bttr-20220930

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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, 2022


☐			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: 29,405,529 shares of $0.001 par value common stock outstanding as of November 8, 2022.

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Better Choice Company Inc.

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Item		Page
	PART I – FINANCIAL INFORMATION
1.	Financial Statements	4
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
3.	Quantitative and Qualitative Disclosures About Market Risk	26
4.	Controls and Procedures	26
	PART II – OTHER INFORMATION
1.	Legal Proceedings	27
1A.	Risk Factors	27
2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
3.	Defaults Upon Senior Securities	27
4.	Mine Safety Disclosures	27
5.	Other Information	27
6.	Exhibits	28
	Signatures	31

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q ("Quarterly Report") are “forward-looking statements” for purposes of federal and state securities laws. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements contained herein include, among others, statements concerning management's expectations about future events, operating plans and performance, the continued effects of the COVID-19 pandemic and geopolitical actions and the threat of cyber-attacks, including levels of consumer, business and economic confidence generally, the regulatory environment, litigation, sales and the expected benefits of our business strategy and strategic priorities, and such statements are based on the current beliefs and expectations of management, as applicable. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, and assumptions. Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and contain inherent risks and uncertainties. Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances, or otherwise. We qualify all of our forward-looking statements by these cautionary statements. You should, however, consult further disclosures we make in future filings and public disclosures, including without limitation, our Annual Report on Form 10-K ("Annual Report"), Quarterly Reports on Forms 10-Q, and Current Reports on Forms 8-K.

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Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

•the impact of damage to or interruption of our information technology systems due to cyber-attacks or other circumstances beyond our control

•the impact of the actual or perceived effects of the COVID-19 pandemic, including as a result of any additional variants of the virus or the efficacy and distribution of vaccines, on the global pet health and wellness industry, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations;

•business interruptions resulting from geopolitical actions, including war and terrorism;

•our ability to successfully implement our growth strategy;

•failure to achieve growth or manage anticipated growth;

•our ability to achieve or maintain profitability;

•the loss of key members of our senior management team;

•our ability to generate sufficient cash flow or raise capital on acceptable terms to run our operations, service our debt and make necessary capital expenditures;

•our ability to successfully integrate Halo’s and TruPet’s brands;

•our dependence on our subsidiaries for payments, advances and transfers of funds due to our holding company status;

•our ability to successfully develop additional products and services or successfully market and commercialize such products and services;

•competition in our market;

•our ability to attract new and retain existing customers, suppliers, distributors or retail partners;

•allegations that our products cause injury or illness or fail to comply with government regulations;

•our ability to manage our supply chain effectively;

•our or our co-manufacturers’ and suppliers’ ability to comply with legal and regulatory requirements;

•the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require, whether as a result of the actual or perceived effects of the COVID-19 pandemic or broader geopolitical and macroeconomic conditions, including the military conflict between Russia and Ukraine;

•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.

NOTE REGARDING TRADEMARKS

We own or have rights to use the trademarks and trade names that we use in conjunction with the operation of our business. Each trademark or trade name of any other company appearing in this Quarterly Report on Form 10-Q is, to our knowledge, owned by such other company. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

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PART I

ITEM 1. FINANCIAL STATEMENTS

Better Choice Company Inc.

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands, except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net sales	$	11,865	$	13,200	$	45,394	$	35,019
Cost of goods sold	7,700		8,762		31,795		22,407
Gross profit	4,165		4,438		13,599		12,612
Operating expenses:
Selling, general and administrative	10,007		7,745		25,771		21,397
Share-based compensation	562		660		2,454		3,517
Total operating expenses	10,569		8,405		28,225		24,914
Loss from operations	(6,404)		(3,967)		(14,626)		(12,302)
Other (expense) income:
Interest expense, net	(142)		(79)		(324)		(3,148)
Gain on extinguishment of debt, net	—		—		—		457
Change in fair value of warrant liabilities	—		590		—		23,463
Total other (expense) income, net	(142)		511		(324)		20,772
Net (loss) income before income taxes	(6,546)		(3,456)		(14,950)		8,470
Income tax expense	1		—		4		—

Net (loss) income available to common stockholders	$	(6,547)	$	(3,456)	$	(14,954)	$	8,470

Weighted average number of shares outstanding, basic	29,364,712		29,466,520		29,339,918		16,799,796
Weighted average number of shares outstanding, diluted	29,364,712		29,466,520		29,339,918		23,685,351
Net (loss) income per share available to common stockholders, basic	$	(0.22)	$	(0.12)	$	(0.51)	$	0.48
Net (loss) income per share available to common stockholders, diluted	$	(0.22)	$	(0.12)	$	(0.51)	$	0.34

See accompanying notes to the unaudited condensed consolidated financial statements.

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Better Choice Company Inc.

Unaudited Condensed Consolidated Balance Sheets

(Dollars in thousands, except share and per share amounts)


	September 30, 2022		December 31, 2021
Assets
Cash and cash equivalents	$	5,652	$	21,729
Restricted cash	6,963		7,213
Accounts receivable, net	9,594		6,792
Inventories, net	11,611		5,245
Prepaid expenses and other current assets	1,108		2,940
Total Current Assets	34,928		43,919
Fixed assets, net	421		369
Right-of-use assets, operating lease	186		56
Intangible assets, net	10,441		11,586
Goodwill	18,614		18,614
Other assets	110		116
Total Assets	$	64,700	$	74,660
Liabilities & Stockholders’ Equity
Current Liabilities
Accounts payable	$	3,852	$	4,553
Accrued and other liabilities	3,109		1,879
Line of credit	640		—
Term loan, net	1,282		855
Operating lease liability	51		54
Total Current Liabilities	8,934		7,341
Non-current Liabilities
Line of credit, net	6,735		4,856
Term loan, net	3,495		4,559
Deferred tax liability	24		24
Operating lease liability	137		5
Total Non-current Liabilities	10,391		9,444
Total Liabilities	19,325		16,785
Stockholders’ Equity
Common Stock, $0.001 par value, 200,000,000 shares authorized, 29,364,712 and 29,146,367 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	29		29
Additional paid-in capital	319,556		317,102
Accumulated deficit	(274,210)		(259,256)
Total Stockholders’ Equity	45,375		57,875
Total Liabilities and Stockholders’ Equity	$	64,700	$	74,660

See accompanying notes to the unaudited condensed consolidated financial statements.

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Better Choice Company Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(Dollars in thousands except shares)


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity
Balance as of December 31, 2021	29,146,367	$	29	$	317,102	$	(259,256)	$	57,875

Share-based compensation	218,345	—		1,091		—		1,091




Net loss available to common stockholders	—	—		—		(4,040)		(4,040)
Balance as of March 31, 2022	29,364,712	$	29	$	318,193	$	(263,296)	$	54,926



Share-based compensation	—	—		801		—		801

Net loss available to common stockholders	—	—		—		(4,367)		(4,367)
Balance as of Balance as of June 30, 2022	29,364,712	$	29	$	318,994	$	(267,663)	$	51,360




Share-based compensation	—	—		562		—		562
Net loss available to common stockholders	—	—		—		(6,547)		(6,547)
Balance as of Balance as of September 30, 2022	29,364,712	$	29	$	319,556	$	(274,210)	$	45,375

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	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 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 September 30, 2021	29,241,317	$	29	—	$	—	$	316,554	$	(253,846)	$	62,737

See accompanying notes to the unaudited condensed consolidated financial statements.

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Better Choice Company Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)


	Nine Months Ended September 30,
	2022		2021
Cash Flow from Operating Activities:
Net (loss) income available to common stockholders	$	(14,954)	$	8,470
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Shares and warrants issued to third parties for services	—		46

Depreciation and amortization	1,265		1,255
Amortization of debt issuance costs and discounts	39		1,785
Share-based compensation	2,454		3,517

Change in fair value of warrant liabilities	—		(23,463)
Payable-in-kind interest expense on notes payable	—		1,110


Amortization of prepaid assets	2,095		891
Other	638		(981)
Changes in operating assets and liabilities:
Accounts receivable, net	(2,901)		(2,893)
Inventories, net	(6,877)		1,445
Prepaid expenses and other assets	(257)		680

Accounts payable and accrued liabilities	466		(8)



Other	60		(174)
Cash Used in Operating Activities	$	(17,972)	$	(8,320)

Cash Flow from Investing Activities:


Capital expenditures	$	(198)	$	(124)
Cash Used in Investing Activities	$	(198)	$	(124)

Cash Flow from Financing Activities:
Proceeds from shares and warrants issued pursuant to private placement, net	$	—	$	4,012

Share repurchases	—		(1,274)

Proceeds from revolving lines of credit	7,500		5,535
Payments on revolving lines of credit	(5,000)		(5,883)
Proceeds from term loan	—		6,000
Payments on term loans	(650)		(8,379)


Cash received for warrant exercises	—		1,685
IPO proceeds, net	—		36,160
Debt issuance costs	(7)		(140)
Cash Provided by Financing Activities	$	1,843	$	37,716

Net (decrease) increase in cash and cash equivalents and restricted cash	$	(16,327)	$	29,272
Total cash and cash equivalents and restricted cash, beginning of period	28,942		3,989
Total cash and cash equivalents and restricted cash, end of period	$	12,615	$	33,261

Supplemental cash flow information:


	Nine Months Ended September 30,
	2022		2021
Cash paid during the period for:

Interest	$	279	$	292

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. (the "Company") is a pet health and wellness company focused on providing pet products and services that help dogs and cats live healthier, happier and longer lives. The Company has a broad portfolio of pet health and wellness products for dogs and cats sold under its Halo brand across multiple forms, including foods, treats, toppers, dental products, chews and supplements. The products consist of kibble and canned dog and cat food, freeze-dried raw dog food and treats, vegan dog food and treats, oral care products and supplements.

Basis of presentation

The Company’s condensed consolidated financial statements are prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reports and accounting principles generally accepted in the United States ("GAAP"). Accordingly, the Condensed Consolidated Balance Sheet as of December 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements. Results of operations for interim periods may not be representative of results to be expected for the full year.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company's Annual Report for the year ended December 31, 2021, filed with the SEC.

Consolidation

The condensed financial statements are presented on a consolidated basis and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results may differ from these estimates.

In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations for the periods ended September 30, 2022 and 2021, the financial position as of September 30, 2022 and December 31, 2021 and the cash flows for the periods ended September 30, 2022 and 2021.

Summary of significant accounting policies

For additional information, please refer to the most recently filed Annual Report regarding the Company's summary of significant accounting policies.

Advertising

The Company charges advertising costs to expense as incurred and such charges are included in selling, general and administrative ("SG&A") expenses. The Company's advertising expenses consist primarily of online advertising, search costs, email advertising, and radio advertising. In addition, the Company reimburses its customers and third parties for in store activities and record these costs as advertising expenses. Advertising costs were $4.8 million and $10.0 million for the three and nine months ended September 30, 2022, respectively, of which $2.1 million is related to the amortization of the prepaid advertising contract with iHeart for both the three and nine months ended September 30, 2022. Advertising costs were $2.9 million and $7.0 million for the three and nine months ended September 30, 2021, respectively, of which $0.9 million is related to the amortization of the prepaid advertising contract with iHeart for both the three and nine months ended September 30, 2021. See "Note 4 - Prepaid expenses and other current assets" for additional information on the prepaid advertising contract with iHeart.

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Share repurchases

On May 10, 2022, the Company's board of directors approved a share repurchase program that authorizes the repurchase of up to $3.0 million of the Company's outstanding common stock in the open market through December 31, 2022. Repurchased shares are immediately retired and returned to unissued status. During the nine months ended September 30, 2022 no shares were repurchased.

New accounting standards

Issued but not yet adopted

ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”

In June 2016, the FASB issued ASU 2016-13, a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for the Company on January 1, 2023, and early adoption is permitted. The Company is currently evaluating the impact the standard, including subsequent updates, will have on its consolidated financial statements and related disclosures, but does not expect the guidance to have a significant impact on the financial statements.

Note 2 - Revenue

The Company records revenue net of discounts, which primarily consist of trade promotions, certain customer allowances and early pay discounts.

The Company excludes sales taxes collected from revenues. Retail-partner based customers are not subject to sales tax.

The Company’s direct-to-consumer ("DTC") loyalty program enables customers to accumulate points based on their spending. A portion of revenue is deferred at the time of sale when points are earned and recognized when the loyalty points are redeemed.

Revenue channels

The Company groups its revenue channels into four categories: E-commerce, which includes the sale of product to online retailers such as Amazon and Chewy; Brick & Mortar, which primarily includes the sale of product to Pet Specialty retailers such as Petco, Pet Supplies Plus and neighborhood pet stores, as well as to select grocery chains; DTC, which includes the sale of product through the Company's website; 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):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2022				2021				2022				2021
E-commerce (1)	$	3,530	30	%	$	4,742	36	%	$	11,035	24	%	$	11,644	33	%
Brick & Mortar (2)	1,342		11	%	1,816		14	%	9,632		21	%	5,408		16	%
DTC	1,371		12	%	2,363		18	%	5,066		11	%	7,140		20	%
International (3)	5,622		47	%	4,279		32	%	19,661		44	%	10,827		31	%
Net Sales	$	11,865	100	%	$	13,200	100	%	$	45,394	100	%	$	35,019	100	%

(1)The Company's E-commerce channel includes two customers that amounted to greater than 10% of the Company's total net sales during the three and nine months ended September 30, 2022. These customers had an aggregate of $3.3 million and $10.6 million of net sales during the three and nine months ended September 30, 2022, respectively. Two customers amounted to greater than 10% of the Company's total net sales during the three and nine months ended September 30, 2021, respectively. These customers had an aggregate of $4.4 million and $10.8 million of net sales during the three and nine months ended September 30, 2021, respectively.

(2)The Company's Brick & Mortar channel includes $4.3 million of net sales from one customer that amounted to greater than 10% of the Company's total net sales during the nine months ended September 30, 2022.

(3)One of the Company's International customers that distributes products in China amounted to greater than 10% of the Company's total net sales during the three and nine months ended September 30, 2022 and represented $5.3 million and $16.6 million of net sales, respectively. One of the Company's International customers in China represented greater than 10% of net sales during the three and nine months ended September 30, 2021 and represented $2.9 million and $6.7 million of net sales, respectively.

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Note 3 - Inventories

Inventories are summarized as follows (in thousands):


	September 30, 2022		December 31, 2021
Food, treats and supplements	$	10,948	$	4,666
Inventory packaging and supplies	1,414		1,028

Total Inventories	12,362		5,694
Inventory reserve (1)	(751)		(449)
Inventories, net	$	11,611	$	5,245

(1)The increase in the Company's inventory reserve is attributable to the Company's rebranding initiatives.

Note 4 - Prepaid expenses and other current assets

Prepaid expenses and other current assets are summarized as follows (in thousands):


	September 30, 2022		December 31, 2021
Prepaid advertising contract with iHeart (1)	$	—	$	2,095
Other prepaid expenses and other current assets	1,108		845
Total Prepaid expenses and other current assets	$	1,108	$	2,940

(1)On August 28, 2019, the Company entered into a radio advertising agreement with iHeart Media + Entertainment, Inc. ("iHeart") 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. The Company utilized the remaining advertising services during the three months ended September 30, 2022.

Note 5 - Accrued and other liabilities

Accrued and other liabilities consist of the following (in thousands):


	September 30, 2022		December 31, 2021
Accrued taxes	$	107	$	139
Accrued payroll and benefits	870		755
Accrued trade promotions and advertising	662		119
Accrued interest	45		25
Accrued commissions	281		—
Deferred revenue	297		225
Short-term financing	289		—
Other	558		616
Total accrued and other liabilities	$	3,109	$	1,879

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Note 6 - Goodwill and intangible assets

Goodwill

Goodwill was $18.6 million as of September 30, 2022 and December 31, 2021, respectively. Goodwill is evaluated for impairment if an event occurs or circumstances change that indicate the carrying value of a reporting unit may not be recoverable. During July 2022, the Company completed a legal merger of TruPet, LLC, a wholly owned subsidiary of Better Choice Company Inc. ("TruPet"), and Halo, Purely for Pets, Inc., a wholly owned subsidiary of Better Choice Company Inc. ("Halo"), with Halo as the surviving entity in connection with the execution of rebranding its former TruDog brand under the Halo brand umbrella. In conjunction with the legal merger and rebranding, the Company performed an analysis of its reporting units and concluded it has one reporting unit after the legal merger and rebrand, and as such, the Company performed a quantitative goodwill assessment as of July 1, 2022. Under the quantitative approach, the Company makes various estimates and assumptions to determine the estimated fair value of the reporting unit using a combination of a discounted cash flow model and a guideline comparable analysis. The fair value measurements used in the impairment review of goodwill are Level 3 measurements which include unobservable inputs that are supported by little, infrequent or no market activity and reflect management’s own assumptions. Key assumptions used in the discounted cash flow analysis included a discount rate, forecasted operating results and long-term growth rates; key assumptions used in the guideline comparable analysis include the determination of comparable companies and market multiples. As a result of the Company's quantitative analysis, no impairment charge was recorded as the fair value of the reporting unit exceeded the carrying value.

During the period from July 2, 2022 through September 30, 2022, there was a decline in the Company's stock price and a change in the Company's Chief Executive Officer ("CEO"), and as such, the Company determined there were triggering events present during the interim period. The Company performed a qualitative analysis around its market capitalization and determined the decline in stock price is not indicative of its operating results and that the decline in market value from July 2,2022 to September 30, 2022 was not of sufficient duration to indicate impairment. Additionally, the Company performed other qualitative analyses which considered the potential impacts of the change in CEO and other known information that could cause a change in the assumptions used in the July 1, 2022 assessment. As a result of the Company's qualitative analysis, it was concluded that it was more-likely-than-not that the carrying value of the reporting unit did not exceed the fair value and no impairment charge was recorded. As of September 30, 2022 and December 31, 2021, there was no accumulated impairment loss and no impairment expense related to goodwill. If global macroeconomic or geopolitical conditions worsen, projected revenue growth rates or projected operating margins decline, weighted average cost of capital increases, or if the Company has a further sustained decline in its stock price, it is possible this could result in a material impairment charge.

Intangible assets

The Company’s intangible assets (in thousands) and related useful lives (in years) are as follows:


				September 30, 2022				December 31, 2021
	Estimated useful life	Gross carrying amount		Accumulated amortization		Net carrying amount		Accumulated amortization		Net carrying amount
Customer relationships	7	$	7,190	$	(2,858)	$	4,332	$	(2,088)	$	5,102
Trade name	15	7,500		(1,391)		6,109		(1,016)		6,484
Total intangible assets		$	14,690	$	(4,249)	$	10,441	$	(3,104)	$	11,586

Amortization expense was $0.4 million and $1.2 million for the three and nine months ended September 30, 2022 and 2021, respectively.

The estimated future amortization of intangible assets over the remaining weighted average useful life of 8.9 years is as follows (in thousands):


Remainder of 2022	$	382
2023	1,527
2024	1,527
2025	1,527
2026	1,494
Thereafter	3,984
	$	10,441

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The Company assesses intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable. If impairment indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to these long-lived assets to their carrying value. Based on the potential impairment indicators described above, the Company performed an assessment of its intangible assets at the end of the reporting period and determined that the undiscounted cash flows of the intangible asset group exceeded the carrying value, and as such, there has been no impairment of the intangible assets as of September 30, 2022.

Note 7 - Debt

The components of the Company’s debt consist of the following (in thousands):


		September 30, 2022			December 31, 2021
	Maturity Date	Amount		Rate	Amount		Rate
Term loan, net	1/6/2024	$	4,777	(1)	$	5,414	(2)
Line of credit, net	1/6/2024	7,375		(1)	4,856		(2)







Total debt		12,152			10,270
Less current portion		1,922			855
Total long term debt		$	10,230		$	9,415

(1)Interest at a variable rate of the daily Federal Funds Rate plus 285 basis points with an interest rate floor of 2.50% per annum.

(2)Interest at a variable rate of LIBOR plus 250 basis points with an interest rate floor of 2.50% per annum.

Term loans and lines of credit

On January 6, 2021, Halo entered into a credit facility with Old Plank Trail Community Bank, N.A., an affiliate of Wintrust Bank, N.A. (“Wintrust”) consisting of a $6.0 million term loan and a $6.0 million revolving line of credit, each scheduled to mature on January 6, 2024 and each bore interest at a variable rate of LIBOR plus 250 basis points, with an interest rate floor of 2.50% per annum (the "Wintrust Credit Facility"). The Second Wintrust Amendment described below updated the rate at which the Wintrust Credit Facility bore interest to the greater of the daily U.S. Federal Funds Rate plus 285 basis points, or the interest rate floor, which remained unchanged. The Third Wintrust Amendment described below updated the interest rate on the Wintrust Credit Facility to the U.S. Federal Funds Rate plus 375 basis points, with an interest rate floor of 3.75% and extends the maturity date of the Wintrust Credit Facility from January 6, 2024 to October 31, 2024. Accrued interest on the Wintrust Credit Facility is payable monthly which commenced on February 1, 2021. Principal payments were required to be made monthly on the term loan commencing February 2021 with a balloon payment upon the original maturity date. The proceeds from the Wintrust Credit Facility were used (i) to repay outstanding principal, interest and fees under the previous revolving line of credit with Citizens Business Bank (the "ABL Facility") and (ii) for general corporate purposes. Debt issuance costs of $0.1 million were incurred related to the Wintrust Credit Facility.

The Wintrust Credit Facility subjected the Company to certain financial covenants, including the maintenance of a fixed charge coverage ratio of no less than 1.25 to 1.00, tested as of the last day of each fiscal quarter. The numerator in the fixed charge coverage ratio was the operating cash flow of Halo, defined as Halo EBITDA less cash paid for unfinanced Halo capital expenditures, income taxes and dividends. The denominator was fixed charges such as interest expense and principal payments paid or payable on other indebtedness attributable to Halo. As of December 31, 2021, the Company failed to satisfy the fixed charge coverage ratio and entered into a default waiver agreement with Wintrust in which Wintrust waived the existing default through the next testing date, March 31, 2022. As part of the Second Wintrust Amendment described below, the financial covenants were amended to subject the Company to a minimum liquidity covenant test in lieu of a fixed charge coverage ratio which required the Company to maintain liquidity, tested on the last day of each fiscal quarter beginning March 31, 2022, of no less than (i) $13.0 million as of the last day of each fiscal quarter ending March 31, 2022, through and including the last day of the fiscal quarter ending December 31, 2022 and (ii) $12.0 million as of the last day of the fiscal quarter ending March 31, 2023, and as of the last day of each fiscal quarter thereafter. Furthermore, as part of the Third Wintrust Amendment described below, the financial covenants were further amended to require the Company to maintain a minimum liquidity of $8.5 million tested on the last day of each fiscal quarter beginning September 30, 2022 and thereafter.

The Wintrust Credit Facility is secured by a general guaranty and security interest on the assets, including the intellectual property, of the Company and its subsidiaries. The Company has also pledged all of the capital stock of Halo held by the Company as additional collateral. Furthermore, the Wintrust Credit Facility was supported by a collateral pledge by a member of the Company’s board of directors; as a result of the First Wintrust Amendment described below, this collateral pledge was terminated and released.

On August 13, 2021, Halo entered into the first amendment to the Wintrust Credit Facility (the “First Wintrust Amendment”) to increase the revolving line of credit from $6.0 million to $7.5 million. The First Wintrust Amendment also required Halo to secure the credit facility with a pledge of a deposit account in the amount of $7.2 million, which was decreased to $6.9 million

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on January 1, 2022 and was to further decrease to $6.0 million on January 1, 2023. Additionally, on March 25, 2022, the Company entered into the second amendment to the Wintrust Credit Facility (the "Second Wintrust Amendment") which provided for the release of the Company's Bona Vida subsidiary as a guarantor, an update to the financial covenants as described above and an update to the rate at which the Wintrust Credit Facility bore interest, which is also described above. Furthermore, on October 24, 2022, the Company entered into the third amendment to the Wintrust Credit Facility (the "Third Wintrust Amendment") which provided for an increase to the revolving line of credit from $7.5 million to $13.5 million, set the amount of Halo's obligation to pledge a deposit account with Wintrust to a fixed amount of $6.3 million throughout the remainder of the term and provided updates to the interest rate, maturity date and financial covenants as described above.

As of September 30, 2022, the term loan and line of credit outstanding under the Wintrust Credit Facility were $4.8 million and $7.4 million, respectively, net of debt issuance costs of less than $0.1 million, respectively. As part of the Third Wintrust Amendment described above, Halo used a portion of the increased revolving credit facility to repay and retire the outstanding term loan portion of the Wintrust Credit Facility. As of December 31, 2021, the term loan and line of credit outstanding were $5.4 million and $4.9 million, respectively, net of debt issuance costs of less than $0.1 million, respectively. Debt issuance costs are amortized using the effective interest method. The carrying amount for the Company’s term loan and line of credit approximate fair value as the instruments have variable interest rates that approximate market rates.

Prior to the Third Wintrust Amendment, the Company would have been in violation of the previous debt covenant associated with the Wintrust Credit Facility as of September 30, 2022. Upon execution of the Third Wintrust Amendment in October as described above, the Company was in compliance with all debt covenant requirements and there were no events of default as of September 30, 2022. The Company currently expects it will be able to generate sufficient cash flow from operations and maintain sufficient liquidity to meet the required debt covenants; however if the Company fails to satisfy the debt covenant as described above, Wintrust has the right to call on the debt.

Note 8 - Commitments and contingencies

The Company had no material purchase obligations as of September 30, 2022 or December 31, 2021.

The Company may be involved in legal proceedings, claims, and regulatory, tax, or government inquiries and investigations that arise in the ordinary course of business resulting in loss contingencies. The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in SG&A expenses. The Company does not accrue for contingent losses that are considered to be reasonably possible, but not probable; however, the Company discloses the range of such reasonably possible losses. Loss contingencies considered remote are generally not disclosed.

Litigation is subject to numerous uncertainties and the outcome of individual claims and contingencies is not predictable. It is possible that some legal matters for which reserves have or have not been established could result in an unfavorable outcome for the Company and any such unfavorable outcome could be of a material nature or have a material adverse effect on the Company's consolidated financial condition, results of operations and cash flows. Management is not aware of any claims or lawsuits that may have a material adverse effect on the consolidated financial position or results of operations of the Company.

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Note 9 - Warrants

The following summarizes the Company's outstanding warrants to purchase shares of the Company's common stock as of and for the periods ended September 30, 2022 and December 31, 2021:


	Warrants	Weighted Average Exercise Price
Warrants outstanding as of December 31, 2020	9,916,997	$	7.32
Issued	548,110	$	8.70
Exercised	(389,881)	$	4.52
Terminated/Expired	(641,642)	$	24.64
Warrants outstanding as of December 31, 2021	9,433,584	$	5.92
Issued	—	$	—
Exercised	—	$	—
Terminated/Expired	—	$	—
Warrants outstanding as of September 30, 2022	9,433,584	$	5.92

There was no intrinsic value associated with the outstanding warrants as of September 30, 2022 and December 31, 2021, respectively.

Note 10 - Share-based compensation

During the three and nine months ended September 30, 2022, the Company recognized $0.6 million and $2.5 million, respectively, of share-based compensation expense. During the three and nine months ended September 30, 2021, the Company recognized $0.7 million and $3.5 million, respectively, of share-based compensation expense.

On November 11, 2019, the Company received shareholder approval for the Amended and Restated 2019 Incentive Award Plan (the “Amended 2019 Plan”). The Amended 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock or cash-based awards or a dividend equivalent award. The total number of shares currently authorized for issuance under the Amended 2019 Plan is 5,614,637.

Stock options

Options granted under the Amended 2019 Plan vest over a period of two to three years. All vested options are exercisable and may be exercised through the ten-year anniversary of the grant date (or such earlier date described in the applicable award agreement). The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. During the three and nine months ended September 30, 2022, the Company granted 9,000 and 611,000 stock options, respectively, under the Amended 2019 Plan. During the three and nine months ended September 30, 2021, the Company granted 473,720 and 1,429,408 stock options, respectively, under the Amended 2019 Plan.

As of September 30, 2022 and December 31, 2021, the Company had 3,250,770 and 2,684,041 stock options outstanding, respectively.

Stock awards

In February 2022, the Company granted 218,345 shares of common stock to members of its board of directors under the Amended 2019 Plan as compensation for annual board service. The stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of $0.5 million upon issuance.

Note 11 - Income taxes

For the three and nine months ended September 30, 2022, the Company recorded minimal income tax expense and for the three and nine months ended September 30, 2021, the Company recorded no income tax expense. For the three and nine months ended September 30, 2022, the Company's effective tax rate was less than 1% and for the three and nine months ended September 30, 2021, the Company’s effective tax rate was 0%. The Company’s effective tax rate differs from the U.S. federal statutory rate of 21% primarily because the Company’s losses have been fully offset by a valuation allowance due to uncertainty of realizing the tax benefit of net operating losses ("NOLs”) for the nine months ended September 30, 2022 and for the year ended December 31, 2021.

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Note 12 - Related party transactions

Director fees

The Company pays quarterly board of director fees. As of September 30, 2022 and December 31, 2021, $0.1 million of director fees were included in accounts payable on the Condensed Consolidated Balance Sheets, respectively.

Note 13 - Concentrations

Major suppliers

The Company sourced approximately 70% of its inventory purchases from three vendors for the nine months ended September 30, 2022. The Company sourced approximately 76% of its inventory purchases from three vendors for the nine months ended September 30, 2021.

Major customers

Accounts receivable from three customers represented 96% of accounts receivable as of September 30, 2022. Accounts receivable from three customers represented 71% of accounts receivable as of December 31, 2021. Four customers represented 70% of gross sales for the nine months ended September 30, 2022. Three customers represented 54% of gross sales for the nine months ended September 30, 2021.

Credit risk

As of September 30, 2022 and December 31, 2021, the Company’s cash and cash equivalents were deposited in accounts at certain financial institutions and may maintain some balances in excess of federally insured limits. The Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk. The Company has not experienced any losses historically in these accounts and believes it is not exposed to significant credit risk in its cash and cash equivalents.

Note 14 - (Loss) earnings per share

The Company presents (loss) earnings per share on a basic and diluted basis. Basic (loss) earnings per share is computed by dividing net (loss) earnings by the weighted average number of common shares outstanding ("WASO") during the period. Diluted (loss) earnings per share includes the dilutive effect of common stock equivalents, consisting of stock options and warrants using the treasury stock method and convertible notes and preferred stock using the if-converted method. Under the treasury stock method, the amount the holder must pay for exercising stock options or warrants and the amount of average compensation cost for future service that has not yet been recognized are collectively assumed to be used to repurchase shares.

For the three and nine months ended September 30, 2022 and the three months ended September 30, 2021, the Company’s basic and diluted net loss per share attributable to common stockholders are the same because the Company generated a net loss and common stock equivalents are excluded from diluted net loss per share as they have an antidilutive impact. As the Company reported net income for the nine months ended September 30, 2021, basic and diluted net earnings per share attributable to common stockholders are calculated as outlined above. For the nine months ended September 30, 2021, the weighted average diluted common shares had 5,397,048 common stock equivalents excluded based on the fact that their inclusion would have had an anti-dilutive effect on earnings per share.

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The following table sets forth basic and diluted net (loss) earnings per share available to common stockholders for the three and nine months ended September 30, 2022 and 2021 (in thousands, except share and per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
Common stockholders	2022		2021		2022		2021
Basic (loss) earnings per share:
Numerator:
Net (loss) income	$	(6,547)	$	(3,456)	$	(14,954)	$	8,470
Less: Adjustment due to warrant modifications	—		—		—		402
Adjusted net (loss) income available to common stockholders	$	(6,547)	$	(3,456)	$	(14,954)	$	8,068
Denominator:
Basic WASO	29,364,712		29,466,520		29,339,918		16,799,796
Net (loss) earnings per share available to common stockholders, basic	$	(0.22)	$	(0.12)	$	(0.51)	$	0.48

Dilutive (loss) earnings per share:
Numerator:
Net (loss) income	$	(6,547)	$	(3,456)	$	(14,954)	$	8,470
Less: Adjustment due to warrant modifications	—		—		—		402

Adjusted net (loss) income available to common stockholders	$	(6,547)	$	(3,456)	$	(14,954)	$	8,068
Denominator:
Basic WASO	29,364,712		29,466,520		29,339,918		16,799,796
Dilutive common stock equivalents	—		—		—		6,885,555
Diluted WASO	29,364,712		29,466,520		29,339,918		23,685,351
Net (loss) earnings per share available to common stockholders, diluted	$	(0.22)	$	(0.12)	$	(0.51)	$	0.34

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. The financial condition, results of operations and cash flows discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of Better Choice Company Inc. and its consolidated subsidiaries, collectively, the “Company,” “Better Choice Company,” “we,” “our,” or “us”. These statements represent projections, beliefs, and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview and Outlook

Better Choice is a pet health and wellness company committed to leading the industry shift toward pet products and services that help dogs and cats live healthier, happier and longer lives. Our mission is to become the most innovative premium pet food company in the world, and we are motivated by our commitment to making products with integrity and treating pets and their parents with respect. We believe that our broad portfolio of pet health and wellness products are well positioned to benefit from the trends of growing pet humanization and an increased consumer focus on health and wellness, and have adopted a laser focused, channel-specific approach to growth that is driven by new product innovation. Our executive team has a proven history of success in both pet and consumer-packaged goods, and has over 50 years of combined experience in the pet industry and over 100 years of combined experience in the consumer-packaged goods industry.

We sell our premium and super-premium products (which we believe generally includes products with a retail price greater than $0.20 per ounce) under the Halo brand umbrella, which includes Halo Holistic™, Halo Elevate® and the former TruDog brand, which has been rebranded and successfully integrated under the Halo brand umbrella during the third quarter of 2022. Our core products sold under the Halo brand are made with high-quality, thoughtfully sourced ingredients for natural, science based nutrition. Each innovative recipe is formulated with leading veterinary and nutrition experts to deliver optimal health. Our diverse and established customer base has enabled us to penetrate multiple channels of trade, which we believe enables us to deliver on core consumer needs and serve pet parents wherever they shop. We group these channels of trade into four distinct categories: E-commerce, which includes the sale of product to online retailers such as Amazon and Chewy; Brick & Mortar, which primarily includes the sale of product to Pet Specialty retailers such as Petco, Pet Supplies Plus and neighborhood pet stores, as well as to select grocery chains; DTC, which includes the sale of product through our website halopets.com; and International, which includes the sale of product to foreign distribution partners and to select international retailers.

The Global Pet Food and Treat Market

The U.S. represents the largest and most developed market for pet food globally, with food and treats accounting for approximately $39 billion of consumer sales in 2019, or 36% of the total U.S. pet care market, according to AlphaWise and Morgan Stanley Research. According to the American Pet Product Association, between 66% and 70% of all households in the U.S. own a pet, equating to a total pet population of more than 130 million companion animals and an average of 1.7 pets per household. Pet spending represents a significant portion of household spend on consumer products, as this translates to an average annual spend on pet care of more than $1,500 per pet owning household, with $460 of this spend attributed to pet food and treats.

Historically, consumer spending on pets grew at an approximately 3% CAGR in the decade leading up to the COVID-19 pandemic, driven by steady annual increases in household pet ownership of approximately 1%, the continued premiumization of the category and the humanization of pets. These industry tailwinds have been magnified in the post-COVID landscape, as stay-at-home orders have driven a more than tripling of annual pet ownership growth alongside fundamental changes in consumer purchasing behavior. This surge in pet acquisition has led to a dramatic increase in the forecasted growth of the pet care industry over the next ten years.

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Beyond the estimated $3.9 billion permanent increase to annual spend on pet food and treats, this “Pet Boom” was driven by the acceleration of pet ownership by millennial and Gen-Z households. From a demographic perspective, younger pet owners are more likely to spend a higher percentage of their income on pets, treat their pet as an important member of the family and to purchase products from pet specialty and online retailers rather than from grocery stores. Along these lines, women are 3.2 times more interested in purchasing pet food than men, and are 2.4 times more likely to engage with search ads than men. Taken holistically, these traits suggest a preference to purchase more premium and super-premium pet food and treats from brands like Halo, with a tendency to purchase products in the channels where we compete.

Globally, Asia is the second largest market for pet products, with China representing the largest market opportunity for growth. Like the U.S., growth in the Asian pet care industry has been driven by dramatic increases in household pet ownership. We believe that growth in Asia is fueled by increasing levels of economic financial status and demand for premium, western manufactured products as a result of product quality concerns. This demand has been supported by a rapidly growing middle class in China, where a recent McKinsey report estimated that in 2018 roughly 730 million people in urban areas fell into the income categories of “aspirants” and “affluents,” with the Brookings group estimating that approximately 60 million people are added to these income categories each year. We believe that this growth drove the increase in the number of dog-owning Chinese households as measured by Euromonitor, which increased from 12% in 2015 to 20% in 2020, according to Euromonitor. According to Euromonitor, the Chinese market for premium dry dog and cat food is anticipated to grow at a 20% CAGR and 28% CAGR, respectively, from 2015 through 2025, suggesting that the Chinese pet market has significant room for growth in the foreseeable future. We are focused on targeting Chinese pet owners with the highest willingness to pay, which tend to be urban dwelling millennial and Gen-Z women. In 2021, 80% of our products were purchased online, and approximately 50% of our end-consumers were born after 1990.

Our Growth Strategy

•Strong Innovation Pipeline. We have a robust and growing pipeline of new products, and believe our size is an advantage as we are nimble enough to quickly bring new products to market, but large enough to benefit from strong existing customer relationships and established economies of scale with our co-manufacturers.

•Ability to Leverage Differentiated Omni-Channel Strategy for Growth. We believe that we can leverage our differentiated omni-channel strategy to design and sell products purpose-built for success in specific channels while maintaining our ability to leverage marketing and sales resources cross-channel. We believe that this strategy will allow us to deliver on core consumer needs, maximize gross margin and respond to changing channel dynamics that have accelerated in recent years.

•Capitalize on Continuing Trends of Humanization of Pets. We believe our combination of innovative products designed specifically for certain channels can assist our growth to become a leader in the premium and super-premium categories across dog and cat food.

•Well Positioned to Capitalize on a Once-in-a-Generation Demographic Shift in Asia. We believe that Asia represents the largest macro-growth opportunity in the global pet food industry. In China, the number of households that own a pet has doubled in the last five years, with younger pet owners leading growth.

Recent Corporate Developments

On September 13, 2022, we announced that Scott Lerner was stepping down from his role as CEO, effective September 14. Also on September 13, 2022, we announced that Lionel F. Conacher was appointed as Interim CEO, effective September 14, 2022.

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Results of Operations for the three and nine months ended September 30, 2022 and 2021

The following table sets forth our consolidated results for the periods presented (in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2022		2021		Change		%		2022		2021		Change		%
Net sales	$	11,865	$	13,200	$	(1,335)	(10)	%	$	45,394	$	35,019	$	10,375	30	%
Cost of goods sold	7,700		8,762		(1,062)		(12)	%	31,795		22,407		9,388		42	%
Gross profit	4,165		4,438		(273)		(6)	%	13,599		12,612		987		8	%
Operating expenses:
Selling, general and administrative	10,007		7,745		2,262		29	%	25,771		21,397		4,374		20	%
Share-based compensation	562		660		(98)		(15)	%	2,454		3,517		(1,063)		(30)	%
Total operating expenses	10,569		8,405		2,164		26	%	28,225		24,914		3,311		13	%
Loss from operations	(6,404)		(3,967)		(2,437)		(61)	%	(14,626)		(12,302)		(2,324)		(19)	%
Other (expense) income:
Interest expense, net	(142)		(79)		(63)		80	%	(324)		(3,148)		2,824		(90)	%
Gain on extinguishment of debt, net	—		—		—		—	%	—		457		(457)		(100)	%
Change in fair value of warrant liabilities	—		590		(590)		(100)	%	—		23,463		(23,463)		(100)	%
Total other (expense) income, net	(142)		511		(653)		(128)	%	(324)		20,772		(21,096)		(102)	%
Net (loss) income before income taxes	(6,546)		(3,456)		(3,090)		(89)	%	(14,950)		8,470		(23,420)		277	%
Income tax expense	1		—		1		—	%	4		—		4		100	%

Net (loss) income available to common stockholders	$	(6,547)	$	(3,456)	$	(3,091)	(89)	%	$	(14,954)	$	8,470	$	(23,424)	277	%

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Net sales

We sell our products through online retailers, pet specialty retailers, our online portal directly to our consumers and internationally to foreign distribution partners (transacted in U.S. dollars). Generally, our sales transactions are single performance obligations that are recorded at the time the product is shipped from our distribution centers and when control transfers. We offer a variety of trade promotions, discounts and incentives to our customers, which impacts the transaction price of our products and our net sales accordingly. DTC net sales include revenue derived from shipping fees and are net of loyalty points earned (a portion of revenue is deferred at the time of the sale as points are earned and not recognized until the redemption of the points, estimated based on historical experience). We record a revenue reserve based on historical return rates to account for customer returns.

Information about our revenue channels is as follows (in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2022				2021				2022				2021
E-commerce (1)	$	3,530	30	%	$	4,742	36	%	$	11,035	24	%	$	11,644	33	%
Brick & Mortar (2)	1,342		11	%	1,816		14	%	9,632		21	%	5,408		16	%
DTC	1,371		12	%	2,363		18	%	5,066		11	%	7,140		20	%
International (3)	5,622		47	%	4,279		32	%	19,661		44	%	10,827		31	%
Net Sales	$	11,865