Loan Facilities. As the term of the Loan Facilities is less than 1 year, 100% of the $5.3 million value of the Shareholder Guarantor Warrants is recognized as interest expense in the twelve months
ended December 31, 2018; none is recognized in the nine months ended September 30, 2019.
J. Interest expense reduction. To reflect the reduction in interest expense associated with the repayment of the
Halo debt on the closing date of the Acquisition described above offset by the write off of remaining deferred financing costs associated with the Halo debt. The interest expense reduction approximates $0.3 million and $0.2 million for the twelve
months ended December 31, 2018 and the nine months ended September 30, 2019, respectively. Additionally, as a result of the Company settling its line of credit with Franklin Synergy Bank, interest expense is reduced by an additional $0.1 million for
the nine months ended September 30, 2019. This line of credit was not incurred until May 6, 2019; accordingly, there is no reduction of interest for the twelve months ended December 31, 2018.
K. Interest expense – acquisition debt. To reflect the interest expense associated with the incurrence of the debt
under the Loan Facilities and the Seller Notes. The interest expense associated with such debt approximates $4.5 million and $3.4 million for the twelve months ended December 31, 2018 and the nine months ended
September 30, 2019, respectively.
| 5. |
Subordinated Convertible Notes. In anticipation of the closing of the Acquisition, on November 6, 2019, the Company issued two-year subordinated convertible notes (the “Convertible Notes”) for
total proceeds of $2.75 million to existing shareholders. In connection with the Convertible Notes, the purchasers were also issued warrants (the “Warrants”) to purchase shares of Common Stock equal to 62.5 Warrants for each Note. Each
Warrant entitles the holder thereof to purchase one share of Common Stock of the Company for a period of 24 months from the date of the consummation of a future IPO at an exercise price equal to the greater of (i) $5.00 per share or (ii)
IPO Price (as defined therein) The Convertible Notes bear interest at 10.0% per annum from the date of issue, payable in kind. These Convertible Notes are not reflected in the unaudited pro forma financial statements.
|