Better Choice Co Inc. - Quarter Report: 2021 March (Form 10-Q)
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 March 31, 2021
Or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 333-161943
Better Choice Company Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 83-4284557 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
12400 Race Track Road
Tampa, Florida 33626
(Address of Principal Executive Offices) (Zip Code)
_______________________________________________
(Registrant’s Telephone Number, Including Area Code): (813) 659-5921
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered | ||||||
| N/A | N/A | N/A | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
*(As a voluntary filer, the registrant has not been subject to the filing requirements of Section 13 or 15(d) of the Exchange Act for the past 90 days. The registrant has filed all reports required under Section 13 or 15(d) of the Exchange Act during the preceding 12 months).
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by checkmark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | ☒ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒
The number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date was: 66,028,348 shares of $0.001 par value common stock outstanding as of May 7, 2021.
Better Choice Company Inc.
Table of Contents
| Item | Page | |||||||
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q ("Quarterly Report") are “forward-looking statements” for purposes of federal and state securities laws, including statements regarding our expectations and projections regarding future developments, operations and financial conditions, and the anticipated impact of COVID-19 and our acquisitions, business strategy, and strategic priorities. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,”or “continue,”or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. Forward-looking statements contained herein include, among others, statements concerning management's expectations about future events and the Company’s operating plans and performance, the effects of the COVID-19 outbreak, including levels of consumer, business and economic confidence generally, the regulatory environment, litigation, sales, and the expected benefits of acquisitions, and such statements are based on the current beliefs and expectations of the Company’s management, as applicable, and are subject to known and unknown risks and uncertainties. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, and assumptions. Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties.
These forward-looking statements present our estimates and assumptions only as of the date of this Quarterly Report. Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances, or otherwise.
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Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
•the impact of COVID-19 on the U.S. and global economies, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations
•our ability to successfully implement our growth strategy;
•failure to achieve growth or manage anticipated growth;
•our ability to achieve or maintain profitability;
•our significant indebtedness;
•the loss of key members of our senior management team;
•our ability to generate sufficient cash flow or raise capital on acceptable terms to run our operations, service our debt and make necessary capital expenditures;
•our ability to maintain effective internal control over financial reporting;
•our limited operating history;
•our ability to successfully integrate Halo’s and TruPet’s businesses and realize anticipated benefits with these acquisitions and with other acquisitions or investments we may make;
•our dependence on our subsidiaries for payments, advances and transfers of funds due to our holding company status;
•our ability to successfully develop additional products and services or successfully market and commercialize such products and services;
•competition in our market;
•our ability to attract new and retain existing customers, suppliers, distributors or retail partners;
•allegations that our products cause injury or illness or fail to comply with government regulations;
•our ability to manage our supply chain effectively;
•our or our third-party contract manufacturers’ and suppliers’ ability to comply with legal and regulatory requirements;
•the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require;
•our ability to develop and maintain our brand and brand reputation;
•compliance with data privacy rules;
•our compliance with applicable regulations issued by the U.S. Food and Drug Administration (“FDA”), the U.S. Federal Trade Commission (“FTC”), the U.S. Department of Agriculture (“USDA”), and other federal, state and local regulatory authorities, including those regarding marketing pet food, products and supplements;
•risk of our products being recalled for a variety of reasons, including product defects, packaging safety and inadequate or inaccurate labeling disclosure;
•risk of shifting customer demand in relation to raw pet foods, premium kibble and canned pet food products, and failure to respond to such changes in customer taste quickly and effectively; and
•the other risks identified in this prospectus 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.
Given these uncertainties, you should not place undue reliance on these forward looking statements. These forward looking statements represent our estimates and assumptions only as of the date of this report and, except as required by law, we undertake no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise after the date of this report. We qualify all of our forward looking statements by these cautionary statements. You should, however, consult further disclosures we make in future filings and public disclosures, including without limitation, our Annual Report on Form 10-K ("Annual Report"), Transition Report on Form 10-KT, Quarterly Reports on Forms 10-Q, and Current Reports on Forms 8-K.
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PART I
ITEM 1. FINANCIAL STATEMENTS
Better Choice Company Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Unaudited | Audited | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 4,298 | $ | 3,926 | |||||||
| Restricted cash | 63 | 63 | |||||||||
| Accounts receivable, net | 6,675 | 4,631 | |||||||||
| Inventories, net | 4,582 | 4,869 | |||||||||
| Prepaid expenses and other current assets | 4,258 | 4,074 | |||||||||
| Total Current Assets | 19,876 | 17,563 | |||||||||
| Property and equipment, net | 205 | 252 | |||||||||
| Right-of-use assets, operating lease | 305 | 345 | |||||||||
| Intangible assets, net | 12,732 | 13,115 | |||||||||
| Goodwill | 18,614 | 18,614 | |||||||||
| Other assets | 635 | 1,364 | |||||||||
| Total Assets | $ | 52,367 | $ | 51,253 | |||||||
| Liabilities & Stockholders’ Deficit | |||||||||||
| Current Liabilities | |||||||||||
| Term loans, net | $ | 628 | $ | 7,826 | |||||||
| PPP loans | 315 | 190 | |||||||||
| Other liabilities | 41 | 47 | |||||||||
| Accounts payable | 5,221 | 3,137 | |||||||||
| Accrued liabilities | 2,090 | 3,003 | |||||||||
| Deferred revenue | 257 | 350 | |||||||||
| Operating lease liability | 180 | 173 | |||||||||
| Warrant liabilities | 46,333 | 39,850 | |||||||||
| Total Current Liabilities | 55,065 | 54,576 | |||||||||
| Non-current Liabilities | |||||||||||
| Notes payable, net | 19,609 | 18,910 | |||||||||
| Term loans, net | 5,219 | — | |||||||||
| Lines of credit, net | 4,781 | 5,023 | |||||||||
| PPP loans | 537 | 662 | |||||||||
| Operating lease liability | 136 | 184 | |||||||||
| Total Non-current Liabilities | 30,282 | 24,779 | |||||||||
| Total Liabilities | 85,347 | 79,355 | |||||||||
| Stockholders’ Deficit | |||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized, 66,004,348 and 51,908,398 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 66 | 52 | |||||||||
Series F Preferred Stock, $0.001 par value, 30,000 shares authorized, 17,306 and 21,754 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | — | — | |||||||||
| Additional paid-in capital | 240,847 | 232,487 | |||||||||
| Accumulated deficit | (273,893) | (260,641) | |||||||||
| Total Stockholders’ Deficit | (32,980) | (28,102) | |||||||||
| Total Liabilities and Stockholders’ Deficit | $ | 52,367 | $ | 51,253 | |||||||
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Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(Dollars in thousands, except share and per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net sales | $ | 10,830 | $ | 12,226 | |||||||
| Cost of goods sold | 6,556 | 8,069 | |||||||||
| Gross profit | 4,274 | 4,157 | |||||||||
| Operating expenses: | |||||||||||
| General and administrative | 4,551 | 8,245 | |||||||||
| Share-based compensation | 2,525 | 2,485 | |||||||||
| Sales and marketing | 2,336 | 1,959 | |||||||||
| Total operating expenses | 9,412 | 12,689 | |||||||||
| Loss from operations | (5,138) | (8,532) | |||||||||
| Other expense (income): | |||||||||||
| Interest expense | 835 | 2,301 | |||||||||
| Loss on extinguishment of debt | 394 | — | |||||||||
| Change in fair value of warrant liabilities | 6,483 | (1,379) | |||||||||
| Total other expense, net | 7,712 | 922 | |||||||||
| Net and comprehensive loss | (12,850) | (9,454) | |||||||||
| Preferred dividends | — | 34 | |||||||||
| Net and comprehensive loss available to common stockholders | $ | (12,850) | $ | (9,488) | |||||||
| Weighted average number of shares outstanding, basic and diluted | 57,525,054 | 48,526,396 | |||||||||
| Loss per share, basic and diluted | $ | (0.23) | $ | (0.20) | |||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit
(Dollars in thousands except shares)
| Common Stock | Series F Convertible Preferred Stock | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional paid-in capital | Accumulated deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||
| Balance as of December 31, 2020 | 51,908,398 | $ | 52 | 21,754 | $ | — | $ | 232,487 | $ | (260,641) | $ | (28,102) | |||||||||||||||||
| Shares and warrants issued pursuant to private placement | 3,280,400 | 3 | — | — | 4,069 | — | 4,072 | ||||||||||||||||||||||
| Share-based compensation | 105,222 | — | — | — | 2,544 | — | 2,544 | ||||||||||||||||||||||
| Warrant exercises | 1,784,298 | 2 | — | — | 1,308 | — | 1,310 | ||||||||||||||||||||||
| Shares issued to third-party for services | 30,000 | — | — | — | 46 | — | 46 | ||||||||||||||||||||||
| Warrant modifications | — | — | — | 402 | (402) | — | |||||||||||||||||||||||
| Conversion of Series F shares to common stock | 8,896,030 | 9 | (4,448) | — | (9) | — | — | ||||||||||||||||||||||
| Net and comprehensive loss available to common stockholders | — | — | — | — | — | (12,850) | (12,850) | ||||||||||||||||||||||
| Balance as of March 31, 2021 | 66,004,348 | $ | 66 | 17,306 | $ | — | $ | 240,847 | $ | (273,893) | $ | (32,980) | |||||||||||||||||
| Common Stock | Redeemable Series E Convertible Preferred Stock | ||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Deficit | Shares | Amount | |||||||||||||||||||||||
| Balance as of December 31, 2019 | 47,977,390 | $ | 48 | $ | 194,150 | $ | (201,269) | $ | (7,071) | 1,387,378 | $ | 10,566 | |||||||||||||||||
| Shares issued pursuant to a private placement | 308,642 | — | 500 | — | 500 | — | — | ||||||||||||||||||||||
| Share-based compensation | 455,956 | 1 | 2,484 | — | 2,485 | — | — | ||||||||||||||||||||||
| Shares and warrants issued to third party for contract termination | 72,720 | — | 198 | — | 198 | — | — | ||||||||||||||||||||||
| Shares issued to third parties for services | 125,000 | — | 125 | — | 125 | — | — | ||||||||||||||||||||||
| Warrants issued to third parties for services | — | — | 2,594 | — | 2,594 | — | — | ||||||||||||||||||||||
| Net and comprehensive loss available to common stockholders | — | — | — | (9,488) | (9,488) | — | — | ||||||||||||||||||||||
| Balance as of March 31, 2020 | 48,939,708 | $ | 49 | $ | 200,051 | $ | (210,757) | $ | (10,657) | 1,387,378 | $ | 10,566 | |||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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Better Choice Company Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flow from Operating Activities: | |||||||||||
| Net and comprehensive loss available to common stockholders | $ | (12,850) | $ | (9,488) | |||||||
| Adjustments to reconcile net and comprehensive loss to net cash used in operating activities: | |||||||||||
| Shares and warrants issued to third parties for services | 46 | 2,792 | |||||||||
| Depreciation and amortization | 411 | 457 | |||||||||
| Amortization of debt issuance costs and discounts | 161 | 1,090 | |||||||||
| Share-based compensation | 2,544 | 2,485 | |||||||||
| Change in fair value of warrant liabilities | 6,483 | (1,379) | |||||||||
| Payment In Kind (PIK) interest expense on notes payable | 548 | 459 | |||||||||
| Other | (92) | 644 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | (2,044) | (297) | |||||||||
| Inventories, net | 287 | 1,818 | |||||||||
| Prepaid expenses and other assets | 545 | 5 | |||||||||
| Accounts payable and accrued liabilities | 1,735 | 26 | |||||||||
| Other | (99) | 229 | |||||||||
| Cash Used in Operating Activities | $ | (2,325) | $ | (1,159) | |||||||
| Cash Flow from Investing Activities | |||||||||||
| Acquisition of property and equipment | $ | — | $ | (8) | |||||||
| Cash Used in Investing Activities | $ | — | $ | (8) | |||||||
| Cash Flow from Financing Activities | |||||||||||
| Proceeds from shares and warrants issued pursuant to private placement, net | $ | 4,012 | $ | — | |||||||
| Proceeds from revolving lines of credit | 5,155 | 500 | |||||||||
| Payments on revolving lines of credit | (5,584) | — | |||||||||
| Proceeds from term loan | 6,000 | — | |||||||||
| Payments on term loans | (8,080) | — | |||||||||
| Cash received for warrant exercises | 1,310 | — | |||||||||
| Debt issuance costs | (116) | — | |||||||||
| Cash Provided by Financing Activities | $ | 2,697 | $ | 500 | |||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | $ | 372 | $ | (667) | |||||||
| Total cash and cash equivalents and restricted cash, Beginning of Period | 3,989 | 2,534 | |||||||||
| Total cash and cash equivalents and restricted cash, End of Period | $ | 4,361 | $ | 1,867 | |||||||
Supplemental cash flow information
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash paid during the period for: | |||||||||||
| Income taxes | $ | — | $ | — | |||||||
| Interest | $ | 148 | $ | 613 | |||||||
| Non-cash financing and investing transactions | |||||||||||
| Stock issued for services | $ | — | $ | 125 | |||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Nature of business and summary of significant accounting policies
Nature of the Business
Better Choice Company Inc. is a growing animal health and wellness company focused on providing pet products and services that help dogs and cats live healthier, happier and longer lives. The Company sells its product offering under the Halo and TruDog brands, which have a long history of providing high quality products to pet parents. The Company believes its portfolio of brands are well-positioned to benefit from the trends of growing pet humanization and an increased consumer focus on health and wellness, and the Company has adopted a laser focused, channel-specific approach to growth that is driven by new product innovation. The Company has a broad portfolio of over 100 active premium and super-premium animal health and wellness products for dogs and cats sold under its Halo, and TruDog brands across multiple forms, including foods, treats, toppers, dental products, chews, grooming products and supplements. The products consist of naturally formulated premium kibble and canned dog and cat food, freeze-dried raw dog food and treats, vegan dog food and treats, oral care products, supplements and grooming aids. The core products sold under the Halo brand are sustainably sourced, derived from real whole meat and no rendered meat meal and include non-genetically modified fruits and vegetables. The core products sold under the TruDog brand are made according to the Company's nutritional philosophy of fresh, meat-based nutrition and minimal processing.
Basis of Presentation
The Company’s condensed consolidated financial statements are prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reports and accounting principles generally accepted in the United States ("GAAP"). Results of operations for interim periods may not be representative of results to be expected for the full year.
Certain reclassifications have been made to conform the prior period data to the current presentation. These reclassifications had no material effect on the reported results.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company’s Annual Report for the year ended December 31, 2020, filed with the SEC.
Consolidation
The financial statements are presented on a consolidated basis subsequent to acquisitions and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 and comprehensive loss for the periods ended March 31, 2021 and 2020, the financial position as of March 31, 2021 and December 31, 2020 and the cash flows for the periods ended March 31, 2021 and 2020.
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. As of March 31, 2021, the Company has not experienced a significant adverse impact to its business, financial condition or cash flows resulting from the COVID-19 pandemic. However, uncertainties regarding the continued economic impact of COVID-19 are likely to result in sustained market turmoil which could also negatively impact the Company's business, financial condition, and cash flows in the future. The Company has continually incurred losses and has an accumulated deficit. The Company continues to rely on current investors and the public markets to finance these losses through debt and/or equity issuances. These operating losses, working capital deficit and the outstanding debt create substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date these condensed consolidated financial statements are issued.
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The Company is implementing plans to achieve cost savings and other strategic objectives to address these conditions. The Company expects cost savings from consolidation of third-party manufacturers, optimizing shipping and warehousing as well as overhead cost reductions. The business is focused on successful completion of capital raises and growing the most profitable channels while reducing investments in areas that are not expected to have long-term benefits. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.
Summary of Significant Accounting Policies
For additional information, please refer to our most recently filed Annual Report regarding the Company's summary of significant accounting policies.
New Accounting Standards
Recently adopted
ASU 2020-03 “Codification Improvements to Financial Instruments”
In March 2020, FASB issued Accounting Standards Update ("ASU") 2020-03, Codification Improvement to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the current expected credit losses standard issued in 2016. The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates, some of which were effective for the Company beginning on January 1, 2021. The amendments adopted did not have a material impact on the Company’s condensed consolidated financial statements.
ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This new guidance was effective for the Company beginning on January 1, 2021 and did not have an impact on the Company’s condensed consolidated financial statements.
Issued but not yet adopted
ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326)”
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326),” a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for the Company on January 1, 2023, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its consolidated financial statements.
ASU 2020-04 “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (IBORs) and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The ASU can be adopted no later than December 1, 2022 with early adoption permitted. The Company is currently evaluating the impact the standard will have on its consolidated financial statements and related disclosures.
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ASU 2020-06 "Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, FASB issued ASU 2020-06, Debt - Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging - Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This ASU reduces the number of accounting models for convertible instruments, amends diluted EPS calculations for convertible instruments, and amends the requirements for a contract (or embedded derivative) that is potentially settled in an entity’s own shares to be classified in equity. This standard is effective for the Company beginning on January 1, 2024 with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
Note 2 - Revenue
The Company records revenue net of discounts, which primarily consist of early pay discounts, general percentage allowances and contractual trade promotions.
The Company excludes sales taxes collected from revenues. Retail-partner based customers are not subject to sales tax.
The Company’s direct-to-consumer ("DTC") loyalty program enables customers to accumulate points based on their spending. A portion of revenue is deferred at the time of sale when points are earned and recognized when the loyalty points are redeemed. As of March 31, 2021 and December 31, 2020, customers held unredeemed loyalty program awards of $0.3 million and $0.4 million, respectively.
Shipping Costs
Shipping costs associated with moving finished products to customers were $0.5 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively. Such shipping costs are recorded as part of general and administrative expenses.
Revenue Channels
The Company groups its revenue channels into four distinct categories: E-Commerce, which includes the sale of product to online retailers such as Amazon and Chewy; Brick & Mortar, which includes the sale of product to pet specialty chains such as Petco, PetSmart, select grocery chains, and neighborhood pet stores; DTC which includes the sale of product through the Company's online web platform to more than 20,000 unique customers; and International, which includes the sale of product to foreign distribution partners (transacted in U.S. dollars) and to select international retailers. Information about the Company’s net sales by revenue channel is as follows (in thousands):
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| E-commerce | $ | 4,010 | 37 | % | $ | 4,481 | 37 | % | ||||||||||||||||||
| Brick & Mortar | 1,894 | 18 | % | 2,897 | 23 | % | ||||||||||||||||||||
| DTC | 2,436 | 22 | % | 2,804 | 23 | % | ||||||||||||||||||||
| International | 2,490 | 23 | % | 2,044 | 17 | % | ||||||||||||||||||||
| Net Sales | $ | 10,830 | 100 | % | $ | 12,226 | 100 | % | ||||||||||||||||||
Note 3 - Inventories
Inventories are summarized as follows (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Food, treats and supplements | $ | 4,439 | $ | 4,987 | |||||||
| Inventory packaging and supplies | 503 | 596 | |||||||||
| Total Inventories | 4,942 | 5,583 | |||||||||
| Inventory reserve | (360) | (714) | |||||||||
| Inventories, net | $ | 4,582 | $ | 4,869 | |||||||
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Note 4 - Prepaid expenses and other current assets
| March 31, 2021 | December 31, 2020 | ||||||||||
Prepaid advertising contract with iHeart (1) | $ | 2,500 | $ | 1,788 | |||||||
Other prepaid expenses and other current assets (2) | 1,758 | 2,286 | |||||||||
| Total Prepaid expenses and other current assets | $ | 4,258 | $ | 4,074 | |||||||
(2) As of March 31, 2021, this amount includes various other prepaid contracts. During the fourth quarter of 2020, the Company entered into an agreement for access to an investment platform in exchange for 500,000 shares of common stock valued at $0.5 million and also entered into an agreement for marketing services in exchange for 500,000 shares of common stock valued at $0.5 million.
Note 5 - Accrued liabilities
Accrued liabilities consist of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Accrued professional fees | $ | 225 | $ | 704 | |||||||
| Accrued sales tax | 412 | 1,009 | |||||||||
| Accrued payroll and benefits | 1,147 | 913 | |||||||||
| Accrued trade promotions | 112 | 106 | |||||||||
| Accrued interest | 24 | 86 | |||||||||
| Other | 170 | 185 | |||||||||
| Total accrued liabilities | $ | 2,090 | $ | 3,003 | |||||||
Note 6 - Intangible assets, royalties, and goodwill
Intangible assets
The Company’s intangible assets (in thousands) and related useful lives (in years) are as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Customer relationships | 7 | $ | 7,190 | $ | (1,317) | $ | 5,873 | $ | (1,059) | $ | 6,131 | ||||||||||||||||||||||||
| Trade name | 15 | 7,500 | (641) | 6,859 | (516) | 6,984 | |||||||||||||||||||||||||||||
| Total intangible assets | $ | 14,690 | $ | (1,958) | $ | 12,732 | $ | (1,575) | $ | 13,115 | |||||||||||||||||||||||||
Amortization expense was $0.4 million for the three months ended March 31, 2021 and 2020, respectively.
The estimated future amortization of intangible assets over the remaining weighted average useful life of 10.0 years is as follows (in thousands):
| Remainder of 2021 | $ | 1,145 | |||
| 2022 | 1,527 | ||||
| 2023 | 1,527 | ||||
| 2024 | 1,527 | ||||
| 2025 | 1,527 | ||||
| Thereafter | 5,479 | ||||
| $ | 12,732 | ||||
There were no indicators or impairment of the intangible assets as of March 31, 2021.
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Goodwill
Goodwill was $18.6 million as of March 31, 2021 and December 31, 2020, respectfully. The Company performed a quantitative assessment for its annual impairment test as of October 1, 2020. Under the quantitative approach, the Company makes various estimates and assumptions to determine the estimated fair value of the reporting unit using a combination of a discounted cash flow model and earnings multiples for guideline public companies. As of March 31, 2021, there was no accumulated impairment loss and no impairment expense related to goodwill.
Note 7 - Debt
The components of the Company’s debt consist of the following (in thousands):
| Dollars in thousands | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||
| Amount | Rate | Maturity Date | Amount | Rate | Maturity Date | ||||||||||||||||||||||||||||||
| Term loan, net | $ | 5,847 | (1) | 1/6/2024 | $ | 7,826 | (2) | 1/15/2021 | |||||||||||||||||||||||||||
| Line of credit, net | 4,781 | (1) | 1/6/2024 | 5,023 | (3) | 7/5/2022 | |||||||||||||||||||||||||||||
| November 2019 notes payable, net (November 2019 Notes) | 2,927 | 10.00 | % | 6/30/2023 | 2,830 | 10.00 | % | 6/30/2023 | |||||||||||||||||||||||||||
| December 2019 senior notes payable, net (Senior Seller Notes) | 10,679 | 10.00 | % | 6/30/2023 | 10,332 | 10.00 | % | 6/30/2023 | |||||||||||||||||||||||||||
| December 2019 junior notes payable, net (Junior Seller Notes) | 5,153 | 10.00 | % | 6/30/2023 | 4,973 | 10.00 | % | 6/30/2023 | |||||||||||||||||||||||||||
| ABG Notes | 702 | 10.00 | % | 6/30/2023 | 687 | 10.00 | % | 6/30/2023 | |||||||||||||||||||||||||||
| June 2020 notes payable, net (June 2020 Notes) | 148 | 10.00 | % | 6/30/2023 | 88 | 10.00 | % | 6/30/2023 | |||||||||||||||||||||||||||
| Halo PPP Loan | 431 | 1.00 | % | 5/3/2022 | 431 | 1.00 | % | 5/3/2022 | |||||||||||||||||||||||||||
| TruPet PPP Loan | 421 | 0.98 | % | 4/6/2022 | 421 | 0.98 | % | 4/6/2022 | |||||||||||||||||||||||||||
| Total debt | 31,089 | 32,611 | |||||||||||||||||||||||||||||||||
| Less current portion | 943 | 8,016 | |||||||||||||||||||||||||||||||||
| Total long term debt | $ | 30,146 | $ | 24,595 | |||||||||||||||||||||||||||||||
(1)Interest at a variable rate of LIBOR plus 250 basis points with an interest rate floor of 2.50% per annum
(2)Interest at Bank of Montreal Prime plus 8.05%
(3)Interest at a variable rate of LIBOR plus 250 basis points with an interest rate floor of 3.25% per annum
Term loans and lines of credit
On December 19, 2019, the Company entered into a Loan Facilities Agreement (the “Facilities Agreement”) by and among the Company, as the borrower, the several lenders from time to time parties thereto (collectively, the “Lenders”) and a private debt lender, as agent (the “Agent”). The Facilities Agreement provided for (i) a term loan facility of $20.5 million and (ii) a revolving loan facility not to exceed $7.5 million. The term loan was scheduled to mature on December 19, 2020 or such earlier date on which a demand was made by the Agent or any Lender, and was extended as discussed below. The remaining revolving credit facility balance of $5.1 million was repaid in full with a portion of the proceeds from the ABL Facility, discussed below, and resulted in a loss on debt extinguishment of $0.1 million.
Certain directors and shareholders of the Company (“Shareholder Guarantors”) agreed to guarantee the Company’s obligations under the Facilities Agreement up to an aggregate amount of $20.0 million pursuant to a Continuing Guarantee between the Shareholder Guarantors and the lender under the Facilities Agreement (the "Shareholder Guaranties"). As consideration for the Shareholder Guaranties, the Company issued common stock purchase warrants to the Shareholder Guarantors in an amount equal to 0.325 warrants for each dollar of debt guaranteed by such Shareholder Guarantors (the “Guarantor Warrants”).
On July 16, 2020, the Company entered into a revolving line of credit with Citizens Business Bank in the aggregate amount of $7.5 million (the “ABL Facility”). The proceeds of the ABL Facility were used (i) to repay all principal, interest and fees outstanding under the Company’s previous revolving credit facility and (ii) for general corporate purposes. Debt issuance costs of less than $0.1 million were incurred related to the Company entering into this revolving line of credit.
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The ABL Facility was scheduled to mature on July 5, 2022 and bore interest at a variable rate of LIBOR plus 250 basis points, with an interest rate floor of 3.25% per annum. Accrued interest on the ABL Facility was payable monthly commencing on August 5, 2020. The ABL Agreement provided for customary financial covenants, such as maintaining a specified adjusted EBITDA and a maximum senior debt leverage ratio, that commenced on December 31, 2020 and customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company prepaid all of the outstanding principal under the ABL Facility in full and did not incur any prepayment charges.
The ABL Facility was secured by a general security interest on the assets of the Company and was personally guaranteed by a member of the Company’s board of directors.
On October 5, 2020, the Company paid down the term loan by $11.0 million using proceeds from the Series F Private Placement. On October 29, 2020, the Company made an additional pay down on the term loan of $1.0 million using additional proceeds from the Series F Private Placement.
On November 25, 2020, the Company entered into the fifth amendment to the Facilities Agreement, extending the maturity date of the term loan to January 15, 2021.
On January 6, 2021, Halo, Purely for Pets, Inc., a wholly owned subsidiary of Better Choice Company Inc. ("Halo") entered into a credit facility with Old Plank Trail Community Bank, N.A., an affiliate of Wintrust Bank, N.A. (“Wintrust”) consisting of a $6.0 million term loan and a $6.0 million revolving line of credit, each scheduled to mature on January 6, 2024 and each bear interest at a variable rate of LIBOR plus 250 basis points, with an interest rate floor of 2.50% per annum (the "Wintrust Credit Facility"). Accrued interest on the Wintrust Facility is payable monthly commencing on February 1, 2021. Principal payments are required to be made monthly on the term loan commencing February 2021 with a balloon payment upon maturity. The proceeds from the Wintrust Credit Facility were used (i) to repay the principal, interest and fees outstanding under the ABL Facility and (ii) for general corporate purposes. We applied extinguishment accounting to the outstanding balances of the ABL Facility and term loan and recorded a loss on extinguishment of debt of $0.4 million during the three months ended March 31, 2021. Debt issuance costs of $0.1 million were incurred related to the Wintrust Credit Facility.
The Wintrust Credit Facility subjects the Company to certain financial covenants, including the maintenance of a fixed charge coverage ratio of no less than 1.25 to 1.00, tested as of the last day of each fiscal quarter. The numerator in the fixed charge coverage ratio is the operating cash flow of Halo, defined as Halo EBITDA less cash paid for unfinanced Halo capital expenditures, income taxes and dividends. The denominator is fixed charges such as interest expense and principal payments paid or payable on other indebtedness attributable to Halo.
The Wintrust Credit Facility is secured by a general guaranty and security interest on the assets, including the intellectual property, of the Company and its subsidiaries. The Company has also pledged all of the capital stock of Halo held by the Company as additional collateral. Furthermore, the Wintrust Credit Facility is supported by a collateral pledge by a member of the Company’s board of directors.
As of March 31, 2021, the term loan and line of credit outstanding under the Wintrust Credit Facility were $5.8 million and $4.8 million, respectively, net of debt issuance costs of less than $0.1 million, respectively. As of December 31, 2020, the previous term loan and line of credit outstanding were $7.8 million and $5.0 million, respectively, net of debt issuance costs and discounts of less than $0.2 million and $0.2 million, respectively. The debt issuance costs and discounts are amortized using the effective interest method.
As of March 31, 2021 and December 31, 2020, the Company was in compliance with its debt covenants.
Notes payable
On November 4, 2019, the Company issued $2.8 million of subordinated convertible notes (the “November 2019 Notes”) which carry a 10% interest rate and mature on November 4, 2021. The interest is payable in kind, in arrears on March 31, June 30, September 30 and December 31 of each year. Payment in kind ("PIK") interest is payable by increasing the aggregate principal amount of the November 2019 Notes. The November 2019 Notes are convertible any time from the date of issuance and carried an initial conversion price of the lower of (a) $4.00 per share or (b) the IPO Price (defined as the price at which the Company’s stock will be sold in a future IPO).
The November 2019 Notes were amended on January 6, 2020. The amendment incorporates only the preferable terms of the Seller Notes as noted below, and all other terms and provisions of the November 2019 Notes remain in full force and effect. As amended, for so long as any event of default (as defined in the November 2019 Notes) exists, interest shall accrue on the November 2019 Notes principal at the default interest rate of 12.0% per annum, and such accrued interest shall be immediately due and payable.
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The November 2019 Notes were amended for the second time on June 24, 2020 in connection with the issuance of the June 2020 Notes. The amendment lowers the maximum conversion price applicable to the conversion of these notes from $4.00 per share to $3.75 per share and extends the maturity date from November 4, 2021 to June 30, 2023. Under the applicable accounting guidance, the Company accounted for the change in conversion price as a modification of the debt instrument. The Company recognized the increase in the fair value of the conversion option of $0.3 million as a reduction to the carrying amount of the debt instrument by increasing the associated debt discount with a corresponding increase in additional paid-in capital.
As of March 31, 2021 and December 31, 2020, the November 2019 Notes outstanding were $2.9 million and $2.8 million, respectively, net of discounts of $0.2 million and less than $0.3 million, respectively. The discounts are being amortized over the life of the November 2019 Notes using the effective interest method.
On December 19, 2019, the Company issued $10.0 million and $5.0 million in senior subordinated convertible notes (the “Senior Seller Notes”) and junior subordinated convertible notes (the “Junior Seller Notes” and together with the Senior Seller Notes, the “Seller Notes”), respectively, to the sellers of Halo. The Seller Notes are convertible any time from the date of issuance and carry a 10% interest rate and mature on June 30, 2023. Interest is payable in kind, in arrears on March 31, June 30, September 30 and December 31 of each year. PIK interest is payable by increasing the aggregate principal amount of the Seller Notes. The Seller Notes carried a conversion price of the lower of (a) $4.00 per share or (b) the IPO Price.
The Seller Notes were amended on June 24, 2020 in connection with the issuance of the June 2020 Notes. The amendment lowers the maximum conversion price applicable to the conversion of these notes from $4.00 per share to $3.75 per share. The Company accounted for the change in the conversion price as a modification of the debt instrument. The Company recognized the increase in the fair value of the conversion option of less than of $0.3 million as a reduction to the carrying amounts of the debt instruments by increasing the associated debt discounts with a corresponding increase in additional paid-in capital.
As of March 31, 2021, the Senior Seller Notes outstanding were $10.7 million, net of discounts of $0.7 million, and the Junior Seller Notes outstanding were $5.2 million, net of discounts of $0.5 million. As of December 31, 2020, the Senior Seller Notes outstanding were $10.3 million, net of discounts of $0.8 million, and the Junior Seller Notes outstanding were $5.0 million, net of discounts of $0.5 million. The discounts are being amortized over the life of the Seller Notes using the effective interest method.
On January 13, 2020, the Company issued $0.6 million in senior subordinated convertible notes to Authentic Brands and Elvis Presley Enterprises (“ABG”) in connection with the termination of a previous licensing agreement (the "ABG Notes"). The terms of the ABG Notes match those of the Seller Notes, including conversion features convertible any time after the date of issuance, a 10% interest rate and maturity date of June 30, 2023. The interest is payable in kind, in arrears on March 31, June 30, September 30 and December 31 of each year. PIK interest is payable by increasing the aggregate principal amount of the ABG Notes. The ABG Notes carried an initial conversion price of the lower of (a) $4.00 per share or (b) the IPO Price.
In addition to issuing the ABG Notes, as part of the ABG termination on January 13, 2020, the Company paid ABG $0.1 million in cash, issued ABG 72,720 shares of the Company’s common stock, agreed to pay ABG $0.1 million in cash in four equal installments each month from July 31, 2020 through October 31, 2020 and issued ABG common stock purchase warrants (the “ABG Warrants”) equal to a fair value of $0.2 million.
The ABG Notes were amended on June 24, 2020 in connection with the issuance of the June 2020 Notes. The amendment lowers the maximum conversion price applicable to the conversion of these notes from $4.00 per share to $3.75 per share. The Company accounted for the change in the conversion price as a modification of the debt instrument. The Company recognized the increase in the fair value of the conversion option of less than $0.1 million as a reduction to the carrying amount of the debt instrument by decreasing the associated debt premium with a corresponding increase in additional paid-in capital.
As of March 31, 2021 and December 31, 2020, the ABG Notes outstanding were $0.7 million, including a debt premium of less than $0.1 million, respectively. The debt premium is being amortized over the life of the ABG Notes using the effective interest method.
On June 24, 2020, the Company issued $1.5 million in subordinated convertible promissory notes (the “June 2020 Notes”) which carry a 10% interest rate and mature on June 30, 2023. The interest is payable quarterly in kind, in arrears on March 31, June 30, September 30, and December 31 of each year. PIK interest is payable by increasing the aggregate principal amount of the June 2020 Notes. The June 2020 Notes are convertible any time from the date of issuance and carry a conversion price $0.75 per share. The June 2020 Notes are also convertible automatically upon the Company’s consummation of an initial public offering or change in control (each as defined in the June 2020 Notes).
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The Company evaluated the conversion option within the June 2020 Notes to determine whether the conversion price was beneficial to the note holders. The Company recorded a beneficial conversion feature (“BCF”) related to the issuance of the June 2020 Notes. The BCF for the June 2020 Notes was recognized and measured by allocating a portion of the proceeds to the beneficial conversion feature, based on relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature limited to the proceeds amount allocated to the instrument. The discount recorded in connection with the BCF valuation is being accreted as interest expense over the term of the June 2020 Notes, using the effective interest rate method.
As of March 31, 2021 and December 31, 2020, the June 2020 Notes outstanding were $0.1 million, net of discounts of $1.5 million, respectively. The discounts are being amortized over the life of the June 2020 Notes using the effective interest method.
The exercise, conversion or exchange of convertible securities, including for other securities, will dilute the percentage ownership of the Company’s stockholders. The dilutive effect of the exercise or conversion of these securities may adversely affect the Company’s ability to obtain additional capital.
The Company previously issued $0.1 million of Seller Notes to an executive in satisfaction of a transaction bonus pursuant to his employment agreement. These convertible notes remained outstanding as of March 31, 2021 and December 31, 2020. Additionally, the Company previously issued $2.2 million of subordinated convertible notes to a member of the board of directors, which remain outstanding as of March 31, 2021 and December 31, 2020. Interest expense related to the subordinated convertible notes was less than $0.1 million for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021 and December 31, 2020, the Company was in compliance with all covenant requirements and there were no events of default. All notes payable are subordinated to the term loan and line of credit.
PPP loans
On April 10, 2020, TruPet, LLC, a wholly owned subsidiary of Better Choice Company Inc., was granted a loan from JPMorgan Chase Bank, N.A. in the aggregate amount of $0.4 million, pursuant to the Paycheck Protection Program ("PPP") under Division A, Title I of the CARES Act (the “TruPet PPP Loan”). The loan matures on April 6, 2022 and bears interest at a rate of 0.98% per annum, with interest and principal payable monthly, commencing on November 6, 2020. As of March 31, 2021 and December 31, 2020, the TruPet PPP Loan outstanding was $0.4 million.
On May 7, 2020, Halo, Purely for Pets, Inc., a wholly owned subsidiary of Better Choice Company Inc., was granted a loan from Wells Fargo Bank, N.A. in the aggregate amount of $0.4 million, pursuant to the PPP (the “Halo PPP Loan”). The loan matures on May 3, 2022 and bears interest at a rate of 1.00% per annum, with interest and principal payable monthly, commencing on November 1, 2020. As of March 31, 2021 and December 31, 2020, the Halo PPP Loan outstanding was $0.4 million.
Under the terms of the PPP, certain amounts of the loans may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has used all of the proceeds from the TruPet PPP Loan and the Halo PPP Loan for qualifying expenses and during April 2021, the Company applied for forgiveness for both of these loans.
The Company recorded interest expense related to its outstanding indebtedness of $0.8 million and $2.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively.
Fair Value
The fair value of the November 2019, Senior Seller Notes and Junior Seller Notes, ABG Notes and June 2020 Notes were approximately $2.6 million, $9.5 million, $4.7 million, $0.6 million and $1.3 million, respectively, as of March 31, 2021. Fair value was determined by applying the income approach using a discounted cash flow model which primarily uses unobservable inputs (Level 3).
The carrying amounts of the Company's PPP loans approximate fair value due to the short term nature. The carrying amount for the Company’s term loan and line of credit approximate fair value as the instruments have variable interest rates that approximate market rates.
Note 8 - Commitments and contingencies
The Company had no material purchase obligations as of March 31, 2021 or December 31, 2020.
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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. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss. We do not accrue for contingent losses that are considered to be reasonably possible, but not probable; however, we disclose the range of such reasonably possible losses. Loss contingencies considered remote are generally not disclosed.
Litigation is subject to numerous uncertainties and the outcome of individual claims and contingencies is not predictable. It is possible that some legal matters for which reserves have or have not been established could result in an unfavorable outcome for the Company and any such unfavorable outcome could be of a material nature or have a material adverse effect on the Company's consolidated financial condition, results of operations and cash flows. Management is not aware of any claims or lawsuits that may have a material adverse effect on the consolidated financial position or results of operations of the Company.
Note 9 - Convertible preferred stock
During October, 2020, the Company consummated an insider-led equity financing, including the transactions contemplated by a securities purchase agreement (the “Securities Purchase Agreement”) between the Company and certain accredited and sophisticated investors (the “Purchasers”) and an exchange agreement (the “Series E Exchange Agreement”) between the Company and Cavalry Fund LP ("Cavalry"), the holder of all of the Company’s previously outstanding Series E preferred stock.
Pursuant to the Securities Purchase Agreement, the Company, in a private placement (the “Series F Private Placement”), issued and sold units (the “Series F Units”) to the Purchasers for a purchase price of $1,000 per Unit. Each Unit consists of: (i) one share of the Company’s Series F convertible preferred stock, par value $0.001 per share (the “Series F Preferred Stock”), which is convertible into shares of the Company’s common stock, par value $0.001 per share, at a value per share of common stock of $0.50; and (ii) a warrant to purchase for a six year period such number of shares of common stock (the “Series F Warrant Shares”) into which such share of Series F Preferred Stock is convertible at an exercise price per Warrant Share of $0.75. Pursuant to the Series F Private Placement, the Company raised approximately $18.2 million in gross cash proceeds, approximately $6.5 million of which was invested by certain officers, directors, employees and associated related parties thereto of the Company. The Series F Shares were recorded at fair value on the date of issuance on an as converted basis.
Concurrently with the execution of the Securities Purchase Agreement, the Company and the Purchasers entered into a registration rights agreement, (as amended by a certain first amendment dated October 29,2020, the "Registration Rights Agreement"), pursuant to which the Company filed a registration statement which was declared effective by the SEC on February 16, 2021 to register the Warrant Shares and the shares of common stock issuable upon conversion of the Series F Preferred Stock.
In connection with the consummation of the Series F Private Placement, on October 1, 2020, the Company filed with the Secretary of State of Delaware a Certificate of Designations which authorizes a total of 30,000 shares of Series F Preferred Stock and sets forth the designations, preferences, and rights of the Company's Series F Preferred Stock.
On October 1, 2020, the Company issued 14,264 Series F Units in conjunction with money received for the Series F Private Placement. In addition, pursuant to the Series E Exchange Agreement, on October 1, 2020, the Company issued 3,500 Series F Units to Cavalry in exchange for all of its outstanding Series E Preferred Stock. The exchange of Series E Preferred Shares resulted in a $5.4 million gain and was recorded to Accumulated deficit on the Company's Consolidated Balance Sheets.
On October 12, 2020 and October 23, 2020, the Company issued 1,106 and 2,832 Series F Units, respectively, in conjunction with the Series F Private Placement. In addition, on October 23, 2020, the Company issued an additional 100 shares of Series F Preferred Stock in conjunction with a marketing agreement.
The Company evaluated the conversion option within the Series F Preferred Stock on the dates of issuance to determine whether the conversion price was beneficial to the holders. The Company recorded a BCF related to the issuance of the Series F Preferred Stock. The BCF was recognized and measured by allocating a portion of the proceeds to the beneficial conversion feature, based on fair value and was recorded to Accumulated deficit on the Company's Consolidated Balance Sheets limited to the proceeds amount allocated to the instrument.
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The rights, preferences and privileges of Series F are as follows:
Ranking
Except to the extent the holders of the Series F Preferred Stock consent to the creation of a class of equity securities ranking senior to, or pari passu with, the Series F Preferred Stock, the Series F Preferred Stock shall rank senior to all shares of capital stock of the Company with respect to preferences as to dividends, distributions and payments upon liquidation, dissolution or winding up of the Company.
Voting
As to matters submitted to the holders of the Common Stock, each holder of the Series F Preferred Stock will be entitled to such number of votes equal to the number of shares of Common stock issuable upon conversion of such holder’s Series F Preferred Stock and shall vote, or provide consent, together with the Common Stock as if they were a single class. The holders of the Series F Preferred Stock shall vote as a separate class on matter affecting the terms of the Series F Preferred Stock, such as the authorization of a class of equity securities ranking senior to, or pari passu with, the Series F Preferred Stock.
Dividends
Holders of Series F Preferred Stock will not be entitled to receive dividends except to the extent that dividends are declared on the Series F Preferred Stock by the Company in its sole discretion or declared and made by the Company to holders of the Common Stock. In addition, if the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to all or substantially all of the record holders of any class of Common Stock (the “Purchase Rights”), then each holder of Series F Preferred Stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of all the Series F Preferred Stock (without taking into account any limitations or restrictions on the convertibility of the Series F Preferred Stock) held by such holder.
Liquidation
If the Company voluntarily or involuntarily liquidates, dissolves or winds up, the holders of Series F Preferred Stock shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders, before any amount shall be paid to the holders of any of shares of Common Stock or other capital stock of the Company ranking junior to the Series F Preferred Stock, an amount per share of Series F Preferred Stock equal to the sum of $1,000 (subject to adjustment for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications, combinations, subdivisions or other similar events occurring after the initial issuance date with respect to the Series F Preferred Stock, the “Stated Value”)) plus any accrued and unpaid dividends and late charges (such sum, the “Conversion Amount”). The rights of holders of Series F Preferred Stock to receive their liquidation preference also will be subject to the proportionate rights of capital stock, if any, ranking senior to or in parity with the Series F Preferred Stock as to liquidation.
Optional Conversion
Subject to certain beneficial ownership limitations contained in the Certificate of Designations, holders of the Series F Preferred Stock shall be entitled to convert each share of outstanding Series F Preferred Stock held by such holder into such number of validly issued, fully paid and non-assessable shares of Common Stock equal to the Conversion Amount of such share of Series F Preferred Stock divided by $0.50 (subject to adjustment, the “Conversion Price”).
Automatic Conversion
Each share of Series F Preferred Stock not previously converted into shares of Common Stock shall automatically, without any further action by the holders of such Series F Preferred Stock, be converted into such number of fully paid and non-assessable shares of Common Stock determined by dividing the Stated Value of such share of Series F Preferred Stock by the then applicable Conversion Price upon the closing of a firm commitment underwritten public offering of shares of Common Stock which results in the Common Stock being traded on any of The New York Stock Exchange, the NYSE American, the Nasdaq Global Select Market, the Nasdaq Global Market or any successor market thereto. Any such conversion shall be subject to the beneficial ownership limitations set forth in the Certificate of Designations.
Anti-dilution
Holders of the Series F Preferred Stock are entitled to a “full rachet” anti-dilution adjustment to the Conversion Price in the event the Company issues, sells or grants any shares of Common Stock (or securities convertible, exercisable or exchangeable for Common Stock) for no consideration or for consideration or purchase price per share (or, in the case of securities convertible, exercisable or exchangeable for Common Stock, with a conversion, exercise or exchange price) less than the Conversion Price then in effect.
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Note 10 - Stockholders’ deficit
On January 22, 2021, the Company consummated a private placement of common stock units (the “January 2021 Private Placement”) in which the Company raised approximately $4.1 million, including an investment by certain officers, directors, employees and associated related parties thereto of approximately $1.6 million. Each common stock unit was sold at a per unit price of $1.25 and consisted of (i) one share of the Company’s common stock, par value $0.001 per share; and (ii) a warrant to purchase one share of common stock. The proceeds were used to pay expenses related to the offering and for general corporate purposes. In connection with the January 2021 Private Placement, we entered into a registration rights agreement (the “January 2021 Registration Rights Agreement”) pursuant to which the Company filed a registration statement that was declared effective by the SEC on February 16, 2021 to register the shares of common stock issued, and issuable upon the exercise of the warrants issued, in the January 2021 Private Placement.
The Company has reserved common stock for future issuance as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Conversion of Series F Preferred Stock | 34,611,100 | 43,507,130 | |||||||||
| Exercise of options to purchase common stock | 13,150,872 | 7,815,442 | |||||||||
| Exercise of warrants to purchase common stock | 60,874,177 | 59,501,978 | |||||||||
| Conversion of Notes payable | 7,718,488 | 7,530,232 | |||||||||
| Total | 116,354,637 | 118,354,782 | |||||||||
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 periods ending March 31, 2021 and December 31, 2020:
| Warrants | Exercise Price | ||||||||||
| Warrants outstanding as of December 31, 2019 | 16,981,854 | $ | 3.23 | ||||||||
| Issued | 49,928,469 | $ | 0.77 | ||||||||
| Exercised | (1,937,690) | $ | 0.58 | ||||||||
| Terminated/Expired | (5,470,655) | $ | 3.07 | ||||||||
| Warrants outstanding as of December 31, 2020 | 59,501,978 | $ | 1.22 | ||||||||
| Issued | 3,288,400 | $ | 1.45 | ||||||||
| Exercised | (1,839,275) | $ | 0.76 | ||||||||
| Terminated/Expired | (76,926) | $ | 0.65 | ||||||||
| Warrants outstanding as of March 31, 2021 | 60,874,177 | $ | 1.18 | ||||||||
The intrinsic value of outstanding warrants was $31.3 million and $23.8 million as of March 31, 2021 and December 31, 2020, respectively. The following discussion provides details on the various types of outstanding warrants and the related relevant disclosures around each type.
Warrant Derivative Liability
During May 2019, the Company acquired 712,823 warrants with a weighted average exercise price of $3.90 (the "May Acquisitions Warrants"). These warrants included an option to settle in cash in the event of a change of control of the Company and a reset feature if the Company issues shares of common stock with a strike price below the exercise price of the warrants, which required the Company to record the warrants as a derivative liability. The Company calculates the fair value of the derivative liability through a Monte Carlo Model that values the warrants based upon a probability weighted discounted cash flow model.
During January 2020, the Company issued shares below the exercise price of the May Acquisitions Warrants. As such, the Company issued an additional 1,003,232 warrants on March 17, 2020 to certain of its warrant holders at an exercise price of $1.62 and modified the exercise price of the existing May Acquisitions Warrants to $1.62.
During June 2020, the Company issued common stock equivalents below the exercise price of the warrants issued on March 17, 2020. As such, the Company issued an additional 1,990,624 warrants to certain of its warrant holders at an exercise price of $0.75 and modified the exercise price of the existing warrants to $0.75.
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During September 2020, the Company amended all of these warrants to eliminate certain anti-dilution rights, fix the number of shares of common stock purchasable under each warrant, and set the exercise price thereof at $0.65 per share. As such, the Company issued an additional 570,258 warrants to certain of its warrant holders at an exercise price of $0.65.
During the fourth quarter of 2020, holders exercised a total 1,687,690 warrants for which the Company issued shares of common stock. During December 2020, 2,512,321 of these warrants expired and an immaterial amount remained outstanding as of December 31, 2020, all of which expired during January 2021.
The following schedule shows the fair value of the warrant derivative liability as of March 31, 2021 and December 31, 2020, and the change in fair value during the periods ended March 31, 2021 and year ended December 31, 2020 (in thousands):
| Warrant Derivative Liability | |||||
| Balance as of December 31, 2019 | $ | 2,220 | |||
| Change in fair value of warrant derivative liability | (2,220) | ||||
| Balance as of December 31, 2020 | $ | — | |||
Change in fair value of warrant derivative liability (1) | — | ||||
| Balance as of March 31, 2021 | $ | — | |||
(1) All of the May Acquisition Warrants expired during January 2021.
Series F Warrant Liability
During October 2020, the Company issued 43,403,130 warrants to purchase common stock in connection with the Series F Private Placement (defined below) with an exercise price of $0.75. The warrants are exercisable commencing on the date of issuance and expire 72 months after the date of issuance. These warrants include a reset feature if the Company issues common stock, options, or convertible securities with a strike price below the exercise price of the warrants. These warrants did not meet the definition of a derivative or the requirements to be considered equity; as such, the Company recorded these as a liability. See "Note 9 - Convertible preferred stock" for more information on Series F.
The warrant liability is remeasured at fair value each reporting period and represents a Level 3 financial instrument. The Company calculates the fair value of the warrant liability through a Monte Carlo Model and a Black Scholes Option Model. The total value of the consideration received in connection with the Series F Private Placement was first allocated to the warrant liability at fair value, with the remainder allocated to the preferred stock, which led to a discount ascribed to the Series F Preferred Stock. Accordingly, the Company recorded a discount of $14.6 million on the Series F Preferred Stock by adjusting Series F Additional Paid-in Capital.
The following schedule shows the fair value of the warrant liability upon issuance, and the change in fair value during the periods ended March 31, 2021 and December 31, 2020 (in thousands):
| Warrant liability | |||||
| Issuance of Series F warrants | $ | 14,952 | |||
| Change in fair value of warrant liability | 24,898 | ||||
| Balance as of December 31, 2020 | $ | 39,850 | |||
| Change in fair value of warrant liability | 6,483 | ||||
| Balance as of March 31, 2021 | $ | 46,333 | |||
The following schedule shows the inputs used to measure the fair value of the warrant liability:
| Warrant Liability | March 31, 2021 | December 31, 2020 | ||||||||||||
| Stock Price | $1.44 | $1.27 | ||||||||||||
| Exercise Price | $0.75 | $0.75 | ||||||||||||
| Expected remaining term (in years) | 5.50 - 5.56 | 5.75 - 5.81 | ||||||||||||
| Volatility | 67.5% | 67.5% | ||||||||||||
| Risk-free interest rate | 1.1% | 0.5% | ||||||||||||
The valuation of the warrants is subject to uncertainty as a result of the unobservable inputs. If the volatility rate or risk-free interest rate were to change, the value of the warrants would be impacted.
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Equity-Classified Warrants
On May 6, 2019, the Company issued 5,744,991 warrants to purchase common stock with an exercise price of $4.25 (the "May 2019 PIPE Warrants"). Additionally, in connection with the May 2019 PIPE transaction, the Company issued 220,539 warrants to brokers with an exercise price of $3.00. The warrants were exercisable commencing on the issuance date and expire 24 months after the date of issuance. In March 2021, the Company offered to a limited number of holders the opportunity to exercise, in full or in part, these warrants to purchase shares of Common Stock at a reduced exercise price of $1.25 per share. The Company received exercise notices for a total of 1,047,609 warrants, resulting in the Company’s receipt of approximately $1.3 million. The Company recognized the increase in the fair value of the modified warrants on the date of exercise of $0.2 million as a deemed dividend through accumulated deficit with a corresponding increase in additional paid-in capital. The remainder of the outstanding and unexercised May 2019 PIPE Warrants expired during May 2021.
On November 4, 2019, the Company issued 11,000 warrants in connection with the November 2019 Notes. The warrants are exercisable commencing on the date of issuance and expire 24 months from the date of the consummation of a future IPO. The warrants carried an initial exercise price equal to the greater of (i) $5.00 per share or (ii) the price at which the common stock of the Company was sold in the IPO.
On December 19, 2019 the Company issued 6,500,000 warrants with an exercise price of $1.82 in conjunction with the term loan (the "Guarantor Warrants"), which are exercisable commencing on the date of issuance and expire 24 months from the date of the consummation of a future IPO. The Guarantor Warrants had a fair value of $4.2 million on the date of issuance.
On December 19, 2019, the Company issued 937,500 warrants in connection with the Seller Notes. The warrants are exercisable commencing on the date of issuance and expire 24 months from the date of the consummation of a future IPO. The warrants carried an initial exercise price equal to the greater of (i) $5.00 per share or (ii) the price at which the common stock of the Company was sold in the IPO.
On January 13, 2020, the Company issued the ABG Warrants, which are exercisable commencing on the date of issuance and expire 24 months from the date of the consummation of an IPO (as defined in the ABG Warrants) and carried an initial exercise price equal to the greater of (i) $5.00 per share or (ii) the price at which the common stock was sold in the IPO.
On June 24, 2020, the warrants related to the November 2019 Notes, the Seller Notes and the ABG Notes were amended in connection with the issuance of the June 2020 Notes to lower the maximum exercise price applicable to these warrants from $5.00 to $4.25 per share. The decrease in the exercise price resulted in an increase to the fair value of the warrants of $0.1 million which the Company recognized in general and administrative expense.
On June 24, 2020, the Company issued 1,000,000 warrants to a member of the board of directors with an exercise price of $1.25 per share in connection with the June 2020 Notes (the “June 2020 Warrants”), which are exercisable commencing on the date of issuance and expire on the earlier of (i) 84 months from the date of the consummation of an underwritten public offering or other up-list transaction or (ii) June 30, 2030.
On July 20, 2020, the Company issued 300,000 warrants to a member of the board of directors with an exercise price of $1.05 per share in consideration for a personal guarantee by a member of the Company's board of directors on the ABL Facility (the "July 2020 Guarantor Warrants"), which are exercisable commencing on the date of issuance and expire on the earlier of (i) 84 months from the date of the consummation of an underwritten public offering or other up-list transaction or (ii) June 30, 2030.
On January 22, 2021, the Company issued 3,288,400 warrants in connection with the January 2021 PIPE transaction. The warrants are exercisable at an exercise price per share of $1.45 commencing on the date of issuance and expire after a six year period, subject to beneficial ownership limitations (the “January 2021 Warrants”). Due to the discounted warrant exercise associated with the May 2019 PIPE warrants as discussed above, the down round provision on the January 2021 Warrants was triggered such that these warrants could be exercised at a price of $1.25 per share. The Company recognized the increase in the fair value of the modified warrants of $0.2 million as a deemed dividend through accumulated deficit with a corresponding increase in additional paid-in capital.
Warrants Issued as Compensation
On September 17, 2019, a Company advisor was issued 2,500,000 warrants with an exercise price of $0.10 per share and 1,500,000 warrants with an exercise price of $10.00 per share; 1,250,000 of the $0.10 exercise price warrants (the "Tranche 1 Warrants") were exercisable on the earlier of twelve-months after issuance date or immediately prior to a change in control subject to the advisor’s continued service and 1,250,000 of the $0.10 exercise price warrants (the "Tranche 2 Warrants") and the 1,500,000 warrants with the $10.00 exercise price (the "Tranche 3 Warrants") were exercisable on the earlier of eighteen-months after issuance or immediately prior to a change in control subject to the advisor’s continued service.
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On June 1, 2020, the Company entered into a termination agreement (the “Termination Agreement”) with the advisor. Pursuant to the terms of the Termination Agreement, the Tranche 1 Warrants were amended to reduce the number of shares of common stock purchasable thereunder to 1,041,666 shares, and the Tranche 2 Warrants and Tranche 3 Warrants were cancelled. The Tranche 1 Warrants (as amended pursuant to the Termination Agreement) were fully vested as of the date of the termination of the agreement and will remain exercisable until September 17, 2029. Furthermore, if the Company engages in any restricted business line as defined in the Termination Agreement, the Company will issue to the former advisor additional shares of common stock based on formulas intended to compensate the former advisor for the warrants that were reduced or terminated. In connection with the Termination Agreement, the Company recorded expense of $5.7 million during the year ended December 31, 2020 in general and administrative expense. During the first quarter of 2021, the former advisor exercised 791,666 of his remaining warrants outstanding in a cashless exercise resulting in 736,689 shares of common stock issued.
On June 24, 2020, the Company issued 1,000,000 warrants with an exercise price of $1.25 per share to two non-employee directors, which are exercisable commencing on the date of issuance and expire on the earlier of (i) 84 months from the date of the consummation of an underwritten public offering or other up-list transaction or (ii) June 30, 2030. On July 20, 2020, the Company issued 200,000 warrants two non-employee directors at a price of $1.05 per share (the "July 2020 Director Warrants"), which are exercisable commencing on the date of issuance and expire on the earlier of (i) 84 months from the date of the consummation of an underwritten public offering or other up-list transaction or (ii) June 30, 2030. The warrants issued to non-employee directors were immediately vested and as such, the Company recorded $1.0 million of share-based compensation expense upon issuance.
On November 30, 2020, the Company issued 400,000 warrants to a third-party for services with an exercise price of $1.00 and an expiration date 72 months after issuance. These warrants were immediately vested and as such, the Company recorded $0.1 million in general and administrative expense.
Note 12 - Share-based compensation
During the three months ended March 31, 2021 and March 31, 2020, the Company recognized $2.5 million and $2.5 million, respectively, of share-based compensation expense.
On November 11, 2019, the Company received shareholder approval for the Amended and Restated 2019 Incentive Award Plan (the “Amended 2019 Plan”). The Amended 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock or cash-based awards or a dividend equivalent award. The Amended 2019 Plan authorized the issuance 6,500,000 shares of common stock which was increased to 9,000,000 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, 2021 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. On January 1, 2021, the number of shares authorized for issuance increased to 13,500,000, as approved by the Board.
Stock Options
During the three months ended March 31, 2021 and March 31, 2020, the Company granted 5,579,000 and 100,000 stock options, respectively.
Restricted Stock
In March 2020, the Company issued 450,000 shares of restricted common stock to three non-employee directors in return for services provided in their capacity as directors and issued 5,956 restricted shares of common stock to an officer of the Company. The restricted shares were immediately vested and as such, the Company recorded share-based compensation expense of $0.5 million upon issuance.
Note 13- Income taxes
For the three months ended March 31, 2021, and March 31, 2020, the Company recorded no income tax expense. For the three months ended March 31, 2021 and March 31, 2020, the Company’s effective tax rate was 0%. The Company’s effective tax rate of 0% differs from the United States 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 months ended March 31, 2021, and year ended December 31, 2020.
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The Company’s deferred tax assets attributed to net operating loss carryforwards begin to expire in 2027. The ultimate realization of deferred taxes is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. On the basis of management’s assessment, a valuation allowance equal to the net deferred tax assets was recorded since it is more likely than not that the deferred tax assets will not be realized.
The Company has no accrued interest and penalties related to uncertain income tax positions. We do not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. As of March 31, 2021 and December 31, 2020, the Company did not have any significant uncertain tax positions.
The Company’s income tax returns generally remain open for examination for three years from the date filed with each taxing jurisdiction.
Note 14 - Concentrations
Major Suppliers
The Company sourced approximately 71% of its inventory purchases from three vendors for the three months ended March 31, 2021. The Company sourced approximately 48% of its inventory purchases from two vendors for the three months ended March 31, 2020.
Major Customers
Accounts receivable from two customers represented 63% of accounts receivable as of March 31, 2021. Accounts receivable from two customers represented 72% of accounts receivable as of December 31, 2020. Two customers represented 42% of gross sales for the three months ended March 31, 2021. Four customers represented 70% of gross sales for the three months ended March 31, 2020.
Credit Risk
At March 31, 2021 and December 31, 2020, 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 15 - Net loss per share
Basic and diluted net loss per share attributable to common stockholders is presented using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future service that has not yet been recognized are collectively assumed to be used to repurchase shares.
Basic and diluted net loss per share is calculated by dividing net and comprehensive loss attributable to common stockholders by the weighted-average shares outstanding during the period. For the three months ended March 31, 2021 and 2020, the Company’s basic and diluted net and comprehensive loss per share attributable to common stockholders are the same because the Company has generated a net loss to common stockholders and common stock equivalents are excluded from diluted net loss per share as they have an antidilutive impact.
The following table sets forth basic and diluted net loss per share attributable to common stockholders for the three months ended March 31, 2021 and 2020 (in thousands, except share and per share amounts):
| Three Months Ended March 31, | ||||||||||||||
| Common stockholders | 2021 | 2020 | ||||||||||||
| Numerator: | ||||||||||||||
| Net and comprehensive loss | $ | (12,850) | $ | (9,454) | ||||||||||
| Less: Preferred stock dividends | — | 34 | ||||||||||||
| Less: Adjustment due to warrant modifications | 402 | — | ||||||||||||
| Adjusted Net and comprehensive loss available to common stockholders | $ | (13,252) | $ | (9,488) | ||||||||||
| Denominator: | ||||||||||||||
| Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted | 57,525,054 | 48,526,396 | ||||||||||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | (0.23) | $ | (0.20) | ||||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. The financial condition, results of operations and cash flows discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of Better Choice Company Inc. and its consolidated subsidiaries, collectively, the “Company,” “Better Choice Company,” “we,” “our,” or “us”. These statements represent projections, beliefs, and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview and Outlook
We are an animal health and wellness company ready to lead the global 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 our portfolio of brands are well positioned to benefit from the trends of growing pet humanization and an increased consumer focus on health and wellness, and 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.
Our product offering is sold today under the Halo and TruDog brands and has enabled the Company to penetrate multiple channels of trade, which we believe enables us to deliver on core consumer needs and respond to changing channel dynamics that have only accelerated as a result of the COVID-19 pandemic. 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 includes the sale of product to pet specialty chains such as Petco, PetSmart, select grocery chains and neighborhood pet stores; DTC, which includes the sale of product through our online web platform; and International, which includes the sale of product to foreign distribution partners and to select international retailers. We believe our omni-channel approach is a significant competitive advantage, as it allows us to design and sell products purpose-built for success in specific channels while maintaining our ability to leverage marketing and sales resources cross-channel.
Although the COVID-19 pandemic has dramatically changed the U.S. retail landscape, the pet industry has proven to be resilient, with Packaged Facts recently increasing their projected 2021 growth rate for U.S. retail sales of pet food and supplies from 5.3% to 7.6%. While the industry-wide E-Commerce sales have retreated somewhat following the March 2020 pantry stocking, the sale of pet food and supplies online has increased 35% year-over-year according to Packaged Facts, with subscription sales nearly equal to the March 2020 peak. We anticipate our ability reach a growing base of diverse customers online will only increase as approximately 59% of our sales during fiscal year 2020 and the first quarter of 2021 were made via our DTC and E-Commerce channels. Conversely, we believe that our long-established relationships with key Brick & Mortar customers will enable us to jointly launch new products in the future that are designed for in-store success.
In addition to our domestic sales channels, the Halo brand’s international sales grew by 95% in 2020, driven primarily by Halo’s ability to secure Product Import Registrations for 15 Dog and Cat Food Diets from the Ministry of Agriculture and Rural Affairs of China (“MOA”) in June 2020. We believe that our growth in Asia is fueled by increasing levels of economic financial status and demand for premium, western manufactured products, with China representing the largest market opportunity for growth and 48% of Better Choice’s international sales in 2020. 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. This growth rate is driven by dramatic increases in pet ownership, which has seen the number of dog-owning Chinese households increase from 12% in 2015 to 20% in 2020. On a relative basis, 67% of U.S. households owned a pet in 2020 according to the American Pet Products Association, suggesting that the Chinese pet market has significant room to grow in the foreseeable future.
New product innovation represents the cornerstone of our growth plan, and our established supply and distribution infrastructure allows us to develop, manufacture and bring new products to market in generally under nine months. Our flexible and scalable outsourced manufacturing model also promotes innovation, as we offer a wide variety of dog and cat food products under the Halo and TruDog brands that serve many different consumer needs. Founded in 1986, the Halo brand consists of a diversified, premium natural dog and cat portfolio, with products derived from real whole meat, no rendered meat meal and non-genetically modified (non-"GMO") fruits and vegetables, unlike many other kibble and canned products currently in the marketplace.
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In addition to its dry kibble and canned wet food offering, Halo also has a successful line of freeze-dried treats for dogs and cats and a growing line of award-winning vegan products for dogs. Founded in 2013, the TruDog brand offers ultra-premium, freeze-dried raw dog food, toppers, treats and supplements sold predominantly on its DTC website. Freeze-dried raw dog food is one of the fastest growing sub-category of premium pet food, with Packaged Facts reporting 39% year-over-year growth in the sub-category in 2019. We believe that both brands are well positioned to take advantage of pet parents’ increasing desire to feed only the highest quality ingredients to their pets, and that there will continue to be innovative opportunities for brand consolidation over time.
Our marketing strategies are designed to clearly communicate to consumers about the benefits of our products and to build awareness of our brands. We deploy a broad set of marketing tools across various forms of media to reach consumers through multiple touch points and engage with a number of marketing agencies to develop content and product packaging. Our marketing initiatives include the use of social and digital marketing, Search Engine Optimization, email and SMS marketing, and paid media (Facebook, Instagram & YouTube), among other proven strategies to generate and convert sales prospects into loyal, satisfied customers. In addition to directly targeting and educating consumers of our products, we partner with a number of retailers such as Amazon, Chewy and Petco to develop joint sales and marketing initiatives to increase sales and acquire new customers.
On February 2, 2019 and February 28, 2019, respectively, we entered into definitive agreements to acquire through stock exchange agreements, approximately 93% of the outstanding interest of TruPet LLC and all of the outstanding shares of Bona Vida, Inc., an emerging hemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space. On May 6, 2019, Better Choice Company consummated the stock exchange transactions whereby TruPet LLC and Bona Vida, Inc. became wholly owned subsidiaries of Better Choice Company. For accounting and financial reporting purposes, the transaction was treated as a reverse acquisition whereby TruPet is considered the acquiror of Better Choice Company and Bona Vida, Inc. Thus, the historical financial information of the registrant is that of TruPet even though the legal registrant remains Better Choice Company.
On December 19, 2019, the Company acquired 100% of the issued and outstanding capital stock of Halo, Purely for Pets, Inc., in exchange for a combination of cash consideration, shares of our common stock, and convertible subordinated notes and accompanying stock purchase warrants.
Although Bona Vida remains a wholly owned subsidiary, we do not currently sell or market any CBD products, we do not currently own any CBD related inventory or raw materials and we do not currently have plans to re-enter the CBD market at this time.
The impact that COVID-19 will have on our consolidated results of operations is uncertain. Although we have not observed a material reduction in sales as of March 2021 as a result of the COVID-19 pandemic, we will continue to evaluate the nature and extent of COVID-19’s impact to our business, consolidated results of operations, financial condition, and liquidity, and our results presented herein are not necessarily indicative of the results to be expected for future periods in 2021 or the full fiscal year. Management cannot predict the full impact of the COVID-19 pandemic on the Company’s sourcing, manufacturing and distribution of its products or to economic conditions generally, including the effects on consumer spending. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.
Results of Operations for the three months ended March 31, 2021 and 2020
The following table sets forth our consolidated results for the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | % | ||||||||||||||||||||
| Net sales | $ | 10,830 | $ | 12,226 | $ | (1,396) | (11) | % | |||||||||||||||
| Cost of goods sold | 6,556 | 8,069 | (1,513) | (19) | % | ||||||||||||||||||
| Gross profit | 4,274 | 4,157 | 117 | 3 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| General and administrative | 4,551 | 8,245 | (3,694) | (45) | % | ||||||||||||||||||
| Share-based compensation | 2,525 | 2,485 | 40 | 2 | % | ||||||||||||||||||
| Sales and marketing | 2,336 | 1,959 | 377 | 19 | % | ||||||||||||||||||
| Total operating expenses | 9,412 | 12,689 | (3,277) | (26) | % | ||||||||||||||||||
| Loss from operations | $ | (5,138) | $ | (8,532) | $ | 3,394 | (40) | % | |||||||||||||||
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Net sales
We sell our products through online retailers, pet specialty retailers, our online portal directly to our consumers and internationally to foreign distribution partners (transacted in U.S. dollars). During 2019, our net sales were primarily driven by our distribution of TruPet products through our DTC channel. However, with the acquisition of Halo, our sales became more diversified through the E-commerce, Brick & Mortar and International channels.
For many customers, sales transactions are single performance obligations that are recorded at the time the product is shipped from our distribution centers, when control transfers. We record a revenue reserve based on past return rates to account for customer returns. DTC net sales include revenue derived from the sale of our products and related shipping fees offset by promotional discounts, refunds and loyalty points earned. We offer a variety of promotions and incentives to our customers including daily discounts, multi-bag purchase discounts and coupon codes for initial purchases. For our DTC loyalty program, a portion of revenue is deferred at the time of the sale as points are earned based on the relative stand-alone selling price, and not recognized until the redemption of the loyalty points, which do not expire. We have applied a redemption rate based on historical experience.
Information about the Company’s revenue channels is as follows (in thousands):
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| E-commerce | $ | 4,010 | 37 | % | $ | 4,481 | 37 | % | ||||||||||||||||||
| Brick & Mortar | 1,894 | 18 | % | 2,897 | 23 | % | ||||||||||||||||||||
| DTC | 2,436 | 22 | % | 2,804 | 23 | % | ||||||||||||||||||||
| International | 2,490 | 23 | % | 2,044 | 17 | % | ||||||||||||||||||||
| Net Sales | $ | 10,830 | 100 | % | $ | 12,226 | 100 | % | ||||||||||||||||||
Net sales decreased $1.4 million, or 11%, to $10.8 million for the three months ended March 31, 2021 compared to $12.2 million for the three months ended March 31, 2020. The decrease was driven by lower E-Commerce sales due to higher than normal orders during the first quarter of 2020 due to increased warehouse stocking orders in March 2020 associated with the COVID-19 pandemic. The decrease was also driven by lower Brick & Mortar sales due to the discontinuation of products with one of our pet specialty customers and lower DTC sales driven by a decrease in marketing spend with low return on investment. These decreases were partially offset by continued growth in our international channel.
Key factors that affect our future sales growth include new product innovation and expansion in each of the sales channels.
Cost of goods sold and Gross profit
Our products are manufactured to our specifications by contracted manufacturing plants using raw materials sourced by our contracted manufacturers. We design our packaging in-house for manufacture by third parties, and packaging is shipped directly to contracted manufacturing plants. We work with our co-manufacturers to secure a supply of raw materials that meet our specifications, such as USA farm-raised beef, GAP 2 certified cage-free whole chicken and associated broths, GAP 2 certified cage-free whole turkey and associated broths, MSC certified wild-caught salmon and MSC certified wild-caught whitefish and associated broths, and select non-GMO fruits and vegetables, such as peas, sweet potatoes and lentils. In addition to procuring raw materials that meet our formulation requirements, our contract manufacturers manufacture, test and package our products.
Cost of goods sold consists primarily of the cost of product obtained from third-party contract manufacturing plants, packaging materials, inventory freight for shipping product from third-party contract manufacturing plants to our warehouse and third-party fulfillment and royalties. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on the analysis, we record inventories at the lower of cost or net realizable value, with any reduction in value expensed as cost of goods sold.
We calculate gross profit as net sales, including any shipping revenue collected from our customers, less cost of goods sold. 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.
Cost of goods sold decreased $1.5 million, or 19%, to $6.6 million for the three months ended March 31, 2021 compared to $8.1 million for the three months ended March 31, 2020. As a percentage of revenue, cost of goods sold decreased to 61% during the three months ended March 31, 2021 compared to 66% for the three months ended March 31, 2020, respectively. The decrease was driven by $0.9 million of non-cash expense related to the amortization of a purchase accounting adjustment to inventory recorded in connection with the Halo acquisition in the first quarter of 2020 and decrease in net sales.
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During the three months ended March 31, 2021, gross profit increased $0.1 million to $4.3 million from $4.2 million during the three months ended March 31, 2020. Gross profit margin increased to 39% for the three months ended March 31, 2021 as compared to 34% for the three months ended March 31, 2020. The improvement in gross profit margin was impacted by the prior year inventory accounting adjustment discussed above, as well as lower warehouse related costs, partially offset by higher product costs.
Operating Expenses
General and administrative expenses include management and office personnel compensation and bonuses, warrant expense, corporate level information technology related costs, rent, travel, professional service fees, costs related to merchant credit card fees, insurance, product development costs, shipping DTC orders to customers, customer service and warehousing costs and general corporate expenses. During the three months ended March 31, 2021, general and administrative expenses decreased $3.6 million, or 45%, to $4.6 million compared to $8.2 million for the three months ended March 31, 2020. The decrease was driven by a reduction in warrant expense of $2.5 million, contract termination costs incurred during the first quarter of 2020 of $1.1 million, a non-cash reduction of our sales tax liability of $0.5 million and a decrease in professional fees of $0.2 million, all of which was partially offset by higher headcount related costs.
Share-based compensation includes expenses related to stock options and certain warrants issued to employees and non-employee directors. During the three months ended March 31, 2021, share-based compensation remained flat at $2.5 million for the three months ended March 31, 2021 and March 31, 2020.
Sales and marketing expenses include costs related to compensation for sales personnel, other costs related to the selling platform, as well as marketing, including paid media and content creation expenses. Marketing expenses consist primarily of Facebook, Amazon and other media ads, as well as other advertising and marketing costs, all geared towards acquiring new customers and building brand awareness. During the three months ended March 31, 2021, sales and marketing expenses, including paid media, increased $0.3 million, or 19%, to $2.3 million from $2.0 million during the three months ended March 31, 2020, driven primarily by increased promotional spend in our E-Commerce and International sales channels and higher advertising and market research costs, partially offset by a decrease in headcount related costs.
Interest expense
During the three months ended March 31, 2021, interest expense decreased $1.5 million to $0.8 million from $2.3 million for the three months ended March 31, 2020. Interest expense relates primarily to existing and prior indebtedness including term loans, lines of credit and subordinated convertible notes. The reduction in interest expense was driven by a decrease in outstanding debt balances as well as a more favorable interest rate on our new Wintrust Credit Facility.
Loss on extinguishment of debt
During the three months ended March 31, 2021, we incurred a loss on extinguishment of debt of $0.4 million, while there was no corresponding expense for the three months ended March 31, 2020. Loss on extinguishment of debt relates to extinguishment accounting applied in connection with the termination of a term loan and ABL Facility. See "Note 7 - Debt" for additional information.
Change in fair value of warrant liabilities
Common stock warrants classified as liabilities are revalued at each balance sheet date subsequent to the initial issuance and changes in the fair value are reflected in the consolidated statement of operations as change in fair value of warrant liability. The change in fair value for the three months ended March 31, 2021 relates to the increase in the fair value of common stock warrants issued in connection with the Series F Private Placement. See "Note 11 - Warrants" for additional information.
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 the arise. No provision has been made for federal and state income taxes prior to the date of the May Acquisitions as the proportionate share of TruPet’s income or loss was included in the personal tax returns of its members as TruPet was a limited liability company. Subsequent to the acquisitions, the Company, as a corporation is required to provide for income taxes.
During the three months ended March 31, 2021 and 2020, we did not record income tax expense due to the continued losses incurred by the Company. The effective tax rate subsequent to the acquisitions is 0%, which differs from the U.S. Federal statutory rate of 21% as our reported losses are offset by a valuation allowance due to uncertainty as to the realization of those losses.
26
Liquidity and Capital Resources
Since our founding, we have financed our operations primarily through sales of member units while a limited liability company, and since becoming a corporation, through the sales of shares of our common stock, warrants, preferred stock, and loans. On March 31, 2021 and December 31, 2020, we had cash and cash equivalents and restricted cash of $4.4 million and $4.0 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 its products, the successful protection of its proprietary technologies, ability to grow into new markets, and compliance with government regulations. As of March 2021, we have not experienced a significant adverse impact to our business, financial condition or cash flows resulting from the COVID-19 pandemic. However, uncertainties regarding the continued economic impact of COVID-19 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 have an accumulated deficit. We expect to continue to generate operating losses and consume significant cash resources for the foreseeable future. These conditions raise substantial doubt about our ability to continue as a going concern, meaning that we may be unable to continue operations for the foreseeable future or realize assets and discharge liabilities in the ordinary course of operations. We have implemented and continue to implement plans to achieve cost savings and other strategic objectives to address these conditions. We have achieved cost savings from the consolidation of our third-party logistics operations and reduction of overhead costs and we expect to achieve further cost savings from the consolidation of third-party manufacturers and optimization of shipping costs. The business is focused on growing the most profitable channels while reducing investments in areas that are expected to have lower long-term benefits.
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. The accompanying interim condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the interim condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern.
A summary of our cash flows is as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows (used in) provided by: | |||||||||||
| Operating activities | $ | (2,325) | $ | (1,159) | |||||||
| Investing activities | — | (8) | |||||||||
| Financing activities | 2,697 | 500 | |||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | $ | 372 | $ | (667) | |||||||
Cash flows from Operating Activities
Cash used in operating activities increased $1.2 million, or 101%, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Net loss from operations adjusted for non-cash expenses was $2.7 million for the three months ended March 31, 2021 compared to $2.9 million for the comparable prior year period. The increase in cash used in operating activities was driven by higher accounts receivable of $1.7 million due to the timing of sales and collections and higher inventory spend of $1.5 million to maintain a steady level of inventory as compared to the first quarter of 2020, where a large reduction in inventory occurred due to the March 2020 pantry stocking related to the COVID-19 pandemic, partially offset by an increase in accounts payable and other accrued expenses of $1.7 million.
Cash flows from Investing Activities
Cash used in investing activities was $0.0 million during the three months ended March 31, 2021 and less than $0.1 million during the three months ended March 31, 2020.The cash used in investing activities for is related to the purchase of property and equipment.
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Cash flows from Financing Activities
Cash provided by financing activities was $2.7 million for the three months ended March 31, 2021 compared to cash provided by financing activities of $0.5 million during the three months ended March 31, 2020. The cash provided by financing activities for the three months ended March 31, 2021 was related to proceeds from the January Private Placement of $4.1 million and cash received from warrant exercises of $1.3 million, partially offset by net payments on the term loans of $2.1 million, net payments on the revolving line of credit of $0.4 million and $0.1 million in debt issuance costs. Net cash provided by financing activities during the three months ended March 31, 2020 was related to proceeds from the revolving line of credit.
Indebtedness
Our indebtedness includes a term loan, a revolving credit facility, various convertible notes payable, and PPP loans. For additional details about the terms, covenants and restrictions contained in the Wintrust Agreement and the subordinated convertible notes, see "Note 7 - Debt" to our interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Significant Estimates
In connection with the preparation of our unaudited condensed consolidated financial statements prepared in accordance with GAAP, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenues, expenses and the related disclosures. We have identified critical accounting policies and significant estimates that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. Our most critical accounting policies are related to accounting for warrants, share-based compensation, accounting for convertible notes, goodwill impairment, revenue recognition, accounting for business combinations and income taxes. There have been no material changes to our critical accounting policies and estimated compared to the descriptions in our Annual Report for the year ended December 31, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management evaluated its internal control over financial reporting for the quarter ended March 31, 2021. Based upon that evaluation and as a result of the remediation of previously identified material weaknesses, as described in our most recent Annual Report, the Company’s Chief Executive Officer and Principal Financial and Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.
Changes in Internal Control Over Financial Reporting
As of March 31, 2021, management concluded that the remediated controls were operating effectively. There were no other changes in internal control over financial reporting during the fiscal quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Item 1A. of Part 1 of our Annual Report for the fiscal year ended December 31, 2020. While we believe there have been no material changes from the risk factors previously disclosed in our Annual Report, you should carefully consider, in addition to the other information set forth in this report, the risk factors discussed in our 2020 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 Report on Form 10-Q, 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
We have previously disclosed all sales of securities without registration under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith.
EXHIBIT INDEX
| Exhibit | Exhibit Description | Form | File No. | Exhibit | Filing date | ||||||||||||
| 8-K | 333-161943 | 2.1 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 2.2 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 2.3 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 2.4 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 2.1 | 12/26/2019 | ||||||||||||||
| 10-Q | 333-161943 | 3.1 | 04/15/2019 | ||||||||||||||
| 10-Q | 333-161943 | 3.2 | 04/15/2019 | ||||||||||||||
| 8-K | 333-161943 | 3.1 | 03/20/2019 | ||||||||||||||
29
| Exhibit | Exhibit Description | Form | File No. | Exhibit | Filing date | ||||||||||||
| 10-KT | 333-161943 | 3.5 | 07/25/2019 | ||||||||||||||
| 8-K | 333-161943 | 99.1 | 07/30/2020 | ||||||||||||||
| 10-Q | 333-161943 | 3.4 | 04/15/2019 | ||||||||||||||
| 10-Q | 333-161943 | 3.5 | 04/15/2019 | ||||||||||||||
| 8-K | 333-161943 | 3.1 | 05/23/2019 | ||||||||||||||
| 8-K | 333-161943 | 3.1 | 10/02/2020 | ||||||||||||||
| 8-K | 333-161943 | 4.1 | 04/30/2019 | ||||||||||||||
| 8-K | 333-161943 | 4.1 | 09/23/2019 | ||||||||||||||
| 8-K | 333-161943 | 4.2 | 09/23/2019 | ||||||||||||||
| 8-K | 333-161943 | 4.3 | 09/23/2019 | ||||||||||||||
| 8-K | 333-161943 | 4.1 | 11/15/2019 | ||||||||||||||
| 8-K | 333-161943 | 4.2 | 11/15/2019 | ||||||||||||||
| 10-Q | 333-161943 | 10.6 | 01/31/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.7 | 01/31/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.8 | 01/31/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.10 | 01/31/2020 | ||||||||||||||
| 8-K | 333-161943 | 4.1 | 12/13/2018 | ||||||||||||||
| S-1 | 333-234349 | 10.2 | 10/28/2019 | ||||||||||||||
| S-1 | 333-234349 | 10.3 | 10/28/2019 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 04/30/2019 | ||||||||||||||
| 8-K | 333-161943 | 4.1 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 4.2 | 05/10/2019 | ||||||||||||||
| 8-K | 333-161943 | 4.3 | 11/15/2019 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 11/15/2019 | ||||||||||||||
| 10-K | 333-161943 | 10.19 | 05/04/2020 | ||||||||||||||
| S-1 | 333-234349 | 10.7 | 10/28/2019 | ||||||||||||||
30
| Exhibit | Exhibit Description | Form | File No. | Exhibit | Filing date | ||||||||||||
| 10-Q | 333-161943 | 4.11 | 06/25/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.12 | 06/25/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.13 | 06/25/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.14 | 06/25/2020 | ||||||||||||||
| 10-Q | 333-161943 | 4.15 | 8/14/2020 | ||||||||||||||
| 8-K | 333-161943 | 10.5 | 07/21/2020 | ||||||||||||||
| 8-K | 333-161943 | 4.1 | 10/02/2020 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 10/2/2020 | ||||||||||||||
| 8-K | 333-161943 | 10.2 | 10/2/2020 | ||||||||||||||
| 8-K | 333-161943 | 10.3 | 10/2/2020 | ||||||||||||||
| 10-Q | 333-161943 | 10.40 | 11/16/2020 | ||||||||||||||
| S-1/A | 333-251241 | 4.22 | 2/16/2021 | ||||||||||||||
| S-1/A | 333-251241 | 4.23 | 2/16/2021 | ||||||||||||||
| S-1/A | 333-251241 | 4.24 | 2/16/2021 | ||||||||||||||
| S-1 | 333-234349 | 10.8 | 10/28/2019 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 02/07/2019 | ||||||||||||||
| 10-Q | 333-161943 | 10.6 | 10/09/2019 | ||||||||||||||
| 8-K | 333-161943 | 10.3 | 02/11/2020 | ||||||||||||||
| 8-K | 333-161943 | 10.4 | 02/11/2020 | ||||||||||||||
| 10-Q | 333-161943 | 10.7 | 10/09/2019 | ||||||||||||||
| 10-K | 333-161943 | 10.28 | 05/04/2020 | ||||||||||||||
| S-1 | 333-234349 | 10.11 | 10/28/2019 | ||||||||||||||
| S-1 | 333-234349 | 10.12 | 10/28/2019 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 02/11/2020 | ||||||||||||||
| 8-K | 333-161943 | 10.2 | 02/11/2020 | ||||||||||||||
| 10-K | 333-161943 | 10.12 | 3/30/2021 | ||||||||||||||
| 10-K | 333-161943 | 10.13 | 3/30/2021 | ||||||||||||||
| 10-K | 333-161943 | 10.14 | 3/30/2021 | ||||||||||||||
31
| Exhibit | Exhibit Description | Form | File No. | Exhibit | Filing date | ||||||||||||
| 8-K/A | 333-161943 | 10.1 | 1/5/2021 | ||||||||||||||
| 8-K/A | 333-161943 | 10.2 | 1/5/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 1/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.2 | 1/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.3 | 1/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.4 | 1/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.5 | 1/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.6 | 1/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.7 | 1/11/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.1 | 2/18/2021 | ||||||||||||||
| 8-K | 333-161943 | 10.2 | 2/18/2021 | ||||||||||||||
| 10-K | 333-161943 | 21.1 | 3/30/2021 | ||||||||||||||
| 101* | The following materials from the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 formatted in Inline Extensible Business Reporting Language ("iXBRL"): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders Deficit, (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 March 31, 2021, 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: May 13, 2021 | By: | /s/ SCOTT LERNER | ||||||
| Scott Lerner | ||||||||
| Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: May 13, 2021 | By: | /s/ SHARLA A. COOK | ||||||
| Sharla A. Cook | ||||||||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
33