Better Choice Co Inc

Previous wording

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, including 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 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.

Current wording

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, including Halo Holistic™, Halo Elevate® and the former TruDog brand, which was 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 three distinct categories: Digital, which includes the sale of product to online retailers such as Amazon and Chewy, as well as direct to consumer (“DTC”) which included the sale of product through the Company’s website, halopets.com, through June 1, 2024; International, which includes the sale of product to foreign distribution partners and to select international retailers; and Brick & Mortar, which primarily includes the sale of product to pet specialty retailers, independent pet stores, and regional distributors.

Previous wording

The U.S. represents the largest and most developed market for pet food globally, with food and treats accounting for approximately $58 billion, or 42% of the total U.S. pet care market in 2022. According to the American Pet Product Association, between 66% of all households in the U.S. own a pet, equating to a total pet population of more than 130 million companion animals and an average of 1.7 pets per household. Pet spending represents a significant portion of household spend on consumer products, as this translates to an average annual spend on pet care of more than $1,500 per pet owning household, with $460 of this spend attributed to pet food and treats.

Current wording

The U.S. represents the largest and most developed market for pet food globally, with food and treats accounting for approximately $64 billion of total spend in the pet care market in 2023. According to the American Pet Product Association (“APPA”), approximately 63% of all households in the U.S. own a pet, equating to a 180 million adult consumers living in a household with a pet. Pet spending represents a significant portion of household spend on consumer products, as this translates to an average annual spend on pet products of more than $738 in 2023, which represents a 7.4% increase over the previous year.

Previous wording

Historically, consumer spending on pets grew at an approximately 3% CAGR in the decade leading up to the COVID-19 pandemic, driven by steady annual increases in household pet ownership of approximately 1%, the continued premiumization of the category and the humanization of pets. This surge in pet acquisition has led to an increase in the forecasted growth of the pet care industry over the next ten years. The U.S. pet food industry is expected to grow at a 4.96% CAGR between 2023 and 2028 (Statistica).

Current wording

According to the APPA, consumer spending on pets grew at an approximately 5% compound annual growth rate (“CAGR”) in the decade leading up to the COVID-19 pandemic, with a significant spike during the pandemic, fueled by steady annual increases in household pet ownership, the continued premiumization of the category and the humanization of pets. Pet spending is forecasted to grow at a 15% CAGR between 2020 and 2024, with total pet spending to reach $251 billion by 2030. The surge in pet acquisition has led to an increase in the forecasted growth of the pet care industry over the next ten years. Moreover, according to the APPA, the vegan dog food industry expanded at a CAGR of 2.6% from 2018 to 2022, and it is anticipated that market growth for vegan dog food may continue from 2023 to 2033 at a CAGR of 7%. Human diets with less or no animal meat have gained popularity throughout the preceding decade.

Previous wording

Globally, Asia is the second largest market for pet products, with China representing the largest market opportunity for growth. Like the U.S., growth in the Asian pet care industry has been driven by dramatic increases in household pet ownership. We believe that growth in Asia is fueled by increasing levels of economic financial status and demand for premium, western manufactured products as a result of product quality concerns. This demand has been supported by a rapidly growing middle class in China, where a McKinsey report estimated that in 2018 roughly 730 million people in urban areas fell into the income categories of “aspirants” and “affluents,” with the Brookings group estimating that approximately 60 million people are added to these income categories each year. We believe that this growth drove the increase in the number of dog-owning Chinese households as measured by Euromonitor, which increased from 12% in 2015 to 20% in 2020, according to Euromonitor. According to Euromonitor, the Chinese market for premium dry dog and cat food is anticipated to grow at a 20% CAGR and 28% CAGR, respectively, from 2015 through 2025, suggesting that the Chinese pet market has significant room for growth in the foreseeable future. We are focused on targeting Chinese pet owners with the highest willingness to pay, which tend to be urban dwelling millennial and Gen-Z women. In 2021, 80% of our products were purchased online, and approximately 50% of our end-consumers were born after 1990.

Current wording

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. The global plant-based pet food market is set to expand its roots in the global market at a promising CAGR of 9.2%, while the market is anticipated to hold a revenue of USD $57.43 billion in 2032. We believe that growth in Asia is fueled by increasing levels of economic financial status and demand for premium, western manufactured products as a result of product quality concerns. This demand has been supported by a rapidly growing middle class in China, where a McKinsey report estimated that in 2018 roughly 730 million people in urban areas fell into the income categories of “aspirants” and “affluents,” with the Brookings group estimating that approximately 60 million people are added to these income categories each year. We believe that this growth drove the increase in the number of dog-owning Chinese households as measured by Euromonitor, which increased from 12% in 2015 to 20% in 2020, according to Euromonitor. According to Euromonitor, the Chinese market for premium dry dog and cat food is anticipated to grow at a 20% CAGR and 28% CAGR, respectively, from 2015 through 2025, suggesting that the Chinese pet market has significant room for growth in the foreseeable future. We are focused on targeting Chinese pet owners with the highest willingness to pay, which tend to be urban dwelling millennial and Gen-Z women. In 2021, 80% of our products were purchased online, and approximately 50% of our end-consumers were born after 1990.

Previous wording

In December 2023, the Company made a strategic exit out of Petco stores (while remaining on Petco.com), and Pet Supplies Plus. As of Q1 2024, the Company has made plans to exit its DTC channel in Q2 2024, in an effort to improve profitability.

Current wording

In December 2023, the Company made a strategic exit out of Petco stores (while remaining on Petco.com), and Pet Supplies Plus. As of June 1, 2024, the Company has exited its DTC channel, in an effort to improve profitability. On March 25, 2024, Better Choice Company, Inc. (“BTTR”) initiated a legal action to enforce a right of first refusal (“ROFR”) option exercised by Alphia, Inc. (“Alphia”), which is controlled by a Paris-based private equity firm, PAI Partners. On June 20, 2024, the Company agreed to settlement terms of the lawsuit. The agreement dismisses the Company’s ongoing litigation with Alphia and provides for the forgiveness of the Company’s term loan, including $5.0 million in principal and $0.5 million of payable-in-kind (“PIK”) accrued interest, the termination of 335,640 warrants with a strike price of $11.44 per share that were set to expire in 2028, and the forgiveness of up to $2.7 million in accounts payable due to Alphia, provided the remaining outstanding accounts payable balance is paid within 90 days of the settlement date.

Previous wording

The Company was not in compliance with certain covenants related to the Alphia Term Loan Facility as of December 31, 2023 and the debt is callable by the lender. Refer to the Going concern considerations for additional information.

Current wording

The Company was not in compliance with certain covenants related to the Alphia Term Loan Facility as of December 31, 2023 and the debt was callable by the lender. Refer to the Going concern considerations for additional information.

Previous wording

Results of Operations for the three months ended March 31, 2024 and 2023

Current wording

Results of Operations for the three and six months ended June 30, 2024 and 2023

Previous wording

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.

Current wording

We sell our products through online retailers, pet specialty and independent pet retailers and distributors, internationally to foreign distribution partners (transacted in U.S. dollars), and our website directly to consumers. 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 within the Digital channel includes 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.

Previous wording

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.

Current wording

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 damaged, 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.

Previous wording

During the three months ended March 31, 2024, interest expense increased by $0.2 million, or 58% to $0.4 million from $0.2 million for the three months ended March 31, 2023. Interest expense for the three months ended March 31, 2024 is comprised of interest on our Wintrust Receivables Credit Facility, Alphia Term Loan, the amortization of debt issuance costs, and interest accretion on the Alphia Term Loan. Interest expense for the three months ended March 31, 2023 is comprised of interest on our Wintrust Credit Facility and the amortization of debt issuance costs which was refinanced during 2022.

Current wording

During the three months ended June 30, 2024, interest expense decreased by $(0.2) million, or (53)% to $(0.2) million from $(0.4) million for the three months ended June 30, 2023. During the six months ended June 30, 2024, interest expense decreased by $(0.1) million, or (11)% to $(0.5) million from $(0.6) million for the six months ended June 30, 2023. Interest expense for the three and six months ended June 30, 2024 is comprised of interest on our Wintrust Receivables Credit Facility, Alphia Term Loan, the amortization of debt issuance costs, and interest accretion on the Alphia Term Loan. The decrease in interest expense for the three and six months ended June 30, 2024 is related to the forgiveness of the Alphia Term Loan, as discussed in Note 7 - Debt.

Previous wording

Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for any allowable credits, deductions and uncertain tax positions as they arise. During the three months ended March 31, 2024 and March 31, 2023, we recorded income tax benefit of less than $0.1 million, which relates to indefinite-lived assets. The effective tax rate for the three months ended March 31, 2024 and 2023 was less than 1%, respectively, which differs from the U.S. Federal statutory rate of 21% primarily because our losses have been fully offset by a valuation allowance due to uncertainty of realizing the tax benefit of NOLs.

Current wording

Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for any allowable credits, deductions and uncertain tax positions as they arise. During the three and six months ended June 30, 2024, we recorded income tax expense of less than $0.01 million, which relates to the gain on extinguishment of debt. During the three and six months ended June 30, 2023 we recorded income tax expense of less than $0.1 million, which related to indefinite-lived assets. The effective tax rate for the six months ended June 30, 2024 was less than 1%, which differs from the U.S. Federal statutory rate of 21% primarily because our losses have been fully offset by a valuation allowance due to uncertainty of realizing the tax benefit of NOLs.

Previous wording

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 181,818 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 March 31, 2024 and December 31, 2023, we had cash and cash equivalents of $3.9 million and $4.5 million, respectively.

Current wording

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 181,818 shares of common stock at a price of $5.00 per share. On June 30, 2024 and December 31, 2023, we had cash and cash equivalents of $3.3 million and $4.5 million, respectively.

Previous wording

Cash used in operating activities decreased by $0.5 million, or 32%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The decrease in cash was primarily driven by a $(0.7) million decrease in net loss as well as a $(0.6) million decrease in inventory reserve due to selling off stock. The decrease in cash was also driven by significant fluctuations in our working capital, including a comparative decrease in accounts receivable balances of $(0.4) million due to timing of sales and collections and a comparative increase in accounts payable of $0.4 million due to inventory rebuild in 2023.

Current wording

Cash used in operating activities decreased by $0.3 million, or 20%, during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease in cash was primarily driven by a $6.6 million decrease in net loss, which was partially offset by the $(3.6) million gain recognized on extinguishment of the Alphia term loan. The decrease is also driven by significant fluctuations in our working capital, including a comparative decrease in inventory balance of $2.8 million.

Previous wording

Cash used in investing activities was less than $0.1 million during the three months ended March 31, 2024 and March 31, 2023. The cash used in investing activities is related to capital expenditures.

Current wording

Cash used in investing activities was less than $0.1 million during the six months ended June 30, 2024 and June 30, 2023. The cash used in investing activities is related to capital expenditures.

Previous wording

Cash provided by financing activities was $0.4 million and less than $(0.1) million, during the three months ended March 31, 2024 and March 31, 2023, respectively. The cash provided by financing activities for the three months ended March 31, 2024 was related proceeds from the Wintrust revolving line of credit of $3.0 million, offset by payments on the Wintrust revolving line of credit of $(2.6) million. The cash provided by financing activities for the three months ended March 31, 2023 was related to payments on the short-term financing arrangement of $0.04 million.

Current wording

Cash used in financing activities was $(0.2) million, during the six months ended June 30, 2024 and cash used in financing activities was $4.6 million during the six months ended June 30, 2023. The cash used in financing activities for the six months ended June 30, 2024 was related to proceeds from the Wintrust revolving line of credit of $5.5 million, offset by payments on the Wintrust revolving line of credit of $(5.6) million. The cash used in financing activities for the six months ended June 30, 2023 was related to payment of the Wintrust revolving line of credit of $(13.5) million offset by proceeds from the Wintrust revolving line of credit of $1.9 million, $2.3 million from the Wintrust receivables facility and $5.0 million from the Alphia facility.

Previous wording

As of March 31, 2024, the balance outstanding on the Wintrust Receivables Credit Facility amounted to $2.2 million.

Current wording

As of June 30, 2024, the balance outstanding on the Wintrust Receivables Credit Facility amounted to $1.6 million.

Previous wording

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 13 - 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 13 - 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.

Current wording

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” of the Company’s Annual Form 10-K. 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” of the Company’s Annual Form 10-K. 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.