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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, 2021
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: 001-40477
Better Choice Company Inc.
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware | 83-4284557 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
12400 Race Track Road
Tampa, Florida 33626
(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 |
Common Stock, $0.001 par value share | BTTR | NYSE American |
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 | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | ☒ | Emerging 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: 29,241,317 shares of $0.001 par value common stock outstanding as of November 8, 2021.
Better Choice Company Inc.
Table of Contents
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, 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, 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 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 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.
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 COVID-19 on the U.S. and global economies, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations
•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 maintain effective internal control over financial reporting;
•our ability to successfully integrate Halo’s and TruPet’s businesses and realize anticipated benefits with these acquisitions and with other acquisitions or investments we may make;
•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 third-party contract 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;
•our ability to develop and maintain our brand and brand reputation;
•compliance with data privacy rules;
•our compliance with applicable regulations issued by the U.S. Food and Drug Administration (“FDA”), the U.S. Federal Trade Commission (“FTC”), the U.S. Department of Agriculture (“USDA”), and other federal, state and local regulatory authorities, including those regarding marketing pet food, products and supplements;
•risk of our products being recalled for a variety of reasons, including product defects, packaging safety and inadequate or inaccurate labeling disclosure;
•risk of shifting customer demand in relation to raw pet foods, premium kibble and canned pet food products, and failure to respond to such changes in customer taste quickly and effectively; 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.
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)
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Three Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net sales | $ | 35,019 | | | $ | 33,302 | | | $ | 13,200 | | | $ | 11,135 | |
Cost of goods sold | 22,407 | | | 20,563 | | | 8,762 | | | 6,678 | |
Gross profit | 12,612 | | | 12,739 | | | 4,438 | | | 4,457 | |
Operating expenses: | | | | | | | |
General and administrative | 11,778 | | | 23,158 | | | 3,727 | | | 3,545 | |
Sales and marketing | 9,619 | | | 6,847 | | | 4,018 | | | 2,650 | |
Share-based compensation | 3,517 | | | 7,047 | | | 660 | | | 1,543 | |
Total operating expenses | 24,914 | | | 37,052 | | | 8,405 | | | 7,738 | |
Loss from operations | (12,302) | | | (24,313) | | | (3,967) | | | (3,281) | |
Other expense (income): | | | | | | | |
Interest expense, net | 3,148 | | | 7,268 | | | 79 | | | 2,537 | |
(Gain) Loss on extinguishment of debt, net | (457) | | | 88 | | | — | | | 88 | |
| | | | | | | |
Change in fair value of warrant liabilities | (23,463) | | | (2,118) | | | (590) | | | (4,213) | |
Total other (income) expense, net | (20,772) | | | 5,238 | | | (511) | | | (1,588) | |
Net income (loss) | 8,470 | | | (29,551) | | | (3,456) | | | (1,693) | |
Preferred dividends | — | | | 103 | | | — | | | 35 | |
Net income (loss) available to common stockholders | $ | 8,470 | | | $ | (29,654) | | | $ | (3,456) | | | $ | (1,728) | |
| | | | | | | |
Weighted average number of shares outstanding, basic | 16,799,796 | | | 8,134,957 | | | 29,466,520 | | | 8,160,242 | |
Weighted average number of shares outstanding, diluted | 23,685,351 | | | 8,134,957 | | | 29,466,520 | | | 8,160,242 | |
Earnings (loss) per share, basic | $ | 0.48 | | | $ | (3.65) | | | $ | (0.12) | | | $ | (0.21) | |
Earnings (loss) per share, diluted | $ | 0.34 | | | $ | (3.65) | | | $ | (0.12) | | | $ | (0.21) | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Better Choice Company Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Unaudited | | Audited |
Assets | | | |
Cash and cash equivalents | $ | 26,048 | | | $ | 3,926 | |
Restricted cash | 7,213 | | | 63 | |
Accounts receivable, net | 7,524 | | | 4,631 | |
Inventories, net | 3,424 | | | 4,869 | |
| | | |
Prepaid expenses and other current assets | 3,726 | | | 4,074 | |
Total Current Assets | 47,935 | | | 17,563 | |
Property and equipment, net | 168 | | | 252 | |
Right-of-use assets, operating leases | 68 | | | 345 | |
Intangible assets, net | 11,968 | | | 13,115 | |
Goodwill | 18,614 | | | 18,614 | |
Other assets | 114 | | | 1,364 | |
Total Assets | $ | 78,867 | | | $ | 51,253 | |
Liabilities & Stockholders’ Equity (Deficit) | | | |
Current Liabilities | | | |
Term loans, net | $ | 780 | | | $ | 7,826 | |
| | | |
PPP loans | — | | | 190 | |
Accrued and other liabilities | 1,607 | | | 3,400 | |
Accounts payable | 4,047 | | | 3,137 | |
| | | |
| | | |
Operating lease liability | 52 | | | 173 | |
Warrant liability | — | | | 39,850 | |
Total Current Liabilities | 6,486 | | | 54,576 | |
Non-current Liabilities | | | |
Notes payable, net | — | | | 18,910 | |
Term loans, net | 4,779 | | | — | |
Lines of credit, net | 4,846 | | | 5,023 | |
PPP loans | — | | | 662 | |
Operating lease liability | 19 | | | 184 | |
Total Non-current Liabilities | 9,644 | | | 24,779 | |
Total Liabilities | 16,130 | | | 79,355 | |
Stockholders’ Equity (Deficit) | | | |
Common Stock, $0.001 par value, 200,000,000 shares authorized, 29,241,317 and 8,651,400 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 29 | | | 9 | |
Series F Preferred Stock, $0.001 par value, 30,000 shares authorized, — shares and 21,754 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | — | | | — | |
Additional paid-in capital | 316,554 | | | 232,530 | |
Accumulated deficit | (253,846) | | | (260,641) | |
Total Stockholders’ Equity (Deficit) | 62,737 | | | (28,102) | |
Total Liabilities and Stockholders’ Equity (Deficit) | $ | 78,867 | | | $ | 51,253 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Dollars in thousands except shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 8,651,400 | | $ | 9 | | | 21,754 | | $ | — | | | $ | 232,530 | | $ | (260,641) | | $ | (28,102) | |
Shares and warrants issued pursuant to private placement | 546,733 | | 1 | | | — | | — | | | 4,071 | | — | | 4,072 | |
Share-based compensation | 17,537 | | — | | | — | | — | | | 2,544 | | — | | 2,544 | |
Warrant exercises | 297,383 | | — | | | — | | — | | | 1,310 | | — | | 1,310 | |
Shares issued to third-party for services | 5,000 | | — | | | — | | — | | | 46 | | — | | 46 | |
Warrant modifications | — | | — | | | — | | | | 402 | | (402) | | — | |
Conversion of Series F shares to common stock | 1,482,672 | | 1 | | | (4,448) | | — | | | (1) | | — | | — | |
Net loss available to common stockholders | — | | — | | | — | | — | | | — | | (12,850) | | (12,850) | |
Balance as of March 31, 2021 | 11,000,725 | | $ | 11 | | | 17,306 | | $ | — | | | $ | 240,902 | | $ | (273,893) | | $ | (32,980) | |
Warrant exercise | 83,333 | | — | | | — | | — | | | 375 | | — | | 375 | |
Conversion of Series F shares to common stock | 4,000 | | — | | | (12) | | — | | | — | | — | | — | |
Conversion of convertible notes to common stock | 4,732,420 | | 5 | | | — | | — | | | 21,771 | | — | | 21,776 | |
Share-based compensation | — | | — | | | — | | — | | | 313 | | — | | 313 | |
Shares issued in lieu of fractional shares due to reverse stock split | 1,081 | | — | | | — | | — | | | — | | — | | — | |
Net income available to common stockholders | — | | — | | | — | | — | | | — | | 24,776 | | 24,776 | |
Balance as of Balance as of June 30, 2021 | 15,821,559 | | $ | 16 | | | 17,294 | | $ | — | | | $ | 263,361 | | $ | (249,117) | | $ | 14,260 | |
Shares issued pursuant to IPO | 8,000,000 | | 8 | | | — | | — | | | 36,152 | | — | | 36,160 | |
Conversion of Series F shares to common stock | 5,764,533 | | 6 | | | (17,294) | | — | | | (6) | | — | | — | |
Reclassification of warrant liability to equity | — | | — | | | — | | — | | | 16,387 | | — | | 16,387 | |
Share repurchases | (344,775) | | (1) | | | — | | — | | | — | | (1,273) | | (1,274) | |
Share-based compensation | — | | — | | | — | | — | | | 660 | | — | | 660 | |
Net loss available to common stockholders | — | | — | | | — | | — | | | — | | (3,456) | | (3,456) | |
Balance as of Balance as of September 30, 2021 | 29,241,317 | | $ | 29 | | | — | | $ | — | | | $ | 316,554 | | $ | (253,846) | | $ | 62,737 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | Redeemable Series E Convertible Preferred Stock |
| Shares | Amount | | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Deficit | | Shares | Amount |
Balance as of December 31, 2019 | 7,996,232 | | $ | 8 | | | $ | 194,190 | | $ | (201,269) | | $ | (7,071) | | | 1,387,378 | | $ | 10,566 | |
Shares issued pursuant to a private placement | 51,440 | | — | | | 500 | | — | | 500 | | | — | | — | |
Share-based compensation | 75,993 | | 1 | | | 2,484 | | — | | 2,485 | | | — | | — | |
Shares and warrants issued to third party for contract termination | 12,120 | | — | | | 198 | | — | | 198 | | | — | | — | |
Shares issued to third parties for services | 20,833 | | — | | | 125 | | — | | 125 | | | — | | — | |
Warrants issued to third parties for services | — | | — | | | 2,594 | | — | | 2,594 | | | — | | — | |
Net loss available to common stockholders | — | | — | | | — | | (9,488) | | (9,488) | | | — | | — | |
Balance as of March 31, 2020 | 8,156,618 | | $ | 9 | | | $ | 200,091 | | $ | (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 loss available to common stockholders | — | | — | | | — | | (18,438) | | (18,438) | | | — | | — | |
Balance as of June 30, 2020 | 8,156,618 | | $ | 9 | | | $ | 212,572 | | $ | (229,195) | | $ | (16,614) | | | 1,387,378 | | $ | 10,566 | |
Shares issued pursuant to warrant exercise | 33,334 | | — | | | — | | — | | — | | | — | | — | |
Share-based compensation | — | | — | | | 1,543 | | — | | 1,543 | | | — | | — | |
Warrants issued in connection with ABL Facility | — | | — | | | 230 | | — | | 230 | | | — | | — | |
Net loss available to common stockholders | — | | — | | | — | | (1,728) | | (1,728) | | | — | | — | |
Balance as of September 30, 2020 | 8,189,952 | | $ | 9 | | | $ | 214,345 | | $ | (230,923) | | $ | (16,569) | | | 1,387,378 | | $ | 10,566 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
Cash Flow from Operating Activities: | | | |
Net income (loss) available to common stockholders | $ | 8,470 | | | $ | (29,654) | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | |
Shares and warrants issued to third parties for services | 46 | | | 10,182 | |
| | | |
Depreciation and amortization | 1,255 | | | 1,298 | |
Amortization of debt issuance costs and discounts | 1,785 | | | 3,723 | |
Share-based compensation | 3,517 | | | 7,047 | |
| | | |
Change in fair value of warrant liabilities | (23,463) | | | (2,118) | |
PIK interest expense on notes payable | 1,110 | | | 1,465 | |
| | | |
| | | |
Amortization of prepaid advertising | 891 | | | — | |
Other | (981) | | | 772 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | (2,893) | | | 195 | |
Inventories, net | 1,445 | | | 1,458 | |
Prepaid expenses and other assets | 680 | | | 224 | |
| | | |
Accounts payable and accrued liabilities | (8) | | | 691 | |
| | | |
| | | |
| | | |
Other | (174) | | | 194 | |
Cash Used in Operating Activities | $ | (8,320) | | | $ | (4,523) | |
| | | |
Cash Flow from Investing Activities | | | |
| | | |
| | | |
Acquisition of property and equipment | $ | (124) | | | $ | (42) | |
Cash Used in Investing Activities | $ | (124) | | | $ | (42) | |
| | | |
Cash Flow from Financing Activities | | | |
Proceeds from shares and warrants issued pursuant to private placement, net | $ | 4,012 | | | $ | — | |
| | | |
Share repurchases | (1,274) | | | — | |
Proceeds from issuance of debt | — | | | 2,352 | |
Proceeds from revolving lines of credit | 5,535 | | | 6,624 | |
Payments on revolving lines of credit | (5,883) | | | (6,297) | |
Proceeds from term loan | 6,000 | | | — | |
Payments on term loans | (8,379) | | | — | |
| | | |
Proceeds from investor prepayment | — | | | 1,518 | |
Cash received for warrant exercises | 1,685 | | | — | |
IPO proceeds, net | 36,160 | | | — | |
Debt issuance costs | (140) | | | (85) | |
Cash Provided by Financing Activities | $ | 37,716 | | | $ | 4,112 | |
| | | |
Net (decrease) increase in cash and cash equivalents and restricted cash | $ | 29,272 | | | $ | (453) | |
Total cash and cash equivalents and restricted cash, beginning of period | 3,989 | | | 2,534 | |
Total cash and cash equivalents and restricted cash, end of period | $ | 33,261 | | | $ | 2,081 | |
Supplemental cash flow information: | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
Cash paid during the period for: | | | |
| | | |
Interest | $ | 292 | | | $ | 1,729 | |
Non-cash financing and investing transactions | | | |
Stock issued for services | $ | — | | | $ | 125 | |
ABL guarantor warrants | $ | — | | | $ | 230 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
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 growing 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 sells its product offerings under the Halo and TruDog brands, which have a long history of providing high quality products to pet parents. The Company believes its portfolio of brands are well-positioned to benefit from the trends of growing pet humanization and an increased consumer focus on health and wellness, and the Company has adopted a laser focused, channel-specific approach to growth that is driven by new product innovation. The Company has a broad portfolio of premium and super-premium pet health and wellness products for dogs and cats sold under its Halo and TruDog brands across multiple forms, including foods, treats, toppers, dental products, chews, grooming products and supplements. The products consist of naturally formulated premium kibble and canned dog and cat food, freeze-dried raw dog food and treats, vegan dog food and treats, oral care products, supplements and grooming aids. The core products sold under the Halo brand are sustainably sourced, derived from real whole meat and no rendered meat meal and include non-genetically modified fruits and vegetables. The core products sold under the TruDog brand are made according to the Company's nutritional philosophy of fresh, meat-based nutrition and minimal processing.
Reverse stock split
On May 28, 2021, stockholders holding a majority of the voting power of the Company approved, by way of a written consent resolution, for the authorization of the Company's board of directors, in its sole and absolute discretion, and without further action of the stockholders, to file an amendment to the Company’s amended and restated certificate of incorporation to affect a reverse stock split of its common stock at a ratio in the range of 1-for-3 to 1-for-10 at any time prior to December 31, 2021. On June 10, 2021 the Company's board of directors set the reverse stock split ratio at 1-for-6 (the "Reverse Stock Split") and approved the Reverse Stock Split to be effectuated by the Company immediately following the effectiveness of the Company's registration statement related to the Company's IPO (as defined below), which became effective on June 28, 2021.
As a result of the Reverse Stock Split, every six shares of the Company’s common stock was combined and converted into one share of the Company’s common stock as of June 28, 2021. In addition, the conversion rates of the Company's outstanding preferred stock and convertible notes and the exercise prices of the Company’s underlying common stock purchase warrants and stock options were proportionately adjusted at the applicable reverse stock split ratio in accordance with the terms of such instruments. Proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Split, other than as a result of the rounding up of fractional shares. The Company issued 1,081 shares of common stock in lieu of fractional shares in connection with the Reverse Stock Split.
Accordingly, all share and per share amounts related to the Company's common stock and underlying derivatives for all periods presented in the accompanying unaudited condensed consolidated financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the Reverse Stock Split. The number of authorized shares and the par values of the common stock and convertible preferred stock were not adjusted as a result of the Reverse Stock Split.
Initial public offering
On June 28, 2021, the Company’s registration statement on Form S-1 for its underwritten initial public offering (the “IPO”) was declared effective by the SEC, and the Company's common stock commenced trading on the NYSE American ("NYSE") on June 29, 2021. Upon commencement of the trading of the Company's common stock on the NYSE on June 29, 2021, all of the Company's outstanding convertible notes payable automatically converted into 4,732,420 shares of common stock.
In connection with the IPO, which closed on July 1, 2021, the Company issued and sold 8,000,000 shares of its common stock at a price of $5.00 per share. The total net proceeds from the IPO were approximately $36.2 million, after deducting underwriting discounts and commissions of $2.8 million, and offering costs of approximately $1.0 million. The Company plans to use the net proceeds of this IPO for general corporate purposes. The Company may also elect to use proceeds from the IPO to acquire complimentary technologies, products or businesses, although the Company is not a party to any letters of intent or definitive agreements for any such acquisition.
Upon the consummation of the IPO on July 1, 2021, all shares of the Series F convertible preferred stock were converted into 5,764,533 shares of common stock. Additionally, since the anti-dilution provision of the Series F Warrants were no longer effective upon consummation of the Company's IPO, these warrants met the requirements to be considered equity and the outstanding Series F Warrants were reclassified as such.
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"). Results of operations for interim periods may not be representative of results to be expected for the full year.
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.
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, 2020, filed with the SEC.
Consolidation
The financial statements are presented on a 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.
Use of estimates
The preparation of 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, 2021 and 2020, the financial position as of September 30, 2021 and December 31, 2020 and the cash flows for the periods ended September 30, 2021 and 2020.
Summary of significant accounting policies
For additional information, please refer to the most recently filed Annual Report regarding the Company's summary of significant accounting policies.
Cash and cash equivalents
Cash and cash equivalents include demand deposits held with banks and highly liquid investments with original maturities of ninety days or less at acquisition date. Cash and cash equivalents are stated at cost, which approximates fair value because of the short-term nature of these instruments. Our cash equivalents are held in government money market funds and at times may exceed federally insured limits. For purposes of reporting cash flows, the Company considers all cash accounts that are not subject to withdrawal restrictions or penalties to be cash and cash equivalents.
Restricted cash
The Company was required to maintain a restricted cash balance of less than $0.1 million as of September 30, 2021 and December 31, 2020, respectively, associated with a business credit card and credit card clearance operations. The Company was required to maintain a restricted cash balance of $7.2 million as of September 30, 2021 in connection with the amendment to the Wintrust Credit Facility (as defined below). See "Note 7 - Debt" for additional information.
Share repurchases
In August 2021, the Company's Board of Directors approved a share repurchase program that authorizes the repurchase of up to $2.0 million of the Company's outstanding common stock in the open market through December 31, 2021. Repurchased shares are immediately retired and returned to unissued status. During the nine months ended September 30, 2021, 344,775 shares were repurchased for $1.3 million, inclusive of broker's commissions.
Advertising
The Company charges advertising costs to expense as incurred and such charges are included in sales and marketing expenses in the Consolidated Statements of Operations. The Company's advertising expenses consist primarily of online advertising, search costs, email advertising, and radio advertising. In addition, we reimburse our customers and third parties for in store activities and record these costs as sales and marketing expenses. Advertising costs were $3.0 million and $7.3 million for the three and nine months ended September 30, 2021, respectively, and $1.8 million and $4.4 million for the three and nine months ended September 30, 2020, respectively.
New accounting standards
Recently adopted
ASU 2020-03 “Codification Improvements to Financial Instruments”
In March 2020, FASB issued Accounting Standards Update ("ASU") 2020-03, Codification Improvement to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the current expected credit losses 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, some of which were effective for the Company beginning on January 1, 2021. The amendments adopted did not have a material impact on the Company’s condensed consolidated financial statements.
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 new guidance was effective for the Company beginning on January 1, 2021 and did not have an impact on the Company’s condensed consolidated financial statements.
Issued but not yet adopted
ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326)”
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326),” 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 will have on its consolidated financial statements and related disclosures.
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 consolidated financial statements and related disclosures.
Note 2 - Revenue
The Company records revenue net of discounts, which primarily consist of early pay discounts, general percentage allowances and contractual trade promotions.
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.
Shipping costs
Shipping costs associated with moving finished products to customers were $1.2 million and $1.1 million for the nine months ended September 30, 2021 and 2020, respectively, and $0.3 million and $0.4 million for the three months ended September 30, 2021 and 2020, respectively. Such shipping costs are recorded as part of general and administrative expenses.
Revenue channels
The Company groups its revenue channels into four distinct categories: E-Commerce, which includes the sale of product to online retailers such as Amazon and Chewy; Brick & Mortar, which includes the sale of product to pet specialty chains such as Petco, PetSmart, select grocery chains, and neighborhood pet stores; DTC, which includes the sale of product through the Company's online web platform to more than 20,000 unique customers; and International, which includes the sale of product to foreign distribution partners and to select international retailers (transacted in U.S. dollars).
Information about the Company’s net sales by revenue channel is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Three Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
E-commerce | | $ | 11,644 | | | 33 | % | | $ | 10,969 | | | 33 | % | | $ | 4,742 | | | 36 | % | | $ | 3,510 | | | 32 | % |
Brick & Mortar | | 5,408 | | | 16 | % | | 6,725 | | | 20 | % | | 1,816 | | | 14 | % | | 1,953 | | | 17 | % |
DTC | | 7,140 | | | 20 | % | | 8,198 | | | 25 | % | | 2,363 | | | 18 | % | | 2,672 | | | 24 | % |
International | | 10,827 | | | 31 | % | | 7,410 | | | 22 | % | | 4,279 | | | 32 | % | | 3,000 | | | 27 | % |
Net Sales | | $ | 35,019 | | | 100 | % | | $ | 33,302 | | | 100 | % | | $ | 13,200 | | | 100 | % | | $ | 11,135 | | | 100 | % |
Note 3 - Inventories
Inventories are summarized as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Food, treats and supplements | $ | 3,150 | | | $ | 4,987 | |
Inventory packaging and supplies | 637 | | | 596 | |
| | | |
Total Inventories | 3,787 | | | 5,583 | |
Inventory reserve | (363) | | | (714) | |
Inventories, net | $ | 3,424 | | | $ | 4,869 | |
Note 4 - Prepaid expenses and other current assets
Prepaid expenses and other current assets are summarized as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Prepaid advertising contract with iHeart (1) | $ | 2,095 | | | $ | 1,788 | |
Other prepaid expenses and other current assets (2) | 1,631 | | | 2,286 | |
Total Prepaid expenses and other current assets | $ | 3,726 | | | $ | 4,074 | |
(1) On August 28, 2019, the Company entered into a radio advertising agreement with iHeart Media + Entertainment, Inc. and issued 166,667 shares of common stock valued at $3.4 million for future advertising services. The Company issued an additional 20,834 shares valued at $0.1 million on March 5, 2020 pursuant to the agreement. The current portion of the remaining value, reflected above, is the remaining value of services that the Company expects to utilize within the twelve months following the reporting period date, unless the term is extended. There was a long-term portion of $1.2 million recorded in other non-current assets as of December 31, 2020.(2) As of September 30, 2021, this amount includes various other prepaid contracts. In December 2020, the Company entered into an agreement for access to an investment platform in exchange for 83,334 shares of common stock valued at $0.6 million and also entered into an agreement for marketing services in exchange for 83,334 shares of common stock valued at $0.5 million, both of which are being amortized over 12 months.
Note 5 - Accrued and other liabilities
Accrued and other liabilities consist of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Accrued professional fees | $ | 197 | | | $ | 697 | |
Accrued sales tax | 136 | | | 1,009 | |
Accrued payroll and benefits | 939 | | | 913 | |
Accrued trade promotions | 44 | | | 106 | |
Accrued interest | 23 | | | 86 | |
Deferred revenue | 182 | | | 350 | |
Other | 86 | | | 239 | |
Total accrued and other liabilities | $ | 1,607 | | | $ | 3,400 | |
Note 6 - Intangible assets, royalties, and goodwill
Intangible assets
The Company’s intangible assets (in thousands) and related useful lives (in years) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | September 30, 2021 | | December 31, 2020 |
| Estimated useful life | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Accumulated amortization | | Net carrying amount |
Customer relationships | 7 | | $ | 7,190 | | | $ | (1,831) | | | $ | 5,359 | | | $ | (1,059) | | | $ | 6,131 | |
Trade name | 15 | | 7,500 | | | (891) | | | 6,609 | | | (516) | | | 6,984 | |
Total intangible assets | | | $ | 14,690 | | | $ | (2,722) | | | $ | 11,968 | | | $ | (1,575) | | | $ | 13,115 | |
Amortization expense was $0.4 million and $1.2 million for both the three and nine months ended September 30, 2021 and 2020, respectively.
The estimated future amortization of intangible assets over the remaining weighted average useful life of 9.6 years is as follows (in thousands):
| | | | | |
Remainder of 2021 | $ | 382 | |
2022 | 1,527 | |
2023 | 1,527 | |
2024 | 1,527 | |
2025 | 1,527 | |
Thereafter | 5,478 | |
| $ | 11,968 | |
There were no indicators or impairment of the intangible assets as of September 30, 2021.
Goodwill
Goodwill was $18.6 million as of September 30, 2021 and December 31, 2020, respectfully. The Company performed a quantitative assessment for its annual impairment test as of October 1, 2020. 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 earnings multiples for guideline public companies. As of September 30, 2021, there was no accumulated impairment loss and no impairment expense related to goodwill and no indicators, events or changes in circumstances that would indicate goodwill was impaired during the period from October 2, 2020 through September 30, 2021.
Note 7 - Debt
The components of the Company’s debt consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands | September 30, 2021 | | December 31, 2020 |
Amount | | Rate | | Maturity Date | | Amount | | Rate | | Maturity Date |
Term loan, net | $ | 5,559 | | | (1) | | | 1/6/2024 | | $ | 7,826 | | | (2) | | | 1/15/2021 |
Line of credit, net | 4,846 | | | (1) | | | 1/6/2024 | | 5,023 | | | (3) | | | 7/5/2022 |
November 2019 notes payable, net (November 2019 Notes) | — | | | — | % | | (4) | | 2,830 | | | 10 | % | | 6/30/2023 |
December 2019 senior notes payable, net (Senior Seller Notes) | — | | | — | % | | (4) | | 10,332 | | | 10 | % | | 6/30/2023 |
December 2019 junior notes payable, net (Junior Seller Notes) | — | | | — | % | | (4) | | 4,973 | | | 10 | % | | 6/30/2023 |
ABG Notes | — | | | — | % | | (4) | | 687 | | | 10 | % | | 6/30/2023 |
June 2020 notes payable, net (June 2020 Notes) | — | | | — | % | | (4) | | 88 | | | 10 | % | | 6/30/2023 |
Halo PPP Loan | — | | | — | % | | (4) | | 431 | | | 1 | % | | 5/3/2022 |
TruPet PPP Loan | — | | | — | % | | (4) | | 421 | | | 0.98 | % | | 4/6/2022 |
Total debt | 10,405 | | | | | | | 32,611 | | | | | |
Less current portion | 780 | | | | | | | 8,016 | | | | | |
Total long term debt | $ | 9,625 | | | | | | | $ | 24,595 | | | | | |
(1)Interest at a variable rate of LIBOR plus 250 basis points with an interest rate floor of 2.50% per annum
(2)Interest at Bank of Montreal Prime plus 8.05%
(3)Interest at a variable rate of LIBOR plus 250 basis points with an interest rate floor of 3.25% per annum
(4)Converted to common stock upon commencement of the trading of the Company's common stock on the NYSE on June 29, 2021. See "Note 1 - Nature of business and summary of significant accounting policies" for additional information.
Term loans and lines of credit
The term loan balance of $7.8 million at December 31, 2020 was related to the Company's prior loan facilities agreement and after the fifth amendment to that agreement was entered into on November 25, 2020, the term loan maturity date was extended to January 15, 2021.
On July 16, 2020, the Company entered into a revolving line of credit with Citizens Business Bank in the aggregate amount of $7.5 million (the “ABL Facility”). The ABL Facility was scheduled to mature on July 5, 2022 and accrued interest at a variable rate of LIBOR plus 250 basis points, with an interest rate floor of 3.25% per annum. Accrued interest on the ABL Facility was payable monthly commencing on August 5, 2020. The ABL Agreement provided for customary financial covenants, such as maintaining a specified adjusted EBITDA and a maximum senior debt leverage ratio, that commenced on December 31, 2020 and customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The ABL Facility was secured by a general security interest on the assets of the Company and was personally guaranteed by a member of the Company’s board of directors. The Company prepaid all the outstanding principal and accrued interest under the ABL Facility in full and did not incur any prepayment charges.
On January 6, 2021, Halo, Purely for Pets, Inc., a wholly owned subsidiary of Better Choice Company Inc. ("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 bear 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"). Accrued interest on the Wintrust Credit Facility is payable monthly commencing on February 1, 2021. Principal payments are required to be made monthly on the term loan commencing February 2021 with a balloon payment upon maturity. The proceeds from the Wintrust Credit Facility were used (i) to repay outstanding principal, interest and fees under the ABL Facility and (ii) for general corporate purposes. The Company applied extinguishment accounting to the outstanding balances of the term loan and ABL Facility and recorded a loss on extinguishment of debt of $0.4 million during the three months ended March 31, 2021. Debt issuance costs of $0.1 million were incurred related to the Wintrust Credit Facility.
The Wintrust Credit Facility subjects 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 is the operating cash flow of Halo, defined as Halo EBITDA less cash paid for unfinanced Halo capital expenditures, income taxes and dividends. The denominator is fixed charges such as interest expense and principal payments paid or payable on other indebtedness attributable to Halo.
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 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 “Wintrust Amendment”) to increase the revolving line of credit from $6.0 million to $7.5 million. The 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 decreases to $6.9 million on January 1, 2022 and to $6.0 million on January 1, 2023.
As of September 30, 2021, the term loan and line of credit outstanding under the Wintrust Credit Facility were $5.6 million and $4.8 million, respectively, net of debt issuance costs of less than $0.1 million, respectively. As of December 31, 2020, the previous term loan and line of credit outstanding were $7.8 million and $5.0 million, respectively, net of debt issuance costs and discounts of less than $0.2 million and $0.2 million, respectively. Debt issuance costs and discounts are amortized using the effective interest method.
Notes payable
On November 4, 2019, the Company issued $2.8 million of subordinated convertible notes (the “November 2019 Notes”) which carried a 10% interest rate and a maturity date of November 4, 2021. The interest was payable in kind, in arrears on March 31, June 30, September 30 and December 31 of each year. Payment in kind ("PIK") interest was payable by increasing the aggregate principal amount of the November 2019 Notes. The November 2019 Notes were convertible any time from the date of issuance and carried an initial conversion price of the lower of (a) $24.00 per share or (b) the IPO Price. The November 2019 Notes were amended on January 6, 2020. The amendment incorporated only the preferable terms of the Seller Notes as noted below, and all other terms and provisions of the November 2019 Notes remained in full force and effect. As amended, for so long as any event of default existed and was continuing, interest would accrue at the default interest rate of 12.0% per annum, and such accrued interest would be immediately due and payable.
On December 19, 2019, the Company issued $10.0 million and $5.0 million in senior subordinated convertible notes (the “Senior Seller Notes”) and junior subordinated convertible notes (the “Junior Seller Notes” and together with the Senior Seller Notes, the “Seller Notes”), respectively, to the sellers of Halo. The Seller Notes were convertible any time from the date of issuance and carried a 10% interest rate and a maturity date of June 30, 2023. Interest was payable in kind, in arrears on March 31, June 30, September 30 and December 31 of each year by increasing the aggregate principal amount of the Seller Notes. The Seller Notes carried a conversion price of the lower of (a) $24.00 per share or (b) the IPO Price.
On January 13, 2020, the Company issued $0.6 million in senior subordinated convertible notes to Authentic Brands and Elvis Presley Enterprises (“ABG”) in connection with the termination of a previous licensing agreement (the "ABG Notes"). The terms of the ABG Notes were the same as the Seller Notes. In addition to issuing the ABG Notes, as part of the ABG termination on January 13, 2020, the Company paid ABG $0.1 million in cash, issued ABG 12,120 shares of the Company’s common stock, agreed to pay ABG $0.1 million in cash in four equal installments each month from July 31, 2020 through October 31, 2020 and issued ABG common stock purchase warrants (the “ABG Warrants”) equal to a fair value of $0.2 million.
The November 2019 Notes were amended for the second time and the Seller Notes and the ABG Notes were also amended on June 24, 2020 in connection with the issuance of the June 2020 Notes, discussed below. The amendments lowered the maximum conversion price applicable to the conversion of these notes from $24.00 per share to $22.50 per share and aligned all maturity dates to be June 30, 2023. The Company accounted for the change in conversion price as a modification of the debt instruments and recognized the increase in the fair value of the conversion option as a reduction to the carrying amount of the respective debt instrument by increasing the associated debt discount or decreasing the debt premium, with a corresponding increase in Additional paid-in capital. The increase in fair value of the conversion options were $0.3 million for the November 2019 Notes, less than $0.3 million for the Seller Notes and less than $0.1 million for the ABG Notes.
On June 24, 2020, the Company issued $1.5 million in subordinated convertible promissory notes (the “June 2020 Notes”) which carried a 10% interest rate and matures on June 30, 2023. Interest was payable in kind, in arrears on March 31, June 30, September 30, and December 31 of each year by increasing the aggregate principal amount of the June 2020 Notes. The June 2020 Notes were convertible any time from the date of issuance and carried a conversion price $4.50 per share.
The Company evaluated the conversion option within the June 2020 Notes to determine whether the conversion price was beneficial to the note holders and recorded a beneficial conversion feature (“BCF”) related to the issuance of these notes. The BCF for the June 2020 Notes was recognized and measured by allocating a portion of the proceeds to the BCF, based on relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature limited to the proceeds amount allocated to the instrument. The discount recorded in connection with the BCF valuation was being accreted as interest expense over the term of the June 2020 Notes, using the effective interest rate method. Upon the conversion of the June 2020 Notes discussed below, the remaining discount of $1.4 million associated with the June 2020 Notes was fully accreted through interest expense.
As of September 30, 2021, all of the notes payable described had $0 outstanding since they were automatically converted to common stock in connection with the Company's IPO, at a price of $5.00 per share (except for the June 2020 Notes, which were converted at a price of $4.50 per share). See "Note 1 - Nature of business and summary of significant accounting policies" for additional information. As of December 31, 2020, the November 2019 Notes outstanding were $2.8 million, net of discounts of less than $0.3 million, the Senior Seller Notes outstanding were $10.3 million, net of discounts of $0.8 million, the Junior Seller Notes outstanding were $5.0 million, net of discounts of $0.5 million, the ABG Notes outstanding were $0.7 million, including a debt premium of less than $0.1 million, and the June 2020 Notes outstanding were less than $0.1 million, net of discounts of less than $1.5 million. The debt discounts and premium were being amortized over the life of the respective notes using the effective interest method.
Previously, $0.1 million of the Seller Notes were held by an executive of the Company and $2.2 million of the subordinated convertible notes were held by a member of the board of directors, all of which were converted to common stock as described above. PIK interest related to these notes was $0.1 million for the nine months ended September 30, 2021 and less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2020, respectively.
PPP loans
On April 10, 2020, TruPet, LLC, a wholly owned subsidiary of Better Choice Company Inc., was granted a loan from JPMorgan Chase Bank, N.A. in the aggregate amount of $0.4 million, pursuant to the Paycheck Protection Program ("PPP") under Division A, Title I of the CARES Act (the “TruPet PPP Loan”). The loan matured on April 6, 2022 and had an interest rate of 0.98% per annum, with interest and principal payable monthly, commencing on November 6, 2020. During the nine months ended September 30, 2021, the TruPet PPP loan was fully forgiven and the Company recognized a gain on extinguishment of debt of $0.4 million.
On May 7, 2020, Halo, Purely for Pets, Inc., a wholly owned subsidiary of Better Choice Company Inc., was granted a loan from Wells Fargo Bank, N.A. in the aggregate amount of $0.4 million, pursuant to the PPP (the “Halo PPP Loan”). The loan matured on May 3, 2022 and had an interest rate of 1.00% per annum, with interest and principal payable monthly, commencing on November 1, 2020. During the nine months ended September 30, 2021 the Halo PPP loan was fully forgiven and the Company recognized a gain on extinguishment of debt of $0.4 million.
The Company recorded interest expense related to its outstanding indebtedness of $3.1 million and $7.3 million for the nine months ended September 30, 2021 and September 30, 2020, respectively, and $0.1 million and $2.5 million for the three months ended September 30, 2021 and September 30, 2020, respectively. PIK interest relating to notes payable was $1.1 million for the nine months ended September 30, 2021 and $0.5 million and $1.5 million for the three and nine months ended September 30, 2020, respectively.
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.
As of September 30, 2021 and December 31, 2020, the Company was in compliance with all debt covenant requirements and there were no events of default.
Note 8 - Commitments and contingencies
The Company had no material purchase obligations as of September 30, 2021 or December 31, 2020.
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 general and administrative expenses in the Condensed Consolidated Statements of Operations. 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.
Note 9 - Convertible preferred stock
During October, 2020, the Company consummated an insider-led equity financing, including the transactions contemplated by a securities purchase agreement (the “Securities Purchase Agreement”) between the Company and certain accredited and sophisticated investors (the “Purchasers”) and an exchange agreement (the “Series E Exchange Agreement”) between the Company and Cavalry Fund LP ("Cavalry"), the holder of all of the Company’s previously outstanding Series E preferred stock.
Pursuant to the Securities Purchase Agreement, the Company, in a private placement (the “Series F Private Placement”), issued and sold units (the “Series F Units”) to the Purchasers for a purchase price of $1,000 per Unit. Each Unit consisted of: (i) one share of the Company’s Series F convertible preferred stock, par value $0.001 per share (the “Series F Preferred Stock”), which is convertible into shares of the Company’s common stock, par value $0.001 per share, at a value per share of common stock of $3.00; and (ii) a warrant to purchase for a six year period such number of shares of common stock (the “Series F Warrant Shares”) into which such share of Series F Preferred Stock is convertible at an exercise price per Warrant Share of $4.50. Pursuant to the Series F Private Placement, the Company raised approximately $18.2 million in gross cash proceeds, approximately $6.5 million of which was invested by certain officers, directors, employees and associated related parties thereto of the Company. The Series F Shares were recorded at fair value on the date of issuance on an as converted basis.
Concurrently with the execution of the Securities Purchase Agreement, the Company and the Purchasers entered into a registration rights agreement, (as amended by a certain first amendment dated October 29, 2020, the "Registration Rights Agreement"), pursuant to which the Company filed a registration statement which was declared effective by the SEC on February 16, 2021 to register the Warrant Shares and the shares of common stock issuable upon conversion of the Series F Preferred Stock.
In connection with the consummation of the Series F Private Placement, on October 1, 2020, the Company filed with the Secretary of State of Delaware a Certificate of Designations which authorizes a total of 30,000 shares of Series F Preferred Stock and sets forth the designations, preferences, and rights of the Company's Series F Preferred Stock.
On October 1, 2020, the Company issued 14,264 Series F Units in connection with the Series F Private Placement. In addition, pursuant to the Series E Exchange Agreement, on October 1, 2020, the Company issued 3,500 Series F Units to Cavalry in exchange for all of its outstanding Series E Preferred Stock. The exchange of Series E Preferred Shares resulted in a $5.4 million gain and was recorded to Accumulated deficit on the Company's Condensed Consolidated Balance Sheets.
On October 12, 2020 and October 23, 2020, the Company issued 1,106 and 2,832 Series F Units, respectively, in connection with the Series F Private Placement. In addition, on October 23, 2020, the Company issued an additional 100 shares of Series F Preferred Stock in conjunction with a marketing agreement.
The Company evaluated the conversion option within the Series F Preferred Stock on the dates of issuance to determine whether the conversion price was beneficial to the holders. The Company recorded a BCF related to the issuance of the Series F Preferred Stock. The BCF was recognized and measured by allocating a portion of the proceeds to the beneficial conversion feature, based on fair value and was recorded to Accumulated deficit on the Company's Condensed Consolidated Balance Sheets limited to the proceeds amount allocated to the instrument.
On July 1, 2021, all outstanding shares of convertible preferred stock were converted to common stock in connection with the consummation of the Company's IPO. See "Note 1 - Nature of business and summary of significant accounting policies" for additional information.
Note 10 - Stockholders’ equity (deficit)
On January 22, 2021, the Company consummated a private placement of common stock units (the “January 2021 Private Placement”) in which the Company raised approximately $4.1 million, including an investment by certain officers, directors, employees and associated related parties thereto of approximately $1.6 million. Each common stock unit was sold at a per unit price of $7.50 and consisted of (i) one share of the Company’s common stock, par value $0.001 per share; and (ii) a warrant to purchase one share of common stock. The proceeds were used to pay expenses related to the offering