SRX HEALTH SOLUTIONS, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended
September 30, 2022
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from
to
Commission File Number:
001-40477
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of Principal Executive Offices) (Zip Code)
_______________________________________________
(Registrant’s Telephone Number, Including Area Code):
(212)
896-1254
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) |
Name of Each Exchange on which
Registered
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☒ No ☐
Indicate by checkmark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
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☒ | Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No
☒
The number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date was:
29,405,529
shares of $0.001 par value common stock outstanding as of November 8, 2022.
Better Choice Company Inc.
Table of Contents
| Item | Page | |||||||
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q ("Quarterly Report") are “forward-looking statements” for purposes of federal and state securities laws. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements contained herein include, among others, statements concerning management's expectations about future events, operating plans and performance, the continued effects of the COVID-19 pandemic and geopolitical actions and the threat of cyber-attacks, including levels of consumer, business and economic confidence generally, the regulatory environment, litigation, sales and the expected benefits of our business strategy and strategic priorities, and such statements are based on the current beliefs and expectations of management, as applicable. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, and assumptions. Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and contain inherent risks and uncertainties. Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances, or otherwise. We qualify all of our forward-looking statements by these cautionary statements. You should, however, consult further disclosures we make in future filings and public disclosures, including without limitation, our Annual Report on Form 10-K ("Annual Report"), Quarterly Reports on Forms 10-Q, and Current Reports on Forms 8-K.
2
Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
•
the impact of damage to or interruption of our information technology systems due to cyber-attacks or other circumstances beyond our control
•
the impact of the actual or perceived effects of the COVID-19 pandemic, including as a result of any additional variants of the virus or the efficacy and distribution of vaccines, on the global pet health and wellness industry, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations;
•
business interruptions resulting from geopolitical actions, including war and terrorism;
•
our ability to successfully implement our growth strategy;
•
failure to achieve growth or manage anticipated growth;
•
our ability to achieve or maintain profitability;
•
the loss of key members of our senior management team;
•
our ability to generate sufficient cash flow or raise capital on acceptable terms to run our operations, service our debt and make necessary capital expenditures;
•
our ability to successfully integrate Halo’s and TruPet’s brands;
•
our dependence on our subsidiaries for payments, advances and transfers of funds due to our holding company status;
•
our ability to successfully develop additional products and services or successfully market and commercialize such products and services;
•
competition in our market;
•
our ability to attract new and retain existing customers, suppliers, distributors or retail partners;
•
allegations that our products cause injury or illness or fail to comply with government regulations;
•
our ability to manage our supply chain effectively;
•
our or our co-manufacturers’ and suppliers’ ability to comply with legal and regulatory requirements;
•
the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require, whether as a result of the actual or perceived effects of the COVID-19 pandemic or broader geopolitical and macroeconomic conditions, including the military conflict between Russia and Ukraine;
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our ability to develop and maintain our brand and brand reputation;
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compliance with data privacy rules;
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our compliance with applicable regulations issued by the U.S. Food and Drug Administration (“FDA”), the U.S. Federal Trade Commission (“FTC”), the U.S. Department of Agriculture (“USDA”), and other federal, state and local regulatory authorities, including those regarding marketing pet food, products and supplements;
•
risk of our products being recalled for a variety of reasons, including product defects, packaging safety and inadequate or inaccurate labeling disclosure;
•
risk of shifting customer demand in relation to raw pet foods, premium kibble and canned pet food products, and failure to respond to such changes in customer taste quickly and effectively; and
•
the other risks identified in this Quarterly Report including, without limitation, Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 1A “Risk Factors” as such factors may updated from time to time in our other public filings.
NOTE REGARDING TRADEMARKS
We own or have rights to use the trademarks and trade names that we use in conjunction with the operation of our business. Each trademark or trade name of any other company appearing in this Quarterly Report on Form 10-Q is, to our knowledge, owned by such other company. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.
3
PART I
ITEM 1. FINANCIAL STATEMENTS
Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net sales | $ |
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$ |
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$ |
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$ |
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| Cost of goods sold |
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| Gross profit |
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| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative |
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| Share-based compensation |
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| Total operating expenses |
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| Loss from operations |
(
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(
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(
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(
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| Other (expense) income: | |||||||||||||||||||||||
| Interest expense, net |
(
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(
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(
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(
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| Gain on extinguishment of debt, net |
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| Change in fair value of warrant liabilities |
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| Total other (expense) income, net |
(
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(
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| Net (loss) income before income taxes |
(
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(
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(
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| Income tax expense |
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| Net (loss) income available to common stockholders | $ |
(
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$ |
(
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$ |
(
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$ |
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| Weighted average number of shares outstanding, basic |
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| Weighted average number of shares outstanding, diluted |
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| Net (loss) income per share available to common stockholders, basic | $ |
(
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$ |
(
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$ |
(
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$ |
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| Net (loss) income per share available to common stockholders, diluted | $ |
(
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$ |
(
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$ |
(
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
Better Choice Company Inc.
Unaudited Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
| September 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Restricted cash |
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| Accounts receivable, net |
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| Inventories, net |
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| Prepaid expenses and other current assets |
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| Total Current Assets |
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| Fixed assets, net |
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| Right-of-use assets, operating lease |
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| Intangible assets, net |
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| Goodwill |
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| Other assets |
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| Total Assets | $ |
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$ |
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| Liabilities & Stockholders’ Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ |
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$ |
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| Accrued and other liabilities |
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| Line of credit |
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| Term loan, net |
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| Operating lease liability |
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| Total Current Liabilities |
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| Non-current Liabilities | |||||||||||
| Line of credit, net |
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| Term loan, net |
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| Deferred tax liability |
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| Operating lease liability |
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| Total Non-current Liabilities |
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| Total Liabilities |
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| Stockholders’ Equity | |||||||||||
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Common Stock, $
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| Additional paid-in capital |
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| Accumulated deficit |
(
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(
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| Total Stockholders’ Equity |
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| Total Liabilities and Stockholders’ Equity | $ |
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$ |
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5
Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(Dollars in thousands except shares)
| Common Stock | |||||||||||||||||
| Shares | Amount |
Additional
Paid-In Capital |
Accumulated
Deficit |
Total
Stockholders’ Equity |
|||||||||||||
| Balance as of December 31, 2021 |
|
$ |
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$ |
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$ |
(
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$ |
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||||||||
| Share-based compensation |
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— |
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— |
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||||||||||||
| Net loss available to common stockholders | — | — | — |
(
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(
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| Balance as of March 31, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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||||||||
| Share-based compensation | — | — |
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— |
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||||||||||||
| Net loss available to common stockholders | — | — | — |
(
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(
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| Balance as of Balance as of June 30, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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||||||||
| Share-based compensation | — | — |
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— |
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||||||||||||
| Net loss available to common stockholders | — | — | — |
(
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(
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| Balance as of Balance as of September 30, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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6
| Common Stock | Series F Convertible Preferred Stock | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount |
Additional
Paid-In Capital |
Accumulated
Deficit |
Total
Stockholders’ (Deficit) Equity |
|||||||||||||||||||||||
| Balance as of December 31, 2020 |
|
$ |
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$ |
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$ |
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$ |
(
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$ |
(
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| Shares and warrants issued pursuant to private placement |
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— | — |
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— |
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| Share-based compensation |
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— | — | — |
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— |
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| Warrant exercises |
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— | — | — |
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— |
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| Shares issued to third-party for services |
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— | — | — |
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— |
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| Warrant modifications | — | — | — |
|
(
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| Conversion of Series F shares to common stock |
|
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(
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— |
(
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— |
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| Net loss available to common stockholders | — | — | — | — | — |
(
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(
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| Balance as of March 31, 2021 |
|
$ |
|
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$ |
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$ |
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$ |
(
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$ |
(
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| Warrant exercise |
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— | — | — |
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— |
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| Conversion of Series F shares to common stock |
|
— |
(
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— | — | — | — | ||||||||||||||||||||||
| Conversion of convertible notes to common stock |
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— | — |
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— |
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| Share-based compensation | — | — | — | — |
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— |
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| Shares issued in lieu of fractional shares due to reverse stock split |
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— | — | — | — | — | — | ||||||||||||||||||||||
| Net income available to common stockholders | — | — | — | — | — |
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| Balance as of June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Shares issued pursuant to IPO |
|
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— | — |
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— |
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| Conversion of Series F shares to common stock |
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(
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— |
(
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— |
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| Reclassification of warrant liability to equity | — | — | — | — |
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— |
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| Share repurchases |
(
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(
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— | — | — |
(
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(
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| Share-based compensation | — | — | — | — |
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— |
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| Net loss available to common stockholders | — | — | — | — | — |
(
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(
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| Balance as of September 30, 2021 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
7
Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
|
Nine Months Ended
September 30, |
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| 2022 | 2021 | ||||||||||
| Cash Flow from Operating Activities: | |||||||||||
| Net (loss) income available to common stockholders | $ |
(
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$ |
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| Adjustments to reconcile net (loss) income to net cash used in operating activities: | |||||||||||
| Shares and warrants issued to third parties for services |
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| Depreciation and amortization |
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| Amortization of debt issuance costs and discounts |
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| Share-based compensation |
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| Change in fair value of warrant liabilities |
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(
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| Payable-in-kind interest expense on notes payable |
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| Amortization of prepaid assets |
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| Other |
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(
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| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net |
(
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(
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| Inventories, net |
(
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| Prepaid expenses and other assets |
(
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| Accounts payable and accrued liabilities |
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(
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| Other |
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(
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| Cash Used in Operating Activities | $ |
(
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$ |
(
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| Cash Flow from Investing Activities: | |||||||||||
| Capital expenditures | $ |
(
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$ |
(
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| Cash Used in Investing Activities | $ |
(
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$ |
(
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| Cash Flow from Financing Activities: | |||||||||||
| Proceeds from shares and warrants issued pursuant to private placement, net | $ |
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$ |
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| Share repurchases |
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(
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| Proceeds from revolving lines of credit |
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| Payments on revolving lines of credit |
(
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(
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| Proceeds from term loan |
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| Payments on term loans |
(
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(
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| Cash received for warrant exercises |
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| IPO proceeds, net |
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| Debt issuance costs |
(
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(
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| Cash Provided by Financing Activities | $ |
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$ |
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| Net (decrease) increase in cash and cash equivalents and restricted cash | $ |
(
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$ |
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| Total cash and cash equivalents and restricted cash, beginning of period |
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| Total cash and cash equivalents and restricted cash, end of period | $ |
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$ |
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Supplemental cash flow information:
|
Nine Months Ended
September 30, |
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| 2022 | 2021 | ||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ |
|
$ |
|
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See accompanying notes to the unaudited condensed consolidated financial statements.
8
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 -
Nature of business and summary of significant accounting policies
Nature of the business
Better Choice Company Inc. (the "Company") is a pet health and wellness company focused on providing pet products and services that help dogs and cats live healthier, happier and longer lives. The Company has a broad portfolio of pet health and wellness products for dogs and cats sold under its Halo brand across multiple forms, including foods, treats, toppers, dental products, chews and supplements. The products consist of kibble and canned dog and cat food, freeze-dried raw dog food and treats, vegan dog food and treats, oral care products and supplements.
Basis of presentation
The Company’s condensed consolidated financial statements are prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reports and accounting principles generally accepted in the United States ("GAAP"). Accordingly, the Condensed Consolidated Balance Sheet as of December 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements. Results of operations for interim periods may not be representative of results to be expected for the full year.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company's Annual Report for the year ended December 31, 2021, filed with the SEC.
Consolidation
The condensed financial statements are presented on a consolidated basis and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results may differ from these estimates.
In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations for the periods ended September 30, 2022 and 2021, the financial position as of September 30, 2022 and December 31, 2021 and the cash flows for the periods ended September 30, 2022 and 2021.
Summary of significant accounting policies
For additional information, please refer to the most recently filed Annual Report regarding the Company's summary of significant accounting policies.
9
Share repurchases
On May 10, 2022, the Company's board of directors approved a share repurchase program that authorizes the repurchase of up to $
3.0
million of the Company's outstanding common stock in the open market through December 31, 2022. Repurchased shares are immediately retired and returned to unissued status. During the nine months ended September 30, 2022
no
shares were repurchased.
New accounting standards
Issued but not yet adopted
ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
In June 2016, the FASB issued ASU 2016-13, a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for the Company on January 1, 2023, and early adoption is permitted. The Company is currently evaluating the impact the standard, including subsequent updates, will have on its consolidated financial statements and related disclosures, but does not expect the guidance to have a significant impact on the financial statements.
Note 2 -
Revenue
The Company records revenue net of discounts, which primarily consist of trade promotions, certain customer allowances and early pay discounts.
The Company excludes sales taxes collected from revenues. Retail-partner based customers are not subject to sales tax.
The Company’s direct-to-consumer ("DTC") loyalty program enables customers to accumulate points based on their spending. A portion of revenue is deferred at the time of sale when points are earned and recognized when the loyalty points are redeemed.
Revenue channels
Information about the Company’s net sales by revenue channel is as follows (in thousands):
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
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| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
|
E-commerce
(1)
|
$ |
|
|
% | $ |
|
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% | $ |
|
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% | $ |
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% | ||||||||||||||||||||||||||||||||||
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Brick & Mortar
(2)
|
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% |
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% |
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% |
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% | ||||||||||||||||||||||||||||||||||||||
| DTC |
|
|
% |
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|
% |
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|
% |
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% | ||||||||||||||||||||||||||||||||||||||
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International
(3)
|
|
|
% |
|
|
% |
|
|
% |
|
|
% | ||||||||||||||||||||||||||||||||||||||
| Net Sales | $ |
|
|
% | $ |
|
|
% | $ |
|
|
% | $ |
|
|
% | ||||||||||||||||||||||||||||||||||
(1)
The Company's E-commerce channel includes two customers that amounted to greater than
10
% of the Company's total net sales during the three and nine months ended September 30, 2022. These customers had an aggregate of $
3.3
million and $
10.6
million of net sales during the three and nine months ended September 30, 2022, respectively. Two customers amounted to greater than
10
% of the Company's total net sales during the three and nine months ended September 30, 2021, respectively. These customers had an aggregate of $
4.4
million and $
10.8
million of net sales during the three and nine months ended September 30, 2021, respectively.
(2)
The Company's Brick & Mortar channel includes $
4.3
million of net sales from one customer that amounted to greater than
10
% of the Company's total net sales during the nine months ended September 30, 2022.
(3)
One of the Company's International customers that distributes products in China amounted to greater than
10
% of the Company's total net sales during the three and nine months ended September 30, 2022 and represented $
5.3
million and $
16.6
million of net sales, respectively. One of the Company's International customers in China represented greater than
10
% of net sales during the three and nine months ended September 30, 2021 and represented $
2.9
million and $
6.7
million of net sales, respectively.
10
Note 3 -
Inventories
Inventories are summarized as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Food, treats and supplements | $ |
|
$ |
|
|||||||
| Inventory packaging and supplies |
|
|
|||||||||
| Total Inventories |
|
|
|||||||||
|
Inventory reserve
(1)
|
(
|
(
|
|||||||||
| Inventories, net | $ |
|
$ |
|
|||||||
(1)
The increase in the Company's inventory reserve is attributable to the Company's rebranding initiatives.
Note 4 -
Prepaid expenses and other current assets
Prepaid expenses and other current assets are summarized as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
|
Prepaid advertising contract with iHeart
(1)
|
$ |
|
$ |
|
|||||||
| Other prepaid expenses and other current assets |
|
|
|||||||||
| Total Prepaid expenses and other current assets | $ |
|
$ |
|
|||||||
Note 5 -
Accrued and other liabilities
Accrued and other liabilities consist of the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Accrued taxes | $ |
|
$ |
|
|||||||
| Accrued payroll and benefits |
|
|
|||||||||
| Accrued trade promotions and advertising |
|
|
|||||||||
| Accrued interest |
|
|
|||||||||
| Accrued commissions |
|
|
|||||||||
| Deferred revenue |
|
|
|||||||||
| Short-term financing |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total accrued and other liabilities | $ |
|
$ |
|
|||||||
11
Note 6 -
Goodwill and intangible assets
Goodwill
Goodwill was $
18.6
million as of September 30, 2022 and December 31, 2021, respectively. Goodwill is evaluated for impairment if an event occurs or circumstances change that indicate the carrying value of a reporting unit may not be recoverable. During July 2022, the Company completed a legal merger of TruPet, LLC, a wholly owned subsidiary of Better Choice Company Inc. ("TruPet"), and Halo, Purely for Pets, Inc., a wholly owned subsidiary of Better Choice Company Inc. ("Halo"), with Halo as the surviving entity in connection with the execution of rebranding its former TruDog brand under the Halo brand umbrella. In conjunction with the legal merger and rebranding, the Company performed an analysis of its reporting units and concluded it has one reporting unit after the legal merger and rebrand, and as such, the Company performed a quantitative goodwill assessment as of July 1, 2022. Under the quantitative approach, the Company makes various estimates and assumptions to determine the estimated fair value of the reporting unit using a combination of a discounted cash flow model and a guideline comparable analysis. The fair value measurements used in the impairment review of goodwill are Level 3 measurements which include unobservable inputs that are supported by little, infrequent or no market activity and reflect management’s own assumptions. Key assumptions used in the discounted cash flow analysis included a discount rate, forecasted operating results and long-term growth rates; key assumptions used in the guideline comparable analysis include the determination of comparable companies and market multiples. As a result of the Company's quantitative analysis, no impairment charge was recorded as the fair value of the reporting unit exceeded the carrying value.
During the period from July 2, 2022 through September 30, 2022, there was a decline in the Company's stock price and a change in the Company's Chief Executive Officer ("CEO"), and as such, the Company determined there were triggering events present during the interim period. The Company performed a qualitative analysis around its market capitalization and determined the decline in stock price is not indicative of its operating results and that the decline in market value from July 2,2022 to September 30, 2022 was not of sufficient duration to indicate impairment. Additionally, the Company performed other qualitative analyses which considered the potential impacts of the change in CEO and other known information that could cause a change in the assumptions used in the July 1, 2022 assessment. As a result of the Company's qualitative analysis, it was concluded that it was more-likely-than-not that the carrying value of the reporting unit did not exceed the fair value and no impairment charge was recorded. As of September 30, 2022 and December 31, 2021, there was
no
accumulated impairment loss and
no
impairment expense related to goodwill. If global macroeconomic or geopolitical conditions worsen, projected revenue growth rates or projected operating margins decline, weighted average cost of capital increases, or if the Company has a further sustained decline in its stock price, it is possible this could result in a material impairment charge.
Intangible assets
The Company’s intangible assets (in thousands) and related useful lives (in years) are as follows:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Estimated useful life |
Gross
carrying amount |
Accumulated
amortization |
Net carrying
amount |
Accumulated
amortization |
Net carrying
amount |
||||||||||||||||||||||||||||||
| Customer relationships |
|
$ |
|
$ |
(
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||||||||
| Trade name |
|
|
(
|
|
(
|
|
|||||||||||||||||||||||||||||
| Total intangible assets | $ |
|
$ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||
Amortization expense was $
0.4
million and $
1.2
million for the three and nine months ended September 30, 2022 and 2021, respectively.
The estimated future amortization of intangible assets over the remaining weighted average useful life of
8.9
years is as follows (in thousands):
| Remainder of 2022 | $ |
|
|||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| 2026 |
|
||||
| Thereafter |
|
||||
| $ |
|
||||
12
Note 7 -
Debt
The components of the Company’s debt consist of the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
|
Maturity
Date |
Amount | Rate | Amount | Rate | |||||||||||||||||||||||||
| Term loan, net | 1/6/2024 | $ |
|
(1) | $ |
|
(2) | ||||||||||||||||||||||
| Line of credit, net | 1/6/2024 |
|
(1) |
|
(2) | ||||||||||||||||||||||||
| Total debt |
|
|
|||||||||||||||||||||||||||
| Less current portion |
|
|
|||||||||||||||||||||||||||
| Total long term debt | $ |
|
$ |
|
|||||||||||||||||||||||||
(1)
Interest at a variable rate of the daily Federal Funds Rate plus
285
basis points with an interest rate floor of
2.50
% per annum.
(2)
Interest at a variable rate of LIBOR plus
250
basis points with an interest rate floor of
2.50
% per annum.
Term loans and lines of credit
On January 6, 2021, Halo entered into a credit facility with Old Plank Trail Community Bank, N.A., an affiliate of Wintrust Bank, N.A. (“Wintrust”) consisting of a $
6.0
million term loan and a $
6.0
million revolving line of credit, each scheduled to mature on January 6, 2024 and each bore interest at a variable rate of LIBOR plus
250
basis points, with an interest rate floor of
2.50
% per annum (the "Wintrust Credit Facility"). The Second Wintrust Amendment described below updated the rate at which the Wintrust Credit Facility bore interest to the greater of the daily U.S. Federal Funds Rate plus
285
basis points, or the interest rate floor, which remained unchanged. The Third Wintrust Amendment described below updated the interest rate on the Wintrust Credit Facility to the U.S. Federal Funds Rate plus
375
basis points, with an interest rate floor of
3.75
% and extends the maturity date of the Wintrust Credit Facility from January 6, 2024 to October 31, 2024. Accrued interest on the Wintrust Credit Facility is payable monthly which commenced on February 1, 2021. Principal payments were required to be made monthly on the term loan commencing February 2021 with a balloon payment upon the original maturity date. The proceeds from the Wintrust Credit Facility were used (i) to repay outstanding principal, interest and fees under the previous revolving line of credit with Citizens Business Bank (the "ABL Facility") and (ii) for general corporate purposes. Debt issuance costs of $
0.1
million were incurred related to the Wintrust Credit Facility.
The Wintrust Credit Facility subjected the Company to certain financial covenants, including the maintenance of a fixed charge coverage ratio of no less than
1.25
to 1.00, tested as of the last day of each fiscal quarter. The numerator in the fixed charge coverage ratio was the operating cash flow of Halo, defined as Halo EBITDA less cash paid for unfinanced Halo capital expenditures, income taxes and dividends. The denominator was fixed charges such as interest expense and principal payments paid or payable on other indebtedness attributable to Halo. As of December 31, 2021, the Company failed to satisfy the fixed charge coverage ratio and entered into a default waiver agreement with Wintrust in which Wintrust waived the existing default through the next testing date, March 31, 2022. As part of the Second Wintrust Amendment described below, the financial covenants were amended to subject the Company to a minimum liquidity covenant test in lieu of a fixed charge coverage ratio which required the Company to maintain liquidity, tested on the last day of each fiscal quarter beginning March 31, 2022, of no less than (i) $
13.0
million as of the last day of each fiscal quarter ending March 31, 2022, through and including the last day of the fiscal quarter ending December 31, 2022 and (ii) $
12.0
million as of the last day of the fiscal quarter ending March 31, 2023, and as of the last day of each fiscal quarter thereafter. Furthermore, as part of the Third Wintrust Amendment described below, the financial covenants were further amended to require the Company to maintain a minimum liquidity of $
8.5
million tested on the last day of each fiscal quarter beginning September 30, 2022 and thereafter.
The Wintrust Credit Facility is secured by a general guaranty and security interest on the assets, including the intellectual property, of the Company and its subsidiaries. The Company has also pledged all of the capital stock of Halo held by the Company as additional collateral. Furthermore, the Wintrust Credit Facility was supported by a collateral pledge by a member of the Company’s board of directors; as a result of the First Wintrust Amendment described below, this collateral pledge was terminated and released.
On August 13, 2021, Halo entered into the first amendment to the Wintrust Credit Facility (the “First Wintrust Amendment”) to increase the revolving line of credit from $
6.0
million to $
7.5
million. The First Wintrust Amendment also required Halo to secure the credit facility with a pledge of a deposit account in the amount of $
7.2
million, which was decreased to $
6.9
million
13
on January 1, 2022 and was to further decrease to $
6.0
million on January 1, 2023. Additionally, on March 25, 2022, the Company entered into the second amendment to the Wintrust Credit Facility (the "Second Wintrust Amendment") which provided for the release of the Company's Bona Vida subsidiary as a guarantor, an update to the financial covenants as described above and an update to the rate at which the Wintrust Credit Facility bore interest, which is also described above. Furthermore, on October 24, 2022, the Company entered into the third amendment to the Wintrust Credit Facility (the "Third Wintrust Amendment") which provided for an increase to the revolving line of credit from $
7.5
million to $
13.5
million, set the amount of Halo's obligation to pledge a deposit account with Wintrust to a fixed amount of $
6.3
million throughout the remainder of the term and provided updates to the interest rate, maturity date and financial covenants as described above.
As of September 30, 2022, the term loan and line of credit outstanding under the Wintrust Credit Facility were $
4.8
million and $
7.4
million, respectively, net of debt issuance costs of less than $
0.1
million, respectively. As part of the Third Wintrust Amendment described above, Halo used a portion of the increased revolving credit facility to repay and retire the outstanding term loan portion of the Wintrust Credit Facility. As of December 31, 2021, the term loan and line of credit outstanding were $
5.4
million and $
4.9
million, respectively, net of debt issuance costs of less than $
0.1
million, respectively. Debt issuance costs are amortized using the effective interest method. The carrying amount for the Company’s term loan and line of credit approximate fair value as the instruments have variable interest rates that approximate market rates.
Prior to the Third Wintrust Amendment, the Company would have been in violation of the previous debt covenant associated with the Wintrust Credit Facility as of September 30, 2022. Upon execution of the Third Wintrust Amendment in October as described above, the Company was in compliance with all debt covenant requirements and there were no events of default as of September 30, 2022. The Company currently expects it will be able to generate sufficient cash flow from operations and maintain sufficient liquidity to meet the required debt covenants; however if the Company fails to satisfy the debt covenant as described above, Wintrust has the right to call on the debt.
Note 8 -
Commitments and contingencies
The Company had
no
material purchase obligations as of September 30, 2022 or December 31, 2021.
The Company may be involved in legal proceedings, claims, and regulatory, tax, or government inquiries and investigations that arise in the ordinary course of business resulting in loss contingencies. The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in SG&A expenses. The Company does not accrue for contingent losses that are considered to be reasonably possible, but not probable; however, the Company discloses the range of such reasonably possible losses. Loss contingencies considered remote are generally not disclosed.
Litigation is subject to numerous uncertainties and the outcome of individual claims and contingencies is not predictable. It is possible that some legal matters for which reserves have or have not been established could result in an unfavorable outcome for the Company and any such unfavorable outcome could be of a material nature or have a material adverse effect on the Company's consolidated financial condition, results of operations and cash flows. Management is not aware of any claims or lawsuits that may have a material adverse effect on the consolidated financial position or results of operations of the Company.
14
Note 9 -
Warrants
The following summarizes the Company's outstanding warrants to purchase shares of the Company's common stock as of and for the periods ended September 30, 2022 and December 31, 2021:
| Warrants | Weighted Average Exercise Price | ||||||||||
| Warrants outstanding as of December 31, 2020 |
|
$ |
|
||||||||
| Issued |
|
$ |
|
||||||||
| Exercised |
(
|
$ |
|
||||||||
| Terminated/Expired |
(
|
$ |
|
||||||||
| Warrants outstanding as of December 31, 2021 |
|
$ |
|
||||||||
| Issued |
|
$ |
|
||||||||
| Exercised |
|
$ |
|
||||||||
| Terminated/Expired |
|
$ |
|
||||||||
| Warrants outstanding as of September 30, 2022 |
|
$ |
|
||||||||
There was
no
intrinsic value associated with the outstanding warrants as of September 30, 2022 and December 31, 2021, respectively.
Note 10 -
Share-based compensation
During the three and nine months ended September 30, 2022, the Company recognized $
0.6
million and $
2.5
million, respectively, of share-based compensation expense. During the three and nine months ended September 30, 2021, the Company recognized $
0.7
million and $
3.5
million, respectively, of share-based compensation expense.
On November 11, 2019, the Company received shareholder approval for the Amended and Restated 2019 Incentive Award Plan (the “Amended 2019 Plan”). The Amended 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock or cash-based awards or a dividend equivalent award. The total number of shares currently authorized for issuance under the Amended 2019 Plan is
5,614,637
.
Stock options
Options granted under the Amended 2019 Plan vest over a period of
to
three years
. All vested options are exercisable and may be exercised through the
ten-year
anniversary of the grant date (or such earlier date described in the applicable award agreement). The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. During the three and nine months ended September 30, 2022, the Company granted
9,000
and
611,000
stock options, respectively, under the Amended 2019 Plan. During the three and nine months ended September 30, 2021, the Company granted
473,720
and
1,429,408
stock options, respectively, under the Amended 2019 Plan.
As of September 30, 2022 and December 31, 2021, the Company had
3,250,770
and
2,684,041
stock options outstanding, respectively.
Stock awards
In February 2022, the Company granted
218,345
shares of common stock to members of its board of directors under the Amended 2019 Plan as compensation for annual board service. The stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of $
0.5
million upon issuance.
Note 11 -
Income taxes
15
Note 12 -
Related party transactions
Director fees
The Company pays quarterly board of director fees. As of September 30, 2022 and December 31, 2021, $
0.1
million of director fees were included in accounts payable on the Condensed Consolidated Balance Sheets, respectively.
Note 13 -
Concentrations
Major suppliers
The Company sourced approximately
70
% of its inventory purchases from three vendors for the nine months ended September 30, 2022. The Company sourced approximately
76
% of its inventory purchases from three vendors for the nine months ended September 30, 2021.
Major customers
Accounts receivable from three customers represented
96
% of accounts receivable as of September 30, 2022. Accounts receivable from three customers represented
71
% of accounts receivable as of December 31, 2021. Four customers represented
70
% of gross sales for the nine months ended September 30, 2022. Three customers represented
54
% of gross sales for the nine months ended September 30, 2021.
Credit risk
As of September 30, 2022 and December 31, 2021, the Company’s cash and cash equivalents were deposited in accounts at certain financial institutions and may maintain some balances in excess of federally insured limits. The Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk. The Company has not experienced any losses historically in these accounts and believes it is not exposed to significant credit risk in its cash and cash equivalents.
Note 14 -
(Loss) earnings per share
The Company presents (loss) earnings per share on a basic and diluted basis. Basic (loss) earnings per share is computed by dividing net (loss) earnings by the weighted average number of common shares outstanding ("WASO") during the period. Diluted (loss) earnings per share includes the dilutive effect of common stock equivalents, consisting of stock options and warrants using the treasury stock method and convertible notes and preferred stock using the if-converted method. Under the treasury stock method, the amount the holder must pay for exercising stock options or warrants and the amount of average compensation cost for future service that has not yet been recognized are collectively assumed to be used to repurchase shares.
For the three and nine months ended September 30, 2022 and the three months ended September 30, 2021, the Company’s basic and diluted net loss per share attributable to common stockholders are the same because the Company generated a net loss and common stock equivalents are excluded from diluted net loss per share as they have an antidilutive impact. As the Company reported net income for the nine months ended September 30, 2021, basic and diluted net earnings per share attributable to common stockholders are calculated as outlined above. For the nine months ended September 30, 2021, the weighted average diluted common shares had
5,397,048
common stock equivalents excluded based on the fact that their inclusion would have had an anti-dilutive effect on earnings per share.
16
The following table sets forth basic and diluted net (loss) earnings per share available to common stockholders for the three and nine months ended September 30, 2022 and 2021 (in thousands, except share and per share amounts):
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||||||||||||
| Common stockholders | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Basic (loss) earnings per share: | ||||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net (loss) income | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||
| Less: Adjustment due to warrant modifications |
|
|
|
|
||||||||||||||||||||||
| Adjusted net (loss) income available to common stockholders | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Basic WASO |
|
|
|
|
||||||||||||||||||||||
| Net (loss) earnings per share available to common stockholders, basic | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||
| Dilutive (loss) earnings per share: | ||||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net (loss) income | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||
| Less: Adjustment due to warrant modifications |
|
|
|
|
||||||||||||||||||||||
| Adjusted net (loss) income available to common stockholders | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Basic WASO |
|
|
|
|
||||||||||||||||||||||
| Dilutive common stock equivalents |
|
|
|
|
||||||||||||||||||||||
| Diluted WASO |
|
|
|
|
||||||||||||||||||||||
| Net (loss) earnings per share available to common stockholders, diluted | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business.
The financial condition, results of operations and cash flows discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of Better Choice Company Inc. and its consolidated subsidiaries, collectively, the “Company,” “Better Choice Company,” “we,” “our,” or “us”.
These statements represent projections, beliefs, and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview and Outlook
Better Choice is a pet health and wellness company committed to leading the industry shift toward pet products and services that help dogs and cats live healthier, happier and longer lives. Our mission is to become the most innovative premium pet food company in the world, and we are motivated by our commitment to making products with integrity and treating pets and their parents with respect. We believe that our broad portfolio of pet health and wellness products are well positioned to benefit from the trends of growing pet humanization and an increased consumer focus on health and wellness, and have adopted a laser focused, channel-specific approach to growth that is driven by new product innovation. Our executive team has a proven history of success in both pet and consumer-packaged goods, and has over 50 years of combined experience in the pet industry and over 100 years of combined experience in the consumer-packaged goods industry.
We sell our premium and super-premium products (which we believe generally includes products with a retail price greater than $0.20 per ounce) under the Halo brand umbrella, which includes Halo Holistic™, Halo Elevate® and the former TruDog brand, which has been rebranded and successfully integrated under the Halo brand umbrella during the third quarter of 2022. Our core products sold under the Halo brand are made with high-quality, thoughtfully sourced ingredients for natural, science based nutrition. Each innovative recipe is formulated with leading veterinary and nutrition experts to deliver optimal health. Our diverse and established customer base has enabled us to penetrate multiple channels of trade, which we believe enables us to deliver on core consumer needs and serve pet parents wherever they shop. We group these channels of trade into four distinct categories: E-commerce, which includes the sale of product to online retailers such as Amazon and Chewy; Brick & Mortar, which primarily includes the sale of product to Pet Specialty retailers such as Petco, Pet Supplies Plus and neighborhood pet stores, as well as to select grocery chains; DTC, which includes the sale of product through our website halopets.com; and International, which includes the sale of product to foreign distribution partners and to select international retailers.
The Global Pet Food and Treat Market
The U.S. represents the largest and most developed market for pet food globally, with food and treats accounting for approximately $39 billion of consumer sales in 2019, or 36% of the total U.S. pet care market, according to AlphaWise and Morgan Stanley Research. According to the American Pet Product Association, between 66% and 70% of all households in the U.S. own a pet, equating to a total pet population of more than 130 million companion animals and an average of 1.7 pets per household. Pet spending represents a significant portion of household spend on consumer products, as this translates to an average annual spend on pet care of more than $1,500 per pet owning household, with $460 of this spend attributed to pet food and treats.
Historically, consumer spending on pets grew at an approximately 3% CAGR in the decade leading up to the COVID-19 pandemic, driven by steady annual increases in household pet ownership of approximately 1%, the continued premiumization of the category and the humanization of pets. These industry tailwinds have been magnified in the post-COVID landscape, as stay-at-home orders have driven a more than tripling of annual pet ownership growth alongside fundamental changes in consumer purchasing behavior. This surge in pet acquisition has led to a dramatic increase in the forecasted growth of the pet care industry over the next ten years.
18
Beyond the estimated $3.9 billion permanent increase to annual spend on pet food and treats, this “Pet Boom” was driven by the acceleration of pet ownership by millennial and Gen-Z households. From a demographic perspective, younger pet owners are more likely to spend a higher percentage of their income on pets, treat their pet as an important member of the family and to purchase products from pet specialty and online retailers rather than from grocery stores. Along these lines, women are 3.2 times more interested in purchasing pet food than men, and are 2.4 times more likely to engage with search ads than men. Taken holistically, these traits suggest a preference to purchase more premium and super-premium pet food and treats from brands like Halo, with a tendency to purchase products in the channels where we compete.
Globally, Asia is the second largest market for pet products, with China representing the largest market opportunity for growth. Like the U.S., growth in the Asian pet care industry has been driven by dramatic increases in household pet ownership. We believe that growth in Asia is fueled by increasing levels of economic financial status and demand for premium, western manufactured products as a result of product quality concerns. This demand has been supported by a rapidly growing middle class in China, where a recent McKinsey report estimated that in 2018 roughly 730 million people in urban areas fell into the income categories of “aspirants” and “affluents,” with the Brookings group estimating that approximately 60 million people are added to these income categories each year. We believe that this growth drove the increase in the number of dog-owning Chinese households as measured by Euromonitor, which increased from 12% in 2015 to 20% in 2020, according to Euromonitor. According to Euromonitor, the Chinese market for premium dry dog and cat food is anticipated to grow at a 20% CAGR and 28% CAGR, respectively, from 2015 through 2025, suggesting that the Chinese pet market has significant room for growth in the foreseeable future. We are focused on targeting Chinese pet owners with the highest willingness to pay, which tend to be urban dwelling millennial and Gen-Z women. In 2021, 80% of our products were purchased online, and approximately 50% of our end-consumers were born after 1990.
Our Growth Strategy
•
Strong Innovation Pipeline
. We have a robust and growing pipeline of new products, and believe our size is an advantage as we are nimble enough to quickly bring new products to market, but large enough to benefit from strong existing customer relationships and established economies of scale with our co-manufacturers.
•
Ability to Leverage Differentiated Omni-Channel Strategy for Growth
. We believe that we can leverage our differentiated omni-channel strategy to design and sell products purpose-built for success in specific channels while maintaining our ability to leverage marketing and sales resources cross-channel. We believe that this strategy will allow us to deliver on core consumer needs, maximize gross margin and respond to changing channel dynamics that have accelerated in recent years.
•
Capitalize on Continuing Trends of Humanization of Pets
. We believe our combination of innovative products designed specifically for certain channels can assist our growth to become a leader in the premium and super-premium categories across dog and cat food.
•
Well Positioned to Capitalize on a Once-in-a-Generation Demographic Shift in Asia
. We believe that Asia represents the largest macro-growth opportunity in the global pet food industry. In China, the number of households that own a pet has doubled in the last five years, with younger pet owners leading growth.
Recent Corporate Developments
On September 13, 2022, we announced that Scott Lerner was stepping down from his role as CEO, effective September 14. Also on September 13, 2022, we announced that Lionel F. Conacher was appointed as Interim CEO, effective September 14, 2022.
19
Results of Operations for the three and nine months ended September 30, 2022 and 2021
The following table sets forth our consolidated results for the periods presented (in thousands):
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | % | 2022 | 2021 | Change | % | ||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 11,865 | $ | 13,200 | $ | (1,335) | (10) | % | $ | 45,394 | $ | 35,019 | $ | 10,375 | 30 | % | |||||||||||||||||||||||||||||||
| Cost of goods sold | 7,700 | 8,762 | (1,062) | (12) | % | 31,795 | 22,407 | 9,388 | 42 | % | |||||||||||||||||||||||||||||||||||||
| Gross profit | 4,165 | 4,438 | (273) | (6) | % | 13,599 | 12,612 | 987 | 8 | % | |||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 10,007 | 7,745 | 2,262 | 29 | % | 25,771 | 21,397 | 4,374 | 20 | % | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | 562 | 660 | (98) | (15) | % | 2,454 | 3,517 | (1,063) | (30) | % | |||||||||||||||||||||||||||||||||||||
| Total operating expenses | 10,569 | 8,405 | 2,164 | 26 | % | 28,225 | 24,914 | 3,311 | 13 | % | |||||||||||||||||||||||||||||||||||||
| Loss from operations | (6,404) | (3,967) | (2,437) | (61) | % | (14,626) | (12,302) | (2,324) | (19) | % | |||||||||||||||||||||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | (142) | (79) | (63) | 80 | % | (324) | (3,148) | 2,824 | (90) | % | |||||||||||||||||||||||||||||||||||||
| Gain on extinguishment of debt, net | — | — | — | — | % | — | 457 | (457) | (100) | % | |||||||||||||||||||||||||||||||||||||
| Change in fair value of warrant liabilities | — | 590 | (590) | (100) | % | — | 23,463 | (23,463) | (100) | % | |||||||||||||||||||||||||||||||||||||
| Total other (expense) income, net | (142) | 511 | (653) | (128) | % | (324) | 20,772 | (21,096) | (102) | % | |||||||||||||||||||||||||||||||||||||
| Net (loss) income before income taxes | (6,546) | (3,456) | (3,090) | (89) | % | (14,950) | 8,470 | (23,420) | 277 | % | |||||||||||||||||||||||||||||||||||||
| Income tax expense | 1 | — | 1 | — | % | 4 | — | 4 | 100 | % | |||||||||||||||||||||||||||||||||||||
| Net (loss) income available to common stockholders | $ | (6,547) | $ | (3,456) | $ | (3,091) | (89) | % | $ | (14,954) | $ | 8,470 | $ | (23,424) | 277 | % | |||||||||||||||||||||||||||||||
20
Net sales
We sell our products through online retailers, pet specialty retailers, our online portal directly to our consumers and internationally to foreign distribution partners (transacted in U.S. dollars). Generally, our sales transactions are single performance obligations that are recorded at the time the product is shipped from our distribution centers and when control transfers. We offer a variety of trade promotions, discounts and incentives to our customers, which impacts the transaction price of our products and our net sales accordingly. DTC net sales include revenue derived from shipping fees and are net of loyalty points earned (a portion of revenue is deferred at the time of the sale as points are earned and not recognized until the redemption of the points, estimated based on historical experience). We record a revenue reserve based on historical return rates to account for customer returns.
Information about our revenue channels is as follows (in thousands):
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
|
E-commerce
(1)
|
$ | 3,530 | 30 | % | $ | 4,742 | 36 | % | $ | 11,035 | 24 | % | $ | 11,644 | 33 | % | ||||||||||||||||||||||||||||||||||
|
Brick & Mortar
(2)
|
1,342 | 11 | % | 1,816 | 14 | % | 9,632 | 21 | % | 5,408 | 16 | % | ||||||||||||||||||||||||||||||||||||||
| DTC | 1,371 | 12 | % | 2,363 | 18 | % | 5,066 | 11 | % | 7,140 | 20 | % | ||||||||||||||||||||||||||||||||||||||
|
International
(3)
|
5,622 | 47 | % | 4,279 | 32 | % | 19,661 | 44 | % | 10,827 | 31 | % | ||||||||||||||||||||||||||||||||||||||
| Net Sales | $ | 11,865 | 100 | % | $ | 13,200 | 100 | % | $ | 45,394 | 100 | % | $ | 35,019 | 100 | % | ||||||||||||||||||||||||||||||||||
(1)
Our E-commerce channel includes two customers that amounted to greater than 10% of our total net sales during the three and nine months ended September 30, 2022. These customers had an aggregate of $3.3 million and $10.6 million of net sales during the three and nine months ended September 30, 2022, respectively. Two customers amounted to greater than 10% of our total net sales during the three and nine months ended September 30, 2021, respectively. These customers had an aggregate of $4.4 million and $10.8 million of net sales during the three and nine months ended September 30, 2021, respectively.
(2)
Our Brick & Mortar channel includes $4.3 million of net sales from one customer that amounted to greater than 10% of our total net sales during the nine months ended September 30, 2022.
(3)
One of our International customers that distributes products in China amounted to greater than 10% of our total net sales during the three and nine months ended September 30, 2022 and represented $5.3 million and $16.6 million of net sales, respectively. One of our International customers in China represented greater than 10% of net sales during the three and nine months ended September 30, 2021 and represented $2.9 million and $6.7 million of net sales, respectively.
Net sales decreased $1.3 million, or 10%, to $11.9 million for the three months ended September 30, 2022 compared to $13.2 million for the three months ended September 30, 2021. The decrease was driven by softness in our E-commerce channel as one of our primary customers significantly reduced its levels of on-hand inventory and lower customer acquisition and retention marketing spend as we prepare for the Halo Holistic™ relaunch, softness in our DTC channel as we began to re-introduce customer acquisition marketing spend after finalizing the rebranding of TruDog under the Halo umbrella, and a reduction in our Brick & Mortar channel as we exited select grocery chains and shifted the focus of this channel to the Halo Elevate® product line, partially offset by increased International sales. Net sales increased $10.4 million, or 30%, to $45.4 million for the nine months ended September 30, 2022 compared to $35.0 million for the nine months ended September 30, 2021. The increase was driven by growth in our Brick & Mortar channel driven by the launch of Halo Elevate® and growth in our International channel, partially offset by lower E-commerce and DTC sales driven by an intentional reduction in new customer acquisition and retention marketing spend in connection with our strategic rebranding of TruDog under the Halo umbrella which was successfully executed and implemented in July 2022 and the Halo Holistic™ relaunch. Our revenue growth and the sales for certain products was negatively impacted in the first half of 2022 by the supply chain issues being felt globally as we navigate through short-term shortages in raw materials as well as production delays stemming from labor constraints.
Key factors that we expect to affect our future sales growth include new product innovation and launches, our expansion strategy in each of the sales channels and our key supplier relationships.
Gross profit
Cost of goods sold consists primarily of the cost of product obtained from co-manufacturers, packaging materials, freight costs for shipping inventory to the warehouse, as well as third-party warehouse and order fulfillment costs. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on this analysis, we record inventories at the lower of cost or net realizable value, with any reduction in value expensed as cost of goods sold.
21
Our products are manufactured to our specifications by our co-manufacturers using raw materials. We work with our co-manufacturers to secure a supply of raw materials that meet our specifications. In addition to procuring raw materials that meet our formulation requirements, our co-manufacturers manufacture, test and package our products. We design our packaging for our co-manufacturers and the packaging is shipped directly to them.
Our gross profit has been and will continue to be affected by a variety of factors, primarily product sales mix, volumes sold, discounts offered to newly acquired and recurring customers, the cost of our manufactured products, and the cost of freight from the manufacturer to the warehouse.
During the three months ended September 30, 2022, gross profit decreased $0.2 million, or 6%, to $4.2 million compared to $4.4 million during the three months ended September 30, 2021. Gross profit margin increased 1% to 35% for the three months ended September 30, 2022 compared to 34% for the three months ended September 30, 2021. The increase in margin was driven by cost savings realized due to transitioning the production of our dry kibble sold through our International channel to our new co-manufacturer, which was partially offset by an inventory write-off attributable to our Halo Holistic™ rebranding initiatives. During the nine months ended September 30, 2022, gross profit increased $1.0 million, or 8%, to $13.6 million compared to $12.6 million during the three months ended September 30, 2021. Gross profit margin decreased 6% to 30% for the nine months ended September 30, 2022 compared to 36% for the nine months ended September 30, 2021. The decrease in margin was driven primarily by several cost increases from our primary suppliers as a result of broad-scale inflation in the industry as well as an inventory write-off attributable to our Halo Holistic™ rebranding initiatives, which is partially offset by cost savings from transitioning some of our primary suppliers and price increases to customers as described below. We expect these cost savings offsets will contribute to a higher gross profit realization going forward.
We continue to actively work with our co-manufacturer and freight partners to generate future cost savings, and have successfully transitioned some of our primary suppliers to help realize improved gross profit margins in future periods. Additionally, we began implementing price increases to our customers to help cover these cost increases beginning late in the third quarter of 2021. We implemented additional price increases during 2022, which became effective in the second and third quarters of 2022. We could see continued margin variability due to the current economic environment and pricing pressures due to inflationary costs for both transportation and raw materials. We will continue to refine and optimize our overall pricing strategy as we evaluate the future impact of inflation and align ourselves with the market.
Operating expenses
Our SG&A expenses consist of the following:
•
Sales and marketing costs
for specific customer promotional programs, paid media, content creation expenses and our DTC selling platform. Marketing costs are geared towards customer acquisition and retention and building brand awareness. During the three months ended September 30, 2022, sales and marketing costs increased approximately $1.9 million or 54%, to $5.4 million from $3.5 million during the three months ended September 30, 2021. During the nine months ended September 30, 2022, sales and marketing costs increased approximately $3.9 million or 49%, to $11.9 million from $8.0 million during the nine months ended September 30, 2021. The increases were driven primarily by non-cash amortization related to the utilization of the remaining prepaid radio advertisement services with iHeart, marketing and advertising agency fees related to building and launching our new sales strategy as well as increased marketing spend in our International sales channel, partially offset by a temporary intentional decrease in customer acquisition and retention marketing spend as we shift the focus of our investments to our longer-term sales strategy.
•
Employee compensation and benefits
increased approximately $0.3 million or 19% during the three months ended September 30, 2022 to $1.9 million from $1.6 million during the three months ended September 30, 2021. During the nine months ended September 30, 2022, employee compensation and benefits increased approximately $0.4 million or 7% to $6.1 million from $5.7 million during the nine months ended September 30, 2021. The increases were primarily related to the addition of several key members to our management team during the second half of 2021 that have significant operating experience in the pet and consumer-packaged good sectors which we believe will enable us to successfully execute our growth strategy, partially offset by higher severance costs during the first half of 2021.
•
Freight
, which is primarily related to the shipping of DTC orders to customers, remained flat at $0.3 million for both the three months ended September 30, 2022 and 2021. Freight also remained flat at $1.2 million for both the nine months ended September 30, 2022 and 2021. Freight costs are generally increasing, offset by our lower DTC sales as described above.
•
Non-cash charges
including depreciation, amortization, disposal or sale of assets and bad debt expense increased $0.1 million or 25% during the three months ended September 30, 2022 to $0.5 million from $0.4 million for the three months ended September 30, 2021. The increase was driven by additional capital expenditures. During the nine months ended September 30, 2022, non-cash charges decreased approximately $0.1 million or 7% to $1.4 million from $1.5 million during the nine months ended September 30, 2021. The decrease was driven by disposals of certain assets during 2021, offset by additional capital expenditures throughout 2022.
22
•
Other general and administrative costs
for various general corporate expenses, including professional services, information technology, insurance, travel, costs related to merchant credit card fees, product development costs, rent, and certain tax costs. During both the three months ended September 30, 2022 and September 30, 2021, other general and administrative costs remained flat at $1.9 million. During the nine months ended September 30, 2022, other general and administrative costs increased $0.2 million, or 4% to $5.2 million compared to $5.0 million for the nine months ended September 30, 2021. The increase was driven by higher international consulting fees, additional travel fees and higher product development costs during the nine months ended September 30, 2022, partially offset by a non-cash reduction of our sales tax liability of $0.6 million during the nine months ended September 30, 2021 with no similar reduction of expense during the nine months ended September 30, 2022, as well as lower professional fees, lower franchise taxes and a reduction in rent expense as a result of prior lease terminations.
Share-based compensation includes expenses related to equity awards issued to employees and non-employee directors. During the three months ended September 30, 2022, share-based compensation decreased $0.1 million, or 15%, to $0.6 million as compared to $0.7 million for the three months ended September 30, 2021. The decrease was primarily driven by accelerated vesting of certain stock option grants during the three months ended September 30, 2021. During the nine months ended September 30, 2022, share-based compensation decreased $1.0 million, or 30%, to $2.5 million as compared to $3.5 million for the nine months ended September 30, 2021. The decrease was driven by accelerated vesting on certain stock option grants during 2021, partially offset by common stock issued for board service and accelerated vesting of a certain stock option grant during 2022 and additional option grants.
We have had no impairment expense related to goodwill or intangible assets through September 30, 2022. In conjunction with the rebranding of TruDog and legal merger with Halo, we performed an analysis of our reporting units and concluded we have one reporting unit, and as such, we performed a quantitative goodwill assessment as of July 1, 2022 that indicated no impairment. Additionally, during the period from July 2, 2022 through September 30, 2022, there was a decline in our stock price and a change in CEO, and as such, we determined there were triggering events present during the interim period. We performed a qualitative analysis around the market value and determined the decline in stock price is not indicative of our operating results and that the decline in market value from July 2,2022 to September 30, 2022 was not of sufficient duration to indicate impairment. Additionally, we performed other qualitative analyses which considered the potential impacts of the change in CEO and other known information that could cause a change in the assumptions used in the July 1, 2022 assessment. As a result of our analysis, we concluded that the fair value was more-likely-than-not above carrying value. If global macroeconomic or geopolitical conditions worsen, projected revenue growth rates or projected operating margins decline, weighted average cost of capital increases, or if we have a sustained decline in its stock price, it is possible this could result in a potentially material goodwill impairment charge.
Interest expense, net
During the three months ended September 30, 2022, interest expense remained flat at $0.1 million for both the three months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022, interest expense decreased $2.8 million to $0.3 million from $3.1 million for the nine months ended September 30, 2021. Interest expense for the three and nine months ended September 30, 2022 and three months ended September 30, 2021 is comprised of interest on our Wintrust Credit Facility and the amortization of debt issuance costs. Interest expense for the nine months ended September 30, 2021 is comprised of interest on our Wintrust Credit Facility, payable in-kind interest on our previous senior subordinated convertible notes, and the amortization of debt issuance costs and accretion of debt discounts, including $1.4 million during the three months ended June 30, 2021 associated with the remaining discount on the previous convertible notes, which was fully accreted to interest expense in connection with the conversion to common stock resulting from the commencement of the trading of our common stock on the NYSE.
Gain on extinguishment of debt, net
During the nine months ended September 30, 2021, we incurred a net gain on extinguishment of debt of $0.5 million, while there was no corresponding activity for the nine months ended September 30, 2022. Gain on extinguishment of debt for the nine months ended September 30, 2021 relates to extinguishment accounting applied in connection with the forgiveness of our PPP loans, partially offset by the loss on termination of a term loan and ABL Facility.
Change in fair value of warrant liabilities
Common stock warrants classified as liabilities are revalued at each balance sheet date subsequent to the initial issuance and changes in the fair value are reflected in the Condensed Consolidated Statements of Operations as change in fair value of warrant liabilities. The change in fair value for the three and nine months ended September 30, 2021 relates to the change in the fair value of common stock warrants issued in connection with a private placement. Upon consummation of our IPO on July 1, 2021, these warrants met the requirements to be considered equity were reclassified as such.
23
Income taxes
Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for any allowable credits, deductions and uncertain tax positions as they arise. During the three and nine months ended September 30, 2022, we recorded minimal income tax expense. During the three and nine months ended September 30, 2021, we did not record income tax expense due to the continued losses incurred by us. The effective tax rate is less than 1% for the three and nine months ended September 30, 2022 and 0% for the three and nine months ended September 30, 2021, which differs from the U.S. Federal statutory rate of 21% primarily because our losses have been fully offset by a valuation allowance due to uncertainty of realizing the tax benefit of our NOLs.
Liquidity and capital resources
Historically, we have financed our operations primarily through the sales of shares of our common stock, warrants, preferred stock, and loans. In connection with our IPO on July 1, 2021, we issued and sold 8,000,000 shares of common stock at a price of $5.00 per share and received total net proceeds of approximately $36.1 million, after deducting underwriting discounts and commissions of $2.8 million, and offering costs of approximately $1.1 million. On September 30, 2022 and December 31, 2021, we had cash and cash equivalents and restricted cash of $12.6 million and $28.9 million, respectively.
We are subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of our products, the successful protection of our proprietary technologies, ability to grow into new markets, and compliance with government regulations. As of September 30, 2022, we have not experienced a significant adverse impact to our business, financial condition or cash flows resulting from the COVID-19 pandemic, geopolitical actions or threat of cyber-attacks. However, we have seen adverse impacts to our gross profit margin due to inflationary pressures in the current economic environment. Uncertainties regarding the continued economic impact of inflationary pressures, the COVID-19 pandemic, geopolitical actions and threat of cyber-attacks are likely to result in sustained market turmoil, which could negatively impact our business, financial condition, and cash flows in the future.
Our ability to raise additional capital may be adversely impacted by the potential worsening of global economic conditions, including inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and geopolitical tensions. If we seek additional financing to fund our business activities in the future, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all. If we are unable to raise the necessary funds when needed or achieve planned cost savings, or other strategic objectives are not achieved, we may not be able to continue our operations, or we could be required to modify our operations that could slow future growth.
We are required to maintain a minimum liquidity (as defined in the Wintrust Credit Facility) of no less than $8.5 million tested on the last day of each fiscal quarter beginning September 30, 2022 and thereafter to comply with our financial covenants. As of September 30, 2022, we were in compliance with all debt covenant requirements and there were no events of default. We have historically incurred losses and expect to continue to generate operating losses and consume cash resources in the near term; however, due to our high level of working capital, minimal debt and expected financial performance in the future, we expect to be in compliance with all required debt covenants and do not anticipate substantial doubt about our ability to continue as a going concern. We have implemented and continue to implement plans to achieve operating profitability, including various margin improvement initiatives, the consolidation of and introduction of new co-manufacturers, the optimization of our pricing strategy and ingredient profiles, and new product innovation.
A summary of our cash flows is as follows (in thousands):
|
Nine Months Ended
September 30, |
|||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows (used in) provided by: | |||||||||||
| Operating activities | $ | (17,972) | $ | (8,320) | |||||||
| Investing activities | (198) | (124) | |||||||||
| Financing activities | 1,843 | 37,716 | |||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | $ | (16,327) | $ | 29,272 | |||||||
24
Cash flows from operating activities
Cash used in operating activities increased $9.7 million, or 116%, during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in cash used in operating activities was primarily driven by significant fluctuations in our working capital, including a comparative increase in our inventory balance of $8.3 million as we built inventory to support the Halo Elevate® launch and the rebranding of TruDog and Halo Holistic™. Additionally, net (loss) income from operations adjusted for non-cash expenses was $(8.5) million for the nine months ended September 30, 2022 compared to $(7.4) million for the nine months ended September 30, 2021. This increase in operating cash outflows was primarily driven by increased marketing spend related to building and launching our new long-term sales strategy during 2022, which is not expected to recur at the same levels in 2023.
Cash flows from investing activities
Cash used in investing activities was $0.2 million during the nine months ended September 30, 2022 and
$0.1 million
during the nine months ended September 30, 2021. The cash used in investing activities is related to the purchase of fixed assets.
Cash flows from financing activities
Cash provided by financing activities was $1.8 million for the
nine months ended September 30, 2022 compared to
cash provided by financing activities of $37.7 million during the
nine months ended September 30, 2021
. The cash provided by financing activities for the nine months ended September 30, 2022 was related to net proceeds from the revolving line of credit of $2.5 million, partially offset by payments on the term loan of $0.7 million. The cash provided by financing activities for the nine months ended
September 30, 2021 was primarily related to net proceeds from the IPO of
$36.2 million,
proceeds from private placements of $4.1 million and cash received from warrant exercises of
$1.7 million
, partially offset by net payments on the term loans of
$2.4 million, net payments on the revolving line of credit of $0.3 million, $0.1 million of debt issuance costs and $1.3 million related to share repurchases
.
Indebtedness
As of September 30, 2022, our indebtedness consisted of a term loan and a revolving credit facility. For additional details about the terms, covenants and restrictions contained in the Wintrust Credit Facility, see "Note 7 - Debt" to our interim condensed consolidated financial statements included in this Quarterly Report.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net sales, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgements involved in the accounting policies described below and in our Annual Report for the year ended December 31, 2021 have the greatest potential impact on our financial statements and, therefore, we consider those to be our critical accounting estimates. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Other than noted below, there have been no material changes to our critical accounting estimates compared to the descriptions in our Annual Report for the year ended December 31, 2021.
Goodwill Impairment
We evaluate goodwill for impairment at least annually at the reporting unit level. We monitor the existence of potential impairment indicators throughout the year and will evaluate for impairment whenever events or circumstances indicate that the fair value of a reporting unit is below its carrying value. Impairment testing is based on our current business strategy in light of present industry and economic conditions, as well as future expectations. Fair value measurements used in the impairment review of goodwill are Level 3 measurements.
When evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. Qualitative factors include macroeconomic conditions, industry and market conditions, and overall company financial performance. If, after assessing the totality of events and circumstances, we determine that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, a quantitative impairment test is unnecessary. If the fair value exceeds the carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the goodwill. We consider fair value to be substantially in excess of carrying value at a 20% premium or greater.
25
When performing a quantitative impairment test, determining the fair value of a reporting unit involves the use of significant estimates and assumptions to evaluate the impact of operational and macroeconomic changes. If a quantitative assessment is deemed necessary, we determine fair value using a weighted average of widely accepted valuation techniques, including the income approach and market approach. The income approach applies a fair value methodology based on discounted cash flows, which contains uncertainties because it requires management to make significant assumptions and judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital or discount rate, which is risk-adjusted to reflect the specific risk profile of our business. The market approach includes determining appropriate comparable companies and applying an estimated multiple to apply to our operating results. The primary market multiples to which we compare are revenue and earnings before interest, taxes, depreciation, and amortization.
See "Note 6 - Goodwill and intangible assets" to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information regarding goodwill impairment assessment completed during the period.
In performing our assessments, we believe that we have made reasonable estimates based on the facts and circumstances that were available. However, the determination of fair value includes assumptions that are subject to risk and uncertainty. If our future performance varies from current expectations, assumptions, or estimates, including those assumptions around inflationary pressures on product and labor costs, our revenue growth rates and our overall profitability, as well as our expectations around the duration of our stock price decline, may trigger future impairment charges. We will continue to monitor developments throughout the remainder of 2022, including updates to our forecasts as well as our market capitalization, and an update of our assessment and related estimates may be required in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and not required to provide the information under this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Management evaluated its internal control over financial reporting for the quarter ended September 30, 2022. Based upon that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.
Changes in internal control over financial reporting
There were no changes in internal control over financial reporting during the fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
26
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS
Other than noted below, there have been no material changes from the risk factors described under the heading “Risk Factors” in our Annual Report filed on March 29, 2022. Additionally, in the Quarterly Report filed with the SEC on August 11, 2022, we included a risk factor concerning our ability to continue as a going concern for at least one year from the issuance of the financial statements which has since been alleviated and therefore removed from our Risk Factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for further discussion around going concern. You should carefully consider, in addition to the other information set forth in this report, the below and the risk factors discussed in our Annual Report that could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks facing our Company. In addition to risks and uncertainties inherent in forward-looking statements contained in this Quarterly Report, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
If our goodwill or amortizable intangible assets become impaired, then we could be required to record a significant charge to earnings.
We evaluate goodwill for impairment at least annually. We monitor the existence of potential impairment indicators throughout the year and will evaluate for impairment whenever events or circumstances indicate that the fair value of a reporting unit is below its carrying value. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include declines in stock price, market capitalization or cash flows, and slower growth rates in our industry. Depending on the results of these evaluations, we could be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets were determined, negatively impacting our results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
The below presents information with respect to common stock repurchases during the three months ended September 30, 2022:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| July 1, 2022 to July 31, 2022 | — | $ | — | — | $ | 3,000,000 | ||||||||||||||||||||
| August 1, 2022 to August 31, 2022 | — | $ | — | — | $ | 3,000,000 | ||||||||||||||||||||
| September 1, 2022 to September 30, 2022 | — | $ | — | — | $ | 3,000,000 | ||||||||||||||||||||
| Total | — | $ | — | — | ||||||||||||||||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 OTHER INFORMATION
None.
27
ITEM 6. EXHIBITS
The following exhibits are filed herewith.
EXHIBIT INDEX
| Exhibit | Exhibit Description | Form |
File
No. |
Exhibit |
Filing
Date |
||||||||||||
| 8-K | 333-161943 | 2.1 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 2.2 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 2.3 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 2.4 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 2.1 | 12/26/2019 | ||||||||||||||
| 10-Q | 001-40477 | 2.6 | 08/11/2022 | ||||||||||||||
| 10-Q | 333-161943 | 3.1 | 04/15/2019 | ||||||||||||||
| 10-Q | 333-161943 | 3.2 | 04/15/2019 | ||||||||||||||
| 8-K | 333-161943 | 3.1 | 03/20/2019 | ||||||||||||||
| 10-KT | 333-161943 | 3.5 | 07/25/2019 | ||||||||||||||
| 8-K | 333-161943 | 99.1 | 07/30/2020 | ||||||||||||||
| 10-Q | 333-161943 | 3.4 | 04/15/2019 | ||||||||||||||
| 10-Q | 333-161943 | 3.5 | 04/15/2019 | ||||||||||||||
| 8-K | 333-161943 | 3.1 | 10/02/2020 | ||||||||||||||
| 8-K | 001-40477 | 3.1 | 07/29/2022 | ||||||||||||||
| 10-Q | 001-40477 | 3.10 | 08/11/2022 | ||||||||||||||
| 8-K | 333-161943 | 4.2 | 11/15/2019 | ||||||||||||||
| 10-Q | 333-161943 | 10.6 | 01/31/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.8 | 01/31/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.10 | 01/31/2020 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 04/30/2019 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 11/15/2019 | ||||||||||||||
| 10-K | 333-161943 | 10.19 | 05/04/2020 | ||||||||||||||
| S-1 | 333-234349 | 10.7 | 10/28/2019 | ||||||||||||||
| 10-Q | 333-161943 | 4.11 | 06/25/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.13 | 06/25/2020 | ||||||||||||||
28
| Exhibit | Exhibit Description | Form |
File
No. |
Exhibit |
Filing
Date |
||||||||||||
| 8-K | 333-161943 | 10.5 | 07/21/2020 | ||||||||||||||
| 8-K | 333-161943 | 4.1 | 10/02/2020 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 10/02/2020 | ||||||||||||||
| S-1/A | 333-251241 | 4.22 | 02/16/2021 | ||||||||||||||
| S-1/A | 333-251241 | 4.23 | 02/16/2021 | ||||||||||||||
| S-1 | 333-234349 | 10.8 | 10/28/2019 | ||||||||||||||
| 8-K/A | 333-161943 | 10.2 | 01/05/2021 | ||||||||||||||
| 10-K | 333-161943 | 10.12 | 03/30/2021 | ||||||||||||||
| 10-K | 333-161943 | 10.13 | 03/30/2021 | ||||||||||||||
| 10-K | 333-161943 | 10.14 | 03/30/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 01/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.3 | 01/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.4 | 01/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.5 | 01/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.6 | 01/11/2021 | ||||||||||||||
| 8-K | 001-40477 | 10.1 | 08/17/2021 | ||||||||||||||
| 8-K | 001-40477 | 10.2 | 08/17/2021 | ||||||||||||||
| 8-K | 001-40477 | 10.3 | 08/17/2021 | ||||||||||||||
| 10-K | 001-40477 | 10.14 | 03/29/2022 | ||||||||||||||
| 8-K | 001-40477 | 10.1 | 10/25/2022 | ||||||||||||||
| 8-K | 001-40477 | 10.2 | 10/25/2022 | ||||||||||||||
| 8-K | 001-40477 | 10.3 | 10/25/2022 | ||||||||||||||
29
| Exhibit | Exhibit Description | Form |
File
No. |
Exhibit |
Filing
Date |
||||||||||||
| 101* | The following materials from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022 formatted in Inline Extensible Business Reporting Language ("iXBRL"): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) related notes, tagged as blocks of text and including detailed tags | ||||||||||||||||
| 104* | Cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in iXBRL (included as Exhibit 101) | ||||||||||||||||
† Indicates a management contract or any compensatory plan, contract or arrangement.
* Filed or furnished herewith.
# Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10)(iv). Such excluded information is both not material and is the type that the registrant treats as private or confidential.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BETTER CHOICE COMPANY INC. | ||||||||
| Date: November 10, 2022 | By: | /s/ LIONEL F. CONACHER | ||||||
| Lionel F. Conacher | ||||||||
|
Interim Chief Executive Officer
(Principal Executive Officer) |
||||||||
| Date: November 10, 2022 | By: | /s/ SHARLA A. COOK | ||||||
| Sharla A. Cook | ||||||||
|
Chief Financial Officer
(Principal Financial and Accounting Officer) |
||||||||
31
TABLE OF CONTENTS
Part IItem 1. Financial StatementsNote 1 - Nature Of Business and Summary Of Significant Accounting PoliciesNote 2 - RevenueNote 3 - InventoriesNote 4 - Prepaid Expenses and Other Current AssetsNote 5 - Accrued and Other LiabilitiesNote 6 - Goodwill and Intangible AssetsNote 7 - DebtNote 8 - Commitments and ContingenciesNote 9 - WarrantsNote 10 - Share-based CompensationNote 11 - Income TaxesNote 12 - Related Party TransactionsNote 13 - ConcentrationsNote 14 - (loss) Earnings Per ShareItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5 Other InformationItem 6. Exhibits