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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, 2023

 

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

  (212) 896-1254
(Address of Principal Executive Offices) (Zip Code)   (Registrant’s Telephone Number, Including Area Code)

 

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 check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 check mark whether the registrant is a large accelerated filer, an 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 check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

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: 32,081,148 shares of $0.001 par value common stock outstanding as of November 13, 2023.

 

 

 

   
 

 

Better Choice Company Inc.

TABLE OF CONTENTS

 

  Part I  
1. Unaudited Financial Statements 5
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
3. Quantitative and Qualitative Disclosures About Market Risk 31
4. Controls and Procedures 31
  Part II  
1. Legal Proceedings 32
1A. Risk Factors 32
2. Unregistered Sales of Equity Securities and Use of Proceeds 32
3. Defaults Upon Senior Securities 32
4. Mine Safety Disclosures 32
5. Other Information 32
6. Exhibits 32
  Signatures 36

 

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FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “should,” “will,” “would,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including, but not limited to, those summarized below:

 

our ability to continue as a going concern;
   
the impact of damage to or interruption of our information technology systems due to cyber-attacks or other circumstances beyond our control;
   
the continued 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 dependence on our subsidiaries for payments, advances and transfers of funds due to our holding company status;

 

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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 continued 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;
   
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; and
   
Per section 9.3(H) of the WinTrust Credit Facility referenced in Note 8, Halo is restricted on its ability to pay dividends and make payments to the Company as defined in the loan and security agreement. This impacts the Company’s ability to pay dividends to its shareholders, as the Company depends on its subsidiaries for transfers of funds to support professional fees and its holding company status.

 

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)

 

   2023   2022   2023   2022 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2023   2022   2023   2022 
Net sales  $13,117   $11,865   $32,890   $45,394 
Cost of goods sold   8,681    7,700    21,625    31,795 
Gross profit   4,436    4,165    11,265    13,599 
Operating expenses:                    
Selling, general and administrative   7,052    10,569    19,721    28,225 
Total operating expenses   7,052    10,569    19,721    28,225 
Loss from operations   (2,616)   (6,404)   (8,456)   (14,626)
Other expenses:                    
Interest expense, net   (344)   (142)   (952)   (324)
Change in fair value of warrants liabilities   1,339        1,339     
Total other expense, net   995    (142)   387    (324)
Net loss before income taxes   (1,621)   (6,546)   (8,069)   (14,950)
Income tax expense       1        4 
Net loss available to common stockholders  $(1,621)  $(6,547)  $(8,069)  $(14,954)
Weighted average number of shares outstanding, basic   30,975,566    29,364,712    30,679,905    29,339,918 
Weighted average number of shares outstanding, diluted   30,975,566    29,364,712    30,679,905    29,339,918 
Net loss per share available to common stockholders, basic  $(0.05)  $(0.22)  $(0.26)  $(0.51)
Net loss per share available to common stockholders, diluted  $(0.05)  $(0.22)  $(0.26)  $(0.51)

 

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, 2023   December 31, 2022 
Assets          
Cash and cash equivalents  $3,800   $3,173 
Restricted cash       6,300 
Accounts receivable, net   8,582    6,744 
Inventories, net   7,541    10,257 
Prepaid expenses and other current assets   992    1,051 
Total Current Assets   20,915    27,525 
Fixed assets, net   258    375 
Right-of-use assets, operating leases   134    173 
Intangible assets, net   8,914    10,059 
Other assets   828    544 
Total Assets  $31,049   $38,676 
Liabilities & Stockholders’ Equity          
Current Liabilities          
Accounts payable  $7,807   $2,932 
Accrued and other liabilities   2,525    2,596 
Line of credit, net   1,917     
Warrants liabilities   869     
Operating lease liability   56    52 
Total Current Liabilities   13,174    5,580 
Non-current Liabilities          
Line of credit, net       11,444 
Term loan, net   2,714     
Operating lease liability   82    124 
Total Non-current Liabilities   2,796    11,568 
Total Liabilities   15,970    17,148 
Stockholders’ Equity          
Common Stock, $0.001 par value, 200,000,000 shares authorized, 32,077,148 & 29,430,267 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively   32    29 
Additional paid-in capital   321,688    320,071 
Accumulated deficit   (306,641)   (298,572)
Total Stockholders’ Equity   15,079    21,528 
Total Liabilities and Stockholders’ Equity  $31,049   $38,676 

 

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 (Deficit)

(Dollars in thousands, except shares)

 

   Shares   Amount   Capital   Deficit   Equity 
   Common Stock   Additional
Paid-In
   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity 
Balance as of December 31, 2022   29,430,267   $     29   $320,071   $(298,572)  $  21,528 
Share-based compensation   1,066,881        861        861 
Share issuance       1    (1)        
Net loss available to common stockholders               (3,484)   (3,484)
Balance as of March 31, 2023   30,497,148    30    320,931    (302,056)   18,905 
Share-based compensation   80,000        284        284 
Net loss available to common stockholders               (2,964)   (2,964)
Balance as of June 30, 2023   30,577,148    30    321,215    (305,020)   16,225 
Share-based compensation   1,500,000    2    473        475 
Net loss available to common stockholders               (1,621)   (1,621)
Balance as of September 30, 2023   32,077,148    32    321,688    (306,641)   15,079 

 

   Common Stock   Additional
Paid-In
   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   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 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 September 30, 2022   29,364,712    29    319,556    (274,210)   45,375 

 

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)

 

   2023   2022 
   Nine Months Ended 
   September 30, 
   2023   2022 
Cash Flow from Operating Activities:          
Net loss available to common stockholders  $(8,069)  $(14,954)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,262    1,265 
Amortization of debt issuance costs   165    39 
Share-based compensation expense   1,620    2,454 
Amortization of prepaid assets       2,095 
Change in fair value of warrants liabilities   (1,339)    
Inventory reserve   (987)   511 
Loss on disposal of assets   11     
Other   (6)   127 
Changes in operating assets and liabilities:          
Accounts receivable   (1,831)   (2,901)
Inventories   3,703    (6,877)
Prepaid expenses and other assets   (225)   (257)
Accounts payable   4,875    466 
Accrued and other liabilities   (73)   60 
Cash Used in Operating Activities  $(894)  $(17,972)
Cash Flow from Investing Activities:          
Capital expenditures  $(10)  $(198)
Cash Used in Investing Activities  $(10)  $(198)
Cash Flow from Financing Activities:          
Proceeds from revolving lines of credit   6,764    7,500 
Payments on revolving line of credit   (16,291)   (5,000)
Proceeds from Alphia Facility   2,792     
Payment of loan issuance costs   (242)   (7)
Proceeds from warrant liabilities   2,208     
Payments on term loans       (650)
Cash (Used in) Provided by Financing Activities  $(4,769)  $1,843 
Net decrease in cash and cash equivalents and restricted cash  $(5,673)  $(16,327)
Total cash and cash equivalents and restricted cash, beginning of period   9,473    28,942 
Total cash and cash equivalents and restricted cash, end of period  $3,800   $12,615 
Supplemental cash flow information          
Cash paid during the quarter for:          
Interest  $489   $279 

 

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 U.S. (“GAAP”). Accordingly, the Condensed Consolidated Balance Sheet as of December 31, 2022 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, 2022, 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 condensed 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 three and nine months ended September 30, 2023 and 2022, the financial position as of September 30, 2023 and December 31, 2022 and the cash flows for the nine months ended September 30, 2023 and 2022.

 

Going concern considerations

 

The Company is subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of its products, the successful protection of its proprietary technologies, ability to grow into new markets, and compliance with government regulations. The Company has continually incurred losses and has an accumulated deficit. Our continued operating losses raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date these condensed consolidated financial statements are issued. The Company does not currently expect it will be able to generate sufficient cash flow from operations to maintain sufficient liquidity to meet the required financial covenant in certain periods prior to maturity giving the lender the right to call the debt. The Company will need to either raise additional capital or obtain additional financing, and/or secure future waivers or amendments from its lenders, or accomplish some combination of these items to maintain sufficient liquidity. There can be no assurance that the Company will be successful in raising additional capital, securing future waivers and/or amendments from its lenders, renewing or refinancing its existing debt or securing new financing. If the Company is unsuccessful in doing so, it may need to reduce the scope of its operations, repay amounts owed to its lenders or sell certain assets.

 

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The Company is continuing to implement plans to achieve operating profitability, as well as implementing other strategic objectives to address liquidity. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.

 

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. The Company’s 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. At December 31, 2022, the Company had $8.0 million in money market funds, all of which were held in cash. As of September 30, 2023, the Company had closed its money market funds.

 

Restricted cash

 

The Company was required to maintain a restricted cash balance of $6.3 million as of December 31, 2022, in connection with the Wintrust Credit Facility. As of September 30, 2023, there are no restrictions on cash due to the full repayment of the Wintrust Credit Facility described in Note 8.

 

Advertising

 

The Company charges advertising costs to expense as incurred and such charges are included in SG&A expense. 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 $2.4 million and $4.8 million for the three months ended September 30, 2023 and 2022, respectively. Advertising costs were $6.1 million and $10.0 million for the nine months ended September 30, 2023 and 2022, respectively.

 

Reclassification

 

Certain prior period amounts within the condensed consolidated statements of operations related to share-based compensation, previously presented as a separate line item, have been reclassified into selling, general and administrative expense to conform with current period presentation. All share-based compensation in the current and prior periods is a selling, general and administrative expense.

 

New Accounting Standards

 

Recently 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 was effective for the Company on January 1, 2023. The new standard did not have a material impact on the condensed consolidated financial statements for the three and nine months ended September 30, 2023.

 

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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):

 Schedule of Information about Revenue Channels

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2023   2022   2023   2022 
E-commerce (1)  $3,180    24%  $3,530    30%  $10,330    32%  $11,035    24%
Brick & Mortar (2)   2,249    17%   1,342    11%   5,669    17%   9,632    21%
DTC   1,298    10%   1,371    12%   4,316    13%   5,066    11%
International (3)   6,390    49%   5,622    47%   12,575    38%   19,661    44%
Net Sales  $13,117    100%  $11,865    100%  $32,890    100%  $45,394    100%

 

(1) The Company’s E-commerce channel includes two customers that amounted to greater than 10% of the Company’s total net sales for the three and nine months ended September 30, 2023, and 2022, respectively. These customers had $3.1 million and $10.0 million of net sales for the three and nine months ended September 30, 2023 and $3.3 million and $10.6 million of net sales during the three and nine months ended September 30, 2022, 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 for the nine months ended September 30, 2022. None of the Company’s Brick & Mortar customers represented greater than 10% of net sales during the three months ended September 30, 2022 or during the three and nine months ended September 30, 2023.
   
(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 months and nine months ended September 30, 2023 represented $6.0 million and $11.0 million of net sales, respectively. 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 months and nine months ended September 30, 2022 represented $5.3 million and $16.6 million of net sales, respectively.

 

Note 3 - Inventories

 

Inventories are summarized as follows (in thousands):

 Schedule of Inventories

   September 30, 2023   December 31, 2022 
Food, treats and supplements  $7,048   $10,212 
Inventory packaging and supplies   1,160    1,699 
Total Inventories   8,208    11,911 
Inventory reserve   (667)   (1,654)
Inventories, net  $7,541   $10,257 

 

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Note 4 – Prepaid expenses and other current assets

 

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

 Schedule of Prepaid Expenses and Other Current Assets

   September 30, 2023   December 31, 2022 
Total Prepaid expenses and other current assets  $992   $1,051 

 

Note 5 - Fixed assets

 

Fixed assets consist of the following (in thousands):

 Schedule of Fixed Assets

   Estimated Useful Life  September 30, 2023   December 31, 2022 
Equipment  2 - 5 years  $11   $7 
Furniture and fixtures  2 - 5 years   221    221 
Computer software, including website development  2 - 3 years   187    187 
Computer equipment  1 - 2 years   109    129 
Total fixed assets      528    544 
Accumulated depreciation      (270)   (169)
Fixed assets, net     $258   $375 

 

Depreciation expense was $0.04 million for the three months ended September 30, 2023 and September 30, 2022. Depreciation expense was $0.12 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.

 

Note 6 – Intangible assets

 

Intangible assets

 

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

 Schedule of Intangible Assets

          September 30, 2023   December 31, 2022 
   Estimated useful life  Gross carrying amount   Accumulated amortization   Net carrying amount   Accumulated amortization   Net carrying amount 
Customer relationships  7  $7,190   $(3,885)  $3,305   $(3,115)  $4,075 
Trade name  15   7,500      (1,891)   5,609      (1,516)   5,984 
Total intangible assets     $14,690   $(5,776)  $8,914   $(4,631)  $10,059 

 

Amortization expense was $0.38 million and $1.15 million for the for the three and nine months ended September 30, 2023 and September 30, 2022, respectively.

 

The estimated future amortization of intangible assets over the remaining weighted average useful life of 8.3 years is as follows (in thousands):

 Schedule of Future Amortization of Intangible Assets

      
Remainder of 2023  $382 
2024   1,527 
2025   1,527 
2026   1,494 
2027   500 
Thereafter   3,484 
 Total  $8,914 

 

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. There were no indicators of impairment of the intangible assets as of September 30, 2023.

 

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Note 7 – Accrued and other liabilities

 

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

 Schedule of Accrued and Other Liabilities

   September 30, 2023   December 31, 2022 
Accrued taxes  $107   $110 
Accrued payroll and benefits   375    688 
Accrued trade promotions and advertising   524    567 
Accrued interest   181    84 
Accrued commissions   687    385 
Deferred revenue   (8)   336 
Short-term financing   341    165 
Licenses and permits   72    32 
Other   246    229 
Total accrued and other liabilities  $2,525   $2,596 

 

 

Note 8 – Debt

 

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

 

 

   September 30, 2023  December 31, 2022
   Amount   Rate  Maturity date  Amount   Rate  Maturity date
Term loan, net  $2,714   (2)  6/21/2026  $       
Line of credit, net  $1,917   (3)  6/21/2025  $11,444   (1)  10/31/2024
Less current portion   1,917                 
Total long-term debt  $2,714         $11,444       

 

(1) Interest at a variable rate of the daily U.S. Federal Funds Rate plus 375 basis points with an interest rate floor of 3.75% per annum.
   
(2) Interest at a fixed rate of 10.00% per annum.
   
(3) Interest at a variable rate of the daily U.S. Federal Funds Rate plus 250 basis points with an interest rate floor of 5.50% per annum.

 

Wintrust Term Loan and Line 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.

 

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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 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 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.

 

On June 21, 2023, the Company paid off the entire balance in the sum of $13.5 million of the Wintrust Credit Facility removing any covenant requirements to be met at September 30, 2023.

 

As of September 30, 2023, there was no outstanding balance related to the Wintrust Credit Facility. As of December 31, 2022, the line of credit outstanding was $11.4 million, net of debt issuance costs of less than $0.2 million. Debt issuance costs are amortized using the effective interest method. The carrying amount for the Company’s line of credit approximates fair value as the instrument has a variable interest rate that approximates market rates.

 

Wintrust Receivables Credit Facility

 

On June 21, 2023, the Company entered into an account purchase agreement with Wintrust Receivables Finance (AP Agreement), a division of Wintrust Bank N.A. (“Wintrust”) pursuant to which Wintrust will purchase, at its discretion, eligible customer invoices and advance up to 75% of the face amount of all purchased invoices, the maximum outstanding balance can be $4.8 million. Each advance under the Advance Purchase Agreement will bear a variable interest rate at the prime rate plus 2.5% percentage per annum. The interest rate at September 30, 2023 was 5.5% per annum. The AP Agreement has an initial term of two years and will automatically renew annually unless terminated by the Company on at least 60 days’ notice. The Wintrust Receivables Credit Facility is guaranteed and secured by a general security interest in the assets of the Company. The Company continues to service the receivables, the transfers are at full recourse and the eligible customer invoices are not legally isolated from the Company. As such, the Wintrust Receivables Credit Facility was accounted for as a secured borrowing under ASC 860.

 

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The Wintrust Receivables Credit Facility limits or restrict the ability of the Company to incur additional indebtedness; incur additional liens; make dividends and other restricted payments; make investments; sell, assign, transfer or dispose of certain assets; make optional prepayments of other indebtedness; engage in transactions with affiliates; and enter into restrictive agreements. The Wintrust Receivables Credit Facility does not include any financial covenants and if an event of default occurs, Wintrust is entitled to accelerate the advances made thereunder and exercise rights against the collateral.

 

Borrowing under the Wintrust Receivables Credit Facility are classified as current debt as a result of a required lockbox arrangement and a subjective acceleration clause. During the three and nine months ended September 30, 2023, the Company sold receivables having an aggregate face value of $3.5 million and $6.5 million, respectively, in exchange for cash proceeds of $2.6 million and $4.9 million, respectively. As of September 30, 2023, the balance outstanding on the Wintrust Receivables Credit Facility amounted to $1.9 million.

 

Alphia Term Loan Facility

 

On June 21, 2023, the Company entered into a term loan credit agreement (the “Term Loan Agreement”) with Alphia Inc. (“Alphia”), a custom manufacturer of super-premium pet food in the U.S. Pursuant to the Term Loan Agreement, Alphia made a term loan to the Company in the original principal amount of $5.0 million (the “Term Loan”). In conjunction with the Term Loan Agreement, the Company issued warrants to Alphia (see Note 11 – Warrants for further discussion). The proceeds of the Term Loan, together with a portion of the Company’s cash on hand, were used to retire all of the outstanding obligations of Halo, Purely for Pets, Inc. (“Halo”), a wholly-owned subsidiary of the Company, under Halo’s long-term credit facility with Old Plank Trail Community Bank, N.A., an affiliate of Wintrust Bank, N.A described above.

 

The Term Loan bears an interest rate of 10% per annum, compounded quarterly, and will mature on June 21, 2026. Accrued interest on the Term Loan is payable quarterly in cash or, at the election of the Company, in-kind by capitalizing such interest and adding it to the then-outstanding principal amount of the Term Loan. The Term Loan Agreement and Term Note provide for customary financial covenants and customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company was in compliance with these covenants as of September 30, 2023. The Company may prepay the principal of the Term Loan at any time upon written notice to Alphia and subject to a prepayment penalty if such prepayment occurs prior to June 21, 2025.

 

The Term Loan is secured by a general security interest on the assets, including the intellectual property, of the Company and Halo pursuant to (i) that certain Term Loan Security Agreement, dated June 21, 2023, made by the Company and Halo in favor of Alphia (the “Security Agreement”) and (ii) that certain Intellectual Property Security Agreement, dated as of June 21, 2023 of the Company and Halo in favor of Alphia (the “Intellectual Property Security Agreement”). The Company has also pledged all of the capital stock of Halo held by the Company as additional collateral for the Term Loan.

 

The term Loan is guaranteed by Halo pursuant to that certain Term Loan Guaranty, dated as of June 21, 2023, by and between Halo and Alphia (the “Term Loan Guaranty”).

 

As of September 30, 2023, our indebtedness on the Alphia Term Loan Facility is $5.0 million, which is comprised of a discount of $2.5 million and $2.7 million net of debt issuance costs of $0.2 million (See Note 11 for further discussion). Debt issuance costs are amortized using the effective interest method.

 

Future Debt Maturities

 

Future debt maturities as of September 30, 2023 and for succeeding years are as follows (in thousands):

 

Year ending December 31:   
2024  $  
2025     
2026   5,000 
Total  $5,000 

 

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Note 9 - Fair Value Measurements

 

The carrying amounts of cash and cash equivalents, trade accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value because of the short-term nature of these financial instruments. The carrying amounts of borrowings under credit facilities approximates fair value as variable interest rates on these instruments approximates current market rates.

 

The Company estimates the fair value of the term loan based on a discounted cash flow method and the warrants liabilities (measured at fair value on a recurring basis) are based on a risk-neutral Monte Carlo simulation approach. The carrying value of the term loan was based on an accounting entry where proceeds from the loan were first allocated to the warrants liabilities. The following table presents the carrying amount and fair value of the Company’s term note, line of credit and warrants liabilities by hierarchy level:

 

 

        September 30, 2023   December 31, 2022 
  

Fair Value

Hierarchy

  

Carrying

Amount

   Fair Value  

Carrying

Amount

   Fair Value 
Term loan  Level 3 (2)  $2,714   $3,024   $   $ 
Line of credit  Level 2 (1)  $1,917   $1,917   $11,444   $11,444 
Warrants liabilities  Level 3 (2)  $2,208   $869   $   $ 

 

(1)the fair value estimates are based upon observable market data

 

(2)the fair value estimates are based on unobservable inputs reflecting management’s assumptions about inputs used in pricing the asset or liability

 

Note 10 – Commitments and contingencies

 

The Company has manufacturing agreements with its vendors that provides for the company to make its commercial best efforts to purchase minimum quantities in the ordinary course of business. There are no other purchase obligations as of September 30, 2023 or December 31, 2022.

 

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 11 – Warrants

 

The following summarizes the Company’s outstanding warrants to purchase shares of the Company’s common stock as of and for the years ended September 30, 2023 and December 31, 2022:

 

 

   Warrants  

Weighted Average

Exercise Price

 
Warrants outstanding as of December 31, 2022   9,433,584   $5.92 
Issued      $ 
Exercised      $ 
Terminated/Expired      $ 
Warrants outstanding as of March 31, 2023   9,433,584   $5.92 
Issued   14,768,125   $0.26 
Exercised      $ 
Terminated/Expired      $ 
Warrants outstanding as of June 30, 2023   24,201,709   $5.92 
Issued      $ 
Exercised      $ 
Terminated/Expired      $ 
Warrants outstanding as of September 30, 2023   24,201,709   $5.92 

 

The warrants shown in the table above outstanding as of March 31, 2023 and December 31, 2022, are equity classified warrants issued between May 2019 and January 2021. There was no intrinsic value associated with these equity warrants as of March 31, 2023 and December 31, 2022, respectively.

 

In conjunction with the Alphia Term Loan Facility mentioned in Note 8 - Debt, the Company issued to Alphia (i) a warrant (the “First Tranche Warrant”) to purchase 6,545,338.45 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a price of $0.26 per share, and (ii) a warrant (the “Second Tranche Warrant” and together with the First Tranche Warrant, the “Warrants”) to purchase 8,222,787 shares of Common Stock at a price of $0.26 per share. Unless exercised, the Warrants expire on June 21, 2028. Alphia’s exercise of the Second Tranche Warrant is subject to the approval of the Company’s stockholders. The Warrants contain certain anti-dilution provisions in favor of Alphia in connection with any equity offering consummated by the Company prior to December 21, 2023 and equity issuances below the exercise price of the Warrants. The Warrants also contain a cashless exercise option at the election of Alphia.

 

Additionally, in conjunction with the Term Loan, the Company entered into a Side Letter Agreement with Alphia (the “Side Letter”) pursuant to which Alphia was granted a right of first refusal on any of the following relating to the Company or any of its subsidiaries and to the extent such transactions constitute a change of control: (i) any transfer, sale, lease or encumbrance of all or any portion of the capital stock or assets (other than the sale of inventory in the ordinary course of business), (ii) any merger, consolidation or other business combination, (iii) any recapitalization, reorganization or any other extraordinary business transaction, (iv) or any equity issuance or debt incurrence. Alphia’s right of first refusal is effective so long as the Term Loan remains outstanding and for a period of 12 months thereafter. The Side Letter also provides Alphia with certain Board observer rights.

 

The Company evaluated the Alphia warrant liabilities under ASC 815-40, Derivatives and Hedging-Contracts in Entity’s Own Equity (“ASC 815-40”), and concluded they do not meet the criteria to be classified in shareholders’ equity. Specifically, there are contingent exercise provisions and settlement provisions that exist, including provisions where the number of shares available under the warrants may be adjusted based on a percentage of equity. Because the number of outstanding common shares is not a fair value input to a fixed-for-fixed model, this provision violates indexation guidance. Therefore, the warrants are not indexed to the Company’s stock. The Alphia warrant liabilities will be remeasured at fair value each reporting period until provisions precluding equity classification lapse and the Company reassess the warrants classification. The total value of the consideration received in connection with the Alphia Term Loan Agreement was first allocated to warrants liabilities at fair value, with the remainder allocated to the Alphia Term Loan Agreement. Accordingly, the Company recorded a discount of $2.2 million on the Alphia Term Loan Agreement (see Note 8 – Debt for further discussion).

 

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The Alphia warrant liabilities are determined using a risk-neutral Monte Carlo simulation based approach, a Level 3 valuation. The significant inputs to the warrant liabilities are as follows:

 

 

   September 30, 2023 
  

First Tranche

Warrant

  

Second Tranche

Warrant

 
Exercise price  $0.26   $0.26 
Stock price  $0.21   $0.21 
Volatility   66.0%   66.0%
Time to maturity   5 years    5 years 
Risk-free rate   5.55%   4.63%
Dividend yield   %   %

 

The following table summarizes the Alphia warrant liability activity for three and nine months ended September 30, 2023:

 

 

Fair value of warrant liabilities as of March 31, 2023  $ 
Warrant liabilities incurred   2,208 
Loss (gain) in change of fair value of warrant liabilities    
Fair value of warrant liabilities as of June 30, 2023  $2,208 
Warrant liabilities incurred    
Loss (gain) in change of fair value of warrant liabilities   (1,339)
Fair value of warrant liabilities as of September 30, 2023  $869 

 

The change in fair value related to the Alphia warrant liabilities was $(1.3) million for three months and nine months ended September 30, 2023. There were no transfers to/from levels 1, 2 and 3 during the three and nine months ended September 30, 2023.

 

Note 12 – Share-based compensation

 

During the three months ended September 30, 2023 and September 30, 2022, the Company recognized $0.5 million and $0.6 million, respectively, of share-based compensation expense. During the nine months ended September 30, 2023 and September 30, 2022, the Company recognized $1.6 million and $2.5 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 Amended 2019 Plan authorized the issuance of 1,083,334 shares of common stock which was increased to 1,500,000 after the Halo acquisition; the Amended 2019 Plan also provides for an annual increase on the first day of each calendar year beginning on January 1, 2020 and ending on and including January 1, 2029, equal to the lesser of (A) 10% of the shares of common stock outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares of common stock as determined by the Board; provided, however, not more than 9,000,000 shares of common stock shall be authorized for issuance. The authorized shares for issuance was increased to