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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2022
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number: 001-40477
Better Choice Company Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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83-4284557 |
(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
12400 Race Track Road
Tampa, Florida 33626
(212) 896‑1254
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(Address of Principal Executive Offices) (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on which
Registered
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Common Stock, $0.001 par value share |
BTTR |
NYSE American |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well‑known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes
☐ No ☒
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files.) Yes ☒ No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non‑accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule
12b‑2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by a check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit
report. ☐
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by a check mark whether the registrant is a shell company
(as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No
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The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, as of the last
business day of the registrant’s most recently completed second
fiscal quarter, based on the closing sale price of $2.20 as
reported on the NYSE American was: $48,422,086.
The number of shares outstanding of each of the registrant’s
classes of common stock as of the latest practicable date was:
30,541,148 shares of $0.001 par value common stock outstanding as
of March 24, 2023.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Items 10, 11, 12, 13, and 14 will be
furnished (and are hereby incorporated) by an amendment hereto or
pursuant to a definitive proxy statement pursuant to Regulation 14A
that will contain such information.
Better Choice Company Inc.
Annual Report on Form 10‑K for the Fiscal Year Ended
December 31, 2022
TABLE OF CONTENTS
FORWARD‑LOOKING STATEMENTS
This report contains forward-looking statements that are subject to
risks and uncertainties. All statements other than statements of
historical fact included in this report are forward-looking
statements. Forward-looking statements discuss our current
expectations and projections relating to our financial condition,
results of operations, plans, objectives, future performance and
business. You can identify forward-looking statements by the fact
that they do not relate strictly to historical or current facts.
These statements may include words such as “aim,” “anticipate,”
“believe,” “can,” “could,” “estimate,” “expect,” “forecast,”
“intend,” “likely,” “may,” “outlook,” “plan,” “potential,”
“project,” “projection,” “seek,” “should,” “will,” “would,” the
negatives thereof and other words and terms of similar meaning in
connection with any discussion of the timing or nature of future
operating or financial performance or other events. They appear in
a number of places throughout this report and include statements
regarding our intentions, beliefs or current expectations
concerning, among other things, our results of operations,
financial condition, liquidity, prospects, growth, strategies and
the industry in which we operate. All forward-looking statements
are subject to risks and uncertainties that may cause actual
results to differ materially from those that we expected,
including, but not limited to, those summarized below:
•our
ability to continue as a going concern;
•the
impact of damage to or interruption of our information technology
systems due to cyber-attacks or other circumstances beyond our
control;
•the
continued impact of the actual or perceived effects of the COVID-19
pandemic, including as a result of any additional variants of the
virus or the efficacy and distribution of vaccines, on the global
pet health and wellness industry, our employees, suppliers,
customers and end consumers, which could adversely and materially
impact our business, financial condition and results of
operations;
•business
interruptions resulting from geopolitical actions, including war
and terrorism;
•our
ability to successfully implement our growth strategy;
•failure
to achieve growth or manage anticipated growth;
•our
ability to achieve or maintain profitability;
•the
loss of key members of our senior management team;
•our
ability to generate sufficient cash flow or raise capital on
acceptable terms to run our operations, service our debt and make
necessary capital expenditures;
•our
dependence on our subsidiaries for payments, advances and transfers
of funds due to our holding company status;
•our
ability to successfully develop additional products and services or
successfully market and commercialize such products and
services;
•competition
in our market;
•our
ability to attract new and retain existing customers, suppliers,
distributors or retail partners;
•allegations
that our products cause injury or illness or fail to comply with
government regulations;
•our
ability to manage our supply chain effectively;
•our
or our co-manufacturers’ and suppliers’ ability to comply with
legal and regulatory requirements;
•the
effect of potential price increases and shortages on the inputs,
commodities and ingredients that we require, whether as a result of
the continued actual or perceived effects of the COVID-19 pandemic
or broader geopolitical and macroeconomic conditions, including the
military conflict between Russia and Ukraine;
•our
ability to develop and maintain our brand and brand
reputation;
•compliance
with data privacy rules;
•our
compliance with applicable regulations issued by the U.S. Food and
Drug Administration (“FDA”), the U.S. Federal Trade Commission
(“FTC”), the U.S. Department of Agriculture (“USDA”), and other
federal, state and local regulatory authorities, including those
regarding marketing pet food, products and
supplements;
•risk
of our products being recalled for a variety of reasons, including
product defects, packaging safety and inadequate or inaccurate
labeling disclosure;
•risk
of shifting customer demand in relation to raw pet foods, premium
kibble and canned pet food products, and failure to respond to such
changes in customer taste quickly and effectively; and
•other
factors discussed under the headings “Risk Factors,” “Business,”
and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in this Annual Report on Form
10-K.
While we believe that our assumptions are reasonable, we caution
that it is very difficult to predict the impact of known factors,
and it is impossible for us to anticipate all factors that could
affect our actual results. Important factors that could cause
actual results to differ materially from our expectations, or
cautionary statements, are disclosed under “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this report. All forward-looking
statements are expressly qualified in their entirety by these
cautionary statements. You should evaluate all forward-looking
statements made in this report in the context of these risks and
uncertainties.
NOTE REGARDING TRADEMARKS
We own or have rights to use the trademarks and trade names that we
use in conjunction with the operation of our business. Each
trademark or trade name of any other company appearing in this
Annual Report on Form 10-K is, to our knowledge, owned by such
other company. Solely for convenience, our trademarks and trade
names referred to in this Annual Report on Form 10-K may appear
without the ® or ™ symbols, but those references are not intended
to indicate, in any way, that we will not assert, to the fullest
extent under applicable law, our rights or the right of the
applicable licensor to these trademarks and trade
names.
PART I
ITEM 1. BUSINESS
Our History
On December 17, 2018, Better Choice Company made a $2.2 million
investment in TruPet LLC ("TruPet"), an online seller of pet foods,
pet nutritional products and related pet supplies. On February 2,
2019, Better Choice Company entered into a definitive agreement to
acquire the remainder of TruPet and we closed the acquisition on
May 6, 2019.
On February 28, 2019, Better Choice Company entered into a
definitive agreement to acquire all of the outstanding shares of
Bona Vida, Inc. ("Bona Vida") and we closed the acquisition on May
6, 2019.
On October 15, 2019, Better Choice Company entered into a Stock
Purchase Agreement (as amended, the “Halo Agreement”) with Halo,
Thriving Paws, LLC, a Delaware limited liability company (“Thriving
Paws”), HH-Halo LP, a Delaware limited partnership (“HH-Halo” and,
together with Thriving Paws, the “Sellers”) and HH-Halo, in the
capacity of the representative of the Sellers. Pursuant to the
terms and subject to the conditions of the Halo Agreement, among
other things, we agreed to purchase from the Sellers 100% of the
issued and outstanding capital stock of Halo, Purely for Pets, Inc.
("Halo"). We closed this acquisition, which we refer to as the Halo
Acquisition, on December 19, 2019.
Overview of Our Business
Better Choice is a pet health and wellness company committed to
leading the industry shift toward pet products and services that
help dogs and cats live healthier, happier and longer lives. Our
mission is to become the most innovative premium pet food company
in the world, and we are motivated by our commitment to making
products with integrity and treating pets and their parents with
respect. We believe that our broad portfolio of pet health and
wellness products are well positioned to benefit from the trends of
growing pet humanization and an increased consumer focus on health
and wellness, and have adopted a laser focused, channel specific
approach to growth that is driven by new product innovation. Our
executive team has a proven history of success in both pet and
consumer-packaged goods, and has over 50 years of combined
experience in the pet industry and over 100 years of combined
experience in the consumer-packaged goods industry.
We sell our premium and super-premium products (which we believe
generally includes products with a retail price greater than $0.20
per ounce) under the Halo brand umbrella, which includes Halo
Holistic™, Halo Elevate® and the former TruDog brand, which has
been rebranded and successfully integrated under the Halo brand
umbrella during the third quarter of 2022. Our core products sold
under the Halo brand are made with high-quality, thoughtfully
sourced ingredients for natural, science based nutrition. Each
innovative recipe is formulated with leading veterinary and
nutrition experts to deliver optimal health. Our diverse and
established customer base has enabled us to penetrate multiple
channels of trade, which we believe enables us to deliver on core
consumer needs and serve pet parents wherever they shop. We group
these channels of trade into four distinct categories: E-commerce,
which includes the sale of product to online retailers such as
Amazon and Chewy; Brick & Mortar, which primarily includes the
sale of product to Pet Specialty retailers such as Petco, Pet
Supplies Plus and neighborhood pet stores, as well as to select
grocery chains; Direct to Consumer (“DTC”) which includes the sale
of product through our website halopets.com; and International,
which includes the sale of product to foreign distribution partners
and to select international retailers.
New product innovation represents the cornerstone of our growth
plan, supported by our own research and development, and
acquisitions. Our established supply and distribution
infrastructure allows us to bring new products to market in nine
months, generally. Our outsourced manufacturing model is flexible,
scalable and encourages innovation allowing us to offer a breadth
of assortment in dog and cat food products under the Halo brand,
serving a wide variety of customer needs.
Halo is the brand for a new generation of pet parents. For
millennial pet parents who view their pets as children, we believe
Halo provides the world’s best nutrition for the world’s best kids.
Halo offers two premium sub-lines of natural dog and cat food for
this audience - Halo Holistic, which includes the former TruDog
brand and Halo Elevate.
Halo Holistic is designed for the pet parent seeking high-quality
ingredients for digestive health. Halo Holistic is the only
super-premium pet food certified by the Global Animal Partnership
and the Marine Stewardship Council, both of which are animal
welfare organizations recognized worldwide. Halo Holistic also
supports complete digestive health with prebiotics, probiotics and
postbiotics. Additionally, it's made with whole animal proteins
only and no meat meals.
Halo Elevate®, our second sub-line which launched during 2022,
provides best-in-class nutrition. We believe it's the only natural
pet food with leading nutrient levels to support the top five pet
parent health concerns which include digestive health, heart and
immunity support, healthy skin and coat, hip and joint support and
strength and energy. Each recipe delivers natural, science-based
nutrition for optimal health. Both Halo Holistic and Halo Elevate®
provide confidence and validation to empower millennial pet
parents.
Our Products and Brands
We have a broad portfolio of over 100 active premium and super
premium animal health and wellness products for dogs and cats,
which includes products sold under the Halo brand across multiple
forms, including foods, treats, toppers, dental products, chews,
grooming products and supplements. Our 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 and supplements. Our products are sustainably
sourced, derived from real whole meat and no rendered meat meal and
include non-GMO fruits and vegetables.
Our products are manufactured by an established network of
co-manufacturers in partnership with Better Choice. We have
maintained each of our key co-manufacturing relationships for more
than four years, with certain relationships in place for more than
ten years and with the launch of Halo Elevate®, we have expanded
and engaged two new co-manufacturing partners in 2022.
Our Customers and Channels
In 2022, we generated $65.7 million of gross sales and $54.7
million of net sales. By channel in 2022, E-Commerce generated
approximately $21.1 million of gross sales and $14.6 million
of net sales, Direct-to-Consumer generated approximately
$8.1 million of gross sales and $6.6 million of net sales,
Brick & Mortar generated approximately $14.6 million of
gross sales and $11.6 million of net sales and International
generated approximately $21.9 million of gross sales and $21.9
million of net sales. The following chart provides a breakdown of
our net sales by channel for the year ended December 31,
2022:

In 2022, 39% of our net sales were made online, through a
combination of E-commerce partner websites, such as Amazon, Chewy,
Petflow, Thrive Market and Vitacost, and our DTC website, hosted on
Shopify. A majority of our online sales are driven by repeat
purchases from existing customers. Although industry-wide
E-commerce sales retreated somewhat following the March 2020 pantry
stocking, the sale of pet food and supplies online had increased
35% year-over-year according to Packaged Facts, with subscription
sales nearly equal to the March 2020 peak. We anticipate our
ability to reach a growing base of diverse customers online will
continue to improve as E-commerce penetration increases. At the
same time, we believe that our long-established relationships with
key Brick & Mortar customers such as Petco and Pet Supplies
Plus will enable us to jointly launch new products that are
designed for in-store success, such as the national launch of Halo
Elevate® in more than 2,000 Brick & Mortar locations in
2022.
In addition to our domestic sales channels, the Halo brand's
international sales grew 48% in 2022, driven primarily by
significant new customer acquisition and increased brand awareness
in our key Asian markets. We believe that our growth in Asia is
fueled by increasing levels of economic financial status and demand
for premium and super-premium, western manufactured products, with
China representing the largest market opportunity for growth and
81% of Better Choice’s $21.9 million of international sales in
2021. We believe this growth is sustainable and we have more than
$70.0 million of contracted minimum sales with our key Asian
distribution partners from 2023 to 2025.
Supply Chain, Manufacturing and Logistics
Halo partners with a number of co-manufacturing partners to produce
its products. Our products sold today under the Halo brand are made
strictly from naturally raised animals on sustainable farms and are
manufactured in the U.S and use healthy, natural ingredients, with
all purchases transacted in U.S. dollars. By sourcing cage-free
poultry, pasture-raised beef, and wild-caught fish from certified
sustainable fisheries and not including meat meals or other animal
byproducts in its formulations, our Halo brand is able to provide
pets and pet parents with a nutritious and highly digestible suite
of food and treats. Some products are preserved using either freeze
drying or gentle air dehydration to eliminate the need for
artificial preservatives and added chemicals. Our treats and chews
are oven-baked, using natural ingredients for maximum nutrition and
protein content. Halo’s dog and cat foods meet The Association of
American Feed Control Officials (“AAFCO”) guidelines and are
small-batch tested for common contaminants prior to leaving the
manufacturer.
We utilize logistics service providers as a part of our supply
chain, primarily for shipping and logistics support. Fulfillment of
orders is managed by a third-party warehousing and logistics
partner, Fidelitone. Our warehouse was located in Lebanon,
Tennessee throughout 2021 and relocated to Wauconda, Illinois in
2022. Our DTC ecosystem allows us to efficiently manage and
customize the online shopping experience for customers, including a
customer dashboard where shoppers can manage and track orders and
order history. Our products are shipped by trusted carriers for
expeditious and reliable delivery.
Raw Materials and Principal Suppliers
We rely upon the supply of raw materials that meet our high-quality
specifications and sourcing requirements. We source Global Animal
Partnership ("GAP") certified cage-free chicken, GAP certified
cage-free turkey, Marine Stewardship Council ("MSC") certified
wild-caught salmon and whitefish and select non-GMO fruits and
vegetables, such as peas, sweet potatoes and lentils. If any raw
material is adulterated and does not meet our specifications, it
could significantly impact our ability to source manufactured
products and could materially and adversely impact our business,
financial condition and results of operations.
For the supply and co-manufacturing of our products, we have relied
on Alphia, Inc. (“Alphia” f/k/a “C.J. Foods”) for dry kibble which
has been transitioned to Barrett Petfood Innovations during 2022,
Simmons Pet Food, Inc. (“Simmons”) and Thai Union Manufacturing
Co., LTD. for canned wet food, BrightPet Nutrition Group, LLC
(“BrightPet”) for vegan kibble and freeze dried treats, Carnivore
Meat Company, LLC (“Carnivore”) for the supply and co-manufacturing
of freeze-dried food and treats. We sourced approximately 69% of
inventory purchases from three vendors for the year ended
December 31, 2022 and approximately 65% from two vendors for
the year ended December 31, 2021.
Sales and Marketing
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.
In recent years, consumer purchasing behaviors have shifted
dramatically and E-Commerce penetration has significantly
increased. Although approximately 39% of Better Choice’s sales are
made online today, we remain committed to partnering with select
Brick & Mortar retailers in pet specialty and neighborhood pet,
as in-store recommendation and trial represent a significant
opportunity for new customer acquisition. We believe that these
in-store partnerships are complementary to the incentives that our
E-Commerce partners offer to drive monthly subscriptions, and build
upon the recurring revenue that we generate online.
Competition
The pet health and wellness industry is highly competitive.
Competitive factors include product quality, ingredients, brand
awareness and loyalty, product variety, product packaging and
design, reputation, price, advertising, promotion, and nutritional
claims. We believe that we compete effectively with respect to each
of these factors. We compete with manufacturers of conventional pet
food such as Mars, Nestlé and Big Heart Pet Brands (part of the
J.M. Smucker Company), and manufacturers of specialty and natural
pet food such as Blue Buffalo (part of General Mills), Wellness,
Fromm, Orijen, Merrick (part of Nestlé), Stella and Chewy, Open
Farm and Freshpet. In addition, we compete with many regional niche
brands in individual geographic markets.
Employees and Human Capital Resources
As of December 31, 2022, we had 46 full time employees and one
part time employee. Our human capital resource objectives include,
as applicable, identifying, recruiting, retaining, incentivizing
and integrating our existing and additional employees. The
principal purposes of our equity incentive plans are to attract,
retain and motivate selected employees, consultants and directors
through the granting of stock-based compensation awards. Our
employees are not represented by any labor union or any collective
bargaining arrangement with respect to their employment with us. We
have never experienced any work stoppages or strikes as a result of
labor disputes and we believe our overall relationships with our
employees are positive and the strength of our team is a critical
success factor in becoming the most innovative premium pet food
company in the world. Our employees share an entrepreneurial
spirit, a passion for excellence and the inspiration to drive the
future of the pet health and wellness industry.
Our core values are Integrity, Respect, Working Smarter and Faster
and Building Lasting Relationships in all that we do. We
continually focus on employee engagement and a diverse, inclusive
culture in order to ensure the continued strength and well-being of
our workforce. We strive to create a workplace where employees feel
engaged, believe in our mission, understand their role in our
strategy and are passionate about the work they do. We conduct
employee engagement surveys to provide us with valuable insights
into employee perspectives and experiences. We also hold frequent
virtual town-hall meetings and team building events to provide
updates, celebrate milestones in the business, communicate
initiatives, recognize significant individual accomplishments and
provide a forum for employees to communicate and engage with our
entire employee base. We value and embrace diversity by fostering a
culture that encompasses the unique attributes, ideas,
perspectives, and experiences of our employees, customers,
suppliers and communities. We believe a more inclusive and diverse
work environment allows us to achieve better results and makes us a
stronger business.
We operate under a “Win From Anywhere” culture, which is our
approach to creating a flexible and entrepreneurial working
environment built for long term success. Winning from anywhere
means our employees can work from anywhere in the country. We
believe this culture provides the ability for us to attract the
best talent and we now have employees all over the U.S. that are
winning from anywhere.
Government Regulation
The regulation of animal food products is complex, multi-faceted,
and continually changing. The U.S. Food and Drug Administration
("FDA"), the U.S. Federal Trade Commission ("FTC"), the U.S.
Department of Agriculture ("USDA") and other regulatory authorities
at the federal, state and local levels, as well as authorities in
foreign countries, extensively regulate, among other things, the
research, development, testing, composition, manufacture, import,
export, labeling, storage, distribution, promotion, marketing, and
post-market reporting of animal foods. We are required to navigate
a complex regulatory framework in the locations in which we wish to
manufacture, test, import, export, or sell our
products.
FDA Regulation of Animal Foods
The FDA regulates foods, including foods intended for animals,
under the Federal Food, Drug and Cosmetic Act ("FDCA") and its
implementing regulations. The FDCA defines “food” as articles used
for food or drink for man or other animals, which includes products
that are intended primarily for nutritional use, taste, or aroma
and the components of such products. For animal foods in
particular, this definition applies based on their intended use
regardless of labelling as animal food, treats, or supplements. The
FDA also imposes certain requirements on animal foods relating to
their composition, manufacturing, labeling, and marketing. Among
other things, the facilities in which our products and ingredients
are manufactured must register with the FDA, comply with current
good manufacturing practices (“cGMPs”) and comply with a range of
food safety requirements.
Although pet foods are not required to obtain premarket approval
from the FDA, any substance that is added to or is expected to
become a component of a pet food must be used in accordance with a
food additive regulation, unless it is generally recognized as safe
(“GRAS”) under the conditions of its intended use or if it appears
on an FDA-recognized list of acceptable animal food ingredients in
the Official Publication of AAFCO. A food may be adulterated if it
uses an ingredient that is neither GRAS nor an approved food
additive, and that food may not be legally marketed in the
U.S.
The labeling of pet foods is regulated by both the FDA and state
regulatory authorities. FDA regulations require proper
identification of the product, a net quantity statement, a
statement of the name and place of business of the manufacturer or
distributor and proper listing of all the ingredients in order of
predominance by weight. The FDA also considers certain specific
claims on pet food labels to be medical claims and therefore
subject to prior review and approval by the FDA. The FDA has a list
of specific factors it will consider in determining whether to
initiate enforcement action against such products if they do not
comply with the regulatory requirements applicable to drugs,
including, among other things, whether the product is only made
available through or under the direction of a veterinarian and does
not present a known safety risk when used as labeled. The FDA may
classify some of our products differently than we do and may impose
more stringent regulations which could lead to possible enforcement
action.
Under the FDCA, the FDA may require the recall of an animal food
product if there is a reasonable probability that the product is
adulterated or misbranded, and the use of or exposure to the
product will cause serious adverse health consequences or death. In
addition, pet food manufacturers may voluntarily recall or withdraw
their products from the market. If the FDA believes that our
products are adulterated, misbranded or otherwise marketed in
violation of the FDCA, the agency make take further enforcement
action, including: restrictions on the marketing or manufacturing
of a product; required modification of promotional materials or
issuance of corrective marketing information; issuance of safety
alerts, press releases, or other communications containing warnings
or other safety information about a product; warning or untitled
letters; product seizure or detention; refusal to permit the import
or export of products; fines, injunctions, or consent decrees;
and/or imposition of civil or criminal penalties.
Chinese Regulations
General Administration of Quality Supervision, Inspection and
Quarantine of the People’s Republic of China ("AQSIQ") is
responsible for the unified inspection and quarantine of imported
pet food (also referred to in the regulations as “Feed”). Only
registered pet food manufacturers from AQSIQ approved countries
(which includes the U.S.) can import pet food to China, and may do
so only if they have first received an import registration
certificate from the Ministry of Agriculture ("MOA"). In order to
obtain an import registration certificate, a manufacturer must
submit standardized application materials (in both English and
Chinese) along with product samples to the MOA for approval, and if
approved, such import registration certificate shall be valid for
five years. Overseas companies are also prohibited from engaging in
the direct sale of imported pet food within the territory of China
and should establish a sales organization or appoint a sales agent
within the territory of China and file a record with the MOA within
six months from the date the manufacturer obtains its import
registration certificate. All imported pet food must be packaged,
and the packaging must comply with China's safety and hygiene
regulation and must have Chinese labels that are in conformity with
the relevant regulations.
We are also subject to labor and employment laws, laws governing
advertising, privacy laws, safety regulations and other laws,
including consumer protection regulations that regulate retailers
or govern the promotion and sale of merchandise. Our operations,
and those of our distributors and suppliers, are subject to various
laws and regulations relating to environmental protection and
worker health and safety matters. We monitor changes in these laws
and believe that we are in material compliance with applicable
laws. See additional information under the heading “Risks Related
to the Regulation of our
Business and Products” in this Annual Report on Form 10-K for a
discussion of risks relating to federal, state, local and
international regulation of our business.
Our Trademarks and Other Intellectual Property
We believe that our intellectual property has substantial value and
has contributed significantly to the success of our business. Our
trademarks are valuable assets that reinforce our brand, our
sub-brands and our consumers’ perception of our products. The
current registrations of these trademarks in the U.S. and foreign
countries are effective for varying periods of time and may be
renewed periodically, provided that we, as the registered owner, or
our licensees where applicable, comply with all applicable renewal
requirements including, where necessary, the continued use of the
trademarks in connection with the goods or services identified in
the applicable registrations. In addition to trademark protection,
we have registered more than 100 domain names, including
www.betterchoicecompany.com, www.halopets.com, www.trupet.com,
www.trudog.com and www.rawgo.com, that are important to the
successful implementation of our marketing and advertising
strategy. We rely on and carefully protect unpatented proprietary
expertise, recipes and formulations, continuing innovation and
other trade secrets to develop and maintain our competitive
position.
Corporate Information
We were incorporated in the State of Nevada in 2001 under the name
Cayenne Construction, Inc., and in 2009, changed our name to Sports
Endurance, Inc. Effective March 11, 2019, we changed our name to
Better Choice Company Inc. after reincorporating in Delaware. We
have three subsidiaries - Halo, Purely for Pets, Inc., Bona Vida,
Inc. and Wamore Corporation S.A. Our principal executive offices
are located at 12400 Race Track Road, Tampa, FL 33626. Our website
is available at
https://www.betterchoicecompany.com.
Our website and the information contained on or connected to that
site are not, and should not be deemed to be part of or
incorporated into this Annual Report on Form 10-K.
Available Information
We file annual, quarterly and current reports and other information
with the SEC that are publicly available at
www.sec.gov. Our
SEC filings are also available under the Investor Relations section
of our website at
www.betterchoicecompany.com
as soon as reasonably practicable after they are filed with or
furnished to the SEC. Information contained on or connected to our
website are not incorporated into this Annual Report on Form
10-K.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide a
statement of risk factors. Nonetheless, we are voluntarily
providing risk factors herein. You should consider carefully the
following risk factors, together with all the other information in
this Annual Report on Form 10‑K, and in our other public filings
with the SEC. The occurrence of any of the following risks could
harm our business, financial condition, results of operations
and/or growth prospects or cause our actual results to differ
materially from those contained in forward‑looking statements we
have made in this report and those we may make from time to time.
You should consider all of the risk factors described when
evaluating our business.
Risks Related to Our Business and Industry
Increases in sourcing, manufacturing, freight and/or warehousing
costs, supply shortages, interruption in our sourcing operations
and/or supply changes could have an adverse effect on our business,
financial condition, and operating results.
Our products are sourced from a limited number of independent
third-party suppliers, which we depend upon for the manufacture of
all our products. Some of the ingredients, packaging materials, and
other products we purchase may only be available from a single
supplier or a limited group of suppliers. While alternate sources
of supply are generally available, the supply and price are subject
to market conditions and are influenced by other factors beyond our
control, including the continued impact of COVID-19. We do not have
long-term contracts with many of our suppliers, and therefore they
could increase prices or cease doing business with us. As a result,
we may be subject to price fluctuations or demand
disruptions.
The prices of raw materials, packaging materials and freight are
subject to fluctuations in price attributable to, among other
things, global competition for resources, weather conditions,
changes in supply and demand of raw materials, or other
commodities, fuel prices and government-sponsored agricultural
programs. Volatility in the prices of raw materials and other
supplies we purchase could increase our cost of sales and reduce
our profitability, and we have no guarantees that prices will not
rise. Our ability to pass along higher costs through price
increases to our customers is dependent upon competitive conditions
and pricing methodologies employed in the various sales channels in
which we compete, and we may not be successful in implementing
price increases. In addition, any price increases we do implement
may result in lower sales volumes. Customers and consumers may
choose to shift purchases to lower-priced private label or other
value offerings which may adversely affect our results of
operations.
We cannot control all of the various factors that might affect our
ability to ship orders of our products to customers in a timely
manner or to meet our quality standards. Such factors include,
among other things, natural disasters or adverse weather and
climate conditions; political and financial instability; strikes;
unforeseen public health crises, including pandemics and epidemics
such as the COVID-19 pandemic; acts of war or terrorism and other
catastrophic events, whether occurring in the U.S. or
internationally (including, without limitation, the conflict in
Ukraine). From time to time, a co-manufacturer may
experience financial difficulties, bankruptcy or other business
disruptions, which could disrupt our supply of products or require
that we incur additional expense by providing financial
accommodations to the co-manufacturer or taking other steps to seek
to minimize or avoid supply disruption, such as establishing a new
co-manufacturing arrangement with another provider. Further, we may
be unable to locate an additional or alternate co-manufacturing
arrangement in a timely manner or on commercially reasonable terms,
if at all. Any delay, interruption or increased cost in the
proprietary value-branded products that might occur for any reason
could affect our ability to meet customer demand, adversely affect
our net sales, increase our cost of sales and hurt our results of
operations, which in turn may injure our reputation and customer
relationships, thereby harming our business.
Our ability to meet increases in demand may be impacted by our
reliance on our suppliers and we are subject to the risk of
shortages and long lead times. We may not be able to develop
alternate sources in a timely manner. Therefore, we may not be able
to source sufficient product on terms that are acceptable to us, or
at all, which may undermine our ability to fill our orders in a
timely manner. The occurrence of any of the foregoing could
increase our costs, disrupt our operations, or could have a
materially adverse impact on our business, financial condition,
results of operations or prospects.
If we fail to maintain and expand our brand, or the quality of our
products that customers have come to expect, our business could
suffer.
The continued development and maintenance of our brand and the
quality of our products is critical to our success. We seek to
maintain, extend, and expand our brand image through marketing
investments, including advertising and consumer promotions, and
product innovation. Maintaining, promoting and positioning our
brand and reputation will depend on, among other factors, the
success of preserving the quality of our products, the availability
of our products, marketing and merchandising efforts, the
nutritional benefits provided to pets and our ability to provide a
consistent, high-quality customer experience.
The success of our brand may suffer if our marketing plans or
product initiatives do not have the desired impact on our brand’s
image or its ability to attract customers. Brand value is based on
perceptions of subjective qualities, and any incident that erodes
the loyalty of our customers, suppliers or co-manufacturers,
including adverse publicity or a governmental investigation or
litigation, could significantly reduce the value of our brand and
significantly damage our business. Further, our brand value could
diminish significantly due to a number of factors, including
consumer perception that we have acted in an irresponsible manner,
adverse publicity about our products (whether or not valid), our
failure to maintain the quality of our products, product
contamination, the failure of our products to deliver consistently
positive consumer experiences, inadequate labor conditions, health
or safety issues at our co-manufacturers, or the products becoming
unavailable to consumers.
If we are unable to build and sustain brand equity by offering
recognizably superior products, we may be unable to maintain
premium pricing over private label products. The growing use of
social and digital media by consumers increases the speed and
extent that information and opinions can be shared. Negative posts
or comments about us or our brands or products on social or digital
media could damage our brands and reputation. If we fail to
maintain the favorable perception of our brands, our business,
financial condition and results of operations could be negatively
impacted.
We may not be able to successfully implement and/or manage our
growth strategy on a timely basis or we may not grow at
all.
Our future success depends on our ability to implement our growth
strategy of introducing new products and expanding into new markets
and attracting new consumers to our brand and sub-brands. Our
ability to implement this growth strategy depends, among other
things, on our ability to: establish our brands and reputation as a
well-managed enterprise committed to delivering premium quality
products to the pet health and wellness industry; partner with
retailers and other potential distributors of our products;
continue to effectively compete in specialty channels and respond
to competitive developments; continue to market and sell our
products through a multi-channel distribution strategy and achieve
joint growth targets with our distribution partners; expand and
maintain brand loyalty; develop new proprietary value-branded
products and product line extensions that appeal to consumers;
maintain and, to the extent necessary, improve our high standards
for product quality, safety and integrity; maintain sources from
suppliers that comply with all federal, state and local laws for
the required supply of quality ingredients to meet our growing
demand; identify and successfully enter and market our products in
new geographic markets and market segments; execute value-focused
pricing strategies; and attract, integrate, retain and motivate
qualified personnel. We may not be able to successfully implement
our growth strategy and may need to change our strategy in order to
maintain our growth. If we fail to implement our growth strategy or
if we invest resources in a growth strategy that ultimately proves
unsuccessful, our business, financial condition and results of
operations may be materially adversely affected.
If we succeed in growing our business, such growth could strain our
management team and capital resources. Our ability to manage
operations and control growth will be dependent on our ability to
raise and spend capital to successfully attract, train, motivate,
retain and manage new members of senior management and other key
personnel and continue to update and improve our management and
operational systems, infrastructure and other resources, financial
and management controls, and reporting systems and procedures.
Failure to manage our growth effectively could cause us to
misallocate management
or financial resources, and result in additional expenditures and
inefficient use of existing human and capital resources. Such
slower than expected growth may require us to restrict or cease our
operations and go out of business. Additionally, our anticipated
growth will increase the demands placed on our suppliers, resulting
in an increased need for us to manage our suppliers and monitor for
quality assurance and comply with all applicable laws. Any failure
by us to manage our growth effectively could impair our ability to
achieve our business objectives.
Our recurring losses and significant accumulated deficit have
raised substantial doubt regarding our ability to continue as a
going concern.
We have experienced recurring operating losses, have a significant
accumulated deficit and are required to maintain certain minimum
liquidity thresholds to comply with the financial covenants
associated with the Wintrust Credit Facility. We expect to continue
to generate operating losses and consume cash resources in the near
term. Without generating sufficient cash flow from operations or
additional debt or equity financing, 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. If we need to 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 obtain sufficient funding, our business,
prospects, financial condition and results of operations will be
materially and adversely affected and we may be unable to continue
as a going concern. If we are unable to continue as a going
concern, we may have to liquidate our assets and may receive less
than the value at which those assets are carried on our
consolidated financial statements, and it is likely that investors
will lose all or a part of their investment.
If our goodwill or amortizable intangible assets become impaired,
then we could be required to record a significant charge to
earnings.
We evaluate goodwill for impairment at least annually. 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. Factors that may be considered a change
in circumstances indicating that the carrying value of our goodwill
or amortizable intangible assets may not be recoverable include
declines in stock price, market capitalization or cash flows, and
slower growth rates in our industry. Depending on the results of
these evaluations, we could be required to record a significant
charge to earnings in our consolidated financial statements during
the period in which any impairment of our goodwill or amortizable
intangible assets were determined, negatively impacting our results
of operations.
The COVID-19 pandemic could have a material adverse impact on our
business, results of operations and financial
condition.
The COVID-19 pandemic resulted in various governmental measures,
including lockdowns, closures, quarantines and travel bans as well
as individual measures taken by companies, such as requiring
employees to work remotely, imposing travel restrictions and
temporarily closing businesses and facilities. The ongoing impacts
of the COVID-19 pandemic, including global supply chain
disruptions, could impair our third-party business partners'
ability to meet their obligations to us, which may negatively
affect our operations. These third parties include those who supply
our ingredients, packaging, and other necessary operating
materials, co-manufacturers, distributors, and logistics and
transportation services providers. The impact of COVID-19 on these
third-party business partners may negatively affect the price and
availability of our ingredients and/or packaging materials and
impact our supply chain. If the disruptions caused by COVID-19
continue for an extended period of time, our ability to meet the
demands of our customers may be materially impacted. To date, we
have not experienced any reduction in the available supply of our
products.
The pandemic has significantly impacted global economic conditions
and may in the future have an adverse impact on consumer confidence
and spending, which could materially adversely affect the supply
of, as well as the demand for, our products. The extent to which
the COVID-19 pandemic will further impact our business will depend
on future developments and we cannot reasonably estimate the
potential continued impact to our business at this time. However,
if the pandemic or the global supply chain disruptions continue for
a prolonged period it could have a material adverse effect on our
business, results of operations, financial condition and cash flows
and adversely impact the trading price of our common
stock.
If we do not successfully develop additional products and services,
or if such products and services are developed but not successfully
commercialized, our business will be adversely
affected.
Our success will depend, in part, on our ability to develop and
market new products and improvements to our existing products. The
process of identifying and commercializing new products is complex,
uncertain and may involve considerable costs, and if we fail to
accurately predict customers' changing needs and preferences, our
business could be harmed. The success of our innovation and product
development efforts is affected by, among other things, the
technical capability of our team; our ability to establish new
supplier relationships and third-party consultants in developing
and testing new products, and complying with governmental
regulations; our attractiveness as a partner for outside research
and development scientists and entrepreneurs; and the success of
our management and sales team in introducing and marketing new
products.
We have already and may have to continue to commit significant
resources to commercializing new products before knowing whether
our investments will result in products the market will accept.
Substantial promotional expenditures may be required to introduce
new products to the market, or improve our market position. To
remain competitive and expand and keep shelf placement for our
products, we may need to increase our advertising spending to
maintain and increase consumer awareness, protect and grow our
existing market share or promote new products, which could affect
our operating results. We may not always be able to respond quickly
and effectively to changes in customer taste and demand due to the
amount of time and financial resources that may be required to
bring new products to market, which could result in our competitors
taking advantage of changes in customer trends before we are able
to and harm our brand and reputation.
Furthermore, developing and commercializing new products may divert
management's attention from other aspects of our business and place
a strain on management, operational and financial resources, as
well as our information systems. We may not execute successfully on
commercializing those products because of errors in product
planning or timing, technical hurdles that we fail to overcome in a
timely fashion, or a lack of appropriate resources. Launching new
products or updating existing products may also leave us with
obsolete inventory that we may not be able to sell or we may sell
at significantly discounted prices. If we are unable to
successfully develop or otherwise acquire new products, our
business, financial condition and results of operations may be
materially adversely affected.
Because we are engaged in a highly competitive business, if we are
unable to compete effectively, our results of operations could be
adversely affected.
The pet health and wellness industry is highly competitive. We
compete on the basis of product and ingredient quality, product
availability, palatability, brand awareness, loyalty and trust,
product variety and innovation, product packaging and design,
reputation, price and convenience and promotional efforts. The pet
products and services retail industry has become increasingly
competitive due to the expansion of pet-related product offerings
by certain supermarkets, warehouse clubs, and other mass and
general retail and online merchandisers and the entrance of other
specialty retailers into the pet food and pet supply market, which
makes it more difficult for us to compete for brand recognition and
differentiation of our products and services. We face direct
competition from companies that sell various pet health and
wellness products at a lower price point and distribute such
products to traditional retailers, which are larger than we are and
have greater financial resources. Price gaps between products may
result in market share erosion and harm our business. Our current
and potential competitors may also establish cooperative or
strategic relationships amongst themselves or with third parties
that may further enhance their resources and offerings. Further, it
is possible that domestic or foreign companies, some with greater
experience in the pet health and wellness industry or greater
financial resources than we possess, will seek to provide products
or services that compete directly or indirectly with ours in the
future.
Many of our competitors may have longer operating histories,
greater brand recognition, larger fulfillment infrastructures,
greater technical capabilities, significantly greater financial,
marketing and other resources and larger customer bases than we do.
These factors may allow our competitors to derive greater net sales
and profits from their existing customer base, acquire customers at
lower costs or respond more quickly than we can to new or emerging
technologies and changes in consumer preferences or habits. These
competitors may engage in more extensive research and development
efforts, undertake more far-reaching marketing campaigns and adopt
more aggressive pricing policies, which may allow them to build
larger customer bases or generate net sales from their customer
bases more effectively than we do.
Our competitors may be able to identify and adapt to changes in
consumer preferences more quickly than us due to their resources
and scale. They may also be more successful in marketing and
selling their products, better able to increase prices to reflect
cost pressures and better able to increase their promotional
activity, which may impact us and the entire pet health and
wellness industry. Increased competition as to any of our products
could result in price reduction, increased costs, reduced margins
and loss of market share, which could negatively affect our
profitability. While we believe we are better equipped to customize
products for the pet health and wellness market generally as
compared to other companies in the industry, there can be no
assurance that we will be able to successfully compete against
these other companies. Expansion into markets served by our
competitors and entry of new competitors or expansion of existing
competitors into our markets could materially adversely affect our
business, financial condition and results of
operations.
If we fail to attract new customers, or retain existing customers,
or fail to do either in a cost-effective manner, we may not be able
to increase sales.
We are highly dependent on the effectiveness of our marketing
messages and the efficiency of our advertising expenditures in
generating consumer awareness and sales of our products. We may not
always be successful in developing effective messages and new
marketing channels, as consumer preferences and competition change,
and in achieving efficiency in our advertising expenditures. We
depend heavily on internet-based advertising to market our products
through internet-based media and e-commerce platforms. If we are
unable to continue utilizing such platforms, if those media and
platforms diminish in importance or size, or if we are unable to
direct our advertising to our target consumer groups, our
advertising efforts may be ineffective, and our business could be
adversely affected. The costs of advertising through these
platforms have increased significantly, which could in decreased
efficiency in the use of our advertising expenditures, and we
expect these costs may continue to increase in the
future.
Consumers are increasingly using digital tools as a part of their
shopping experience. As a result, our future growth and
profitability will depend in part on:
•the
effectiveness and efficiency of our online experience for disparate
worldwide audiences, including advertising and search optimization
programs in generating consumer awareness and sales of our
products;
•our
ability to prevent confusion among consumers that can result from
search engines that allow competitors to use or bid on our
trademarks to direct consumers to competitors’
websites;
•our
ability to prevent Internet publication or television broadcast of
false or misleading information regarding our products or our
competitors’ products;
•the
nature and tone of consumer sentiment published on various social
media sites; and
•the
stability of our website and other e-commerce platforms we sell our
products on. In recent years, a number of DTC, Internet-based
retailers have emerged and have driven up the cost of basic search
terms, which has and may continue to increase the cost of our
Internet-based marketing programs.
If our marketing messages are ineffective or our advertising
expenditures, geographic price-points, and other marketing
programs, including digital programs, are inefficient in creating
awareness and consideration of our products and brand name and in
driving consumer traffic to our website or to our other sales
channels, our sales, profitability, cash flows and financial
condition may be adversely impacted. In addition, if we are not
effective in preventing the publication of confusing, false or
misleading information regarding our brand or our products, or if
there arises significant negative consumer sentiment on social
media regarding our brand or our products, our sales,
profitability, cash flows and financial condition may be adversely
impacted.
Food safety and food-borne illness incidents may materially
adversely affect our business by exposing us to lawsuits, product
recalls or regulatory enforcement actions, increasing our operating
costs and reducing demand for our product offerings.
Selling food for consumption involves inherent legal and other
risks, and there is increasing governmental scrutiny of and public
awareness regarding food safety. Unexpected side effects, illness,
injury or death related to allergens, food-borne illnesses or other
food safety incidents caused by products we sell, or involving our
suppliers or co-manufacturers, could result in the discontinuance
of sales of these products or our relationships with such suppliers
or co-manufacturers, or otherwise result in increased operating
costs, regulatory enforcement actions or harm to our reputation.
Shipment of adulterated or misbranded products, even if
inadvertent, can result in criminal or civil liability. Such
incidents could also expose us to product liability, negligence or
other lawsuits, including consumer class action lawsuits. Any
claims brought against us may exceed or be outside the scope of our
existing or future insurance policy coverage or limits. Any
judgment against us that is more than our policy limits or not
covered by our policies or not subject to insurance would have to
be paid from our cash reserves, which would reduce our capital
resources.
The occurrence of food-borne illnesses or other food safety
incidents could also adversely affect the price and availability of
affected ingredients, resulting in higher costs, disruptions in
supply and a reduction in our sales. Furthermore, any instances of
food contamination or regulatory noncompliance, whether or not
caused by our actions, could compel us, our suppliers, our
distributors or our customers, depending on the circumstances, to
conduct a recall in accordance with FDA regulations, comparable
state laws or foreign laws in jurisdictions in which we operate.
Food recalls could result in significant losses due to their costs,
the destruction of product inventory, lost sales due to the
unavailability of the product for a period of time and potential
loss of existing distributors or customers and a potential negative
impact on our ability to attract new customers due to negative
consumer experiences or because of an adverse impact on our brand
and reputation. The costs of a recall could exceed or be outside
the scope of our existing or future insurance policy coverage or
limits.
In addition, food companies have been subject to targeted,
large-scale tampering as well as to opportunistic, individual
product tampering, and we, like any food company, could be a target
for product tampering. Forms of tampering could include the
introduction of foreign material, chemical contaminants and
pathological organisms into consumer products as well as product
substitution. FDA regulations require companies like us to analyze,
prepare and implement mitigation strategies specifically to address
tampering (i.e., intentional adulteration) designed to inflict
widespread public health harm. If we do not adequately address the
possibility, or any actual instance, of intentional adulteration,
we could face possible seizure or recall of our products and the
imposition of civil or criminal sanctions, which could materially
adversely affect our business, financial condition and operating
results.
We may not be able to manage our manufacturing and supply chain
effectively, which may adversely affect our results of
operations.
We must accurately forecast demand for all of our products in order
to ensure that we have enough products available to meet the needs
of our customers. Our forecasts are based on multiple assumptions
that may cause our estimates to be inaccurate and affect our
ability to obtain adequate co-manufacturing capacity in order to
meet the demand for our products. If we do not accurately align our
manufacturing capabilities with demand, our business, financial
condition and results of operations may be materially adversely
affected.
In addition, we must continuously monitor our inventory and product
mix against forecasted demand. If we underestimate demand, we risk
having inadequate supplies. We also face the risk of having too
much inventory on hand that may reach its expiration date and
become unsalable, and we may be forced to rely on markdowns or
promotional sales to dispose of excess or slow-moving inventory. If
we are unable to manage our supply chain effectively, our operating
costs could increase and our profit margins could
decrease.
If any of our independent shipping providers experience delays or
disruptions, our business could be adversely affected.
We rely on independent shipping service providers to ship raw
materials and products from our third-party suppliers and to ship
products from our manufacturing and distribution warehouses to our
customers. Our utilization of any shipping companies that we may
elect to use, is subject to risks, including increases in fuel
prices, employee strikes, organized labor activities and inclement
weather, which may impact the shipping company's ability to provide
delivery services sufficient to meet our shipping needs. If we are
not able to negotiate acceptable terms with these companies or they
experience performance problems or other difficulties, it could
negatively impact our operating results and customer
experience.
Our intellectual property rights may be inadequate to protect our
business.
We attempt to protect our intellectual property rights, both in the
U.S. and in foreign countries, through a combination of patent,
trademark, copyright and trade secret laws, as well as licensing
agreements and third-party nondisclosure and assignment agreements.
Because of the differences in foreign trademark, patent and other
laws concerning proprietary rights, our intellectual property
rights may not receive the same degree of protection in foreign
countries as they would in the U.S. Our failure to obtain or
maintain adequate protection of our intellectual property rights
for any reason could have a material adverse effect on our
business, results of operations and financial
condition.
We also rely on unpatented proprietary technology. It is possible
that others will independently develop the same or similar
technology or otherwise obtain access to our unpatented technology.
To protect our trade secrets and other proprietary information, we
require employees, consultants, advisors and collaborators to enter
into confidentiality agreements. We cannot assure you that these
agreements will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event of
any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information. If we are
unable to maintain the proprietary nature of our technologies, we
could be materially adversely affected.
We rely on our trademarks, trade names, and brand names to
distinguish our products from the products of our competitors, and
have registered or applied to register many of these trademarks. We
cannot assure you that our trademark applications will be approved.
Third parties may also oppose our trademark applications, or
otherwise challenge our use of the trademarks. In the event that
our trademarks are successfully challenged, we could be forced to
rebrand our products, which could result in loss of brand
recognition, and could require us to devote significant additional
resources to advertising and marketing new brands. Further, we
cannot assure you that competitors will not infringe our
trademarks, or that we will have adequate resources to enforce our
trademarks.
We depend on the knowledge and skills of our senior management and
other key employees, and if we are unable to retain and motivate
them or recruit additional qualified personnel, our business may
suffer.
We have benefited substantially from the leadership and performance
of our senior management, as well as other key employees. Our
success will depend on our ability to retain our current management
and key employees, and to attract and retain qualified personnel in
the future, and we cannot guarantee that we will be able to retain
our personnel or attract new, qualified personnel. In addition, we
do not maintain any “key person” life insurance policies. The loss
of the services of members of our senior management or key
employees could prevent or delay the implementation and completion
of our strategic objectives, or divert management’s attention to
seeking qualified replacements.
A failure of one or more key information technology systems,
networks or processes may materially adversely affect our ability
to conduct our business.
The efficient operation of our business depends on our information
technology systems. We rely on our information technology systems
to effectively manage our sales and marketing, accounting and
financial and legal and compliance functions, engineering and
product development tasks, research and development data,
communications, supply chain, order entry and fulfillment and other
business processes. We also rely on third parties and virtualized
infrastructure to operate and support our information technology
systems. The failure of our information technology systems, or
those of our third-party service providers, to perform as we
anticipate could disrupt our business and could result in
transaction errors, processing inefficiencies and the loss of sales
and customers, causing our business and results of operations to
suffer.
In addition, our information technology systems may be vulnerable
to damage or interruption from circumstances beyond our control,
including fire, natural disasters, power outages, systems failures,
security breaches, cyber-attacks and computer viruses. The failure
of our information technology systems to perform as a result of any
of these factors or our failure to effectively restore our systems
or implement new systems could disrupt our entire operation and
could result in decreased sales, increased overhead costs, excess
inventory and product shortages and a loss of important
information.
Further, it is critically important for us to maintain the
confidentiality and integrity of our information technology
systems. To the extent that we have information in our databases
that our customers consider confidential or sensitive, any
unauthorized disclosure of, or access to, such information could
result in a violation of applicable data privacy and security, data
protection, and consumer protection laws and regulations, legal and
financial exposure, damage to our reputation, a loss of confidence
of our customers, suppliers and manufacturers and lost sales.
Despite the implementation of certain security measures, our
systems may still be vulnerable to physical break-ins, computer
viruses, programming errors, attacks by third parties or similar
disruptive problems. If any of these risks materialize, our
reputation and our ability to conduct our business may be
materially adversely affected.
We rely heavily on third-party commerce platforms to conduct our
businesses. If one of those platforms is compromised, our business,
financial condition and results of operations could be
harmed.
We currently rely upon third-party commerce platforms, including
Shopify. We also rely on e-mail service providers, bandwidth
providers, Internet service providers and mobile networks to
deliver e-mail and “push” communications to customers and to allow
customers to access our website. Any damage to, or failure of, our
systems or the systems of our third-party commerce platform
providers could result in interruptions to the availability or
functionality of our website and mobile applications. As a result,
we could lose customer data and miss order fulfillment deadlines,
which could result in decreased sales, increased overhead costs,
excess inventory and product shortages.
In the future, the loss of access to these third-party platforms,
or any significant cost increases from operating on the
marketplaces, could significantly reduce our revenues, and the
success of our business depends partly on continued access to these
third-party platforms. Our relationships with our third-party
commerce platform providers could deteriorate as a result of a
variety of factors, such as if they become concerned about our
ability to deliver quality products on a timely basis or to protect
a third-party’s intellectual property. In addition, third-party
marketplace providers could prohibit our access to these
marketplaces if we are not able to meet the applicable required
terms of use. If for any reason our arrangements with our
third-party commerce platform providers are terminated or
interrupted, such termination or interruption could adversely
affect our business, financial condition, and results of
operations.
In addition, we exercise little control over these providers, which
increases our vulnerability to problems with the services they
provide. We could experience additional expense in arranging for
new facilities, technology, services and support. The failure of
our third-party commerce platform providers to meet our capacity
requirements could result in interruption in the availability or
functionality of our website and mobile applications, which could
adversely affect our business and results of
operations.
We may face difficulties as we expand our business and operations
into jurisdictions in which we have no prior operating
experience.
We plan in the future to expand our operations and business into
jurisdictions outside of the jurisdictions where we currently carry
on business, including internationally. There can be no assurance
that any market for our products will develop in any such foreign
jurisdiction. We may face new or unexpected risks or significantly
increase our exposure to one or more existing risk factors,
including economic instability, new competition, changes in laws
and regulations, including the possibility that we could be in
violation of these laws and regulations as a result of such
changes, and the effects of competition.
In addition, it may be difficult for us to understand and
accurately predict taste preferences and purchasing habits of
consumers in new markets. It is costly to establish, develop and
maintain operations and develop and promote our brands in new
jurisdictions. As we expand our business into other jurisdictions,
we may encounter regulatory, legal, personnel, technological and
other difficulties that increase our expenses and/or delay our
ability to become profitable in such countries, which may have a
material adverse effect on our business and brand. These factors
may limit our capability to successfully expand our operations in,
or export our products to, those other jurisdictions.
There may be decreased spending on pets in a challenging economic
climate.
A challenging economic climate, including adverse changes in
interest rates, volatile commodity markets and inflation,
contraction in the availability of credit in the market and
reductions in consumer spending, or a slow-down in the general
economy or a shift in consumer preferences to less expensive
products may result in reduced demand for our products which may
affect our profitability. Pet ownership and the purchase of
pet-related products may constitute discretionary spending for some
consumers and any material decline in consumer discretionary
spending may reduce overall levels of spending on pets. As a
result, a challenging economic climate may cause a decline in
demand for our products which could be disproportionate as compared
to competing pet food brands since our products command a price
premium.
Since a significant portion of our revenue has been and is expected
to be derived from China, a slowdown in economic growth in China
could adversely impact the sales of our products in China, which
could have a material adverse effect on our results of operations
and financial condition. In addition, a deterioration in trade
relations between the U.S. and China or other countries, or the
negative perception of U.S. brands by Chinese or other
international consumers, could have a material adverse effect on
our results of operations and financial condition.
If economic conditions result in decreased spending on pets and
have a negative impact on our suppliers or distributors, our
business, financial condition and results of operations may be
materially adversely affected.
Significant merchandise returns or refunds could harm our
business.
We allow our customers to return products or obtain refunds,
subject to our return and refunds policy. If merchandise returns or
refunds are significant or higher than anticipated and forecasted,
our business, financial condition, and results of operations could
be adversely affected. Further, we modify our policies relating to
returns or refunds from time to time, and may do so in the future,
which may result in customer dissatisfaction and harm to our
reputation or brand, or an increase in the number of product
returns or the amount of refunds we make.
We may seek to grow our company and business through acquisitions,
investments or through strategic alliances and our failure to
identify and successfully integrate and manage these assets could
have a material adverse effect on the anticipated benefits of the
acquisition and our business, financial condition or results of
operations.
We expect to consider opportunities to acquire or make investments
in new or complementary businesses, facilities, technologies or
products, or enter into strategic alliances, which may enhance our
capabilities, expand our network, complement our current products
or expand the breadth of our markets. In 2019, we completed three
significant acquisitions that involved the combination of three
businesses that historically have operated as independent
companies. The success of these completed acquisitions and any
future acquisitions will depend in large part on the success of our
management team in integrating the operations, strategies,
technologies and personnel. Potential and completed acquisitions,
investments and other strategic alliances involve numerous risks,
including: problems integrating the purchased business, facilities,
technologies or products; issues maintaining uniform standards,
procedures, controls and policies; assumed liabilities;
unanticipated costs associated with acquisitions, investments or
strategic alliances; diversion of management's attention from our
existing business; adverse effects on existing business
relationships with suppliers, manufacturers, and retail customers;
risks associated with entering new markets in which we have limited
or no experience; potential write-offs of acquired assets and/or an
impairment of any goodwill recorded as a result of an acquisition;
potential loss of key employees of acquired businesses; and
increased legal and accounting compliance costs.
We may fail to realize some or all of the anticipated benefits of
the acquisitions if the integration process takes longer than
expected or is more costly than expected. Our failure to meet the
challenges involved in successfully integrating acquisitions,
including the operations of Halo or TruPet, or to otherwise realize
any of the anticipated benefits of the acquisitions could impair
our financial condition and results of operations. Furthermore, we
do not know if we will be able to identify additional acquisitions
or strategic relationships we deem suitable or whether we will be
able to successfully complete any such transactions on favorable
terms or at all. Our ability to successfully grow through strategic
transactions depends upon our ability to identify, negotiate,
complete and integrate suitable target businesses, facilities,
technologies and products and to obtain any necessary financing.
These efforts could be expensive and time-consuming and may disrupt
our ongoing business.
Premiums for our insurance coverage may not continue to be
commercially justifiable, and our insurance coverage may have
limitations and other exclusions and may not be sufficient to cover
our potential liabilities.
We have insurance to protect our assets, operations and employees.
While we believe our insurance coverage addresses all material
risks to which we are exposed and is adequate and customary in our
current state of operations, such insurance is subject to coverage
limits and exclusions and may not be available for the risks and
hazards to which we are exposed. No assurance can be given that
such insurance will be adequate to cover our liabilities or will be
generally available in the future or, if available, that premiums
will be commercially justifiable. If we are unable to obtain such
insurances or if we were to incur substantial liability and such
damages were not covered by insurance or were in excess of policy
limits, we may be prevented from entering into certain business
sectors, our growth may be inhibited, and we may be exposed to
additional risk and financial liabilities, which could have a
material adverse effect on our business, results of operations and
financial condition could be materially adversely
affected.
Adverse litigation judgments or settlements resulting from legal
proceedings relating to our business operations could materially
adversely affect our business, financial condition and results of
operations.
From time to time, we are subject to allegations, and may be party
to legal claims and regulatory proceedings, relating to our
business operations. Such allegations, claims and proceedings may
be brought by third parties, including our customers, employees,
governmental or regulatory bodies or competitors. Defending against
such claims and proceedings, regardless of their merits or
outcomes, is costly and time consuming and may divert management’s
attention and personnel resources from our normal business
operations, and the outcome of many of these claims and proceedings
cannot be predicted. If any of these claims or proceedings were to
be determined adversely to us, a judgment, a fine or a settlement
involving a payment of a material sum of money were to occur, or
injunctive relief were issued against us, our reputation could be
affected and our business, financial condition and results of
operations could be materially adversely affected.
If third parties claim that we infringe upon their intellectual
property rights, our business and results of operations could be
adversely affected.
Any claims of intellectual property infringement, even those
without merit, could be expensive and time consuming to defend;
could require us to cease selling the products that incorporate the
challenged intellectual property; could require us to redesign,
reengineer, or rebrand the product, if feasible; could divert
management’s attention and resources; or could require us to enter
into royalty or licensing agreements in order to obtain the right
to use a third party’s intellectual property. Any royalty or
licensing agreements, if required, may not be available to us on
acceptable terms or at all.
A successful claim of infringement against us could result in our
being required to pay significant damages, enter into costly
license or royalty agreements, or stop the sale of certain
products, any of which could have a negative impact on our
business, financial condition, results of operations and our future
prospects.
Failure to comply with the U.S. Foreign Corrupt Practices Act,
other applicable anti-corruption and anti-bribery laws, and
applicable trade control laws could subject us to penalties and
other adverse consequences.
We operate our business in part outside of the U.S. and our
operations are subject to the U.S. Foreign Corrupt Practices Act
(the “FCPA”), as well as the anti-corruption and anti-bribery laws
in the countries where we do business. In addition, we are subject
to U.S. and other applicable trade control regulations that
restrict with whom we may transact business, including the trade
sanctions enforced by the U.S. Treasury, Office of Foreign Assets
Control (“OFAC”). We also plan to expand our operations outside of
the U.S. in the future and our risks related to the FCPA will
increase as we grow our international presence. Any violations of
these anti-corruption or trade controls laws, or even allegations
of such violations, can lead to an investigation and/or enforcement
action, which could disrupt our operations, involve significant
management distraction, and lead to significant costs and expenses,
including legal fees. In addition, our brand and reputation, our
sales activities or our stock price could be adversely affected if
we become the subject of any negative publicity related to actual
or potential violations of anti-corruption, anti-bribery or trade
control laws and regulations.
Our ability to utilize our net operating loss carryforwards may be
limited.
Our ability to utilize our federal net operating loss carryforwards
and federal tax credit may be limited under Section 382 of the Code
as amended by the Tax Cut and Jobs Act (the “TCJA”). The
limitations apply if we experience an “ownership change”. Similar
provisions of state tax law may also apply. If we have experienced
an ownership change at any time since our formation, we may already
be subject to limitations on our ability to utilize our existing
net operating losses to offset taxable income. In addition, future
changes in our stock ownership, which may be outside of our
control, may trigger an ownership change and, consequently, the
limitations under Section 382. As a result, if or when we earn net
taxable income, our ability to use our pre-change net operating
loss carryforwards to offset such taxable income may be subject to
limitations, which could adversely affect our future cash
flows.
We may have material liabilities that have not been discovered
since the closing of the acquisitions.
As a result of our acquisitions in 2019, the prior business plan
and management relating to Better Choice Company was abandoned. We
may have material liabilities based on activities of our
subsidiaries before the acquisitions that have not been discovered
or asserted. We could experience losses as a result of any such
undisclosed liabilities that are discovered in the future, which
could materially harm our business and financial condition.
Although the agreements entered into in connection with the
acquisitions contains customary representations and warranties from
Bona Vida, Halo and TruPet concerning their assets, liabilities,
financial condition and affairs, there may be limited or no
recourse against the pre-acquisition stockholders or principals in
the event those representations prove to be untrue. As a result,
our current and future stockholders will bear some, or all, of the
risks relating to any such unknown or undisclosed
liabilities.
Risks Related to the Regulation of our Business and
Products
We and our co-manufacturers and suppliers are subject to extensive
governmental regulation and may be subject to enforcement if we are
not in compliance with applicable requirements.
We and our third-party suppliers are subject to a broad range of
foreign, federal, state and local laws and regulations governing,
among other things, the testing, development, manufacture,
distribution, marketing and post-market reporting of animal foods.
These include laws administered by the FDA, the FTC, the USDA, and
other federal, state and local regulatory authorities. Because we
market food, supplements and other products that are regulated as
food and cosmetic care products for animals, we and the companies
that manufacture our products are subject to the requirements of
the FDCA and regulations promulgated thereunder by the FDA. The
FDCA and related regulations govern, among other things, the
manufacturing, composition, ingredients, packaging, labeling and
safety of food for animals. The FDA requires that facilities that
manufacture animal food products comply with a range of
requirements. If our third-party suppliers cannot successfully
manufacture products that conform to our specifications and the
strict regulatory requirements, they may be subject to adverse
inspectional findings or enforcement actions, which could
materially impact our ability to market our products, could result
in their inability to continue manufacturing for us or could result
in a recall of our products that have already been
distributed.
If the FDA or other regulatory authority determines that we or they
have not complied with the applicable regulatory requirements, our
business, financial condition and results of operations may be
materially adversely impacted. If we do not comply with labeling
requirements, including making unlawful claims about our products,
we could be subject to public warning letters and possible further
enforcement. Failure by us or our co-manufacturers and suppliers to
comply with applicable laws and regulations or to obtain and
maintain necessary permits, licenses and registrations relating to
our or our partners’ operations could subject us to administrative
and civil penalties, including fines, injunctions, recalls or
seizures, warning letters, restrictions on the marketing or
manufacturing of our products, or refusals to permit the import or
export of products, as well as potential criminal sanctions, which
could result in increased operating costs resulting in a material
effect on our operating results and business. For further detail,
refer to the information under “Item 1. Business—Government
Regulation” in this Annual Report on Form 10-K.
International expansion of our business could expose us to
substantial business, regulatory, political, financial and economic
risks.
We currently conduct business and market products in the U.S.,
Canada and select Asian markets, including China. The expansion of
our business outside of the U.S. could expose us to substantial
risks, which may include, but are not limited to, the
following:
•political,
social and economic instability;
•higher
levels of credit risk, corruption and payment fraud;
•regulations
that might add difficulties in repatriating cash earned outside the
U.S. and otherwise prevent us from freely moving cash;
•import
and export controls and restrictions and changes in trade
regulations
•compliance
with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act
and similar laws in other jurisdictions;
•multiple,
conflicting and changing laws and regulations such as privacy,
security and data use regulations, tax laws, trade regulations,
economic sanctions and embargoes, employment laws, anti-corruption
laws, regulatory requirements, reimbursement or payor regimes and
other governmental approvals, permits and licenses;
•failure
by us, our collaborators or our distributors to obtain regulatory
clearance, authorization or approval for the use of our products in
various countries;
•additional
potentially relevant third-party patent rights;
•complexities
and difficulties in obtaining intellectual property protection and
enforcing our intellectual property;
•logistics
and regulations associated with shipping samples and customer
orders, including infrastructure conditions and transportation
delays;
•the
impact of local and regional financial crises;
•natural
disasters, political and economic instability, including wars,
terrorism and political unrest, and outbreak of
disease;
•breakdowns
in infrastructure, utilities and other services;
•boycotts,
curtailment of trade and other business restrictions;
and
•the
other risks and uncertainties described in this Form
10K
Any of these factors could significantly harm our future
international expansion and operations and, consequently, our
revenue and results of operations.
Changes in government regulations and trade policies may materially
and adversely affect our sales and results of
operations.
The U.S. or foreign governments may take administrative,
legislative, or regulatory action that could materially interfere
with our ability to sell products in certain countries and/or to
certain customers, particularly in China. As part of our attempt to
broaden its customer base, we have begun offering our products to
Chinese consumers. Our decision to export products to China
requires us to comply with Chinese rules, laws, and regulations, as
well as certain domestic and international laws relating to the
import and export of goods to foreign countries. These laws are
often changing, and the costs associated with complying with these
laws and regulations may adversely affect us. Additionally, changes
in the current laws may make importing products to China more
difficult, which may also negatively affect our business.
Furthermore, changes in U.S. trade policy more generally could
trigger retaliatory actions by affected countries, which could
impose restrictions on our ability to do business in or with
affected countries or prohibit, reduce or discourage purchases of
our products by foreign customers. Changes in, and responses to,
U.S. trade policy could reduce the competitiveness of our products,
cause our sales to decline and adversely impact our ability to
compete, which could materially and adversely impact our business,
financial condition and results of operations.
There is significant uncertainty about the future relationship
between the U.S. and China with respect to trade policies,
treaties, government regulations and tariffs. An escalation of
recent trade tensions between the U.S. and China has resulted in
trade restrictions that could harm our ability to participate in
Chinese markets and numerous additional such restrictions have been
threatened by both countries. The U.S. and China have imposed a
number of tariffs and other restrictions on items imported or
exported between the U.S. and China. We cannot predict what actions
may ultimately be taken with respect to tariffs or trade relations
between the U.S. and China or other countries, what products may be
subject to such actions, or what actions may be taken by the other
countries in retaliation. The institution of trade tariffs both
globally and between the U.S. and China specifically carries the
risk of negatively impacting China’s overall economic condition,
which could have negative repercussions for our business. Our
products are and may continue to be subject to export license
requirements or restrictions, particularly in respect of
China.
Our products may be subject to recalls for a variety of reasons,
which could require us to expend significant management and capital
resources.
Manufacturers and distributors of products are sometimes subject to
the recall or return of their products for a variety of reasons,
including product defects, such as contamination, adulteration,
unintended harmful side effects or interactions with other
substances, packaging safety and inadequate or inaccurate labeling
disclosure. Although we have detailed procedures in place for
testing finished products, there can be no assurance that any
quality, potency or contamination problems will be detected in time
to avoid unforeseen product recalls, regulatory action or lawsuits,
whether frivolous or otherwise. If any of the animal food or care
products produced by us are recalled due to an alleged product
defect or for any other reason, we could be required to incur the
unexpected expense of the recall and any legal proceedings that
might arise in connection with the recall. We had to issue a recall
in 2018 for one of our products after a single retail sample
collected by the Michigan Department of Agriculture tested positive
for Salmonella. Although customers reported no incidents of injury
or illness in association with this product, the recall negatively
affected our results. As a result of any such recall, customers may
be hesitant to purchase our products in the future and we may lose
a significant amount of sales and may not be able to replace those
sales at an acceptable margin or at all. In addition, a product
recall may require significant management attention or damage our
reputation and goodwill or that of our products or brands.
Additionally, product recalls may lead to increased scrutiny of our
operations by the FDA or other state or federal regulatory
agencies, requiring further management attention, increased
compliance costs and potential legal fees, fines, penalties and
other expenses.
Changes in existing laws or regulations, including how such
existing laws or regulations are enforced by federal, state, and
local authorities, or the adoption of new laws or regulations may
increase our costs and otherwise adversely affect our business,
financial condition and results of operations.
The manufacture and marketing of animal food products is highly
regulated, and we and our co-manufacturers and suppliers are
subject to a variety of federal and state laws and regulations
applicable to pet food and treats. These laws and regulations apply
to many aspects of our business, including the manufacture,
packaging, labeling, distribution, advertising, sale, quality and
safety of our products. We could incur costs, including fines,
penalties, and third-party claims, in the event of any violations
of, or liabilities under, such requirements, including any
competitor or consumer challenges relating to compliance with such
requirements. For example, in connection with the marketing and
advertisement of our products, we could be the target of claims
relating to false or deceptive advertising, including under the
auspices of the FTC and state consumer protection statutes. The
regulatory environment in which we operate could change
significantly and adversely in the future. The laws and regulations
that apply to our products and business may change in the future
and we may incur (directly or indirectly) material costs to comply
with current or future laws and regulations or any required product
recalls. New or revised government laws and regulations could
significantly limit our ability to run our business as it is
currently conducted, result in additional compliance costs and, in
the event of noncompliance, lead to administrative or civil
remedies, including fines, injunctions, withdrawals, recalls or
seizures and confiscations, as well as potential criminal
sanctions. Any such changes or actions by the FDA or other
regulatory agencies could have a material adverse effect on our
co-manufacturers, our suppliers or our business, financial
condition and results of operations.
Risks Related to Our Capital Structure
We are a holding company and rely on payments, advances and
transfers of funds from our subsidiaries to meet our obligations
and pay any dividends.
We have limited direct operations and significant assets other than
ownership of 100% of the capital stock of our subsidiaries. Because
we primarily conduct our operations through our subsidiaries, we
depend on those entities for payments to generate the funds
necessary to meet our financial obligations, and to pay any
dividends with respect to our common stock. Legal and contractual
restrictions in our term loan and revolving line of credit
agreement and other agreements that may govern future indebtedness
of our subsidiaries, as well as the financial condition and
operating requirements of our subsidiaries, may limit our ability
to obtain cash from our subsidiaries. The earnings from, or other
available assets of, our subsidiaries might not be sufficient to
make distributions or obtain loans to enable us to meet certain of
our obligations. Any of the foregoing could materially and
adversely affect our business, financial condition, results of
operations and cash flows.
Our level of indebtedness and related covenants could limit our
operational and financial flexibility and could significantly
adversely affect our business if we breach such covenants and
default on such indebtedness.
Our ability to meet our debt service obligations depends upon our
operating and financial performance, which is subject to general
economic and competitive conditions and to financial, business and
other factors affecting our operations, many of which are beyond
our control. If we are unable to service our debt, we may need to
sell inventory and other material assets, restructure or refinance
our debt, or seek additional equity capital. If our inability to
meet our debt service obligations results in an event of default as
defined under our subordinated convertible promissory notes or our
senior credit facility, the lenders thereunder may be able to take
possession of substantially all of our assets. Prevailing economic
conditions and global credit markets could adversely impact our
ability to do so.
In addition, our debt agreements contain limits on our ability to,
among other things, incur additional debt, grant liens, undergo
certain fundamental changes, make investments, and dispose of
inventory. These restrictions may prevent us from taking actions
that we believe would be in the best interests of the business and
may make it difficult for us to successfully execute our business
strategy or effectively compete with companies that are not
similarly restricted. If we determine that we need to take any
action that is restricted under our debt agreements, we will need
to first obtain a waiver from the related lenders. Obtaining such
waivers, if needed, may impose additional costs or we may be unable
to obtain such waivers. Our ability to comply with these
restrictive covenants in future periods will largely depend on our
ability to successfully implement our overall business strategy.
The breach of any of these covenants or restrictions could result
in a default, which could result in the acceleration of our
outstanding debt. In the event of an acceleration of such debt, we
could be forced to apply all available cash flows to repay such
debt, which could also force us into bankruptcy or
liquidation.
For information regarding our outstanding debt, refer to "Note 8 -
Debt" in the Notes to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary Data of this report,
which is incorporated into this Item 1A by reference.
Our common stock may be deemed to be a “penny stock” and the “penny
stock” rules could adversely affect the market price of our common
stock.
The SEC has adopted Rule 3a51-1, which establishes the definition
of a “penny stock” as any equity security that has a market price
of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. Our common stock
may be deemed to be a penny stock. For any transaction involving a
penny stock, unless exempt, Rule 15g-9 requires that a
broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive
(i) the purchaser’s written acknowledgment of the receipt of a risk
disclosure statement; (ii) a written agreement to transactions
involving penny stocks; and (iii) a signed and dated copy of a
written suitability statement. Generally, brokers may be less
willing to execute transactions in securities subject to the “penny
stock” rules. This may make it more difficult for investors to
dispose of our common stock and cause a decline in the market value
of our stock.
Our failure to meet the continued listing requirements of NYSE
American could result in a de-listing of our common stock and could
make it more difficult to raise capital in the future.
NYSE has listing requirements for inclusion of securities for
trading on the NYSE American, including minimum levels of
stockholders' equity, market value of publicly held shares, number
of public stockholders and stock price. There can be no assurance
that we will be successful in maintaining the listing of NYSE
American as it is possible we may fail to satisfy the continued
listing requirements, such as the corporate governance requirements
or the minimum stock price requirement. If we fail to satisfy the
continued listing requirements, the NYSE American may take steps to
de-list our common stock. Such a de-listing or the announcement of
such de-listing will have a negative effect on the price of our
common stock and would impair your ability to sell or purchase our
common stock when you wish to do so. In the event of a de-listing,
we may attempt to take actions to restore our compliance with the
NYSE American listing requirements, but we can provide no assurance
that any such action taken by us would allow our common stock to
become listed again, stabilize the market price or improve the
liquidity of our common stock, prevent our common stock from
dropping below the NYSE American minimum listing requirements or
prevent future non-compliance with the NYSE American listing
requirements. If we do not maintain the listing of our common stock
on NYSE American, it could make it harder for us to raise
additional capital in the long-term. If we are unable to raise
capital when needed in the future, we may have to cease or reduce
operations.
Our common stock prices may be volatile.
The market price of our common stock has been and may continue to
be highly volatile and subject to wide fluctuations. Our financial
performance, government regulatory action, tax laws, interest rates
and market conditions in general could have a significant impact on
the future market price of our common stock.
The public price of our common stock could also be subject to wide
fluctuations in response to the risk factors described in this
report and others beyond our control, including: the number of
shares of our common stock publicly owned and available for
trading; actual or anticipated quarterly variations in our results
of operations or those of our competitors; our actual or
anticipated operating performance and the operating performance of
similar companies in our industry; our announcements or our
competitors’ announcements regarding significant contracts,
acquisitions, or strategic investments; general economic conditions
and their impact on the pet food markets; the overall performance
of the equity markets; threatened or actual litigation; changes in
laws or regulations relating to our industry; any major change in
our board of directors or management; publication of research
reports about us or our industry or changes in recommendations or
withdrawal of research coverage by securities analysts; and sales
or expected sales of shares of our common stock by us, and our
officers, directors, and significant stockholders. From time to
time, our affiliates may sell stock for reasons due to their
personal financial circumstances. These sales may be interpreted by
other stockholders as an indication of our performance and result
in subsequent sales of our stock that have the effect of creating
downward pressure on the market price of our common
stock.
The volatility of the market price of our common stock may
adversely affect the ability of investors to purchase or sell
shares of our common stock. Investors may also experience losses on
their investments in our stock due to price fluctuations. In
addition, the stock market in general has experienced extreme price
and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of those companies.
Securities class action litigation has often been instituted
against companies following periods of volatility in the overall
market and in the market price of a company’s securities. Such
litigation, if instituted against us, could result in very
substantial costs, divert our management’s attention and resources
and harm our business, operating results, and financial
condition.
We do not expect to pay any cash dividends to the holders of the
common stock in the foreseeable future and the availability and
timing of future cash dividends, if any, is uncertain.
We expect to use cash flow from future operations to repay debt and
support the growth of our business and do not expect to declare or
pay any cash dividends on our common stock in the foreseeable
future. Our Wintrust Credit Facility, subordinated convertible
notes, term loan and revolving line of credit place certain
restrictions on the ability of us and our subsidiaries to pay cash
dividends. We may amend our current credit facilities or enter into
new debt arrangements that also prohibit or restrict our ability to
pay cash dividends on our common stock.
Subject to such restrictions, our board of directors will determine
the amount and timing of stockholder dividends, if any, that we may
pay in future periods. In making this determination, our directors
will consider all relevant factors, including the amount of cash
available for dividends, capital expenditures, covenants,
prohibitions or limitations with respect to dividends, applicable
law, general operational requirements and other variables. We
cannot predict the amount or timing of any future dividends you may
receive, and if we do commence the payment of dividends, we may be
unable to pay, maintain or increase dividends over time. Therefore,
you may not be able to realize any return on your investment in our
common stock for an extended period of time, if at
all.
Future sales of our common stock, or the perception that such sales
may occur, may depress our share price, and any additional capital
through the sale of equity or convertible securities may dilute
your ownership in us.
In the future, we may issue our previously authorized and unissued
securities. We are authorized to issue 200,000,000 shares of common
stock and 4,000,000 shares of preferred stock with such
designations, preferences and rights as determined by our board of
directors. The potential issuance of such additional shares of
common stock will result in the dilution of the ownership interests
of the holders of our common stock and may create downward pressure
on the trading price, if any, of our common stock. The sales of
substantial amounts of our common stock pursuant to our effective
registration statements, or the perception that these sales may
occur, could cause the market price of our common stock to decline
and impair our ability to raise capital. These shares also may be
sold pursuant to Rule 144 under the Securities Act, depending on
their holding period and subject to restrictions in the case of
shares held by persons deemed to be our affiliates. We also may
grant additional registration rights in connection with any future
issuance of our capital stock.
For information regarding our outstanding stockholders’ equity and
potentially dilutive securities, refer to "Note 8 - Debt", "Note 10
- Stockholders’ equity", "Note 11 - Warrants" and "Note 12 -
Share-based compensation" in the Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and
Supplementary Data of this Annual Report on Form 10-K, which is
incorporated into this Item 1A by reference.
The market price of our common stock may not attract new investors,
including institutional investors, and may not satisfy the
investing requirements of those investors. Consequently, the
trading liquidity of our common stock may not improve.
There can be no assurance that the share price of our stock will
attract new investors, including institutional investors. In
addition, there can be no assurance that the market price of our
common stock will satisfy the investing requirements of those
investors. As a result, the trading liquidity of our common stock
may not necessarily improve.
We may issue preferred stock whose terms could adversely affect the
voting power or value of our common stock.
Our certificate of incorporation authorizes us to issue, without
the approval of our stockholders, one or more classes or series of
preferred stock having such designations, preferences, limitations
and relative rights, including preferences over our common stock
with respect to dividends and distributions, as our board of
directors may determine. The terms of one or more classes or series
of preferred stock could adversely impact the voting power or value
of our common stock. For example, we might grant holders of
preferred stock the right to elect some number of our directors in
all events or on the happening of specified events, or the right to
veto specified transactions. Similarly, the repurchase or
redemption rights or liquidation preferences we might grant to
holders of preferred stock could affect the value of the common
stock. The issuance of such preferred stock could also be used as a
method of discouraging, delaying or preventing a change of
control.
The administrative and regulatory costs of public company
compliance could consume a significant amount of our
resources.
The rules and regulations related to being a public company require
us to incur significant legal, accounting and other expenses. The
legal and financial compliance make some activities more
time-consuming and costly, particularly after we are no longer a
smaller reporting company. Moreover, if we are not able to comply
with the requirements or regulations as a public reporting company
in any regard, we could be subject to sanctions or investigations
by the SEC or other regulatory authorities, which would require
additional financial and management resources.
In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently
implemented by the SEC impose various requirements on public
companies, including establishment and maintenance of effective
disclosure and financial controls and corporate governance
practices. Our management and other personnel devote a substantial
amount of time to these compliance initiatives. To achieve
compliance with Section 404 within the prescribed period, we will
be engaged in a costly and challenging process to document and
evaluate our internal control over financial reporting. In this
regard, we will need to continue to dedicate internal resources and
potentially engage outside consultants or hire an internal audit
resource to assess and document the adequacy of internal control
over financial reporting, validate through testing that controls
are functioning as documented and implement a continuous reporting
and improvement process for internal control over financial
reporting. Despite our efforts, there is a risk that neither we nor
our independent registered public accounting firm will be able to
conclude within the prescribed timeframe that our internal control
over financial reporting is effective as required by Section 404.
This could result in an adverse reaction in the financial markets
due to a loss of confidence in the reliability of our financial
statements.
We are a smaller reporting company which could make our securities
less attractive to investors and may make it more difficult to
compare our performance with other public companies.
We are a smaller reporting company, as defined in Item 10(f)(1) of
Regulation S-K, and we may take advantage of certain reduced
disclosure obligations. To the extent we take advantage of such
reduced disclosure obligations while we continue to qualify as a
smaller reporting company, it may make comparison of our financial
statements with other public companies difficult or impossible.
Some investors may find our common stock less attractive because we
may rely on these exemptions, which could result in a less active
trading market for our common stock, and our stock price may be
more volatile.
Our bylaws designate the Court of Chancery of the State of Delaware
as the sole and exclusive forum for certain types of actions and
proceedings that may be initiated by our stockholders, which could
limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers, employees or
agents.
Our bylaws provide that, unless we consent in writing to the
selection of an alternative forum, the Court of Chancery of the
State of Delaware will, to the fullest extent permitted by
applicable law, be the sole and exclusive forum for (i) any
derivative action or proceeding brought on our behalf, (ii) any
action asserting a claim of breach of a fiduciary duty owed by any
director or officer (or affiliate of any of the foregoing) of us to
us or the our shareholders, (iii) any action asserting a claim
arising pursuant to any provision of the DGCL or our certificate of
incorporation or bylaws, or (iv) any other action asserting a claim
arising under, in connection with, and governed by the internal
affairs doctrine; provided that these exclusive forum provisions
will not apply to suits brought to enforce any liability or duty
created by the Securities Act or the Exchange Act, or to any claim
for which the federal courts have exclusive jurisdiction. Any
person or entity purchasing or otherwise acquiring any interest in
shares of our capital stock will be deemed to have notice of, and
consented to, the provisions of our bylaws described in the
preceding sentence. This choice of forum provision may limit a
stockholder’s ability to bring a claim in a judicial forum that it
finds favorable for disputes with us or our directors, officers,
employees or agents, which may discourage such lawsuits against us
and such persons. Alternatively, if a court were to find these
provisions of our bylaws inapplicable to, or unenforceable in
respect of, one or more of the specified types of actions or
proceedings, we may incur additional costs associated with
resolving such matters in other jurisdictions, which could
adversely affect our business, financial condition or results of
operations.
Provisions in our certificate of incorporation and bylaws and
Delaware law may discourage a takeover attempt even if a takeover
might be beneficial to our stockholders.
Provisions contained in our certificate of incorporation and bylaws
could make it more difficult for a third party to acquire us after
we have become a publicly traded company. Provisions in our
certificate of incorporation and bylaws impose various procedural
and other requirements, which could make it more difficult for
stockholders to effect certain corporate actions. For example, our
certificate of incorporation authorizes our board of directors to
determine the rights, preferences, privileges and restrictions of
unissued series of preferred stock without any vote or action by
our stockholders. Thus, our board of directors can authorize and
issue shares of preferred stock with voting or conversion rights
that could dilute the voting power of holders of our other series
of capital stock. These rights may have the effect of delaying or
deterring a change of control of our company. Additionally, our
certificate of incorporation and/or bylaws establish limitations on
the removal of directors and on the ability of our stockholders to
call special meetings and include advance notice requirements for
nominations for election to our board of directors and for
proposing matters that can be acted upon at stockholder
meetings.
Moreover, because we are incorporated in Delaware, we are governed
by the provisions of Section 203 of the General Corporation Law of
the State of Delaware (the “DGCL”), which prohibits an “interested
stockholder” owning in excess of 15% of our outstanding voting
stock from merging or combining with us for a period of three years
after the date of the transaction in which such stockholder
acquired in excess of 15% of our outstanding voting stock, unless
the merger or combination is approved in a prescribed manner. These
provisions could limit the price that certain investors might be
willing to pay in the future for shares of our common
stock.
Claims for indemnification by our directors and officers may reduce
our available funds to satisfy successful third-party claims
against us and may reduce the amount of money available to
us.
Our certificate of incorporation provides that we will indemnify
our directors and officers, in each case to the fullest extent
permitted by Delaware law. In addition, as permitted by Section 145
of the Delaware General Corporation Law, our certificate of
incorporation and our indemnification agreements that we have
entered into with our directors and officers provide
that:
•We
will indemnify our directors and officers for serving us in those
capacities or for serving other business enterprises at our
request, to the fullest extent permitted by Delaware law. Delaware
law provides that a corporation may indemnify such person if such
person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding,
had no reasonable cause to believe such person’s conduct was
unlawful.
•We
may, in our discretion, indemnify employees and agents in those
circumstances where indemnification is permitted by applicable
law.
•We
are required to advance expenses, as incurred, to our directors and
officers in connection with defending a proceeding, except that
such directors or officers shall undertake to repay such advances
if it is ultimately determined that such person is not entitled to
indemnification.
•We
will not be obligated pursuant to the indemnification agreements
entered into with our directors and executive officers to indemnify
a person with respect to proceedings initiated by that person,
except with respect to proceedings to enforce an indemnitees right
to indemnification or advancement of expenses, proceedings
authorized by our board of directors and if offered by us in our
sole discretion.
•The
rights conferred in our certificate of incorporation are not
exclusive, and we are authorized to enter into indemnification
agreements with our directors, officers, employees and agents and
to obtain insurance to indemnify such persons.
•We
may not retroactively amend our certificate of incorporation or
indemnification agreement provisions to reduce our indemnification
obligations to directors, officers, employees and
agents.
As a result of these provisions, if an investor were able to
enforce an action against our directors or officers, in all
likelihood, we would be required to pay any expenses they incurred
in defending the lawsuit and any judgment or settlement they
otherwise would be required to pay. Accordingly, our
indemnification obligations could divert needed financial resources
and may adversely affect our business, financial condition, results
of operations and cash flows, and adversely affect the value of our
business.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
Our principal place of business is located at 12400 Race Track
Road, Tampa, FL 33626, which consists of approximately 5,000 square
feet of office space which we lease. Our lease for this location is
scheduled to expire on January 31, 2026.
We do not own any properties or land.
We believe our facilities are adequate and suitable for our current
needs and that suitable additional or alternative space will be
available if the need arises in the future.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to litigation and other
proceedings that arise in the ordinary course of our business.
Subject to the inherent uncertainties of litigation and although no
assurances are possible, we believe that there are no pending
lawsuits or claims that, individually or in the aggregate, will
have a material adverse effect on our business, financial condition
or our yearly results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock is currently listed on the NYSE American
marketplace under the symbol “BTTR” after the consummation of our
IPO on July 1, 2021 and was previously listed on the OTC Market
Group Inc.'s OTCQX market after being upgraded from the OTCQB on
December 28, 2020 where it had been trading since June 2010. The
following table sets forth, for the periods indicated and as
reported on the NYSE American and OTC Markets, the high and low bid
prices for our common stock. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up,
mark-downs or commissions, and may not necessarily represent actual
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
2021 |
|
|
|
|
First Quarter
(1)
|
|
$10.80 |
|
$6.84 |
Second Quarter
(1)
|
|
$9.72 |
|
$4.02 |
Third Quarter
(2)
|
|
$4.78 |
|
$2.96 |
Fourth Quarter
(2)
|
|
$4.30 |
|
$2.85 |
2022 |
|
|
|
|
First Quarter
(2)
|
|
$3.95 |
|
$2.11 |
Second Quarter
(2)
|
|
$3.04 |
|
$1.86 |
Third Quarter
(2)
|
|
$2.65 |
|
$0.78 |
Fourth Quarter
(2)
|
|
$1.24 |
|
$0.44 |
(1)The
high and low bid prices for this quarter were reported by the OTCQX
marketplace.
(2)The
high and low bid prices for this quarter were reported by the NYSE
American marketplace.
Holders of Common Stock
As of March 24, 2023, we had 30,541,148 shares of our common
stock issued and outstanding. As of March 24, 2023, there were
152 record holders of our common stock. Certain shares are held in
“street” name and accordingly, the number of beneficial owners of
such shares is not known or included in the foregoing number. This
number of holders of record also does not include stockholders
whose shares may be held in trust by other entities.
Dividend Policy
We do not currently anticipate declaring or paying cash dividends
on our common stock in the foreseeable future. We currently intend
to retain our future earnings, if any, to finance the development
and expansion of our business. Any future determination to pay
dividends will be at the discretion of our board of directors and
will depend upon then-existing conditions, including our results of
operations and financial condition, capital requirements, business
prospects, statutory and contractual restrictions on our ability to
pay cash dividends, including restrictions contained in our credit
agreements, and other factors our board of directors may deem
relevant. Accordingly, you may need to sell your shares of our
common stock to realize a return on your investment, and you may
not be able to sell your shares at or above the price you paid for
them.
Securities Authorized for Issuance under Equity Compensation
Plans
Information about our equity compensation plans is included in Item
12 of Part III of this Annual Report on Form 10‑K.
Recent Sales of Unregistered Securities
Since January 1, 2020, the registrant made the following issuances
and purchases of its unregistered securities as described below.
All share amounts have been retroactively adjusted to give effect
to a reverse stock split of 1-for-6 effective June 28, 2021 in
connection with the IPO.
(1) On January 2, 2020, the registrant issued 51,441 shares of
common stock to an investor for net proceeds of $0.5 million, net
of issuance costs of less than $0.1 million.
(2) On January 13, 2020 and January 20, 2020, respectively, the
registrant issued 12,120 shares of common stock and 10,204 common
stock warrants to a third party in connection with a contract
termination.
(3) On March 3, 2020, the registrant issued 75,000 shares of
restricted common stock to three non-employee directors in return
for services provided in their capacity as directors.
(4) On March 5, 2020, the registrant issued 20,834 shares of common
stock to an affiliate of iHeartMedia Entertainment, Inc. (“iHeart”)
for future advertising.
(5) On March 17, 2020, the registrant issued an additional 167,206
warrants to holders of warrants acquired on May 6, 2019 due to
dilutive impact of subsequent issuances.
(6) On March 30, 2020, the registrant issued 993 restricted shares
of common stock to an officer.
(7) On June 24, 2020, the registrant issued an aggregate principal
amount of $1.5 million subordinated convertible promissory notes
and 83,334 warrants to one of our directors and 83,334 warrants to
one of our shareholders. The subordinated convertible promissory
notes were convertible at a conversion price of $4.50 per share and
the warrants have an exercise price of $7.50 per
share.
(8) On June 24, 2020, the registrant issued 166,668 warrants to two
of our directors with an exercise price of $7.50 per
share.
(9) On July 20, 2020, the registrant issued a total of 50,000
common stock purchase warrants to certain of our directors as
consideration for the shareholder guaranty in connection with the
Citizens ABL Agreement with an exercise price of $6.30 per
share.
(10) On July 20, 2020, the registrant issued a total of 33,334
common stock purchase warrants to certain of our directors with an
exercise price of $6.30 per share.
(11) On October 1, 2020, October 12, 2020 and October 23, 2020, the
registrant issued (i) 17,763.55 shares, 1,106.015 shares and 2,832
shares, respectively, of Series F Preferred Stock and (ii)
5,921,184 warrants, 368,672 warrants, 944,000 warrants,
respectively, to acquire shares of registrant’s common stock. The
Series F Preferred Stock and related warrants were issued as units,
with each (i) share of Series F Preferred Stock having a Stated
Value of $1,000 and was convertible into shares of registrant’s
common stock at a price of $3.00 per share and (ii) related warrant
being exercisable to acquire such number of shares of common stock
as the related share of Series F Preferred Stock was convertible
into with an exercise price of $4.50 per share of common
stock.
(12) On October 23, 2020, the registrant issued a total of 100
shares of Series F Preferred Stock in connection with a marketing
agreement. Each share of Series F Preferred Stock had a Stated
Value of $1,000 and was convertible into shares of registrant’s
common stock at a price of $3.00 per share.
(13) On November 30, 2020, the registrant issued (i) 66,667
warrants to acquire shares of the registrant's common stock to a
third-party as consideration for services.
(14) On January 22, 2021, the registrant issued (i) a total of
548,082 shares of common stock and (ii) 548,082 shares of common
stock purchase warrants to acquire shares of registrant’s common
stock. The common stock and related warrants were issued as units,
with each (i) share of common stock having a par value of $.001 and
(ii) related warrant being exercisable to acquire the same number
of shares common stock issued, at an exercise price of $8.70 per
share of common stock.
(15) On February 1, 2021, the registrant issued (i) 16,204 shares
of common stock in connection with a separation
agreement.
(16) On February 1, 2021, the registrant issued (i) 5,000 shares of
common stock to a third-party as consideration for
services.
(17) On June 28, 2021, the registrant issued 1,081 shares of common
stock in lieu of fractional shares in connection with the Reverse
Stock Split.
(18) On June 29, 2021, upon commencement of the trading of the
registrant's common stock on the NYSE on June 29, 2021, all of its
outstanding convertible notes payable automatically converted into
4,732,420 shares of common stock.
(19) Upon the consummation of the IPO on July 1, 2021, all shares
of the Series F convertible preferred stock were converted into
5,764,533 shares of common stock.
(20) On February 1, 2022, the registrant issued 218,345 shares of
common stock to five non-employee directors in return for services
provided in their capacity as directors.
(21) On November 2, 2022, the registrant issued 40,817 shares of
common stock to a member of its board of directors for service as
interim CEO.
(22) On December 30, 2022, the registrant issued 24,738 shares of
common stock to a member of its board of directors for service as
interim CEO.
Unless otherwise stated above, the issuances of the above
securities were deemed to be exempt from registration under the
Securities Act in reliance upon Section 4(a)(2) of the Securities
Act, or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as
transactions by an issuer not involving any public offering or
pursuant to benefit plans and contracts relating to compensation as
provided under Rule 701. The recipients of the securities in each
of these transactions represented their intentions to acquire the
securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends
were placed upon the stock certificates issued in these
transactions.
Purchases of Equity Securities by the Issuer
The following table presents information with respect to our
repurchases of Better Choice Company common stock during the three
months ended December 31, 2022:
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|
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|
|
|
|
|
|
Period
(1)
|
|
Total Number of Shares Purchased |
|
Average Price Paid per Share |
|
Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs |
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under
the Plans or Programs |
October 1, 2021 to October 31, 2021 |
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
3,000,000 |
|
November 1, 2021 to November 30, 2021 |
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
3,000,000 |
|
December 1, 2021 to December 31, 2021 |
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
3,000,000 |
|
Total |
|
— |
|
|
$ |
— |
|
|
— |
|
|
|
(1)In
May 2022, our Board of Directors approved a share repurchase
program that authorized the repurchase of up to $3.0 million
of the Company's outstanding common stock in the open market
through December 31, 2022 .
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion includes forward-looking statements about
our business, financial condition and results of operations,
including discussions about management’s expectations for our
business. The financial condition, results of operations and cash
flows discussed in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations are those of Better
Choice Company Inc. and its consolidated subsidiaries,
collectively, the “Company,” “Better Choice Company,” “we,” “our,”
or “us”. These statements represent projections, beliefs and
expectations based on current circumstances and conditions and in
light of recent events and trends, and you should not construe
these statements either as assurances of performance or as promises
of a given course of action. Instead, various known and unknown
factors are likely to cause our actual performance and management’s
actions to vary, and the results of these variances may be both
material and adverse. A description of material factors known to us
that may cause our results to vary or may cause management to
deviate from its current plans and expectations, is set forth under
“Risk Factors.” See “Cautionary Note Regarding Forward-Looking
Statements.” The following discussion should also be read in
conjunction with our audited consolidated financial statements
including the notes thereto appearing elsewhere in this filing.
Accordingly, readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management’s
analysis only as of the date hereof. We undertake no obligation to
publicly release the results of any revision to these
forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview and Outlook
Better Choice is a pet health and wellness company committed to
leading the industry shift toward pet products and services that
help dogs and cats live healthier, happier and longer lives. Our
mission is to become the most innovative premium pet food company
in the world, and we are motivated by our commitment to making
products with integrity and treating pets and their parents with
respect. We believe that our broad portfolio of pet health and
wellness products are well positioned to benefit from the trends of
growing pet humanization and an increased consumer focus on health
and wellness, and have adopted a laser focused, channel specific
approach to growth that is driven by new product innovation. Our
executive team has a proven history of success in both pet and
consumer-packaged goods, and has over 50 years of combined
experience in the pet industry and over 100 years of combined
experience in the consumer-packaged goods industry.
We sell our premium and super-premium products (which we believe
generally includes products with a retail price greater than $0.20
per ounce) under the Halo brand umbrella, which includes Halo
Holistic™, Halo Elevate® and the former TruDog brand, which has
been rebranded and successfully integrated under the Halo brand
umbrella during the third quarter of 2022. Our core products sold
under the Halo brand are made with high-quality, thoughtfully
sourced ingredients for natural, science based nutrition. Each
innovative recipe is formulated with leading veterinary and
nutrition experts to deliver optimal health. Our diverse and
established customer base has enabled us to penetrate multiple
channels of trade, which we believe enables us to deliver on core
consumer needs and serve pet parents wherever they shop. We group
these channels of trade into four distinct categories: E-commerce,
which includes the sale of product to online retailers such as
Amazon and Chewy; Brick & Mortar, which primarily includes the
sale of product to Pet Specialty retailers such as Petco, Pet
Supplies Plus and neighborhood pet stores, as well as to select
grocery chains; Direct to Consumer (“DTC”) which includes the sale
of product through our website halopets.com; and International,
which includes the sale of product to foreign distribution partners
and to select international retailers.
The Global Pet Food and Treat Market
The U.S. represents the largest and most developed market for pet
food globally, with food and treats accounting for approximately
$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 Chief Executive Officer ("CEO"), effective
September 14, 2022. Also on September 13, 2022, we announced that
Lionel F. Conacher was appointed as Interim CEO, effective
September 14, 2022.
On March 2, 2023, we announced that Robert Sauermann was resigning
from his role as Chief Operating Officer ("COO"), effective March
17, 2023. On March 21, 2023, we announced that Sharla Cook was
resigning from her role as Chief Financial Officer, effective April
3, 2023.
Results of Operations for the Years Ended December 31, 2022
and 2021
The following table sets forth our consolidated results for the
periods presented (in thousands):
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|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Change |
|
2022 |
|
2021 |
|
$ |
|
% |
Net sales |
|
$ |
54,660 |
|
|
$ |
46,006 |
|
|
$ |
8,654 |
|
|
19 |
% |
Cost of goods sold |
|
39,399 |
|
|
30,638 |
|
|
8,761 |
|
|
29 |
% |
Gross profit |
|
15,261 |
|
|
15,368 |
|
|
(107) |
|
|
(1) |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
32,461 |
|
|
28,507 |
|
|
3,954 |
|
|
14 |
% |
Share-based compensation |
|
2,969 |
|
|
4,140 |
|
|
(1,171) |
|
|
(28) |
% |
Impairment of goodwill |
|
18,614 |
|
|
— |
|
|
18,614 |
|
|
100 |
% |
Total operating expenses |
|
54,044 |
|
|
32,647 |
|
|
21,397 |
|
|
66 |
% |
Loss from operations |
|
(38,783) |
|
|
(17,279) |
|
|
(21,504) |
|
|
(124) |
% |
Other (expense) income: |
|
|
|
|
|
|
|
|
Interest expense, net |
|
(551) |
|
|
(3,217) |
|
|
2,666 |
|
|
83 |
% |
Gain on extinguishment of debt, net |
|
— |
|
|
457 |
|
|
(457) |
|
|
(100) |
% |
Change in fair value of warrant liabilities |
|
— |
|
|
23,463 |
|
|
(23,463) |
|
|
(100) |
% |
Total other (expense) income, net |
|
(551) |
|
|
20,703 |
|
|
(21,254) |
|
|
103 |
% |
Net (loss) income before income taxes |
|
(39,334) |
|
|
3,424 |
|
|
(42,758) |
|
|
(1,249) |
% |
Income tax (benefit) expense |
|
(18) |
|
|
37 |
|
|
(55) |
|
|
(149) |
% |
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders |
|
$ |
(39,316) |
|
|
$ |
3,387 |
|
|
$ |
(42,703) |
|
|
(1,261) |
% |
Net sales
We sell our products through online retailers, pet specialty
retailers, our online portal directly to our consumers and
internationally to foreign distribution partners (transacted in
U.S. dollars). Generally, our sales transactions are single
performance obligations that are recorded at the time the product
is shipped from our distribution centers and when control
transfers. We offer a variety of trade promotions, discounts and
incentives to our customers, which impacts the transaction price of
our products and our net sales accordingly. DTC net sales include
revenue derived from shipping fees and are net of loyalty points
earned (a portion of revenue is deferred at the time of the sale as
points are earned and not recognized until the redemption of the
points, estimated based on historical experience). We record a
revenue reserve based on historical return rates to account for
customer returns.
Information about our revenue channels is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, |
|
2022 |
|
2021 |
E-commerce
(1)
|
|
$ |
14,565 |
|
|
27 |
% |
|
$ |
15,091 |
|
|
33 |
% |
Brick & Mortar |
|
11,624 |
|
|
21 |
% |
|
6,766 |
|
|
15 |
% |
DTC |
|
6,620 |
|
|
12 |
% |
|
9,397 |
|
|
20 |
% |
International
(2)
|
|
21,851 |
|
|
40 |
% |
|
14,752 |
|
|
32 |
% |
Net Sales |
|
$ |
54,660 |
|
|
100 |
% |
|
$ |
46,006 |
|
|
100 |
% |
(1)Our
E-commerce channel includes two customers that amounted to greater
than 10% of total net sales. These customers had $7.5 million
and $6.6 million of net sales for the year ended
December 31, 2022, respectively and $7.0 million and
$7.6 million of net sales for the year ended December 31,
2021, respectively.
(2)One
of our International customers that distributes products in China
amounted to greater than 10% of total net sales during the years
ended December 31, 2022 and December 31, 2021 and
represented $17.7 million and $9.1 million of net sales,
respectively.
Net sales increased $8.7 million, or 19%, to $54.7 million for the
year ended December 31, 2022 compared to $46.0 million for the
year ended December 31, 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.
Gross profit
Cost of goods sold consists primarily of the cost of product
obtained from co-manufacturers, packaging materials, freight costs
for shipping inventory to the warehouse, as well as third-party
warehouse and order fulfillment costs. We review inventory on hand
periodically to identify damages, slow moving inventory, and/or
aged inventory. Based on this analysis, we record inventories at
the lower of cost or net realizable value, with any reduction in
value expensed as cost of goods sold.
Our products are manufactured to our specifications by our
co-manufacturers using raw materials. We work with our
co-manufacturers to secure a supply of raw materials that meet our
specifications. In addition to procuring raw materials that meet
our formulation requirements, our co-manufacturers manufacture,
test and package our products. We design our packaging for our
co-manufacturers and the packaging is shipped directly to
them.
Our gross profit has been and will continue to be affected by a
variety of factors, primarily product sales mix, volumes sold,
discounts offered to newly acquired and recurring customers, the
cost of our manufactured products, and the cost of freight from the
manufacturer to the warehouse.
During the year ended December 31, 2022, gross profit
decreased $0.1 million, or 1%, to $15.3 million compared to $15.4
million during the year ended December 31, 2021. Gross profit
margin decreased 6% to 28% for the year ended December 31,
2022 compared to 33% for the year ended December 31, 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, partially offset by cost
savings from transitioning some of our primary suppliers and price
increases to customers as described below. We expect these cost
saving offsets will contribute to higher gross profit realization
going forward.
We continue to actively work with our co-manufacturing 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.
Operating expenses
Our Selling, general and administrative ("SG&A") expenses
consist of the following:
•Sales
and marketing costs,
for specific customer promotional programs, paid media, content
creation expenses and our DTC selling platform. Marketing costs are
geared towards customer acquisition and retention and building
brand awareness. During the year ended December 31, 2022,
sales and marketing costs increased approximately $3.9 million or
36%, to $14.6 million from $10.7 million during the year ended
December 31, 2021. The increase was 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 4% during the year ended
December 31, 2022 to $7.5 million from $7.2 million during the
year ended December 31, 2021. The increase was 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,
decreased $0.2 million or 15% during the year ended
December 31, 2022 to $1.6 million
from $1.8 million during the year ended December 31, 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 decreased $0.2 million or 6% to $1.8 million
during the year ended December 31, 2022 from $2.0 million
during the year ended December 31, 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 the year ended December 31, 2022,
other general and administrative costs increased $0.1 million, or
2% to $6.9 million compared to $6.8 million in the year ended
December 31, 2021. The increase was driven by higher
international consulting fees, additional travel fees and higher
product development costs during the year ended December 31,
2022, partially offset by a non-cash reduction of our sales tax
liability of $0.6 million during the year ended
December 31, 2021 with no similar reduction of expense during
the year ended December 31, 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 year
ended December 31, 2022, Share-based compensation decreased
$1.1 million, or 28%, to $3.0 million, as compared to share-based
compensation of $4.1 million during the year ended
December 31, 2021. The decrease is 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, interim CEO
service compensation and additional option grants.
Impairment of goodwill included an impairment charge of $18.6
million during the year ended December 31, 2022, while there
was no corresponding activity for the year ended December 31,
2021. See "Note 7 - Goodwill and intangible assets" for additional
information.
Interest expense, net
During the year ended December 31, 2022, interest expense
increased $2.6 million, or 83% to $0.6 million from $3.2 million
for the fiscal year ended December 31, 2021. Interest expense
for the year ended December 31, 2022 is comprised of interest
on our Wintrust Credit Facility and the amortization of debt
issuance costs. Interest expense for the year ended
December 31, 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 associated with the remaining discount on the previous
senior subordinated 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 year ended December 31, 2021, we incurred a net
gain on extinguishment of debt of $0.5 million, while there was no
corresponding activity for the year ended December 31, 2022.
Gain on extinguishment of debt for the year ended December 31,
2021 relates to extinguishment accounting applied in connection
with 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 Consolidated
Statements of Operations as change in fair value of warrant
liabilities. The change in fair value for the year ended
December 31, 2021 relates to the change in the fair value of
the Series F Warrants. See "Note 11 - Warrants" for additional
information.
Income taxes
Our income tax (benefit) 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 year ended
December 31, 2022, we recorded income tax benefit of less than
$0.1 million, which relates to indefinite-lived assets. During the
year ended December 31, 2021, we recorded income tax expense
of less than $0.1 million, which relates to indefinite-lived
assets. The effective tax rate for the years ended
December 31, 2022 and 2021 was 0% and 1%, respectively, which
differs from the U.S. Federal statutory rate of 21% due to
permanent differences attributable to the impairment of goodwill in
2022 and change in the fair value of the warrant liabilities in
2021 and because our losses have been fully offset by a valuation
allowance due to uncertainty of realizing the tax benefit of NOLs
for the years ended December 31, 2022 and 2021.
Liquidity and capital resources
Historically, we have financed our operations primarily through the
sales of shares of our common stock, warrants, preferred stock, and
loans. In connection with our IPO, we issued and sold 8,000,000
shares of common stock at a price of $5.00 per share. On July 1,
2021 we received total net proceeds of approximately
$36.1 million from the IPO, after deducting underwriting
discounts and commissions of $2.8 million, and offering costs
of approximately $1.1 million. On December 31, 2022 and
December 31, 2021, we had cash and cash equivalents and
restricted cash of $9.5 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 December 31, 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.
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. We have
historically incurred losses and expect to continue to generate
operating losses and consume cash resources in the near term. These
conditions raise substantial doubt about our ability to continue as
a going concern for a period of twelve months from the date these
interim condensed consolidated financial statements are issued,
meaning that we may be unable to generate sufficient operating cash
flows to maintain compliance with our financial covenant giving the
lender the right to call the debt. 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. As of December 31, 2022, we were in compliance
with all debt covenant requirements and there were no events of
default.
Our ability to raise additional capital may be adversely impacted
by the potential worsening of global economic conditions, including
inflationary pressures, and the recent disruptions to, and
volatility in, the credit and financial markets in the United
States and worldwide resulting from the COVID-19 pandemic and
geopolitical tensions. If we seek additional financing to fund our
business activities in the future and there remains doubt about our
ability to continue as a going concern, investors or other
financing sources may be unwilling to provide additional funding on
commercially reasonable terms or at all. If we are unable to raise
the necessary funds when needed or achieve planned cost savings, or
other strategic objectives are not achieved, we may not be able to
continue our operations, or we could be required to modify our
operations that could slow future growth.
A summary of our cash flows is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2022 |
|
2021 |
Cash flows (used in) provided by: |
|
|
|
Operating activities |
$ |
(20,553) |
|
|
$ |
(11,858) |
|
Investing activities |
(198) |
|
|
(353) |
|
Financing activities |
1,282 |
|
|
37,164 |
|
Net (decrease) increase in cash and cash equivalents |
$ |
(19,469) |
|
|
$ |
24,953 |
|
Cash flows from operating activities
Cash used in operating activities increased $8.7 million, or 73%,
during the year ended December 31, 2022 compared to the year
ended December 31, 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 $6.2 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 $(12.0) million for
the year ended December 31, 2022 compared to $(10.0) million
for the comparable prior year period. 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 year
ended December 31, 2022 and $0.4 million during the year ended
December 31, 2021. The cash used in investing activities is
related to capital expenditures.
Cash flows from financing activities
Cash provided by financing activities was $1.3 million, during the
year ended December 31, 2022 and $37.2 million during the year
ended December 31, 2021. The cash provided by financing
activities for the year ended December 31, 2022 was related to
net proceeds from the revolving line of credit of $6.7 million and
net proceeds from a short term financing arrangement of $0.2
million, partially offset by payments on the term loan of $5.5
million and debt issuance costs of $0.1 million. The cash provided
by financing activities for the year ended December 31, 2021
was related to net proceeds from the IPO of $36.1 million, proceeds
from the January Private Placement of $4.1 million and cash
received from warrant exercises of $1.7 million, partially offset
by net payments on the term loans of $2.5 million, net payments on
the revolving line of credit of $0.3 million, $0.1 million in debt
issuance costs, and $1.6 million related to share
repurchases.
Wintrust Credit Facility
On January 6, 2021, Halo entered into a credit facility with Old
Plank Trail Community Bank, N.A., an affiliate of Wintrust,
consisting of a $6.0 million term loan and a $6.0 million revolving
line of credit, each scheduled to mature on January 6, 2024. The
Wintrust Credit Facility is secured by a general guaranty and
security interest on the assets, including the intellectual
property of us and our subsidiaries. We have also pledged all of
the capital stock of Halo held by us as additional
collateral.
The Wintrust Credit Facility subjects us 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. For the test as of December 31, 2021, we
failed to satisfy the fixed charge coverage ratio and entered into
a default waiver agreement with Wintrust in which Wintrust waived
the existing default through the next testing date, March 31, 2022.
Additionally, on March 25, 2022, we entered into the second
amendment to the Wintrust Credit Facility, which removed the
financial covenant to maintain a fixed charge coverage ratio and
included a new financial covenant to maintain a minimum liquidity,
as well updated the rate at which the Wintrust Credit Facility bore
interest.
Furthermore, on October 24, 2022, we entered into the third
amendment to the Wintrust Credit Facility which provided for an
increase to the revolving line of credit, set the amount of Halo's
obligation to pledge a deposit account with Wintrust to a fixed
amount throughout the remainder of the term and provided updates to
the interest rate, maturity date and minimum liquidity amount
associated with the financial covenant. During the year ended
December 31, 2022, we used proceeds from the increased
revolving line of credit to pay off and retire the outstanding term
loan associated with the Wintrust Credit Facility.
See "Note 8 - Debt" to our audited consolidated financial
statements included in this Annual Report on Form 10-K for more
information.
Contractual Commitments and Obligations
We are contractually obligated to make future cash payments for
various items, including debt arrangements, certain purchase
obligations, as well as the lease arrangement for our office. See
"Note 8 - Debt" to our audited consolidated financial statements
included in this Annual Report on Form 10-K for more information
about our debt obligations. Our purchase obligations include
certain ongoing marketing projects, software subscriptions as well
as in-transit or in-production purchase orders with our suppliers,
for which amounts vary depending on the purchasing cycle. The
majority of our software subscriptions are not under long-term
contracts, and we do not have long-term contracts or commitments
with any of our suppliers beyond active purchase orders. These
purchase obligations were not material as of the date of this
Annual Report on Form 10-K.
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 Estimates
Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements,
which have been prepared in accordance with GAAP. The preparation
of our consolidated financial statements and related disclosures
requires us to make estimates, assumptions and judgements that
affect the reported amounts of assets, liabilities, net sales,
costs and expenses and related disclosures. We believe that the
estimates, assumptions and judgments involved in the accounting
policies described below have the greatest potential impact on our
financial statements and, therefore, we consider these to be our
critical accounting estimates. Accordingly, we evaluate our
estimates and assumptions on an ongoing basis. Our actual results
may differ from these estimates under different assumptions
and
conditions. See "Note 1 - Nature of business and summary of
significant accounting policies" to our audited consolidated
financial statements included in this Annual Report on Form 10-K
for a description of our significant accounting
policies.
Goodwill Impairment
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 1 - Nature of business and summary of
significant accounting policies" for further information about our
policy for fair value measurements. See "Note 7 - Goodwill and
intangible assets" to our audited consolidated financial statements
included in this Annual Report on Form 10-K for more
information.
Share-Based Compensation
Share-based compensation expense is measured based on the estimated
fair value of awards granted to employees, directors, officers and
consultants on the grant date. Forfeitures are accounted for as
they occur, therefore there are no forfeiture related estimates
required.
The fair value of an option award is estimated on the date of grant
using the Black–Scholes option valuation model, which requires the
development of input assumptions, as described in "Note 12 -
Share-based compensation". Determining the appropriate fair value
model and calculating the fair value of share-based payment awards
requires the input of the subjective assumptions described in "Note
12 - Share-based compensation". The assumptions used in calculating
the fair value of share-based payment awards represent management’s
best estimates, which involve inherent uncertainties and the
application of management’s judgment. See "Note 12 - Share-based
compensation" to our audited consolidated financial statements
included in this Annual Report on Form 10-K for more
information.
Accounting for Warrants
The fair value of warrants is estimated using a Monte Carlo and/or
Black-Scholes valuation model. The assumptions used in these models
included the simulation of future stock prices based on future
financing events, likelihood of mandatory exercise of the warrants,
and timing and likelihood of fundamental transactions, such as a
change in control. Both valuation methodologies use key inputs,
including expected stock volatility, the risk–free interest rate,
the expected life of the option and the expected dividend yield.
Expected volatility is calculated based on the analysis of other
public companies within the pet wellness and internet commerce
(e-commerce) sectors. Risk–free interest rates are calculated based
on risk–free rates for the appropriate term. The expected life is
estimated based on contractual terms as well as expected exercise
dates. The dividend yield is based on the historical dividends
issued by us. 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.
Warrants that are classified as liabilities due to the terms of the
warrant obligation are measured at fair value on a recurring basis
at the end of each reporting period and as a result, we recorded an
adjustment to the warrant liabilities to reflect the fair value as
of December 31, 2021. Warrants that are classified as equity or
considered compensation are measured at fair
value on a non-recurring basis on the date of issuance. See "Note
11 - Warrants" to our audited consolidated financial statements
included in this Annual Report on Form 10-K for more
information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are 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 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Better Choice Company Inc.
Index to Consolidated Financial Statements
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Page |
Report of Independent Registered Public Accounting Firm (BDO USA,
LLP; Tampa, Florida; PCAOB ID #243)
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Consolidated Statements of Operations for the years ended
December 31, 2022 and 2021
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Consolidated Balance Sheets as of December 31, 2022 and
2021
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Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2022 and 2021
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Consolidated Statements of Cash Flows for the years ended
December 31, 2022 and 2021
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Notes to the Consolidated Financial Statements |
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All financial statement schedules have been omitted, since the
required information is not applicable or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements and accompanying notes.
Report of Independent Registered Public Accounting
Firm
To the Shareholders and the Board of Directors
Better Choice Company Inc.
Tampa, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Better Choice Company Inc. (the "Company") as of December 31, 2022
and 2021, the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended, and
the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company at December 31, 2022 and 2021, and the
results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial
statements, the Company has continually incurred losses, has an
accumulated deficit and is currently subject to certain financial
covenants that raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising
from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to
the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial
statements and (2) involved our especially challenging, subjective,
or complex judgments. The communication of the critical audit
matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or
disclosures to which they relate.
Goodwill Impairment Assessment
As described in Notes 1 and 7 to the consolidated financial
statements, the Company has recognized goodwill impairment of $18.6
million for the year ended December 31, 2022. The Company evaluates
goodwill for impairment annually, or more frequently if an event
occurs or circumstances change that indicate the fair value of a
reporting unit is below its carrying value. The Company performed
multiple quantitative assessments for potential impairment during
fiscal 2022. Under the quantitative approach, the Company made
various estimates and assumptions to determine the estimated fair
value of the reporting unit using a combination of a discounted
cash flow model (income approach) and earnings multiples for
guideline public companies (market approach).
We identified management’s judgments used in the income approach in
estimating the fair value of the reporting units with goodwill
balances as a critical audit matter. Significant judgments are
required by management to develop assumptions used in the
discounted cash flow analysis. In particular, the fair value
estimate was sensitive to changes in revenue growth rates and the
weighted average cost of capital (WACC) or discount rate. Auditing
these assumptions involved especially challenging auditor judgment
due to the nature and extent of audit effort required in performing
procedures and evaluating audit evidence obtained and involved the
use of professionals with specialized skill and knowledge to assist
in performing these procedures.
The primary procedures we performed to address this critical audit
matter included:
•Testing
the completeness and accuracy of the underlying data used by the
Company in its discounted cash flow analysis.
•Evaluating
the reasonableness of management’s assumptions used in the
Company’s discounted cash flow analysis, including forecasted
revenue growth rates by comparing these assumptions to historical
performance and those of the Company’s peers and industry
reports.
•Utilizing
personnel with specialized knowledge and skills in valuation to
assist in the evaluation of the Company’s discounted cash flow
analysis and certain significant assumptions, including reviewing
internally projected results of operations to ensure the WACC
adequately captures the conditions present in the projections, as
well as comparison of growth rates and internally projected results
of operations to historical measures, and those of other market
participants.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2021.
Tampa, Florida
March 28, 2023
Better Choice Company Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share
amounts)
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Year ended December 31, |
2022 |
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2021 |
Net sales |
$ |
54,660 |
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$ |
46,006 |
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Cost of goods sold |
39,399 |
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30,638 |
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Gross profit |
15,261 |
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15,368 |
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Operating expenses: |
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Selling, general and administrative |
32,461 |
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28,507 |
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Share-based compensation |
2,969 |
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4,140 |
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Impairment of goodwill |
18,614 |
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— |
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Total operating expenses |
54,044 |
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32,647 |
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Loss from operations |
(38,783) |
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(17,279) |
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Other (expense) income: |
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Interest expense, net |
(551) |
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(3,217) |
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Gain on extinguishment of debt, net |
— |
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457 |
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Change in fair value of warrant liabilities |
— |
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23,463 |
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Total other (expense) income, net |
(551) |
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20,703 |
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Net (loss) income before income taxes |
(39,334) |
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3,424 |
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Income tax (benefit) expense |
(18) |
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37 |
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Net (loss) income available to common stockholders |
$ |
(39,316) |
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$ |
3,387 |
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Weighted average number of shares outstanding, basic |
29,353,013 |
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19,927,862 |
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Weighted average number of shares outstanding, diluted |
29,353,013 |
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21,902,547 |
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Net (loss) income per share available to common stockholders,
basic |
$ |
(1.34) |
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$ |
0.15 |
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Net (loss) income per share available to common stockholders,
diluted |
$ |
(1.34) |
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$ |
0.14 |
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The accompanying notes are an integral part of these consolidated
financial statements.
Better Choice Company Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share
amounts)
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December 31, 2022 |
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December 31, 2021 |
Assets |
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Cash and cash equivalents |
$ |
3,173 |
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$ |
21,729 |
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Restricted cash |
6,300 |
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7,213 |
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Accounts receivable, net |
6,744 |
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6,792 |
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Inventories, net |
10,257 |
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5,245 |
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Prepaid expenses and other current assets |
1,051 |
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2,940 |
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Total Current Assets |
27,525 |
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43,919 |
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Fixed assets, net |
375 |
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369 |
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Right-of-use assets, operating leases |
173 |
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56 |
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Intangible assets, net |
10,059 |
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11,586 |
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Goodwill |
— |
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18,614 |
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Other assets |
544 |
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116 |
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Total Assets |
$ |
38,676 |
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$ |
74,660 |
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Liabilities & Stockholders’ Equity |
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Current Liabilities |
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Accounts payable |
$ |
2,932 |
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$ |
4,553 |
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Accrued and other liabilities |
2,596 |
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1,879 |
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Term loan, net |
— |
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855 |
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Operating lease liability |
52 |
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54 |
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Total Current Liabilities |
5,580 |
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7,341 |
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Non-current Liabilities |
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Line of credit, net |
11,444 |
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4,856 |
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Term loan, net |
— |
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4,559 |
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Deferred tax liability |
— |
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24 |
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Operating lease liability |
124 |
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5 |
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Total Non-current Liabilities |
11,568 |
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9,444 |
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Total Liabilities |
17,148 |
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16,785 |
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Stockholders’ Equity |
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Common Stock, $0.001 par value, 200,000,000 shares authorized,
29,430,267 & 29,146,367 shares issued and outstanding as of
December 31, 2022 and 2021, respectively
|
29 |
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29 |
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Additional paid-in capital |
320,071 |
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317,102 |
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Accumulated deficit |
(298,572) |
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(259,256) |
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Total Stockholders’ Equity |
21,528 |
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57,875 |
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Total Liabilities and Stockholders’ Equity |
$ |
38,676 |
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$ |
74,660 |
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The accompanying notes are an integral part of these consolidated
financial statements.
Better Choice Company Inc.
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands, except shares)
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Common Stock |
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Series F Convertible Preferred Stock |
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Additional
Paid-In
Capital |
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Accumulated
Deficit |
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Total
Stockholders’
Equity |
Shares |
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Amount |
|
Shares |
|
Amount |
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Balance as of December 31, 2020 |
8,651,400 |
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$ |
9 |
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|
21,754 |
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$ |
— |
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$ |
232,530 |
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$ |
(260,641) |
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$ |
(28,102) |
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Shares and warrants issued pursuant to private
placement |
546,733 |
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|
1 |
|
|
— |
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|
— |
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|
4,071 |
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|
— |
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|
4,072 |
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Share-based compensation |
17,537 |
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|
— |
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— |
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|
— |
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|
4,140 |
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|
— |
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|
4,140 |
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Warrant exercises |
380,716 |
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— |
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— |
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— |
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|
1,685 |
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— |
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|
1,685 |
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Shares issued to third-parties for services |
5,000 |
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— |
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— |
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— |
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|
46 |
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— |
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46 |
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Warrant modifications |
— |
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— |
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— |
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— |
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|
402 |
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(402) |
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|
— |
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Conversion of Series F shares to common stock |
7,251,205 |
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7 |
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(21,754) |
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|
— |
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(7) |
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|
— |
|
|
— |
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Conversion of convertible notes to common stock |
4,732,420 |
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|
5 |
|
|
— |
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|
— |
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|
21,771 |
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|
— |
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|
21,776 |
|
Shares issued in lieu of fractional shares due to reverse stock
split |
1,081 |
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|
— |
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|
— |
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|
— |
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|
— |
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|
— |
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|
— |
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Shares issued pursuant to IPO |
8,000,000 |
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|
8 |
|
|
— |
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|
— |
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|
36,077 |
|
|
— |
|
|
36,085 |
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Reclassification of warrant liability to equity |
— |
|
|
— |
|
|
— |
|
|
— |
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|
16,387 |
|
|
— |
|
|
16,387 |
|
Share repurchases |
(439,725) |
|
|
(1) |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,600) |
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|
(1,601) |
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Net income available to common stockholders |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,387 |
|
|
3,387 |
|
Balance as of December 31, 2021 |
29,146,367 |
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|
$ |
29 |
|
|
— |
|
|
$ |
— |
|
|
$ |
317,102 |
|
|
$ |
(259,256) |
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|
$ |
57,875 |
|
Share-based compensation |
283,900 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,969 |
|
|
— |
|
|
2,969 |
|
Net loss available to common stockholders |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(39,316) |
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|
(39,316) |
|
Balance as of December 31, 2022 |
29,430,267 |
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|
$ |
29 |
|
|
— |
|
|
$ |
— |
|
|
$ |
320,071 |
|
|
$ |
(298,572) |
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|
$ |
21,528 |
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The accompanying notes are an integral part of these consolidated
financial statements.
Better Choice Company Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
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Year Ended December 31, |
|
2022 |
|
2021 |
Cash Flow from Operating Activities: |
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Net (loss) income available to common stockholders |
$ |
(39,316) |
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$ |
3,387 |
|
Adjustments to reconcile net (loss) income to net cash used in
operating activities: |
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Shares and warrants issued to third-parties for
services |
— |
|
|
46 |
|
Depreciation and amortization |
1,690 |
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|
1,664 |
|
Amortization of debt issuance costs and discounts |
56 |
|
|
1,800 |
|
Share-based compensation |
2,969 |
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|
4,140 |
|
Goodwill impairment |
18,614 |
|
|
— |
|
Change in fair value of warrant liabilities |
— |
|
|
(23,463) |
|
PIK interest expense on notes payable |
— |
|
|
1,110 |
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Amortization of prepaid assets |
2,095 |
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|
2,049 |
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Inventory reserve |
1,809 |
|
|
265 |
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Other |
126 |
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|
(1,007) |
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Changes in operating assets and liabilities: |
|
|
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Accounts receivable |
(66) |
|
|
(2,141) |
|
Inventories |
(6,821) |
|
|
(642) |
|
Prepaid expenses and other assets |
(1,047) |
|
|
306 |
|
Accounts payable and accrued liabilities |
(761) |
|
|
773 |
|
Other |
99 |
|
|
(145) |
|
Cash Used in Operating Activities |
$ |
(20,553) |
|
|
$ |
(11,858) |
|
Cash Flow from Investing Activities: |
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|
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Capital expenditures |
$ |
(198) |
|
|
$ |
(353) |
|
Cash Used in Investing Activities |
$ |
(198) |
|
|
$ |
(353) |
|
Cash Flow from Financing Activities: |
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|
|
Proceeds from shares and warrants issued pursuant to private
placement, net |
$ |
— |
|
|
$ |
4,012 |
|
Share repurchases |
— |
|
|
(1,601) |
|
|
|
|
|
Proceeds from short-term financing arrangement |
413 |
|
|
— |
|
Payments on short-term financing arrangement |
(248) |
|
|
— |
|
Proceeds from revolving lines of credit |
12,317 |
|
|
5,535 |
|
Payments on revolving lines of credit |
(5,640) |
|
|
(5,883) |
|
Proceeds from term loan |
— |
|
|
6,000 |
|
Payments on term loans |
(5,450) |
|
|
(8,529) |
|
|
|
|
|
Cash received for warrant exercises |
— |
|
|
1,685 |
|
IPO proceeds, net |
— |
|
|
36,085 |
|
Debt issuance costs |
(110) |
|
|
(140) |
|
Cash Provided by Financing Activities |
$ |
1,282 |
|
|
$ |
37,164 |
|
Net (decrease) increase in cash and cash equivalents and restricted
cash |
$ |
(19,469) |
|
|
$ |
24,953 |
|
Total cash and cash equivalents and restricted cash, beginning of
period |
28,942 |
|
|
3,989 |
|
Total cash and cash equivalents and restricted cash, end of
period |
$ |
9,473 |
|
|
$ |
28,942 |
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
Income taxes |
$ |
12 |
|
|
$ |
8 |
|
Interest |
$ |
444 |
|
|
$ |
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Notes to the Consolidated Financial Statements
Note 1 – Nature of business and summary of significant accounting
policies
Nature of the business
Better Choice Company Inc. (the "Company") is a pet health and
wellness company focused on providing pet products and services
that help dogs and cats live healthier, happier and longer lives.
The Company has a broad portfolio of pet health and wellness
products for dogs and cats sold under its Halo brand across
multiple forms, including foods, treats, toppers, dental products,
chews and supplements. The products consist of kibble and canned
dog and cat food, freeze-dried raw dog food and treats, vegan dog
food and treats, oral care products and supplements.
Reverse stock split
On June 28, 2021 the Company effectuated a 1-for-6 reverse stock
split (the "Reverse Stock Split"). In addition, the conversion
rates of the Company's outstanding preferred stock and convertible
notes and the exercise prices of the Company’s underlying common
stock purchase warrants and stock options were proportionately
adjusted at the applicable reverse stock split ratio in accordance
with the terms of such instruments. Proportionate voting rights and
other rights of common stockholders were not affected by the
Reverse Stock Split, other than as a result of the rounding up of
fractional shares. The Company issued 1,081 shares of common stock
in lieu of fractional shares in connection with the Reverse Stock
Split.
Accordingly, all share and per share amounts related to the
Company's common stock and underlying derivatives for all periods
presented in the accompanying consolidated financial statements and
notes thereto have been retroactively adjusted, where applicable,
to reflect the Reverse Stock Split. The number of authorized shares
and the par values of the common stock and convertible preferred
stock were not adjusted as a result of the Reverse Stock
Split.
Initial public offering
The Company completed its initial public offering (the “IPO”) on
July 1, 2021, in which it issued and sold 8,000,000 shares of its
common stock at a price of $5.00 per share. The total net proceeds
from the IPO were approximately $36.1 million, after deducting
underwriting discounts and commissions of $2.8 million, and
offering costs of approximately $1.1 million. These IPO costs
were recorded as a reduction of stockholders' equity, and presented
net of cash proceeds received in the Consolidated Statement of Cash
Flows.
Upon the commencement of the IPO, all of the Company's outstanding
convertible notes payable automatically converted into 4,732,420
shares of common stock and upon the consummation of the IPO, all
outstanding shares of the Series F convertible preferred stock were
converted into 5,764,533 shares of common stock. Additionally,
since the anti-dilution provision of the Series F Warrants were no
longer effective upon consummation of the Company's IPO, these
warrants met the requirements to be considered equity and the
outstanding Series F Warrants were reclassified as
such.
Basis of presentation
The Company’s consolidated financial statements are prepared in
accordance with the rules and regulations of the U.S. Securities
and Exchange Commission ("SEC") for annual financial reports and
accounting principles generally accepted in the U.S.
("GAAP").
Consolidation
The financial statements are presented on a consolidated basis and
include the accounts of the Company and its wholly owned
subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.
Use of estimates
The preparation of the financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during
the reporting periods. The Company bases its estimates on
historical experience and on various other assumptions that the
Company believes to be reasonable under the circumstances. On an
ongoing basis, the Company evaluates these assumptions, judgments
and estimates. Actual results may differ from these
estimates.
In the opinion of management, the consolidated financial statements
contain all adjustments necessary for a fair statement of the
results of operations for the years ended December 31, 2022
and 2021, the financial position as of December 31, 2022 and
2021 and the cash flows for the years ended December 31, 2022
and 2021.
Going concern considerations
The Company is subject to risks common in the pet wellness consumer
market including, but not limited to, dependence on key personnel,
competitive forces, successful marketing and sale of its products,
the successful protection of its proprietary
technologies, ability to grow into new markets, and compliance with
government regulations. The Company has continually incurred
losses, has an accumulated deficit and is currently subject to
certain financial covenants, which requires maintaining a minimum
liquidity (as defined in the Wintrust Credit Facility below) of no
less than $8.5 million tested as of the last day of each
fiscal quarter. Our continued operating losses along with this
financial covenant create substantial doubt about the Company’s
ability to continue as a going concern for a period of twelve
months from the date these consolidated financial statements are
issued. The Company does not currently expect it will be able to
generate sufficient cash flow from operations to maintain
sufficient liquidity to meet the required financial covenant in
certain periods prior to maturity giving the lender the right to
call the debt. The Company will need to either raise additional
capital or obtain additional financing, and/or secure future
waivers or amendments from its lenders, or accomplish some
combination of these items to maintain sufficient liquidity. There
can be no assurance that the Company will be successful in raising
additional capital, securing future waivers and/or amendments from
its lenders, renewing or refinancing its existing debt or securing
new financing. If the Company is unsuccessful in doing so, it may
need to reduce the scope of its operations, repay amounts owed to
its lenders or sell certain assets.
The Company is continuing to implement plans to achieve operating
profitability, as well as implementing other strategic objectives
to address liquidity. The accompanying consolidated financial
statements have been prepared assuming the Company will continue as
a going concern, which contemplates the realization of assets and
payments of liabilities in the ordinary course of business.
Accordingly, the consolidated financial statements do not include
any adjustments relating to the 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
Cash and cash equivalents
Cash and cash equivalents include demand deposits held with banks
and highly liquid investments with original maturities of ninety
days or less at acquisition date. Cash and cash equivalents are
stated at cost, which approximates fair value because of the
short-term nature of these instruments. The Company's cash
equivalents are held in government money market funds and at times
may exceed federally insured limits. For purposes of reporting cash
flows, the Company considers all cash accounts that are not subject
to withdrawal restrictions or penalties to be cash and cash
equivalents. At December 31, 2022 and 2021, the Company had
$8.0 million and $18.6 million, respectively, in money
market funds all of which were held in cash.
Restricted cash
The Company was required to maintain a restricted cash balance of
$6.3 million and $7.2 million as of December 31,
2022 and 2021, respectively, in connection with the Wintrust Credit
Facility. See "Note 8 - Debt" for additional
information.
Accounts receivable and allowance for doubtful
accounts
Accounts receivable consist of unpaid buyer invoices from the
Company’s customers and credit card payments receivable from
third-party credit card processing companies. Accounts receivable
is stated at the amount billed to customers, net of point of sale
and cash discounts. The Company assesses the collectability of all
receivables on an ongoing basis by considering its historical
credit loss experience, current economic conditions, and other
relevant factors. Based on this analysis, an allowance for doubtful
accounts is recorded, and the provision is included within SG&A
expense. The Company recorded a $0.1 million allowance for doubtful
accounts for the years ended December 31, 2022 and 2021,
respectively.
Inventories
Inventories, consisting of finished goods available for sale as
well as packaging materials, are valued using the first-in
first-out (“FIFO”) method and are recorded at the lower of cost or
net realizable value. Cost is determined on a standard cost basis
and includes the purchase price, as well as inbound freight costs
and packaging costs.
The Company regularly reviews inventory quantities on hand. Excess
or obsolete reserves are established when inventory is estimated to
not be sellable before expiration dates based on forecasted usage,
product demand and product life cycle. Additionally,
inventory valuation reflects adjustments for anticipated physical
inventory losses that have occurred since the last physical
inventory.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets,
and depreciation expense is included within SG&A expense.
Expenditures for normal repairs and maintenance are charged to
operations as incurred. The cost of fixed assets that are retired
or otherwise disposed of and the related accumulated depreciation
are removed from the fixed asset accounts in the year of disposal
and the resulting gain or loss is included in SG&A
expense.
The Company assesses potential impairments of its fixed assets
whenever events or changes in circumstances indicate that the
asset’s carrying value may not be recoverable. An impairment charge
would be recognized when the carrying amount of the identified
asset grouping exceeds its fair value and is not recoverable, which
would occur if the carrying amount exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the identified asset grouping.
Goodwill
Goodwill is evaluated for impairment either through a qualitative
or quantitative approach at least annually, or more frequently if
an event occurs or circumstances change that indicate the carrying
value of a reporting unit may not be recoverable. If a quantitative
assessment is performed that indicates the carrying amount of a
reporting unit exceeds its fair market value, an impairment loss is
recognized to reduce the carrying amount to its fair market value.
The fair market value is determined based on a weighting of the
present value of projected future cash flows (the “income
approach”) and the use of comparative market approaches (“market
approach”). Factors requiring significant judgment include, among
others, the assumptions related to discount rates, forecasted
operating results, long-term growth rates, the determination of
comparable companies and market multiples. Fair value measurements
used in the impairment review of goodwill are Level 3 measurements.
See further information about our policy for fair value
measurements within this section below. See "Note 7 - Goodwill and
intangible assets" for additional information regarding the
goodwill impairment test.
Intangible assets
Intangible assets acquired are carried at cost, less accumulated
amortization. The Company reviews finite-lived intangible assets
for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable and any not
expected to be recovered through undiscounted future net cash flows
are written down to current fair value. Amortization expense is
included in SG&A expense.
Preferred stock
In accordance with FASB ASC Topic 480, “Distinguishing Liabilities
from Equity (ASC 480)”, preferred stock issued with redemption
provisions that are outside of the control of the Company or that
contain certain redemption rights in a deemed liquidation event is
required to be presented outside of Stockholders’ Equity on the
face of the Consolidated Balance Sheets. The Company's Convertible
Series F Preferred Stock (the "Series F") contained redemption
provisions that required it to be presented within Stockholders’
Equity.
Share repurchases
In August 2021, the Company's board of directors approved a share
repurchase program that authorized the repurchase of up to
$2.0 million of the Company's outstanding common stock in the
open market through December 31, 2021. Repurchased shares are
immediately retired and returned to unissued status. During the
year ended December 31, 2021, 439,725 shares were repurchased for
$1.6 million, inclusive of broker's commissions.
On May 10, 2022, the Company's board of directors approved a share
repurchase program that authorized the repurchase of up to
$3.0 million of the Company's outstanding common stock in the
open market through December 31, 2022. Repurchased shares are
immediately retired and returned to unissued status. During the
year ended December 31, 2022 no shares were
repurchased.
Common stock warrants
Common stock warrants are recorded as either liabilities or as
equity instruments, depending on the specific terms of the warrant
agreement. 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 Statements of
Operations as change in fair value of warrant liabilities. Upon
exercise, the warrant is marked to fair value on the exercise date
and the related fair value is reclassified to equity.
Income taxes
Income taxes are recorded in accordance with FASB ASC Topic 740,
“Income Taxes (ASC 740)”, which provides for deferred taxes using
an asset and liability approach. The Company recognizes deferred
tax assets and liabilities for the expected future tax consequences
of events that have been included in the consolidated financial
statements or tax returns. Deferred tax assets and liabilities are
determined based on the difference between the consolidated
financial statements and tax bases of assets and liabilities and
for loss and credit carryforwards using enacted tax rates
anticipated to be in effect for the year in which the differences
are expected to reverse. Valuation allowances are provided, if,
based upon the weight of available evidence, it is more likely than
not that some or all the deferred tax assets will not be
realized.
The Company accounts for uncertain tax positions in accordance with
the provisions of ASC 740. When uncertain tax positions exist, the
Company recognizes the tax benefit of tax positions to the extent
that some or all the benefit will more likely than
not be realized. The determination as to whether the tax benefit
will more likely than not be realized is based upon the technical
merits of the tax position, as well as consideration of the
available facts and circumstances. As of December 31, 2022 and
2021, the Company does not have any significant uncertain income
tax positions. If incurred, the Company would classify interest and
penalties on uncertain tax positions as income tax
expense.
The Company was incorporated on May 6, 2019. Prior to this date,
the Company operated as a flow through entity for state and U.S.
federal tax purposes. The Company files a U.S. federal and state
income tax return, including for its wholly owned
subsidiaries.
Revenue
Generally, the Company's customer contracts have a single
performance obligation, and revenue is recognized when the product
is shipped as this is when it has been determined that control has
been transferred. Amounts billed and due from customers are
classified as receivables and require payment on a short-term basis
and therefore do not have any significant financing
components.
Revenue is measured as the amount of consideration the Company
expects in exchange for transferring goods, which varies with
changes in trade incentives the Company offers to its customers.
Trade incentives consist primarily of customer pricing allowances
and merchandising funds, and point of sale discounts. Estimates of
trade promotion expense and coupon redemption costs are based upon
programs offered, timing of those offers, estimated
redemption/usage rates from historical performance, management’s
experience and current economic trends.
Cost of goods sold
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. During the year ended
December 31, 2022, the Company's cost of goods sold increased
$8.8 million, or 29% compared to the year ended December 31,
2021. The increase in cost was driven by cost increases from
primary suppliers as a result of broad-scale inflation in the
industry.
Advertising
The Company charges advertising costs to expense as incurred and
such charges are included in SG&A expense. The Company's
advertising expenses consist primarily of online advertising,
search costs, email advertising and radio advertising. In addition,
the Company reimburses its customers and third parties for in store
activities and record these costs as advertising expenses.
Advertising costs were $12.2 million and $9.0 million for the years
ended December 31, 2022 and 2021, respectively, of which
$2.1 million and $0.9 million is related to the
amortization of the prepaid advertising contract with iHeart for
the years ended December 31, 2022 and 2021, respectively. See
"Note 4 - Prepaid expenses and other current assets" for additional
information on the prepaid advertising contract with
iHeart.
Freight Out
Costs incurred for shipping and handling, including moving finished
product to customers are included in SG&A expense. Shipping
costs associated with moving finished products to customers were
$1.6 million and $1.8 million for the years ended December 31,
2022 and 2021, respectively.
Research and development
Research and development costs related to developing and testing
new products are expensed as incurred and included in SG&A
expense. Research and development costs were $0.5 million for
the years ended December 31, 2022 and 2021,
respectively.
Share-based compensation
Share-based compensation awards are measured at their estimated
fair value on each respective grant date. The Company recognizes
share-based payment expenses over the requisite service period. The
Company’s share-based compensation awards are subject only to
service based vesting conditions. Pursuant to ASC 718-10-35-8, the
Company recognizes compensation cost for stock awards with only
service conditions that have a graded vesting schedule on a
straight-line basis over the service period for each separately
vesting portion of the award as if the award was, in-substance,
multiple awards. Forfeitures are recognized as they
occur.
Operating leases
We determine if a contract or arrangement meets the definition of a
lease at inception. The Company has elected to make the accounting
policy election for short-term leases. For leases with terms
greater than 12 months, the Company records the related asset and
obligation at the present value of lease payments over the term.
Lease renewal options are only included in the measurement if we
are reasonably certain to exercise the optional renewals. Any
variable lease costs, other than those
dependent upon an index or rate, are expensed as incurred. If a
lease does not provide a readily available implicit rate, the
Company estimates the incremental borrowing discount rate based on
information available at lease commencement.
The Company's only remaining operating lease as of
December 31, 2022 relates to office space. There are no
material residual value guarantees or material restrictive
covenants.
Fair value of financial instruments
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants at the
measurement date. The fair value hierarchy uses a framework which
requires categorizing assets and liabilities into one of three
levels based on the inputs used in valuing the asset or
liability.
Level 1 inputs are unadjusted, quoted market prices in active
markets for identical assets or liabilities.
Level 2 inputs are observable inputs other than quoted prices
included in Level 1, such as quoted prices for similar assets or
liabilities in active markets or quoted prices for identical assets
or liabilities in inactive
markets.
Level 3 inputs include unobservable inputs that are supported by
little, infrequent or no market activity and reflect management’s
own assumptions about inputs used in pricing the asset or
liability.
Level 1 provides the most reliable measure of fair value, while
Level 3 generally requires significant management judgment. Assets
and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value
measurement. The Company’s financial instruments recognized on the
Consolidated Balance Sheets consist of cash and cash equivalents,
restricted cash, accounts receivable, prepaid assets, accounts
payable, term loan, line of credit, accrued liabilities and other
liabilities.
The fair value of the Company’s money market funds is based on
quoted market prices using Level 1 inputs. The fair value for the
Company’s term loan and line of credit approximates carrying value
as the instrument has a variable interest rate that approximates
market rates. These inputs related to the Company’s term loan and
line of credit are reflected as Level 2 inputs.
The Company values it's warrant liabilities using Level 2
inputs.
Fair value measurements of non-financial assets and non-financial
liabilities reflect Level 3 inputs and are primarily used to
measure the estimated fair values of goodwill, other intangible
assets and long-lived assets impairment analyses.
Basic and diluted (loss) income per share
Basic and diluted (loss) income per share has been determined by
dividing the net (loss) income available to common stockholders for
the applicable period by the basic and diluted weighted average
number of shares outstanding, respectively. Common stock
equivalents are excluded from the computation of diluted weighted
average shares outstanding when their effect is
anti-dilutive.
Segment information
Operating segments are defined as components of an enterprise about
which separate discrete financial information is available for
evaluation by the chief operating decision-maker ("CODM") in making
decisions regarding resource allocation and assessing performance.
The Company has viewed its operations and manages its business as
one segment. The Company’s CODM reviews operating results on an
aggregated basis. All the assets and operations of the Company are
in the U.S.
New Accounting Standards
Recently adopted
ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments”
In June 2016, the FASB issued ASU 2016-13, a new standard to
replace the incurred loss impairment methodology under current GAAP
with a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. The
standard is effective for the Company on January 1, 2023. The new
standard will not have a material impact on the consolidated
financial statements.
Note 2 – Revenue
The Company records revenue net of discounts, which primarily
consist of trade promotions, certain customer allowances and early
pay discounts.
The Company excludes sales taxes collected from revenues.
Retail-partner based customers are not subject to sales
tax.
The Company's direct-to-consumer ("DTC") loyalty program enables
customers to accumulate points based on their spending. A portion
of revenue is deferred at the time of sale when points are earned
and recognized when the loyalty points are redeemed.
Revenue channels
The Company groups its revenue channels into four categories:
E-commerce, which includes the sale of product to online retailers
such as Amazon and Chewy; Brick & Mortar, which primarily
includes the sale of product to Pet Specialty retailers such as
Petco, Pet Supplies Plus and neighborhood pet stores, as well as to
select grocery chains; DTC, which includes the sale of product
through the Company's website; and International, which includes
the sale of product to foreign distribution partners and to select
international retailers (transacted in U.S. dollars).
Information about the Company’s net sales by revenue channel is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, |
|
|
2022 |
|
2021 |
E-commerce
(1)
|
|
$ |
14,565 |
|
|
27 |
% |
|
$ |
15,091 |
|
|
33 |
% |
Brick & Mortar |
|
11,624 |
|
|
21 |
% |
|
6,766 |
|
|
15 |
% |
DTC |
|
6,620 |
|
|
12 |
% |
|
9,397 |
|
|
20 |
% |
International
(2)
|
|
21,851 |
|
|
40 |
% |
|
14,752 |
|
|
32 |
% |
Net Sales |
|
$ |
54,660 |
|
|
100 |
% |
|
$ |
46,006 |
|
|
100 |
% |
(1)The
Company's E-commerce channel includes two customers that amounted
to greater than 10% of the Company's total net sales. These
customers had $7.5 million and $6.6 million of net sales
for the year ended December 31, 2022, respectively and
$7.0 million and $7.6 million of net sales for the year
ended December 31, 2021, respectively.
(2)One
of the Company's International customers that distributes products
in China amounted to greater than 10% of the Company's total net
sales during the years ended December 31, 2022 and
December 31, 2021 and represented $17.7 million and
$9.1 million of net sales, respectively.
Note 3 - Inventories
Inventories are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
December 31, 2021 |
Food, treats and supplements |
$ |
10,212 |
|
|
$ |
4,666 |
|
Inventory packaging and supplies |
1,699 |
|
|
1,028 |
|
|
|
|
|
Total Inventories |
11,911 |
|
|
5,694 |
|
Inventory reserve |
(1,654) |
|
|
(449) |
|
Inventories, net |
$ |
10,257 |
|
|
$ |
5,245 |
|
Note 4 – Prepaid expenses and other current assets
Prepaid expenses and other current assets are summarized as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
December 31, 2021 |
Prepaid advertising contract with iHeart
(1)
|
$ |
— |
|
|
$ |
2,095 |
|
Other prepaid expenses and other current assets |
1,051 |
|
|
845 |
|
Total Prepaid expenses and other current assets |
$ |
1,051 |
|
|
$ |
2,940 |
|
(1)On
August 28, 2019, the Company entered into a radio advertising
agreement with iHeart Media + Entertainment, Inc. ("iHeart") and
issued 166,667 shares of common stock valued at $3.4 million for
future advertising services. The Company issued an additional
20,834 shares valued at $0.1 million on March 5, 2020 pursuant
to the agreement. The current portion of the remaining value,
reflected above, is the remaining value of services that the
Company expects to utilize within the twelve months following the
reporting period date, unless the term is extended. The Company
utilized the remaining advertising services during the year ended
December 31, 2022.
Note 5 - Fixed assets
Fixed assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life |
|
December 31, 2022 |
|
December 31, 2021 |
Equipment |
2 - 5 years
|
|
$ |
7 |
|
|
$ |
163 |
|
Furniture and fixtures |
2 - 5 years
|
|
221 |
|
|
179 |
|
Computer software, including website development |
2 - 3 years
|
|
187 |
|
|
161 |
|
Computer equipment |
1 - 2 years
|
|
129 |
|
|
72 |
|
Total fixed assets |
|
|
544 |
|
|
575 |
|
Accumulated depreciation |
|
|
(169) |
|
|
(206) |
|
Fixed assets, net |
|
|
$ |
375 |
|
|
$ |
369 |
|
Depreciation expense was $0.2 million and $0.1 million for the
years ended December 31, 2022 and 2021,
respectively.
Note 6 – Accrued and other liabilities
Accrued and other liabilities consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
December 31, 2021 |
Accrued taxes |
110 |
|
|
139 |
|
Accrued payroll and benefits |
688 |
|
|
755 |
|
Accrued trade promotions and advertising |
567 |
|
|
119 |
|
Accrued interest |
84 |
|
|
25 |
|
Accrued commissions |
385 |
|
|
— |
|
Deferred revenue |
336 |
|
|
225 |
|
Short-term financing |
165 |
|
|
— |
|
Other |
261 |
|
|
616 |
|
Total accrued and other liabilities |
$ |
2,596 |
|
|
$ |
1,879 |
|
Note 7 – Goodwill and intangible assets
Goodwill
The change in the carrying amount of goodwill for the years ended
December 31, 2022 and 2021 is summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
Balance as of December 31, 2020 |
|
18,614 |
|
Accumulated impairment |
|
— |
|
Balance as of December 31, 2021 |
|
$ |
18,614 |
|
Impairment expense |
|
(18,614) |
|
Balance as of December 31, 2022 |
|
$ |
— |
|
Goodwill is evaluated for impairment if an event occurs or
circumstances change that indicate the carrying value of a
reporting unit may not be recoverable. During July 2022, the
Company completed a legal merger of TruPet and Halo, Purely for
Pets, Inc., a wholly owned subsidiary of Better Choice Company Inc.
("Halo"), with Halo as the surviving entity in connection with the
execution of rebranding its former TruDog brand under the Halo
brand umbrella. In conjunction with the legal merger and
rebranding, the Company performed an analysis of its reporting
units and concluded it has one reporting unit after the legal
merger and rebrand, and as such, the Company performed a
quantitative goodwill assessment as of July 1, 2022 in addition to
its annual impairment test as of October 1, 2022.
Under the quantitative approach, the Company makes various
estimates and assumptions to determine the estimated fair value of
the reporting unit using a combination of a discounted cash flow
model and a guideline comparable analysis. The fair value
measurements used in the impairment review of goodwill are Level 3
measurements which include unobservable inputs that are supported
by little, infrequent or no market activity and reflect
management’s own assumptions. The key assumptions used in
estimating the fair value of its reporting units as of July 1, 2022
and October 1, 2022 utilizing the income approach include the
discount rate and revenue growth rates. The discount rate utilized
in estimating the fair value of its reporting units as of July 1,
2022 and October 1 2022 was 20.0%, reflecting the assessment of a
market participant's view of the risks associated with the
projected cash flows. Revenue growth rates varied for each year
included in the valuation model based on management’s best estimate
of forecasted operating results. The assumptions used in estimating
the fair values are based on currently available data and
management's best estimates of revenues, EBITDA margins, and cash
flows and, accordingly, a change in market conditions or other
factors could have a material effect on the estimated values. There
are inherent uncertainties related to the assumptions used and to
management's application of these assumptions. As a result of the
annual impairment test, the Company recorded an impairment charge
of $18.6 million during the year ended December 31, 2022,
resulting in full impairment to the goodwill carrying
value.
Intangible assets
The Company’s intangible assets (in thousands) and related useful
lives (in years) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
December 31, 2021 |
|
Estimated useful life |
|
Gross
carrying
amount |
|
Accumulated
amortization |
|
Net carrying
amount |
|
Accumulated
amortization |
|
Net carrying
amount |
Customer relationships |
7 |
|
$ |
7,190 |
|
|
$ |
(3,115) |
|
|
$ |
4,075 |
|
|
$ |
(2,088) |
|
|
$ |
5,102 |
|
Trade name |
15 |
|
7,500 |
|
|
(1,516) |
|
|
5,984 |
|
|
(1,016) |
|
|
6,484 |
|
Total intangible assets |
|
|
$ |
14,690 |
|
|
$ |
(4,631) |
|
|
$ |
10,059 |
|
|
$ |
(3,104) |
|
|
$ |
11,586 |
|
Amortization expense was $1.5 million for the years ended
December 31, 2022 and 2021, respectively.
The estimated future amortization of intangible assets over the
remaining weighted average useful life of 8.7 years is as follows
(in thousands):
|
|
|
|
|
|
2023 |
$ |
1,527 |
|
2024 |
1,527 |
|
2025 |
1,527 |
|
2026 |
1,494 |
|
2027 |
500 |
|
Thereafter |
3,484 |
|
|
$ |
10,059 |
|
The Company assesses intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be fully recoverable. If
impairment indicators are present, the Company performs a
recoverability test by comparing the sum of the estimated
undiscounted future cash flows attributable to these long-lived
assets to their carrying value. Based on the impairment indicators
and goodwill impairment charge described above, the Company
performed an assessment of its intangible assets at the end of the
reporting period and determined that the undiscounted cash flows of
the identified asset grouping exceeded the carrying value, and as
such, there has been no impairment of the intangible assets as of
December 31, 2022.
Note 8 – Debt
The components of the Company’s debt consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
December 31, 2021 |
Amount |
|
Rate |
|
Maturity
date |
|
Amount |
|
Rate |
|
Maturity
date |
Term loan, net |
$ |
— |
|
|
(1) |
|
10/31/2024 |
|
$ |
5,414 |
|
|
(2) |
|
1/6/2024 |
Line of credit, net |
11,444 |
|
|
(1) |
|
10/31/2024 |
|
4,856 |
|
|
(2) |
|
1/6/2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
11,444 |
|
|
|
|
|
|
10,270 |
|
|
|
|
|
Less current portion |
— |
|
|
|
|
|
|
855 |
|
|
|
|
|
Total long-term debt |
$ |
11,444 |
|
|
|
|
|
|
$ |
9,415 |
|
|
|
|
|
(1)Interest
at a variable rate of the daily U.S. Federal Funds Rate plus 375
basis points with an interest rate floor of 3.75% per
annum.
(2)Interest
at a variable rate of LIBOR plus 250 basis points with an interest
rate floor of 2.50% per annum.
Term loan and lines of credit
On January 6, 2021, Halo entered into a credit facility with Old
Plank Trail Community Bank, N.A., an affiliate of Wintrust Bank,
N.A. (“Wintrust”) consisting of a $6.0 million term loan and a
$6.0 million revolving line of credit, each scheduled to
mature on January 6, 2024 and each bore interest at a variable rate
of LIBOR plus 250 basis points, with an interest rate floor of
2.50% per annum (the "Wintrust Credit Facility"). The Second
Wintrust Amendment described below updated the rate at which the
Wintrust Credit Facility bore interest to the greater of the daily
U.S. Federal Funds Rate plus 285 basis points, or the interest rate
floor, which remained unchanged. The Third Wintrust Amendment
described below updated the interest rate on the Wintrust Credit
Facility to the U.S. Federal Funds Rate plus 375 basis points, with
an interest rate floor of 3.75% and extends the maturity date of
the Wintrust Credit Facility from January 6, 2024 to October 31,
2024. Accrued interest on the Wintrust Credit Facility is payable
monthly which commenced on February 1, 2021. Principal payments
were required to be made monthly on the term loan commencing
February 2021 with a balloon payment upon the original maturity
date. The proceeds from the Wintrust Credit Facility were used (i)
to repay outstanding principal, interest and fees under the
previous revolving line of credit with Citizens Business Bank (the
"ABL Facility") and (ii) for general corporate purposes. The
Company applied extinguishment accounting to the outstanding
balances of the previous term loan and ABL Facility and recorded a
loss on extinguishment of debt of $0.4 million during 2021.
Debt issuance costs of $0.1 million were incurred related to
the Wintrust Credit Facility.
The Wintrust Credit Facility subjected the Company to certain
financial covenants, including the maintenance of a fixed charge
coverage ratio of no less than 1.25 to 1.00, tested as of the last
day of each fiscal quarter. The numerator in the fixed charge
coverage ratio was the operating cash flow of Halo, defined as Halo
EBITDA less cash paid for unfinanced Halo capital expenditures,
income taxes and dividends. The denominator was fixed charges such
as interest expense and principal payments paid or payable on other
indebtedness attributable to Halo. As of December 31, 2021, the
Company failed to satisfy the fixed charge coverage ratio and
entered into a default waiver agreement with Wintrust in which
Wintrust waived the existing default through the next testing date,
March 31, 2022. As part of the Second Wintrust Amendment described
below, the financial covenants were amended to subject the Company
to a minimum liquidity covenant test in lieu of a fixed charge
coverage ratio which required the Company to maintain liquidity,
tested on the last day of each fiscal quarter beginning March 31,
2022, of no less than (i) $13.0 million as of the last day of
each fiscal quarter ending March 31, 2022, through and including
the last day of the fiscal quarter ending December 31, 2022 and
(ii) $12.0 million as of the last day of the
fiscal
quarter ending March 31, 2023, and as of the last day of each
fiscal quarter thereafter. Furthermore, as part of the Third
Wintrust Amendment described below, the financial covenants were
further amended to require the Company to maintain a minimum
liquidity of $8.5 million tested on the last day of each
fiscal quarter beginning September 30, 2022 and
thereafter.
The Wintrust Credit Facility is secured by a general guaranty and
security interest on the assets, including the intellectual
property, of the Company and its subsidiaries. The Company has also
pledged all of the capital stock of Halo held by the Company as
additional collateral. Furthermore, the Wintrust Credit Facility
was supported by a collateral pledge by a member of the Company’s
board of directors; as a result of the First Wintrust Amendment
described below, this collateral pledge was terminated and
released.
On August 13, 2021, Halo entered into the first amendment to the
Wintrust Credit Facility (the “First Wintrust Amendment”) to
increase the revolving line of credit from $6.0 million to
$7.5 million. The First Wintrust Amendment also required Halo
to secure the credit facility with a pledge of a deposit account in
the amount of $7.2 million, which was decreased to
$6.9 million on January 1, 2022 and was to further decrease to
$6.0 million on January 1, 2023. Additionally, on March 25,
2022, the Company entered into the second amendment to the Wintrust
Credit Facility (the "Second Wintrust Amendment") which provided
for the release of the Company's Bona Vida subsidiary as a
guarantor, an update to the financial covenants as described above
and an update to the rate at which the Wintrust Credit Facility
bore interest, which is also described above. Furthermore, on
October 24, 2022, the Company entered into the third amendment to
the Wintrust Credit Facility (the "third Wintrust Amendment") which
provided for an increase to the revolving line of credit from
$7.5 million to $13.5 million, set the amount of Halo's
obligation to pledge a deposit account with Wintrust to a fixed
amount of $6.3 million throughout the remainder of the term
and provided updates to the interest rate, maturity date and
financial covenants as described above.
As part of the Third Wintrust Amendment described above, Halo used
a portion of the increased revolving credit facility to repay and
retire the outstanding term loan portion of the Wintrust Credit
Facility. As of December 31, 2022, the line of credit
outstanding under the Wintrust Credit Facility was
$11.4 million, net of debt issuance costs of less than
$0.2 million. As of December 31, 2021, the term loan and
line of credit outstanding were $5.4 million and
$4.9 million, respectively, net of debt issuance costs of less
than $0.1 million, respectively. Debt issuance costs are
amortized using the effective interest method. The carrying amount
for the Company’s term loan and line of credit approximate fair
value as the instruments have variable interest rates that
approximate market rates.
As of December 31, 2022, the Company was in compliance with
all debt covenant requirements and there were no events of
default.
Notes payable
On November 4, 2019, the Company issued $2.8 million of
subordinated convertible notes (the “November 2019 Notes”) which
carried a 10% interest rate and a maturity date of November 4,
2021. The interest was payable in kind, in arrears on March
31, June 30, September 30 and December 31 of each year. Payment in
kind ("PIK") interest was payable by increasing the aggregate
principal amount of the November 2019 Notes. The November 2019
Notes were convertible any time from the date of issuance and
carried an initial conversion price of the lower of (a) $24.00 per
share or (b) the IPO Price. The November 2019 Notes were amended on
January 6, 2020. The amendment incorporated only the preferable
terms of the Seller Notes as noted below, and all other terms and
provisions of the November 2019 Notes remained in full force and
effect. As amended, for so long as any event of default existed and
was continuing, interest would accrue at the default interest rate
of 12.0% per annum, and such accrued interest would be immediately
due and payable.
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 were convertible any time from the date of
issuance and carried a 10% interest rate and a maturity date of
June 30, 2023. Interest was payable in kind, in arrears
on March 31, June 30, September 30 and December 31 of each
year by increasing the aggregate principal amount of the Seller
Notes. The Seller Notes carried a conversion price of the lower of
(a) $24.00 per share or (b) the IPO Price.
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 were the same as the Seller Notes. 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 12,120
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 10,204
common stock purchase warrants (the "ABG Warrants") equal to a fair
value of approximately $0.2 million. The total cost of the
contract termination noted above was measured at its fair value of
$1.1 million and included in SG&A expense.
The November 2019 Notes were amended for the second time and the
Seller Notes and the ABG Notes were also amended on June 24, 2020
in connection with the issuance of the June 2020 Notes, discussed
below. The amendments lowered the
maximum conversion price applicable to the conversion of these
notes from $24.00 per share to $22.50 per share and aligned all
maturity dates to be June 30, 2023. The Company accounted for the
change in conversion price as a modification of the debt
instruments and recognized the increase in the fair value of the
conversion option as a reduction to the carrying amount of the
respective debt instrument by increasing the associated debt
discount or decreasing the debt premium, with a corresponding
increase in Additional paid-in capital. The increase in fair value
of the conversion options were $0.3 million for the November
2019 Notes, less than $0.3 million for the Seller Notes and
less than $0.1 million for the ABG Notes.
On June 24, 2020, the Company issued $1.5 million in
subordinated convertible promissory notes (the “June 2020 Notes”)
which carried a 10% interest rate and a maturity date of June 30,
2023. Interest was payable in kind, in arrears on March 31, June
30, September 30, and December 31 of each year by increasing the
aggregate principal amount of the June 2020 Notes. The June 2020
Notes were convertible any time from the date of issuance and
carried a conversion price of $4.50 per share.
The Company evaluated the conversion option within the June 2020
Notes to determine whether the conversion price was beneficial to
the note holders and recorded a beneficial conversion feature
(“BCF”) related to the issuance of these notes. The BCF for the
June 2020 Notes was recognized and measured by allocating a portion
of the proceeds to the BCF, 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 was being accreted as
interest expense over the term of the June 2020 Notes, using the
effective interest rate method. Upon the conversion of the June
2020 Notes, discussed below, the remaining discount of
$1.4 million associated with the June 2020 Notes was fully
accreted through interest expense.
As of December 31, 2021, all of the Notes Payable described had $0
outstanding since they were automatically converted to common stock
in connection with the Company's IPO, at a price of $5.00 per share
(except for the June 2020 Notes, which were converted at a price of
$4.50 per share). See "Note 1 - Nature of business and summary of
significant accounting policies" for additional
information.
Previously, $0.1 million of the Seller Notes were held by an
executive of the Company and $2.2 million of the subordinated
convertible notes were held by a member of the board of directors,
all of which were converted to common stock as described above. PIK
interest related to these notes was $0.1 million for the year
ended December 31, 2021.
PPP loans
On April 10, 2020, TruPet 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 matured on April 6,
2022, and had an interest rate of 0.98% per annum, with interest
and principal payable monthly commencing on November 6, 2020.
During 2021, the TruPet PPP loan was fully forgiven and the Company
recognized a gain on extinguishment of debt of
$0.4 million.
On May 7, 2020, Halo 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 matured on May 3, 2022 and had an
interest rate of 1.00% per annum, with interest and principal
payable monthly, commencing on November 1, 2020. During 2021, the
Halo PPP loan was fully forgiven and the Company recognized a gain
on extinguishment of debt of $0.4 million.
The Company recorded interest expense related to its outstanding
indebtedness of $0.6 million and $3.2 million for the years ended
December 31, 2022 and 2021, respectively. PIK interest
relating to Notes Payable was $1.1 million for the year ended
December 31, 2021.
Future Debt Maturities
Future debt maturities as of December 31, 2022 and for
succeeding years are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year ending December 31: |
|
|
2023 |
|
$ |
— |
|
2024 |
|
$ |
11,444 |
|
2025 |
|
$ |
— |
|
2026 |
|
$ |
— |
|
2027 |
|
$ |
— |
|
Thereafter |
|
$ |
— |
|
Total |
|
$ |
11,444 |
|
Note 9 – Commitments and contingencies
The Company had no material purchase obligations as of
December 31, 2022 or 2021.
The Company may be involved in legal proceedings, claims, and
regulatory, tax, or government inquiries and investigations that
arise in the ordinary course of business resulting in loss
contingencies. The Company accrues for loss contingencies when
losses become probable and are reasonably estimable. If the
reasonable estimate of the loss is a range and no amount within the
range is a better estimate, the minimum amount of the range is
recorded as a liability. Legal costs such as outside counsel fees
and expenses are charged to expense in the period incurred and are
recorded in SG&A expenses. The Company does not accrue for
contingent losses that are considered to be reasonably possible,
but not probable; however, the Company discloses the range of such
reasonably possible losses. Loss contingencies considered remote
are generally not disclosed.
Litigation is subject to numerous uncertainties and the outcome of
individual claims and contingencies is not predictable. It is
possible that some legal matters for which reserves have or have
not been established could result in an unfavorable outcome for the
Company and any such unfavorable outcome could be of a material
nature or have a material adverse effect on the Company's
consolidated financial condition, results of operations and cash
flows. Management is not aware of any claims or lawsuits that
may have a material adverse effect on the consolidated financial
position or results of operations of the Company.
Note 10 – Stockholders’ equity
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 $7.50 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, the Company entered into a
registration rights agreement (the “January 2021 Registration
Rights Agreement”) pursuant to which the Company filed a
registration statement to register the shares of common stock
issued, and issuable upon the exercise of the warrants issued, in
the January 2021 Private Placement.
See "Note 1 - Nature of business and summary of significant
accounting policies" for additional information regarding the
impacts to the Company's Stockholders’ equity related to the
Company's IPO.
The Company has reserved common stock for future issuance as
follows for the years ended December 31, 2022 and
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
December 31, 2021 |
|
|
|
|
|
|
|
|
Exercise of options to purchase common stock |
3,071,187 |
|
|
2,684,041 |
|
Exercise of warrants to purchase common stock |
9,433,584 |
|
|
9,433,584 |
|
|
|
|
|
Total |
12,504,771 |
|
|
12,117,625 |
|
Note 11 – Warrants
The following summarizes the Company's outstanding warrants to
purchase shares of the Company's common stock as of and for the
years ended December 31, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
Weighted Average Exercise Price |
Warrants outstanding as of December 31, 2020 |
9,916,997 |
|
|
$ |
7.32 |
|
Issued |
548,110 |
|
|
$ |
8.70 |
|
Exercised |
(389,881) |
|
|
$ |
4.52 |
|
Terminated/Expired |
(641,642) |
|
|
$ |
24.64 |
|
Warrants outstanding as of December 31, 2021 |
9,433,584 |
|
|
$ |
5.92 |
|
Issued |
— |
|
|
$ |
— |
|
Exercised |
— |
|
|
$ |
— |
|
Terminated/Expired |
— |
|
|
$ |
— |
|
Warrants outstanding as of December 31, 2022 |
9,433,584 |
|
|
$ |
5.92 |
|
The intrinsic value of outstanding warrants was $0.0 million as of
December 31, 2022 and 2021, respectively. The following
discussion provides details on the various types of outstanding
warrants and the related relevant disclosures around each
type.
Series F warrant liability
During October 2020, the Company issued 7,233,855 warrants to
purchase common stock in connection with the Series F Private
Placement with an exercise price of $4.50 (the "Series F
Warrants"). The warrants are exercisable commencing on the date of
issuance and expire 72 months after the date of issuance. These
warrants included a reset feature if the Company issued common
stock, options, or convertible securities with a strike price below
the exercise price of the warrants. Upon consummation of the
Company's IPO on July 1, 2021, this reset feature no longer
applies. During the second quarter of 2021, a Series F warrant
holder exercised 83,334 warrants, resulting in the Company's
receipt of approximately $0.4 million. Initially 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. Due to changes in certain terms of the
warrant agreements in connection with the Company's IPO whereby the
warrants did meet the requirements to be considered equity, the
outstanding Series F warrants were reclassified to equity upon
consummation of the IPO on July 1, 2021. See "Note 1 - Nature of
business and summary of significant accounting policies" for
additional information on the Company's IPO.
The pre-IPO warrant liability was remeasured at fair value using a
Monte Carlo Model, representing a level 3 financial instrument.
Post-IPO the fair value was measured at each reporting period using
the Black Scholes Option Model representing a level 2 financial
instrument. 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 Additional paid-in capital.
The following schedule shows the change in fair value during the
year ended December 31, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability |
Balance as of December 31, 2020 |
|
$ |
39,850 |
|
Change in fair value of warrant liability |
|
(23,463) |
|
Reclassification of warrant liability to equity
(1)
|
|
(16,387) |
|
Balance as of December 31, 2021 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
(1)Reclassified
to equity on July 1, 2021 in connection with the IPO. See "Note 1 -
Nature of business and summary of significant accounting policies"
for additional information.
The following schedule shows the inputs used to measure the fair
value of the warrant liability:
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability |
|
July 1, 2021 |
|
|
Stock Price |
|
$4.19 |
|
|
Exercise Price |
|
$4.50 |
|
|
Expected remaining term (in years) |
|
5.25 - 5.31
|
|
|
Volatility |
|
60.0% |
|
|
Risk-free interest rate |
|
0.94% |
|
|
The valuation of the warrants was 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.
Equity-classified warrants
On May 6, 2019, the Company issued 957,499 warrants to purchase
common stock with an exercise price of $25.50 (the "May 2019 PIPE
Warrants"). Additionally, in connection with the May 2019 PIPE
transaction, the Company issued 36,757 warrants to brokers with an
exercise price of $18.00. The warrants were exercisable commencing
on the issuance date and expired 24 months after the issuance date.
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
$7.50 per share. The Company received exercise notices for a total
of 174,602 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 1,834 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 an IPO, which occurred July 1,
2021. The warrants carried an initial exercise price equal to the
greater of (i) $30.00 per share or (ii) the price at which the
common stock was sold in the IPO (which was $5.00).
On December 19, 2019, the Company issued 1,083,334 warrants with an
exercise price of $10.92 as consideration for certain directors and
shareholders of the Company guaranteeing the Company's obligations
under a prior credit facility agreement (the "Guarantor Warrants"),
which are exercisable commencing on the date of issuance and expire
24 months from the date of the consummation of an IPO, which
occurred July 1, 2021. The Guarantor Warrants had a fair value of
$4.2 million on the date of issuance.
On December 19, 2019, the Company issued 156,250 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 an IPO, which occurred July 1, 2021.
The warrants carried an initial exercise price equal to the greater
of (i) $30.00 per share or (ii) the price at which the common stock
was sold in the IPO (which was $5.00).
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, which occurred July 1,
2021 and carried an initial exercise price equal to the greater of
(i) $30.00 per share or (ii) the price at which the common stock
was sold in the IPO (which was $5.00).
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 $30.00 to $25.50 per share.
The decrease in the exercise price resulted in an increase to the
fair value of the warrants of $0.1 million which was
recognized in SG&A expense.
On June 24, 2020, the Company issued 83,334 warrants to a
non-employee director and 83,334 warrants to a shareholder with an
exercise price of $7.50 per share in connection with the June 2020
Notes (the “June 2020 Warrants”), which are exercisable commencing
on the date of issuance and expire 84 months from the date of the
consummation of an IPO, which occurred July 1, 2021.
On July 20, 2020, the Company issued 50,000 warrants to a member of
the board of directors with an exercise price of $6.30 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 84 months from the date of the consummation of
an IPO, which occurred July 1, 2021.
On January 22,2021, the Company issued 548,082 warrants in
connection with the January 2021 PIPE transaction. The warrants are
exercisable at an exercise price per share of $8.70 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 $7.50 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 416,668
warrants with an exercise price of $0.60 per share and 250,000
warrants with an exercise price of $60.00 per share; 208,334 of the
$0.60 exercise price warrants (the "Tranche 1 Warrants") were
exercisable on the earlier of twelve-months after the issuance date
or immediately prior to a change in control subject to the
advisor’s continued service and 208,334 of the $0.60 exercise price
warrants (the "Tranche 2 Warrants") and the 250,000 warrants with
the $60.00 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. 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 173,611 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 remained 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 SG&A expense. During the
first quarter of 2021, the former advisor exercised his remaining
131,945 warrants outstanding in a cashless exercise resulting in
122,782 shares of common stock issued.
On June 24, 2020, the Company issued 166,668 warrants with an
exercise price of $7.50 per share to two non-employee directors,
which are exercisable commencing on the date of issuance and expire
84 months from the date of the consummation of an IPO, which
occurred July 1, 2021. On July 20, 2020, the Company issued 33,334
warrants to two non-employee directors at a price of $6.30 per
share (the "July 2020 Director Warrants"), which are exercisable
commencing on the date of issuance and expire 84 months from the
date of the consummation of an IPO, which occurred July 1, 2021.
The
warrants issued to the 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 66,667 warrants to a
third-party for services with an exercise price of $6.00 and an
expiration date 72 months after issuance. These warrants were
immediately vested and as such, the Company recorded
$0.1 million in SG&A expense.
Note 12 – Share-based compensation
On November 11, 2019, the Company received shareholder approval for
the Amended and Restated 2019 Incentive Award Plan (the “Amended
2019 Plan”). The Amended 2019 Plan provides for the grant of stock
options, stock appreciation rights, restricted stock awards,
restricted stock units, other stock or cash-based awards or a
dividend equivalent award. The Amended 2019 Plan authorized the
issuance of 1,083,334 shares of common stock which was increased to
1,500,000 after the Halo acquisition; the Amended 2019 Plan also
provides for an annual increase on the first day of each calendar
year beginning on January 1, 2020 and ending on and including
January 1, 2029, equal to the lesser of (A) 10% of the shares of
common stock outstanding (on an as-converted basis) on the last day
of the immediately preceding fiscal year and (B) such smaller
number of shares of common stock as determined by the Board;
provided, however, not more than 9,000,000 shares of common stock
shall be authorized for issuance. The authorized shares for
issuance was increased to 2,700,000 on January 1, 2021, increased
to 5,614,637 on January 1, 2022 and again increased to 8,557,663 on
January 1, 2023.
Stock options
The following table provides detail of the options granted and
outstanding (dollars in thousands):
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|
|
Options |
|
Weighted Average
Exercise Price |
|
Weighted Average Remaining Contractual Life (Years) |
|
Aggregate Intrinsic Value |
|
|
|
|
|
|
|
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Options outstanding as of December 31, 2021 |
|
2,684,041 |
|
|
$ |
6.10 |
|
|
8.5 |
|
$ |
— |
|
Granted |
|
618,500 |
|
|
$ |
2.24 |
|
|
|
|
|
Forfeited/Expired |
|
(231,354) |
|
|
$ |
5.26 |
|
|
|
|
|
Options outstanding as of December 31, 2022 |
|
3,071,187 |
|
|
$ |
5.39 |
|
|
7.2 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2022 |
|
2,141,961 |
|
|
$ |
5.84 |
|
|
6.5 |
|
$ |
— |
|
Options granted under the Amended 2019 Plan vest over a period of
two to three years. All
vested options are exercisable and may be exercised through the
ten-year anniversary of the grant date (or such earlier date
described in the applicable award agreement).
During the years ended December 31, 2022 and 2021, $2.4
million and $4.0 million, respectively, of share-based compensation
expense was recognized related to options issued. As of
December 31, 2022, unrecognized share-based compensation
related to options was $2.0 million, which is expected to be
recognized over a weighted average period of 0.8
years.
The fair value of an option award is estimated on the date of grant
using the Black–Scholes option valuation model, using the following
assumptions primarily based on historical data:
|
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|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2022 |
|
2021 |
Risk-free interest rate |
|
1.70 - 4.02%
|
|
0.36 - 1.39%
|
Expected volatility
(1)
|
|
65.0% - 72.5%
|
|
60.0% - 67.5%
|
Expected dividend yield |
|
—% |
|
—% |
Expected life (years)
(2)
|
|
6.0 - 6.5
|
|
6.0 - 6.5
|
(1)Expected
volatility was determined using a combination of historical
volatility and implied volatility.
(2)For
certain options, the simplified method is utilized to determine the
expected life due to the lack of historical data.
Restricted Stock Awards
In February 2022, the Company granted 218,345 shares of restricted
common stock to members of its board of directors under the Amended
2019 Plan as compensation for annual board service. These
restricted stock awards were immediately vested and, as such, the
Company recorded share-based compensation expense of
$0.5 million upon issuance.
During the fourth quarter of 2022, the Company granted 65,555
shares of restricted common stock to a member of its board of
directors for service as interim CEO. These restricted stock awards
were immediately vested and, as such, the Company recorded
share-based compensation expense of less than $0.1 million
upon issuance.
In January 2023, the Company granted 892,860 shares of restricted
common stock to members of its board of directors under the Amended
2019 Plan as compensation for annual board service. These
restricted stock awards were immediately vested and, as such, the
Company recorded share-based compensation expense of
$0.5 million upon issuance.
In January 2023, the Company granted 200,000 shares of restricted
common stock to certain executives and employees under the Amended
2019 Plan as performance bonus compensation totaling
$0.1 million. These restricted stock awards were issued on the
grant date with a one year cliff vesting condition and the Company
will recognize the expense over the vesting period.
During the first quarter of 2023, the Company granted 18,021 shares
of restricted common stock to a member of its board of directors
for service as interim CEO. These restricted stock awards were
immediately vested and, as such, the Company recorded share-based
compensation expense of less than $0.1 million upon
issuance.
Note 13 – Employee benefit plans
The Company has a qualified defined contribution 401(k) plan, which
covers substantially all of its employees. Participants are
entitled to make pre-tax and/or Roth post-tax contributions up to
the annual maximums established by the IRS. The Company matches
participant contributions pursuant to the terms of the plan, which
contributions are limited to a percentage of the participant’s
eligible compensation. The Company made contributions related to
the plan and recognized expense of less than $0.2 million during
the years ended December 31, 2022 and 2021,
respectively.
Note 14 – Related party transactions
Notes payable
The Company issued $0.8 million of subordinated convertible
notes to a member of the board of directors during June 2020 and
were converted to common stock upon consummation the Company's IPO
on July 1, 2021. See "Note 8 - Debt" and "Note 1 - Nature of
business and summary of significant accounting policies" for
additional information.
Director Fees
The Company pays quarterly board of director fees. During the years
ended December 31, 2022 and 2021, board of director fees
totaled $0.3 million and $0.4 million, respectively. As
of December 31, 2022 and 2021, $0.1 million of these
director fees were in accounts payable on the Consolidated Balance
Sheets, respectively.
Note 15 – Income taxes
For the year ended December 31, 2022, the Company recorded
income tax benefit of less than $0.1 million. For the year
ended December 31, 2021, the Company recorded income tax
expense of less than $0.1 million. For the years ended
December 31, 2022 and 2021, the Company's effective tax rate
was 0% and 1%, respectively. The Company’s effective tax rate
differs from the U.S. federal statutory rate of 21% primarily
because the Company’s losses have been fully offset by a valuation
allowance due to uncertainty of realizing the tax benefit of net
operating losses (“NOLs”) for the years ended December 31,
2022 and 2021.
The following table is a reconciliation of the components that
caused the Company's provision for income taxes to differ from
amounts computed by applying the U.S. federal statutory rate of 21%
(in thousands):
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|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2022 |
|
2021 |
Statutory U.S. Federal income tax |
$ |
(8,260) |
|
|
21.0 |
% |
|
$ |
719 |
|
|
21.0 |
% |
State income taxes, net |
(167) |
|
|
0.4 |
% |
|
(650) |
|
|
(19.0) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
5,384 |
|
|
(13.7) |
% |
|
2,371 |
|
|
69.2 |
% |
Goodwill impairment |
3,802 |
|
|
(9.7) |
% |
|
— |
|
|
— |
% |
Warrant valuation |
— |
|
|
— |
% |
|
(4,927) |
|
|
(143.9) |
% |
Tax effect of non-deductible equity instruments |
— |
|
|
0.1 |
% |
|
2,340 |
|
|
68.4 |
% |
Return to provision adjustment |
(5) |
|
|
— |
% |
|
20 |
|
|
0.6 |
% |
Other |
(772) |
|
|
2.0 |
% |
|
164 |
|
|
4.8 |
% |
Total provision |
$ |
(18) |
|
|
0.1 |
% |
|
$ |
37 |
|
|
1.1 |
% |
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes.
Significant components of the Company’s deferred tax assets and
liabilities are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
December 31, |
|
2022 |
|
2021 |
Deferred income tax assets: |
|
|
|
Net operating loss carryforwards |
$ |
19,182 |
|
|
$ |
15,049 |
|
ROU assets |
42 |
|
|
14 |
|
Share-based compensation |
5,251 |
|
|
4,668 |
|
Inventory |
157 |
|
|
106 |
|
Other assets |
2,306 |
|
|
2,021 |
|
Gross deferred tax assets |
26,938 |
|
|
21,858 |
|
Valuation allowance |
(24,479) |
|
|
(19,095) |
|
Net deferred tax assets |
$ |
2,459 |
|
|
$ |
2,763 |
|
Deferred income tax liabilities: |
|
|
|
Fixed assets |
(86) |
|
|
— |
|
Operating lease liabilities |
(41) |
|
|
(13) |
|
Intangibles |
(2,332) |
|
|
(2,774) |
|
Deferred tax liabilities, net of valuation allowance |
$ |
— |
|
|
$ |
(24) |
|
As of December 31, 2022, the Company had a deferred tax asset
(before valuation allowance) recorded on gross federal and state
net operating loss carryforwards of approximately $78.6 million and
$59.0 million, respectively. The net operating losses will begin to
expire in 2026.
The Internal Revenue Code, as amended (“IRC”), imposes restrictions
on the utilization of NOLs and other tax attributes in the event of
an “ownership change” of a corporation. Accordingly, a company’s
ability to use pre-change NOLs may be limited as prescribed under
IRC Section 382. Events which may cause limitation in the amount of
the NOLs and credits that can be utilized annually include, but are
not limited to, a cumulative ownership change of more than 50% over
a three-year period.
Management assesses the available positive and negative evidence to
estimate if sufficient future taxable income will be generated to
use the existing deferred tax assets in the future. A significant
piece of objective negative evidence evaluated was the cumulative
loss incurred through the years ended December 31, 2022 and
2021. Such objective evidence limits the ability to consider other
subjective positive evidence such as current year taxable income
and future income projections. On the basis of this evaluation, as
of December 31, 2022, a valuation allowance of $24.5 million
was recorded since it is more likely than not that the deferred tax
assets will not be realized.
Changes in valuation allowance are as follows (in
thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2022 |
|
2021 |
Valuation allowance, at beginning of year |
$ |
19,095 |
|
|
$ |
16,724 |
|
Increase in valuation allowance |
5,384 |
|
|
2,371 |
|
|
|
|
|
Valuation allowance, at end of year |
$ |
24,479 |
|
|
$ |
19,095 |
|
As of December 31, 2022 and 2021, the Company does not have
any significant uncertain tax positions and as
of December 31, 2022 and 2021, the Company had no accrued
interest and penalties related to uncertain income tax positions.
The Company does not anticipate that the amount of unrecognized tax
benefits will significantly increase or decrease within the next
twelve months. If incurred, the Company would classify interest and
penalties on uncertain tax positions as income tax
expense.
The Company is subject to taxation in the U.S. federal and various
state jurisdictions. The Company is not currently under audit by
any taxing authorities. The Company remains open to examination by
tax jurisdictions for tax years beginning with the 2019 tax year
for federal and 2018 for states. Federal and state net
operating losses are subject to review by taxing authorities in the
year utilized and future years.
Note 16 – Concentrations
Major suppliers
The Company sourced approximately 69% of its inventory purchases
from three vendors for the year ended December 31, 2022. The
Company sourced approximately 65% of its inventory purchases from
two vendors for the year ended December 31, 2021.
Major customers
Accounts receivable from three customers represented 88% of
accounts receivable as of December 31, 2022. Accounts
receivable from three customers represented 71% of accounts
receivable as of December 31, 2021. Three customers
represented 58% of gross sales for the year ended December 31,
2022. Three customers represented 54% of gross sales for the year
ended December 31, 2021.
Credit risk
As of December 31, 2022 and 2021, the Company’s cash and cash
equivalents were deposited in accounts at several financial
institutions and may maintain some balances in excess of federally
insured limits. The Company maintains its cash and cash equivalents
with high-quality, accredited financial institutions and,
accordingly, such funds are subject to minimal credit risk. The
Company has not experienced any losses historically in these
accounts and believes it is not exposed to significant credit risk
in its cash and cash equivalents.
Note 17 – (Loss) earnings per share
The Company presents (loss) earnings per share on a basic and
diluted basis. Basic (loss) earnings per share is computed by
dividing net (loss) income by the weighted average number of common
shares outstanding ("WASO") during the period. Diluted (loss)
earnings per share includes the dilutive effect of common stock
equivalents consisting of stock options and warrants using the
treasury stock method and convertible notes and preferred stock
using the if-converted method. Under the treasury stock method, the
amount the holder must pay for exercising stock options or warrants
and the amount of average compensation cost for future service that
has not yet been recognized are collectively assumed to be used to
repurchase shares.
For the year ended December 31, 2022, the Company’s basic and
diluted net loss per share attributable to common stockholders are
the same as the Company generated a net loss and common stock
equivalents are excluded from diluted net loss per share as they
have an anti-dilutive impact. Therefore, the Company did not have
any dilutive securities and/or other contracts that could,
potentially, be exercised or converted into shares of common stock
and then share in the earnings of the Company. For the year ended
December 31, 2022, potentially dilutive securities not
included in the calculation of diluted net loss per share, because
to do so would be anti-dilutive, are as follows: 9,433,583 of stock
equivalent warrants, 3,064,775 of stock equivalent employee stock
options and 6,412 of stock equivalent other options.
As the Company reported net income for the year ended
December 31, 2021, basic and diluted net earnings per share
are calculated as outlined above. For the year ended
December 31, 2021, diluted WASO included 1,974,685 common
stock equivalents, and 5,114,148 common stock equivalents were
excluded based on the fact that their inclusion would have had an
anti-dilutive effect on earnings per share.
The following table sets forth basic and diluted net (loss)
earnings per share attributable to common stockholders for the
years ended December 31, 2022 and 2021 (in thousands, except
share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2022 |
|
2021 |
Numerator: |
|
|
|
Net (loss) income |
$ |
(39,316) |
|
|
$ |
3,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Adjustment due to warrant modifications |
— |
|
|
402 |
|
Adjusted net (loss) income available to common
stockholders |
$ |
(39,316) |
|
|
$ |
2,985 |
|
Denominator: |
|
|
|
Basic WASO |
29,353,013 |
|
|
19,927,862 |
|
Dilutive common stock equivalents |
— |
|
|
1,974,685 |
|
Diluted WASO |
29,353,013 |
|
|
21,902,547 |
|
|
|
|
|
Net (loss) earnings per share attributable to common stockholders,
basic |
$ |
(1.34) |
|
|
$ |
0.15 |
|
Net (loss) earnings per share attributable to common stockholders,
diluted |
$ |
(1.34) |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
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|
|
Note 18 – Subsequent events
On March 7, 2023, the Company entered into an agreement with
Believeco to provide marketing support services for an interim
period. A member of the Company's board of directors is a partner
at Believeco.
On March 2, 2023, we announced that Robert Sauermann was resigning
from his role as Chief Operating Officer ("COO"), effective March
17, 2023. On March 21, 2023, we announced that Sharla Cook was
resigning from her role as Chief Financial Officer, effective April
3, 2023.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act are controls and other
procedures that are designed to ensure that information required to
be disclosed in our reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act
is accumulated and communicated to management, including our
principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Our management, with the participation of our interim chief
executive officer (our principal executive officer) and our chief
financial officer (our principal financial officer) evaluated the
effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Annual Report on Form 10-K. Based
upon that evaluation, our principal executive officer and principal
financial officer concluded that, as of December 31, 2022, our
disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has not been any change in our internal controls over
financial reporting identified in connection with the Evaluation
that occurred during the quarter ended December 31, 2022 that
has materially affected, or is reasonably likely to materially
affect, those controls.
Management’s Annual Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule
13a-15(f) and 15d-15(f) under the Exchange Act. Because of its
inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projection of any
evaluation of effectiveness to future periods is subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or
procedures may deteriorate. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control
– Integrated Framework (2013 Framework). Based on this assessment,
management concluded that, as of December 31, 2022, the
Company’s internal control over financial reporting was
effective.
Attestation Report of Independent Registered Public Accounting
Firm
This Annual Report on Form 10-K does not include an attestation
report of the Company’s registered public accounting firm, as
non-accelerated filers are exempt from the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley
Act.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The information required by this item will be furnished (and is
hereby incorporated by reference) by an amendment hereto or
pursuant to a definitive proxy statement pursuant to Regulation 14A
that will contain such information.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be furnished (and is
hereby incorporated by reference) by an amendment hereto or
pursuant to a definitive proxy statement pursuant to Regulation 14A
that will contain such information.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item will be furnished (and is
hereby incorporated by reference) by an amendment hereto or
pursuant to a definitive proxy statement pursuant to Regulation 14A
that will contain such information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be furnished (and is
hereby incorporated by reference) by an amendment hereto or
pursuant to a definitive proxy statement pursuant to Regulation 14A
that will contain such information.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The information required by this item will be furnished (and is
hereby incorporated by reference) by an amendment hereto or
pursuant to a definitive proxy statement pursuant to Regulation 14A
that will contain such information.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
The following documents are filed as part of this
report:
(1)Financial
Statements - See Index to Consolidated Financial Statements
appearing on page
37.
(2)Financial
Statement Schedules -
None.
(3)Exhibits
- The exhibits listed on the accompanying index are filed as part
of, or incorporated by reference into, this Annual Report on Form
10-K.
EXHIBIT INDEX
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|
|
|
|
|
|
|
|
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 |
|