ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. The financial condition, results of operations and cash flows discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of Better Choice Company Inc. and its consolidated subsidiaries, collectively, the “Company,” “Better Choice Company,” “we,” “our,” or “us”. These statements represent projections, beliefs, and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview and Outlook
Better Choice is a pet health and wellness company committed to leading the industry shift toward pet products and services that help dogs and cats live healthier, happier and longer lives. Our mission is to become the most innovative premium pet food company in the world, and we are motivated by our commitment to making products with integrity and treating pets and their parents with respect. We believe that our broad portfolio of pet health and wellness products are well positioned to benefit from the trends of growing pet humanization and an increased consumer focus on health and wellness, and have adopted a laser focused, channel-specific approach to growth that is driven by new product innovation. Our executive team has a proven history of success in both pet and consumer-packaged goods, and has over 50 years of combined experience in the pet industry and over 100 years of combined experience in the consumer-packaged goods industry.
We sell our premium and super-premium products (which we believe generally includes products with a retail price greater than $0.20 per ounce) under the Halo brand umbrella, which includes Halo Holistic™, Halo Elevate® and the former TruDog brand, which has been rebranded and successfully integrated under the Halo brand umbrella during the third quarter of 2022. Our core products sold under the Halo brand are made with high-quality, thoughtfully sourced ingredients for natural, science based nutrition. Each innovative recipe is formulated with leading veterinary and nutrition experts to deliver optimal health. Our diverse and established customer base has enabled us to penetrate multiple channels of trade, which we believe enables us to deliver on core consumer needs and serve pet parents wherever they shop. We group these channels of trade into four distinct categories: E-commerce, which includes the sale of product to online retailers such as Amazon and Chewy; Brick & Mortar, which primarily includes the sale of product to Pet Specialty retailers such as Petco, Pet Supplies Plus and neighborhood pet stores, as well as to select grocery chains; DTC, which includes the sale of product through our website halopets.com; and International, which includes the sale of product to foreign distribution partners and to select international retailers.
The Global Pet Food and Treat Market
The U.S. represents the largest and most developed market for pet food globally, with food and treats accounting for approximately $39 billion of consumer sales in 2019, or 36% of the total U.S. pet care market, according to AlphaWise and Morgan Stanley Research. According to the American Pet Product Association, between 66% and 70% of all households in the U.S. own a pet, equating to a total pet population of more than 130 million companion animals and an average of 1.7 pets per household. Pet spending represents a significant portion of household spend on consumer products, as this translates to an average annual spend on pet care of more than $1,500 per pet owning household, with $460 of this spend attributed to pet food and treats.
Historically, consumer spending on pets grew at an approximately 3% CAGR in the decade leading up to the COVID-19 pandemic, driven by steady annual increases in household pet ownership of approximately 1%, the continued premiumization of the category and the humanization of pets. These industry tailwinds have been magnified in the post-COVID landscape, as stay-at-home orders have driven a more than tripling of annual pet ownership growth alongside fundamental changes in consumer purchasing behavior. This surge in pet acquisition has led to a dramatic increase in the forecasted growth of the pet care industry over the next ten years.
Beyond the estimated $3.9 billion permanent increase to annual spend on pet food and treats, this “Pet Boom” was driven by the acceleration of pet ownership by millennial and Gen-Z households. From a demographic perspective, younger pet owners are more likely to spend a higher percentage of their income on pets, treat their pet as an important member of the family and to purchase products from pet specialty and online retailers rather than from grocery stores. Along these lines, women are 3.2 times more interested in purchasing pet food than men, and are 2.4 times more likely to engage with search ads than men. Taken holistically, these traits suggest a preference to purchase more premium and super-premium pet food and treats from brands like Halo, with a tendency to purchase products in the channels where we compete.
Globally, Asia is the second largest market for pet products, with China representing the largest market opportunity for growth. Like the U.S., growth in the Asian pet care industry has been driven by dramatic increases in household pet ownership. We believe that growth in Asia is fueled by increasing levels of economic financial status and demand for premium, western manufactured products as a result of product quality concerns. This demand has been supported by a rapidly growing middle class in China, where a recent McKinsey report estimated that in 2018 roughly 730 million people in urban areas fell into the income categories of “aspirants” and “affluents,” with the Brookings group estimating that approximately 60 million people are added to these income categories each year. We believe that this growth drove the increase in the number of dog-owning Chinese households as measured by Euromonitor, which increased from 12% in 2015 to 20% in 2020, according to Euromonitor. According to Euromonitor, the Chinese market for premium dry dog and cat food is anticipated to grow at a 20% CAGR and 28% CAGR, respectively, from 2015 through 2025, suggesting that the Chinese pet market has significant room for growth in the foreseeable future. We are focused on targeting Chinese pet owners with the highest willingness to pay, which tend to be urban dwelling millennial and Gen-Z women. In 2021, 80% of our products were purchased online, and approximately 50% of our end-consumers were born after 1990.
Our Growth Strategy
•Strong Innovation Pipeline. We have a robust and growing pipeline of new products, and believe our size is an advantage as we are nimble enough to quickly bring new products to market, but large enough to benefit from strong existing customer relationships and established economies of scale with our co-manufacturers.
•Ability to Leverage Differentiated Omni-Channel Strategy for Growth. We believe that we can leverage our differentiated omni-channel strategy to design and sell products purpose-built for success in specific channels while maintaining our ability to leverage marketing and sales resources cross-channel. We believe that this strategy will allow us to deliver on core consumer needs, maximize gross margin and respond to changing channel dynamics that have accelerated in recent years.
•Capitalize on Continuing Trends of Humanization of Pets. We believe our combination of innovative products designed specifically for certain channels can assist our growth to become a leader in the premium and super-premium categories across dog and cat food.
•Well Positioned to Capitalize on a Once-in-a-Generation Demographic Shift in Asia. We believe that Asia represents the largest macro-growth opportunity in the global pet food industry. In China, the number of households that own a pet has doubled in the last five years, with younger pet owners leading growth.
Recent Corporate Developments
On September 13, 2022, we announced that Scott Lerner was stepping down from his role as CEO, effective September 14. Also on September 13, 2022, we announced that Lionel F. Conacher was appointed as Interim CEO, effective September 14, 2022.
Results of Operations for the three and nine months ended September 30, 2022 and 2021
The following table sets forth our consolidated results for the periods presented (in thousands):
|Three Months Ended|
|Nine Months Ended|
|Net sales||$||11,865 ||$||13,200 ||$||(1,335)||(10)||%||$||45,394 ||$||35,019 ||$||10,375 ||30 ||%|
|Cost of goods sold||7,700 ||8,762 ||(1,062)||(12)||%||31,795 ||22,407 ||9,388 ||42 ||%|
|Gross profit||4,165 ||4,438 ||(273)||(6)||%||13,599 ||12,612 ||987 ||8 ||%|
|Selling, general and administrative||10,007 ||7,745 ||2,262 ||29 ||%||25,771 ||21,397 ||4,374 ||20 ||%|
|Share-based compensation||562 ||660 ||(98)||(15)||%||2,454 ||3,517 ||(1,063)||(30)||%|
|Total operating expenses||10,569 ||8,405 ||2,164 ||26 ||%||28,225 ||24,914 ||3,311 ||13 ||%|
|Loss from operations||(6,404)||(3,967)||(2,437)||(61)||%||(14,626)||(12,302)||(2,324)||(19)||%|
|Other (expense) income:|
|Interest expense, net||(142)||(79)||(63)||80 ||%||(324)||(3,148)||2,824 ||(90)||%|
|Gain on extinguishment of debt, net||— ||— ||— ||— ||%||— ||457 ||(457)||(100)||%|
|Change in fair value of warrant liabilities||— ||590 ||(590)||(100)||%||— ||23,463 ||(23,463)||(100)||%|
|Total other (expense) income, net||(142)||511 ||(653)||(128)||%||(324)||20,772 ||(21,096)||(102)||%|
|Net (loss) income before income taxes||(6,546)||(3,456)||(3,090)||(89)||%||(14,950)||8,470 ||(23,420)||277 ||%|
|Income tax expense||1 ||— ||1 ||— ||%||4 ||— ||4 ||100 ||%|
|Net (loss) income available to common stockholders||$||(6,547)||$||(3,456)||$||(3,091)||(89)||%||$||(14,954)||$||8,470 ||$||(23,424)||277 ||%|
We sell our products through online retailers, pet specialty retailers, our online portal directly to our consumers and internationally to foreign distribution partners (transacted in U.S. dollars). Generally, our sales transactions are single performance obligations that are recorded at the time the product is shipped from our distribution centers and when control transfers. We offer a variety of trade promotions, discounts and incentives to our customers, which impacts the transaction price of our products and our net sales accordingly. DTC net sales include revenue derived from shipping fees and are net of loyalty points earned (a portion of revenue is deferred at the time of the sale as points are earned and not recognized until the redemption of the points, estimated based on historical experience). We record a revenue reserve based on historical return rates to account for customer returns.
Information about our revenue channels is as follows (in thousands):
|Three Months Ended|
|Nine Months Ended|
|$||3,530 ||30 ||%||$||4,742 ||36 ||%||$||11,035 ||24 ||%||$||11,644 ||33 ||%|
Brick & Mortar (2)
|1,342 ||11 ||%||1,816 ||14 ||%||9,632 ||21 ||%||5,408 ||16 ||%|
|DTC||1,371 ||12 ||%||2,363 ||18 ||%||5,066 ||11 ||%||7,140 ||20 ||%|
|5,622 ||47 ||%||4,279 ||32 ||%||19,661 ||44 ||%||10,827 ||31 ||%|
|Net Sales||$||11,865 ||100 ||%||$||13,200 ||100 ||%||$||45,394 ||100 ||%||$||35,019 ||100 ||%|
(1)Our E-commerce channel includes two customers that amounted to greater than 10% of our total net sales during the three and nine months ended September 30, 2022. These customers had an aggregate of $3.3 million and $10.6 million of net sales during the three and nine months ended September 30, 2022, respectively. Two customers amounted to greater than 10% of our total net sales during the three and nine months ended September 30, 2021, respectively. These customers had an aggregate of $4.4 million and $10.8 million of net sales during the three and nine months ended September 30, 2021, respectively.
(2)Our Brick & Mortar channel includes $4.3 million of net sales from one customer that amounted to greater than 10% of our total net sales during the nine months ended September 30, 2022.
(3)One of our International customers that distributes products in China amounted to greater than 10% of our total net sales during the three and nine months ended September 30, 2022 and represented $5.3 million and $16.6 million of net sales, respectively. One of our International customers in China represented greater than 10% of net sales during the three and nine months ended September 30, 2021 and represented $2.9 million and $6.7 million of net sales, respectively.
Net sales decreased $1.3 million, or 10%, to $11.9 million for the three months ended September 30, 2022 compared to $13.2 million for the three months ended September 30, 2021. The decrease was driven by softness in our E-commerce channel as one of our primary customers significantly reduced its levels of on-hand inventory and lower customer acquisition and retention marketing spend as we prepare for the Halo Holistic™ relaunch, softness in our DTC channel as we began to re-introduce customer acquisition marketing spend after finalizing the rebranding of TruDog under the Halo umbrella, and a reduction in our Brick & Mortar channel as we exited select grocery chains and shifted the focus of this channel to the Halo Elevate® product line, partially offset by increased International sales. Net sales increased $10.4 million, or 30%, to $45.4 million for the nine months ended September 30, 2022 compared to $35.0 million for the nine months ended September 30, 2021. The increase was driven by growth in our Brick & Mortar channel driven by the launch of Halo Elevate® and growth in our International channel, partially offset by lower E-commerce and DTC sales driven by an intentional reduction in new customer acquisition and retention marketing spend in connection with our strategic rebranding of TruDog under the Halo umbrella which was successfully executed and implemented in July 2022 and the Halo Holistic™ relaunch. Our revenue growth and the sales for certain products was negatively impacted in the first half of 2022 by the supply chain issues being felt globally as we navigate through short-term shortages in raw materials as well as production delays stemming from labor constraints.
Key factors that we expect to affect our future sales growth include new product innovation and launches, our expansion strategy in each of the sales channels and our key supplier relationships.
Cost of goods sold consists primarily of the cost of product obtained from co-manufacturers, packaging materials, freight costs for shipping inventory to the warehouse, as well as third-party warehouse and order fulfillment costs. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on this analysis, we record inventories at the lower of cost or net realizable value, with any reduction in value expensed as cost of goods sold.
Our products are manufactured to our specifications by our co-manufacturers using raw materials. We work with our co-manufacturers to secure a supply of raw materials that meet our specifications. In addition to procuring raw materials that meet our formulation requirements, our co-manufacturers manufacture, test and package our products. We design our packaging for our co-manufacturers and the packaging is shipped directly to them.
Our gross profit has been and will continue to be affected by a variety of factors, primarily product sales mix, volumes sold, discounts offered to newly acquired and recurring customers, the cost of our manufactured products, and the cost of freight from the manufacturer to the warehouse.
During the three months ended September 30, 2022, gross profit decreased $0.2 million, or 6%, to $4.2 million compared to $4.4 million during the three months ended September 30, 2021. Gross profit margin increased 1% to 35% for the three months ended September 30, 2022 compared to 34% for the three months ended September 30, 2021. The increase in margin was driven by cost savings realized due to transitioning the production of our dry kibble sold through our International channel to our new co-manufacturer, which was partially offset by an inventory write-off attributable to our Halo Holistic™ rebranding initiatives. During the nine months ended September 30, 2022, gross profit increased $1.0 million, or 8%, to $13.6 million compared to $12.6 million during the three months ended September 30, 2021. Gross profit margin decreased 6% to 30% for the nine months ended September 30, 2022 compared to 36% for the nine months ended September 30, 2021. The decrease in margin was driven primarily by several cost increases from our primary suppliers as a result of broad-scale inflation in the industry as well as an inventory write-off attributable to our Halo Holistic™ rebranding initiatives, which is partially offset by cost savings from transitioning some of our primary suppliers and price increases to customers as described below. We expect these cost savings offsets will contribute to a higher gross profit realization going forward.
We continue to actively work with our co-manufacturer and freight partners to generate future cost savings, and have successfully transitioned some of our primary suppliers to help realize improved gross profit margins in future periods. Additionally, we began implementing price increases to our customers to help cover these cost increases beginning late in the third quarter of 2021. We implemented additional price increases during 2022, which became effective in the second and third quarters of 2022. We could see continued margin variability due to the current economic environment and pricing pressures due to inflationary costs for both transportation and raw materials. We will continue to refine and optimize our overall pricing strategy as we evaluate the future impact of inflation and align ourselves with the market.
Our SG&A expenses consist of the following:
•Sales and marketing costs for specific customer promotional programs, paid media, content creation expenses and our DTC selling platform. Marketing costs are geared towards customer acquisition and retention and building brand awareness. During the three months ended September 30, 2022, sales and marketing costs increased approximately $1.9 million or 54%, to $5.4 million from $3.5 million during the three months ended September 30, 2021. During the nine months ended September 30, 2022, sales and marketing costs increased approximately $3.9 million or 49%, to $11.9 million from $8.0 million during the nine months ended September 30, 2021. The increases were driven primarily by non-cash amortization related to the utilization of the remaining prepaid radio advertisement services with iHeart, marketing and advertising agency fees related to building and launching our new sales strategy as well as increased marketing spend in our International sales channel, partially offset by a temporary intentional decrease in customer acquisition and retention marketing spend as we shift the focus of our investments to our longer-term sales strategy.
•Employee compensation and benefits increased approximately $0.3 million or 19% during the three months ended September 30, 2022 to $1.9 million from $1.6 million during the three months ended September 30, 2021. During the nine months ended September 30, 2022, employee compensation and benefits increased approximately $0.4 million or 7% to $6.1 million from $5.7 million during the nine months ended September 30, 2021. The increases were primarily related to the addition of several key members to our management team during the second half of 2021 that have significant operating experience in the pet and consumer-packaged good sectors which we believe will enable us to successfully execute our growth strategy, partially offset by higher severance costs during the first half of 2021.
•Freight, which is primarily related to the shipping of DTC orders to customers, remained flat at $0.3 million for both the three months ended September 30, 2022 and 2021. Freight also remained flat at $1.2 million for both the nine months ended September 30, 2022 and 2021. Freight costs are generally increasing, offset by our lower DTC sales as described above.
•Non-cash charges including depreciation, amortization, disposal or sale of assets and bad debt expense increased $0.1 million or 25% during the three months ended September 30, 2022 to $0.5 million from $0.4 million for the three months ended September 30, 2021. The increase was driven by additional capital expenditures. During the nine months ended September 30, 2022, non-cash charges decreased approximately $0.1 million or 7% to $1.4 million from $1.5 million during the nine months ended September 30, 2021. The decrease was driven by disposals of certain assets during 2021, offset by additional capital expenditures throughout 2022.
•Other general and administrative costs for various general corporate expenses, including professional services, information technology, insurance, travel, costs related to merchant credit card fees, product development costs, rent, and certain tax costs. During both the three months ended September 30, 2022 and September 30, 2021, other general and administrative costs remained flat at $1.9 million. During the nine months ended September 30, 2022, other general and administrative costs increased $0.2 million, or 4% to $5.2 million compared to $5.0 million for the nine months ended September 30, 2021. The increase was driven by higher international consulting fees, additional travel fees and higher product development costs during the nine months ended September 30, 2022, partially offset by a non-cash reduction of our sales tax liability of $0.6 million during the nine months ended September 30, 2021 with no similar reduction of expense during the nine months ended September 30, 2022, as well as lower professional fees, lower franchise taxes and a reduction in rent expense as a result of prior lease terminations.
Share-based compensation includes expenses related to equity awards issued to employees and non-employee directors. During the three months ended September 30, 2022, share-based compensation decreased $0.1 million, or 15%, to $0.6 million as compared to $0.7 million for the three months ended September 30, 2021. The decrease was primarily driven by accelerated vesting of certain stock option grants during the three months ended September 30, 2021. During the nine months ended September 30, 2022, share-based compensation decreased $1.0 million, or 30%, to $2.5 million as compared to $3.5 million for the nine months ended September 30, 2021. The decrease was driven by accelerated vesting on certain stock option grants during 2021, partially offset by common stock issued for board service and accelerated vesting of a certain stock option grant during 2022 and additional option grants.
We have had no impairment expense related to goodwill or intangible assets through September 30, 2022. In conjunction with the rebranding of TruDog and legal merger with Halo, we performed an analysis of our reporting units and concluded we have one reporting unit, and as such, we performed a quantitative goodwill assessment as of July 1, 2022 that indicated no impairment. Additionally, during the period from July 2, 2022 through September 30, 2022, there was a decline in our stock price and a change in CEO, and as such, we determined there were triggering events present during the interim period. We performed a qualitative analysis around the market value and determined the decline in stock price is not indicative of our operating results and that the decline in market value from July 2,2022 to September 30, 2022 was not of sufficient duration to indicate impairment. Additionally, we performed other qualitative analyses which considered the potential impacts of the change in CEO and other known information that could cause a change in the assumptions used in the July 1, 2022 assessment. As a result of our analysis, we concluded that the fair value was more-likely-than-not above carrying value. If global macroeconomic or geopolitical conditions worsen, projected revenue growth rates or projected operating margins decline, weighted average cost of capital increases, or if we have a sustained decline in its stock price, it is possible this could result in a potentially material goodwill impairment charge.
Interest expense, net
During the three months ended September 30, 2022, interest expense remained flat at $0.1 million for both the three months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022, interest expense decreased $2.8 million to $0.3 million from $3.1 million for the nine months ended September 30, 2021. Interest expense for the three and nine months ended September 30, 2022 and three months ended September 30, 2021 is comprised of interest on our Wintrust Credit Facility and the amortization of debt issuance costs. Interest expense for the nine months ended September 30, 2021 is comprised of interest on our Wintrust Credit Facility, payable in-kind interest on our previous senior subordinated convertible notes, and the amortization of debt issuance costs and accretion of debt discounts, including $1.4 million during the three months ended June 30, 2021 associated with the remaining discount on the previous convertible notes, which was fully accreted to interest expense in connection with the conversion to common stock resulting from the commencement of the trading of our common stock on the NYSE.
Gain on extinguishment of debt, net
During the nine months ended September 30, 2021, we incurred a net gain on extinguishment of debt of $0.5 million, while there was no corresponding activity for the nine months ended September 30, 2022. Gain on extinguishment of debt for the nine months ended September 30, 2021 relates to extinguishment accounting applied in connection with the forgiveness of our PPP loans, partially offset by the loss on termination of a term loan and ABL Facility.
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 Condensed Consolidated Statements of Operations as change in fair value of warrant liabilities. The change in fair value for the three and nine months ended September 30, 2021 relates to the change in the fair value of common stock warrants issued in connection with a private placement. Upon consummation of our IPO on July 1, 2021, these warrants met the requirements to be considered equity were reclassified as such.
Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for any allowable credits, deductions and uncertain tax positions as they arise. During the three and nine months ended September 30, 2022, we recorded minimal income tax expense. During the three and nine months ended September 30, 2021, we did not record income tax expense due to the continued losses incurred by us. The effective tax rate is less than 1% for the three and nine months ended September 30, 2022 and 0% for the three and nine months ended September 30, 2021, which differs from the U.S. Federal statutory rate of 21% primarily because our losses have been fully offset by a valuation allowance due to uncertainty of realizing the tax benefit of our NOLs.
Liquidity and capital resources
Historically, we have financed our operations primarily through the sales of shares of our common stock, warrants, preferred stock, and loans. In connection with our IPO on July 1, 2021, we issued and sold 8,000,000 shares of common stock at a price of $5.00 per share and received total net proceeds of approximately $36.1 million, after deducting underwriting discounts and commissions of $2.8 million, and offering costs of approximately $1.1 million. On September 30, 2022 and December 31, 2021, we had cash and cash equivalents and restricted cash of $12.6 million and $28.9 million, respectively.
We are subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of our products, the successful protection of our proprietary technologies, ability to grow into new markets, and compliance with government regulations. As of September 30, 2022, we have not experienced a significant adverse impact to our business, financial condition or cash flows resulting from the COVID-19 pandemic, geopolitical actions or threat of cyber-attacks. However, we have seen adverse impacts to our gross profit margin due to inflationary pressures in the current economic environment. Uncertainties regarding the continued economic impact of inflationary pressures, the COVID-19 pandemic, geopolitical actions and threat of cyber-attacks are likely to result in sustained market turmoil, which could negatively impact our business, financial condition, and cash flows in the future.
Our ability to raise additional capital may be adversely impacted by the potential worsening of global economic conditions, including inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and geopolitical tensions. If we seek additional financing to fund our business activities in the future, 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.
We are required to maintain a minimum liquidity (as defined in the Wintrust Credit Facility) of no less than $8.5 million tested on the last day of each fiscal quarter beginning September 30, 2022 and thereafter to comply with our financial covenants. As of September 30, 2022, we were in compliance with all debt covenant requirements and there were no events of default. We have historically incurred losses and expect to continue to generate operating losses and consume cash resources in the near term; however, due to our high level of working capital, minimal debt and expected financial performance in the future, we expect to be in compliance with all required debt covenants and do not anticipate substantial doubt about our ability to continue as a going concern. We have implemented and continue to implement plans to achieve operating profitability, including various margin improvement initiatives, the consolidation of and introduction of new co-manufacturers, the optimization of our pricing strategy and ingredient profiles, and new product innovation.
A summary of our cash flows is as follows (in thousands):
|Nine Months Ended|
|Cash flows (used in) provided by:|
|Financing activities||1,843 ||37,716 |
|Net (decrease) increase in cash and cash equivalents and restricted cash||$||(16,327)||$||29,272 |
Cash flows from operating activities
Cash used in operating activities increased $9.7 million, or 116%, during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in cash used in operating activities was primarily driven by significant fluctuations in our working capital, including a comparative increase in our inventory balance of $8.3 million as we built inventory to support the Halo Elevate® launch and the rebranding of TruDog and Halo Holistic™. Additionally, net (loss) income from operations adjusted for non-cash expenses was $(8.5) million for the nine months ended September 30, 2022 compared to $(7.4) million for the nine months ended September 30, 2021. This increase in operating cash outflows was primarily driven by increased marketing spend related to building and launching our new long-term sales strategy during 2022, which is not expected to recur at the same levels in 2023.
Cash flows from investing activities
Cash used in investing activities was $0.2 million during the nine months ended September 30, 2022 and $0.1 million during the nine months ended September 30, 2021. The cash used in investing activities is related to the purchase of fixed assets.
Cash flows from financing activities
Cash provided by financing activities was $1.8 million for the nine months ended September 30, 2022 compared to cash provided by financing activities of $37.7 million during the nine months ended September 30, 2021. The cash provided by financing activities for the nine months ended September 30, 2022 was related to net proceeds from the revolving line of credit of $2.5 million, partially offset by payments on the term loan of $0.7 million. The cash provided by financing activities for the nine months ended September 30, 2021 was primarily related to net proceeds from the IPO of $36.2 million, proceeds from private placements of $4.1 million and cash received from warrant exercises of $1.7 million, partially offset by net payments on the term loans of $2.4 million, net payments on the revolving line of credit of $0.3 million, $0.1 million of debt issuance costs and $1.3 million related to share repurchases.
As of September 30, 2022, our indebtedness consisted of a term loan and a revolving credit facility. For additional details about the terms, covenants and restrictions contained in the Wintrust Credit Facility, see "Note 7 - Debt" to our interim condensed consolidated financial statements included in this Quarterly Report.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net sales, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgements involved in the accounting policies described below and in our Annual Report for the year ended December 31, 2021 have the greatest potential impact on our financial statements and, therefore, we consider those to be our critical accounting estimates. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Other than noted below, there have been no material changes to our critical accounting estimates compared to the descriptions in our Annual Report for the year ended December 31, 2021.
We evaluate goodwill for impairment at least annually at the reporting unit level. We monitor the existence of potential impairment indicators throughout the year and will evaluate for impairment whenever events or circumstances indicate that the fair value of a reporting unit is below its carrying value. Impairment testing is based on our current business strategy in light of present industry and economic conditions, as well as future expectations. Fair value measurements used in the impairment review of goodwill are Level 3 measurements.
When evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. Qualitative factors include macroeconomic conditions, industry and market conditions, and overall company financial performance. If, after assessing the totality of events and circumstances, we determine that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, a quantitative impairment test is unnecessary. If the fair value exceeds the carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the goodwill. We consider fair value to be substantially in excess of carrying value at a 20% premium or greater.
When performing a quantitative impairment test, determining the fair value of a reporting unit involves the use of significant estimates and assumptions to evaluate the impact of operational and macroeconomic changes. If a quantitative assessment is deemed necessary, we determine fair value using a weighted average of widely accepted valuation techniques, including the income approach and market approach. The income approach applies a fair value methodology based on discounted cash flows, which contains uncertainties because it requires management to make significant assumptions and judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital or discount rate, which is risk-adjusted to reflect the specific risk profile of our business. The market approach includes determining appropriate comparable companies and applying an estimated multiple to apply to our operating results. The primary market multiples to which we compare are revenue and earnings before interest, taxes, depreciation, and amortization.
See "Note 6 - Goodwill and intangible assets" to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information regarding goodwill impairment assessment completed during the period.
In performing our assessments, we believe that we have made reasonable estimates based on the facts and circumstances that were available. However, the determination of fair value includes assumptions that are subject to risk and uncertainty. If our future performance varies from current expectations, assumptions, or estimates, including those assumptions around inflationary pressures on product and labor costs, our revenue growth rates and our overall profitability, as well as our expectations around the duration of our stock price decline, may trigger future impairment charges. We will continue to monitor developments throughout the remainder of 2022, including updates to our forecasts as well as our market capitalization, and an update of our assessment and related estimates may be required in the future.