bttr-20230630

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 June 30, 2023


☐			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: 30,577,148 shares of $0.001 par value common stock outstanding as of August 18, 2023.

Table of Contents

Better Choice Company Inc.

TABLE OF CONTENTS


	Part I
1.	Unaudited Financial Statements	4
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
3.	Quantitative and Qualitative Disclosures About Market Risk	28
4.	Controls and Procedures	29
	Part II
1.	Legal Proceedings	29
1A.	Risk Factors	29
2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
3.	Defaults Upon Senior Securities	30
4.	Mine Safety Disclosures	30
5.	Other Information	30
6.	Exhibits	30
	Signatures	33

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;

•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.

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net sales	$	10,536	$	16,515	$	19,773	$	33,529
Cost of goods sold	6,948		11,788		12,944		24,095
Gross profit	3,588		4,727		6,829		9,434
Operating expenses:
Selling, general and administrative	6,173		8,988		12,669		17,656


Total operating expenses	6,173		8,988		12,669		17,656
Loss from operations	(2,585)		(4,261)		(5,840)		(8,222)
Other expenses:
Interest expense, net	(379)		(106)		(608)		(182)



Total other expense, net	(379)		(106)		(608)		(182)
Net loss before income taxes	(2,964)		(4,367)		(6,448)		(8,404)
Income tax expense	—		—		—		3


Net loss available to common stockholders	$	(2,964)	$	(4,367)	$	(6,448)	$	(8,407)
Weighted average number of shares outstanding, basic	30,551,653		29,364,712		30,516,666		29,327,316
Weighted average number of shares outstanding, diluted	30,551,653		29,364,712		30,516,666		29,327,316
Net loss per share available to common stockholders, basic	$	(0.10)	$	(0.15)	$	(0.21)	$	(0.29)
Net loss per share available to common stockholders, diluted	$	(0.10)	$	(0.15)	$	(0.21)	$	(0.29)

See accompanying notes to the unaudited condensed consolidated financial statements.

Better Choice Company Inc.

Unaudited Condensed Consolidated Balance Sheets

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


	June 30, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	3,607	$	3,173
Restricted cash	—		6,300
Accounts receivable, net	5,781		6,744
Inventories, net	8,557		10,257
Prepaid expenses and other current assets	1,820		1,051
Total Current Assets	19,765		27,525
Fixed assets, net	292		375
Right-of-use assets, operating leases	147		173
Intangible assets, net	9,296		10,059

Other assets	904		544
Total Assets	$	30,404	$	38,676
Liabilities & Stockholders’ Equity
Current Liabilities
Accounts payable	$	4,193	$	2,932
Accrued and other liabilities	2,818		2,596
Line of credit	2,260		—
Warrants liabilities	2,208		—

Operating lease liability	54		52
Total Current Liabilities	11,533		5,580
Non-current Liabilities
Line of credit, net	—		11,444
Term loan, net	2,550		—

Operating lease liability	96		124
Total Non-current Liabilities	2,646		11,568
Total Liabilities	14,179		17,148
Stockholders’ Equity
Common Stock, $0.001 par value, 200,000,000 shares authorized, 30,577,148 & 29,430,267 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	30		29

Additional paid-in capital	321,215		320,071
Accumulated deficit	(305,020)		(298,572)
Total Stockholders’ Equity	16,225		21,528
Total Liabilities and Stockholders’ Equity	$	30,404	$	38,676

See accompanying notes to the unaudited condensed consolidated financial statements.

Better Choice Company Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Dollars in thousands, except shares)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
















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


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
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

See accompanying notes to the unaudited condensed consolidated financial statements.

Better Choice Company Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)


	Six Months Ended
	June 30,
	2023		2022
Cash Flow from Operating Activities:
Net loss available to common stockholders	$	(6,448)	$	(8,407)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	845		839
Amortization of debt issuance costs and discounts	150		26
Share-based compensation	1,145		1,892
Inventory reserve	(547)		245
Loss on disposal of assets	11		—
Other	5		10
Changes in operating assets and liabilities:
Accounts receivable	958		(1,905)
Inventories	2,247		(5,489)
Prepaid expenses and other assets	(1,129)		6
Accounts payable and accrued liabilities	1,838		(227)
Other	(312)		12
Cash Used in Operating Activities	$	(1,237)	$	(12,998)
Cash Flow from Investing Activities:
Capital expenditures	$	(10)	$	(189)
Cash Used in Investing Activities	$	(10)	$	(189)
Cash Flow from Financing Activities:
Payments on short-term financing arrangement	$	(41)	$	—
Proceeds from revolving lines of credit	4,164		5,000
Payments on revolving line of credit	(13,500)		(2,500)
Proceeds from term loan	2,792		—
Payments on term loans	—		(425)
Proceeds from warrants liabilities	2,208		—
Debt issuance costs	(242)		(7)
Cash (Used in) Provided by Financing Activities	$	(4,619)	$	2,068
Net decrease in cash and cash equivalents and restricted cash	$	(5,866)	$	(11,119)
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	$	3,607	$	17,823

Supplemental cash flow information


Cash paid during the quarter for:

Interest	$	489	$	156

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 six months ended June 30, 2023 and 2022, the financial position as of June 30, 2023 and December 31, 2022 and the cash flows for the six months ended June 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.

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

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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 June 30, 2023 and December 31, 2022, the Company had less than $0.1 million and $8.0 million, respectively, in money market funds all of which were held in cash.

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 June 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 $2.3 million and $2.9 million for the three months ended June 30, 2023 and 2022, respectively. Advertising costs were $3.7 million and $5.2 million for the six months ended June 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 six months ended June 30, 2023.

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

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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 June 30,								Six Months Ended June 30,
	2023				2022				2023				2022
E-commerce (1)	$	3,256	31	%	$	3,681	22	%	$	7,151	37	%	$	7,505	22	%
Brick & Mortar (3)	1,710		16	%	3,956		24	%	3,419		17	%	8,290		25	%
DTC	1,696		16	%	1,762		11	%	3,018		15	%	3,695		11	%
International (2)	3,874		37	%	7,116		43	%	6,185		31	%	14,039		42	%
Net Sales	$	10,536	100	%	$	16,515	100	%	$	19,773	100	%	$	33,529	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 six months ended June 30, 2023, and 2022, respectively. These customers had $3.1 million and $6.9 million of net sales for the three and six months ended June 30, 2023 and $3.6 million and $7.3 million of net sales during the three and six months ended June 30, 2022, respectively.

(2)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 six months ended June 30, 2023 represented $2.9 million and $5.0 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 six months ended June 30, 2022 represented $5.5 million and $11.3 million of net sales, respectively.

(3)The Company's Brick & Mortar channel includes $2.2 million and $4.0 million of net sales from one customer that amounted to greater than 10% of the Company's total net sales for the three and six months ended June 30, 2022. None of the Company's Brick & Mortar customers represented greater than 10% of net sales during the three and six months ended June 30, 2023.

Note 3 - Inventories

Inventories are summarized as follows (in thousands):


	June 30, 2023		December 31, 2022
Food, treats and supplements	$	8,472	$	10,212
Inventory packaging and supplies	1,192		1,699

Total Inventories	9,664		11,911
Inventory reserve	(1,107)		(1,654)
Inventories, net	$	8,557	$	10,257

Note 4 – Prepaid expenses and other current assets

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


	June 30, 2023		December 31, 2022

Total Prepaid expenses and other current assets	$	1,820	$	1,051

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Note 5 - Fixed assets

Fixed assets consist of the following (in thousands):


	Estimated Useful Life	June 30, 2023		December 31, 2022
Equipment	2 - 5 years	$	10	$	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		527		544
Accumulated depreciation		(235)		(169)
Fixed assets, net		$	292	$	375

Depreciation expense was $0.04 million and $0.05 million for the three months ended June 30, 2023 and June 30, 2022, respectively. Depreciation expense was $0.08 million and $0.08 million for the six months ended June 30, 2023 and June 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:


				June 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	$	(3,628)	$	3,562	$	(3,115)	$	4,075
Trade name	15	7,500		(1,766)		5,734		(1,516)		5,984
Total intangible assets		$	14,690	$	(5,394)	$	9,296	$	(4,631)	$	10,059

Amortization expense was $0.38 million and $0.76 million for the for the three and six months ended June 30, 2023 and June 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):


Remainder of 2023	$	764
2024	1,527
2025	1,527
2026	1,494
2027	500
Thereafter	3,484
	$	9,296

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 June 30, 2023.

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Note 7 – Accrued and other liabilities

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


	June 30, 2023		December 31, 2022
Accrued taxes	$	98	$	110
Accrued payroll and benefits	706		688
Accrued trade promotions and advertising	432		567
Accrued interest	—		84
Accrued commissions	—		385
Deferred revenue	20		336
Short-term financing	—		165
Other	1,562		261
Total accrued and other liabilities	$	2,818	$	2,596

Note 8 – Debt

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


	June 30, 2023				December 31, 2022
	Amount		Rate	Maturity date	Amount		Rate	Maturity date
Term loan, net	$	2,550	(2)	6/21/2026
Line of credit, net	$	2,260	(3)	6/21/2025	$	11,444	(1)	10/31/2024








Less current portion	2,260				—
Total long-term debt	$	2,550			$	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.

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.

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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 June 30, 2023.

As of June 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 approximate 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, maxing out at the limit of $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 June 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.

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 June 2023, the Company sold receivables having an aggregate face value of $3 million in exchange for cash proceeds of $2.3 million. As of June 30, 2023, the balance outstanding on the Wintrust Receivables Credit Facility amounted to $2.3 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.

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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 June 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 June 30, 2023, our indebtedness on the Alphia Term Loan Facility amounted to $4.8 million net of debt issuance costs of $0.2 million. Debt issuance costs are amortized using the effective interest method.

Future Debt Maturities

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


Year ending December 31:
2024	$	—
2025	$	—
2026	$	2,792



Less: Accumulated Debt Issuance Costs	$	(242)
Total	$	2,550

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:


			June 30, 2023				December 31, 2022
	Fair Value Hierarchy		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Term loan	Level 3	(2)	$	2,550	$	2,550	$	—	$	—
Line of credit	Level 2	(1)	$	2,260	$	2,260	$	11,444	$	11,444
Warrants liabilities	Level 3	(2)	$	2,208	$	2,208	$	—	$	—

(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 it's commercial best efforts to purchase minimum quantities in the ordinary course of business. There are no other purchase obligations as of June 30, 2023 or December 31, 2022.

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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.

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 June 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

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

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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).

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:


	June 30, 2023
	First Tranche Warrant			Second Tranche Warrant
Exercise price	$	0.26		$	0.26
Stock price	$	0.21		$	0.21
Volatility	67.0		%	67.0		%
Time to maturity	5 years			5 years
Risk-free rate	3.95		%	3.95		%
Dividend yield	—		%	—		%

The following table summarizes the Alphia warrant liability activity for three and six months ended June 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

There was no change in fair value related to the Alphia warrant liabilities for three months and six months ended June 30, 2023 as the warrants were valued at June 21, 2023, which approximated the fair value as of June 30, 2023. There were no transfers to/from levels 1, 2 and three during the three and six months ended June 30, 2023.

Note 12 – Share-based compensation

During the three months ended June 30, 2023 and June 30, 2022, the Company recognized $0.3 million and $0.8 million, respectively, of share-based compensation expense. During the six months ended June 30, 2023 and June 30, 2022, the Company recognized $1.7 million and $1.9 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 2,700,000 on January 1, 2021, increased to 5,614,637 on January 1, 2022 and again increased to 8,557,663 on January 1, 2023.

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Stock options

The following table provides detail of the options granted and outstanding (dollars in thousands):


	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value







Options outstanding as of December 31, 2022	3,071,187	$	5.39	7.2	$	—
Granted	—	—
Forfeited/Expired	(178,656)	4.05
Options outstanding as of March 31, 2023	2,892,531	$	5.47	6.3	$	—
Granted	—
Forfeited/Expired	(280,689)	4.69
Options outstanding as of June 30, 2023	2,611,842	$	5.51	6.2	$	—

Options exercisable as of June 30, 2023	2,233,624	$	5.69	5.8	$	—

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).

Restricted Stock Awards

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

During the fourth quarter of 2022, the Company granted 65,555 shares of restricted common stock to a member of its board of directors for service as interim CEO. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of less than $0.1 million upon issuance.

In January 2023, the Company granted 892,860 shares of restricted common stock to members of its board of directors under the Amended 2019 Plan as compensation for annual board service. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of $0.5 million upon issuance.

In January 2023, the Company granted 200,000 shares of restricted common stock to certain executives and employees under the Amended 2019 Plan as performance bonus compensation totaling $0.1 million. These restricted stock awards were issued on the grant date with a one year cliff vesting condition and the Company will recognize the expense over the vesting period.

During the first quarter of 2023, the Company granted 18,021 shares of restricted common stock to a member of its board of directors for service as interim CEO. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of less than $0.1 million upon issuance.

Note 13 – Employee benefit plans

The Company has a qualified defined contribution 401(k) plan, which covers substantially all of its employees. Participants are entitled to make pre-tax and/or Roth post-tax contributions up to the annual maximums established by the IRS. The Company matches participant contributions pursuant to the terms of the plan, which contributions are limited to a percentage of the participant’s eligible compensation. The Company made contributions related to the plan and recognized expense of less than $0.1 million during the three and six months ended June 30, 2023 and 2022, respectively.

Note 14 – Related party transactions

Director Fees

The Company pays quarterly board of director fees. As of June 30, 2023 and December 31, 2022, $0.1 million of these director fees were in accounts payable on the Condensed Consolidated Balance Sheets, respectively.

Marketing Support Services

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On March 7, 2023, the Company entered into an agreement with Believeco to provide marketing support services for an interim period. A member of the Company's board of directors is a partner at Believeco. As of June 30, 2023 marketing expense related to Beleiveco totaled $0.19 million of which $0.15 million are included within Accounts Payable.

Note 15 – Income taxes

For the three and six months ended June 30, 2023 and June 30, 2022, the Company recorded income tax provision of less than $0.1 million. For the three and six months ended June 30, 2023 and 2022, the Company's effective tax rate was less than 1%, respectively. 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 three and six months ended June 30, 2023 and June 30, 2022.

Note 16 – Concentrations

Major suppliers

The Company sourced approximately 83% of its inventory purchases from three vendors for the six months ended June 30, 2023. The Company sourced approximately 73% of its inventory purchases from three vendors for the six months ended June 30, 2022.

Major customers

Accounts receivable from three customers represented 90% of accounts receivable as of June 30, 2023. Accounts receivable from three customers represented 89% of accounts receivable as of December 31, 2022. Three customers represented 60% of gross sales for the six months ended June 30, 2023. Four customers represented 68% of gross sales for the six months ended June 30, 2022.

Credit risk

As of June 30, 2023 and December 31, 2022, the Company’s cash and cash equivalents were deposited in accounts at several 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 17 – Loss per share

The Company presents loss per share on a basic and diluted basis. Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding ("WASO") during the period. For the three and six months ended June 30, 2023 and 2022, the Company’s basic and diluted net loss per share attributable to common stockholders are the same as the Company generated a net loss and common stock equivalents are excluded from diluted net loss per share as they have an anti-dilutive impact.

For the three and six months ended June 30, 2023, potentially dilutive securities not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows: 9,433,584 of stock equivalent warrants; 14,768,125 of warrant liabilities (6,545,338.45 First Tranche Warrant and 8,222,787 Second Tranche Warrant); 2,611,842 of stock equivalent employee stock options and 6,412 of stock equivalent other options. For the three months ended June 30, 2022, potentially dilutive securities not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows: 9,433,584 of stock equivalent warrants; 14,768,125 of warrant liabilities; 3,200,271 of stock equivalent employee stock options and 6,412 of stock equivalent other options. The warrants classified as liabilities represent a participating security and thus should be included in the calculation of earnings per share (EPS) using the two-class method. Because these warrants do not have a contractual obligation to share in losses, these warrants will be included in only the diluted EPS calculation assuming the Company has undistributed losses for the period. To determine if the warrants are dilutive, the First Tranche will be calculated using the treasury stock method and adjusting the numerator for changes in fair value and included in diluted EPS, if considered dilutive. The Second Tranche Warrant is contingently exercisable and should not be included in the denominator until the contingency (approval of the Company’s stockholders) is resolved.

The following table sets forth basic and diluted net (loss) earnings per share attributable to common stockholders for the three months ended June 30, 2023 and 2022 (in thousands, except share and per share amounts):

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	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Numerator:
Net loss	$	(2,964)	$	(4,367)	$	(6,448)	$	(8,407)




Adjusted net loss available to common stockholders	$	(2,964)	$	(4,367)	$	(6,448)	$	(8,407)
Denominator:
Basic WASO	30,551,653		29,364,712		30,516,666		29,327,316
Dilutive common stock equivalents	—		—		—		—
Diluted WASO	30,551,653		29,364,712		30,516,666		29,327,316

Net loss per share attributable to common stockholders, basic	$	(0.10)	$	(0.15)	$	(0.21)	$	(0.29)
Net loss per share attributable to common stockholders, diluted	$	(0.10)	$	(0.15)	$	(0.21)	$	(0.29)

Note 18 – Subsequent events

In July 2023, the Company became aware of a cybersecurity incident via email compromise. Management is investigating the matter internally and has engaged a third-party forensics expert to facilitate a full investigation to determine the exact nature, timing, and magnitude of the breach. The investigation is still ongoing as of the date of this report. The impact to the financial statements as of and for the three and six months ended June 30, 2023 was determined to be immaterial.

In August 2023, the Company borrowed an additional $1 million from the Wintrust Receivables Credit Facility.

In August 2023, the Company granted 1,500,000 shares of restricted common stock to members of its board of directors for the Alphia Term Loan Facility. These restricted stock awards were immediately vested and, as such, the Company recorded share-based compensation expense of $0.4 million upon issuance.

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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. A description of material factors known to us that may cause our results to vary or may cause management to deviate from its current plans and expectations, is set forth under “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.” The following discussion should also be read in conjunction with our audited consolidated financial statements including the notes thereto appearing elsewhere in this filing. 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; Direct to Consumer (“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 $58 billion, or 42% of the total U.S. pet care market in 2022. According to the American Pet Product Association, between 66% 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. This surge in pet acquisition has led to an increase in the forecasted growth of the pet care industry over the next ten years. The U.S. pet food industry is expected to grow at a 4.96% CAGR between 2023 and 2028 (Statistica).

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.

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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 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 Chief Executive Officer ("CEO"), effective September 14, 2022. Also on September 13, 2022, we announced that Lionel F. Conacher was appointed as Interim CEO, effective September 14, 2022.

On March 2, 2023, we announced that Robert Sauermann was resigning from his role as Chief Operating Officer ("COO"), effective March 17, 2023. On March 21, 2023, we announced that Sharla Cook was resigning from her role as Chief Financial Officer ("CFO"), effective April 3, 2023. Also on March 21, 2023, we announced that Carolina Martinez was appointed as Interim CFO, effective April 3, 2023.

On May 11, 2023, we announced that Lionel F. Conacher was resigning from his role as Interim CEO of the Company, effective May 22, 2023. Mr. Conacher will still continue to serve on the Board as a Director. On May 11, 2023, we announced that Kent Cunningham was appointed as Chief Executive Officer of the Company, effective May 22, 2023. On August 2, 2023, we announced that Carolina Martinez was appointed as Chief Financial Officer, Treasurer and Secretary of the Company, effective August 7, 2023.

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Results of Operations for the three and six months ended June 30, 2023 and 2022

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


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2023		2022		$		%		2023		2022		$		%
Net sales	$	10,536	$	16,515	$	(5,979)	(36)	%	$	19,773	$	33,529	$	(13,756)	(41)	%
Cost of goods sold	6,948		11,788		(4,840)		(41)	%	12,944		24,095		(11,151)		(46)	%
Gross profit	3,588		4,727		(1,139)		(24)	%	6,829		9,434		(2,605)		(28)	%
Operating expenses:
Selling, general and administrative	6,173		8,988		(2,815)		(31)	%	12,669		17,656		(4,987)		(28)	%
Total operating expenses	6,173		8,988		(2,815)		(31)	%	12,669		17,656		(4,987)		(28)	%
Loss from operations	(2,585)		(4,261)		1,676		39	%	(5,840)		(8,222)		2,382		29	%
Other expenses:
Interest expense, net	(379)		(106)		(273)		(258)	%	(608)		(182)		(426)		234	%
Total other expense, net	(379)		(106)		(273)		(258)	%	(608)		(182)		(426)		234	%
Net loss before income taxes	(2,964)		(4,367)		1,403		32	%	(6,448)		(8,404)		1,956		23	%


Net loss available to common stockholders	$	(2,964)	$	(4,367)	$	1,403	32	%	$	(6,448)	$	(8,407)	$	1,959	23	%

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.

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


	Three Months Ended June 30,								Six Months Ended June 30,
	2023				2022				2023				2022
E-commerce (1)	$	3,256	31	%	$	3,681	22	%	$	7,151	37	%	$	7,505	22	%
Brick & Mortar (3)	1,710		16	%	3,956		24	%	3,419		17	%	8,290		25	%
DTC	1,696		16	%	1,762		11	%	3,018		15	%	3,695		11	%
International (2)	3,874		37	%	7,116		43	%	6,185		31	%	14,039		42	%
Net Sales	$	10,536	100	%	$	16,515	100	%	$	19,773	100	%	$	33,529	100	%

Net sales decreased $(6.0) million, or (36)%, to $10.5 million for the three months ended June 30, 2023 compared to $16.5 million for the three months ended June 30, 2022. Net sales decreased $(13.8) million, or (41)%, to $19.8 million for the six months ended June 30, 2023 compared to $33.5 million for the six months ended June 30, 2022. The decrease is primarily attributable to supply chain constraints and the downstream impact it has on our business. We experienced significant production delays from our dry kibble co-manufacturing partner stemming from short-term shortages in raw materials, labor constraints, and capacity constraints. The inconsistency in supply created material out-of-stocks which resulted in less-than-optimal fill rates of our Halo Elevate® product line, sold primarily in our Brick & Mortar channel. Since closing the Alphia Term Loan, we have been transitioning our dry kibble manufacturer to Alphia which, albeit a very positive change needed for stabilizing supply and for long-term sustainability, has had a short-term impact to our International channel as it created registration delays in certain foreign markets, in turn delaying ordering and product launches.

Key factors that we expect to affect our future sales growth include new product innovation and launches, our expansion strategy in each of the sales channels and our key supplier relationships.

Gross profit

Cost of goods sold consists primarily of the cost of product obtained from co-manufacturers, packaging materials, freight costs for shipping inventory to the warehouse, as well as third-party warehouse and order fulfillment costs. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on this analysis, we record inventories at the lower of cost or net realizable value, with any reduction in value expensed as cost of goods sold.

Our products are manufactured to our specifications by our co-manufacturers using raw materials. We work with our co-manufacturers to secure a supply of raw materials that meet our specifications. In addition to procuring raw materials that meet our formulation requirements, our co-manufacturers manufacture, test and package our products. We design our packaging for our co-manufacturers and the packaging is shipped directly to them.

Our gross profit has been and will continue to be affected by a variety of factors, primarily product sales mix, volumes sold, discounts offered to newly acquired and recurring customers, the cost of our manufactured products, and the cost of freight from the manufacturer to the warehouse.

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During the three months ended June 30, 2023, gross profit decreased $(1.1) million, or 24%, to $3.6 million compared to $4.7 million during the three months ended June 30, 2022. During the six months ended June 30, 2023, gross profit decreased $(2.6) million, or (28)%, to $6.8 million compared to $9.4 million during the six months ended June 30, 2022.

Gross margin increased 6% to 34% for the three months ended June 30, 2023 compared to 29% for the three months ended June 30, 2022. Gross margin increased 7% to 35% for the six months ended June 30, 2023 compared to 28% for the six months ended June 30, 2022. The increase in gross margin is primarily attributable to a decrease in cost of goods sold (“COGS”) at a rate higher than the rate at which revenue decreased. For the six months ended June 30, 2023, the average price per pound cost $1.87, versus $1.92 for the six months ended June 30, 2022. Due to the increased production run sizes for the International channel, we were able to achieve minimum order quantity price breaks which included orders over 100,000 pounds receiving approximately a 6% price break on COGS. We also implemented a 7% price increase across our Halo Holistic™ and Halo masterbrand wet product lines in August 2022, and a 12.5% sales price increase on our Halo Elevate® products in the first half of 2023.

We continue to actively work with our co-manufacturing and freight partners to generate future cost savings and realize improved gross margins in future periods. We could see continued margin variability due to the current economic environment and pricing pressures due to inflationary costs for both transportation and raw materials. We will continue to refine and optimize our overall pricing strategy as we evaluate the future impact of inflation and align ourselves with the market.

Operating expenses

Our Selling, general and administrative ("SG&A") expenses consist of the following:

•Sales and marketing costs, for specific customer promotional programs, paid media, content creation expenses and our DTC selling platform. Marketing costs are geared towards customer acquisition and retention and building brand awareness. During the three months ended June 30, 2023, sales and marketing costs decreased approximately $(1.2) million or (35)%, to $2.3 million from $3.6 million during the three months ended June 30, 2022. During the six months ended June 30, 2023, sales and marketing costs decreased approximately $(2) million or (36)%, to $4.2 million from $6.5 million during the six months ended June 30, 2022. The decrease was driven primarily by lower marketing and advertising agency fees related to building and launching our new sales strategy as well as increased marketing spend in our International sales channel during 2022.

•Employee compensation and benefits decreased approximately $(0.6) million or (26)% during the three months ended June 30, 2023 to $1.6 million from $2.2 million during the three months ended June 30, 2022. Employee compensation and benefits decreased approximately $(1.0) million or (23)% during the six months ended June 30, 2023 to $3.3 million from $4.2 million during the six months ended June 30, 2022. The decrease was primarily related to a reduction in employee headcount, partially offset by higher severance costs during the first half of 2022.

•Share-based compensation includes expenses related to equity awards issued to employees and non-employee directors. During the three months ended June 30, 2023, Share-based compensation decreased $(0.5) million or (65)% to $0.3 million compared to $0.8 million for the three months ended June 30, 2022. During the six months ended June 30, 2023, Share-based compensation decreased by $(0.7) million, or (39)%, to $1.1 million, as compared to share-based compensation of $1.9 million during the six months ended June 30, 2022. The decrease is driven by reduction of senior management headcount resulting in cancellations of options during 2023, partially offset by common stock issued for board service and accelerated vesting of a certain stock option grant during 2022, interim CEO service compensation and additional option grants.

•Freight, which is primarily related to the shipping of DTC orders to customers, decreased $(0.1) million or (32)% during the three months ended June 30, 2023 to $0.3 million from $0.5 million during the three months ended June 30, 2022. Freight decreased $(0.2) million or (27)% during the six months ended June 30, 2023 to $0.7 million from $0.9 million during the six months ended June 30, 2022. Freight costs are generally decreasing due to lower DTC sales as described above.

•Non-cash charges including depreciation, amortization, disposal or sale of assets and bad debt expense decreased slightly by less than $(0.01) million or (3)% to $0.4 million during the three months ended June 30, 2023 from $0.4 million during the three months ended June 30, 2022. Non-cash charges remained consistent at $0.9 million during the six months ended June 30, 2023 and June 30, 2022. The decrease was driven by disposals of certain assets during 2023, offset by additional capital expenditures throughout 2022.

•Other general and administrative costs for various general corporate expenses, including professional services, information technology, insurance, travel, costs related to merchant credit card fees, product development costs, rent, and certain tax costs. During the three months ended June 30, 2023, other general and administrative costs decreased $(0.3) million, or (22)% to $1.2 million compared to $1.5 million during the three months ended June 30, 2022. During the six

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months ended June 30, 2023, other general and administrative costs decreased $(0.7) million, or (22)% to $2.6 million compared to $3.3 million during the six months ended June 30, 2022. The decrease was driven by commission fees related to sales in our International channel, and lower professional fees related to investor relations.

Interest expense, net

During the three months ended June 30, 2023, interest expense increased by $0.3 million, or 258% to $0.4 million from $0.1 million for the three months ended June 30, 2022. During the six months ended June 30, 2023, interest expense increased by $0.4 million, or 234% to $0.6 million from $0.2 million for the six months ended June 30, 2022. Interest expense for the three and six months ended June 30, 2023 is comprised of interest on our Wintrust Credit Facility and the amortization of debt issuance costs which was refinanced during 2022. The increase in interest expense for the three and six months ended June 30, 2023 is related to the acceleration of debt issuance costs charged to interest expense due to the payoff of the Wintrust credit facility.

Income taxes

Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for any allowable credits, deductions and uncertain tax positions as they arise. During the three and six months ended June 30, 2023 and June 30, 2022, we recorded income tax benefit of less than $0.1 million, which relates to indefinite-lived assets. The effective tax rate for the three and six months ended June 30, 2023 and 2022 was less than 1%, respectively, which differs from the U.S. Federal statutory rate of 21% primarily because our losses have been fully offset by a valuation allowance due to uncertainty of realizing the tax benefit of NOLs.

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Liquidity and capital resources

Historically, we have financed our operations primarily through the sales of shares of our common stock, warrants, preferred stock, and loans. In connection with our IPO, we issued and sold 8,000,000 shares of common stock at a price of $5.00 per share. On July 1, 2021 we received total net proceeds of approximately $36.1 million from the IPO, after deducting underwriting discounts and commissions of $2.8 million, and offering costs of approximately $1.1 million. On June 30, 2023 and December 31, 2022, we had cash and cash equivalents and restricted cash of $3.6 million and $9.5 million, respectively.

We are subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of our products, the successful protection of our proprietary technologies, ability to grow into new markets, and compliance with government regulations. As of June 30, 2023, we have not experienced a significant adverse impact to our business, financial condition or cash flows resulting from the COVID-19 pandemic, geopolitical actions or threat of cyber-attacks. However, we have seen adverse impacts to our gross margin from time to time due to inflationary pressures in the current economic environment. Uncertainties regarding the continued economic impact of inflationary pressures, the COVID-19 pandemic, geopolitical actions and threat of cyber-attacks are likely to result in sustained market turmoil, which could negatively impact our business, financial condition, and cash flows in the future.

We have historically incurred losses and expect to continue to generate operating losses and consume cash resources in the near term. These conditions raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the date these interim condensed consolidated financial statements are issued, meaning that we may be unable to generate sufficient operating cash flows to pay our short-term obligations. We have implemented and continue to implement plans to achieve operating profitability, including various margin improvement initiatives, the consolidation of and introduction of new co-manufacturers, the optimization of our pricing strategy and ingredient profiles, and new product innovation.

Our ability to raise additional capital may be adversely impacted by the potential worsening of global economic conditions, including inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and geopolitical tensions. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all. If we are unable to raise the necessary funds when needed or achieve planned cost savings, or other strategic objectives are not achieved, we may not be able to continue our operations, or we could be required to modify our operations that could slow future growth.

A summary of our cash flows is as follows (in thousands):


	Six Months Ended June 30,
	2023		2022
Cash flows (used in) provided by:
Operating activities	$	(1,237)	$	(12,998)
Investing activities	(10)		(189)
Financing activities	(4,619)		2,068
Net decrease in cash and cash equivalents	$	(5,866)	$	(11,119)

Cash flows from operating activities

Cash used in operating activities decreased $11.8 million, or 90%, during the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease in cash used in operating activities was primarily driven by significant fluctuations in our working capital, including a comparative decrease in our inventory balance of $7.7 million as we built inventory during 2022 to support the Halo Elevate® launch and the rebranding of TruDog and Halo Holistic™. Additionally, a comparative decrease in accounts receivable balances of $2.9 million due to timing of sales and collections and a comparative increase in accounts payable and accrued liabilities of $2.1 million.

Cash flows from investing activities

Cash used in investing activities was less than $0.1 million during the six months ended June 30, 2023 and $0.2 million during the six months ended June 30, 2022. The cash used in investing activities is related to capital expenditures.

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Cash flows from financing activities

Cash used in financing activities was $(4.6) million, during the six months ended June 30, 2023 and cash provided by financing activities was $2.1 million during the six months ended June 30, 2022. The cash used in financing activities for the six months ended June 30, 2023 was related to payment of the Wintrust revolving line of credit of $(13.5) million offset by proceeds from the Wintrust revolving line of credit of $1.9 million, $2.3 million from the Wintrust receivables facility and $2.8 million from the Alphia facility. The cash provided by financing activities for the six months ended June 30, 2022 was related to net proceeds from the revolving lines of credit of $2.5 million, $2.8 million from the Alphia facility partially offset by payments on the term loan of (0.4) million.

Wintrust Credit Facility

On January 6, 2021, Halo entered into a credit facility with Old Plank Trail Community Bank, N.A., an affiliate of 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. The Wintrust Credit Facility is secured by a general guaranty and security interest on the assets, including the intellectual property of us and our subsidiaries. We have also pledged all of the capital stock of Halo held by us as additional collateral.

On March 25, 2022, we entered into the second amendment to the Wintrust Credit Facility, which removed the financial covenant to maintain a fixed charge coverage ratio and included a new financial covenant to maintain a minimum liquidity, as well updated the rate at which the Wintrust Credit Facility bore interest.

On October 24, 2022, we entered into the third amendment to the Wintrust Credit Facility which provided for an increase to the revolving line of credit, set the amount of Halo's obligation to pledge a deposit account with Wintrust to a fixed amount throughout the remainder of the term and provided updates to the interest rate, maturity date and minimum liquidity amount associated with the financial covenant.

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 June 30, 2023.

As of June 30, 2023, there was no outstanding balance related to the Wintrust Credit Facility.

Wintrust Receivables Credit Facility

On June 21, 2023, the Company entered into an account purchase agreement with Wintrust Receivables Finance, a division of Wintrust Bank N.A. (“Wintrust”) pursuant to which Wintrust will purchase, at its discretion, up to eligible customer invoices and advance up to 75% of the face amount of all purchased invoices up to $4,750,000. Each advance under the AP Agreement will bear interest at a minimum rate of 5.5%. 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 secured by a general security interest in the assets of the Company. The Wintrust Receivables Credit Facility is guaranteed secured by the Company pursuant to that certain Unlimited Continuing Guaranty Agreement dated as of June 21, 2023.

As of June 30, 2023, the balance outstanding on the Wintrust Receivables Credit Facility amounted to $2.3 million.

Alphia Term Loan

On June 21, 2023, the Company entered into a term loan credit agreement with Alphia Inc., a leading 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 $5,000,000 (the “Term Loan”). The Term Loan is also evidenced by that certain Term Note dated as of June 21, 2023 issued by the Company to Alphia (the “Term Note”). 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.

The Term Loan will bear interest at a 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 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.

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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”).

In conjunction with the Term Loan, 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.

As of June 30, 2023, our indebtedness on the Alphia Term Loan Facility amounted to $2.6 million net of debt issuance costs of $0.2 million. For details about the terms, covenants and restrictions contained in the Alphia Term Loan Facility, see "Note 8 - Debt" to our interim condensed consolidated financial statements included in this Quarterly Report.

Contractual Commitments and Obligations

We are contractually obligated to make future cash payments for various items, including debt arrangements, certain purchase obligations, as well as the lease arrangement for our office. See "Note 8 - Debt" to our interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information about our debt obligations. Our purchase obligations include certain ongoing marketing projects, software subscriptions as well as in-transit or in-production purchase orders with our suppliers, for which amounts vary depending on the purchasing cycle. The majority of our software subscriptions are not under long-term contracts, and we do not have long-term contracts or commitments with any of our suppliers beyond active purchase orders. These purchase obligations were not material as of the date of this Quarterly Report on Form 10-Q.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgements that affect the reported amounts of assets, liabilities, net sales, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies described in our Annual Report for the year ended December 31, 2022 have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting estimates. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. There have been no material changes to our critical accounting estimates compared to the descriptions in our Annual Report for the year ended December 31, 2022.

Share-Based Compensation

Share-based compensation expense is measured based on the estimated fair value of awards granted to employees, directors, officers and consultants on the grant date. Forfeitures are accounted for as they occur, therefore there are no forfeiture related estimates required.

The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model, which requires the development of input assumptions, as described in "Note 12 - Share-based compensation". Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires the input of the subjective assumptions described in "Note 12 - Share-based compensation". The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our interim chief executive officer (our principal executive officer) and our interim chief financial officer (our principal financial officer) evaluated the effectiveness of our disclosure controls and procedures as of the quarter ended June 30, 2023. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2023, our disclosure controls and procedures were not effective due to the material weaknesses discussed below. Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.

In July 2023, the Company became aware of a cybersecurity incident via email compromise. Management is investigating the matter internally and has engaged a third-party forensics expert to facilitate a full investigation to determine the exact nature, timing, and magnitude of the breach. The investigation is still ongoing as of the date of this report. Management determined that although there was a control that was designed and implemented, it did not prevent the cybersecurity breach. Management has thus determined that there is a material weakness related to the failure to maintain controls that should have been operating effectively as of June 30, 2023.

Our disclosure controls and procedures were not effective as of June 30, 2023, due a material weakness in analyzing complex financial instruments, including the proper classification of warrants as liabilities and the related financial statement disclosures. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our condensed consolidated financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this report present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.

To address the material weakness associated with failure to maintain controls over the operating effectiveness of IT general controls, we have planned to (i) transition to a new outsourced managed IT service provider with an appropriate level of knowledge and technical experience to design and maintain IT general controls, (ii) establish policies and procedures for the design and operation of IT general controls, (iii) implement an IT general controls framework, and (iv) where necessary, we have identified, implemented, and documented IT general controls. We continue to evaluate the appropriate controls to design and maintain effective controls supporting financial systems relevant to our financial reporting processes. We continue to evaluate staffing requirements and technology improvement opportunities to further address and achieve remediation.

To address the material weakness in internal controls related to the accounting for complex financial instruments, we are in the process of implementing further controls over the review of complex financial instruments, which may include engaging outside advisors with specialist knowledge of GAAP and valuation.

Changes in Internal Control Over Financial Reporting

Other than the material weaknesses described above, there has not been any change in our internal controls over financial reporting identified in connection with the Evaluation that occurred during the quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, those controls.

PART II

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to litigation and other proceedings that arise in the ordinary course of our business. Subject to the inherent uncertainties of litigation and although no assurances are possible, we believe that there are no pending lawsuits or claims that, individually or in the aggregate, will have a material adverse effect on our business, financial condition or our yearly results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors described under the heading “Risk Factors” in our Annual Report filed on March 28, 2023. While we believe there have been no material changes from the risk factors previously disclosed, you should carefully consider, in addition to the other information set forth in this report, the risk factors discussed in our Annual Report that could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks facing our Company. In addition to risks and uncertainties inherent in forward-looking statements contained in this Quarterly Report, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following exhibits are filed herewith.

EXHIBIT INDEX


Exhibit	Exhibit Description	Form	File No.	Exhibit	Filing date
2.1	Agreement and Plan of Merger, dated February 28, 2019, by and among the Company, BBC Merger Sub, Inc. and Bona Vida, Inc.	8-K	333-161943	2.1	05/10/2019
2.2	First Amendment to Agreement and Plan of Merger, dated February 28, 2019, by and among the Company, BBC Merger Sub, Inc., and Bona Vida, Inc., dated May 3, 2019	8-K	333-161943	2.2	05/10/2019
2.3	Securities Exchange Agreement, dated February 2, 2019, by and among the Company, TruPet LLC and the members of TruPet LLC	8-K	333-161943	2.3	05/10/2019
2.4	First Amendment to Securities Exchange Agreement, dated February 2, 2019, by and among the Company, TruPet LLC and the members of TruPet LLC, dated May 6, 2019	8-K	333-161943	2.4	05/10/2019
2.5	Amended and Restated Stock Purchase Agreement, dated December 18, 2019, by and among the Company, Halo, Purely For Pets, Inc., Thriving Paws, LLC and HH-Halo LP	8-K	333-161943	2.1	12/26/2019
2.6	Agreement and Plan of Merger, dated July 28, 2022, by and among TruPet LLC and Halo, Purely for Pets, Inc.	10-Q	001-40477	2.6	08/11/2022
3.1	Certificate of Incorporation, dated January 1, 2019	10-Q	333-161943	3.1	04/15/2019
3.2	Certificate of Amendment to Certificate of Incorporation, dated February 1, 2019	10-Q	333-161943	3.2	04/15/2019
3.3	Certificate of Amendment to Certificate of Incorporation, dated March 13, 2019	8-K	333-161943	3.1	03/20/2019
3.4	Certificate of Amendment to Certificate of Incorporation, dated April 18, 2019	10-KT	333-161943	3.5	07/25/2019
3.5	Certificate of Amendment to Certificate of Incorporation, dated July 30, 2020	8-K	333-161943	99.1	07/30/2020
3.6	Certificate of Merger of Sport Endurance, Inc. with and into the Company	10-Q	333-161943	3.4	04/15/2019
3.7	Bylaws	10-Q	333-161943	3.5	04/15/2019
3.8	Certificate of Designation for Series F Convertible Preferred Stock	8-K	333-161943	3.1	10/02/2020
3.9	Certificate of Cancellation of Series F Preferred Stock of Better Choice	8-K	001-40477	3.10	08/11/2022
3.10	Certificate of Merger of TruPet LLC with and into Halo, Purely for Pets, Inc.	10-Q	001-40477	3.10	08/11/2022
4.1	Form of Warrant in connection with the November 2019 private placement	8-K	333-161943	4.2	11/15/2019
4.2	Form of Subscription Agreement, dated December 19, 2019, by and among the Company and the Halo Sellers	10-Q	333-161943	10.6	01/31/2020
4.3	Form of Warrant, dated December 19, 2019, by and among the Company and the Halo Sellers	10-Q	333-161943	4.8	01/31/2020
4.4	Form of Warrant, dated December 19, 2019, by and among the Company and the Shareholder Personal Guarantors	10-Q	333-161943	4.10	01/31/2020
4.5	Form of Subscription Agreement dated April 25, 2019 in connection with the May 2019 private placement	8-K	333-161943	10.1	04/30/2019

Table of Contents


Exhibit	Exhibit Description	Form	File No.	Exhibit	Filing date
4.6	Form of Subscription Agreement in connection with the November 2019 private placement	8-K	333-161943	10.1	11/15/2019
4.7†	Better Choice Company Inc. Amended and Restated 2019 Incentive Award Plan	10-K	333-161943	10.19	05/04/2020
4.8†	Form of 2019 Incentive Award Plan Stock Option Agreement	S-1	333-234349	10.7	10/28/2019
4.9	Form of Common Stock Purchase Warrant in connection with the June 2020 private placement.	10-Q	333-161943	4.11	06/25/2020
4.10	Form of Subscription Agreement in connection with the June 2020 private placement.	10-Q	333-161943	4.13	06/25/2020
4.11	Form of July 2020 Warrants	8-K	333-161943	10.5	07/21/2020
4.12	Form of Warrant in connection with the October 2020 Series F Private Placement	8-K	333-161943	4.1	10/02/2020
4.13	Form of Securities Purchase Agreement in connection with the October 2020 Series F Private Placement	8-K	333-161943	10.1	10/02/2020
4.14	Form of warrant in connection with the January 2021 Private Placement	S-1/A	333-251241	4.22	02/16/2021
4.15	Form of Securities Purchase Agreement in connection with the January 2021 Private Placement	S-1/A	333-251241	4.23	02/16/2021
10.1†	Form of Indemnification Agreement by and among the Company and its officers and directors	S-1	333-234349	10.8	10/28/2019
10.2†	Employment Agreement, Dated December 28, 2020 by and between Scott Lerner and the Company	8-K/A	333-161943	10.2	01/05/2021
10.3†	Employment Agreement, dated October 8, 2020, by and between Sharla Cook and the Company	10-K	333-161943	10.12	03/30/2021
10.4†	Employment Agreement, dated September 27, 2020, by and between Robert Sauermann and the Company	10-K	333-161943	10.13	03/30/2021
10.5†	Employment Agreement, dated January 1, 2021, by and between Donald Young and the Company	10-K	333-161943	10.14	03/30/2021
10.6	Loan and Security Agreement, dated as of January 6, 2021, by and between Old Plank Trail Community Bank, N.A. ("Lender") and Halo, Purely for Pets, Inc., a Delaware corporation ("Halo")	8-K	333-161943	10.1	01/11/2021
10.7	Term Note A, dated as of January 6, 2021, issued by Halo in favor of Lender	8-K	333-161943	10.3	01/11/2021
10.8	Guaranty and Security Agreement, dated as of January 6, 2021, made by Better Choice Company Inc. , TruPet LLC, and Bona Vida, Inc., a Delaware corporation	8-K	333-161943	10.4	01/11/2021
10.9	Intellectual Property Security Agreement, dated as of January 6, 2021, executed and delivered by the Company, TruPet and Bona Vida	8-K	333-161943	10.5	01/11/2021
10.10	Stock Pledge Agreement, dated as of January 6, 2021, executed and delivered by the Company in favor of Lender	8-K	333-161943	10.6	01/11/2021
10.11	First Amendment to Loan and Security Agreement, dated as of August 13, 2021, by and between Old Plank Trail Community Bank, N.A. ("Lender") and Halo, Purely for Pets, Inc.	8-K	001-40477	10.1	08/17/2021
10.12	Revolving Promissory Note, dated as of August 13, 2021, issued by Halo Purely for Pets, Inc.	8-K	001-40477	10.2	08/17/2021
10.13	Deposit Account Pledge Agreement, dated as of August 13, 2021, executed and delivered by Halo Purely for Pets Inc.	8-K	001-40477	10.3	08/17/2021
10.14	Second Amendment to Loan and Security Agreement, dated March 25, 2022, by and between Old Plank Trail Community Bank, N.A. and Halo, Purely for Pets, Inc.	10-K	001-40477	10.14	03/29/2022
10.15	Third Amendment to Loan and Security Agreement, dated October 24, 2022, by and between Old Plank Trail Community Bank, N.A. and Halo, Purely for Pets, Inc.	8-K	001-40477	10.1	10/25/2022

Table of Contents

Exhibit

Exhibit Description

Form

File No.

Exhibit

Filing date

10.16

Revolving Promissory Note, dated as of October 24, 2022, issued by Halo in favor of Lender

8-K

001-40477

10.2

10/25/2022

10.17

First Amendment to Deposit Account Pledge Agreement, dated as of October 24, 2022, executed and delivered by Halo in favor of Lender.

8-K

001-40477

10.3

10/25/2022

10.18 †#

Separation Agreement, dated as of September 14, 2022, by and between the Company and Scott Lerner

10-Q

001-40477

10.18

11/10/2022

10.19 †#

Advisory Consulting Agreement, dated as of November 2, 2022, by and between the Company and Lionel F. Conacher

10-Q

001-40477

10.19

11/10/2022

10.20 †

Engagement Agreement, dated as of March 13, 2023, by and between ONE10 Advisors, LLC and Better Choice Company Inc.

8-K

001-40477

10.1

03/21/2023

10.21 †

Interim Officer Agreement, dated as of March 20, 2023, by and between Carolina Martinez and Better Choice Company, Inc.

8-K

001-40477

10.1

03/21/2023

10.2 2 †

Employment Agreement, dated as of May 22, 2023, by and between Kent Cunningham and Better Choice Company, Inc.

8-K

001-40477

10.2

05/16/2023

10.2 3 †

Term Loan Credit Agreement, dated as of June 21, 2023, by and between Better Choice Company Inc. and Alphia Inc.

8-K

001-40477

10.1

06/21/2023

10.2 4 †

Account Purchase Agreement, dated as of June 21, 2023, by and between Wintrust Receivables Finance, a division of Wintrust Bank N.A., and Halo, Purely for Pets, Inc.

8-K

001-40477

10.9

06/21/2023

21.1

Subsidiaries of the Company

10-K

001-40477

21.1

03/28/2023

31.1 *

Certification of Principal Executive Officer Pursuant to Rules 13a‑14(a) and 15d‑14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

31.2 *

Certification of Principal Financial Officer Pursuant to Rules 13a‑14(a) and 15d‑14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

32.1 *

Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002

101 *

The following materials from the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023 formatted in Inline Extensible Business Reporting Language ("iXBRL"): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Stockholders' Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) related notes, tagged as blocks of text and including detailed tags.

104 *

Cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in iXBRL (included as Exhibit 101).

†Indicates a management contract or any compensatory plan, contract or arrangement.

* Filed or furnished herewith.

# Certain schedules and similar attachments to this agreement have been omitted in accordance with Item 601(b)(5) of Regulation S-K. The Company will furnish copies of any schedules or similar attachments to the SEC upon request.

*** Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such excluded information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BETTER CHOICE COMPANY INC.

Date: August 18, 2023	By:	/S/ KENT CUNNINGHAM
		Kent Cunningham
		Chief Executive Officer (Principal Executive Officer)

Date: August 18, 2023	By:	/S/ CAROLINA MARTINEZ
		Carolina Martinez
		Interim Chief Financial Officer (Principal Financial and Accounting Officer)