SECURITIES AND EXCHANGE COMMISSION
FORM
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
February 28,June 30, 2019or
☐ TRANSITION REPORT PURSUANT TO SECTION 13
OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934| ☐ | 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: file number: 333-161943BETTER CHOICE COMPANY INC.
Better Choice Company Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 83-4284557 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
4025 Tampa Road, Suite 1117 Oldsmar, Florida | | 34677 |
| (Address of principal executive offices) | | (Zip Code) |
81 Prospect Street, Brooklyn, NY 11201
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Sport Endurance, Inc.
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| N/A | N/A | N/A |
Indicate by check mark whether the
registrantregistrant: (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 ☒
☒*
*(As a voluntary filer, the Registrant has not been subject to the filing requirements of Section 13 or 15(d) of the Exchange Act for the past 90 days. The Registrant has filed all reports required under Section 13 or 15(d) of the Exchange Act during the preceding 12 months).
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by 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”,filer,” “accelerated
filer”,filer,” “smaller reporting company”
, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check One):
Large accelerated filer | ☐ | | | Accelerated filer ☐ | Accelerated filer
☐ |
| | | | | |
Non-accelerated filer ☐ | ☒ | | | Smaller reporting company | ☒ |
| | | | | |
| | | | Emerging growth company ☐ | ☐ |
If an emerging growth company, indicate by 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the
The number of shares
outstanding of each of the
issuer’s classes ofregistrant’s common stock,
as of the latest practicable date: 2,841,210 shares of $0.001 par value
common stock$0.001 per share, outstanding as of
April 9, 2019. October 7, 2019 was 45,427,659.
BETTER
CHOICE CHOICE COMPANY INC.(FORMERLY SPORT ENDURANCE, INC.)
FORM 10-Q
Quarterly Period Ended February 28, 2019
EXPLANATORY NOTE
We were incorporated
This Quarterly Report is filed by Better Choice Company Inc. (“Better Choice Company”) and as discussed in more detail in our Transition Report on Form 10-KT, filed on July 25, 2019, the Company completed its acquisitions (the “acquisitions”) of TruPet LLC (“TruPet”) and Bona Vida, Inc. (“Bona Vida”). The acquisition of TruPet is treated as a reverse merger with TruPet determined to be the accounting acquirer of the Company. As such, the historical financial statements are those of TruPet and TruPet’s equity has been re-cast to reflect shares of Better Choice Company common stock received in the Stateacquisitions. The acquisition of NevadaBona Vida is treated as an asset acquisition. Unless otherwise stated or the context otherwise requires, the historical business information described in 2001 underthis Quarterly Report prior to consummation of the name Cayenne Construction, Inc.Acquisitions is that of TruPet and, following consummation of the Acquisitions, reflects business information of the Company, TruPet and Bona Vida as a combined business. References to the “Company”, “we”, “us” and “our” in 2009 changed our namethis Report, refer to Sport Endurance, Inc. Effective March 11,TruPet and its consolidated subsidiaries prior to May 6, 2019 we changed our nameand to Better Choice Company, Inc. after reincorporatingTruPet and Bona Vida and their consolidated subsidiaries post May 6, 2019.
Concurrently with the filing of this Quarterly Report, the Company is filing an amendment on Form 8-K/A to its Current Report on Form 8-K relating to the completion of the acquisitions which includes unaudited financial statements of TruPet and Bona Vida as of and for the three months ended March 31, 2019 and certain pro forma financial information. This Quarterly Report should be read in Delaware. Unless otherwise noted, referencesconjunction with the information in the Form 8-K/A.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this quarterly reportQuarterly Report are “forward-looking statements” for purposes of federal and state securities laws, including statements regarding our expectations and projections regarding future developments, operations and financial conditions, and the anticipated impact of our acquisitions, business strategy, and strategic priorities. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties and assumptions. Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties.
These forward-looking statements present our estimates and assumptions only as of the date of this Quarterly Report. Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. You should, however, consult further disclosures we make in future filings and public disclosures, including without limitation, our Annual Report on Form 10-K, Transition Report on Form 10-KT, Quarterly Reports on Forms 10-Q (the “Report”) to the “Company,” “we,” “our” or “us” means and Current Reports on Forms 8-K.
PART I. FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
Better Choice Company Inc.
(formerly Sport Endurance, Inc.).Condensed Consolidated Balance Sheets As of June 30, 2019 and December 31, 2018
(Dollars in thousands)
| | 6/30/2019 (Unaudited) | | | 12/31/2018 | |
| Assets | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 5,019 | | | $ | 3,946 | |
| Restricted cash | | | 6,243 | | | | - | |
| Accounts receivable, net | | | 333 | | | | 276 | |
| Inventories, net | | | 1,707 | | | | 1,557 | |
| Prepaid expenses and other current assets | | | 1,134 | | | | 269 | |
| Total Current Assets | | | 14,436 | | | | 6,048 | |
| Property and equipment, net | | | 59 | | | | 71 | |
| Right of use asset, operating lease, net of accumulated amortization | | | 840 | | | | - | |
| Intangible assets, net | | | 961 | | | | - | |
| Other assets | | | 182 | | | | 28 | |
| Total Assets | | $ | 16,478 | | | $ | 6,147 | |
| Liabilities & Stockholders’ Deficit | | |
| | | |
| |
| Current Liabilities | | |
| | | |
| |
| Line of credit | | $ | - | | | $ | 4,600 | |
| Other liabilities | | | - | | | | 1,899 | |
| Long-term debt, current portion | | | 6,200 | | | | 1,600 | |
| Accounts payable | | | 2,413 | | | | 765 | |
| Due to related parties | | | 134 | | | | - | |
| Accrued liabilities | | | 2,198 | | | | 244 | |
| Deferred revenue | | | 318 | | | | 66 | |
| Operating lease liability, current portion | | | 262 | | | | - | |
| Warrant derivative liability | | | 2,304 | | | | - | |
| Total Current Liabilities | | | 13,829 | | | | 9,174 | |
| Operating lease liability | | | 590 | | | | - | |
| Deferred rent | | | 15 | | | | 15 | |
| Total Liabilities | | | 14,434 | | | | 9,189 | |
Commitments and contingencies | | | - | | | | - | |
| Redeemable Series E Convertible Preferred Stock, $0.001 par value, 2,900,000 & 0 shares authorized, 1,707,919 & 0 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively. | | | 13,007 | | | | - | |
| Stockholders’ Deficit | | | | | | | | |
| Common Stock, $0.001 par value, 88,000,000 shares authorized, 43,168,161 & 11,661,485 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively. | | | 43 | | | | 12 | |
| Convertible Series A Preferred Units, $0.001 par value, units equivalent to 0 & 2,391,403 Common Stock issued and outstanding at June 30, 2019 and December 31, 2018, respectively | | | - | | | | 2 | |
| Additional paid-in capital | | | 170,017 | | | | 13,642 | |
| Accumulated deficit | | | (181,023 | ) | | | (16,698 | ) |
| Total Stockholders’ Deficit | | | (10,963 | )
| | | (3,042 | )
|
| Total Liabilities, Redeemable Preferred Stock and Stockholders’ Deficit | | $ | 16,478 | | | $ | 6,147 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PART I – FINANCIAL INFORMATION
Better Choice Company Inc.
Item 1. Financial Statements.BETTER CHOICE COMPANY INC.
Unaudited Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2019 and 2018
(
FORMERLY SPORT ENDURANCE, INC.)CONDENSED BALANCE SHEETS
| | | February 28, | | | August 31, | |
| | | 2019 | | | 2018 | |
| | | (Unaudited) | | | | | |
ASSETS | | | | | | | | |
Current assets | | | | | | | | |
Cash and cash equivalents | | $ | 107,936 | | | $ | 199,674 | |
Prepaid expenses | | | 41,082 | | | | - | |
Inventory | | | - | | | | 9,402 | |
Total current assets | | | 149,018 | | | | 209,076 | |
| | | | | | | | | |
Investment in TruPet | | | 2,200,000 | | | | - | |
| | | | | | | | | |
Total Assets | | $ | 2,349,018 | | | $ | 209,076 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | | | |
Current liabilities | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 104,912 | | | $ | 106,445 | |
Accrued interest, related party | | | 1,657 | | | | - | |
Dividends payable | | | 98,595 | | | | 20,280 | |
Derivative liability | | | 2,432,459 | | | | 2,317,412 | |
Accrued officer salary | | | 108,000 | | | | 140,000 | |
Convertible notes, net of unamortized debt discounts of $0 and $752,990, respectively | | | - | | | | 274,214 | |
| | | | | | | | | |
Total current liabilities | | | 2,745,623 | | | | 2,858,351 | |
| | | | | | | | | |
Commitments and contingencies | | | - | | | | - | |
| | | | | | | | | |
Stockholders’ deficit | | | | | | | | |
Preferred stock, $0.001 par value, 20,000,000 shares authorized, 16,294,000 and 19,194,000 shares undesignated and unissued as of February 28, 2019 and August 31, 2018, respectively | | | | | | | | |
Series A Preferred stock, $0.001 par value, 1,000 shares designated, 0 and 1,000 shares issued and outstanding as of February 28, 2019 and August 31, 2018, respectively | | | - | | | | 1 | |
Series B Convertible Preferred stock, $0.001 par value, 805,000 shares designated, 0 and 803,969.73 shares issued and outstanding as of February 28, 2019 and August 31, 2018, respectively | | | - | | | | 804 | |
Series E Convertible Preferred stock, $0.001 par value, 2,900,000 shares designated, 2,693,678 and 0 shares issued and outstanding as of February 28, 2019 and August 31, 2018, respectively | | | 2,693 | | | | - | |
Common stock, $0.001 par value, 580,000,000 shares authorized 2,699,502 and 3,064,763 shares issued and outstanding as of February 28, 2019 and August 31, 2018, respectively | | | 2,700 | | | | 3,065 | |
Additional paid-in capital | | | 5,318,132 | | | | 3,406,146 | |
Accumulated deficit | | | (5,720,130 | ) | | | (6,059,291 | ) |
Total stockholders’ deficit | | | (396,605 | ) | | | (2,649,275 | ) |
| | | | | | | | | |
Total liabilities and stockholders’ deficit | | $ | 2,349,018 | | | $ | 209,076 | |
SeeDollars in thousands, except per share amounts)
| | | For the Six Months ended June 30, | | | For the Three Months ended June 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | |
| Net Sales | | $ | 7,635 | | | $ | 7,064 | | | $ | 4,084 | | | $ | 3,817 | |
| Cost of Goods Sold | | | 4,082 | | | | 3,329 | | | | 2,421 | | | | 1,384 | |
| Gross Profit | | | 3,553 | | | | 3,735 | | | | 1,663 | | | | 2,433 | |
| Operating Expenses: | | |
| | | |
| | | |
| | | |
| |
| General & Administrative Expense | | | 6,004 | | | | 1,351 | | | | 4,571 | | | | 665 | |
| Share-Based Compensation Expense | | | 4,212 | | | | - | | | | 4,006 | | | | - | |
| Sales & Marketing | | | 5,597 | | | | 2,819 | | | | 3,412 | | | | 1,512 | |
| Other Operating Expenses | | | 1,721 | | | | 1,899 | | | | 937 | | | | 958 | |
| Total Operating Expenses | | | 17,534 | | | | 6,069 | | | | 12,926 | | | | 3,135 | |
| Loss from Operations | | | (13,981 | ) | | | (2,334 | ) | | | (11,263 | ) | | | (702 | ) |
| Other Income (Expense) | | |
| | | |
| | | |
| | | |
| |
| Interest Expense | | | (124 | ) | | | (66 | ) | | | (62 | ) | | | (43 | ) |
| Loss on Acquisition | | | (149,988 | ) | | | - | | | | (149,988 | ) | | | - | |
| Change in Fair Value of Derivative Liability | | | (193 | ) | | | - | | | | (193 | ) | | | - | |
| Total Other Expenses | | | (150,305 | ) | | | (66 | ) | | | (150,243 | ) | | | (43 | ) |
| | | |
| | | |
| | | |
| | | |
| |
| Net Loss | | | (164,286 | ) | | | (2,400 | ) | | | (161,506 | ) | | | (745 | ) |
| Preferred dividends | | | 27 | | | | - | | | | 27 | | | | - | |
| Net Loss Available to Common Stockholders | | $ | (164,313 | ) | | $ | (2,400 | ) | | $ | (161,533 | ) | | $ | (745 | ) |
| Weighted Average Number of Shares Outstanding | | | 21,202,188 | | | | 11,497,128 | | | | 30,638,048 | | | | 11,497,128 | |
| Loss per share, basic and diluted | | $ | (7.75 | ) | | $ | (0.21 | ) | | $ | (5.27 | ) | | $ | (0.06 | ) |
The accompanying notes
to theare an integral part of these unaudited condensed
consolidated financial statements.
5
BETTER CHOICE COMPANY INC.
(FORMERLY SPORT ENDURANCE, INC.)
Better Choice Company Inc.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS| | | For the Three | | | For the Three | | | For the Six | | | For the Six | |
| | | Months Ended | | | Months Ended | | | Months Ended | | | Months Ended | |
| | | February 28, | | | February 28, | | | February 28, | | | February 28, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | | | | |
Revenue | | $ | - | | | $ | 261 | | | $ | - | | | $ | 475 | |
Cost of goods sold | | | - | | | | 184 | | | | - | | | | 211 | |
| | | | | | | | | | | | | | | | | |
Gross profit | | | - | | | | 77 | | | | - | | | | 264 | |
| | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 388,905 | | | | 66,479 | | | | 536,428 | | | | 151,722 | |
| | | | | | | | | | | | | | | | | |
Total operating expenses | | | 388,905 | | | | 66,479 | | | | 536,428 | | | | 151,722 | |
| | | | | | | | | | | | | | | | | |
Operating loss | | | (388,905 | ) | | | (66,402 | ) | | | (536,428 | ) | | | (151,458 | ) |
| | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest expense, net | | | (368 | ) | | | (768,129 | ) | | | (133,913 | ) | | | (449,136 | ) |
Excess value of warrants liability over net proceeds of sale of common stock at inception | | | (3,675,385 | ) | | | - | | | | (3,675,385 | ) | | | - | |
Gain on exchange of debt and equity | | | - | | | | 139,323 | | | | 472,267 | | | | 139,323 | |
Gain (loss) on change in fair value of derivative liability | | | 3,898,599 | | | | (256,286 | ) | | | 4,212,620 | | | | (600,923 | ) |
Total other income (expense), net | | | 222,846 | | | | (885,092 | ) | | | 875,589 | | | | (910,736 | ) |
| | | | | | | | | | | | | | | | | |
Net (loss) income before tax | | | (166,059 | ) | | | (951,494 | ) | | | 339,161 | | | | (1,062,194 | ) |
| | | | | | | | | | | | | | | | | |
Provision for income tax | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
Net (loss) income | | | (166,059 | ) | | | (951,494 | ) | | | 339,161 | | | | (1,062,194 | ) |
| | | | | | | | | | | | | | | | | |
Preferred stock dividend | | | (68,787 | ) | | | - | | | | (109,934 | ) | | | - | |
| | | | | | | | | | | | | | | | | |
Net (loss) income available to common shareholders | | $ | (234,846 | ) | | $ | (951,494 | ) | | $ | 229,227 | | | $ | (1,062,194 | ) |
| | | | | | | | | | | | | | | | | |
Net loss (income) per share – basic | | $ | (0.09 | ) | | $ | (0.31 | ) | | $ | 0.08 | | | $ | (0.35 | ) |
| | | | | | | | | | | | | | | | | |
Net loss (income) per share - diluted | | $ | (0.09 | ) | | $ | (0.31 | ) | | $ | 0.06 | | | $ | (0.35 | ) |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding - basic | | | 2,724,359 | | | | 3,039,160 | | | | 2,883,911 | | | | 3,027,393 | |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding – diluted | | | 2,724,359 | | | | 3,039,160 | | | | 5,449,488 | | | | 3,027,393 | |
See accompanying notes to the unaudited condensed financial statements.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit
| | | Common Stock | | | Series A Preferred Units | | | | | | | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Additional Paid-in
Capital
| | | Accumulated Deficit | | | Total | |
| Balance at December 31, 2017 | | | 11,497,128 | | | $
| 11,497 | | | | | | | | | $ | 8,545,446 | | | $ | (10,672,090 | ) | | $ | (2,115,147 | ) |
| Net loss for the period | | | | | | | | | | | | | | | | | | | | | (1,655,302 | ) | | | (1,655,302 | ) |
Subtotal - March 31, 2018
| | | 11,497,128 | | | | 11,497 | | | | | | | | | | 8,545,446 | | | | (12,327,392 | ) | | | (3,770,449 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss for the period | | | | | | | | | | | | | | | | | | | | | (744,558 | ) | | | (744,558 | ) |
Subtotal - June 30, 2018
| | | 11,497,128 | | | | 11,497 | | | | | | | | | | 8,545,446 | | | | (13,071,950 | ) | | | (4,515,007 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued pursuant to private placement | | | | | | | | | | | 2,391,403 | | | | 2,391 | | | | 4,665,609 | | | | | | | | 4,668,000 | |
| Stock compensation pursuant to services provided | | | 164,357 | | | | 164 | | | | | | | | | | | | 430,647 | | | | | | | | 430,811 | |
| Net loss for the period | | | | | | | | | | | | | | | | | | | | | | | (3,626,157 | ) | | | (3,626,157 | ) |
| Balance at December 31, 2018 | | | 11,661,485 | | | | 11,661 | | | | 2,391,403 | | | | 2,391 | | | | 13,641,701 | | | | (16,698,107 | ) | | | (3,042,353 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impact on Prior Year of Adoption of ASC 842 | | | | | | | | | | | | | | | | | | | | | | | (11,824 | ) | | | (11,824 | ) |
| Shares issued pursuant to private placement | | | | | | | | | | | 69,115 | | | | 69 | | | | 149,931 | | | | | | | | 150,000 | |
| Stock compensation pursuant to services provided | | | 18,964
| | | | 19
| | | | | | | | | | | | 206,147 | | | | | | | | 206,166 | |
| Net loss for the period | | | | | | | | | | | | | | | | | | | | | | | (2,780,082 | ) | | | (2,780,082 | ) |
Subtotal - March 31, 2019
| | | 11,680,449 | | | | 11,680 | | | | 2,460,517 | | | | 2,461 | | | | 13,997,779 | | | | (19,490,013 | ) | | | (5,478,093 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock compensation pursuant to services provided | | | 1,099,822 | | | | 1,100 | | | | | | | | | | | | 2,225,907 | | | | | | | | 2,227,006 | |
| Stock based commissions to third parties | | | 798,492 | | | | 798 | | | | | | | | | | | | 4,790,156 | | | | | | | | 4,790,955 | |
| Conversion of Series A Preferred Units to Common Stock | | | 2,460,517 | | | | 2,461 | | | | (2,460,517 | ) | | | (2,461 | ) | | | | | | | | | | | - | |
Retired TruPet Units
| | | (1,011,748 | ) | | | (1,012 | ) | | | | | | | | | | | (2,198,988 | ) | | | | | | | (2,200,000 | )
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal - May 6, 2019 (Pre-Transaction) | | | 15,027,533 | | | | 15,028 | | | | - | | | | - | | | | 18,814,854 | | | | (19,490,013 | ) | | | (660,132 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition of Better Choice Company
| | | 3,117,364 | | | | 3,117 | | | | | | | | | | | | 18,701,067 | | | | | | | | 18,704,184 | |
| Acquisition of Bona Vida | | | 18,003,273 | | | | 18,003 | | | | | | | | | | | | 108,001,637 | | | | | | | | 108,019,640 | |
| PIPE (net of issuance costs) | | | 5,744,991 | | | | 5,745 | | | | | | | | | | | | 15,670,045 | | | | | | | | 15,675,790 | |
| Subtotal - May 6, 2019 (Post-Transaction) | | | 41,893,161 | | | | 41,893 | | | | | | | | | | | | 161,187,602 | | | | (19,490,013 | ) | | | 141,739,482 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock compensation pursuant to services provided | | | 100,000 | | | | 100 | | | | | | | | | | | | 599,900 | | | | | | | | 600,000 | |
| Conversion of Series E Preferred Stock | | | 1,175,000 | | | | 1,175 | | | | | | | | | | | | 7,050,678 | | | | | | | | 7,051,853 | |
| Vesting of stock options for services provided | | | | | | | | | | | | | | | | | | | 1,178,997 | | | | | | | | 1,178,997 | |
| Net loss for the period | | | | | | | | | | | | | | | | | | | | | | | (161,533,182 | ) | | | (161,533,182 | ) |
| Balance at June 30, 2019 | | | 43,168,161 | | | $ | 43,168 | | | | | | | | | | | $ | 170,017,177 | | | $ | (181,023,195 | ) | | $ | (10,962,849 | ) |
Better Choice Company Inc.
BETTER CHOICE COMPANY INC.Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2019 and 2018
(
FORMERLY SPORT ENDURANCE, INC.)UNAUDITED CONDENSEDSTATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
| | | | | | | | | | | | | | | | | | | | | Total Stockholders’ | |
| | | Preferred Stock Series A | | Preferred Stock Series B | | Preferred Stock Series E | | Common Stock | | | Paid-In | | | Subscriptions | | | Accumulated | | | Equity | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | Capital | | | Receivable | | | Deficit | | | (Deficit) | |
Balance, August 31, 2017 | | | 1,000 | | $ | 1 | | | - | | $ | - | | | - | | $ | - | | | 3,008,730 | | $ | 3,009 | | | $ | 1,927,960 | | | $ | (5,372 | ) | | $ | (3,108,472 | ) | | $ | (1,182,874 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion of notes payable and accrued interest | | | - | | | - | | | - | | | - | | | - | | | - | | | 17,628 | | | 18 | | | | 78,429 | | | | - | | | | - | | | | 78,447 | |
Net loss for the period | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | - | | | | - | | | | (110,700 | ) | | | (110,700 | ) |
Balance, November 30, 2017 | | | 1,000 | | | 1 | | | - | | | - | | | - | | | - | | | 3,026,358 | | | 3,027 | | | | 2,006,389 | | | | (5,372 | ) | | | (3,219,172 | ) | | | (1,215,127 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion of notes payable and accrued interest | | | - | | | - | | | - | | | - | | | - | | | - | | | 38,405 | | | 38 | | | | 149,460 | | | | - | | | | - | | | | 149,498 | |
Settlement of derivative liabilities | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | 333,947 | | | | - | | | | - | | | | 333,947 | |
Net loss for the period | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | - | | | | - | | | | (951,494 | ) | | | (951,494 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, February 28, 2018 | | | 1,000 | | $ | 1 | | | - | | $ | - | | | - | | $ | - | | | 3,064,763 | | $ | 3,065 | | | $ | 2,489,796 | | | $ | (5,372 | ) | | $ | (4,170,666 | ) | | $ | (1,683,176 | ) |
See accompanying notesDollars in thousands)
Cash Flow from Operating Activities | | June 30, 2019 | | | June 30, 2018 | |
| |
| | |
| |
| Net loss | | $ | (164,286 | ) | | $ | (2,400 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| | | |
| |
| Depreciation and amortization | | | 45 | | | | 7 | |
| Stock-based compensation expense | | | 4,212 | | | | - | |
| Non-cash lease expense | | | 2 | | | | - | |
| Change in fair value of derivative liability | | | 193 | | | | - | |
| Loss on acquisition | | | 149,988 | | | | - | |
| Other | | | (4 | ) | | | - | |
| (Increase) decrease in operating assets | | |
| | | |
| |
| Accounts receivable | | | (27 | ) | | | (50 | ) |
| Inventories | | | 42 | | | | (296 | ) |
| Prepaid expenses and other assets | | | (466 | ) | | | 48 | |
Change in operating lease right of use asset
| | | (457
| )
| | | -
| |
| (Decrease) increase in current liabilities | | |
| | | |
| |
| Accounts payable | | | (32 | ) | | | 530 | |
| Accrued liabilities | | | 1,600 | | | | 76 | |
| Deferred revenue | | | 252 | | | | 68 | |
| Deferred rent | | | - | | | | (9 | ) |
Change in Lease liability
| | | 457
| | | | -
| |
| | | |
| | | |
| |
Cash Used in Operating Activities | | $ | (8,481 | ) | | $ | (2,026 | ) |
| | | | | | | | | |
| Cash Flow from Investing Activities | | |
| | | |
| |
| Cash spent for acquisition of fixed assets (Office Furniture) | | | (4 | ) | | | (31 | ) |
| Cash acquired in merger | | | 1,955 | | | | - | |
| Security deposits paid | | | (81 | ) | | | - | |
| | | |
| | | |
| |
Cash Provided by (Used in) Investing Activities | | $ | 1,870 | | | $ | (31 | ) |
| | | | | | | | | |
| Cash Flow from Financing Activities | | |
| | | |
| |
| Repayment of advance | | | (1,899 | ) | | | - | |
| Proceeds from private placement of Series A Preferred Units | | | 150 | | | | - | |
| Proceeds from private issuance of public equity | | | 15,676 | | | | - | |
| Payment of old debt | | | (6,200 | ) | | | - | |
| Proceeds from the issuance of debt | | | 6,200 | | | | 2,013 | |
| | | |
| | | |
| |
| Cash Provided by Financing Activities | | $ | 13,927 | | | $ | 2,013 | |
| | | | | | | | | |
| Net Changes in Cash, Cash Equivalents and Restricted Cash | | $ | 7,316 | | | $ | (44 | ) |
| Total Cash, Cash Equivalents and Restricted Cash, Beginning of Period | | | 3,946 | | | | 157 | |
| Total Cash, Cash Equivalents and Restricted Cash, End of Period | | $ | 11,262 | | | $ | 113 | |
Supplemental Cash Flow Information
The following represent noncash financing and investing activities and other supplemental disclosures related to the
unaudited condensed financial statements.statement of cash flows:
On May 6, 2019, the Company acquired the net assets of Bona Vida and Better Choice in exchange for shares:
Dollars in thousands
| Assets | | | |
| Current Assets | | | |
| Accounts receivable, net | | $ | 30 | |
| Inventories, net | | | 193 | |
| Prepaid expenses and other current assets | | | 399 | |
| Total Current Assets | | | 622 | |
| Intangible Assets | | | 986 | |
| Other assets | | | 74 | |
| Total Assets | | $ | 1,682 | |
| Liabilities | | | | |
| Current Liabilities | | | | |
| Accounts payable | | $ | (1,814 | ) |
| Accrued liabilities | | | (325 | ) |
| Total Current Liabilities | | | (2,139 | ) |
| Warrant derivative liability | | | (2,111 | ) |
| Total Liabilities | | $ | (4,250 | ) |
| | | | | |
| Redeemable Series E Preferred Stock | | $ | 20,059 | |
| | | | | |
| | | | | |
| | | | | |
| On January 1, 2019, the Company adopted ASC 842 which resulted in the acquisition of right of use assets and lease liabilities as follow: | | | | |
| Right of use asset and lease liability acquired under operating leases | | | | |
| Right of Use asset recorded upon adoption of ASC 842 | | $ | 477 | |
| Lease liability recorded upon adoption of ASC 842 | | | (489 | ) |
The Company paid no income taxes during the six months ended June 30, 2019 or 2018.
Cash interest paid amounted to $123 and $66 during the six months ended June 30, 2019 and 2018, respectively.
7
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Stockholders’ | |
| | | Preferred Stock Series A | | Preferred Stock Series B | | Preferred Stock Series E | | Common Stock | | | Paid-In | | | Subscriptions | | | Accumulated | | | Equity | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | Capital | | | Receivable | | | Deficit | | | (Deficit) | |
Balance, August 31, 2018 | | | 1,000 | | $ | 1 | | | 803,970 | | $ | 804 | | | - | | $ | - | | | 3,064,763 | | $ | 3,065 | | | $ | 3,406,146 | | | $ | - | | | $ | (6,059,291 | ) | | $ | (2,649,275 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exchange of notes, interest, Series B Preferred and warrants with Series E Preferred Stock | | | - | | | - | | | (803,970 | ) | | (804 | ) | | 2,846,356 | | | 2,846 | | | - | | | - | | | | 2,019,920 | | | | - | | | | - | | | | 2,021,962 | |
Purchase and retirement of common stock | | | - | | | - | | | - | | | - | | | - | | | - | | | (1,048,904 | ) | | (1,049 | ) | | | (26,222 | ) | | | - | | | | - | | | | (27,271 | ) |
Preferred stock dividend | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | (41,147 | ) | | | - | | | | - | | | | (41,147 | ) |
Net income for the period | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | - | | | | - | | | | 505,220 | | | | 502,220 | |
Balance, November 30, 2018 | | | 1,000 | | | - | | | - | | | - | | | 2,846,356 | | | 2,846 | | | 2,015,859 | | | 2,016 | | | | 5,358,697 | | | | - | | | | (5,554,071 | ) | | | (190,511 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of vested stock options | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | 51,660 | | | | - | | | | - | | | | 51,660 | |
Purchase and retirement of common stock | | | - | | | - | | | - | | | - | | | - | | | - | | | (935,897 | ) | | (936 | ) | | | (23,397 | ) | | | - | | | | - | | | | (24,333 | ) |
Sale of common stock, net of issuance costs | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,425,641 | | | 1,426 | | | | 2,655,673 | | | | - | | | | - | | | | 2,657,099 | |
Conversion of Series A Preferred stock to Common Stock | | | (1,000 | ) | | (1 | ) | | - | | | - | | | - | | | - | | | 115 | | | - | | | | 1 | | | | - | | | | - | | | | - | |
Conversion of Series E Preferred stock to Common Stock | | | - | | | - | | | - | | | - | | | (152,678 | ) | | (153 | ) | | 193,784 | | | 193 | | | | (41 | ) | | | - | | | | - | | | | - | |
Fair value of warrants issued along with sale of common stock allocated to paid-in capital | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | (2,655,673 | ) | | | - | | | | - | | | | (2,655,673 | ) |
Preferred stock dividend | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | (68,787 | ) | | | - | | | | - | | | | (68,787 | ) |
Net loss for the period | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | | - | | | | - | | | | (166,059 | ) | | | (166,059 | ) |
Balance, February 28, 2019 | | | - | | $ | - | | | - | | $ | - | | | 2,693,678 | | $ | 2,693 | | | 2,699,502 | | $ | 2,700 | | | $ | 5,318,132 | | | $ | - | | | $ | (5,720,130 | ) | | $ | (396,605 | ) |
See accompanying notes
Notes to the
unaudited condensed financial statements.BETTER CHOICE COMPANY INC.
(FORMERLY SPORT ENDURANCE, INC.)
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
| | | For the Six | | | For the Six | |
| | | Months Ended | | | Months Ended | |
| | | February 28, | | | February 28, | |
| | | 2019 | | | 2018 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
Net income (loss) | | $ | 339,161 | | | $ | (1,062,194 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | |
Gain on exchange transaction | | | (472,267 | ) | | | - | |
Change in fair value of derivative liabilities | | | (4,212,620 | ) | | | 600,923 | |
Amortization of discount on convertible debt | | | 118,707 | | | | 397,811 | |
Fair value of vested stock options | | | 51,660 | | | | - | |
Excess value of warrants liability over net proceeds of sale of common stock at inception | | | 3,675,385 | | | | - | |
Gain on note exchange | | | | | | | (139,323 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Prepaid expenses | | | (41,082 | ) | | | - | |
Inventory | | | 9,402 | | | | 211 | |
Accrued officer salary | | | (32,000 | ) | | | 40,000 | |
Interest payable - related party | | | 1,657 | | | | 1,013 | |
Accounts payable and accrued liabilities | | | 64,764 | | | | (4,454 | ) |
Net cash used in operating activities | | | (497,233 | ) | | | (166,013 | ) |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Deposit made on investment in TruPet | | | (2,200,000 | ) | | | - | |
Net cash used in investing activities | | | (2,200,000 | ) | | | - | |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Cash paid for the purchase of common stock | | | (51,604 | ) | | | - | |
Cash from sale of common stock, net of costs | | | 2,657,099 | | | | - | |
Proceeds from notes payable - related party | | | - | | | | 35,500 | |
Repayments of notes payable - related party | | | - | | | | (100,000 | ) |
Proceeds from convertible debt | | | - | | | | 482,500 | |
Net cash provided by financing activities | | | 2,605,495 | | | | 418,000 | |
Net (decrease) increase in cash and cash equivalents | | | (91,738 | ) | | | 251,987 | |
Cash and cash equivalents at beginning of period | | | 199,674 | | | | 1,442 | |
| | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 107,936 | | | $ | 253,429 | |
| | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
Interest paid | | $ | - | | | $ | 1,087 | |
Income taxes paid | | $ | - | | | $ | - | |
| | | | | | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | |
Common stock issued for conversion of notes payable and accrued interest | | $ | - | | | $ | 84,956 | |
Preferred Stock Series E issued for cancellation of convertible notes payable, accrued interest, Series B Preferred Stock and warrants | | $ | 2,022,766 | | | $ | - | |
Conversion of Series A Preferred Stock to common stock | | $ | 1 | | | $ | - | |
Conversion of Series E Preferred Stock to common stock | | $ | 153 | | | $ | - | |
Discount on notes payable due to beneficial conversion feature | | $ | - | | | $ | 891,168 | |
Settlement of derivative | | $ | 2,003,390 | | | $ | 476,936 | |
Accrued interest capitalized into principal of convertible notes payable | | $ | - | | | $ | 15,823 | |
Fair value of warrants issued with sale of common stock allocated to additional paid in capital | | $ | 2,655,673 | | | $ | - | |
Accrued preferred stock dividends | | $ | 108,843 | | | $ | - | |
See accompanying notes to the unaudited condensed financial statements.
Better Choice Company Inc.
(Formerly Sport Endurance, Inc.)
Notes toUnaudited Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Nature of Business and
Summary of Significant Accounting Policies
Nature of the BusinessWe were incorporated in the State of Nevada in 2001 under the name Cayenne Construction, Inc., and in 2009 changed our name to Sport Endurance, Inc. Effective March 11, 2019, we changed our name to
Better Choice Company, Inc.
after reincorporating in Delaware.The Company previously marketed(the “Company”) is a holistic pet wellness company providing high quality, hemp-based, raw cannabidiol (“CBD”) infused and non-CBD infused food, treats and supplements, dental care products, and accessories for sale three sport nutritionalpets and their human parents. Our products which it suspended in March 2018.are formulated and manufactured using only high-quality ingredients manufactured, tested and packaged to our specifications. On March 14, 2018,May 6, 2019, the Company through its wholly-owned subsidiary Yield Endurance,acquired TruPet LLC and Bona Vida Inc. (“Yield”), entered intoin a seriespair of agreements under which Yield borrowed $5 million of bitcoin (“BTC”all-stock transactions (the “acquisitions”). The Company simultaneously entered into transactions with Madison Partners LLC and Prism Funding Co. LP to lend the BTC to third parties. On August 21, 2018, the Company entered into a series of restructuring agreements to unwind the BTC transactions thereby exiting the BTC and cryptocurrency markets.
Effective March 11, 2019, Sport Endurance, Inc. merged into its wholly-owned subsidiary, Better Choice Company Inc., a Delaware corporation. As a result, the name of Sport Endurance, Inc. was changed to Better Choice Company Inc. Pursuant to the merger, each outstanding share of common stock of Sport Endurance, Inc. converted into one share of common stock of Better Choice Company Inc. and each outstanding share of Series E Convertible Preferred Stock (the “Series E”) of Sport Endurance, Inc. converted into one share of Series E Convertible Preferred Stock of Better Choice Company Inc.
On December 17, 2018, the Company made a $2,200,000 investment in TruPet LLC, an online seller of pet foods, flea and tick products, pet nutritional products and related pet supplies. On February 2, 2019 and February 29, 2019, respectively, the Company entered into definitive agreements to acquire the remainderacquisition of TruPet LLC is a reverse acquisition for accounting purposes, with TruPet as the accounting acquirer.
The majority of our products are sold online directly to consumers with additional sales through online retailers and
allpet specialty stores. We have a limited selection of
the outstanding shares ofCBD infused canine products available on our Bona Vida
Inc., an emerging hemp based CBD platform focused on developingwebsite. The information contained in, or accessible through, these websites does not constitute a
portfoliopart of
brand and product verticals within the animal health and wellness space. The definitive agreements are based on various conditions being met including completion of a financing. While the Company believes it is close to completing the financing and closing the acquisitions, no assurances can be given that we will close these transactions. On March 14, 2019, the Company filed a Certificate of Amendment of Certificate of Incorporation (the “Amendment”) with the Delaware Secretary of State to effect a one-for-26 reverse split of the Company’s common stock. The Amendment took effect on March 15, 2019. No fractional shares will be issued or distributed as a result of the Amendment. These financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified.
Our auditors note that the absence of revenues and operations, in the audit report for the year ended August 31, 2018 dated December 21, 2018, is a going concern. The going concern statement opinion issued by the independent auditors is the result of a lack of operations and working capital.
The Company cannot pay its short-term liabilities and will need to raise capital which concerned the independent auditors because there is insufficient cash for operations for the next 12 months. If we cannot raise sufficient capital, we will cease operations. See Note 2, “Going Concern” for more information.
this Quarterly Report.
The accompanying unaudited condensed consolidated financial statements of the Company, have been prepared in accordance with accounting principles generally accepted in the United States generally accepted accounting principlesof America (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Regulation S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q.10–Q and Article 10 of Regulation S–X. Accordingly, they do not include all of the information and footnotesnotes required by accounting principles generally accepted accounting principles for complete financial statements. Inin the United States of America. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and operating results have been included. Operating results for the three and six months ended February 28,June 30, 2019 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the fiscal year ending AugustDecember 31, 2019. The significant accounting policies applied by the Company are described below. We present our tables, except for the Statements of Stockholders’ Deficit, in dollars (thousands), numbers in the text in dollars (millions) and % as rounded up or down.
Basis of Measurement
The unaudited condensed
consolidated financial statements
should be read in conjunction withof the
auditedCompany are presented on a going concern basis, under the historical cost convention except for certain financial
statementsinstruments that are measured at fair value, as
of and for the year ended August 31, 2018 and footnotes thereto includedexplained in the
Company’s Annual Report on Form 10-K filed with the SEC on December 21, 2018. The Company has adopted a fiscal year end of August 31st.All amounts referred to in the notes to the financial statements are in United States Dollars ($) unless stated otherwise.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not limited to determining the collectability of accounts receivable,policies below. Historical cost is measured as the fair value of warrantsthe consideration provided in exchange for goods and options issued, the fair value of conversion features, the recognition of revenue, the valuation allowance for deferred tax assetsservices. The Company’s functional and other legal claims and contingencies. presentation currency is United States dollars (“USD”).
Consolidation
The
results of any changes in accounting estimates are reflected in theconsolidated financial statements
and related notes include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in
the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits held with banks and highly liquid investments with initialremaining maturities of three monthsninety days or less. Theless at acquisition date. For purposes of reporting cash flows, the Company maintains itsconsiders all cash balances at credit-worthy financial institutionsaccounts that are insured bynot subject to withdrawal restrictions or penalties to be cash and cash equivalents.
Restricted Cash
As part of the Federal Deposit Insurance Corporation uprevolving credit agreement with Franklin Synergy Bank, the Company is required to $250,000. Depositsmaintain a cash balance of $6.2 million in its account. Any withdrawals from the account require an equal reduction to the funds available under the revolving credit agreement.
| Dollars in thousands | | June 30, 2019 | | | December 31, 2018 | |
| Cash and cash equivalents | | $ | 5,019 | | | $ | 3,946 | |
| Restricted cash | |
| 6,243 | | |
| 0 | |
| Total cash, cash equivalents and restricted cash | | $ | 11,262 | | | $ | 3,946 | |
Accounts Receivable
Accounts receivable represents amounts due from customers less an allowance for doubtful accounts. A provision is recorded for impairment when there is objective evidence (such as significant financial difficulties of the debtor) that the Company will not be able to collect all amounts due according to the original terms of the receivable. A provision is recorded as the difference between the carrying value of the receivable and the present value of future cash flows expected from the debtor, with
these banks may exceedan offsetting amount recorded as an allowance, reducing the
amountcarrying value of
insurance provided on such deposits; however, these deposits typically may be redeemed upon demandthe receivable. The provision is included in general and
therefore, bear minimal risk. At February 28,administrative expense in the statements of operations. As of the period ended June 30, 2019 and
AugustDecember 31, 2018, the
uninsured balances amountedCompany considers accounts receivable to
$0. Inventory
Inventory consists of finished goodsbe fully collectible and, is statedaccordingly, no allowance for doubtful accounts has been recorded.
Inventories
Inventories are recorded at the lower of cost by the first-in, first-out method orand net realizable value. The net realizable value represents the estimated selling price for inventories in the ordinary course of business, less all estimated costs of completion and costs necessary to make the sale.
Cost is determined on a standard cost basis and includes the purchase price and other costs, such as transportation costs. Inventory average cost is determined on a first‑in, first‑out (“FIFO”) basis and trade discounts are deducted from the purchase price.
Property and Equipment
Property and equipment are carried at cost and includes expenditures for new additions and other additions, which substantially increase the useful lives of existing assets. Depreciation is computed at various rates by use of the straight-line method. Depreciable lives are generally as follows:
| Furniture and Fixtures | 5 to 7 years |
| Equipment | 7 years |
Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of property or equipment retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts in the year of disposal with the resulting gain or loss reflected in earnings.
The Company had 0assesses potential impairments of its property and 2,432 containersequipment 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 “Ultra Peak T”property and equipment is not recoverable and exceeds its fair value. The carrying amount of property and equipment is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the property and equipment.
Income Taxes
No provision has been made for federal and state income taxes prior to the date of the acquisitions since the proportionate share of TruPet’s income or loss was included in
inventory at February 28, 2019 and August 31, 2018, respectively.Revenue Recognition
Adoptionthe personal tax returns of ASU 2014-09, Revenue from Contracts with Customers
On September 1, 2018,its members because TruPet was a limited liability company. Subsequent to the acquisitions, the Company, adopted Financial Accounting Standards Board (FASB)as a corporation, is required to provide for income taxes.
The Company utilizes Accounting Standards Codification
Topic 606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective (cumulative effect) transition method. Under this transition method, results for reporting periods beginning September 1, 2018 or later are presented under (“ASC
606, while prior period results continue to be reported in accordance with previous guidance. The cumulative effect of the initial application of ASC 606 was immaterial, no adjustment was recorded to the opening balance of retained earnings. The timing of revenue recognition for our revenue stream was not materially impacted by the adoption of this standard. The Company believes its business processes, systems, and controls are appropriate to support recognition and disclosure under ASC 606. In addition, the adoption has led to increased footnote disclosures. Overall, the adoption of ASC 606 did not have a material impact on the Company’s condensed balance sheet, statement of operations and statement of cash flows for the three and six months ended February 28, 2019. ASC 606 also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with the Company’s historical practice of recognizing product revenue when title and risk of loss pass to the customer.Policy
The Company recognizes revenue upon product delivery. All of our products are shipped through a third party fulfillment center to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.
For revenue from product sales, the Company recognizes revenue in accordance with ASC 606. A five-step analysis a must be met as outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
Contract Assets
The Company does not have any contract assets such as work-in-process. All trade receivables on the Company’s condensed balance sheet are from contracts with customers.
Contract Costs
Costs incurred to obtain a contract are capitalized unless short term in nature. As a practical expedient, costs to obtain a contract that are short term in nature are expensed as incurred. The Company does not have any contract costs capitalized as of February 28, 2019.
Contract Liabilities - Deferred Revenue
The Company’s contract liabilities may consist of advance customer payments and deferred revenue. Deferred revenue results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have not yet been met. Once all revenue recognition criteria have been met, the deferred revenues are recognized.
Income Taxes
The Company utilizes ASC 740, Accounting740”), “Accounting for Income Taxes,Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The effective tax rate for each of the three months and the six months ended June 30, 2019 is 0%. The effective tax rate differs from the U.S. Federal statutory rate of 21% primarily because our previously reported losses have been offset by a valuation allowance due to uncertainty as to the realization of those losses.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. Accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements, under which a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accordingly, the Company would report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company elects to recognize any interest and penalties, if any, related to unrecognized tax benefits in tax expense.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. As of the completion of these unaudited condensed financial statements, we have made a reasonable estimate of the effects of the Tax Act. This estimate incorporates assumptions made based upon the Company’s current interpretation of the Tax Act and may change as the Company may receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company will finalize the accounting for the effects of the Tax Act no later than the
end of the fourth quarter of fiscal year 2019. Future adjustments made to the provisional effects will be reported as a component of income tax expense in the reporting period in which any such adjustments are determined. Based on the new tax law that lowers corporate tax rates, the Company revalued its deferred tax assets. Future tax benefits are expected to be lower, with the corresponding
one timeone-time charge being recorded as a component of income tax expense.
Revenue
The Company recognizes revenue to depict the transfer of promised goods to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods.
In order to recognize revenue, the Company applies the following five (5) steps:
11Identify a customer along with a corresponding contract;
Identify the performance obligation(s) in the contract to transfer goods to a customer;
Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods to a customer;
Allocate the transaction price to the performance obligation(s) in the contract; and
Recognize revenue when or as the Company satisfies the performance obligation(s).
A description of the Company’s revenue generating activities is listed below:
Direct-to-consumer (“DTC”) – Our products are offered through our online stores where customers place orders online or through our customer service number. Revenue is recorded, net of discounts, at the time the order is received by the customer. Revenue is deferred for orders that have been placed, and paid for, but have not yet been received by the customer during the reporting period. As our customers have a 60-day guarantee on the product purchased, the Company records a liability for two months of estimated returns based on historical experience.
Loyalty Program - The Company offers a loyalty program to all of its direct-to-consumer customers. There are two tiers to the program.
Tier 1: the customer will earn 6 points for every $1 spent
Tier 2: the customer can earn points at a much faster rate and will also have opportunities to earn bonus points for different events, such as a birthday. This tier is known as the TruDog Love Club, and the customer accumulates twelve points for every $1 spent.
The redemption requirements are the same under both levels and, for every five hundred points earned, customers receive a $5 gift code which can be redeemed for goods purchased in the future. The Company records a reduction to sales revenue and deferred revenue when the customer accumulates loyalty points.
Wholesale Sales – This channel includes the sale of our products to wholesale customers for resale. The Company’s policy is to recognize revenue at the time the product is shipped to the wholesale customer, net of estimated returns and allowances.
Consignment – The Company partners with an Amazon channel partner to market and sell TruDog products. Revenue is recognized, net of returns, when our partner ships the product to the end customer. The commission, selling, marketing and storage fees are recognized at the time the services are rendered by the channel partner and are recorded by the Company, as follows:
Commission, selling and marketing fees as sales and marketing expenses
Storage fees as cost of goods sold.
Cost of Goods Sold
Cost of goods sold consists primarily of the cost of product obtained from the contract manufacturing plants, packaging materials and CBD oils directly sourced by the Company, and freight for shipping product from our contract manufacturing plants to our warehouse. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on the analysis, we record inventories on the lower of cost and net realizable value, with any reduction in value expensed as cost of goods sold.
Advertising
The Company charges advertising costs to expense as incurred and such charges are included in sales and marketing expenses.
Advertising costs, consisting primarily of Facebook advertising, search costs and email advertising, were $2.3 million and $1.2 million for the three-month periods ended June 30, 2019 and 2018, respectively. For the six-month periods ended June 30, 2019 and 2018, advertising costs were $3.5 million and $2.2 million, respectively.
Research and Development
Research is a planned search or a critical investigation aimed at discovering new knowledge and information with the hope that such knowledge will be useful in developing a new product or service (referred to as a “product”) or a new process or technique (referred to as a “process”) or bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. It includes the conceptual formulation, design and testing of product alternatives, construction of prototypes and operation of pilot plants. No research and development costs were incurred during the three or six month period ended June 30, 2019 and June 30, 2018.
Shipping and Handling / Freight Out
The Company recognizes shipping and handling costs as a fulfillment cost, included in other operating expenses as they are incurred prior to the customer obtaining control of the products. Shipping and handling costs primarily consist of costs associated with moving finished products to customers through third-party carriers.
Shipping and handling costs were $0.6 million and $0.7 million for the three-month periods ended June 30, 2019 and 2018, respectively. For the six-month periods ended June 30, 2019 and 2018, shipping and handling costs were $1.2 million and $1.3 million, respectively.
Additionally, for direct to consumer customers, the Company may recover such costs by passing them onto the customer. In these instances, the Company includes the freight charges billed to customers in total revenue.
The amount included in revenue related to such recoveries was $0.2 million and $0.3 million for the three-month periods ended June 30, 2019 and 2018, respectively. For the six-month periods ended June 30, 2019 and 2018, the amounts included in revenue related to such recoveries was $0.4 million and $0.6 million, respectively.
Fair Value of Financial InstrumentsUnder FASB ASC 820-10-05,
A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that both:
Imposes on one entity a contractual obligation either:
| o | To deliver cash or another financial instrument to a second entity; or |
| o | To exchange other financial instruments on potentially unfavorable terms with the second entity. |
Conveys to that second entity a contractual right either:
| o | To receive cash or another financial instrument from the first entity; or |
| o | To exchange other financial instruments on potentially favorable terms with the first entity. |
The Company’s financial instruments recognized in the FASB establishesbalance sheet consist of cash and cash equivalents, restricted cash accounts, accounts receivable, deposits, accounts payable, line of credit, due to related party, accrued and other liabilities, warrant derivative liability and long-term debt. Warrant derivative liability is measured at fair value each reporting period. The fair values of the remaining financial instruments approximate their carrying values.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has applied the framework for measuring fair value in GAAP and expands disclosures aboutwhich requires a fair value hierarchy to be applied to all fair value measurements. This Statement reaffirms thatThe fair value of the warrant derivative liability is the relevant measurement attribute. The adoption of this standard did not haveconsidered a material effect on the Company’sLevel 3 financial statements as reflected herein. The carrying amounts of cash and accrued expenses reported oninstrument.
All financial instruments recognized at fair value in the balance sheet are
estimated by management to approximate fair value primarily due to the short-term natureclassified into one of
the instruments. Fair Value Measurements
The Company follows ASC 820–10 to measurethree levels in the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820–10 establishes a framework for measuring fair value and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820–10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The three (3) levels of fair value hierarchy defined by ASC 820–10 are described below:
as follows:
Level 1
- fair value measurements are those derived from– valuation based on quoted prices
(unadjusted(unadjusted) observed in active markets for identical assets or
liabilities);liabilities. Cash is measured based on Level 1 inputs.
Level 2
- fair value measurements– valuation techniques based on inputs that are
those derived fromquoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices
included within Level 1used in a valuation model that are observable for
the asset or liability, either directly (i.e. as prices) or indirectly (i.e.that instrument; and inputs that are derived from
prices); andLevel 3 - fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based oncorroborated by observable market data (unobservable inputs).
Financial instruments classified as by correlation or other means.
Level
1 - quoted prices in active markets include cash.These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require3 – valuation techniques with significant management judgment to estimation. Valuations based on unobservable inputs are highly subjective and require significant judgments. Changes in such judgments could have a material impact on fair value estimates. In addition, since estimates are as of a specific point in time, they are susceptible to material near-term changes. Changes in economic conditions may also dramatically affect the estimated fair values.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of February 28, 2019 and August 31, 2018. The respective carrying value of certain financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts payable and accrued expenses.
inputs.
Derivative Financial Instruments
Financial Accounting Standards Board (“FASB”) ASC
Topic 815,
“Derivatives and Hedging”, generally provides three criteria that, if met, require companies to bifurcate conversion options from
theirits host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not
re- measuredre-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.
The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
12
The pricing model we use for determining fair value of our derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income (see note 7)Note 8).
Conversion options
Basic and Diluted Loss Per Share
Basic and diluted loss per share has been determined by dividing the net loss available to stockholders for the applicable period by the basic and diluted weighted average number of shares outstanding, respectively. Common Stock equivalents and incentive shares are excluded from the computation of diluted loss per share when their effect is anti-dilutive.
Stock-Based Compensation
The Company recognizes a compensation expense for all equity–based payments in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”. The Company accounts for share–based payments granted to non–employees in accordance with FASB ASC Topic 505–50, “Equity Based Payments to Non–Employees.” The Company follows the fair value method of accounting for stock awards granted to employees, directors, officers and consultants. Stock-based awards to employees are measured at the fair value of the related stock-based awards. Stock-based payments to others are valued based on the related services rendered or goods received or if this cannot be reliably measured, on the fair value of the instruments issued. Issuances of such awards are valued using the fair value of the awards at the time of grant. The Company recognizes stock-based payment expenses over the vesting period based on the number of awards expected to vest over that period on a straight-line basis. Forfeitures are accounted for as they occur.
The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the analysis of other public companies within the pet wellness sector. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term.
Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.
Use of Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of expenses during the reporting periods.
The Company evaluates its estimates on an ongoing basis. The Company bases its estimates on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one segment operating in the United States of America. The Company’s chief operating decision-maker does not review operating results on a disaggregated basis; rather, the chief operating decision-maker reviews operating results on an aggregate basis.
License Intangibles
License intangibles are recorded
as debt discountat fair value at the date of acquisition and are amortized
as interest expenseratably over the life of the
underlying debt instrument using effective interest method.license agreement.
BasicCommitments and Diluted Income (Loss) Per ShareContingenciesThe basic net
We 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
per common share is computed by dividingcontingencies. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the
netreasonable estimate of the loss
by the weighted average number of common stock outstanding. Diluted net income (loss) per common share is computed by dividing the net income (loss) adjusted on an “as if converted” basis, by the weighted average number of common stock outstanding plus potential dilutive securities.The following is a reconciliationrange and no amount within the range is a better estimate, the minimum amount of the numberrange is recorded as a liability.
We do not accrue for contingent losses that are considered to be reasonably possible, but not probable; however, we disclose the range of shares used in the calculationsuch reasonably possible losses. Loss contingencies considered remote are generally not disclosed.
We have entered into debt, royalty and lease agreements for which we are committed to pay certain amounts over a period of
basic earnings per sharetime. See Notes 5, 6 and
diluted earnings per share for the three months ended February 28, 2019 and 2018:| | | 2019 | | | 2018 | |
| | | | | | | | | |
Net loss available to common shareholders | | $ | (234,846 | ) | | $ | (951,494 | ) |
Weighted average common shares outstanding | | | 2,724,359 | | | | 3,039,160 | |
| | | | | | | | | |
Net loss per share: | | | | | | | | |
Basic | | $ | (0.09 | ) | | $ | (0.31 | ) |
Diluted | | $ | (0.09 | ) | | $ | (0.31 | ) |
The following is a reconciliation7.
Reclassification of the number of shares used in the calculation of basic earnings per share and diluted earnings per share for the six months ended February 28, 2019 and 2018:| | | 2019 | | | 2018 | |
| | | | | | | | | |
Net income (loss) available to common shareholders | | $ | 229,227 | | | $ | (1,062,194 | ) |
Plus: Income impact of assumed conversions | | | | | | | | |
Preferred stock dividends | | | 109,934 | | | | - | |
Net income (loss) available to common shareholders + assumed conversions | | $ | 339,161 | | | $ | (1,062,194 | ) |
| | | | | | | | | |
Weighted average common shares outstanding | | | 2,883,911 | | | | 3,027,393 | |
Plus: Incremental shares from assumed conversions | | | | | | | | |
Series E Convertible Preferred Stock | | | 2,565,577 | | | | - | |
Dilutive potential common shares | | | 2,565,577 | | | | - | |
Adjusted weighted average shares | | | 5,449,488 | | | | 3,027,393 | |
| | | | | | | | | |
Net income (loss) per share: | | | | | | | | |
Basic | | $ | 0.08 | | | $ | (0.35 | ) |
Diluted | | $ | 0.06 | | | $ | (0.35 | ) |
The following securities were not included in the computation of diluted net earnings per share as their effect would
Certain reclassifications have been antidilutive:
| | | February 28, 2019 | | | February 28, 2018 | |
| | | | | | | | | |
Conversion of notes payable | | | - | | | | 1,318,674 | |
Series E Convertible Preferred stock | | | - | | | | - | |
Warrants | | | 712,820 | | | | 19,231 | |
Stock options | | | 38,462 | | | | - | |
| | | | 751,282 | | | | 1,337,905 | |
13
Table of Contentsmade to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.
Recently Issued Accounting PronouncementsIn February 2016,
The Company has reviewed the Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof issued by the FASB issued ASU No. 2016–02, “Leases (Topic 842)”, which createsthat have effective dates during the reporting period and in future periods.
New Standards and Interpretations:
Adoption of FASB ASC Topic 842 “Leases”
The amendments in this update establish a comprehensive new
lease accounting
and reporting guidelines for leasing arrangements.model. The new
guidancestandard: (a) clarifies the definition of a lease; (b) requires
organizations thata dual approach to lease
assetsclassification similar to current lease classifications; and (c) causes lessees to recognize
assets and liabilitiesleases on the balance sheet
related to the rights and obligations created by those leases, regardless of whether they are classified as
finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease
primarily will depend on its classification asliability with a
finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertaintycorresponding right-of-use asset for leases with a lease term of
cash flows arising from leases.more than twelve months. The new standard
is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The Company is currently evaluating the impact of the new pronouncement on its unaudited condensed financial statements.In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. ASU 2017-11 is effective for fiscal years and interim periods within those years, beginning after December 15, 2018. 2018, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, including a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, an update which provides another transition method, the prospective transition method, which allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new standard on January 1, 2019 using the prospective transition method.
The Company has
determined that adopting this pronouncement will not have a material effectidentified all leases to determine the impact of ASC 842 on its
unaudited condensedconsolidated financial statements.
On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act of 2017). Stakeholders raised a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act of 2017. ASU 2018-02 is the final version of Proposed Accounting Standards Update 2018-210—Income Statement—Reporting Comprehensive Income (Topic 220), which The Company has been deleted. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in ASU 2018-02 affect any entity that is requiredelected to apply the provisionspractical expedient to certain classes of Topic 220, Income Statement-Reporting Comprehensive Income,leases, whereby the separation of components of leases into lease and has itemsnon-lease components is not required, and all of other comprehensive incomethe practical expedients to all leases, (1) whether any expired or existing contracts are or contain leases, (2) lease classification for whichany expired or existing leases and (3) initial direct costs for any existing leases. The adoption of the related tax effects are presentednew standard resulted in other comprehensive incomethe recording on the consolidated balance sheet as required by GAAP.of January 1, 2019 a right-of-use asset of $0.5 million, a lease liability of $0.5 million and a corresponding cumulative adjustment to accumulated deficit of an immaterial amount in accordance with ASC 842.
Adoption of FASB ASU No. 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting”
On January 1, 2019, the Company adopted ASU No. 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting”. The amendments in this update
is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.ASU 2018-05 Accounting Standards Update adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018) was signed into law. We are currently evaluating the impact of adopting ASU 2017-13 on our unaudited condensed financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expandsexpanded the scope of TopicASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees.non-employees. The requirements of ASC 718 are applied to nonemployee awards except for specific guidance is effectiveon inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that ASC 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for public entities, certain not-for-profit entities, and certain employee benefit plans for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. under ASC 606, “Revenue from Contracts with Customers.”
The Company is
evaluatingtreating the
inclusion of share-based payments to non-employees as a change in accounting principle prospectively beginning in the period ending June 30, 2019. As the Company did not make any share-based payments to non-employees in prior periods, there was no impact
on the results of
adopting this pronouncement on our unaudited condensed financial statements.operations in prior periods.
Adoption of ASU 2018-13 “Fair Value Measurement”
In August 2018, the FASB issued ASU 2018-13,
Fair“Fair Value Measurement (Topic 820) Changes to the Disclosure
RequirementsRequirement for Fair Value
Measurement.The amendments in this Update modifyMeasurement” which amends ASC 820 to expand the disclosure requirements ondisclosures required for items subject to Level 3, fair value measurements in Topic 820, Fair Value Measurement.
Removals
The following disclosure requirements were removed from Topic 820:
| 1.
| The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
|
| 2.
| The policy for timing of transfers between levels
|
| 3.
| The valuation processes for Level 3 fair value measurements
|
| 4.
| For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.
|
Modifications
The following disclosure requirements were modified in Topic 820:
| 1.
| In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entityremeasurement, including the underlying assumptions. ASU 2018-13 is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.
|
| 2.
| For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
|
| 3.
| The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
|
Additions
The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities:
| 1.
| The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period
|
| | |
| 2.
| The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
|
In addition, the amendments eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.
The amendments in this Update are effective for all entitiespublic companies for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. The amendmentsCompany has early adopted the disclosures as permitted under the ASU.
New and Revised Standards not Yet Adopted:
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326)”. ASU 2016-13 changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in unrealized gainsearlier recognition of allowances for losses. ASU 2016-13 is effective for annual and losses,interim periods beginning after December 15, 2019. The Company does not anticipate any material impact from the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuanceimplementation of this Update. An entity is permitted to early adoptASU.
The Company has carefully considered other new pronouncements that alter previous generally accepted accounting principles and does not believe that any
removednew or modified
disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The impact of this ASU on the Company’s unaudited condensed financial statements is not expected to be material.There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to aprinciples will have a material impact on our unaudited condensed financial position, results ofthe Company’s reported balance sheet or operations or cash flows.
in 2019.
15
Note 2 – Going Concern
As shown in the accompanying unaudited condensed financial statements, the Company has incurred recurring net losses from operations resulting in an accumulated deficit of $5,720,130 and working capital deficit of $2,596,605 as of February 28, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new ventures to increase revenues including entering into definitive agreements to acquire the remainder- Acquisition of TruPet LLC and allBona Vida, Inc.
On May 6, 2019, the Company completed the acquisitions through the issuance of shares of Common Stock, par value $0.001 of the Company (the “Common Stock”). Following the completion of the acquisitions, the business conducted by the Company became primarily the businesses conducted by TruPet and Bona Vida. TruPet is a North American online seller of pet foods, pet nutritional products and related pet supplies. Bona Vida is an emerging hemp based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space. The completion of the acquisitions has created a vertically integrated pet wellness company providing high-quality raw CBD infused and non-CBD infused food, treats and supplements in addition to dental care products and accessories for pets and their human parents.
Based upon the guidance described in ASC 805-10-25-4 and 5, TruPet LLC has been determined to be the accounting acquirer. As such, the historical financial statements are those of TruPet, and TruPet’s equity has been re-cast to reflect shares of Common Stock received in the acquisitions.
At the closing of the TruPet transaction, the Company issued 15,027,533 shares of Common Stock in exchange for the remaining 93% of the outstanding interests in TruPet. BCC had acquired the initial 7% of TruPet in December 2018. Immediately after the consummation of the acquisitions, the TruPet members, in the aggregate, owned 38% of the combined company. The Company retired 914,919 TruPet Member Units (equivalent to 1,011,748 Common Shares) owned by Better Choice Company as part of the acquisition.
Bona Vida did not meet the definition of a business and therefore asset acquisition accounting was applied. At the closing of the Bona Vida transaction, the Company issued 18,003,274 shares of Common Stock in exchange for 100% of the outstanding shares of Bona Vida. Immediately after the consummation of the acquisitions, the Bona Vida Inc.stockholders, in the aggregate, owned 46% of the combined company.
Better Choice Company did not meet the definition of a business and therefore asset acquisition accounting was applied. The fair value of Better Choice Company’s net liabilities and redeemable preferred stock acquired by TruPet is estimated to be $19.5 million. The estimated purchase price has been allocated based on a preliminary estimate of the fair value of Better Choice Company assets acquired and liabilities assumed and redeemable preferred stock assumed with the remainder recorded as an expense. The loss on acquisition of Better Choice Company assets was $38.2 million.
The fair value of Bona Vida’s net assets acquired is estimated to be $1.0 million. The estimated purchase price has been allocated based on a preliminary estimate of the fair value of assets acquired and liabilities. The excess of the consideration paid over the net assets acquired has been recorded as an expense. The loss on acquisition of Bona Vida’s assets was $107.0 million.
On May 6, 2019, the fair value of the following assets and liabilities were acquired:
| Dollars in thousands | | Better Choice Company | | | Bona Vida | | | Total | |
| Assets | | | | | | | | | |
| Current Assets | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,546 | | | $ | 384 | | | $ | 1,930 | |
| Restricted cash | | | | | | | 25 | | | | 25 | |
| Accounts receivable | | | | | | | 30 | | | | 30 | |
| Intercompany receivables | | | 6,161 | | | | 38 | | | | 6,199 | |
| Inventories | | | | | | | 193 | | | | 193 | |
| Prepaid expenses and other current assets | | | 52 | | | | 347 | | | | 399 | |
| Total Current Assets | | | 7,759 | | | | 1,017 | | | | 8,776 | |
| Intangible assets, net of amortization | | | 986 | | | | | | | | 986 | |
| Other assets | | | | | | | 74 | | | | 74 | |
| Total Assets | | $ | 8,745 | | | $ | 1,091 | | | $ | 9,836 | |
| | | | | | | | | | | | | |
| Liabilities and Redeemable Preferred Stock | | | | | | | | | | | | |
| Current Liabilities | | | | | | | | | | | | |
| Warrant derivative liability | | $ | 2,111 | | | $
| - | | | $ | 2,111 | |
| Accounts payable & accrued liabilities | | | 2,071 | | |
| 69 | | | | 2,140 | |
| Long term debt, current portion | | | 6,200 | | | | | | | | 6,200 | |
| Total Current Liabilities | | $ | 10,382 | | | $ | 69 | | | $ | 10,451 | |
| Total Liabilities | | $ | 10,382 | | | $ | 69 | | | $ | 10,451 | |
| | | | | | | | | | | | | |
| Redeemable Series E Preferred Stock | | $ | 20,059 | | | $
| - | | | $ | 20,059 | |
Note 3 - Inventories
Inventories reflected on the accompanying balance sheets are summarized as follows:
| | June 30, 2019 | | | December 31, 2018 | |
| Food, treats and supplements | | $ | 1,682 | | | $ | 1,301 | |
| Other products and accessories | | | 87 | | | | 191 | |
| Inventory packaging and supplies | | | 168 | | | | 133 | |
| | | | 1,937 | | | | 1,625 | |
| Inventory reserve | | | (230 | ) | | | (68 | ) |
| | | $ | 1,707 | | | $ | 1,557 | |
Note 4 - Property and Equipment
Property and equipment consist of the following:
| | June 30, 2019 | | | December 31, 2018 | |
| Warehouse equipment | | $ | 49 | | | $ | 49 | |
| Computer equipment | | | 14 | | | | 14 | |
| Furniture and fixtures | | | 76 | | | | 46 | |
Total property and equipment | | | 139 |
| | | 109 | |
| Accumulated depreciation | | | (80 | ) | | | (38 | ) |
| | | $ | 59 | | | $ | 71 | |
Depreciation expense was immaterial for the three and six-month periods ended June 30, 2019 and 2018, respectively. Depreciation expense is included as a component of general and administrative expenses.
Note 5 – Operating Leases
The Company adopted Topic 842 “Leases” effective January 1, 2019. A modified retrospective transition approach was followed by applying the new standard to all leases existing at the date of initial application. We chose to use January 1, 2019 as our date of initial application of the standard. Since we adopted the new standard on January 1, 2019 and use the effective date as our date of initial application, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We elected all of the new standard’s available transition practical expedients.
The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Operating lease right-of-use assets and liabilities were recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date was used in determining the present value. The Company will use the implicit rate when readily determinable.
This standard did not have a material effect on our financial statements. The adoption of Topic 842 resulted in an immaterial cumulative effect adjustment to accumulated deficit and the Company recognized operating lease right-of-use assets of $0.5 million and operating lease liabilities of $0.5 million on January 1, 2019. The most significant future effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate operating leases and (2) providing significant new disclosures about our leasing activities.
The Company leases its office and warehouse facilities under operating leases which originally expired in November 2018. These agreements were modified in October 2017 for additional space leased. With this modification, the rent term was also revised and extended until October 2022, at a base prices of $13.02 per square foot for the existing lease and $15.50 per square foot for the additional space leased, with a 3.5% annual escalation clause and a one-time option to renew the leases for an additional 5-year term. In addition to base monthly rent, the agreement requires the Company to pay its proportionate share of real estate taxes, insurance, and common area maintenance expenses.
In February and May 2019, the Company entered into two additional operating leases for office and warehouse facilities under three- year lease agreements at base monthly rental rates of $8,856 and $4,492, respectively. The monthly rent shall increase each year which will be based on the Consumer Price Index promulgated by the United States Bureau of Labor Statistics. The rent adjustment will not be less than two percent or exceed five percent per year.
The Company determines if an arrangement contains a lease at inception based on the ability to control a physically distinct asset. Operating and finance lease right-of-use assets are recorded in the consolidated balance sheets based on the initial measurement of the lease liability as adjusted to include prepaid rent and initial direct costs less any lease incentives received. Lease liabilities are measured at the commencement date based on the present value of the lease payments over the lease term. Lease payments are generally fixed but may include provisions for future rent increases. The Company separately accounts for variable components within lease agreements including common area maintenance, insurance and real estate taxes. The Company uses its incremental borrowing rate to present value the lease liability as key inputs to determine the interest rate implicit in the lease are not shared by lessors.
Operating lease expense is recorded on a straight-line basis over the lease term. Right-of-use assets and lease liabilities for short-term leases are not recognized in the consolidated balance sheets. Payments for leases with a term of one month or less are recognized in the consolidated statements of operations as incurred. We have no leases that are considered short term (one year or less).
Rent expenses related to our real estate leases for which a right of use asset has been recognized totaled $0.1 million and $0.1 million for the three and six months ended June 30, 2019, respectively. Estimated expenses for variable lease costs are immaterial for the three and six months period ended June 30, 2019.
Rent expense for operating leases in effect and recorded prior to the adoption of ASC 842. Leases amount to an immaterial amount and $0.1 million for the three and six-month periods ended June 30, 2018, respectively.
The table below presents the operating lease-related assets and liabilities recorded on the consolidated balance sheets:
| Balance Sheet Classification | | June 30, 2019 | |
| Assets | | | | |
| Non-current assets | Operating lease right-of-use assets, net of accumulated amortization | | $ | 840 | |
| Total operating lease assets | | | $ | 840 | |
| | | | | | |
| Liabilities | | | | | |
| Current | | | | | |
| Operating | Operating lease liabilities | | | (262 | ) |
| Non-current | | | | | |
| Operating | Operating lease liabilities | | | (590 | ) |
| Total operating lease liabilities | | | $ | (852 | ) |
The table below presents the maturity of lease liabilities as of June 30, 2019:
Lease payments | | Operating Leases | |
| Remainder of 2019 | | $ | 147 | |
| 2020 | | | 299 | |
| 2021 | | | 303 | |
| 2022 | | | 169 | |
| Total undiscounted minimum future lease payments | | | 918 | |
| Less: imputed interest | | | 66 | |
| Present value of lease liabilities | | $ | 852 | |
Note 6 – License Intangibles and Royalties
On May 6, 2019, the Company entered into a licensing agreement with Elvis Presley Enterprises, LLC which is fairly valued at $1 million and related to an April 2019 agreement between Better Choice Company, Authentic Brands and Elvis Presley Enterprises focused on the development of hemp-derived CBD products under the Elvis Presley Hound Dog name. Product development is expected to be complete in late 2019.
The initial term of the licensing agreement ends on December 31, 2025. The license agreement is amortized on a straight-line basis over the life of the agreement. During the period from May 6, 2019 through June 30, 2019, an immaterial amount in amortization was expensed related to the Hound Dog license.
Royalties are required to be paid quarterly at a rate of 5% of net retail sales and 10% of net wholesale sales. The contract includes Guaranteed Minimum Royalty Payments for each of the contract years as per the table below:
| | | Guaranteed Minimum Royalty | |
| 2019-2020 | | | $ | 1,500 | |
| 2021 | | | $ | 1,000 | |
| 2022 | | | $ | 1,125 | |
| 2023 | | | $ | 1,250 | |
| 2024 | | | $ | 1,500 | |
| 2025 | | | $ | 1,750 | |
As of June 30, 2019, the Company had paid $0.6 million of the 2019-2020 Guaranteed Minimum Royalty Payments which were recorded as prepaid expenses. There were no sales related to Hound Dog products during the three and six-month periods ended June 30, 2019.
The Company entered into an agreement for the payment of royalties related to sales of the Orapup brand dental system in November 2015. The agreement called for a 10% royalty to be paid on the first $2.5 million of related sales for a term of three years. Thereafter, commencing on the earlier of the end of the three-year term or having reached $2.5 million in sales, a 2% royalty was to be paid thereafter. Royalty expense was minimal during 2017 and 2018. In November 2018, the parties reached a settlement whereby the Company paid $0.1 million to fulfill all of its present and future obligations related to this agreement. Due to the settlement by the parties, the Company no longer has any royalty obligation related to the Orapup brand dental system.
Note 7 - Line of Credit and Debt
In May 2017, the Company along with the majority owners serving as co-borrowers entered into a credit facility providing for up to $2 million of borrowings. Through various amendments, the maximum borrowings under the line increased to $4.6 million with a maturity of May 2019. Borrowings bear interest at LIBOR plus 3%. At June 30, 2019 and December 31, 2018, outstanding borrowings amounted to $0 and $4.6 million, respectively.
The line of credit was secured by personal assets of the co-borrowers. Covenants under the line of credit required the Company to be within a certain quarterly and annual loss limitation threshold, and certain other restrictions. As of December 31, 2018, the Company was in compliance with its covenants and/or obtained waivers from the lien holders. At June 30, 2019 and December 31, 2018, outstanding borrowings amounted to $0 and $1.6 million, respectively.
At December 31, 2018, our long-term debt consisted of an unsecured note payable to a director of the Company bearing 26.6% interest with principal and interest due within 30 days after change of control. No interest was paid during 2019.
On May 6, 2019, Better Choice Company refinanced the $4.6 million line of credit and the $1.6 million note payable to the director with a $6.2 million revolving credit agreement with Franklin Synergy Bank. All advances relating to this revolving credit agreement bear a fixed rate of interest equal to 3.7% per annum, which may be adjusted from time to time subject to certain conditions. In addition, the Company
is currently seeking to raise $15 million in an ongoing offering to fund operations.paid a fee of $10,000 upon closing. The Company
however, is
dependent upon its abilityalso required to
secure this financing and therepay a late charge equal to 5% of the aggregate amount of any payments of principal and/or interest that are
no assurancespaid more than 10 days after the due date. This note matures on May 6, 2020. The Franklin Synergy Bank note requires that the Company
will be successful, therefore, without sufficient financing it would be unlikely formaintain deposits on account at the
Company to continue as a going concern. The unaudited condensed financial statements do not include any adjustments that might resultbank in the total amount of $6.2 million. If withdrawals are made from the outcomeaccount, the amount available under the revolving credit agreement decreases by the amount of any uncertainty as tothe withdrawal.
TruPet and Bona Vida became guarantors of the Company’s
ability to continue as a going concern. The unaudited condensed financial statements also do not include any adjustments relating toobligations under the
recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary shouldLoan Agreement after the
Company be unable to continue as a going concern.Note 3 – Discontinued Operations
On August 21, 2018, the Company cancelled allclosing of the business agreements, relatedacquisitions. In addition, pursuant to Yield and entered into a Restructuring Agreement.
Pursuant to the terms of the Restructuring Agreement, the parties agreed to (a) assign to Madison all of the capital stock of Yield to provide for the continuation of the business of Yield as a subsidiary of Madison, (b) terminate the GuarantySecurity Agreement by and between the Company and Prism, and (c) cancel 576,923Lender dated the date of the 961,538 warrants issuedLoan Agreement (the “Security Agreement”), the Company has granted the Lender a security interest in all assets of the Company owned or later acquired. The Loan Agreement also contains certain events of default, representations, warranties and covenants of the Company and its subsidiaries. For example, the Loan Agreement contains representations and covenants that, subject to Prism in connection with the note purchase agreement. On the Effective Date,exceptions, restrict the Company’s liability forability to do the senior note issued pursuant to the note purchase agreementfollowing, among things: incur additional indebtedness, engage in certain asset sales, or undergo a change in ownership.
Interest expense of approximately $0.1 million and $0.1 million was
extinguished.There are no continuing cash inflows our outflows to or from the discontinued operations.
The following information presents the major classes of line items constituting the after-tax loss from discontinued operationsrecorded in the condensed statements of operations forrelated to the year ended August 31, 2018:
Share income | | $ | (48,593 | ) |
Sales, general and administrative | | | 368,032 | |
Interest expense – accrued interest | | | 117,534 | |
Interest expense – excess value of warrants | | | 2,988,090 | |
Interest expense – amortization of discount on note payable | | | 5,500,000 | |
Mark to market BTC | | | 509,730 | |
Mark to market derivative liability | | | (4,051,087 | ) |
Reserve for uncollectible note receivable | | | 4,490,270 | |
Gain on disposal of discontinued operations | | | (8,038,065 | ) |
Loss from discontinued operations, net of tax | | $ | 1,835,911 | |
The following table presents the calculationlines of the gain on the sale of discontinued operations:
Assets of discontinued operations disposed in sale | | $ | (9,415 | ) |
Liabilities of discontinued operations disposed in sale | | | 9,648,488 | |
Fair value of warrants to purchase 10,000,000 shares of common stock to buyer | | | (1,601,008 | ) |
Gain on disposal of discontinued operations | | $ | 8,038,065 | |
Note 4 – Investment in TruPet
On December 17, 2018 the Company acquired a minority interest in TruPet. The Company invested $2,200,000 into TruPetcredit and acquired a Series A Membership Interest equal to approximately 6.7% of the Membership Interests. The Company is entitled to appoint one of the five managers and certain preferential informational rights. The Company entered into a definitive agreement to acquire the remainder of TruPet in February 2019. The definitive agreement is based on various conditions being met including completion of a financing. While the Company believes it is close to completing the financing and closing the acquisition, no assurances can be given that we will close this transaction.
Note 5 – Dividends Payable
On May 30, 2018, the Company issued 803,969.73 shares of its Series B Preferred Stock with a stated value of $0.99 per sharedirector note for a total stated value of $795,930 (the “Series B Preferred Stock”). The Series B Preferred Stock accrued dividends at the rate of 10% per annum on the stated value. During the year ended August 31, 2018, the Company accrued dividends payable in the amount of $20,280 on the Series B Preferred Stock. From the period September 1, 2018 to October 22, 2018, the Company accrued an additional $11,339 in dividends payable. At October 22, 2018, the amount of dividends payable on the Series B Preferred Stock was $31,619. On October 22, 2018, the Company entered into a transaction whereby the Company exchanged all of its convertible debt and all Series B Preferred Stock outstanding for Series E Preferred Stock (the “Exchange Agreement”, see note 10). At October 22, 2018, dividends payable in the amount of $31,619 was outstanding in connection with the Series B Preferred Stock; this amount was converted to Series E Preferred Stock in connection with the Exchange Agreement.
On October 22, 2018, the Company authorized 2,900,000 shares of its Series E Convertible Preferred Stock. The Company accrued dividends on the Series E Preferred Stock in the amounts of $68,787 and $109,934 during the three and six months ended February 28,June 30, 2019, respectively. The
Interest expense of approximately an immaterial amount
of $97,504 appears as dividends payable on the Company’s unaudited condensed balance sheet at February 28, 2019.Note 6 – Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
| | | February 28, 2019 | | | August 31, 2018 | |
Trade accounts payable | | $ | 86,023 | | | $ | 39,052 | |
Payroll and related | | | 18,889 | | | | 15,931 | |
Accrued interest | | | - | | | | 51,462 | |
Total | | $ | 104,912 | | | $ | 106,445 | |
Note 7 – Related Party Transactions
The Company’s President, David Lelong, earns a salaryapproximately $0.1 million was recorded in the amountstatements of $8,000 per month. Duringoperations related to the line of credit and the director note for the three and six months ended February 28, 2019, the Company paid current period salary in the amount of $24,000 and $48,000, respectively to Mr. Lelong. At February 28, 2019, the Company had accrued salary due to Mr. Lelong in the amount of $108,000 which beginning on February 1, 2019, the Company began to accrue interest at the rate of 18% per annum on the accrued salary payable to Mr. Lelong. During the three months ended February 28, 2019, the Company accrued interest payable to Mr. Lelong in the amount $1,657. During the three months ended February 28,June 30, 2018, respectively.
Note 8 – Warrant Derivative Liability
On December 12, 2018, the Company
paid Mr. Lelong salary in the amountclosed a private placement offering (the “December Offering”) of
$8,000 and accrued an additional $16,000 in salary due to Mr. Lelong. At August 31, 2018, the Company had accrued salary due to Mr. Lelong in the amount1,425,641 units (the “Units”), each unit consisting of
$140,000.During the six months ended February 28, 2018, Mr. Lelong loaned the Company an additional $35,500 represented by four notes payable, and the Company repaid two of the notes in the amount of $100,000. The Company accrued interest expense in the amount of $2,100 and paid accrued interest in the amount of $1,087 under these notes payable during the six months ended February 28, 2018. At February 28, 2018, the Company has a principal balance in the amount of $166,500 and accrued interest in the amount of $3,024 due to Mr. Lelong pursuant to these notes payable. There were no notes outstanding due to Mr. Lelong during the three months ended February 28, 2019.
On January 4, 2019, the Company repurchased 935,897 shares(i) one share of the Company’s common stock from Mr. Lelong inCommon Stock and (ii) a private transaction.warrant to purchase one half of a share of Common Stock. The sharesUnits were repurchasedoffered at a fixed price of $1.95 per Unit for gross proceeds of $2.8 million. Costs associated with the December Offering were $0.1 million, and net proceeds were $2.7 million. $2.6 million of the net proceeds were received by the Company during the period ended December 31, 2018 for the par valuesale of 1,400,000 common shares, and $0.1 million of the pre-reverse split shares of $0.001 per share or a total of $24,333. Prior to the repurchase the shares represented approximately 38% of the Company’s outstanding common stock.
Note net proceeds were received on January 8, – Derivative Liability
The Company has entered into convertible note agreements containing beneficial conversion features and warrants. The convertible notes include a ratchet reset provision which allows the note holders to reduce the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note agreement (see Note 9). The Company accounts 2019 for the fair valuesale of this conversion feature in accordance with ASC 815, Accounting for Derivatives and Hedging and EITF 07-05, which provides that25,641 common shares. The warrants are exercisable over a two-year period at the embedded derivatives should be bundled and valued as a single, compound embedded derivative bifurcate treated as a derivative liability. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component in its results of operations.
The conversion feature embedded within these convertible notes is a financial derivative and GAAP requires that this embedded conversion option be accounted for at fair value.
During the three months ended February 28, 2019, the Company sold 1,425,641 shares of common stock and 712,820 two-year warrants to purchase one share of common stock at ainitial exercise price of $3.90 per share for total proceeds of $2,657,099, net of issuance costs.share. The warrant holders have an option to settle in cash in the event of a change of control of the Company. The Company considers these warrants a derivative liability and calculated the fair value of this liability utilizing a lattice modelLattice Model that values the warrant based upon a probability weighted discounted cash flow model.
At May 6, 2019, the derivative liability was recorded at fair value as part of the purchase price of Better Choice Company by TruPet.
The following schedule shows the change in fair value of the derivative liabilities for the
six months ended February 28, 2019:| | | Derivative | |
| | | Liability | |
Liabilities Measured at Fair Value | | | | |
| | | | | |
Balance as of August 31, 2017 | | $ | 312,878 | |
| | | | | |
Issuances | | | 1,565,487 | |
| | | | | |
Conversions / redemptions | | | (1,207,308 | ) |
| | | | | |
Reclass from sale of discontinued operations | | | 1,601,007 | |
| | | | | |
Revaluation loss | | | 45,348 | |
| | | | | |
Balance as of August 31, 2018 | | $ | 2,317,412 | |
| | | | | |
Issuances | | | 6,331,058 | |
| | | | | |
Revaluation gain | | | (4,212,621 | ) |
| | | | | |
Conversion / redemptions | | | (2,003,390 | ) |
| | | | | |
Balance as of February 28, 2019 | | $ | 2,432,459 | |
The derivative liabilities incurred valued based upon the following assumptions and key inputs at February 28,period from May 6, 2019 Novemberthrough June 30, 2018 and August 31, 2018:
| | | November 30, | | | August 31, | |
Assumption | | 2018 | | | 2018 | |
Expected dividends: | | | 0 | % | | | 0 | % |
Expected volatility: | | | 155.0 | % | | | 121.1– 248.8 | % |
Expected term (years): | | | 5.00 | | | | 0.21–1.00 | |
Risk free interest rate: | | | 2.99 | % | | | 0.97–2.08 | % |
Stock price | | $ | 5.46 | | | $ | 9.10–28.86 | |
| | Warrant Liability | |
| Assumption of warrants pursuant to May 6, 2019 acquisition of Better Choice Company | | $ | 2,110 | |
Change in fair value of derivative liability
| | | 193 | |
| Balance as of June 30, 2019 | | $ | 2,304 | |
| | | May 6, 2019 | | | June 30, 2019 | |
| Warrant Liability | | | | | | |
| Stock Price | | $ | 6.00 | | | $ | 6.35 | |
| Exercise Price | | $ | 3.90 | | | $ | 3.90 | |
| Remaining term (in years) | | | 1.60 – 1.68 | | | | 1.45 – 1.53 | |
| Volatility | | | 64 | % | | | 65 | % |
| Risk-free interest rate | | | 2.39 | % | | | 1.98 | % |
The warrants feature provisions to reset the exercise price in the event of certain fundamental transactions. Such a transaction is considered a likelihood of 50% for December 31, 2019.
Additionally, the warrants feature provisions to force an early exercise in the event of the Company’s stock trading above a certain threshold for a specified period. The Company derivativeconsiders the likelihood of meeting these conditions to be zero.
If all shares were redeemed at June 30, 2019, the Company would be required to pay $2.3 million if all warrants were fair valuedsettled in cash as a result of issuancea fundamental transaction or issue 712,823 shares if all warrants were settled in shares.
Note 9 - Loyalty Program Provision
The Company offers a loyalty program to all of its direct-to-consumer customers. The loyalty program is designed to increase customer visits and spending. There are two tiers to the program as outlined below:
Tier 1: the customer earns six points for every $1 spent
Tier 2: the customer earns points at a much faster rate and will also have opportunities to earn bonus points for different events, such as a birthday. This tier is known as the TruDog Love Club (TLC), and the customer accumulates twelve points for every $1 spent.
The redemption requirements are the same under both levels, for every five hundred points earned, customers receive a $5 gift code which can be redeemed for goods purchased in the future. The Company records a liability provision of
February 28, 201945% of all accrued and unredeemed points based on historical redemption rates. The redemption rate is consistent with the
following assumptions:- The quoted stock price ranged from of $2.75 to $10.14 and would fluctuate withredemption rate used for the Company historic volatility;
- The projected volatility curve from an annualized analysis for each valuation period was basedending December 31, 2018. We have included the redemption amounts as deferred revenue on the historical volatilityCondensed Consolidated Balance Sheets. As of the Company and the term remaining for each Warrant – the volatility ranged from 198-213%.
- The full reset events projected to occur based on future financing events on March 31,June 30, 2019 and December 31, 2019 resulting in2018, earned, but not redeemed, loyalty program awards are estimated to be $0.2 million and $0.1 million, respectively, and are recorded as a potential reset exercise price.
- Adjustments to warrants exercise prices have not occurred to date due to reset events.
- A fundamental transactiondeferred revenues.
Note 10 – Other Liabilities
Other liabilities include outstanding amounts on bank issued revolving credit cards. Interest rates on the issued credit cards was
projected to potentially occur on 4/30/19 or 12/31/19. The likelihood of such an event was estimated at 85%22% for purchases and 24.24% for cash advances for the
4/30/19 event as of December/Januarythree and six months ended June 30, 2019
increasing to 95% by 2/28/19. The 12/31/19 event was estimated at 50% for all dates.- The option to force early exercise was estimated at 0% since it was unlikely that the Company would meet the registration and trading volume requirements necessary to trigger the option.
Note 9 – Convertible Notes Payable
| | | February 28, 2019 | | | August 31, 2018 | |
February 2018 Convertible Note On February 15, 2018, the Company issued a 3.5% OID senior secured convertible promissory note with a face amount of $250,000 (the “February 2018 Convertible Note”). The February 2018 Convertible Note bears interest at a rate of 10% per annum and matures in nine months. The Company received cash proceeds of $241,250 net of the 3.5% original issue discount of $8,750. At the investor’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $13.00 per share and have a full reset feature. The February 2018 Convertible Note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the investor 19,231 warrants to purchase 19,231 shares of the Company’s common stock with an exercise price of $0.26. The warrants have a five-year term. A derivative liability in the amount of $667,470 was created with regard to the conversion features and warrants associated with this note; $241,250 was charged to discount on notes payable, and the balance of $426,220 was charged to interest expense during the three months ended February 28, 2018. On March 26, 2018, the February 2018 Convertible Note was amended to eliminate the reset feature. During the year ended August 31, 2018, the Company accrued interest in the amount of $13,681 on this note; as of August 31, 2018, principal in the amount of $250,000 was outstanding under the February 2018 Convertible Note. In October 2018, the February 2018 Convertible Note, accrued interest and warrants were converted to a new series of the Company’s preferred stock. During the three months ended February 28, 2019 and 2018, the Company charged to interest expense the amounts of $0 and $248,721, respectively, in connection with the amortization of the discount on these notes. During the six months ended February 28, 2019 and 2018, the Company charged to interest expense the amounts of $16,298 and $248,721, respectively, in connection with the amortization of the discount on these notes. | | $ | - | | | $ | 250,000 | |
19
| | | February 28, 2019 | | | August 31, 2018 | |
March 2018 Convertible Note On March 9, 2018, the Company issued a 3.5% OID senior secured convertible promissory note with a face amount of $777,202 (the “March 2018 Convertible Note”). The March 2018 Convertible Note bears interest at a rate of 10% per annum and matures in nine months. The Company received cash proceeds of $750,000 net of the 3.5% original issue discount of $27,202. At the investor’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $13.00 per share. The March 2018 Convertible Note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the investor 59,785 warrants to purchase 59,785 shares of the Company’s common stock with an exercise price of $0.26. The warrants have a five-year term. A derivative liability in the amount of $771,460 was created with regard to the conversion features and warrants associated with this note, which was charged to discount on notes payable. On May 9, 2018, the investor transferred its ownership in $497,458 of principal and $18,042 of accrued interest in the March 2018 Convertible Note to a third party. The Company revalued the derivative liability associated with the conversion feature of the March 2018 Convertible Note at the time of this restructure, and recorded a gain on revaluation in the amount of $40,072. During the year ended August 31, 2018, the Company accrued interest in the amount of $37,780 on the March 2018 Convertible Note. As of August 31, 2018, principal in the amount of $777,202 was outstanding under the March 2018 Convertible Note. During the three months ended November 30, 2018, the Company accrued interest in the amount of $11,226 on this note. In October 2018, the March 2018 Convertible Note, accrued interest and warrants were converted to a new series of the Company’s preferred stock. During the three months ended February 28, 2019 and 2018, the Company charged to interest expense the amount of $0 in connection with the amortization of the discount on these notes; during the six months ended February 28, 2019 and 2018, the Company charged to interest expense the amount of $0 in connection with the amortization of the discount on these notes. | | $ | - | | | $ | 777,202 | |
| | | | | | | | | |
Total | | $ | - | | | $ | 1,027,202 | |
Less: Unamortized discount | | | - | | | | (752,988 | ) |
Total, net of discount | | $ | - | | | $ | 274,214 | |
| | | | | | | | | |
Current portion | | $ | - | | | $ | 1,027,202 | |
Long term | | | - | | | | - | |
Total | | $ | - | | | $ | 1,027,202 | |
March 2018 Note to Prism
Under the terms of a seriesBusiness Cash Advance Agreement, during 2018, the Company sold $2.0 million of agreements (the “Former Agreements”) relatingfuture receivables for proceeds of $1.9 million. Future receivables are defined as all future payments made by cash, check, ACH, direct or pre-authorized debit, wire transfer, credit card, debit card, charge card or other form of payment related to the BTC transactions described in Note 1, Yield issued Prism Funding Co, LP (“Prism”) a 10% OID Senior Secured Convertible Note (the “Senior Note”) inbusiness of the principalCompany. The creditor had the right to decline to purchase any future receivables and/or adjust the amount of $5,500,000.the advance. In the event of a sale, disposition, assignment, transfer or otherwise of all or substantially all of the business assets, the creditor’s consent was required or repayment in full of the amount of future receivables remaining. The Senior Note was payable 30 days following written demand from Prism (the “Maturity Date”) and with interest at 10% per annum. Pursuantfuture receivables were remitted to the termscreditor based on a percentage of the restructuring agreement entered into in August 2018, the Company’s liability for the Senior Note was extinguished upon the restructuringdaily cash receipts. All remaining advances were repaid as of the BTC loan (see Note 3).
June 30, 2019.
| | Advance #1 | | | Advance #2 | | | Advance #3 | | | Total | |
| Opening balance – January 1, 2018 | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Advance of outstanding amounts | | | 399 | | | | 965 | | | | 1,050 | | | | 2,414 | |
| 2018 Payments | | | (429 | ) | | | (256 | ) | | | (102 | ) | | | (787 | ) |
| Rollover to Advance #3 | | | | | | | (824 | ) | | | 824 | | | | | |
| Advance fixed fee | | | 30 | | | | 115 | | | | 126 | | | | 271 | |
| Closing Balance – December 31, 2018 | | | - | | | | - | | | | 1,899 | | | | 1,899 | |
| Payments | | | | | | | | | | | (1,899 | ) | | | (1,899 | ) |
| Balance June 30, 2019 | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Note
1011 – Stockholders’ EquityRedeemable Preferred Stock
The Company is authorized to issue 20,000,000 shares of $0.001 par value preferred stock as of February 28, 2019 and August 31, 2018.
Series A Preferred Stock
On February 20, 2019, the Company filed a Certificate of Amendment to Certificate of Designation (the “Amendment to COD”) for the Company’s Series A Preferred Stock (the “Series A”) permitting the Board to convert all outstanding shares of Series A into shares of the Company’s common stock at the Board’s discretion. On February 22, 2019, the Company issued 115 shares of common stock in exchange for all outstanding 1,000 shares of Series A, and cancelled the Series A. The Company has issued and outstanding 0 and 1,000 shares of Series A as of February 28, 2019 and August 31, 2018, respectively.
Series B Convertible Preferred Stock
On May 30, 2018, the Company authorized 805,000 shares of Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock is convertible at a rate of $0.78 per share, has a stated value of $0.99 per share, and accrues dividends at the rate of 10% per annum on the stated value. The Series B Convertible Preferred Stock has voting rights equal to those of the underlying common stock. Under certain default condition, the Series B Convertible Preferred Stock is subject to mandatory redemption at 125%, and the conversion price resets to 75% of the market price of the Company’s common stock. On May 31, 2018, the Company issued 803,969.73 shares of Series B Convertible Preferred Stock for the conversion of debt. The Company began to accrue dividends on the Series B Convertible Preferred Stock on June 1, 2018. From June 1, 2018 through August 31, 2018, the Company accrued dividends in the amount of $20,280 on the Series B Convertible Preferred Stock; from September 1, 2018 through October 22, 2018, the Company accrued dividends in the amount of $11,339 on the Series B Convertible Preferred Stock. On October 22, 2018, all 803,969.73 outstanding shares of the Series B Convertible Preferred Stock and accrued dividends in the amount of $31,619 were exchanged for shares of the Company’s Series E Convertible Preferred Stock. On February 12, 2019, the Company filed a Certificate of Withdrawal of Certificate of Designation for the Company’s Series B Preferred Stock (the “Series B”). There were 0 and 803,969.73 shares of the Series B outstanding at February 28, 2019 and August 31, 2018, respectively.
Series E Convertible Preferred Stock
On October 22, 2018, the
Board of Directors of Better Choice Company
authorizedapproved a resolution to designate a series of 2,900,000 shares of its Series E Convertible Preferred
Stock.Stock pursuant to its articles of incorporation. The Series E Convertible Preferred Stock
is convertible at a rate of $0.78 per share, has a stated value of $0.99
per share; is convertible to Common Stock at a price of $0.78 per share and accrues dividends at the rate of 10% per annum on the stated value. The Series E Convertible Preferred Stock has voting rights equal to those of the underlying
common stock.Common Stock. Under certain default
condition,conditions, the Series E Convertible Preferred Stock is subject to mandatory redemption
atin cash equal to 125%
, and of the
conversion price resets togreater of $0.99 per share ($1.23 per share) or 75% of the market price of the
Company’s common stock.On October 22, 2018,Common Stock. As the redemption is outside the control of the Company, entered into an Exchange Agreement whereby the following were exchanged for 2,846,355.54 shares of Series E Convertible Preferred Stock: (i) Convertible debtStock has been recorded as mezzanine equity between liabilities and accrued interestequity in the amounts of $1,027,202 and $66,299, respectively; (ii) 803,969.73 shares ofbalance sheet.
On May 6, 2019, the Series BE Convertible Preferred Stock; (iii) accrued dividends in the amount $31,619Stock was recorded at its fair value based on the $6.00 per share closing price of Better Choice Company’s common shares as they remained outstanding after the reverse acquisitions discussed in Note 2 above.
On May 10, 2019 and May 13, 2019, holders of the Company’s Series BE Convertible Preferred Stock;Stock converted 689,394 and (iv) outstanding warrants to purchase 463,631236,364 preferred shares into 875,000 and 300,000 shares of the Company’s common stock. A derivative liabilityCommon Stock, respectively.
Pursuant to waiver letters executed by each investor, the holders of the Company’s Series E Convertible Preferred Stock agreed to waive their right to the distribution of dividends until October 22, 2019.
The below table summarizes changes in the amount of $2,003,390 related to the convertible debt and was also settled pursuant to the Exchange Agreement. The Company valued the 2,846,355.14 sharesbalance of Series E Convertible Preferred Stock at $2,022,766,for the periods ended June 30, 2019 and recordedDecember 31, 2018 including its value prior to acquisition by the Company.
| | | Number
| | | Amount
| |
| |
| | |
| |
| Issued on October 18, 2018 | | | 2,846,356 | | | $ | 2,023 | |
| Converted to Common Stock | | | (212,678 | ) | | | (152 | ) |
| Balance on May 6, 2019 | | | 2,633,678 | | | | 1,871 | |
| Purchase price adjustment | | | | | | | 18,188 | |
| Outstanding at May 6, 2019 | | | 2,633,678 | | | | 20,059 | |
| Converted to Common Stock | | | (925,758 | ) | | | (7,052 | ) |
| Balance at June 30, 2019 | | | 1,707,920 | | | $ | 13,007 | |
Note 12 - Stockholders’ Deficit
On May 6, 2019, Better Choice Company completed the acquisition of TruPet pursuant to a
gain in the amount of $472,267 on theStock Exchange Agreement
duringdated February 2, 2019 and amended May 6, 2019. At the
three months ended November 30, 2018.Duringclosing of the three months endedtransaction, Better Choice Company issued 15,027,533 shares of its Common Stock in exchange for 93% of the outstanding ownership units of TruPet. Additionally, on May 6, 2019, Better Choice Company also completed the acquisition of Bona Vida pursuant to an Agreement and Plan of Merger dated February 28, 2019 holdersand amended May 3, 2019. At the closing of the transaction, Better Choice Company issued 18,003,273 shares of its Common Stock in exchange for all outstanding shares of Bona Vida. The operations of Better Choice Company subsequent to the acquisitions are those of TruPet and Bona Vida. For accounting purposes, the transaction is considered a reverse merger whereby TruPet is considered the accounting acquirer of Better Choice Company.
As a result of the transaction the historical TruPet members’ equity (units and incentive units) has been recast to reflect the equivalent Better Choice Common Stock for all periods presented after the transaction. Prior to the transaction, TruPet was a Limited Liability Company and as such, the concept of authorized shares was not relevant.
Series A Preferred Units
In December 2018, the Company completed a private placement and issued 2,162,536 Series A Preferred Units (no par value) to unrelated parties for $2.40 per unit. The proceeds were approximately $4.7 million, net of $0.5 million of share issuance costs. Additionally, on February 12, 2019, an additional private placement of 62,500 Series A Preferred Units at $2.40 per unit was completed. The proceeds were approximately $0.2 million, net of share issuance costs.
On May 6, 2019, all Series A Preferred Units were converted to 2,460,517 shares of Common Stock.
Series E Convertible Preferred Stock converted
On May 6, 2019, the
following: | ●
| On January 18, 2019, 49,155.36Company acquired 2,633,678 shares of Series E Preferred stock were converted to 62,389 shares of common stock;
|
| ●
| On February 6, 2019, 49,523 shares of Series E Preferred stock were converted to 62,856 shares of common stock; and
|
| ●
| On February 11, 2019, 54,000 shares of Series E Preferred stock were converted to 68,538 shares of common stock.
|
The Company has issued and outstanding 2,693,678 and 0 of the Series E Preferred Stock at February 28,issued by Better Choice Company in the transaction. Series E Preferred Stock is treated as mezzanine equity as it has redemption features that can be exercised by the holder under certain instances outside the control of the Company. 925,758 shares of Series E Preferred Stock were converted to Common Stock in the three- and six-month period ended June 30, 2019. As of June 30, 2019, and August 31, 2018, respectively
1,707,920 shares of Series E Preferred Stock remain outstanding. Full conversion of the remaining Series E Preferred Stock would result in the issuance of 2,167,745 shares of Common Stock.
The Company iswas authorized to issue 580,000,000 shares of $0.001 par value common stockCommon Stock as of February 28,December 31, 2018. On April 22, 2019, the Company filed a certificate of amendment of certificate of incorporation with the State of Delaware which reduced the number of authorized shares of Common Stock to 88,000,000. The Company has 43,168,161 and 11,661,485 shares of Common Stock issued and outstanding as of June 30, 2019 and AugustDecember 31, 2018. 2018, respectively.
On March 14, 2019, the Company filed a certificate of amendment of Certificate of Incorporation with the Delaware Secretary of State to effect a one-for-26 reverse split of
common stockCommon Stock effective March 15, 2019. All of the
common stockCommon Stock amounts and per share amounts in these financial statements and footnotes have been retroactively adjusted to reflect the effect of this reverse split.
The Company had 72,202,907 shares of common stock outstanding immediately before the reverse stock split, and 2,699,502 shares of common stock outstanding immediately after the reverse stock split. The Company had 2,699,502 and 3,064,763 shares of common stock issued and outstanding as of February 28, 2019 and August 31, 2018, respectively.Six Months Ended February 28, 2019
On November 28, 2018, the Company repurchased 1,048,904 shares of the Company’s common stock from two shareholders in a series of private transactions. The shares were repurchased by the Company for the par value of the pre-reverse split Shares or a total of $27,271.On December 12, 2018,
theBetter Choice Company closed a private placement offering (the “December Offering”) of 1,425,641 units (the “Units”), each unit consisting of (i) one share of the Company’s
common stock, par value $0.001 per shareCommon Stock and (ii) a warrant to purchase one half of a share of Common Stock. The Units were offered at a fixed price of $1.95 per Unit for gross proceeds of
$2,779,840.$2.8 million. Costs associated with the December Offering were
$122,741,$0.1 million, and net proceeds were
$2,657,099.$2.7 million. Net proceeds of $2.6 million were received by the Company during the period ended December 31, 2018 for the sale of 1,400,000 common shares, and $0.1 million of the net proceeds were received on January 8, 2019 for the sale of 25,641 common shares. The Warrants are exercisable over a two-year period at the initial exercise price of $3.90 per share.
The Company entered into a Securities Purchase Agreement, dated as(See Note 8 – Warrant Derivative Liability). A portion of the
Closing Date (the “SPA”) with each investor inproceeds from this private placement was used to acquire the
December Offering.initial 7% of TruPet.
In connection with the December Offering,
theBetter Choice Company also entered into a
Registration Rights Agreement, dated as of the Closing Dateregistration rights agreement (the “Registration Rights Agreement”) with each investor in the Offering. Pursuant to the Registration Rights Agreement, the Company agreed to use commercially reasonable efforts to file with the Securities and Exchange Commission a registration statement on Form S-1 (or other applicable form) within 60 days following the
Closing Dateclosing date to register the resale of the shares of Common Stock sold in the Offering and shares of Common Stock issuable upon exercise of the Warrants.
On November 18, 2018 the Company entered into a consulting agreement for management services. The consultant was awarded the equivalent of 303,427 shares of Common Stock, half which vested on November 18, 2018 and the remainder on a monthly schedule over 2 years.
During the period from January 4,1, 2019 through May 5, 2019, equity awards for the equivalent of 979,716 shares were issued to employees and consultants and were valued at a weighted average value per share of $2.26, the fair value at the date of award. The awards vested over three years.
However, on May 6, 2019, all equity incentive awards issued prior to May 6, 2019 immediately vested. As a result of the immediate vesting of these awards, share-based compensation expense equal to $2.2 million and $2.4 million has been recorded during the three and six-months ended June 30, 2019. There were no equity awards issued or outstanding during the three and six months ended June 30, 2018.
The Company retired 914,919 member units (equivalent to 1,011,748 Common Shares) in TruPet representing the 7% Better Choice Company ownership of TruPet valued at $2.2 million which was recorded as part of loss on acquisition.
The Company also issued 5,744,991 million units for gross proceeds of $3.00 per unit, also closing on May 6, 2019 (the “PIPE Transaction”). Each unit included one common share of Better Choice Company stock, and a warrant to purchase an additional share. The funds raised from the PIPE Transaction will be used to fund the operations of the combined company. Net proceeds of $15.7 million were received in the private placement, allocable between shares of Common Stock and warrants.
Pursuant to Damian Dalla-Longa’s (“Mr. Dalla-Longa”) employment agreement with Bona Vida dated October 29, 2018, he was entitled to a $500,000 Change of Control payment. It was later agreed to and included in Mr. Dalla-Longa’s Better Choice Company employment agreement dated May 6, 2019, that he would receive 100,000 common shares in the Company in consideration for the $500,000 Change of Control payment. The 100,000 common shares were valued at $6.00 per share, which was the market value as of the date of Mr. Dalla-Longa’s employment agreement.
Stock Options
On May 6, 2019, the Company repurchased 935,897acquired the Better Choice Company, Inc. 2019 Incentive Award Plan (“2019 Incentive Award Plan”) which became effective as of April 29, 2019. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock or cash-based awards or a dividend equivalent award (each an “Award”). Non-employee directors of the Company and employees and consultants of the Company or any of its subsidiaries are eligible to receive awards under the 2019 Plan. The 2019 Plan authorizes the issuance of (i) 6,000,000 shares of common stock plus (ii) 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. At the time of acquisition, the following grants had been issued under the 2019 Incentive Award Plan:
On May 6, 2019, as part of the merger, the Company acquired options to purchase an aggregate of 3,750,000 shares of the Company’s
common stock from David Lelong,Common Stock at an exercise price of $5.00 per share. These options had been granted to management of Better Choice Company on May 2, 2019. Subject to the
Company’s former Chief Executive Officer, in a private transaction. The Shares were repurchased byholder’s continued service to the Company,
for the par valueeach such option vests with respect to 1/24th of the
pre-reverse splitunderlying shares
of $0.001 per share or a total of $24,333. Prior to the repurchase the shares represented approximately 38%on each monthly anniversary of the
Company’s outstanding common stock.grant date such that the option is fully vested on the second anniversary of the grant date.
On January 18,May 6, 2019, as part of the merger, the Company issued 62,389 sharesacquired options to purchase an aggregate of common stock for the conversion of 49,155.361,500,000 shares of the Company’s Series E Preferred stock;Common Stock at an exercise price of $5.00 per share. These options had been granted to non-employee directors of Better Choice Company on February 6,May 2, 2019. Subject to the holder’s continued service to the Company, each such option vests with respect to 1/24th of the underlying shares on each monthly anniversary of the grant date such that the option is fully vested on the second anniversary of the grant date.
After the acquisition, the following stock option awards were granted under the 2019 Incentive Award Plan, subject to stockholder approval of the 2019 Incentive Award Plan:
On May 21, 2019, the Company
issued 62,856 sharesgranted to third-party consultants options to purchase an aggregate of
common stock for the conversion of 49,52360,000 shares of the Company’s
Series E Preferred stock; andCommon Stock at an exercise price of $7.50 per share. Subject to the holder’s continued service to the Company, each such option vests with respect to 1/36th of the underlying shares on
February 11,each monthly anniversary of the grant date, such that the option is fully vested on the third anniversary of the grant date.
On May 21, 2019, the Company
issued 68,538 sharesgranted to employees options to purchase an aggregate of
common stock for the conversion of 54,00030,000 shares of the Company’s
Series E Preferred stockOn February 22, 2019, the Company issued 115 shares of common stock in exchange for 1,000 shares of Series A.
Six Months Ended February 28, 2018
On September 28, 2017, the Company issued 8,013 shares of common stock, for the conversion of $16,347 of principal and $8,653 of accrued interest of convertible notes payable.
On November 16, 2017, the Company issued 9,615 shares of common stock, for the conversion of $17,518 of principal and $12,482 of accrued interest of convertible notes payable.
On January 28, 2018, the Company issued 38,405 shares of common stock, for the conversion of $28,148 of principal and $1,808 of accrued interest of convertible notes payable.
Warrants
On October 22, 2018, the Company exchanged 463,631 warrants along with certain additional securities for shares of Series E Convertible Preferred Stock.
On December 12, 2018, the Company closed the December Offering which included the issuance of 712,820 warrants (the “December 2018 Warrants”) withCommon Stock at an exercise price of $3.90$7.50 per share. The holdersSubject to the holder’s continued service to the Company, each such option vests with respect to 25% of the December Warrants have an option to settle in cash inunderlying shares on the event of a change of controlfirst anniversary of the Company. The Company considersgrant date and the December 2018 warrants to be derivative liabilities, and calculated the fair valueremainder vests in 24 equal installments on each monthly anniversary of the December 2018 warrants by utilizing a lattice modelgrant date following the first anniversary of the grant date, such that values the warrant based upon a probability weighted discounted cash flow model.
The following table summarizesoption is fully vested on the significant termsthird anniversary of warrants outstanding at February 28, 2019:
| | | | | | | | | | | | | | Weighted | | | | | | | Weighted | |
| | | | | | | | | | Weighted | | | average | | | | | | | average | |
| | | | | | | | | | average | | | exercise | | | | | | | exercise | |
| | Range of | | | Number of | | | remaining | | | price of | | | number of | | | price of | |
| | exercise | | | warrants | | | contractual | | | outstanding | | | warrants | | | exercisable | |
| | prices | | | outstanding | | | life (years) | | | warrants | | | exercisable | | | warrants | |
| | $ | 3.90 | | | | 712,820 | | | | 1.80 | | | $ | 3.90 | | | | 712,820 | | | $ | 3.90 | |
Aggregate intrinsic valuethe grant date.
On June 29, 2019, the Company granted to employees options to purchase an aggregate of
warrants outstanding and exercisable at February 28, 2019 was $0. Aggregate intrinsic value represents the difference between3,000 shares of the Company’s
closing stock price on the last trading day of the fiscal period, which was $2.76 as of February 28, 2019, and the exercise price multiplied by the number of warrants outstanding.Transactions involving warrants are summarized as follows:
| | | Number of Warrants | | | Weighted Average Exercise Price | |
Warrants outstanding at August 31, 2018 | | | 463,631 | | | $ | 0.26 | |
| | | | | | | | | |
Granted | | | 712,820 | | | | 3.90 | |
Exercised | | | - | | | | - | |
Cancelled / Expired | | | (463,631 | ) | | | 0.26 | |
| | | | | | | | | |
Warrants outstanding at February 28, 2019 | | | 712,820 | | | $ | 3.90 | |
Common Stock Options
On December 21, 2018, the Company issued 19,231 options to each of Michael Young, the Company’s chairman, and to David Lelong, the Company’s President, Chief Financial Officer, and Secretary (an aggregate of 38,462 options). These options have a five-year term,at an exercise price of $6.76, and vest quarterly over a one-year period beginning January 1, 2019. The fair value of each grant of 19,231 options was $154,983. During$7.50 per share. Subject to the three months ended February 28, 2019,holder’s continued service to the Company, recordedeach such option vests with respect to 25% of the amountunderlying shares on the first anniversary of $51,660 representing the pro-rata valuegrant date and the remainder vests in 24 equal installments on each monthly anniversary of the grant date following the first anniversary of the grant date, such that the option is fully vested on the third anniversary of the grant date.
Following the stockholder approval of the 2019 Incentive Award Plan, all vested options
vested duringdescribed herein will become exercisable and may be exercised through the
period.ten-year anniversary of the grant date (or such earlier date described in the applicable award agreement following a holder’s termination of service).
| Dollars in thousands except per share amounts | Date of grant(s) | | Vesting period (years) | | | Number | | | Exercise price ($) | | | Share-based payment expense ($) | | | Risk-free rate | | | Volatility | | Dividend yield | | Expiry (yrs) | | | Remaining Life (yrs) | |
| Option grant | 5/21/2019 | | | 2 | | | | 60,000 | | | $ | 7.50 | | | | 9 | | | | 2.28 | % | | | 55.00 | % | Nil | | | 10 | | | | 9.9 | |
| Option grant | 5/21/2019 | | | 3 | | | | 30,000 | | | $ | 7.50 | | | | 5 | | | | 2.28 | % | | | 55.00 | % | Nil | | | 10 | | | | 9.9 | |
| Option grant | 6/29/2019 | | | 3 | | | | 3,000 | | | $ | 7.50 | | | | 0 | | | | 1.84 | % | | | 56.00 | % | Nil | | | 10 | | | | 10.0 | |
| | | | | | | | | 93,000 | | | | | | | $ | 14 | | | | | | | | | | | | | | | | | | |
Pursuant to ASC 718-10-35-8, the Company recognizes compensation cost for stock and option 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.
The following table summarizes the significant terms of options outstanding at
February 28,June 30, 2019:
| | | | | | | | | | | | | Weighted | | | | | | | Weighted | |
| | | | | | | | | Weighted | | | average | | | | | | | average | |
| | | | | | | | | average | | | exercise | | | | | | | exercise | |
Range of | | | Number of | | | remaining | | | price of | | | number of | | | price of | |
exercise | | | options | | | contractual | | | outstanding | | | options | | | exercisable | |
prices | | | outstanding | | | life (years) | | | options | | | exercisable | | | options | |
| $ | 6.76 | | | | 38,462 | | | | 4.81 | | | $ | 6.76 | | | | 0 | | | | N/A | |
Range of exercise prices | | | Number of options outstanding | | | Weighted average remaining contractual life (years) | | | Weighted average exercise price of outstanding options | | | number of options exercisable | | | Weighted average exercise price of exercisable options | |
| $ | 5.00 – 7.50 | | | | 5,381,462 | | | | 9.8 | | | $ | 5.06 | | | | 260,545 | | | | 5.04 | |
Aggregate intrinsic value of options outstanding and exercisable at February 28, 2019 was $0. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $2.76 as of February 28, 2019, and the exercise price multiplied by the number of options outstanding.
Transactions involving options are summarized below:
| | | Number of Options | | | Weighted Average Exercise Price | |
| Acquired on May 6, 2019 | | | 5,288,462 | | | $ | 5.00 | |
| Granted | | | 93,000 | | | $ | 7.50 | |
| Options outstanding at June 30, 2019 | | | 5,381,462 | | | $ | 5.04 | |
The intrinsic value of outstanding options is $34.2 million as
follows:| | | Number of | | | Weighted Average | |
| | | Options | | | Exercise Price | |
Options outstanding at August 31, 2018 | | | - | | | $ | - | |
| | | | | | | | | |
Granted | | | 38,462 | | | | 6.76 | |
Exercised | | | - | | | | - | |
Cancelled / Expired | | | - | | | | - | |
| | | | | | | | | |
Options outstanding at February 28, 2019 | | | 38,462 | | | $ | 6.76 | |
Note 11 – Fair Value of Financial Instruments
Under FASB ASC 820-10-05,June 30, 2019.
Warrants
On May 6, 2019, the FASB establishesCompany acquired 913,310 warrants with a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement reaffirms that fair value isweighted average exercise price of $3.70 with the relevant measurement attribute.acquisition of Better Choice Company. The adoptionCompany also issued 5,744,991 warrants with an exercise price of this standard did not have a material effect$4.50 on the Company’s financial statementsMay 6, 2019 as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short-term naturepart of the instruments. PIPE. No warrants were exercised in the six months ending June 30, 2019.
| | | Number of Warrants | | | Weighted Average Exercise Price | |
| Warrants Acquired on May 6, 2019 | | | 913,310 | | | $ | 3.70 | |
Issued
| | | 5,744,991 | | | $ | 4.50 | |
| | | - | | | | - | |
Canceled / expired
| | | - | | | | - | |
| Warrants outstanding at June 30, 2019 | | | 6,658,301 | | | $ | 4.39 | |
The
Company had no other items that required fairintrinsic value
measurement on a recurring basis.The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels areoutstanding warrants is $13.0 million as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following summarized the Company’s financial liabilities that are recorded at fair value on a recurring basis at February 28, 2019 and August 31, 2018.
| | August 31, 2018 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Liabilities | | | | | | | | | | | | | | | | |
Derivative liabilities | | $ | - | | | $ | - | | | $ | 2,317,412 | | | $ | 2,317,412 | |
| | February 28, 2019 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Liabilities | | | | | | | | | | | | | | | | |
Derivative liabilities | | $ | - | | | $ | - | | | $ | 2,432,459 | | | $ | 2,432,459 | |
Note 12 –13 - Related Party Transactions and Material Service Agreements
Related Party Transactions
Management Services
A related party provided management services during 2018. Payments related to this arrangement were immaterial for the three and six-month period ended June 30, 2018. No payments were made to the related party during 2019. Outstanding balances were immaterial amounts for the periods ending June 30, 2019 and December 31, 2018, respectively.
Marketing Services
A related party provides online traffic acquisition marketing services for the Company. The Company paid immaterial amounts for their services during the three and six months ended June 30, 2019, respectively. The Company did not use this related party’s services in 2018. The service contract has a 30-day termination clause. Outstanding balances were $0.1 million and an immaterial amount for the periods ending June 30, 2019 and December 31, 2018, respectively.
Financial and Accounting Personnel
The Company entered into an agreement in December 2018 for assistance and support regarding its financial operation and capital raise efforts and can be terminated at any time by either party with a 60-day notice with an affiliate of the managing member. The agreement requires payments amounting to $21,160 every four weeks through December 2020. Payments related to this agreement amounted to $0.1 million and $0.2 million for the three and six-month period ended June 30, 2019, respectively.
The Company entered into an employment agreement in February 2019 with a previous executive for a term of six months. Payments related to this agreement amounted to $0.1 million and $0.2 million for the three and six-month period ended June 30, 2019.
Finder’s Fee and Other Services
The Company paid a finders’ fee of $0.3 million during the year ended December 31, 2018 to an entity owned by one of its members. Additionally, the Company paid approximately $0.4 million to this entity for other professional services rendered. No amounts have been paid in 2019.
Material Service Agreements Consummated with Third Parties:
Financial and Accounting Personnel
The Company entered into a new agreement in December 2018 for accounting management services for a fee of $8,370 to be paid every two weeks. Prior to this entering into this agreement, the same company was performing similar services in 2018 for $2,600 every two weeks.
Payments related to this agreement amounted to $0.1 million and an immaterial amount for the three-month period ended June 30, 2019 and 2018, respectively.
Payments related to this agreement amounted to $0.2 million and an immaterial amount for the six-month period ended June 30, 2019 and 2018, respectively.
Marketing Services
The Company entered into multiple agreements with marketing services with independent contractors during 2018 and 2019. Payments related to the marketing agreements amounted to $0.2 million and an immaterial amount for the three-month period ended June 30, 2019 and 2018, respectively.
Payments related to the marketing agreements amounted to $0.4 million and $0.2 million for the six-month period ended June 30, 2019 and 2018, respectively.
Placement and Selling Agent
In December 2018, the Company executed an agreement with a third party to assist the Company in identifying and negotiating with potential investors, assisting in due diligence, and other capital market functions for a term of six months. The agreement calls for a $0 base fee and a 5% commission on cash proceeds obtained in exchange for shares or equity interest in the Company. The commissions can be paid in cash or equity in the Company. This agreement has an initial six-month term and, thereafter, the Company at its option may elect to extend this agreement for one successive twelve-month term upon a sixty-day notice prior to the end of the initial term.
Payments related to this agreement amounted to $0.1 million for the year ended December 31, 2018 and was capitalized to related private placement as costs of issuance. On May 6, 2019, the Company expensed the issuance costs of $0.1 million. No other amounts were paid under this agreement in 2019.
On May 6, 2019, the Company issued the equivalent of 798,492 shares of its Common Stock to the Placement and Selling Agent. As a cost associated with the merger, this amount is presented as a loss on acquisition of $4.8 million.
Note 14 - Major Suppliers
The Company purchased approximately 83% and 72% of its inventories from one vendor for the six months ended June 30, 2019 and 2018, respectively. Additionally, the Company primarily utilized one vendor for outsourced manufacturing of meals for the six-month periods ended June 30, 2019 and the year ended June 30, 2018.
Note 15 - Concentration of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. The Company places its cash and cash equivalents with primarily one financial institution. At times, such amounts may be in excess of the FDIC insured limit. The Company has never experienced any losses related to these balances. As of June 30, 2019 and December 31, 2018 the Company had deposits in excess of the FDIC insured limits of $10.3 million and $3.4 million, respectively.
The Company routinely assesses the financial strength of its customers and, consequently, believes that its accounts receivable credit risk exposure is limited.
Note 16 - Net Loss per Share
Basic and diluted net loss per share attributable to Common Stockholders is presented using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future service that has not yet recognized are collectively assumed to be used to repurchase shares.
Basic and diluted net loss per share is calculated by dividing net loss attributable to Common Stockholders by the weighted-average shares outstanding during the period. For the six months ended June 30, 2019 and 2018, the Company’s basic and diluted net loss per share attributable to Common Stockholders are the same, because the Company has generated a net loss to Common Stockholders and Common Stock equivalents are excluded from diluted net loss per share as they have an antidilutive impact.
The following table sets forth basic and diluted net loss per share attributable to Common Stockholders for the three and six months ended June 30, 2019 and 2018:
Dollars in thousands except per share amounts
| | Six Months Ended June 30 | | | Three Months Ended June 30 | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Common Stockholders | | | | | | | | | | | | |
| Numerator: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net loss | | $ | (164,286 | ) | | $ | (2,400 | ) | | $ | (161,506 | ) | | $ | (745 | ) |
| Less: Preferred Stock Dividends | | | (27 | ) | | | - | | | | (27 | ) | | | - | |
| Net loss attributable to Common Stockholders | | $ | (164,313 | ) | | $ | (2,400 | ) | | $ | (161,533 | ) | | $ | (745 | ) |
| Denominator: | | | | | | | | | | | | | | | | |
| Weighted average shares used in computing net loss per share attributable to Common Stockholders, basic and diluted | | | 21,202,188 | | | | 11,497,128 | | | | 30,638,048 | | | | 11,497,128 | |
| Net loss per share attributable to Common Stockholders, basic and diluted | | $ | (7.75 | ) | | $ | (0.21 | ) | | $ | (5.27 | ) | | $ | (0.06 | ) |
Note 17 - Going Concern
The Company has incurred significant losses over the last three years and has a significant accumulated deficit. These operating losses create an uncertainty about the Company’s ability to continue as a going concern for a period of twelve months from the date these unaudited condensed consolidated financial statements are issued. Management has evaluated whether the unaudited condensed consolidated financial statements should be presented as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The unaudited condensed consolidated financial statements have been prepared on a going concern basis. In making this assessment, management conducted a comprehensive review of the Company’s affairs including, but not limited to:
The Company’s financial position at June 30, 2019 which includes $0.6 million of working capital;
Significant events and transactions the Company has entered into, including and through the date the unaudited condensed consolidated financial statements were available to be issued;
The loss from operations includes $4.2 million related to non-cash stock compensation;
Sales and profitability forecasts for the Company for the next financial year;
The continued support of the Company’s members and lenders.
The repayment of the line of credit with proceeds from a new $6.2 million loan. To address the future additional funding requirements members have undertaken the following initiatives:
| o | To continue to monitor the Company’s ongoing working capital requirements and minimum expenditure commitments; |
| o | Continue their focus on maintaining an appropriate level of corporate overhead in line with the Company’s available cash resources. |
Management is confident that it will be able to meet its minimum expenditure commitments and support its planned level of overhead expenditures. There can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 18 - Subsequent Events
Management has evaluated subsequent events through the date on which the unaudited condensed consolidated financial statements were issued.
On March 4,June 28, 2019, Mr. David Lelong resigned from his position asthe Company granted 500,000 options to Andreas Schulmeyer, the Company’s Chief Executive Officer effective immediately. Mr. Lelong remains as the President, Chief Financial Officer, Secretarysubject to commencement of employment on July 29, 2019. The options have an exercise price of $6.35 and Treasurervest over a two-year period beginning with commencement of employment.
On July 23, 2019, the
Company.On March 4, 2019,Audit Committee of the Board of Directors of the Company appointed Mr. Damian Dalla-Longa and Ms. Lori TaylorErnst & Young LLP as the Company’s Co-Chief Executive Officers.
independent registered public accounting firm for fiscal periods on or after January 1, 2019.
On March 7,July 29, 2019, Mr. Schulmeyer received a grant of 6,042 common shares as a consulting fee pursuant to his employment agreement dated June 28, 2019.
On August 14, 2019, the Company
filed a Certificate of Withdrawal of Certificate of Designation for the Company’s Series A Preferred Stock. The filinggranted 30,000 options to an employee of the
Amendment in Nevada was approved by the Company’s BoardCompany. The options have an exercise price of
Directors$4.00 and
there were no shares of Series A outstanding on the Effective Date.vest over a three-year period.
On March 8,August 28, 2019, the Company entered into a radio advertising agreement with iHeartMedia + Entertainment, Inc. The Company issued 1,000,000 common shares which shall be entirely paid for by iHeartMedia in the form of a Canadian investment banker 141,026 sharescommitment from iHeartMedia to provide to Company advertising media inventory having an aggregate value of $5,000,000. Company has committed to using $2,500,000 of the media inventory by August 28, 2020 with the remainder of the inventory available through August 28, 2021
On August 30, 2019, the Company granted 100,000 stock options to Mr. Schulmeyer. These options have an exercise price of $3.90 and vest over a two-year period.
On September 6, 2019, the Audit Committee notified RBSM LLP of the Audit Committee’s approval to dismiss RBSM as the Company’s
common stock for advisory services rendered.Effective March 11,independent registered public accounting firm upon filing of this Quarterly Report.
On September 9, 2019,
Sport Endurance, Inc. merged into its wholly-owned subsidiary, Better Choicethe Company
Inc.,granted 30,000 options to an employee of the Company. The options have an exercise price of $3.70 and vest over a
Delaware corporation. As a result, the name of Sport Endurance, Inc. was changed to Better Choice Company Inc. Pursuant to the merger, each outstanding share of common stock of Sport Endurance, Inc. converted into one share of common stock of Better Choice Company Inc. and each outstanding share of Series E Convertible Preferred Stock of Sport Endurance, Inc. converted into one share of Series E of Better Choice Company Inc.three-year period.
On
March 14,September 13, 2019,
Mr. David LelongLori R. Taylor notified the Company of
hisher decision to resign as Co-Chief Executive Officer of the Company effective as of September 13, 2019. The Company also entered into a separation agreement with Ms. Taylor, in connection with her resignation
as an officer of the Company, effective as of the date thereof. Pursuant to the separation agreement all outstanding stock option awards will become fully vested on November 12, 2019, subject to Ms. Taylor’s continued cooperation with the Company through such date and subject to the effectiveness and irrevocability of the release of claims. Ms. Taylor will continue to serve as a member of the
Company’s Boardboard of
Directors effective immediately. Mr. Lelong remains as the President, Chief Financial Officer, Secretary and Treasurerdirectors of the Company.
On
March 15,September 17, 2019,
the Board appointed the Company’s Co-Chief Executive Officers, Mr. Damian Dalla-Longa and Ms. Lori Taylor, to the Board, as well as Mr. Jeff Davis and Michael Galego. Mr. Galego will be the Chairman of the Board.On March 15, 2019, the Company effected a 1 for 26 reverse split of its common stock. An additional 682 shares of common stock were issued as a result of rounding up of any fractional shares as a result of the reverse split.
We evaluated subsequent events after the balance sheet date through the date the unaudited condensed financial statements were issued. We did not identify any additional material events or transactions occurring during this subsequent event reporting period that required further recognition or disclosure in these unaudited condensed financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
We were incorporated in the State of Nevada in 2001 under the name Cayenne Construction, Inc., and in 2009 changed our name to Sport Endurance, Inc. Effective March 11, 2019, we changed our name to Better Choice Company Inc. after reincorporating in Delaware.
The Company previously marketed for sale three sport nutritional products which it suspended in March 2018. On March 14, 2018, the Company, through its wholly-owned subsidiary Yield Endurance, Inc. (“Yield”), entered into a series of agreements under which Yield borrowed $5 million of bitcoin (“BTC”). The Company simultaneously entered into transactions with Madison Partners LLC and Prism Funding Co. LP to lend the BTC to third parties. On August 21, 2018, the Company entered into a series5-year consulting agreement with Bruce Linton. As compensation for the services rendered, the Company has issued 2,500,000 share purchase warrants to acquire one share each of restructuring agreementsCompany Common Stock with an exercise price of $0.10. An additional 1,500,000 share purchase warrants to unwindacquire one share each of Company Common Stock with an exercise price of $10.00.
The Warrants will vest as follows: (i) 50% (or 1,250,000) of the
BTC transactions thereby exitingWarrants (the “Tranche 1 Warrants”), will vest and be exercisable upon the
BTCearlier of (Y) September 17, 2020 or (Z) immediately prior to a Change in Control (as such term is defined under the Company’s 2019 Incentive Award Plan) (a “Change in Control”) and
cryptocurrency markets.Effective(ii) the remaining 50% (or 1,250,000) of the Warrants (the “Tranche 2 Warrants”) will vest and be exercisable upon the earlier of (Y) March 11,17, 2021 or (Z) immediately prior to a Change in Control, in each case, subject to Mr. Linton’s continued service to the Company through the applicable vesting date or Change in Control. The Warrants have a term expiring on September 17, 2029 (the “Expiry Date”) and will be subject to such other terms and conditions as may be determined by the Board.
The Additional Warrants will be exercisable on the earlier of (Y) March 17, 2021 or (Z) immediately prior to a Change in Control, in each case, subject to Mr. Linton’s continued service to the Company through the applicable date. The Additional Warrants have a term expiring on the Expiry Date and will be subject to such other terms and conditions as may be determined by the Board.
If Mr. Linton should cease to be engaged by the Company for any reason, other than as a result of a termination by reason of Just Cause (as such term is defined in the Independent Contractor Agreement) or as a result of Mr. Linton’s resignation as an independent contractor of the Company, the Incentive Warrants which have not then vested will immediately prior to the date Mr. Linton ceases to be engaged with the Company be deemed to become vested and such Incentive Warrants will remain exercisable until the Expiry Date.
During the month of September 2019 Sport Endurance, Inc. merged into its wholly-owned subsidiary, several warrant holders converted 1,144,999 warrants to 1,259,498 Common Stock shares. The Company received $4.0 million in return for the common shares issued.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview and Outlook
Better Choice Company
Inc.,is a
Delaware corporation. As a result, the name of Sport Endurance, Inc. was changedholistic pet wellness company providing high quality raw Cannabidiol (“CBD”) infused and non-CBD infused food, treats, and supplements in addition to
Better Choice Company Inc. Pursuant to the merger, each outstanding share of common stock of Sport Endurance, Inc. converted into one share of common stock of Better Choice Company Inc. and each outstanding share of Series E Convertible Preferred Stock (the “Series E”) of Sport Endurance, Inc. converted into one share of Series E Convertible Preferred Stock of Better Choice Company Inc.On December 17, 2018, the Company made a $2,200,000 investment in TruPet LLC, an online seller of pet foods, flea and tick products, pet nutritionaldental care products and related pet supplies. accessories for pets and their human parents. Our products are formulated and manufactured using only high-quality ingredients manufactured, tested and packaged to our specifications.
On February 2, 2019 and February 29, 2019, respectively, theBetter Choice Company entered into definitive agreements to acquire through stock exchange agreements, approximately 93% of the remainderoutstanding limited liability company interest of TruPet LLC and all of the outstanding shares of Bona Vida, Inc., an emerging hemp basedhemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space. On May 6, 2019, Better Choice Company consummated the stock exchange transactions whereby TruPet LLC and Bona Vida, Inc. became wholly owned subsidiaries of Better Choice Company. For accounting and financial reporting purposes, the transaction has been treated as a reverse acquisition whereby TruPet is considered the acquiror of Better Choice Company. Thus, the historical financial information of the registrant is that of TruPet even though the legal registrant remains Better Choice Company.
TruPet was founded in 2013 and has a track record of increasing its sales and customer base since that time. TruPet has contributed to and has benefited from the positive trend toward feeding pets a healthy, natural diet. We pride ourselves on our customer service and ability to communicate and educate our customers. During 2017 and 2018, we increased marketing investments to acquire new customers while also maintaining our relationship with our current customers. During 2017, we launched the TruDog Love Club (“TLC”), a loyalty program that provides our customers with unique benefits including discounted prices, subscription shipments of replenishable products, free or reduced shipping, and other benefits not available to non-TLC members. The definitive agreements are basedprogram has expanded and now has two tiers of loyalty club members. Tier 1 awards customers with six points per dollar spent and tier 2, TLC, awards customers with twelve points per dollar spent and provides opportunities to earn points at a higher rate. The number of loyalty members has grown to approximately 28,000 club members since its inception. Approximately 81% of DTC sales during the six-month period ending June 30, 2019 were from returning customers including TLC club members.
In order to obtain customers, we invest in advertising on
various conditions being met including completion of a financing. While the Company believes itsocial media sites and offer products to first time buyers at significant discounts. Our goal is
close to
completing the financing and closing the acquisitions, no assurances can be givenblend different acquisition channels as efficiently as possible in our advertising so that we
will close these transactions. On March 14, 2019,obtain the Company filed a Certificatemost customers for the least amount of Amendmentspend while maintaining our target growth rates. We are currently evaluating various long-term metrics for customer acquisition to determine the optimum mix of Certificatecustomer acquisition spend.
During 2018, we experienced two separate recalls of Incorporation (the “Amendment”) with the Delaware Secretary of State to effect a one-for-26 reverse split of the Company’s common stock. The Amendment took effect on March 15, 2019. No fractional shares will be issued or distributedour products as a result of the Amendment. These financial statements give retroactive effectdetection of salmonella. Since that time, we and our third-party manufacturing partners have increased testing of each product batch to avoid any additional recalls. While we do not believe we lost customers because of the recalls, we did incur additional shipping and customer service expenses to alleviate and avoid additional backlogs in product shipments caused by the recalls. We allowed products to be shipped from the manufacturing plants to the reversewarehouse using truckloads not at full capacity, or LTL, which is more expensive than limiting our shipments to full-capacity truckloads. We also shipped customer orders in several shipments, rather than waiting to fulfill entire orders as certain products were backlogged due to the recall. To address the additional strain on our customer service function, we also expanded the number and hours of our customer service representatives to help guide our customers through the recall process, resulting in an increase to our customer service costs.
Fiscal Year End
On May 21, 2019, the Board of Directors of the Company approved a change fiscal year from August 31 to December 31 to align with TruPet’s fiscal year end. The fiscal year change for the Company is effective with our 2019 fiscal year, which begins January 1, 2019 and ends December 31, 2019.
Management’s Discussion and Analysis
Components of Our Results of Operations
Net Sales
We sell non-CBD and CBD infused product for pets, including private branded freeze dried and dehydrated raw foods, supplements, dental care products for dogs, and treats and accessories for dogs, cats, and pet parents. We sell our products through our online portal directly to our consumers and through online retailers and pet specialty retail stores. Our products are sold under the TruDog, RawGo, TruCat, OraPup and Bona Vida brands.
Net sales include revenue derived from the sale of our products and related shipping fees offset by promotional discounts, refunds and loyalty points earned. We offer a variety of promotions and incentives to our customers including daily discounts, multi-bag purchase discounts and coupon codes for initial purchases. Historically, our net sales have been driven by our distribution of our products through our direct to consumer channel. However, sales through the retail channel have become a more important component of our growth in net sales and gross profit.
Key factors that affect our future sales growth include: our new product introduction in both the non-CBD and CBD markets, our expansion into retail and other specialty channels, entry into the market of competitors in the CBD industry and international expansion. We recognize revenue to depict the transfer of promised goods to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. Revenue is recognized upon receipt of product by our DTC customers and at the time of shipment for our retail and consignment customers. We record a revenue reserve based on past return rates to account for customer returns.
Cost of Goods Sold and Gross Profit
Our products are manufactured to our specifications by contracted manufacturing plants. We design our packaging in-house for manufacture by third parties. Packaging is shipped directly to contracted manufacturing plants. We directly source the hemp derived CBD oils used in our products from select suppliers to ensure product quality and traceability of the ingredient. CBD oils are shipped to our warehouse and forwarded to our contracted manufacturing partners as needed for production. Our contract manufacturers procure the raw food ingredients, manufacture, test and package our products. Cost of goods sold consists primarily of the cost of product obtained from the contract manufacturing plants, packaging materials and CBD oils directly sourced by the Company, and freight for shipping product from our contract manufacturing plants to our warehouse. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on the analysis, we record inventories on the lower of cost and net realizable value, with any reduction in value expensed as cost of goods sold.
We calculate gross profit as net sales, including any shipping revenue collected from our customers, less cost of goods sold. Our gross profit has been and, we expect, will continue to be affected by a variety of factors, primarily product sales mix, volumes sold, discounts offered to our club members, discounts offered to newly acquired and recurring customers, the cost of our manufactured products, and the cost of freight from the manufacturer to our warehouse. Changes in cost of goods sold and gross profit may be driven by the volume and price of our sales, including the extent of discounts offered, variations in the cost of CBD and the price we pay for our manufactured products and variations in our freight costs.
Sales and marketing expenses include costs related to customer service and warehousing, merchant credit card fees, compensation for sales personnel, shipping costs, other costs related to the selling platform, as well as marketing, including paid media and content creation expenses. Customer service and warehousing costs include the cost of our customer service department, including our in-house call center, and costs associated with warehouse operations, including but not limited to payroll, rent, and warehouse management systems. Marketing expenses consist primarily of Facebook and other media ads, other advertising and marketing costs, all geared towards acquiring new customers and building brand awareness. We expect selling expenses to continue to grow as we actively acquire new online customers and begin to build our wholesales channel.
General and administrative expenses include management and office personnel compensation and bonuses, stock split for allcompensation, corporate level information technology related costs, rent, travel, professional service fees, insurance, product development costs and general corporate expenses. We expect general and administrative expenses to continue to increase in absolute dollars as we expand our commercial infrastructure to both drive and support our planned growth in revenue and support the additional costs associated with being a public company.
Research and Development
We do not invest in non-CBD pet food research, but we do continually review sales of our existing products as well as those of non-CBD competitors to identify possible product extensions. We acquired two CBD related research agreements as part of the acquisition of Bona Vida Inc. We will invest resources into the effectiveness of CBD infused canine pet food to determine if specific strains of CBD are more effective than others in addressing canine health issues. We are also conducting trials with existing products to determine optimal product formulations. During the periods
presented, unless otherwise specified.Forended June 30, 2019 and June 30, 2018, we did not record research and development expenses. We expect to incur research and development expenses during the six months ended February 28,remainder of 2019 we hadand in future periods.
Interest Expense
Interest expense originates from debt incurred under a net income of $339,161 comparedunder a revolving credit agreement entered into in May 2019, and under our note payable to a net lossprior TruPet LLC member, corporate credit cards, and our line of $1,062,194credit agreement and other debt in place prior to the acquisitions.
Income Taxes
Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions and uncertain tax positions. During the periods ended June 30, 2019 and June 30, 2018, we did not record income tax expense because TruPet was a limited liability company. Subsequent to the consummation of the acquisitions, the Company, as a corporation, is required to provide for income taxes.
Results of Operations
Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018
| | | Six Months Ended | | | Three Months Ended | |
| | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | |
| Net Sales | | $ | 7,635 | | | $ | 7,064 | | | | 8 | % | | $ | 4,084 | | | $ | 3,818 | | | | 7 | % |
| Cost of Goods Sold | | | 4,082 | | | | 3,329 | | | | 23 | % | | | 2,420 | | | | 1,384 | | | | 75 | % |
| Gross Profit | | | 3,553 | | | | 3,735 | | | | -5 | % | | | 1,663 | | | | 2,433 | | | | -32 | % |
General & Administrative
| | | 6,004 | | | | 1,351 | | | | 344 | % | | | 4,571 | | | | 665 | | | | 587 | % |
Share-Based Compensation
| | | 4,212 | | | | 0 | | | | - | | | | 4,006 | | | | 0 | | | | - | |
| Sales & Marketing | | | 5,597 | | | | 2,819 | | | | 99 | % | | | 3,412 | | | | 1,512 | | | | 126 | % |
Other Operating
| | | 1,721 | | | | 1,899 | | | | -9 | % | | | 936 | | | | 958 | | | | -2 | % |
Loss from operations
| | $ | (13,981 | ) | | $ | (2,334 | ) | | | 499 | % | | $ | (11,263 | ) | | $ | (702 | ) | | | 1,505 | % |
Net Sales
Net sales increased $0.6 million, or 8%, to $7.6 million for the six months ended February 28,June 30, 2019 compared to $7.1 million for the six months ended June 30, 2018.
Net sales increased $0.3 million, or 7%, to $4.1 million for the three months ended June 30, 2019 compared to $3.8 million for the three months ended June 30, 2018.
Net sales increased in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 as a result of increased media and acquisition spend and a shift to higher unit priced products. Our accumulated deficitTruDog brand shifted away from dental products during the first half of 2019 towards consumable food and topper sales. Dental products were effective for initial customer acquisition but return and retention rates were relatively low. Although food and topper products are not as effective in initial customer conversion as the dental products, topper products yield a better lifetime value as retention and repeat rates are higher. In the three months ended June 30, 2019, we saw a further increase in our acquisition and conversion rates as a result of February 28,increased media spend on Facebook and Google. A decline in sales through our online retailers Amazon and Chewy.com was the result of lower Amazon promotion spends and Chewy.com’s customers buying directly from us. We expect to see sales to these online retailers to grow in the second half of 2019 was $5,720,130. These conditions raise substantial doubt aboutas we rebalance our abilitysales efforts between DTC and online retail partners.
The increase in net sales in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 as a result of higher media spend on acquiring new customers as well as a higher retention rates of customers we previously acquired. We continue to see high retention rates of returning customers either through our subscription offers or from repeat purchases. We expect the share of returning sales to continue
to grow as
a going concern over the next 12 months.we focus our acquisition spend on high value, repeat buyers. Online retail partners sales dropped slightly as we continued to focus on driving traffic to our own sites.
26
ResultsCost of
Operationsgoods sold increased $0.8 million, or 23%, to $4.1 million for the
Three Months Ended February 28,six months ended June 30, 2019
compared to $3.3 million for the six months ended June 30, 2018. As a percentage of revenue, cost of goods sold increased to 53% during the six months ended June 30, 2019 compared to 47% during the six months ended June 30, 2018. The increase in cost of goods sold was primarily due to a mix shift to food and 2018Revenues
topper products, which have higher costs and lower gross margin than dental products. We continue to negotiate for improved conversion costs from our manufacturing partners and expect to see further cost reductions as we rationalize the product offering and gain scale in the remaining products. The Company had salescost of $0hemp derived CBD oils has declined in the market, thus, reducing our ingredient costs. In the six-month period ended on June 30, 2018, the inventory reserve taken was $0.2 million for slow moving and discontinued items.
Cost of goods sold increased $1.0 million, or 75%, to $2.4 million for the three months ended June 30, 2019 compared to $1.4 million for the three months ended June 30, 2018. As a percentage of revenue, cost of goods sold increased to 59% during the three months ended February 28,June 30, 2019 compared to $26136% during the three months ended June 30, 2018. During the three-months ended on June 30, 2019, we continued to discount discontinued items to clear out the inventory to focus on our top selling products. The inventory review at the end of the three-month period ended on June 30, 2019 led to an inventory reserve charge of $0.2 million for the three months ended February 28,June 30, 2019 as compared to a reserve of $0.1 million for the three months ended June 30, 2018.
During the six months ended June 30, 2019, gross profit decreased $0.2 million, or 5%, to $3.6 million compared to $3.7 million during the six months ended June 30, 2018. Gross profit margin decreased to 47% from 53% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The Company had cost of goodsongoing shift into food and topper products from the dental products sold in 2018 and discounting of discontinued products also reduced the amountgross margin for the six month period ended June 30, 2019.
During the three months ended June 30, 2019, gross profit decreased $0.8 million, or 32%, to $1.7 million compared to $2.4 million for the three months ended June 30, 2018. Gross profit margin decreased to 41% from 64% for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The decrease was primarily due to the inventory reserve taken during the reporting period. The ongoing shift into food and topper products from the dental products and discounting of $0discontinued products also reduced the gross margin for the three months ended June 30, 2019.
Operating Expenses
During the six months ended June 30, 2019, general and administrative expenses increased approximately $4.7 million, or 345% to $6.0 million compared to $1.4 million in the six months ended June 30, 2018.
During the three months ended June 30, 2019, general and administrative expenses increased approximately $3.9 million, or 587%, to $4.6 million compared to $0.7 million in the three months ended June 30, 2018. The increase resulted from the expansion of our corporate staff and the incurrence of professional fees post-acquisitions as we began building the infrastructure to support our status as a public company. The increase resulted from the expansion of our corporate staff and the incurrence of professional fees post-acquisition as we began building the infrastructure to support our status as a public company.
During the six months ended June 30, 2019, we incurred share-based compensation of $4.2 million, as compared to share based compensation of an immaterial amount during the six months ended in June 30, 2018.
During the three months ended June 30, 2019, we incurred share-based compensation of $4.0 million, as compared to share based compensation of an immaterial amount during the three months ended February 28,in June 30, 2018. The increase in equity-based compensation was driven by awards issued related to the acquisitions on May 6, 2019. The increase in equity-based compensation was driven by awards issued related to the acquisitions on May 6, 2019.
During the six months ended June 30, 2019, comparedsales and marketing expenses, including paid media, increased approximately $2.8 million, or 99%, to cost$5.6 million from $2.8 million during the six months ended in June 30, 2018 as a result of goods soldincreased new customer acquisition efforts. TruPet traditionally invested in Facebook advertisement to drive traffic to the amount of $184 for gross profit of $77site. We increased spending on Facebook and Google, and began to invest additional spend in other media outlets to build brand awareness.
During the three months ended June 30, 2019, sales and marketing expenses, including paid media, increased approximately $1.9 million, or 126%, to $3.4 million from $1.5 million during the three months ended February 28,in June 30, 2018 primarily due to a shift in media spending towards Facebook and Google advertisements as well as retargeting lapsed customers.
During the six months ended June 30, 2019, other operating costs including customer service and warehousing costs decreased $0.2 million, or 9%, to $1.7 million compared to $1.9 million for the six months ended June 30, 2018.
Selling, generalWe rationalized the operations in our warehouse at the end of 2018, reducing the staff and operating costs. We saw higher than normal shipping costs during the six months ended June 30, 2018 due to the product recall. During this period, we shipped partial orders and replacement product, increasing our shipping expenses. During the six months ended June 30, 2019, we began renovating a new facility in Tampa, Florida to house our warehouse, fulfillment and administrative expenses
Generaldepartments. Rent and administrative expenses were $388,905associated utilities for this period are reflecting both the rent for the new facility as well as the existing facility that houses these departments.
During the three months ended June 30, 2019, other operating costs including customer service and warehousing costs decreased by an immaterial amount, or 2%, to $0.1 million compared to $0.1 million for the three months ended
February 28, 2019 comparedJune 30, 2018. We rationalized the operations in our warehouse at the end of 2018, reducing staff and operating costs. In addition, we continue to
$66,479 for the three months ended February 28, 2018, an increase of $322,426. The increase was primarily due to an increase in legalreduce our unit shipping costs as we gain scale and
accounting fees, and the value of stock options vested during the period.Interest expense
Net interest expense for the three months ended February 28, 2019 was $368 compared to $768,129 for the three months ended February 28, 2018, a decrease of $767,761. The decrease was due primarily to the decrease in debt on the Company’s balance sheet.
Excess value of warrants liability over net proceeds from the sale of common stock at inception
The excess value of warrants for the three months ended February 28, 2019 was $3,675,385 compared to $0 for the three months ended February 28, 2018. The increase was due to the value of warrants issued with a private placement of common stock in excess of the amount of cash received.
Gain on exchange of debt and equity
shipping efficiency. During the three months ended February 28, 2018, the Company recorded a non-cash gain in the amount of $139,323 on exchange of certain convertible notes forJune 30, 2019, we began renovating a new convertible note. There were no such comparable transactions duringfacility in Tampa, Florida to house our warehouse, fulfillment and administrative departments. Rent and associated utilities for this period are reflecting both the three months ended February 28, 2019.
Change in fair value of derivative liability
The Company had a non-cash gain of $3,898,599 on revaluation of derivative liabilities during the three months ended February 28, 2019, compared to a non-cash loss of $256,286rent for the three months ended February 28, 2018. The increased gain was due to a decrease innew facility as well as the Company’s stock priceexisting facility.
Research and
to the additional derivative liabilities outstanding at February 28, 2019 related to the Company’s warrants. Net loss
For the reasons above, our net loss for the three months ended February 28, 2019 was $166,059, a decrease of $785,435 compared to a loss of $951,494 for the three months ended February 28, 2018.
Development
27
Results of Operations for the Six Months Ended February 28, 2019and 2018
Revenues
The Company had sales of $0 during the six months ended February 28, 2019 compared to $475 for the six months ended February 28, 2018. The Company had cost of goods sold in the amount of $0 for gross profit of $0 during the six months ended February 28, 2019 compared to cost of goods sold in the amount of $211 for gross profit of $264 during the six months ended February 28, 2018.
Selling, general and administrative expenses
General and administrative expenses were $536,428 for the six months ended February 28, 2019 compared to $151,722 for the six months ended February 28, 2018, an increase of $384,706. The increase was primarily due to an increase in legal and accounting fees, and the value of stock options vested during the period.
Interest expense
Net interest expense for the six months ended February 28, 2019 was $133,913 compared to $449,136 for the six months ended February 28, 2018, a decrease of $315,223. The decrease was due primarily to the decrease in debt on the Company’s balance sheet.
Excess value of warrants liability over net proceeds from the sale of common stock at inception
The excess value of warrants for the six months ended February 28, 2019 was $3,675,385 compared to $0 for the six months ended February 28, 2018. The increase was due to the value of warrants issued with a private placement of common stock in excess of the amount of cash received.
Gain on exchange of debt and equity
During the six months ended February 28,June 30, 2019 the Company recorded a non-cash gainand 2018, there were no research and development expenses incurred. We acquired two CBD related research contracts from Bona Vida on May 6, 2019. We expect to incur expenses in the amountthird and fourth quarters of $472,267 on exchange of debt and equity to preferred stock, an increase of $332,944 compared to a gain on exchange of certain convertible notes2019 for a new convertible note during the six months ended February 28, 2018 in the amount of $139,323.
Change in fair value of derivative liability
The Company had a non-cash gain of $4,212,620 on revaluation of derivative liabilities during the six months ended February 28, 2019, compared to a loss of $600,923 during the six months ended February 28, 2018, an increase in gain in the amount of $4,813,543. The increased gain was due to a decrease in the Company’s stock price and to the additional derivative liabilities outstanding at February 28, 2019 related to the Company’s warrants.
Net income (loss)
For the reasons above, the Company had net income for the six months ended February 28, 2019 of $339,161, an increase of $1,401,355 compared to a loss of $1,062,194 for the six months ended February 28, 2018.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at February 28, 2019 compared to August 31, 2018.
| | | February 28, 2019 | | | August 31, 2018 | |
| | | | | | | | | |
Current Assets | | $ | 149,018 | | | $ | 209,076 | |
| | | | | | | | | |
Current Liabilities | | $ | 2,745,623 | | | $ | 2,858,351 | |
| | | | | | | | | |
Working Capital Deficit | | $ | (2,596,605 | ) | | $ | (2,649,275 | ) |
The Company had cash used in operating activities of $497,233 during the six months ended February 28, 2019. This primarily consisted of the Company’s net income of $339,161, decreased by non-cash gain on exchange of debt and equity of $472,267 and by a change in the market value of derivative liabilities in the amount of $4,212,621, offset by excess value of warrants liability over net proceeds from the sale of common stock at inception of $3,675,385, value of options vested of $51,660, and amortization of discount on convertible debt in the amount of $118,707. The Company’s cash position also increased by $2,742these contracts as a result of changes in components of current assets and current liabilities.
our research efforts continue.
Interest Expense, Net
During the six months ended
February 28,June 30, 2019,
the Company used$2,200,000 of cash in investing activities in connection with its investment in TruPet.Duringinterest expense remained fairly constant at approximately $0.1 million compared to the six months ended February 28, 2019, the Company had cash provided by financing activities in the amount of $2,605,495, consisting of the cash received from the sale of common stock of $2,657,099 (net of costs in the amount of $122,741), partiallyJune 30, 2018. Interest expense increased primarily due to increased debt incurred under a note payable to a director, offset by the purchaserefinancing of $51,604the Company’s line of common stock from shareholders.
credit agreement of $4.6 million and the note payable to the director of $1.6 million into a $6.2 million line of credit on May 6, 2019 at a lower interest rate. The Company had $48,842 of cash as of April 9, 2019 which is not sufficientincreased debt was necessary to meet ourfinance working capital needs for at least the next 12 months. In addition, it is not likely we can complete an acquisition including those described above, without completingbusiness.
During the three months ended June 30, 2019, interest expense changed immaterially compared to the six months ended June 30, 2018.
Income Taxes
No provision has been made for federal and state income taxes prior to the date of the acquisitions since the proportionate share of TruPet’s income or loss was included in the personal tax returns of its members because TruPet was a financing. The amount and type of financing and its dilutionlimited liability company. Subsequent to existing shareholders cannot be determined at this time. Ifthe acquisitions, the Company, as a corporation is ablerequired to raise $15 million it is seekingprovide for income taxes.
The effective tax rate subsequent to the acquisitions 0%. The effective tax rate differs from the U.S. Federal statutory rate of 21% primarily because our previously reported losses have been offset by a valuation allowance due to uncertainty as to the realization of those losses.
Loss from Acquisition
Note 2 in
an ongoing offering and completeNotes to the
TruPet and Bona Vida acquisitions, current investors will own 14%Unaudited Condensed Consolidated Financial Statements details the impact of the
Companytransaction on
a fully diluted basis. No assurances can be given that the Company will complete the financing or the two acquisitions.We anticipate that we will incur operating losses in the next 12 months. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development. Such risks for us include, but are not limited to, the risks described in our Form 10-K filed on December 21, 2018.
Cautionary Note Regarding Forward Looking Statements
This Report contains forward-looking statements including statements regarding our ability to acquire TruPet and Bona Vida, complete a material financing, and our liquidity. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy, the acquisition of TruPet, and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
May 6, 2019.
2932
The results anticipated
Liquidity and Capital Resources
Since our founding, we have financed our operations primarily through sales of member units as a limited liability company, sales of shares of Common Stock and warrants, as a corporation, preferred stock and cash flows generated by any or alloperations. At June 30, 2019, we had cash and cash equivalents of these forward-looking statements might not occur. Important factors that could cause actual results to differ$11.2 million (including restricted cash of $6.2 million) which represented an increase of $7.3 million from those in the forward-looking statements include those relating to the condition of the capital markets and the ability of the parties to meet or waive key conditions to the closing of the two acquisitions. Other risks are contained in our Form 10-K for the fiscal year ended AugustDecember 31, 2018. Any forward-looking statement made by us in this report speaks only as of
The Company has incurred significant losses over the
date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time,last three years and
it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.Going Concern
Our unaudited condensed financial statements are prepared using GAAP applicable tohas a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. We have incurred continuoussignificant accumulated deficit. These operating losses from operations, havecreate an accumulated deficit of $5,720,130 and working capital deficit of $2,596,605 at February 28, 2019. These factors raise substantial doubtuncertainty about the Company’s ability to continue as a going concern. concern for a period of twelve months from the date of our unaudited condensed consolidated financial statements.
Management conducted a comprehensive review of the Company’s affairs including, but not limited to:
The Company’s financial position at June 30, 2019 which includes $0.6 million of working capital;
Significant events and transactions the Company has entered into, including and through the date the financial statements were available to be issued;
The loss from operations which includes $4.2 million related to non-cash stock compensation;
Sales and profitability forecasts for the Company for the next fiscal year;
The continued support of the Company’s major stockholders and lenders; and
The repayment of the line of credit with proceeds from a new $6.2 million loan.
To address the future additional funding requirements management has undertaken the following initiatives:
To continue to monitor the Company’s ongoing working capital requirements and minimum expenditure commitments;
Continue their focus on maintaining an appropriate level of corporate overhead in line with the Company’s available cash resources.
Management is
actively pursuing new venturesconfident that it will be able to
increase revenues including entering into definitive agreements to acquire the remaindermeet its minimum expenditure commitments and support its planned level of
TruPet LLC and all of the outstanding shares of Bona Vida, Inc. In addition, the Company is currently seeking to raise $15 million in an ongoing offering to fund operations. The Company,overhead expenditures. There can be no assurance however
is dependent upon its ability to secure this financing and there are no assurances that the Company will be
successful, therefore, without sufficient financing it would be unlikely for the Companyable to
continue as a going concern. raise additional capital when needed, or at terms deemed acceptable, if at all. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The unaudited condensed financial statements also do not include any adjustments relatingrelated to the recoverability and classification of recorded asset amounts or amounts and classificationsthe classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The following table presents a summary of our cash flow for the six-month periods ended:
| Dollars in thousands | | | | | | |
| Cash flows provided by (used in): | | | | | | |
| Operating activities | | $ | (8,481 | ) | | $ | (2,026 | ) |
| Investing activities | | | 1,870 |
| | | (31 | ) |
| Financing activities | | | 13,927 | | | | (2,031 | ) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 7,316 | | | $ | (44 | ) |
Cash flows from Operating Activities
Cash provided by (used in) operating activities consisted of net loss adjusted for non-cash items, including the loss on acquisition, stock-based compensation expense, change fair value of in derivative liability, depreciation and amortization, changes in working capital and other activities
Cash used in operating activities increased $6.5 million, or 319%, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Cash used in operating activities was $8.5 million for the six months ended June 30, 2019, which consisted of the net loss of $164.3 million, offset by $150.0 million from the loss from the acquisitions, $4.2 million in stock-based compensation expense and a combined $1.4 million of net cash generated via changes in operating assets and current liabilities. Cash used in operating activities was $2.0 million for the six months ended June 30, 2018, which consisted of net loss of $2.4 million, offset by a combined $0.4 million net cash generated via changes in operating assets and current liabilities.
The decrease in working capital (deficit) during the six months ended June 30, 2019 was primarily due to an increase of accrued liabilities of $1.6 million offset by an increase in prepaid expenses of $0.5 million.
The decrease in working capital (deficit) during the six months ended June 30, 2018 was primarily due to an increase in accounts payable of $0.5 million offset by an increase in inventories of $0.3 million
Cash flows from Investing Activities
Cash from investing activities increased by $1.9 million during the six months ended June 30, 2019 by an immaterial amount during the six months ended June 30, 2018. The change in cash from investing activities is the result of $2.0 million cash acquired in the acquisitions offset by an increase in security deposits paid.
Cash flows from Financing Activities
Cash from financing activities increased by $11.9 million, to $13.9 million, during the six months ended June 30, 2019 from $2.0 million during the six months ended June 30, 2018. The primary drivers of the overall cash from financing activities were proceeds from a private placement of $15.7 million offset by payments to eliminate the balance due under the Business Cash Advance Agreement of $1.9 million. The Company refinanced debt acquired in the merger of $6.2 million with the proceeds from the issuance of new debt of $6.2 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that have, or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results orof operations, liquidity, capital expenditures or capital resources that are material to investors..
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. GAAPgenerally accepted accounting principles requires management to make estimates and assumptions that affect the reported amountamounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenuerevenues and expenses during the reporting periods. We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Significant Accounting Policies
Our discussion and analysis of our results of operations and liquidity and capital resources are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported periods. The more critical accountingamounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates include estimatesand judgments, including those related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve thebasis of presentation, use of estimates, cash and cash equivalents, inventory, revenue recognition, income taxes, fair value of financial instruments, fair value measurements, derivative financial instruments, basic and diluted loss per share, related parties, discontinued operations, and investments (see Note 1 to the Company’s unaudited condensed consolidated financial statements). We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the significant accounting policies and assumptions that are significant to understanding our results, which are describedas detailed in Note 1 to our unaudited condensedthe financial statements appearing elsewhere incontained herein may involve a higher degree of judgment and complexity than others.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this
report.Recently Issued Accounting Standards
There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows. Note 1 to our unaudited condensed financial statements appearing elsewhere in this report includes Recent Accounting Pronouncements.
Item.
Management previously disclosed material weaknesses in its internal control over financial reporting in its This Transition Report on Form 10-KT for the transition period from September 1, 2018 to December 31, 2018. These material weaknesses related to (1) our development and Qualitativeeffective communicated to our employees and consultants our accounting policies and procedures that resulted in inconsistent practices and (2) the small size of the Company’s accounting staff, which resulted in a lack of segregation of duties and insufficient review procedures. We have begun to build our in-house finance team by hiring a Chief Financial Officer. Under the new leadership, we will review, revise and amend the internal processes to develop effective controls.
Evaluation of Disclosure
About Market Risk.This item is not applicable as we are currently considered a smaller reporting company.
Item 4. Controls and Procedures.
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
by us in
theour reports
that we filefiled or
submit pursuant tosubmitted under the
requirements of the Securities Exchange Act
of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s
(“SEC”)’s rules and forms. Disclosure controls and procedures include,
among other things,without limitation, controls and procedures designed to ensure that information required to be disclosed
by us in
theour reports
that we filefiled or submitted under the Exchange Act is accumulated and communicated to
our management, including our principal executive and
principal financial officers,
as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
Our Chief Financial Officer, David Lelong, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this report. Based on the evaluation, Mr. Lelong concluded that our disclosure controls and procedures are not effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings and ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief financial officer, or personpersons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer) evaluated the effectiveness of our disclosure
forcontrols and procedures as of the
following reasons: | ●
| The Company does not have an independent board of directors or audit committee or adequate segregation of duties;
|
| ●
| All of our financial reporting is carried out by our financial consultant;
|
| ●
| We do not have an independent body to oversee our internal controls over financial reporting and lack segregation of dutiesend of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2019, our disclosure controls and procedures were not effective. The conclusion that our disclosure controls and procedures were not effective was due to the limited nature and resources of the Company.
|
We plan to rectify thesethe presence of material weaknesses by implementing an independent board of directorsin internal control over financial reporting described above. Management anticipates that such disclosure controls and hiring additional accounting personnel once we have additional resources to do so.
procedures will not be effective until the material weaknesses are remediated.
Changes in Internal Control Over Financial Reporting
There
Except as described above, there were no changes in our internal control over financial reporting
during the period covered by this report that
occurred during our most recent fiscal quarter that havehas materially affected, or
areis reasonably likely to materially affect our internal control over financial reporting.
PART
II –II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may bebecome involved in litigation relating to claims arising out of our operationsvarious lawsuits and legal proceedings, which arise in the normalordinary course of business. AsHowever, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of the date of this Report to our knowledge, there were no pendingany such legal proceedings or threatened lawsuitsclaims that could reasonably be expected towe believe will have a material adverse effect on our business, financial condition or operating results.
The Company qualifies as a “smaller reporting company” as defined by Rule 12b-2 of the
results of our operationsExchange Act and
there are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.Item 1A. Risk Factors.
This item is not applicablerequired to a smaller reporting company.
provide information under this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
We have previously disclosed all sales of securities without registration under the Securities Act of
1933.Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
1933, as amended.
32| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
Not applicable.
None.
Listed and indexed below are all Exhibits filed as part of this Quarterly Report.
Exhibit Number | | Description | Form | File No. | Exhibit | Filing Date | Filed/Furnished Herewith |
| | Agreement and Plan of Merger, dated February 28, 2019, by and among the Better Choice Company Inc., BBC Merger Sub, Inc. and Bona Vida, Inc. | 8-K | 333-161943 | 2.1 | 5/10/2019 | |
| | | | | | | | |
| | First Amendment to Agreement and Plan of Merger, dated February 28, 2019, by and among the Better Choice Company Inc., BBC Merger Sub, Inc., and Bona Vida, Inc., dated May 3, 2019. | 8-K | 333-161943 | 2.1 | 5/10/2019 | |
| | | | | | | | |
| | Securities Exchange Agreement, dated February 2, 2019, by and among Better Choice Company Inc., TruPet LLC and the members of TruPet LLC. | 8-K | 333-161943 | 2.3 | 5/10/2019 | |
| | | | | | | | |
| | First Amendment to Securities Exchange Agreement, dated February 2, 2019, by and among Better Choice Company Inc., TruPet LLC and the members of TruPet LLC, dated May 6, 2019. | 8-K | 333-161943 | 2.4 | 5/10/2019 | |
36
Item 6. Exhibits.
+ Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.
Exhibit Number | | Description
| Form
| File No.
| Exhibit
| Filing Date
| Filed/Furnished Herewith |
| | Certificate of Incorporation. | 10-Q | 333-161943 | 3.1 | 4/15/2019 | |
| | | | | | | | |
| | Bylaws. | | 333-161943 | 3.5 | | |
| | | | | | | | |
| | Certificate of Amendment to Certificate of Incorporation. | | 333-161943 | 3.2 | 7/14/2017 | |
| | | | | | | | |
| | Certificate of Amendment to Certificate of Incorporation. | 8-K | 333-161943 | 3.2 | 3/22/2018 | |
| | | | | | | | |
| | Certificate of Amendment to Certificate of Incorporation. | 10-KT | 333-161943 | 3.5 | 7/24/2019 | |
| | | | | | | | |
| | Form of Registration Rights Agreement dated May 6, 2019, by and among Better Choice Company Inc. and the former stockholders of Bona Vida listed on the signature pages thereto. | 8-K | 333-161943 | 4.1 | 5/10/2019 | |
| | | | | | | | |
| | Form of Registration Rights Agreement dated May 6, 2019, by and among Better Choice Company Inc. and the former member of TruPet listed on the signature pages thereto. | 8-K | 333-161943 | 4.2 | 5/10/2019 | |
| | | | | | | | |
| | Form of First Amendment to Registration Rights Agreement, dated June 10, 2019, by and among the Company and the stockholders party thereto | 8-K | 333-161943 | 10.1 | 6/13/2019 | |
| | | | | | | | |
| | Tranche 1 Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton | 8-K | 333-161943 | 4.1 | 9/23/2019 | |
| | | | | | | | |
| | Tranche 2 Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton | 8-K | 333-161943 | 4.2 | 9/23/2019 | |
| | | | | | | | |
| | Additional Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton | 8-K | 333-161943 | 4.3 | 9/23/2019 | |
| | | | | | | | |
| | Form of Subscription Agreements dated April 25, 2019, between Better Choice Company Inc. and the purchaser named in the signature pages thereto. | 8-K | 333-161943 | 10.1 | 4/30/2019 | |
| | | | | | | | |
| | Loan Agreement dated May 6, 2019, between Better Choice Company Inc. and Franklin Synergy Bank. | 8-K | 333-161943 | 10.1 | 5/10/2019 | |
| | | | | | | | |
| | Security Agreement dated May 6, 2019, between Better Choice Company Inc. and Franklin Synergy Bank. | 8-K | 333-161943 | 10.2 | 5/10/2019 | |
| | | | | | | | |
| | Form of Revolving Line of Credit Promissory Note. | 8-K | 333-161943 | 10.3 | 5/10/2019 | |
| | | | | | | | |
| | Independent Contractor Agreement, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton | 8-K | 333-161943 | 10.1 | 9/23/2019 | |
Exhibit Number | | Description
| Form
| File No.
| Exhibit
| Filing Date
| Filed/Furnished Herewith |
| | Employment Agreement, dated as of May 6, 2019, by and between Better Choice Company Inc. and Damian Dalla-Longa. | | | | | * |
| | | | | | | |
| | Employment Agreement, dated as of May 6, 2019, by and between Better Choice Company Inc. and Lori Taylor. | | | | | * |
| | | | | | | |
| | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | * |
| | | | | | | |
| | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | * |
| | | | | | | |
| | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | * |
| | | | | | | |
| | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | * |
| | | | | | | |
| 101.INS | | XBRL Instance Document | | | | | * |
| | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | * |
| | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | * |
| | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | * |
| | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | * |
| | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | * |
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BETTER CHOICE COMPANY INC. | |
| | | |
Date: April 15,October 9, 2019 | By: | /s/ Damian Dalla-Longa | |
| | Damian Dalla-Longa | Chief Executive Officer |
| | Co-Chief Executive Officer, Director
(Principal Executive Officer)
| |
Date: October 9, 2019 | By: | | |
| BETTER CHOICE COMPANY INC.
| /s/ Andreas Schulmeyer |
| | | |
Date: April 15, 2019
| By:
| /s/ David Lelong
| |
| | David Lelong
| |
| | Andreas Schulmeyer Chief Financial Officer (Principal Accounting Officer)
| |
| | | |
39