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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to
Commission File Number: 333-161943
Better Choice Company Inc.
(Exact name of registrant as specified in its charter)
Delaware83-4284557
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
164 Douglas Road East
Oldsmar, Florida 34677
(Address of Principal Executive Offices) (Zip Code)
_______________________________________________
(Registrant’s Telephone Number, Including Area Code): (813) 659-5921
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)
Name of Each Exchange on which Registered
N/AN/AN/A
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
*(As a voluntary filer, the registrant has not been subject to the filing requirements of Section 13 or 15(d) of the Exchange Act for the past 90 days. The registrant has filed all reports required under Section 13 or 15(d) of the Exchange Act during the preceding 12 months).
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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
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: 49,139,708 shares of $0.001 par value common stock outstanding as of November 12, 2020.


Table of Contents
Better Choice Company Inc.
TABLE OF CONTENTS
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
This Quarterly Report on Form 10-Q (“Quarterly Report”) is filed by Better Choice Company Inc. (“Better Choice Company” or the “Company”) and as discussed in more detail in our Annual Report on Form 10-K, filed on May 4, 2020 (the “Annual Report”), the Company completed its acquisitions of TruPet LLC (“TruPet”) and Bona Vida, Inc. (“Bona Vida”) on May 6, 2019 (the “May Acquisitions”). The acquisition of TruPet is treated as a reverse merger with TruPet determined to be the accounting acquirer of the Company. As such, the historical financial statements of the registrant prior to the May Acquisitions are those of TruPet and TruPet’s equity has been re-cast to reflect shares of Better Choice Company common stock received in the May Acquisitions. The acquisition of Better Choice Company and Bona Vida were treated as asset acquisitions. On December 19, 2019, Better Choice Company acquired (the “Halo Acquisition,” and together with the May Acquisitions, the “Acquisitions”) 100% of the issued and outstanding capital stock of Halo, Purely for Pets, Inc. (“Halo”). Unless otherwise stated or the context otherwise requires, the historical business information described in this Quarterly Report prior to consummation of the May Acquisitions is that of TruPet and, following consummation of the May Acquisitions through December 19, 2019, reflects business information of the Company, TruPet, and Bona Vida. From December 19, 2019 onward, the results of operations reflects business information of the Company and Halo as a combined business.
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 are “forward-looking statements” for purposes of federal and state securities laws, including statements regarding our expectations and projections regarding future developments, operations and financial conditions, and the anticipated impact of COVID-19 and our acquisitions, business strategy, and strategic priorities. 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 and the Company’s operating plans and performance, the effects of the COVID-19 outbreak,
including levels of consumer, business and economic confidence generally, the regulatory environment, litigation, sales, and the
expected benefits of acquisitions, and such statements are based on the current beliefs and expectations of the Company’s
management, as applicable, and are subject to known and unknown risks and uncertainties. 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 inherent risks and uncertainties.
These forward-looking statements present our estimates and assumptions only as of the date of this Quarterly Report. 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. You should, however, consult further disclosures we make in future filings and public disclosures, including without limitation, our Annual Report, Transition Report on Form 10-KT, Quarterly Reports on Forms 10-Q, and Current Reports on Forms 8-K.
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PART I
ITEM 1.    FINANCIAL STATEMENTS
Better Choice Company Inc.
Condensed Consolidated Balance Sheets
As of September 30, 2020 and December 31, 2019
(Dollars in thousands, except share and per share amounts)

September 30, 2020December 31, 2019
UnauditedAudited
Assets
Cash and cash equivalents$563 $2,361 
Restricted cash1,518 173 
Accounts receivable, net5,629 5,824 
Inventories, net5,122 6,580 
Prepaid expenses and other current assets2,005 2,641 
Total Current Assets14,837 17,579 
Property and equipment, net305 417 
Right-of-use assets, operating leases718 951 
Intangible assets, net13,496 14,641 
Goodwill18,614 18,614 
Other assets1,876 1,330 
Total Assets$49,846 $53,532 
Liabilities & Stockholders’ Deficit
Current Liabilities
Short term loan, net$19,369 $16,061 
Line of credit, net 4,819 
PPP loans458  
Other liabilities1,727 500 
Accounts payable4,090 4,049 
Accrued liabilities5,371 4,721 
Deferred revenue305 311 
Operating lease liability, current portion395 345 
Warrant derivative liability102 2,220 
Total Current Liabilities31,817 33,026 
Non-current Liabilities
Notes payable, net18,240 16,370 
Line of credit, net5,048  
PPP loans394  
Operating lease liability350 641 
Total Non-current Liabilities24,032 17,011 
Total Liabilities55,849 50,037 
Redeemable Series E Convertible Preferred Stock
Redeemable Series E preferred stock, $0.001 par value, 2,900,000 shares authorized, 1,387,378 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
10,566 10,566 
Stockholders’ Deficit
Common stock, $0.001 par value, 200,000,000 and 88,000,000 shares authorized as of September 30, 2020 and December 31, 2019, respectively, and 49,139,708 and 47,977,390 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
49 48 
Additional paid-in capital214,305 194,150 
Accumulated deficit(230,923)(201,269)
Total Stockholders’ Deficit(16,569)(7,071)
Total Liabilities, Redeemable Preferred Stock, and Stockholders’ Deficit$49,846 $53,532 
See accompanying notes to the unaudited condensed consolidated financial statements.
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Better Choice Company Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
(Dollars in thousands, except share and per share amounts)
Nine Months Ended September 30,Three Months Ended September 30,
2020201920202019
Net sales$33,302 $11,567 $11,135 $3,932 
Cost of goods sold20,567 7,178 6,681 3,096 
Gross profit12,735 4,389 4,454 836 
Operating expenses:
General and administrative23,298 12,031 3,648 4,856 
Share-based compensation7,047 6,708 1,543 2,496 
Sales and marketing6,203 8,452 2,396 2,856 
Customer service and warehousing500 854 148 303 
Total operating expenses37,048 28,045 7,735 10,511 
Loss from operations(24,313)(23,656)(3,281)(9,675)
Other expense (income):
Interest expense, net7,268 165 2,537 41 
Loss on extinguishment of debt88  88  
Loss on acquisitions 147,376  (2,612)
Change in fair value of warrant derivative liability(2,118)(886)(4,213)(1,079)
Total other expense (income), net5,238 146,655 (1,588)(3,650)
Net and comprehensive loss(29,551)(170,311)(1,693)(6,025)
Preferred dividends103 70 35 43 
Net and comprehensive loss available to common stockholders$(29,654)$(170,381)$(1,728)$(6,068)
Weighted average number of shares outstanding, basic and diluted48,809,740 28,624,230 48,961,447 43,575,010 
Loss per share, basic and diluted$(0.61)$(5.95)$(0.04)$(0.14)
See accompanying notes to the unaudited condensed consolidated financial statements.
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Better Choice Company Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
For the Nine Months Ended September 30, 2020
(unaudited)
(Dollars in thousands except shares)
Common StockRedeemable Series E
Convertible Preferred Stock
SharesAmountAdditional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Deficit
SharesAmount
Balance as of December 31, 201947,977,390 $48 $194,150 $(201,269)$(7,071)1,387,378 $10,566 
Shares issued pursuant to a private placement308,642 — 500 — 500 — — 
Share-based compensation455,956 1 2,484 — 2,485 — — 
Shares and warrants issued to third
party for contract termination
72,720 — 198 — 198 — — 
Shares issued to third parties for services125,000 — 125 — 125 — — 
Warrants issued to third parties for services— — 2,594 — 2,594 — — 
Net and comprehensive loss available to common stockholders— — — (9,488)(9,488)— — 
Balance as of March 31, 202048,939,708 $49 $200,051 $(210,757)$(10,657)1,387,378 $10,566 
Warrants issued to third parties for services— — 7,390 — 7,390 — — 
Share-based compensation— — 3,020 — 3,020 — — 
Warrants issued in connection with June 2020 Notes— — 337 — 337 — — 
Beneficial conversion feature of June 2020 Notes— — 1,163 — 1,163 — — 
Modification of conversion feature
for November 2019 Notes, Seller Notes, and ABG Notes
— — 528 — 528 — — 
Modification of warrants— — 43 — 43 — — 
Net and comprehensive loss
available to common stockholders
— — — (18,438)(18,438)— — 
Balance as of June 30, 202048,939,708 $49 $212,532 $(229,195)$(16,614)1,387,378 $10,566 
Shares issued pursuant to warrant exercise200,000 — — — — — — 
Share-based compensation— — 1,543 — 1,543 — — 
Warrants issued in connection with ABL Facility— — 230 — 230 — — 
Net and comprehensive loss available to common stockholders— — — (1,728)(1,728)— — 
Balance as of September 30, 202049,139,708 $49 $214,305 $(230,923)$(16,569)1,387,378 $10,566 
See accompanying notes to the unaudited condensed consolidated financial statements.
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Better Choice Company Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
For the Nine Months Ended September 30, 2019
(unaudited)
(Dollars in thousands except shares)
Common StockSeries A
Preferred Units
Redeemable Series E
Convertible Preferred
Stock
SharesAmountSharesAmountAdditional
paid-in
capital
Accumulated
deficit
Total Stockholders’DeficitSharesAmount
Balance as of December 31, 201811,661,485 $12 2,391,403 $2 $13,642 $(16,698)$(3,042) $ 
Shares issued pursuant to a private placement – net proceeds— — 69,115 — 150 — 150 
Share-based compensation18,964 — — — 206 — 206 — — 
Net and comprehensive loss available to common stockholders— — — — — (2,776)(2,776)— — 
Balance as of March 31, 201911,680,449 $12 2,460,518 $2 $13,998 $(19,474)$(5,462) $ 
Share-based compensation1,199,822 2 — — 4,006 — 4,008 — — 
Conversion of Series A shares to common stock2,460,518 2 (2,460,518)(2)— — — — — 
Acquisition of treasury shares(1,011,748)(1)— — (2,199)— (2,200)— — 
Acquisition of Better Choice3,915,856 3 — — 23,490 — 23,493 2,633,678 20,059 
Acquisition of Bona Vida18,003,273 18 — — 108,002 — 108,020 — — 
Shares and warrants issued pursuant to private issuance of public equity (PIPE) – net proceeds5,744,991 6 — — 15,670 — 15,676 — — 
Conversion of Series E Preferred Stock1,175,000 1 — — 7,050 — 7,051 (925,758)(7,052)
Net and comprehensive loss available to common stockholders— — — — — (161,533)(161,533)— — 
Balance as of June 30, 201943,168,161 $43  $ $170,017 $(181,007)$(10,947)1,707,920 $13,007 
Share-based compensation— — — — 2,496 — 2,496 — — 
Stock issued to third parties for services1,000,000 1 — — 3,439 — 3,440 — — 
Acquisition of treasury shares— — — — (3,870)— (3,870)— — 
Acquisition of Better Choice— — — — 69 — 69 — — 
Acquisition of Bona Vida— — — — 600 — 600 — — 
Private issuance of public equity ("PIPE") warrant exercise1,259,498 1 — — 4,006 — 4,007 — — 
Net and comprehensive loss available to common stockholders— — — — — (6,068)(6,068)— — 
Balance as of Balance as of September 30, 201945,427,659 $45  $ $176,757 $(187,075)$(10,273)1,707,920 $13,007 
See accompanying notes to the unaudited condensed consolidated financial statements.
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Better Choice Company Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended September 30,
20202019
Cash Flow from Operating Activities:
Net and comprehensive loss available to common stockholders$(29,654)$(170,381)
Adjustments to reconcile net and comprehensive loss to net cash used in operating activities:
Non-cash expenses:
Shares and warrants issued to third parties for services10,182  
Modification of warrants43  
Contract termination costs649  
Depreciation and amortization1,298 76 
Amortization of debt issuance costs and discounts3,723  
Share-based compensation7,047 6,708 
Lease expenses(8)39 
Change in fair value of warrant derivative liability(2,118)(886)
Payment In Kind (PIK) interest expense on notes payable1,465  
Loss on extinguishment of debt88  
Loss on acquisitions 146,980 
Changes in operating assets and liabilities, net of effects of business acquisition:
Accounts receivable, net195 76 
Inventories, net1,458 (705)
Prepaid expenses and other current assets224 437 
Other assets(9)31 
Accounts payable41 889 
Accrued liabilities650 3,357 
Deferred revenue(6)172 
Other209 (17)
Cash Used in Operating Activities$(4,523)$(13,224)
Cash Flow from Investing Activities
Cash acquired in the May Acquisitions$ $416 
Acquisition of property and equipment(42)(52)
Cash (Used in) Provided by Investing Activities$(42)$364 
Cash Flow from Financing Activities
Proceeds from shares issued pursuant to private placement, net$ $15,826 
Payment of related party note payable (1,600)
Proceeds from issuance of debt 6,200 
Proceeds from revolving lines of credit6,624  
Payments on revolving lines of credit(6,297)(4,600)
Proceeds from PPP loans852  
Proceeds from June 2020 Notes1,500  
Cash advance, net (1,898)
Proceeds from investor prepayment1,518  
PIPE warrant exercise 4,007 
Debt issuance costs(85)(20)
Cash Provided by Financing Activities$4,112 $17,915 
Net (decrease) increase in Cash and cash equivalents and Restricted cash$(453)$5,055 
Total Cash and cash equivalents, Beginning of Period2,534 3,946 
Total Cash and cash equivalents and Restricted cash, End of Period$2,081 $9,001 
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Supplemental cash flow information
The following represent noncash financing and investing activities and other supplemental disclosures related to the statement of cash flows:
On January 1, 2019, the Company adopted ASC 842 which resulted in the acquisition of right-of-use assets and operating lease liabilities as follows:
Right-of-use assets and operating lease liability acquired under operating leases
Right-of-use assets recorded upon adoption of ASC 842$421 
Operating lease liability recorded upon adoption of ASC 842$(429)
Noncash acquisition of right-of-use assets for leases entered into during period$607 
Noncash acquisition of operating lease liability for leases entered into during the period$(594)
The Company paid no income taxes during the nine months ended September 30, 2020 and 2019.
The Company paid interest of $1.7 million and $0.2 million during the nine months ended September 30, 2020 and 2019, respectively.
The Company issued warrants with a fair value of $0.2 million on July 20, 2020 in connection with a personal guarantee related to the ABL Facility (as defined herein).
See accompanying notes to the unaudited condensed consolidated financial statements.
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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. is a growing animal 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. The Company sells the majority of its dog food, cat food and treats under the Halo and TruDog brands, which are focused, respectively, on providing sustainably sourced kibble and canned food derived from real whole meat, and minimally processed raw-diet dog food and treats.
On May 6, 2019, the Company completed the reverse acquisition of TruPet LLC (“TruPet”) and Bona Vida Inc. (“Bona Vida”) in a pair of all stock transactions (together referred to as the “May Acquisitions”) through the issuance of shares of common stock. Following the completion of the May Acquisitions, the business conducted by the Company became primarily the businesses conducted by TruPet and Bona Vida. As a result, the condensed consolidated financial statements for the year ended December 31, 2019 are comprised of the results of TruPet for the period between January 1, 2019 and December 31, 2019 and the results of Bona Vida beginning May 6, 2019 through December 31, 2019. The Company completed the acquisition of Halo on December 19, 2019 (see "Note 2 - Acquisitions"). Accordingly, Halo’s operations are included in the Company’s condensed consolidated financial statements beginning on December 19, 2019.
Basis of Presentation
The condensed consolidated financial statements reflect all normal recurring adjustments which, in management’s opinion, are necessary for a fair statement of the results for interim periods. 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 condensed consolidated financial statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”).
Tables are presented in U.S. dollars (thousands) and percentage as rounded up or down. In the notes, the Company represents U.S. dollars (millions) and percentage as rounded up or down.
Consolidation
The Company’s interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial statements are presented on a condensed consolidated basis subsequent to acquisitions and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Going Concern Considerations
The Company is subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of its products, the successful protection of its proprietary technologies, ability to grow into new markets, and compliance with government regulations. In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. As of November 2020, the Company has not experienced a significant adverse impact to its business, financial condition or cash flows resulting from the pandemic. However, uncertainties regarding the continued economic impact of COVID-19, the disease caused by the novel coronavirus, are likely to result in sustained market turmoil which could also negatively impact the Company’s business, financial condition, and cash flows in the future. The Company has continually incurred losses and has an accumulated deficit. The Company continues to rely on current investors and the public markets to finance these losses through debt and/or equity issuances. These operating losses and the outstanding debt create substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date these interim condensed consolidated financial statements are issued. The Company is implementing plans to achieve cost savings and other strategic objectives to address these conditions. The Company expects cost savings from consolidation of third-party manufacturers, optimizing shipping and warehousing as well as overhead cost reductions. The business is focused on growing the most profitable channels while reducing investments in areas that are not expected to have long-term benefits. The accompanying interim condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the interim condensed consolidated financial statements do not include any
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adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.
Restricted cash
The Company was required to maintain a restricted cash balance of less than $0.1 million and $0.2 million as of September 30, 2020 and December 31, 2019, respectively, associated with a business credit card and credit card clearance operations.
During the third quarter of 2020, the Company received investor prepayment funds of $1.5 million related to the issuance of Series F Preferred Stock that was completed in October 2020 (see "Note 21 - Subsequent events").
Allowance for doubtful accounts
Accounts receivable consist of unpaid buyer invoices from the Company’s Retail customers and credit card payments receivable from third-party credit card processing companies. Accounts receivable is stated at the amount billed to customers, net of point of sale and cash discounts. The Company recorded a less than $0.1 million allowance for doubtful accounts as of September 30, 2020 and December 31, 2019, respectively.
Goodwill
Goodwill of $18.6 million was recognized as of December 31, 2019 in connection with the Halo Acquisition (see "Note 2 - Acquisitions"). No impairment was recognized as of September 30, 2020 and December 31, 2019, respectively.
Intangible assets
The Company acquired an intangible asset related to the Houndog license with the acquisition of Bona Vida on May 6, 2019. The Company fully impaired the asset as of December 31, 2019 as the Company terminated the contract on January 13, 2020. The Company also acquired intangible assets consisting of customer relationships and trade name with the acquisition of Halo on December 19, 2019. There were no interim indicators or impairment of intangible assets as of September 30, 2020 and December 31, 2019, respectively.
Leases
The Company’s leases relate to its corporate offices and warehouses. Effective January 1, 2019, the Company adopted the FASB guidance on leases (“Topic 842”), which requires leases with durations greater than twelve months to be recognized on the balance sheets. The Company adopted Topic 842 using the modified retrospective transition approach.
Redeemable convertible preferred stock
The Company’s Redeemable Series E Convertible Preferred Stock (the “Series E”) contains redemption provisions that require it to be presented outside of stockholders’ deficit. Changes in the redemption value of the redeemable convertible preferred stock, if any, are recorded immediately in the period occurred as an adjustment to additional paid-in capital in the condensed consolidated balance sheets.
Income taxes
The Company was incorporated on May 6, 2019. Prior to this date, the Company operated as a flow through entity for state and United States federal tax purposes. The Company files a U.S. federal and state income tax return including its wholly owned subsidiaries. As of September 30, 2020 and December 31, 2019, the Company does not have any uncertain income tax positions.
Revenue
The Company recognizes revenue to depict the transfer of promised goods to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods in accordance with the provisions of ASC 606, “Revenue from Contracts with Customers”.
Fair value of financial instruments
The warrant derivative liability is remeasured at fair value each reporting period and represents a Level 3 financial instrument.
Reclassification of prior period presentation
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Certain reclassifications have been made to conform the prior period data to the current presentation. These reclassifications had no material effect on the reported results.
Recently issued accounting pronouncements
The Company has reviewed the Accounting Standards Update (ASU), accounting pronouncements and interpretations thereof issued by the FASB that have effective dates during the reporting period and in future periods.
Recently adopted:
ASU 2018-13 “Fair Value Measurement”
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This new guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance was effective for the Company beginning on January 1, 2020 and did not have a material impact on the Company’s condensed consolidated financial statements.
ASU 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40)”
In August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” to amend ASU 2015-5 in an effort to provide additional guidance on the accounting for costs implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalizing implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The new standard was effective for the Company on January 1, 2020. The Company has no internal use software.
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 No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)” Codification Improvements to Financial Instruments-Credit Losses (Topic 326). Subsequent updates were released in November 2018 (ASU No. 2018-19), November 2019 (ASU No. 2019-10 and 2019-11) and February 2020 (ASU No. 2020-2) that provided additional guidance on this Topic. This ASU introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. The standard is effective for the Company on January 1, 2023, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements and related disclosures.
ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for the Company beginning January 1, 2021 with early adoption permitted. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related disclosures.
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ASU 2020-04 “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (IBORs) and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The ASU can be adopted no later than December 1, 2022 with early adoption permitted. The Company is currently evaluating the impact the standard will have on its condensed consolidated financial statements and related disclosures.
ASU 2020-03 “Codification Improvements to Financial Instruments”
In March 2020, FASB issued ASU 2020-03, Codification Improvement to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. The Company is evaluating the impact the accounting guidance will have on its condensed consolidated financial statements and related disclosures.
ASU 2020-06 "Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, FASB issued ASU 2020-06, Debt - Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging - Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This ASU reduces the number of accounting models for convertible instruments, amends diluted EPS calculations for convertible instruments, and amends the requirements for a contract (or embedded derivative) that is potentially settled in an entity’s own shares to be classified in equity. This standard is effective for the Company beginning on January 1, 2024 with early adoption permitted. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related disclosures.
The Company has carefully considered other new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the Company’s reported balance sheets or operations.
Note 2 - Acquisitions
Acquisition of Halo
On October 15, 2019, the Company entered into a Stock Purchase Agreement (the “Agreement”) to acquire Halo and the acquisition (the “Halo Acquisition”) was completed on December 19, 2019 (“Halo Acquisition Date”) for $38.2 million. The consideration was subject to customary adjustments for Halo’s net working capital, cash, and indebtedness, and consisted of a combination of cash consideration ($20.5 million), shares of the Company’s common stock ($3.9 million), seller notes ($15.0 million), and seller warrants ($0.3 million).
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The Halo Acquisition was accounted for under the purchase method of accounting, and accordingly, the purchase price was allocated to the identifiable assets and liabilities based on their estimated fair values at the Halo Acquisition Date. The determination of the preliminary purchase price allocation to specific assets acquired and liabilities assumed is incomplete for Halo. The preliminary purchase price allocation may change in future periods as the fair value estimates of assets and liabilities and the valuation of the related tax assets and liabilities are completed. The preliminary purchase price allocation is summarized as follows:
Dollars in thousands
Total purchase price$38,244 
Assets
Property and equipment260 
Accounts receivable5,540 
Inventories5,160 
Intangible assets14,690 
Other assets329 
Total assets25,979 
Liabilities
Accounts payable4,628 
Accrued liabilities1,553 
Long term liability168 
Total liabilities6,349 
Net assets acquired19,630 
Goodwill$18,614 
The intangible assets acquired relate to customer relationships and trade name. Acquired customer relationships are finite-lived intangible assets and are amortized over their estimated life of 7 years using the straight-line method, which approximates the customer attrition rate, reflecting the pattern of economic benefits associated with these assets. The trade name is a finite-lived intangible asset and is being amortized over its estimated life of 15 years using the straight-line method, which reflects the pattern of economic benefits associated with this asset.
The excess of purchase price over the fair value amounts assigned to the identifiable assets acquired and liabilities assumed represents goodwill from the acquisition. The Company believes the factors that contributed to goodwill include the acquisition of a talented workforce and administrative cost synergies. The Company does not expect any portion of this goodwill to be deductible for tax purposes. See "Note 9 - Intangible assets, royalties, and goodwill" for more information.
Reverse Acquisitions of Better Choice and Bona Vida by TruPet
On May 6, 2019, Better Choice Company completed the reverse acquisitions of TruPet and Bona Vida whereby TruPet is considered the acquirer for accounting and financial reporting purposes. The acquisitions were accounted for as asset acquisitions.
The purchase price for Better Choice Company was $37.9 million and has been allocated based on an estimate of the fair value of Better Choice Company’s assets acquired and liabilities assumed with the remainder recorded as an expense. The loss on acquisition of Better Choice Company’s net liabilities is $39.6 million.
The purchase price for Bona Vida was $108.6 million and the estimated purchase price has been allocated based on an estimate of the fair value of assets acquired and liabilities assumed. The excess of the purchase price over the net assets acquired has been recorded as an expense. The loss on acquisition of Bona Vida’s net assets is $107.8 million.
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On May 6, 2019, the fair value of assets and liabilities acquired was:
Dollars in thousandsBetter Choice
Company
Bona VidaTotal
Total purchase price$37,949 $108,620 $146,569 
Net Assets (Liabilities) Acquired:
Assets
Cash and cash equivalents7 384 391 
Restricted cash 25 25 
Accounts receivable 69 69 
Inventories 95 95 
Prepaid expenses and other current assets32 348 380 
Intangible assets986  986 
Other assets 74 74 
Total assets1,025 995 2,020 
Liabilities
Warrant derivative liability(2,130) (2,130)
Accounts payable & accrued liabilities(544)(153)(697)
Total liabilities(2,674)(153)(2,827)
Net assets (liabilities) acquired(1,649)842 (807)
Loss on acquisitions$(39,598)$(107,778)$(147,376)
In connection with the preparation of the Company’s condensed consolidated financial statements for the period ended September 30, 2019, the Company identified an error in the condensed consolidated financial statements for the six month period ended June 30, 2019 related to the overstatement of loss on acquisitions of $2.6 million in the condensed consolidated statement of operations and comprehensive loss. This was primarily due to a change in the estimated purchase price, which also resulted in errors in the statement of stockholders’ deficit and statement of cash flows. The errors were all corrected during the three-month period ended September 30, 2019. The Company believes the correction of these errors is not material to the condensed consolidated financial statements as of and for the period ended September 30, 2019.
Note 3 - Revenue
The Company has two categories of revenue channels: retail-partner based (“Retail”), which includes the sale of product to e-commerce retailers, pet specialty chains, grocery, mass and distributors, and direct to consumer (“DTC”), which is focused on driving consumers to directly purchase product through its online web platform.
Retail-partner based channel
The Company’s Retail channel includes the sale of goods to customers for resale. The Company records revenue net of discounts. Discounts primarily consist of early pay discounts, general percentage allowances and contractual trade promotions such as auto-ship subscriptions, and cooperative agreements with third party distributors. Retail-partner based customers are not subject to sales tax. The Retail channel represents 76% and 75% of consolidated revenue for the three and nine months ended September 30, 2020, respectively, and 9% and 10% for the three and nine months ended September 30, 2019.
Shipping costs associated with moving finished products to customers through third party carriers were less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2020, respectively, and no shipping costs were recorded for the three and nine months ended September 30, 2019, respectively. Such shipping costs are recorded as part of general and administrative expenses.
Direct to consumer channel
The Company’s DTC products are offered through online stores where customers place orders directly for delivery across the United States. The DTC channel represents 24% and 25% of consolidated revenue of the Company for the three and nine months ended September 30, 2020, respectively, and 91% and 90% for the three and nine months ended September 30, 2019, respectively.
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The Company excludes sales taxes collected from revenues. Revenue is deferred for orders that have been paid for, but not shipped. Based on historical experience, the Company records an estimated liability for returns. Product returns were $0.1 million and $0.3 million for the three and nine months ended September 30, 2020, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2019.
Shipping costs associated with moving finished products to customers were $0.3 million and $1.0 million for the three and nine months ended September 30, 2020, respectively, and $0.6 million and $1.8 million for the three and nine months ended September 30, 2019, respectively. Such shipping costs are recorded as part of general and administrative expenses.
The Company’s DTC loyalty program enables customers to accumulate points based on spending. A portion of revenue is deferred at the time of the sale when points are earned and recognized when the loyalty points are redeemed. As of September 30, 2020 and December 31, 2019, customers held unredeemed loyalty program awards of $0.3 million and $0.2 million, respectively. The Company recognized revenue of $0.1 million and $0.4 million from the loyalty program for the three and nine months ended September 30, 2020, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2019, respectively.
The amount included in net sales related to recoveries of shipping costs from customers for direct to consumer sales was $0.2 million and $0.4 million for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2019, respectively.
Note 4 - Inventory
Inventories are summarized as follows:
Dollars in thousandsSeptember 30, 2020December 31, 2019
Food, treats and supplements$5,054 $6,425 
Inventory packaging and supplies564 504 
Other products and accessories12 73 
Total Inventories5,630 7,002 
Inventory reserve(508)(422)
Inventories, net$5,122 $6,580 
Note 5 - Prepaid expenses and other current assets
On August 28, 2019, the Company entered into a radio advertising agreement with iHeart and issued 1,000,000 shares of common stock valued at $3.4 million for future advertising to be provided to the Company from August 2019 to August 2021. The Company issued an additional 125,000 shares valued at $0.1 million on March 5, 2020 pursuant to the agreement. The agreement requires the Company to spend a minimum amount for talent and other direct iHeart costs. The Company committed to using $1.7 million of the media advertising inventory by August 28, 2020, with the remainder of the advertising available through August 28, 2021. On August 28, 2020 the contract was amended to extend the commitment dates by one year, whereas $1.7 million of the advertising media inventory will now be used by August 28, 2021, with the remainder available through August 28, 2022. Prepaid advertising was $3.0 million as of September 30, 2020 and $2.8 million as of December 31, 2019. Of the total prepaid advertising amount, $1.3 million and $1.7 million is recorded in prepaid expenses and other current assets and $1.7 million and $1.1 million in other non-current assets as of September 30, 2020 and December 31, 2019, respectively. During the nine months ended September 30, 2019, $0.6 million of the $3.4 million of the prepaid advertising was incurred.
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Note 6 - Property and equipment
Property and equipment consist of the following:
Dollars in thousandsSeptember 30, 2020December 31, 2019
Equipment$216 $222 
Furniture and fixtures199 138 
Computer software111 115 
Computer equipment2 4 
Total property and equipment528 479 
Accumulated depreciation(223)(62)
Property and equipment, net$305 $417 
Depreciation expense was less than $0.1 million and less than $0.2 million for the three and nine months ended September 30, 2020, respectively, and less than $0.1 million for both the three and nine months ended September 30, 2019. Depreciation expense is included as a component of general and administrative expenses.
Note 7 - Accrued liabilities
Accrued liabilities consist of the following:
Dollars in thousandsSeptember 30, 2020December 31, 2019
Accrued professional fees$1,802 $1,695 
Accrued sales tax1,041 1,233 
Accrued payroll and benefits1,154 994 
Accrued trade promotions360 357 
Accrued dividends359 256 
Accrued interest359 109 
Other296 77 
Total accrued liabilities$5,371 $4,721 
Accrued dividends related to the Series E are $0.4 million and $0.3 million as of September 30, 2020 and December 31, 2019, respectively. In connection with the issuance of Series F Preferred Stock in October 2020, all accrued dividends were settled through the terms of the exchange agreement related to the Series E preferred stock. See "Note 21 - Subsequent events" for additional information.
Note 8 - Operating leases
The table below presents certain information related to the lease costs for operating leases for the three and nine months ended September 30, 2020 and 2019:
Dollars in thousands
For the Nine Months Ended
For the Three Months Ended
September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Operating lease costs$331 $219 $110 $95 
Variable lease costs27 24 11 8 
Total operating lease costs$358 $243 $121 $103 
As of September 30, 2020, the weighted-average remaining operating lease term was 1.9 years and the incremental borrowing rate was 12.5% for operating leases recognized on the Company’s condensed consolidated balance sheets. Short term lease costs, excluding expenses relating to leases with a lease term of one month or less, were less than $0.1 million for the nine months ended September 30, 2020. During the three and nine months ended September 30, 2019, the Company recorded less than $0.1 million of short term lease costs, respectively.
Rent expense was $0.2 and $0.4 million for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.3 million for the three and nine months ended September 30, 2019, respectively.
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Undiscounted cash flows
The table below reconciles the undiscounted cash flows for the remaining term of the operating lease liabilities recorded on the condensed consolidated balance sheets:
Dollars in thousandsOperating Leases
Remainder of 2020$114 
2021464 
2022246 
20237 
Total minimum lease payments$831 
Less: amount of lease payments representing interest86 
Present value of future minimum lease payments$745 
Less: current obligations under leases395 
Long-term lease obligations$350 
Note 9 - Intangible assets, royalties, and goodwill
Intangible assets and royalties
The Company’s intangible assets as of September 30, 2020 and December 31, 2019 consist of customer relationships and trade name acquired in the Halo Acquisition. The customer relationships and trade name are amortized over their estimated useful lives of 7 and 15 years respectively, using the straight-line method.
In May 2019, the Company acquired a licensing agreement with Authentic Brands and Elvis Presley Enterprises (“ABG”) whereby Better Choice Company was to sell newly developed hemp-derived CBD products that were to be marketed under the Elvis Presley Houndog name. The license agreement required an upfront equity payment of $1.0 million worth of common stock and the license was recorded at its amortized cost which approximated fair value. The Company did not plan to use the license in the future and therefore terminated the agreement on January 13, 2020. The Company recognized an impairment charge for the net book value of the licensing agreement as of and for the year ended December 31, 2019.
As part of the termination, the Company: (1) paid ABG $0.1 million in cash upon the signing of the termination agreement on January 13, 2020, (2) issued ABG 72,720 shares of the Company’s common stock on January 13, 2020, (3) agreed to pay ABG $0.1 million in cash in four equal installments each month from July 31, 2020 through October 31, 2020, (4) issued ABG $0.6 million aggregate principal amount of Subordinated Promissory Notes (the “ABG Notes”) effective January 20, 2020, and (5) issued ABG a common stock purchase warrant (the “ABG Warrants”) equal to a fair value of $150,000 on January 20, 2020. The terms of the ABG Notes match those of the Seller Notes, including convertible features exercisable any time after the date of issuance, a 10% interest rate and maturity date of June 30, 2023. The ABG Warrants are exercisable for 24 months from the date of the consummation of an IPO (as defined in the ABG Warrants) and carried an initial exercise price equal to the greater of (i) $5.00 per share or (ii) the price at which the common stock was sold in the IPO. The fair values of the ABG Notes and ABG Warrants on their issuance dates were $0.6 million and less than $0.1 million, respectively. On June 24, 2020, the exercise price of the ABG Warrants was amended in connection with the issuance of the June 2020 Notes (defined below) to lower the maximum exercise price from $5.00 to $4.25 per share.
The total cost of the contract termination noted above is measured at its fair value of $