Better Choice pany (BTTR) - 2024 Q1 - Quarterly Report

PART I - Financial Information This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis ITEM 1. Condensed Consolidated Unaudited Financial Statements Unaudited financial statements detail decreased sales, reduced net loss, and going concern considerations Unaudited Condensed Consolidated Statements of Operations This chapter presents the unaudited condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023 Condensed Consolidated Statements of Operations (Three Months Ended March 31) | Metric (in thousands) | 2024 | 2023 | Change ($) | Change (%) | | :-------------------- | :---------- | :---------- | :---------- | :---------- | | Net sales | $7,903 | $9,237 | $(1,334) | (14)% | | Cost of goods sold | $5,289 | $5,996 | $(707) | (12)% | | Gross profit | $2,614 | $3,241 | $(627) | (19)% | | Operating expenses | $5,080 | $6,496 | $(1,416) | (22)% | | Loss from operations | $(2,466) | $(3,255) | $789 | 24% | | Interest expense, net | $(362) | $(229) | $(133) | (58)% | | Net loss | $(2,830) | $(3,484) | $654 | 19% | | Net loss per share | $(3.60) | $(5.03) | $1.43 | 28.4% | Unaudited Condensed Consolidated Balance Sheets This chapter presents the unaudited condensed consolidated balance sheets as of March 31, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets (as of March 31, 2024 vs. December 31, 2023) | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $3,876 | $4,455 | | Total Current Assets | $14,586 | $16,232 | | Total Assets | $15,444 | $16,737 | | Total Current Liabilities | $14,266 | $13,692 | | Total Liabilities | $14,318 | $13,759 | | Total Stockholders' Equity | $1,126 | $2,978 | Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit) This chapter presents the unaudited condensed consolidated statements of stockholders' equity for the three months ended March 31, 2024 Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Three Months Ended March 31) | Metric (in thousands) | Balance as of Dec 31, 2023 | Share-based compensation | Share issuance | Equity issued in business combinations | Net loss attributable to common stockholders | Balance as of Mar 31, 2024 | | :-------------------- | :------------------------- | :----------------------- | :------------- | :------------------------------------- | :------------------------------------------- | :------------------------- | | Common Shares | 729,026 | 42,088 | 6,818 | 45,629 | — | 823,650 | | Common Stock Amount | $32 | — | $2 | — | — | $34 | | Additional Paid-In Capital | $324,288 | $518 | $58 | $400 | — | $325,264 | | Accumulated Deficit | $(321,342) | — | — | — | $(2,830) | $(324,172) | | Total Stockholders' Equity | $2,978 | $518 | $60 | $400 | $(2,830) | $1,126 | Unaudited Condensed Consolidated Statements of Cash Flows This chapter presents the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31) | Metric (in thousands) | 2024 | 2023 | | :-------------------- | :---------- | :---------- | | Net cash used in operating activities | $(1,006) | $(1,473) | | Net cash used in investing activities | $(3) | $(10) | | Net cash provided by (used in) financing activities | $430 | $(41) | | Net decrease in cash and cash equivalents | $(579) | $(1,524) | | Cash and cash equivalents, end of period | $3,876 | $7,949 | Notes to the Condensed Consolidated Financial Statements This chapter provides detailed notes to the condensed consolidated financial statements, explaining significant accounting policies and financial details Note 1 – Nature of business and summary of significant accounting policies This note describes the company's business, significant accounting policies, and going concern considerations - The Company is a pet health and wellness company focused on providing products and services for dogs and cats under its Halo brand[19] - A 1-for-44 reverse stock split was approved on March 8, 2024, and became effective March 20, 2024, retroactively adjusting all share and per share amounts[20][42] - The Company's continued operating losses and failure to meet financial covenants create substantial doubt about its ability to continue as a going concern[46][180] - Advertising costs decreased to $1.1 million for the three months ended March 31, 2024, from $1.4 million in the prior year period[26] Note 2 – Revenue This note details net sales by revenue channel and strategic shifts in sales distribution Net Sales by Revenue Channel (Three Months Ended March 31, in thousands) | Channel | 2024 ($) | 2024 (%) | 2023 ($) | 2023 (%) | | :----------------- | :------- | :------- | :------- | :------- | | E-commerce | $3,265 | 41% | $3,895 | 42% | | International | $2,874 | 37% | $2,311 | 25% | | DTC | $1,209 | 15% | $1,322 | 14% | | Brick & mortar | $555 | 7% | $1,709 | 19% | | Total Net Sales| $7,903| 100% | $9,237| 100% | - E-commerce sales decreased, while International sales increased significantly, becoming a larger percentage of total net sales[52][71] - The Company strategically exited Petco stores in Q1 2024, shifting Petco sales to the E-commerce channel (Petco.com)[71][196] Note 3 - Inventories This note provides a breakdown of inventories, net, and changes in inventory levels Inventories, Net (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :------------------------- | :------------- | :---------------- | | Food, treats and supplements | $5,056 | $6,296 | | Inventory packaging and supplies | $1,113 | $1,166 | | Total Inventories | $6,169 | $7,462 | | Inventory reserve | $(968) | $(851) | | Inventories, net | $5,201 | $6,611 | - Net inventories decreased by $1.41 million, or 21.3%, from December 31, 2023, to March 31, 2024, primarily due to a reduction in food, treats, and supplements[53] Note 4 – Prepaid expenses and other current assets This note details prepaid expenses and other current assets, highlighting changes in their composition Prepaid Expenses and Other Current Assets (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :---------------------------------------- | :------------- | :---------------- | | Prepaid marketing expenses | $451 | $451 | | Other prepaid expenses and other current assets | $718 | $361 | | Total Prepaid expenses and other current assets | $1,169 | $812 | - Total prepaid expenses and other current assets increased by $0.36 million, or 44%, primarily due to an increase in 'Other prepaid expenses and other current assets'[72] Note 5 - Fixed assets This note presents fixed assets, net, and related depreciation expenses Fixed Assets, Net (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :---------------------------------------- | :------------- | :---------------- | | Total fixed assets | $537 | $534 | | Accumulated depreciation | $(339) | $(304) | | Fixed assets, net | $198 | $230 | - Net fixed assets decreased by $0.032 million, or 13.9%, primarily due to accumulated depreciation[54] - Depreciation expense was $0.04 million for both three months ended March 31, 2024 and 2023[73] Note 6 – Intangible assets This note discusses intangible assets, their impairment, and amortization expenses - The Company's intangible assets (trade name and customer relationships) were fully impaired as of December 31, 2023, resulting in an $8.5 million impairment charge[55][75] - No impairment loss on long-lived assets was recorded for the three months ended March 31, 2024[55] - Amortization expense was $0.4 million for the three months ended March 31, 2023, but zero for the three months ended March 31, 2024, due to the full impairment[56] Note 7 – Accrued and other liabilities This note details accrued and other liabilities, explaining changes in their balances Accrued and Other Liabilities (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :------------------------------- | :------------- | :---------------- | | Accrued taxes | $0 | $105 | | Accrued payroll and benefits | $479 | $487 | | Accrued trade promotions and advertising | $203 | $90 | | Accrued interest | $379 | $254 | | Accrued commissions | $0 | $686 | | Deferred revenue | $0 | $7 | | Short-term financing | $0 | $162 | | Other | $295 | $294 | | Total accrued and other liabilities | $1,505 | $2,085 | - Total accrued and other liabilities decreased by $0.58 million, or 27.8%, primarily due to the absence of accrued commissions and short-term financing in Q1 2024[76] Note 8 – Debt This note provides a breakdown of debt components, interest rates, and covenant compliance Debt Components (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :---------------- | :------------- | :---------------- | | Term loan, net | $3,054 | $2,881 | | Line of credit, net | $2,171 | $1,741 | | Total debt | $5,225 | $4,622 | - Total debt increased by $0.603 million, or 13%, from December 31, 2023, to March 31, 2024, driven by an increase in both term loan and line of credit balances[57] - The Wintrust Receivables Credit Facility has a variable interest rate (11.0% at March 31, 2024) and a maximum outstanding balance of $4.8 million[78] - The Alphia Term Loan bears a fixed interest rate of 10% per annum, compounded quarterly, and matures on June 21, 2026[61] - The Company was in compliance with Alphia Term Loan covenants as of March 31, 2024, but was not in compliance as of December 31, 2023, making the debt callable[61][140] Note 9 - Business combinations This note describes the recent acquisition of Aimia Pet Healthco and its financial impact - The Company acquired Aimia Pet Healthco, Inc. for $0.4 million on February 9, 2024, to develop GLP-1 supplements for pets[63][82][107] - The acquisition resulted in the recognition of $405,194 in goodwill, attributed to expanding R&D for weight loss dog treats[86][111] - Aimia was a pre-revenue business, and no operating results were included in the Q1 2024 consolidated statements of operations[83] Note 10 - Fair Value Measurements This note presents fair value measurements for debt instruments and valuation methodologies Fair Value of Debt Instruments (in thousands) | Instrument | Fair Value Hierarchy | March 31, 2024 Carrying Amount | March 31, 2024 Fair Value | December 31, 2023 Carrying Amount | December 31, 2023 Fair Value | | :---------------- | :------------------- | :----------------------------- | :------------------------ | :-------------------------------- | :--------------------------- | | Term loan | Level 3 | $3,054 | $3,565 | $2,881 | $3,314 | | Line of credit | Level 2 | $2,171 | $2,171 | $1,741 | $1,741 | - The fair value of the term loan is estimated using a discounted cash flow method (Level 3 inputs), while the line of credit's fair value approximates its carrying amount due to variable interest rates (Level 2 inputs)[88][112] Note 11 – Commitments and contingencies This note outlines legal actions and other commitments and contingencies - The Company initiated legal action on March 25, 2024, to enforce a right of first refusal option exercised by Alphia, with an unpredictable outcome[114][192] - 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[90] Note 12 – Warrants This note details outstanding warrants, their exercise prices, and reclassification to equity Warrants Outstanding (as of March 31, 2024) | Metric | Warrants | Weighted Average Exercise Price | | :----------------------------------- | :------- | :------------------------------ | | Warrants outstanding as of Dec 31, 2023 | 550,039 | $2.47 | | Warrants outstanding as of Mar 31, 2024 | 550,039 | $2.47 | - The Company issued First and Second Tranche Warrants to Alphia in conjunction with the Term Loan, with an exercise price of $0.26 per share and an expiration date of June 21, 2028[91][211] - The warrants were reclassified to equity as of December 31, 2023, after anti-dilution provisions expired[117] Note 13 – Share-based compensation This note discusses share-based compensation expense and related grants - Share-based compensation expense decreased to $0.5 million for the three months ended March 31, 2024, from $0.9 million in the prior year period[118] - In February 2024, 42,088 shares of restricted common stock were granted to Board members, resulting in $0.4 million in immediate share-based compensation expense[100] - Unrecognized share-based compensation related to options was $0.1 million as of March 31, 2024, to be recognized over 0.4 years[120] Note 14 – Employee benefit plans This note details contributions to employee benefit plans - The Company contributed less than $0.1 million to its 401(k) plan for both the three months ended March 31, 2024 and 2023[124] Note 15 – Related party transactions This note outlines transactions with related parties, including marketing expenses and board fees - Marketing expense related to Believeco (a firm where a board member is a partner) totaled less than $0.01 million for the three months ended March 31, 2024[150] - As of March 31, 2024, $0.1 million in quarterly board of director fees were in accounts payable[125] Note 16 – Income taxes This note presents income tax provisions and the effective tax rate - The Company recorded an income tax provision of less than $0.1 million for both periods, with an effective tax rate of less than 1% due to a valuation allowance offsetting NOLs[101][126] Note 17 – Concentrations This note identifies significant customer and vendor concentrations and cash risk - Two customers accounted for 89% of accounts receivable as of March 31, 2024, and three customers represented 70% of gross sales for the three months ended March 31, 2024[127] - Approximately 75% of inventory purchases were sourced from two vendors for the three months ended March 31, 2024[151] - Cash and cash equivalents are held in accounts at several financial institutions, with some balances exceeding federally insured limits, but the Company believes credit risk is minimal[128] Note 18 – Loss per share This note details the calculation of net loss per share for basic and diluted shares Net Loss Per Share Attributable to Common Stockholders (Three Months Ended March 31, in thousands, except per share data) | Metric | 2024 | 2023 | | :-------------------------------------- | :---------- | :---------- | | Net loss | $(2,830) | $(3,484) | | Adjusted net loss attributable to common stockholders | $(2,830) | $(3,484) | | Basic WASO | 786,745 | 692,615 | | Diluted WASO | 786,745 | 692,615 | | Net loss per share, basic | $(3.60) | $(5.03) | | Net loss per share, diluted | $(3.60) | $(5.03) | - Basic and diluted net loss per share were the same for both periods due to the Company generating a net loss, making common stock equivalents anti-dilutive[154] Note 19 – Subsequent events This note describes significant events occurring after the reporting period, including a share repurchase program and NYSE compliance issues - In April 2024, the Board approved a share repurchase program for up to $5.0 million of common stock through December 31, 2024[130] - In April and May 2024, the Company borrowed an additional $0.8 million and $0.6 million, respectively, from the Wintrust Receivables Credit Facility[131][155] - The NYSE American notified the Company in April 2024 of non-compliance with listing standards due to stockholders' equity below $4.0 million, requiring a compliance plan by May 24, 2024[156] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operational results, market trends, growth strategies, and liquidity Overview and Outlook This section provides an overview of the company's business and its strategic outlook - Better Choice Company Inc. is a pet health and wellness company focused on premium and super-premium products under the Halo brand[133][159] - The Company's products are sold through E-commerce, Brick & Mortar, Direct to Consumer (DTC), and International channels[159] The Global Pet Food and Treat Market This section analyzes trends and growth opportunities within the global pet food and treat market - The U.S. pet food industry is projected to grow at a 4.96% CAGR between 2023 and 2028, driven by pet humanization and premiumization[134] - Asia, particularly China, represents a significant growth opportunity, with the Chinese market for premium dry dog and cat food anticipated to grow at 20% and 28% CAGR, respectively, from 2015-2025[135] Our Growth Strategy This section outlines the company's growth strategy, focusing on omni-channel sales and innovation - The Company aims to leverage its differentiated omni-channel strategy to design and sell products purpose-built for specific channels, maximizing gross margin and responding to market dynamics[163] - Focus on capitalizing on the demographic shift in Asia, where pet ownership has doubled in the last five years, particularly among younger pet owners[164] - Maintain a strong innovation pipeline to quickly bring new products to market, benefiting from existing customer relationships and economies of scale[137] Recent Corporate Developments This section highlights key corporate developments, including executive appointments and strategic exits - Kent Cunningham was appointed CEO effective May 22, 2023, and Carolina Martinez was appointed CFO effective August 7, 2023[139][191] - The Company strategically exited Petco stores and Pet Supplies Plus in December 2023 and plans to exit its DTC channel in Q2 2024 to improve profitability[166] - Better Choice Company initiated legal action against Alphia Inc. on March 25, 2024, to enforce a right of first refusal option[192] Results of Operations for the three months ended March 31, 2024 and 2023 This section provides a detailed analysis of the company's operational results for the three months ended March 31, 2024 and 2023 Net sales This section analyzes net sales performance by channel and key drivers of change Net Sales by Channel (in thousands) | Channel | 2024 ($) | 2024 (%) | 2023 ($) | 2023 (%) | | :----------------- | :------- | :------- | :------- | :------- | | E-commerce | 3,265 | 41% | 3,895 | 42% | | International | 2,874 | 37% | 2,311 | 25% | | DTC | 1,209 | 15% | 1,322 | 14% | | Brick & mortar | 555 | 7% | 1,709 | 19% | | Total Net Sales| 7,903| 100% | 9,237| 100% | - Net sales decreased by $1.3 million (14%) to $7.9 million, primarily due to new payment terms in the International channel and a decline in E-commerce traffic[169] Cost of goods sold This section details the cost of goods sold and its primary components - Cost of goods sold decreased by $0.7 million (12%) to $5.3 million for the three months ended March 31, 2024[141] - COGS primarily includes product costs from co-manufacturers, packaging, freight, and third-party warehouse/fulfillment costs[170] Gross profit This section discusses gross profit and gross margin changes, including contributing factors - Gross profit decreased by $0.6 million (19%) to $2.6 million, and gross margin decreased by 200 basis points to 33% for the three months ended March 31, 2024[171][198] - The decrease in gross margin was attributed to selling excess inventory at a discount, product sales mix, decreased sales volume, and an increased inventory reserve due to Halo Elevate expiration risk[198] Operating expenses This section analyzes changes in operating expenses, including SG&A and share-based compensation - Selling, general and administrative (SG&A) expenses decreased by $1.4 million (22%) to $5.1 million[141] - Employee compensation and benefits decreased by $0.2 million (10%) due to reduced headcount, partially offset by higher severance costs[174] - Sales and marketing costs decreased by $0.6 million (33%) due to lower marketing and advertising agency fees and increased marketing spend in the International channel[199] - Share-based compensation decreased by $0.4 million (40%) to $0.5 million[200] - Other general and administrative costs increased by $0.2 million (14%) due to commission fees related to International sales[176] Interest expense, net This section details the increase in net interest expense and its drivers - Interest expense, net, increased by $0.2 million (58%) to $0.4 million, driven by interest on the Wintrust Receivables Credit Facility, Alphia Term Loan, amortization of debt issuance costs, and interest accretion[177] Income taxes This section discusses the income tax provision and effective tax rate - Income tax provision was less than $0.1 million for both periods, with an effective tax rate below 1% due to losses being offset by a valuation allowance against NOLs[178] Liquidity and capital resources This section assesses the company's liquidity, cash flows, debt obligations, and going concern status - Cash and cash equivalents were $3.9 million as of March 31, 2024, down from $4.5 million at December 31, 2023[179] - The Company's continued losses and non-compliance with debt covenants raise substantial doubt about its ability to continue as a going concern[180][204] - Cash used in operating activities decreased by $0.5 million (32%) to $1.0 million, primarily due to a decrease in net loss and inventory reserve[205] - Cash provided by financing activities was $0.4 million, mainly from Wintrust revolving line of credit proceeds ($3.0 million) offset by payments ($2.6 million)[207] - The Alphia Term Loan, with an outstanding balance of $3.1 million (net of debt issuance costs) as of March 31, 2024, is secured by a general security interest in the Company's and Halo's assets, including intellectual property[234][232] Critical Accounting Estimates This section outlines the company's critical accounting estimates, including share-based compensation - The Company's critical accounting estimates, including those for share-based compensation, remain consistent with the Annual Report for the year ended December 31, 2023[213][235] - Share-based compensation expense is measured at fair value on the grant date, using the Black-Scholes option valuation model and management's best estimates for assumptions[214][236] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is exempt from market risk disclosures - As a smaller reporting company, Better Choice Company Inc. is exempt from providing quantitative and qualitative disclosures about market risk[237] ITEM 4. Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses, though cybersecurity controls have been remediated Evaluation of Disclosure Controls and Procedures This section details the evaluation of disclosure controls and procedures by management - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2024, due to material weaknesses in internal control over financial reporting[216][238] - Despite material weaknesses, the condensed consolidated financial statements are deemed to present fairly the financial position, results of operations, and cash flows[239] Material Weaknesses This section identifies previously reported material weaknesses in internal control over financial reporting - Three material weaknesses were previously reported: (i) failure to maintain controls over cybersecurity and IT general controls; (ii) insufficient policies for complex transactions; and (iii) failure to design and maintain revenue recognition controls[240] Remediation of Prior Year Material Weaknesses This section describes ongoing and completed remediation efforts for identified material weaknesses - The material weakness related to cybersecurity and IT general controls has been successfully remediated through a new IT service provider, established policies, and sustained control operation[218][241] - Remediation for complex accounting transactions includes adding resources, expanding specialist involvement, and enhancing internal controls related to business combinations[242] - Remediation for revenue recognition involves evaluating and enhancing controls, adding resources, and training personnel[243] Changes in Internal Control Over Financial Reporting This section reports on changes in internal control over financial reporting during the quarter - No material changes in internal control over financial reporting occurred during Q1 2024, except for ongoing remediation efforts and the successful remediation of the cybersecurity and IT general controls material weakness[244] - The acquisition completed in Q1 2024 (less than 1% of total assets and no revenues) will be excluded from the assessment of internal control over financial reporting as of December 31, 2024[220] PART II - Other Information This section provides other required information, such as legal proceedings, risk factors, and exhibits ITEM 1. Legal Proceedings The company is involved in ordinary course litigation, with no anticipated material adverse effects - The Company is involved in ordinary course litigation but does not anticipate any material adverse effects on its business or financial results from current claims[222] ITEM 1A. Risk Factors No material changes to previously disclosed risk factors have occurred since the Annual Report - No material changes have occurred to the risk factors described in the Company's Annual Report filed on April 12, 2024[223] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds are reported for the period - There were no unregistered sales of equity securities or use of proceeds to report[224] ITEM 3. Defaults Upon Senior Securities No defaults upon senior securities are reported for the period - There were no defaults upon senior securities to report[225] ITEM 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to the Company[226] ITEM 5. Other Information No other information is reported for the period - There is no other information to report[227] ITEM 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q - The report includes an exhibit index detailing various agreements, notices, and certifications filed herewith[228][229][251] SIGNATURES This section contains the official signatures of the company's executive officers - The report is signed by Kent Cunningham, Chief Executive Officer, and Carolina Martinez, Chief Financial Officer, on May 17, 2024[249][252]