UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
Form 10-Q
 

 
(MARK ONE)
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019 OR
 
 
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: 333-161943
 
 
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.)
 
164 DOUGLAS RD EAST, OLDSMAR, FL 34677
   
Oldsmar, Florida
 
34677
(Address of principal executive offices)
 
(Zip Code)
 
(813) 659-5921
  
(Registrant’s telephone number, including area code)
 

 
N/A
 
(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 registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☐        No  ☒*
 
*(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,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large 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    ☒
 
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of January 31, 2020 was 47,977,390.



BETTER CHOICE COMPANY INC.
TABLE OF CONTENTS

 
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EXPLANATORY NOTE
 
This Quarterly Report on Form 10-Q (“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 prior to the Acquisitions are those of TruPet and TruPet’s equity has been re-cast to reflect shares of Better Choice Company common stock received in the acquisitions. The acquisition of Bona Vida is treated as an asset acquisition. Unless otherwise stated or the context otherwise requires, the historical business information described in this Quarterly Report prior to consummation of the 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.
 
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 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 and Current Reports on Forms 8-K.
 
PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

Better Choice Company Inc.
Unaudited Consolidated Balance Sheets
As of September 30, 2019 and December 31, 2018
(Dollars in thousands)

   
9/30/2019
(Unaudited)
   
12/31/2018
(Audited)
 
Assets
           
Current Assets
           
Cash and cash equivalents
 
$
2,776
   
$
3,946
 
Restricted cash
   
6,225
     
-
 
Accounts receivable, net
   
269
     
276
 
Inventories, net
   
2,358
     
1,557
 
Prepaid expenses and other current assets
   
1,931
     
269
 
Total Current Assets
   
13,559
     
6,048
 
Noncurrent Assets
               
Property and equipment, net
   
115
     
71
 
Right-of-use asset, operating lease
   
879
     
-
 
Intangible assets, net
   
926
     
-
 
Other assets
   
1,716
     
28
 
Total Assets
 
$
17,195
   
$
6,147
 
Liabilities & Stockholders’ Deficit
               
Current Liabilities
               
Line of credit
 
$
6,191
   
$
4,600
 
Other liabilities
   
-
     
1,914
 
Accounts payable
   
1,972
     
765
 
Due to related parties
   
34
     
1,600
 
Accrued liabilities
   
3,874
     
244
 
Deferred revenue
   
238
     
66
 
Operating lease liability, current portion
   
293
     
-
 
Warrant derivative liability
   
1,244
     
-
 
Total Current Liabilities
   
13,846
     
9,189
 
Noncurrent Liabilities
               
Operating lease liability
   
619
     
-
 
Total Liabilities
   
14,465
     
9,189
 
Redeemable Series E Convertible Preferred Stock
               
Redeemable Series E Convertible Preferred Stock, $0.001 par value, 2,900,000 and 0 shares authorized, 1,707,920 and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.
   
13,007
     
-
 
Stockholders’ Deficit
               
Common Stock, $0.001 par value, 88,000,000 shares and 580,000,000 shares authorized as of September 30, 2019 and December 31, 2018, respectively, 45,427,659 and 11,661,485 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.
   
45
     
12
 
Convertible Series A Preferred Units, no par value, units equivalent to 0 and 2,391,403 Common Stock issued and outstanding at September 30, 2019 and December 31, 2018, respectively
   
-
     
2
 
Additional paid-in capital
   
176,757
     
13,642
 
Accumulated deficit
   
(187,079
)
   
(16,698
)
Total Stockholders’ Deficit
   
(10,277
)
   
(3,042
)
Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit
 
$
17,195
   
$
6,147
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Better Choice Company Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Three and Nine Months Ended September 30, 2019 and 2018
(Dollars in thousands, except per share amounts)

   
For the Nine Months ended September 30,
   
For the Three Months ended September 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Net sales
 
$
11,567
   
$
11,045
   
$
3,932
   
$
3,981
 
Cost of goods sold
   
7,178
     
5,786
     
3,096
     
2,457
 
Gross profit
   
4,389
     
5,259
     
836
     
1,524
 
Operating expenses:
                               
General and administrative
   
12,031
     
4,013
     
4,856
     
1,341
 
Share-based compensation
   
6,708
     
-
     
2,496
     
-
 
Sales and marketing
   
8,452
     
4,061
     
2,856
     
1,242
 
Customer service and warehousing
   
854
     
927
     
303
     
350
 
Total operating expenses
   
28,045
     
9,001
     
10,511
     
2,933
 
Loss from operations
   
(23,656
)
   
(3,742
)
   
(9,675
)
   
(1,409
)
Other (expense) income:
                               
Interest expense
   
(165
)
   
(94
)
   
(41
)
   
(28
)
Loss on acquisitions
   
(147,376
)
   
-
     
2,612
     
-
 
Change in fair value of warrant derivative liability
   
886
     
-
     
1,079
     
-
 
Total other (expense) income
   
(146,655
)
   
(94
)
   
3,650
     
(28
)
                                 
Net and comprehensive loss
   
(170,311
)
   
(3,836
)
   
(6,025
)
   
(1,437
)
Preferred dividends
   
70
     
-
     
43
     
-
 
Net and comprehensive loss available to common stockholders
 
$
(170,381
)
 
$
(3,836
)
 
$
(6,068
)
 
$
(1,437
)
Weighted average number of shares outstanding
   
28,624,230
     
11,497,128
     
43,575,010
     
11,497,128
 
Loss per share, basic and diluted
 
$
(5.95
)
 
$
(0.33
)
 
$
(0.14
)
 
$
(0.12
)

The accompanying notes are an integral part of these unaudited consolidated financial statements.  Net loss and comprehensive loss are the same for all periods presented.

Better Choice Company, Inc.
Unaudited Consolidated Statements of Stockholders’ Deficit
For the three months ended September 30, 2019 and September 30, 2018
(dollars and share amounts in thousands)

   
Common Stock
                     
Redeemable Series E
Convertible Preferred
Stock
 
   
Number
   
Amount
   
Additional
paid-in
capital
   
Accumulated
deficit
   
Total Stockholders’
Deficit
   
Number
   
Amount
 
Balance at June 30, 2019
   
43,168
   
$
43
   
$
170,017
   
$
(181,023
)
 
$
(10,963
)
   
1,708
   
$
13,007
 
Impact of adoption of ASC 842 - See Note 8
   
-
     
-
     
-
     
12
     
12
                 
Share-based compensation
                   
2,496
     
-
     
2,496
                 
Stock issued to third parties for services
   
1,000
     
1
     
3,439
     
-
     
3,440
                 
Acquisition of treasury shares
   
-
             
(3,870
)
   
-
     
(3,870
)
               
Acquisition of Better Choice
                   
69
     
-
     
69
                 
Acquisition of Bona Vida
                   
600
     
-
     
600
                 
Private issuance of public equity (“PIPE”) warrant exercise
   
1,260
     
1
     
4,006
     
-
     
4,007
                 
Net and comprehensive loss available to common stockholders
   
-
             
-
     
(6,068
)
   
(6,068
)
               
Balance at September 30, 2019
   
45,428
   
$
45
   
$
176,757
   
$
(187,079
)
 
$
(10,277
)
   
1,708
   
$
13,007
 
 
                                                       
Balance at June 30, 2018
   
11,497
    $ 11     $ 8,545     $
(13,072
)   $ (4,516 )                
Net and comprehensive loss available to common stockholders
    -       -       -
     
(1,437
)    
(1,437
)                
Balance at September 30, 2018
   
11,497
    $ 11     $ 8,545     $
(14,509
)   $
(5,953
)                

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Better Choice Company, Inc.
Unaudited Consolidated Statements of Stockholders’ Deficit
For the nine months ended September 30, 2019 and September 30, 2018
(dollars and share amounts in thousands)

   
Common Stock
   
Convertible Series
A Preferred Units
                     
Redeemable Series E
Convertible Preferred
Stock
 
   
Number
   
Amount
   
Number
   
Amount
   
Additional
paid-in
capital
   
Accumulated
deficit
   
Total
Stockholders’
Deficit
   
Number
 
Amount
 
Balance at January 1, 2019
   
11,662
   
$
12
     
2,391
   
$
2
   
$
13,642
   
$
(16,698
)
 
$
(3,042
)
         
Initial impact of adoption of ASC 842
   
-
     
-
     
-
     
-
     
-
     
(12
)
   
(12
)
         
Impact of adoption of ASC 842 - See Note 8
   
-
     
-
     
-
     
-
     
-
     
12
     
12
           
Shares issued pursuant to private issuance of public equity- net proceeds
   
5,745
     
6
     
70
     
-
     
15,820
     
-
     
15,826
           
Share-based compensation
   
1,119
     
1
     
-
     
-
     
6,708
     
-
     
6,709
           
Stock issued to third parties for services
   
1,000
     
1
     
-
     
-
     
3,439
     
-
     
3,440
           
Conversion of Series A shares to common stock
   
2,461
     
2
     
(2,461
)
   
(2
)
   
-
     
-
     
-
           
Acquisition of treasury shares
   
(1,012
)
   
(1
)
   
-
     
-
     
(6,070
)
   
-
     
(6,071
)
         
Acquisition of Better Choice
   
3,915
     
4
     
-
     
-
     
23,560
     
-
     
23,564
   
2,634
   
$
20,059
 
Acquisition of Bona Vida
   
18,103
     
18
     
-
     
-
     
108,602
     
-
     
108,620
               
Conversion of Series E Preferred Stock
   
1,175
     
1
     
-
     
-
     
7,050
     
-
     
7,051
   
(926
)
   
(7,052
)
PIPE warrant exercise
   
1,260
     
1
     
-
     
-
     
4,006
     
-
     
4,007
   
-
     
-
 
Net and comprehensive loss available to common stockholders
   
-
     
-
     
-
     
-
             
(170,381
)
   
(170,381
)
 
-
     
-
 
Balance at September 30, 2019
   
45,428
   
$
45
     
-
   
$
-
   
$
176,757
   
$
(187,079
)
 
$
(10,277
)
 
1,708
   
$
13,007
 

Better Choice Company, Inc.
Unaudited Consolidated Statements of Stockholders’ Deficit
For the nine months ended September 30, 2018
(dollars and share amounts in thousands)

         
Common Stock
                   
   
Units
   
Number
   
Amount
   
Additional
paid-in
capital
   
Accumulated
deficit
   
Total Stockholders’
Deficit
 
Reported balance at January 1, 2018
   
10,397
   
-
    $
-
   
$
8,545
   
$
(10,673
)
 
$
(2,128
)
Recapitalization adjustment (1)
   
(10,397
)
   
11,497
     
11
     
-
     
-
     
11
 
Recast balance at January 1, 2018
   
-
     
11,497
     
11
     
8,545
     
(10,673
)
   
(2,117
)
Net and comprehensive loss available to common stockholders
   
-
     
-
     
-
     
-
     
(3,836
)
   
(3,836
)
Balance at September 30, 2018
   
-
     
11,497
   
$
11
   
$
8,545
   
$
(14,509
)
 
$
(5,953
)

(1) Certain prior year amounts were adjusted to retroactively reflect the legal capital of the Company from LLC units to common stock due to the reverse acquisition described in Note 2.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Better Choice Company Inc.
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2019 and 2018
(Dollars in thousands)

Cash Flow from Operating Activities
 
September 30, 2019
   
September 30, 2018
 
             
Net and comprehensive loss
 
$
(170,311
)
 
$
(3,836
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Non-cash expenses
   
572
     
-
 
Depreciation and amortization
   
76
     
11
 
Share-based compensation expenses
   
6,708
     
-
 
Non-cash lease expenses
   
39
     
-
 
Change in fair value of warrant derivative liability
   
(886
)
   
-
 
Non-cash loss on acquisitions
    146,980      
-
 
(Increase) decrease in operating assets
               
Accounts receivable, net
   
76
     
(161
)
Inventories, net
   
(705
)
   
(476
)
Prepaid expenses and other current assets
   
(135
)
   
58
 
Other assets
   
31
     
-
 
(Decrease) increase in current liabilities
               
Accounts payable
   
889
     
1,220
 
Accrued liabilities
   
3,287
     
18
 
Deferred revenue
   
172
     
119
 
Deferred rent
   
-
     
(9
)
Other
   
(17
)
   
(1
)
Cash Used in Operating Activities
 
$
(13,224
)
 
$
(3,057
)
                 
Cash Flow from Investing Activities
               
Acquisition of property and equipment, net
 
$
(52
)
 
$
(31
)
Cash acquired in merger
   
416
     
-
 
Cash Provided by (Used in) Investing Activities
 
$
364

 
$
(31
)
                 
Cash Flow from Financing Activities
               
Repayment of cash advance
 
$
(1,898
)
 
$
-
 
Proceeds from private issuance of public equity, net
   
15,826
     
-
 
Payments on line of credit
   
(4,600
)
   
-
 
Payment of related party note payable
   
(1,600
)
   
(53
)
Proceeds from related party note payable
   
-
     
1,248
 
Capital contributions by owners
   
-
     
356
 
Distribution to the owners
   
-
     
(356
)
Proceeds from the issuance of debt
   
6,200
     
1,970
 
PIPE warrant exercise
   
4,007
     
-
 
Debt issuance costs
   
(20
)
   
-
 
                 
Cash Provided by Financing Activities
 
$
17,915
   
$
3,165
 
                 
Net Increase in Cash, Cash Equivalents and Restricted Cash
 
$
5,055
   
$
77
 
Total Cash and Cash Equivalents, Beginning of Period
   
3,946
     
157
 
Total Cash, Cash Equivalents and Restricted Cash, End of Period
 
$
9,001
   
$
234
 

Supplemental Cash Flow Information
 
The following represent noncash financing and investing activities and other supplemental disclosures related to the statement of cash flows:

On January 1, 2019, the Company adopted ASC 842 which resulted in the acquisition of right-of-use assets and operating lease liabilities as follows:

Right-of-use asset and operating lease liability acquired under operating leases
     
Right-of-use asset recorded upon adoption of ASC 842
 
$
421
 
Operating lease liability recorded upon adoption of ASC 842
   
(429
)
Noncash acquisition of right-of-use asset for leases entered into during period
 
$
607
 
Noncash acquisition of operating lease liability for leases entered into during the period
 
$
(594
)

On May 6, 2019 we acquired two businesses using stock for a purchase price of $146.6 million, including non-cash transaction costs of $4.8 million. See Note 2.

On August 28, 2019, the Company issued 1,000,000 shares of Common Stock valued at $3.4 million to iHeartMedia for future advertising to be incurred from August, 2019 to August, 2021.  During the nine month period ended September 30, 2019, $0.6 million of the $3.4 million of the prepaid advertising was incurred. Refer to “Note 5 – Prepaid Expenses and Other Current Assets” for more information.

The Company paid no income taxes during the nine months ended September 30, 2019 or 2018.

Cash interest paid was $0.2 million and $0.1 million during the nine months ended September 30, 2019 and the nine months ended September 30, 2018, respectively.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Notes to the Unaudited Consolidated Financial Statements

Note 1 – Nature of Business and Summary of Significant Accounting Policies

Nature of the Business
 
Better Choice Company, Inc. (the “Company”) is a 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 pets and their human parents. Our products are formulated and manufactured using only high-quality ingredients manufactured, tested and packaged to our specifications. The Company operations include those of its two wholly-owned subsidiaries, 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 majority of our products are sold online directly to consumers with additional sales through online retailers and pet specialty stores. We have a limited selection of CBD infused canine products available on our Bona Vida website.  The information contained in, or accessible through, these websites does not constitute a part of this Quarterly Report.
 
Basis of Presentation and Consolidation
 
On May 6, 2019, Better Choice Company, Inc. completed the acquisition, for TruPet LLC (“TruPet”) and Bona Vida Inc. (“Bona Vida”) in a pair of all stock transactions (the “Acquisitions”) through the issuance of 32,332,314 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.
 
The Company is the legal acquirer of TruPet and Bona Vida. However, the Acquisitions were treated as a reverse acquisition whereby TruPet acquired the Company and Bona Vida for accounting and financial reporting purposes. As a result, the financial statements for the nine months ending September 30, 2019 are comprised of 1) the results of TruPet for the period between January 1, 2019 and September 30, 2019 and 2) the results of the Company and Bona Vida, after giving effect to the Acquisitions on May 6, 2019 through September 30, 2019. All periods presented prior to the effective date of the Acquisitions are comprised solely of the operations and financial position of TruPet, and therefore, are not directly comparable. TruPet’s equity has been re-cast to reflect the equity structure of Better Choice Company and the shares of Common Stock received in the Acquisitions.
 
References to the “Company”, “we”, “us” and “our” in this Report, refer to TruPet and its consolidated subsidiaries prior to May 6, 2019 and to Better Choice Company, TruPet and Bona Vida and their consolidated subsidiaries post May 6, 2019.
 
The Company’s consolidated financial statements are prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission for quarterly reports and accounting principles generally accepted in the United States (GAAP).  The financial statements are presented on a consolidated basis subsequent to the Acquisitions and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. 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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2019. The significant accounting policies applied by the Company are described below. We present our tables in U.S. dollars (thousands), numbers in the text in dollars (millions), shares in thousands, and % as rounded up or down.
 
Going Concern Considerations
 
The Company is subject to risks common in the pet wellness consumer market including, but not limited to, dependence on key personnel, competitive forces, successful marketing and sale of its products, the successful protection of its proprietary technologies, ability to grow into new markets, compliance with government regulations, and the ability to obtain additional financing when needed. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern. See “Note 22- Going Concern” for more information.

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits held with banks and highly liquid investments with original maturities of ninety days or less at acquisition date. For purposes of reporting cash flows, the Company considers all cash accounts that are not subject to withdrawal restrictions or penalties to be cash and cash equivalents.

Restricted Cash

As part of the line of credit agreement secured with a financial institution, the Company is required to maintain a restricted cash balance of $6.2 million in its account.  Any withdrawals from the account require an equal reduction to the funds available under the line of credit agreement. See “Note 10 – Line of Credit and Due to Related Parties” for more details on the revolving credit agreement.

The Company is also required to maintain a restricted cash balance of less than $0.1 million associated with a business credit card.

Accounts receivable and allowance for doubtful accounts

Accounts receivable primarily consist of credit card payments receivable from third-party credit card processing companies and unpaid buyer invoices from the Company’s wholesale customers. Accounts receivable is stated at the amount billed to customers, net of point of sale discounts. The Company assesses the collectability of all receivables on an ongoing basis by considering its historical credit loss experience, current economic conditions, and other relevant factors.  Based on this analysis, an allowance for doubtful accounts is recorded. The provision for doubtful accounts is included in general and administrative expense in the consolidated statements of operations. As of September 30, 2019 and December 31, 2018, the Company considers accounts receivable to be fully collectible and, accordingly, no allowance for doubtful accounts was recorded.

Inventories

Inventories, primarily consisting of products available for sale and supplies, are valued using the first-in first-out (“FIFO”) method and are recorded at the lower of cost or net realizable value. Cost is determined on a standard cost basis and includes the purchase price, as well as inbound freight costs and packaging costs.

The Company regularly reviews inventory quantities on hand.  Excess or obsolete reserves are established when inventory is estimated to not be sellable before expiration dates based on forecasted usage, product demand and product life cycle.  Additionally, inventory valuation reflects adjustments for anticipated physical inventory losses, such as shrink, that have occurred since the last physical inventory.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Depreciable lives are 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 property and equipment accounts in the year of disposal with the resulting gain or loss reflected in general and administrative expenses.

The Company assesses potential impairments of its property and equipment 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 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.  No impairment charges have been incurred for property and equipment for any period presented.

License Intangibles

Intangible assets acquired are carried at cost, less accumulated amortization. The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable and any not expected to be recovered through undiscounted future net cash flows and assets are written down to current fair value.
 
The Company acquired a licensing agreement for Houndog brand.  The estimated life was six years and was amortized on a straight line basis.   On January 16, 2020, the Company terminated the licensing agreement with Associated Brands Group and Elvis Presley Enterprises, refer to Note 23 - Subsequent Events. The Company agreed to (i) pay a termination fee of $0.1 million in cash on the date of termination, (ii) pay $0.1 million in cash in four equal installment payments between July 31, 2020 and October 31, 2020, (iii) issued 72,720 shares of common stock, and (iv) issued a promissory note of $0.6 million.
 
Redeemable Convertible Preferred Stock
 
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 480, Distinguishing Liabilities from Equity (ASC 480), preferred stock issued with redemption provisions that are outside of the control of the Company or that contain certain redemption rights in a deemed liquidation event is required to be presented outside of stockholders’ deficit on the face of the consolidated balance sheet. The Company’s Redeemable Series E Convertible Preferred Stock contain redemption provisions that require it to be presented outside of stockholders’ deficit. Changes in the redemption value of the redeemable convertible preferred stock, if any, are recorded immediately in the period occurred as an adjustment to additional paid-in capital in the consolidated balance sheet.
 
Income Taxes

Income taxes are recorded in accordance with FASB ASC Topic 740, Income Taxes (ASC 740), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities and for loss and credit carryforwards using enacted tax rates anticipated to be in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all the deferred tax assets will not be realized.
 
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that some or all the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances. As of September 30, 2019, and 2018, the Company does not have any significant uncertain tax positions. If incurred, the Company would classify interest and penalties on uncertain tax positions as 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:


Identify 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).

TruPet adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2017. Accordingly all periods presented reflect the recognition of revenue and related disclosures required by ASC 606.

Cost of Goods Sold

Cost of goods sold consists primarily of the cost of product obtained from third-party contract manufacturing plants, packaging materials, CBD oils directly sourced by the Company, and inventory freight for shipping product from third-party contract manufacturing plants to the Company’s warehouse.

General and Administrative Expenses

General and administrative expenses include management and office personnel compensation and bonuses, corporate level information technology related costs, rent, travel, professional service fees, insurance, product development costs, general corporate expenses and outbound shipping.  Shipping costs primarily consist of costs associated with moving finished products to customers through third-party carriers. Shipping costs were $0.6 million and $1.8 million for the three and nine month periods ended September 30, 2019 and $0.6 million and $1.9 million during the three and nine month periods ended September 30, 2018, respectively.

For direct to consumer customers, the Company may recover shipping costs by charging the customer a shipping fee. In these instances, the Company includes the shipping charges billed to customers in net sales. The amount included in net sales related to such recoveries was $0.2 million and $0.5 million for the three and nine month periods ended September 30, 2019 and $0.2 million and $0.7 million for the three and nine month periods ended September 30, 2018, respectively.

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 online advertising, search costs, email advertising, and radio advertising were $1.8 million and $0.8 million for the three months ended September 30, 2019 and 2018, respectively and $5.8 million and $3.0 million for the nine-month periods ended September 30, 2019 and 2018, 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.  Research and development costs incurred during both the three and nine month periods months ended September 30, 2019 were less than $0.1 million.  No research and development costs were incurred during the three or nine month periods ended September 30, 2018.

Customer Service and Warehousing

Customer Service and Warehousing include costs associated with storing inventory, customer service and fulfilling customer orders.

Fair Value of Financial Instruments

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 on the balance sheets consist of cash and cash equivalents, restricted cash, accounts receivable, deposits, accounts payable, line of credit, due to related party, accrued and other liabilities, and warrant derivative liability. The warrant derivative liability is measured, due to their short term nature, 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 which requires a fair value hierarchy to be applied to all fair value measurements.  The fair value of the warrant derivative liability is considered a Level 3 financial instrument.

The Company uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value, and related disclosures for instruments measured at fair value. Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. An instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The Company measures assets and liabilities using inputs from the following three levels of fair value hierarchy:
 
Level 1 - Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Company’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which may include the Company’s own financial data, such as internally developed pricing models, DCF methodologies, as well as instruments for which the fair value determination requires significant management judgment.

The following table sets forth the Company’s financial liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2019 and December 31, 2018:

   
September 30, 2019
 
Dollars in thousands
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Liabilities
                       
Warrant derivative liability
 
$
-
   
$
-
   
$
1,244
   
$
1,244
 

Basic and Diluted Loss Per Share

Basic and diluted loss per share has been determined by dividing the net loss available to common 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.

Share-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 follows the fair value method of accounting for stock awards granted to employees, directors, officers and consultants. Share-based awards to employees are measured at the fair value of the related share-based awards on grant date. The Company recognizes share-based payment expenses over the vesting period based on the number of awards expected to vest over that period on a straight-line basis. The Company’s share-based compensation awards are subject only to service based vesting conditions. 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 and the dividend yield on the underlying stock. Expected volatility is calculated based on the analysis of other public companies within the pet wellness, Internet commerce, and hemp derived CBD sectors. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The expected life is calculated as the mid-point between the vested date and the contractual expiration of the option as it factors in early exercise typically seen with employee options.  The graded vesting period was incorporated into the calculation of the adjusted 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.

Use of Estimates

The preparation of the consolidated 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.

The Company’s results can also be affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, and government fiscal policies, can have a significant effect on operations. While the Company maintains reserves for anticipated liabilities and carries various levels of insurance, the Company could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings.
 
Significant changes to the key assumptions used in the valuations could result in different fair values of equity instruments at each valuation date.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker 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 reviews operating results on an aggregated basis. All the assets and operations of the Company are in the United States.

Commitments and Contingencies

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 contingencies. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.

We do not accrue for contingent losses that are considered to be reasonably possible, but not probable; however, we disclose the range of such reasonably possible losses. Loss contingencies considered remote are generally not disclosed.

We have entered into lease, royalty and line of credit agreements for which we are committed to pay certain amounts over a period of time.  See Notes 8, 9, and 10.

In connection with the preparation of the Company’s consolidated financial statements for the three and nine month periods ended September 30, 2019, the Company identified an error as of  December 31, 2018 and June 30, 2019, related to an understatement of sales taxes due and payable of $0.7 million and $0.8 million, respectively. The error was corrected during the three and nine month periods ended September 30, 2019. The Company believes that the correction of this error is not material to the consolidated financial statements as of and for the three and nine month periods ended September 30, 2019.
 
Reclassification of Prior Period Presentation

Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.

Recently Issued Accounting Pronouncements

The Company has reviewed the Accounting Standards Update (“ASU”), accounting pronouncements and interpretations thereof issued by the FASB that have effective dates during the reporting period and in future periods.

Recently adopted:

Adoption of FASB ASC Topic 842 “Leases”

In February 2016, the Financial Accounting Standard Board (’ FASB’) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842) ” (“ASU 2016-02”), which amends leasing guidance by requiring companies to recognize a right-of-use asset and a lease liability for all operating and financing leases with lease terms greater than twelve months. The lease liability is equal to the present value of lease payments. The right-of-use lease asset is based on the lease liability, subject to adjustment for prepaid and deferred rent and tenant incentives. For income statement purposes, leases will continue to be classified as operating or financing with lease expense in both cases calculated substantially the same as under the prior leasing guidance.

The adoption of ASC 842 resulted in recognition of right-of-use assets of $0.4 million and operating lease liabilities of $0.4 million as of January 1, 2019.  The Company adopted the optional transition method that gives companies the option to use the adoption date as the initial application on transition.  Accordingly, results for reporting periods beginning prior to January 1, 2019 continue to be reported in accordance with our historical treatment.  The adoption of ASC 842 did not have a material impact on the Company’s results of operations or cash flows (See “Note 8 – Operating Leases” ).

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 expanded the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. The requirements of ASC 718 are applied to nonemployee awards except for specific guidance on 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 under ASC 606, “Revenue from Contracts with Customers.”

The Company is treating the inclusion of share-based payments to non-employees as a change in accounting principle prospectively beginning in the period ending January 1, 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 operations in prior periods.

Adoption of ASU 2018-13 “Fair Value Measurement”

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Changes to the Disclosure Requirement for Fair Value Measurement” which amends ASC 820 to expand the disclosures required for items subject to Level 3, fair value remeasurement, including the underlying assumptions.  ASU 2018-13 is effective for public companies for fiscal years beginning after December 15, 2019.  The Company has early adopted the disclosures as of January 1, 2019 as permitted under the ASU.   As this standard only requires additional disclosures, there is no financial statement impact of its adoption.

Issued but not Yet Adopted:

ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326)”

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326),” a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for the Company on January 1, 2021, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its consolidated financial statements.

ASU 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40)”

In August 2018, the FASB issued ASU 2018-15Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” to amend ASU 2015-05 in an effort to provide additional guidance on the accounting for costs implementation activities performed in a cloud computing arrangement that is a service contract.  The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).  The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.  The amendments in this update also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalizing implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element.  The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The new standard is effective for the Company on January 1, 2021, and early adoption is permitted.  The Company believes that current practices of capitalization vs expensing IT costs are in line with this guidance, however, the amendment will require the Company to change presentation within the statement of cash flows. The Company currently has no internal use software and expects this accounting standard will have no impact on its consolidated financial statements.

The Company has carefully considered other new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the Company’s reported balance sheet or operations in 2019.

Note 2 - Acquisitions

On May 6, 2019, the Company completed the Acquisitions through the issuance of 32,332,314 shares of Common Stock, par value $0.001 of the Company (the “Common Stock”).  Following the completion of the Acquisitions, the operations of the Company are primarily comprised of the operations of TruPet and Bona Vida.  The strategic objective for combining the two complementary businesses was to create a leading innovative holistic pet wellness company operating in a rapidly evolving and growing industry.

The Company’s board of directors (“The Board”) consists of five directors: the current chairman of the Company who was the prior chairman of Bona Vida, two prior directors from TruPet, one prior director from Bona Vida, and one director who was a TruPet managing member as well as the prior chairman of the Company.

TruPet was determined to be the accounting acquirer of the Company and Bona Vida.  As such, the historical financial statements are those of TruPet, and TruPet’s equity has been re-cast to reflect the equity structure of the Company and the shares of Common Stock received. Better Choice exchanged 14,229,041 shares for the outstanding membership interest in TruPet.

The Acquisitions were accounted for as asset acquisitions. The purchase price for Better Choice Company was $37.9 million which includes stock, minority interest, fully vested stock-based compensation and transaction expenses.  The transaction price of Better Choice Company includes 100% of all outstanding stock valued at net $32.7 million, non-cash transaction costs of $4.8 million, cash transaction costs of $0.4 million and fully vested stock-based compensation with an estimated fair value of $0.1 million.  The stock exchanged in the Acquisition of Better Choice Company is equal to the 3,915,856 shares of Better Choice Company outstanding prior to the issuance of additional shares in the Acquisitions, at the market price of $6.00 per share. The total purchase price has been allocated based on an estimate of the fair value of Better Choice Company’s assets acquired and liabilities assumed with the remainder recorded as an expense.  The loss on acquisition of Better Choice Company’s net liabilities is $39.6 million.
 
The purchase price for Bona Vida was $108.6 million for 100% of all outstanding stock.  At the closing of the Bona Vida transaction, the Company issued 18,103,273 shares of Common Stock in exchange for 100% of the outstanding shares of Bona Vida. The fair value of Bona Vida’s net assets acquired is estimated to be $0.8 million.  The estimated purchase price has been allocated based on an estimate of the fair value of assets acquired and liabilities assumed.  The excess of the purchase price over the net assets acquired has been recorded as an expense.  The loss on acquisition of Bona Vida’s net assets is $107.8 million.

On May 6, 2019, the fair value of the following assets and liabilities were acquired resulting in the total loss of approximately $147.4 million:


   
Better Choice
Company
   
Bona Vida
   
Total
 
Total Purchase Price
 
$
37,949
   
$
108,620
   
$
146,569
 
Net Assets (Liabilities) Acquired:
                       
Assets
                       
Cash and cash equivalents
   
7
     
384
     
391
 
Restricted cash
   
-
     
25
     
25
 
Accounts receivable
   
-
     
69
     
69
 
Inventories
   
-
     
95
     
95
 
Prepaid expenses and other current assets
   
32
     
348
     
380
 
Intangible assets
   
986
     
-
     
986
 
Other assets
   
-
     
74
     
74
 
Total Assets
   
1,025
     
995
     
2,020
 
Liabilities
                       
Warrant derivative liability
   
(2,130
)
   
-
     
(2,130
)
Accounts payable & accrued liabilities
   
(544
)
   
(153
)
   
(697
)
Debt
   
-
     
-
     
-
 
Total Liabilities
   
(2,674
)
   
(153
)
   
(2,827
)
Net Assets (Liabilities) Acquired
   
(1,649
)
   
842
     
(807
)
Loss on Acquisitions
 
$
(39,598
)
 
$
(107,778
)
 
$
(147,376
)
 
The results of operations of the acquired entities are included in the accompanying consolidated financial statements subsequent to the date of Acquisitions.
 
In connection with the preparation of the Company’s consolidated financial statements for the three and nine month periods ended September 30, 2019, the Company identified an error in the consolidated financial statements for the six month period ended June 30, 2019 related to the overstatement of Loss on Acquisitions of $2.6 million in the consolidated statement of operations and comprehensive loss.   This was primarily due to a change in the estimated purchase price, which also resulted in errors in the statement of stockholders’ deficit.  The errors were all corrected during the three month period ended September 30, 2019.  The Company believes the correction of these errors is not material to the consolidated financial statements as of and for the three month period ended September 30, 2019.
 
Note 3 – 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 the goods. The Company has two revenue channels, direct to consumer (“DTC”) and wholesale.  Nearly all of the Company’s revenue is derived from the DTC channel which represents 95% of consolidated revenue; the wholesale channel represents 5% of consolidated revenue. The majority of these sales transactions are single performance obligations that are recorded when control is transferred to the customer.  The Company offers a loyalty program to its DTC customers which creates a separate performance obligation.

The following is a description of principal activities from which the Company generates its revenue, by revenue channel.

The Company’s DTC products are offered through the online stores where customers place orders directly for delivery across the United States. Revenue is recorded, net of discounts, at the time the order is shipped to the customer as this is when it has been determined that control has been transferred, and includes shipping paid by customers. Revenue is measured as the amount of consideration, net of discounts, the Company expects to receive in exchange for transferring the merchandise. The Company has elected to exclude from revenue all collected sales taxes paid by its customers.

Revenue is deferred for orders that have been placed, and paid for, but have not yet been shipped. Customers have a 60-day guarantee on the product purchased.  Based on the historical experience, the Company records an estimated liability for returns.  Product returns have historically not been significant to the financial statements taken as a whole.

For the Company’s DTC loyalty program, a portion of revenue is deferred at the time of the sale as points are earned based on the relative stand-alone selling price, and not recognized, until the redemption of the loyalty points.  The Company has applied a redemption rate based on the historical age of the points.

The customer has a material right in the form of future discounts with their accumulated points. For these transactions, the transaction price is allocated to the separate performance obligations based on the relative standalone selling price of loyalty points.  The standalone selling price for the points earned for the Company’s loyalty program is estimated using the net retail value of the merchandise purchased, adjusted for the redemption percentage based on historical redemption patterns.  The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed. Customer points do not expire.

The Company’s wholesale channel includes the sale of goods to wholesale customers for resale. The wholesale sale of goods is considered a single performance obligation. The Company records revenue net of discounts. There is no shipping revenue on wholesale transactions and wholesale customers are not subject to sales tax.

Revenue for wholesale sales are recognized when the product is shipped to the wholesale customer as this is when it has been determined that control has been transferred, with the exception of the Company’s largest customer due to specific FOB destination shipping terms as this is when it has been determined that control has transferred.

The Company’s net revenue in the Consolidated Statements of Operations and Comprehensive Loss are net of sales taxes.

Note 4 - Inventories

Inventories are summarized as follows:

Dollars in thousands
 
September 30, 2019
   
December 31, 2018
 
Food, treats and supplements
 
$
2,544
   
$
1,301
 
Other products and accessories
   
110
     
191
 
Inventory packaging and supplies
   
142
     
133
 
     
2,796
     
1,625
 
Inventory reserve
   
(438
)
   
(68
)
   
$
2,358
   
$
1,557
 

Note 5 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

Dollars in thousands
 
September 30, 2019
   
December 31, 2018
 
Prepaid insurance
 
$
50
   
$
15
 
Prepaid advertising
   
1,291
     
-
 
Other
   
590
     
254
 
Total prepaid expenses and other current assets
 
$
1,931
   
$
269
 

On August 28, 2019, the Company entered into a radio advertising agreement with iHeartMedia + Entertainment, Inc.  On August 28, 2019, the Company issued to iHeart Media 1,000,000 shares of common stock valued at $3.4 million for future advertising to be provided to the Company from August, 2019 to August, 2021.  During each of the three and nine month periods ended September 30, 2019, $0.6 million of the $3.4 million of the prepaid advertising was incurred. In addition, the agreement requires the Company to spend a minimum amount for talent fees or other direct iHeart costs. As of September 30, 2019, the additional commitment is for less than $0.1 million. The company has committed to using $1.7 million of the media inventory by August 28, 2020, with the remainder of the inventory available through August 28, 2021. The Company expensed $0.6 million of the media inventory in the period ended September 30, 2019, reducing the Prepaid Advertising balance to $2.8 million, of which $1.3 million is recorded in Prepaid Expenses and Other Current Assets and $1.5 million in Other Noncurrent Assets.

Note 6 - Property and Equipment

Property and equipment consist of the following:

Dollars in thousands
 
September 30, 2019
   
December 31, 2018
 
Warehouse equipment
 
$
49
   
$
49
 
Computer equipment
   
14
     
14
 
Furniture and fixtures
   
99
     
46
 
Total property and equipment
   
162
     
109
 
Accumulated depreciation
   
(47
)
   
(38
)
Net property and equipment
 
$
115
   
$
71
 

Depreciation expense was less than $0.1 million for the three months ended September 30, 2019 and 2018, respectively and less than $0.1 million for the nine months ended September 30, 2019 and 2018 respectively. Depreciation expense is included as a component of general and administrative expenses.

Note 7 – Accrued Liabilities

Accrued expenses consist of the following:

Dollars in thousands
 
September 30, 2019
   
December 31, 2018
 
Accrued payroll and benefits
 
$
528
   
$
85
 
Accrued professional fees
   
1,788
     
-
 
Accrued sales tax
   
1,275
     
-
 
Other
   
283
     
159
 
Total accrued liabilities
 
$
3,874
   
$
244
 

Note 8 – Operating Leases

Effective January 1, 2019, the Company adopted the FASB guidance on leases (“Topic 842”), which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted Topic 842 using the modified retrospective transition approach.  Prior year financial statements were not recast under Topic 842, and therefore those amounts are not disclosed.  The Company has elected certain practical expedients, including the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs as well as an accounting policy to account for lease and non-lease components as a single component.  The Company also elected the optional transition method that gives companies the option to use the effective date as the date of initial application on transition, and as a result, the Company will not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date. The Company has elected to make the accounting policy election for short-term leases.  Consequently, short-term leases will be recorded as an expense on a straight-line basis over the lease term.  The Company did not elect the hindsight practical expedient.

The Company’s leases relate to our corporate offices and warehouse. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Lease renewal options are not included in the measurement of the right-of-use assets and right-of-use liabilities unless the Company is reasonably certain to exercise the optional renewal periods.  The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.  Additionally, our leases contain rent escalations over the lease term and the Company recognizes expense for these leases on a straight-line basis over the lease term. Some of the Company’s leases include rent escalations based on inflation indexes, tenant allowances and fair market value adjustments.
 
In connection with the preparation of the Company’s consolidated financial statements for the three and nine month periods ended September 30, 2019, the Company identified an error as of January 1, 2019 related to the adoption of ASC 842, Leases, which resulted in an overstatement of less than $0.1 million for right-of-use assets and operating lease liabilities, respectively.   The Company also identified an overstatement of Accumulated Deficit of less than $0.1 million as of January 1, 2019.  The errors related to impact upon adoption of ASC 842 were corrected during the three-and-nine-month periods ended September 30, 2019.  The Company believes the correction of these errors is not material to the consolidated financial statements as of and for the three-and-nine-month periods ended September 30, 2019.
 
For leases entered into or reassessed after the adoption of the new standard, the Company has elected the practical expedient allowed by the standard to account for all fixed consideration in a lease as a single lease component. Therefore, the lease payments used to measure the operating lease liability for these leases include fixed minimum rentals along with fixed operating costs such as common area maintenance and utilities.

The Company’s leases do not provide a readily available implicit rate. Therefore, the Company estimates the incremental borrowing discount rate based on information available at lease commencement. The discount rates used are indicative of a synthetic credit rating based on quantitative and qualitative analysis.

Lease position as of January 1, 2019
 
The table below presents the lease-related assets and liabilities recorded on the balance sheet.

Dollars in thousands
Classification on the Balance Sheet 2019
 
January 1,
2019
 
Assets
       
Operating lease right-of-use assets
Operating lease right-of-use assets
   
421
 
           
Liabilities
         
Current - Operating
Operating lease liability short term
   
87
 
Noncurrent - Operating
Operating lease liability long term
   
342
 
Total operating lease liabilities
   
$
429
 

The table below presents certain information related to the lease costs for operating leases for the three and nine months ended September 30, 2019.

   
Three months
ended
September 30,
2019
   
Nine months
ended
September 30,
2019
 
Dollars in thousands
           
Operating lease costs
   
95
     
219
 
Variable lease costs
   
8
     
24
 
Total Operating Lease costs
 
$
103
     
243
 

As of September 30, 2019, the weighted-average remaining operating lease term was 2.75 years and the weighted average discount rate was 12.5% for operating leases recognized on our Consolidated Balance Sheet.

Undiscounted cash flows
 
The table below reconciles the undiscounted cash flows for each of the first four years and total of the remaining
years to the operating lease liabilities recorded on the balance sheet.

Dollars in thousands                           
Operating Leases      
Remainder of 2019

 
$
95
 
2020
     
381
 
2021
     
381
 
2022
     
182
 
Total Minimum Lease Payments
     
1,039
 
Less: amount of lease payments representing interest
     
127
 
Present value of future minimum lease payments
   
$
912
 
Less: current obligations under leases
     
293
 
Long-term lease obligations
   
$
619
 

Note 9 – Intangible Assets and Royalties

In April 2019, Better Choice Company entered into a licensing agreement with Authentic Brands and Elvis Presley Enterprises whereby Better Choice will be able to sell newly developed hemp-derived CBD products that will be marketed under the Elvis Presley Houndog name.  The license agreement required an upfront equity payment of $1 million worth of Common Stock.
 
Upon the Acquisitions on May 6, 2019, the Company acquired the license agreement and recorded it at its amortized cost which approximated fair value.

Dollars in thousands
 
September 30, 2019
   
December 31, 2018
 
License intangibles
 
$
986
   
$
-
 
Less accumulated amortization
   
60
     
-
 
Total Intangible Assets, net
 
$
926
   
$
-
 

As of September 30, 2019, the Company paid $0.6 million of the 2019-2020 Guaranteed Minimum Royalty Payment. As there were no sales related to Houndog products during the three and nine month periods ended September 30, 2019, the Company determined that the minimum royalties paid through September 30, 2019 should be expensed. The Houndog license agreement was terminated in January 2020, refer to Note 23 - Subsequent Events.
 
Note 10 - Line of Credit and Due to Related Parties

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 secured by the personal assets of the two majority owners. Through various amendments, the maximum borrowings under the credit facility increased to $4.6 million with a maturity of May 2019. Borrowings bear interest at LIBOR plus 3% and were repaid on May 6, 2019. At December 31, 2018, outstanding borrowings were $4.6 million.  Accrued interest recorded at December 31, 2018 was less than $0.1 million.

The credit facility was secured by personal assets of the co-borrowers, as noted above. Covenants under the credit facility required the Company to be within certain restrictions. As of December 31, 2018, the Company was in compliance with its covenants.

At December 31, 2018, due to related parties consisted of a $1.6 million unsecured note payable to the director of the Company bearing 26.6% interest with principal and interest due within 30 days after change of control, as described below.  On May 6, 2019, this loan was repaid.  There was no accrued interest recorded at December 31, 2018.   The unsecured note totaled $1.2 million during nine months ended September 30, 2018.

On May 6, 2019, the Better Choice Company refinanced the $4.6 million credit facility and the $1.6 million note payable to the director with a $6.2 million revolving line of credit agreement with a financial institution (the “revolving line of credit”). The $6.2 million revolving line of credit agreement (“revolving credit agreement”) is secured by $6.2 million in restricted cash held in a Money Market Account. 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 in the event that the interest payable on the Money Market Account increases where the interest rate on the revolving line of credit is 185 basis points higher than the rate payable on the Money Market Account. The Company paid an issuance fee of $8,856 upon closing, which was recorded as a contra liability and will be amortized over the life of the debt. . The Company is also required to pay a late charge equal to 5% of the aggregate amount of any payments of principal and/or interest that are paid more than 10 days after the due date.  This revolving credit agreement matures on May 6, 2020 and requires that the Company maintain the $6.2 million restricted deposits on account at the bank.  If withdrawals are made from the account, the amount available under the revolving credit agreement decreases by the amount of the withdrawal.

Management has determined that the fair value of debt approximates the carrying value of the revolving line of credit given its short-term nature.

The Company has granted the Lender a security interest in all assets of the Company owned or later acquired. The revolving credit agreement also contains certain events of default, representations, warranties and covenants of the Company and its subsidiaries. For example, the revolving credit agreement contains representations and covenants that, subject to exceptions, restrict the Company’s ability to do the following, among things: incur additional indebtedness, engage in certain asset sales, or undergo a change in ownership. As of September 30, 2019, the Company was in compliance with its covenants.

Interest expense of approximately $0.2 million was recorded in the consolidated statements of operations and comprehensive loss related to the lines of credit and the director note for the nine months ended September 30, 2019, and $0.1 million and less than $0.1 million for three and nine months ended September 30, 2018, respectively. Interest expense of approximately $0.1 million was recorded in the consolidated statements of operations and comprehensive loss related to the lines of credit for the three months ended September 30, 2019.

Note 11 – Warrant Derivative Liability

On December 12, 2018, the 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 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 $2.8 million. Costs associated with the December Offering were $0.1 million, and net proceeds were $2.7 million. The December Offering generated $2.6 million of net proceeds that were received by the Company during the period ended December 31, 2018 for the sale of 1,400,000 Units, and $0.1 million of the net proceeds were received on January 8, 2019 for the sale of 25,641 Units. The warrants are exercisable over a two-year period at the initial exercise price of $3.90 per share.

The warrants include an option to settle in cash in the event of a change of control of the Company and a reset feature if the Company issues shares of common stock with a strike price below $3.90 per share, which requires the Company to record the warrants as a derivative liability. The Company calculates the fair value of the derivative liability through a Monte Carlo Model that values the warrants 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 period from May 6, 2019 through September 30, 2019.

Dollars in thousands
 
Warrant Liability
 
Assumption of warrants pursuant to May 6, 2019 acquisition of Better Choice Company
 
$
2,130
 
Change in fair value of derivative liability
   
(886
)
Balance as of September 30, 2019
 
$
1,244
 

   
May 6, 2019
   
September 30, 2019
 
Warrant Liability
           
Stock Price
 
$
6.00
   
$
4.36
 
Exercise Price
 
$
3.90
   
$
3.90
 
Expected remaining term (in years)
   
1.60 – 1.68
     
1.20 – 1.28
 
Volatility
   
64
%
   
64% – 69
%
Risk-free interest rate
   
2.39
%
   
1.72
%

The valuation of the warrants is subject to uncertainty as a result of the unobservable inputs.  If the volatility rate or risk-free interest rate were to change, the value of the warrants would be impacted.

At September 30, 2019, the Company would be required to pay $0.3 million if all warrants were settled in cash or issue 712,823 shares if all warrants were settled in shares.

Note 12 – Other Liabilities

Other liabilities consist of the following:

Dollars in thousands
 
September 30, 2019
   
December 31, 2018
 
Cash Advance
 
$
-
   
$
1,898
 
Deferred Rent
   
-
     
16
 
Total Other Liabilities
 
$
-
   
$
1,914
 

During the fourth quarter of 2018, the Company received cash advances totaling $2.4 million from a third party lender, plus fees of $0.3 million, that were secured by customer payments on future sales and receivables.  $0.8 million of the cash advance was paid back to the lender in the fourth quarter of 2018 and the remaining $1.9 million was paid during the nine month period ended September 30, 2019.

Note 13 – Commitments and Contingencies

We have entered into lease, royalty and line of credit agreements for which we are committed to pay certain amounts over a period of time.  See Notes 8, 9, and 10.

In the normal course of business, the Company is subject to certain claims or lawsuits. Management is not aware of any claims or lawsuits that may have a material adverse effect on the consolidated financial position or results of operations of the Company.

The Company has historically collected and remitted sales tax based on the locations of its significant physical operations. On June 21, 2018, the U.S. Supreme Court rendered a 5-4 majority decision in South Dakota v. Wayfair Inc., 17-494. Among other things, the Court held that a state may require an out-of-state seller with no physical presence in the state to collect and remit sales taxes on goods the seller ships to consumers in the state, overturning existing court precedent.  Additionally, the Company discovered that TruPet had not collected and paid sales tax related to all sales in some states where it had a physical presence.  The Company has estimated and recorded $1.2 million of sales tax liability as of September 30, 2019.  While additional assessments are not anticipated, additional states may assert that the Company has nexus and must pay sales tax for prior sales.  We do not believe that additional assessments, if any, will have a material impact on our financial position or results of operations.

Note 14 – Redeemable Series E Convertible Preferred Stock

On October 22, 2018, the Board approved a resolution to designate a series of 2,900,000 shares of its Redeemable Series E Convertible Preferred Stock pursuant to its articles of incorporation of which 2,846,356 were issued. The Redeemable Series E Convertible Preferred Stock has a stated value of $0.99 per share; is convertible to Common Stock at a price of $0.78 per share.

On May 6, 2019, 2,633,678 outstanding shares of Redeemable Series E Convertible Preferred Stock, represented an element of the purchase price were acquired and recorded at fair value (on an as converted into common stock basis) based on the $6.00 per share closing price of Better Choice Company’s shares of Common Stock 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 Redeemable Series E Convertible Preferred Stock converted 689,394 and 236,364 preferred shares into 875,000 and 300,000 shares of the Company’s Common Stock, respectively.

The below table summarizes changes in the balance of Redeemable Series E Convertible Preferred Stock since inception through September 30, 2019 including its value prior to acquisition by the Company.

   
Number
   
Amount
 
Dollars in thousands
           
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 September 30, 2019
   
1,707,920
   
$
13,007
 

The rights preferences and privileges of Redeemable Series E Convertible Preferred stock are as follows:
 
Voting

The Redeemable Series E Convertible Preferred Stock has voting rights equal to those of the underlying Common Stock and ranks senior in respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company.

Dividends

The holders of the Redeemable Series E Convertible Preferred stock are entitled to receive cumulative dividends at a rate of 10% per annum on the stated value. Each Holder of Redeemable Series E Convertible Preferred stock will be entitled to receive dividends or distributions on each share of Redeemable Series E Convertible Preferred stock on an as converted into common stock basis. Pursuant to waiver letters executed by each investor, the holders of the Company’s Redeemable Series E Convertible Preferred Stock agreed to waive their right to the distribution of dividends until October 22, 2019. Dividends accrued are $0.2 million as of September 30, 2019.

Liquidation

In the event of a Liquidation Event, the holders of Redeemable Series E Convertible Preferred stock will be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders, before any amount shall be paid to the holders of any of shares of Common Stock, an amount per share of Series E Preferred equal to the greater of (A) the sum of (1) the Stated Value thereof plus (2) the Additional Amount thereon and any accrued and unpaid Late Charges with respect to such Stated Value and Additional Amount as of such date of determination (the “Conversion Amount”) and (B) the amount per share such holder of Redeemable Series E Convertible Preferred would receive if such holder converted such Series E into Common Stock immediately prior to the date of such payment. Liquidation Event means, whether in a single transaction or series of transactions, the voluntary or involuntary liquidation, dissolution or winding up of the Corporation or such Subsidiaries the assets of which constitute all or substantially all of the assets of the business of the Corporation and its Subsidiaries, taken as a whole.

Conversion

Each holder of Redeemable Series E Convertible Preferred stock will be entitled to convert any portion of the outstanding Redeemable Series E Convertible Preferred held by such holder into validly issued, fully paid and non-assessable shares of common stock at the Conversion Rate. The number of shares of common stock issuable upon conversion of any share of Redeemable Series E Convertible Preferred would be determined by dividing (x) the Conversion Amount of such share of Series E Preferred by (y) the Conversion Price. The Redeemable Series E Convertible Preferred Stock has a stated value of $0.99 per share; is convertible to Common Stock at a price of $0.78 per share.

Redemption

Under certain default conditions, the Redeemable Series E Convertible Preferred Stock is subject to mandatory redemption in cash equal to 125% of the greater of $0.99 per share ($1.23 per share) or 75% of the market price of the Common Stock. The Redeemable Series E Convertible Preferred Stock has a stated value of $0.99 per share; is convertible to Common Stock at a price of $0.78 per share.Redemption of the Redeemable Series E Convertible Preferred stock also occurs upon Triggering Events, which are not all entirely within the control of the Company. Due to this redemption option, the Redeemable Series E Convertible Preferred stock is recorded in the mezzanine equity and subject to subsequent measurement under the guidance provided under FASB ASC 480-10-S99-3A, Accounting for Redeemable Equity Investments.

Note 15 - Stockholders’ Deficit

As noted above, on May 6, 2019, Better Choice Company completed the Acquisition of TruPet pursuant to a Stock Exchange Agreement dated February 2, 2019 and amended May 6, 2019.  At the closing of the transaction, Better Choice Company issued 14,229,041 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 and amended May 3, 2019.  At the closing of the transaction, Better Choice Company issued 18,103,273 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 re-cast 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.

Capital Contributions and Distributions of Capital

During the nine months ended September 30, 2018, a Company Director contributed $0.4 million and received $0.4 million as distributions.  There was no equity issued for the contribution.

Series A Preferred Units

In December 2018, the Company completed a private placement and issued 2,162,536 Series A Preferred Units to unrelated parties for $2.40 per unit.  The proceeds were approximately $4.7 million, net of $0.5 million of 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.

Common Stock

The Company was authorized to issue 580,000,000 shares of Common Stock as of December 31, 2018. 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 Stock effective March 15, 2019. All of the Common and Preferred Stock amounts and per share amounts in these financial statements and footnotes have been retroactively adjusted to reflect the effect of this reverse split. 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 45,427,659 and 11,661,485 shares of Common Stock issued and outstanding as of September 30, 2019 and December 31, 2018, respectively.

On December 12, 2018, Better 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 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 $2.8 million.  Costs associated with the December Offering were $0.1 million, and net proceeds were $2.7 million.  The December Offering generated $2.6 million of the net proceeds were received by the Company during the period ended December 31, 2018 for the sale of 1,400,000 Units, and $0.1 million of the net proceeds were received on January 8, 2019 for the sale of 25,641 Units. The Warrants are exercisable over a two-year period at the initial exercise price of $3.90 per share. (See Note 11 – Warrant Derivative Liability). A portion of the proceeds from this private placement was used to acquire the initial 7% of TruPet.

In connection with the December Offering, Better Choice Company also entered into a registration 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 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 May 6, 2019, the Company acquired 1,011,748 shares of Common Stock (equivalent to 914,919 member units) valued at $6.1 million representing its initial 7% investment in TruPet.  These shares are recorded as an acquisition of treasury shares.

The Company issued 5,744,991 million units for gross proceeds of $3.00 per unit, also closing on May 6, 2019 with the PIPE transaction.  Each unit included one share of Common Stock of Better Choice Company stock and a warrant to purchase an additional share.  The shares issued in the PIPE are subject to the Securities and Exchange Commission’s Rule 144 restrictions which require the purchasers of the PIPE units to hold the shares for at least 6 months from the date of issuance. The funds raised from the PIPE 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 the employment agreement of an officer with Bona Vida dated October 29, 2018, the officer was entitled to a $500,000 Change of Control payment.  The officer later agreed to receive 100,000 shares of Better Choice Company Common Stock.  The 100,000 shares of Common Stock were valued at $6.00 per share, which was the market value as of the date of Acquisition.

As of September 30, 2019, the Company has reserved approximately 18 million shares of Common Stock for future issuance as follows:

   
September 30, 2019
 
Conversion of Redeemable Series E Convertible Preferred Stock
   
2,167,744
 
Exercise of options to purchase Common Stock
   
6,031,462
 
Warrants to purchase Common Stock
   
9,533,354
 
Total shares of Common Stock reserved for future issuance
   
17,732,560
 

The Company did not reserve any units for future issuances during the period ended September 30, 2018.

Stock Awards

During the period from November 1, 2018 through May 5, 2019, incentive equity awards for the equivalent of 1.1 million shares were awarded to employees and consultants.  The incentive equity awards were valued at the date of award with a weighted average value per share of $2.26.  The awards were to vest over a period of three or four years.
 
On May 6, 2019, all outstanding 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 was recorded in the Consolidated Statements of Operations and Comprehensive Loss on May 6, 2019.  There were no other incentive equity awards issued or outstanding during the nine months ended September 30, 2018. As of December 31, 2018, incentive equity awards for the equivalent of 164,356 shares were awarded to a consultant.
 
Stock Options

Options which had been granted in December 2018 to purchase an aggregate of 38,462 shares of Common Stock at an exercise price of $6.76 per share were outstanding prior to the merger.  As a result of the merger, those options immediately vested. The estimated fair value associated with the vesting options with a value of $0.1 million is part of the purchase price of Better Choice Company.  The options have not been exercised, remain outstanding at September 30, 2019, have a remaining life of 4.2 years and no intrinsic value.

On May 6, 2019, the Company acquired 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.

Options to purchase an aggregate of 5,250,000 shares of the Company’s Common Stock at an exercise price of $5.00 per share were granted to management and non-employee directors of Better Choice Company on May 2, 2019. Subject to the holder’s continued service to the Company, 1/24th of the options vest on each monthly anniversary of the grant date such that the options are fully vested on the second anniversary of the grant date.

After the Acquisitions, an additional 743,000 stock option awards were granted under the 2019 Incentive Award Plan.  During the three and nine months ended September 30, 2019, 912,917 stock option awards vested due to severance agreements.

All vested options are exercisable and may be exercised through the ten-year anniversary of the grant date (or such earlier date described in the applicable award agreement following a holder’s termination of service).

The following table provides detail of the options granted and outstanding under the 2019 Incentive Award Plan. The table excludes any options awarded before the Plan was implemented.

               
Vested
Options
   
Non-vested options
 
   
Total
Number of
Options
   
Weighted
Average
Exercise Price
   
Number
   
Number
   
Weighted average
grant date fair
value
 
Acquired on May 6, 2019
   
5,250,000
   
$
5.00
     
-
     
5,250,000
   
$
2.75
 
Granted
   
743,000
     
5.95
     
-
     
743,000
     
2.56
 
Vested during period
           
5.05
     
2,080,829
     
(2,080,829
)
   
2.75
 
Options outstanding at September 30, 2019
   
5, 993,000
   
$
5.12
     
2,080,829
     
3,912,171
   
$
2.73
 
Options expected to vest
                           
3,907,571
         
Weighted average exercise price
                   
5.05
   
$
5.15
         
Weighted average remaining contractual term (years)
                   
9.6
     
9.6
         
Aggregate intrinsic value at September 30, 2019 (in thousands)
                 
$
2
   
$
74
         

Pursuant to ASC 718-10-35-8, the Company recognizes compensation cost for stock awards with only service conditions that have a graded vesting schedule on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.  During the three and nine months ended September 30, 2019, $2.5 million and $6.7 million, respectively, of share-based compensation expense was recognized related to stock options issued.  The options were valued using the Black-Scholes method assuming the following:


Term: Equal to the mid-point between the fully vested date and the contractual expiration of the option.

Dividend yield: 0%

Exercise Price: $3.70 to $7.50

Risk-free rate: 1.41% to 2.39%

Volatility: 55-60%

The number of options expected to vest are estimated based on expected attrition rates for non-executives.

Aggregate intrinsic value represents the fair value of the Company’s Common Stock at the end of the period in excess of the exercise price multiplied by the number of options.

Warrants

On May 6, 2019, the Company acquired 712,823 warrants to purchase Common Stock with a weighted average exercise price of $3.90 with the Acquisition of Better Choice Company. The Company also issued 5,744,991 warrants with an exercise price of $4.25 on May 6, 2019 as part of the PIPE. Additionally, in connection with the PIPE transaction, the Company issued 220,539 warrants to brokers with an exercise price of $3.00.  During the three months ended September 30, 2019, a company advisor was issued 2,500,000 warrants with a strike price of $0.10 and 1,500,000 warrants with a strike price of $10.00.

   
Warrants
   
Exercise Price
 
Warrants Acquired on May 6, 2019
   
712,823
   
$
3.90
 
Issued
   
9,965,530
     
4.05
 
Exercised
   
(1,144,999
)
   
3.50
 
Warrants outstanding at September 30, 2019
   
9,533,354
   
$
4.01
 

The intrinsic value of outstanding warrants is $11.8 million as of September 30, 2019. No warrants were issued or outstanding at September 30, 2018.

Note 16 - Employee Benefit Plans

The Company maintains a qualified defined contribution 401(k) plan, which covers substantially all of our employees. Under the plan, participants are entitled to make pre-tax and/or Roth post-tax contributions up to the annual maximums established by the Internal Revenue Service. The Company matches 4% of participant contributions pursuant to the terms of the plan, which contributions are limited to a percentage of the participant’s eligible compensation. The Company made contributions related to the plan of less than $0.1 million during both the three and nine months ended September 30, 2019, respectively and zero during the three and nine months ended September 30, 2018.

Note 17 - Related Party Transactions

Management Services

A related party provided management services during 2018.  Payments related to this arrangement were less than $0.1 million for the three and nine months ended September 30, 2018.  No payments were made to the related party during 2019.  There were no outstanding balances at September 30, 2019 or December 31, 2018.

Marketing Services

A related party provides online traffic acquisition marketing services for the Company. The Company paid a total of $0.1 million for their services during the three and nine months ended September 30, 2019 and September 30, 2018.  The service contract has a 30-day termination clause.  Outstanding balances were less than $0.1 million at September 30, 2019 and December 31, 2018.

Financial and Accounting Personnel

The Company entered into an agreement with a related party 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. Payments related to this agreement were less than $0.1 million and $0.2 million for the three and nine-month periods ended September 30, 2019, respectively.  As of September 30, 2019, the agreement was terminated and there is no outstanding balance due.

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 officers. Additionally, the Company paid approximately $0.4 million to this entity for other professional services rendered.  No amounts have been paid in 2019.

Note 18 - Income Taxes
 
For the three and nine months ended September 30, 2019 we recorded income tax expense of zero.
 
Our effective tax rate differs from the United States federal statutory rate of 21% primarily because our losses have been offset by a valuation allowance due to uncertainty as to the realization of the tax benefit of net operating losses (“NOLs”).
 
The following is a reconciliation of the total amounts of unrecognized tax benefits (in thousands):
 
   
Nine months ended
September 30,
 

 
2019
 
Unrecognized tax benefit beginning of year
 
$
--
 
Decreases-tax positions in prior year
   
--
 
Increases-tax positions in current year
   
--
 
Unrecognized tax benefit end of year
 
$
--
 

As of September 30, 2019, we had no accrued interest and penalties related to uncertain income tax positions. We do not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
 
As of September 30, 2019, and 2018, the Company does not have any significant uncertain tax positions. If incurred, the Company would classify interest and penalties on uncertain tax positions as income tax expense.
 
On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the existing tax law by, among other things, lowering the United States corporate income tax rate from 35% to 21% beginning in 2018.
 
Although the accounting related to the income tax effects of the TCJA is complete pursuant to available guidance, certain technical aspects of the TCJA remain subject to varying degrees of uncertainty as additional technical guidance and clarification from the U.S. government continues to be issued.  Receipt of additional guidance and clarification from the U.S. government, as well as changes to the Company’s operations, may result in material changes to the provision for income taxes.  To the extent applicable, the Company would recognize such adjustments in the provision for income taxes in the period that additional guidance and clarification is received.
 
Note 19 - Major Suppliers

The Company purchased approximately 85% and 60% of its inventories from one vendor for the nine months ended September 30, 2019 and 2018, respectively and approximately 90% and 51% for the three months ended September 30, 2019 and 2018, respectively.

Note 20 - Concentration of Credit Risk and Off-Balance Sheet Risk

Cash and cash equivalents and accounts receivable potentially subject the Company to concentrations of credit risk. At September 30, 2019 and December 31, 2018, all the Company’s cash and cash equivalents were deposited in accounts at several financial institutions. The Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk. The Company may maintain balances with financial institutions in excess of federally insured limits. The Company has not experienced any losses historically in these accounts and believes it is not exposed to significant credit risk in its cash and cash equivalents.  The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts, or other hedging arrangements.
 
The largest customer of the Company had purchases that represented approximately 4% and 6% of total gross sales for the nine months ended September 30, 2019 and 2018, respectively and approximately 4% and 6% for the three months ending September 30, 2019 and 2018.  Accounts receivable from the largest customer represented 38% and 54% of accounts receivable at September 30, 2019 and December 31, 2018, respectively.

Note 21 - 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 three and nine month periods ended September 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 nine months ended September 30, 2019 and 2018:

Dollars in thousands except per share amounts
 
Nine Months Ended
September 30,
   
Three Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Common Stockholders
                 
Numerator:
                 
Net loss
 
$
(170,311
)
 
$
(3,836
)
 
$
(6,025
)
  $
(1,437
)
Less: Preferred Stock Dividends
   
70
     
-
     
43
     
-
 
Net loss attributable to Common Stockholders
 
$
(170,381
)
 
$
(3,836
)
 
$
(6,068
)
  $
(1,437
)
Denominator:
                               
Weighted average shares used in computing net loss per share attributable to Common Stockholders, basic and diluted
   
28,624,230
     
11,497,128
     
43,575,010
     
11,497,128
 
Net loss per share attributable to Common Stockholders, basic and diluted
 
$
(5.95
)
 
$
(0.33
)
 
$
(0.14
)
 
$
(0.12
)

Note 22 - Going Concern

The Company has incurred losses over the last three years and has an accumulated deficit. These operating losses create substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date these consolidated financial statements are issued.

The 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. We reviewed sales and profitability forecasts for the Company for the next fiscal year including the impact of the acquisition of Halo, Purely for Pets, Inc. (“Halo”) on December 20, 2019.

The Company believes its available cash together with future capital raises and available borrowings, are sufficient to fund planned operations and operate its business for the next 12 months. The Company continues to have access to the public markets for additional funds for operations as well as refinancing of existing loans.
 
If the Company is unable to raise the necessary funds when needed or achieve planned cost savings, or other strategic objectives are not achieved, the Company may not be able to continue its operations or the Company could be required to modify its operations that could slow future growth. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Note 23 - Subsequent Events
 
Management has evaluated subsequent events through the date on which the consolidated financial statements were issued.

Lease Operations

In October 2019, the Company moved its distribution center to its new facility.  The lease on its new distribution facility was signed in May 2019.

In November 2019, the Company terminated its month-to-month office lease at its Milford, Ohio location and started a new month-to-month lease in Blue Ash, Ohio.

Subordinated Convertible Notes
 
On November 6, 2019, the Company issued 2,750 subordinated convertible notes (each, a “Convertible Note” and collectively, the “Convertible Notes”) for total proceeds of $2.75 million to existing shareholders. In connection with the Convertible Notes, the purchasers will be issued warrants (each, a “Warrant” and collectively, the “Warrants”) to purchase shares of common stock par value $0.001 of the Company (the “Common Stock”) equal to 62.5 Warrants for each Note. Each Warrant will entitle the holder thereof to purchase one share of Common Stock of the Company for a period of 24 months from the date of the consummation of a future initial public offering (“IPO”) at an exercise price equal to the greater of (i) $5.00 per share or (ii) the price at which the Common Stock of the Company was sold in the IPO. The issue price per Convertible Note is $1,000 and the maturity date is two years from the issue date. The Convertible Notes include interest at a rate of 10.0% per annum from the date of issue, payable quarterly. Fifty percent of the interest shall be payable in kind and the remainder shall be payable in cash. The Company intends to use the net proceeds from the offering for general working capital needs.
 
Halo Acquisition
 
On October 15, 2019, the Company entered into a Stock Purchase Agreement (“the Agreement”) with Halo, a Delaware corporation, Thriving Paws, LLC, a Delaware limited liability company (“Thriving Paws”), HH-Halo LP, a Delaware limited partnership (“HH-Halo” and, together with Thriving Paws, the “Sellers”) with HH-Halo, in the capacity of the representative of the Sellers. Pursuant to the terms and subject to the conditions of the Agreement, the Company agreed to purchase one hundred percent (100%) of the issued and outstanding capital stock of Halo. Halo is an ultra-premium, natural pet food brand.
 
On December 18, 2019, Better Choice Company Inc. entered into an Amended and Restated Stock Purchase Agreement by and among the Company, Halo and the Sellers to acquire one hundred percent (100%) of the issued and outstanding capital stock of Halo, Purely For Pets, Inc (the “Acquisition”). Pursuant to the Amended Agreement, a portion of the consideration for the Acquisition as described below was paid to Werner von Pein, the chief executive officer of Halo.
 
Under the terms of the Amended Agreement, the Company completed the Acquisition on December 19, 2019, for approximately $45 million pending final valuation of non-cash components issued to the sellers in the acquisition. The consideration was subject to customary adjustments for Halo’s net working capital, cash, and indebtedness, and consisted of a combination of (i) cash consideration, (ii) a total of 2,134,390 shares of the Company’s common stock, par value $0.001 per share, and (iii) transaction costs. The Company also (i) entered into a Subscription Agreement with the Sellers relating to the issuance of the Common Stock Consideration, (ii) issued convertible subordinated seller notes (“Seller Notes”), and (iii) issued Seller Warrants on December 19, 2019.  
 
Seller Notes
 
The Seller Notes are scheduled to mature on June 30, 2023 and accrue interest at 10.00% per annum from December 19, 2019 until the Maturity Date, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The interest shall be payable by increasing the aggregate principal amount of the Seller Notes. The Seller Notes may be converted into shares of Common Stock at any time prior to the last Business Day immediately preceding the Maturity Date and shall be automatically converted into Common Stock upon an IPO. The conversion price shall be equal to the lower of $4.00 per share or the price at which the Common Stock was sold in an IPO. In the event of a change of control, each holder of the Seller Notes shall have the option to (i) convert all of the Seller Notes held by such holder into a replacement note issued by the new issuer in an aggregate principal amount equal to 104% of the outstanding principal amount of, and all accrued interest on, the Seller Notes held by such holder or (ii) require the Company to repay all of the outstanding principal amount of the Seller Notes held by such holder at a redemption price of 4% of the sum of all outstanding principal amount of the Seller Notes held by such holder plus all accrued interest thereon. If any such holder of Seller Notes fails to make an election above within thirty days of receipt of written notice of the change of control, all principal and accrued interest under the Seller Notes held by such holder shall automatically convert into Common Stock at the conversion price.
 
Loan Agreement
 
On December 19, 2019, the Company entered into a Loan Facilities Agreement (the “Facilities Agreement”) by and among the Company, as the borrower, the several lenders from time to time parties thereto (collectively, the “Lenders”) and a private debt lender, as agent (the “Agent”) that provides for a term loan facility not to exceed $20.5 million (the “Term Facility”) and a revolving demand loan facility not to exceed $7.5 million (the “Revolving Facility” and, together with the Term Facility, the “Facilities”). The Facilities are scheduled to mature on December 19, 2020 or such earlier date on which a demand is made by the Agent or any Lender. The obligations of the Company under the Facilities Agreement are guaranteed by each of the Company’s domestic subsidiaries and secured by a first-priority security interest in substantially all of the assets of the Company and the assets of its domestic subsidiaries. Borrowings under the Facilities bear interest at a rate per annum equal to the floating annual rate of interest established from time to time by the Bank of Montreal plus 8.05% calculated on the daily outstanding balance of the Facilities and compounded monthly. The revolving line of credit was satisfied in full on the same date.  Three directors of the Company entered into a Continuing Personal Guaranty agreement as a condition to the Facilities Agreement.
 
Amended Subordinated Convertible Notes
 
The Subordinated Convertible Notes were amended on January 6th, 2020. Pursuant to Section 7(c) of the Subordinated Convertible Promissory Note (the “Notes”) issued on November 11, 2019, the Purchasers have the right to amend and restate the Note and related documents to incorporate the preferable terms of any convertible promissory notes issued after November 11, 2019, so long as the Note is outstanding. As disclosed in the Company’s 8-K issued on December 26, 2019, the Company issued convertible subordinated notes to the Sellers and Werner von Pein. The Amended Agreement was entered into in order to incorporate only the preferable terms of the convertible subordinated notes issued to the Sellers and all other terms and provisions of the Note shall remain in full force and effect. Pursuant to the Amended Notes, the interest shall be payable by increasing the aggregate principal amount of the Notes (such increase being referred to therein as “PIK Interest”). As amended, for so long as any Event of Default (as defined in the Note) exists, interest shall accrue on the Note principal at the default interest rate of 12.0% per annum, and such accrued interest shall be immediately due and payable. As amended, the provisions of the Note that provided for an additional number of shares of Common Stock to the Investor if the IPO (as defined in the Note) had not been completed by June 30, 2020, have been removed.
 
2019 Incentive Award Plan

On November 11, 2019, the Company received shareholder approval for the Amended and Restated 2019 Incentive Award Plan.  Under the Amended and Restated 2019 Incentive Award Plan, the number of awards available for issuance increased from 6,000,000 to 9,000,000 with the closing of the Halo Acquisition on December 20, 2019

Effective as of December 19, 2019, the Board repriced all outstanding options to purchase Common Stock issued pursuant to the 2019 Better Choice Amended and Restated Incentive Award Plan, including options held by executive officers. As a result, the exercise price of all Options was lowered to $1.82 per share, the closing price of the Companys Common Stock on December 19, 2019. No other terms of the Options were changed.  Damian Dalla-Longa, Chief Executive Officer of the Company, Andreas Schulmeyer, Chief Financial Officer of the Company, and Anthony Santarsiero, President of the Company, are the executive officers who hold Options subject to the repricing.

The Board effectuated the repricing to realign the value of the Options with their intended purpose, which is to retain and motivate the holders of the Options to continue to work in the best interests of the Company. Prior to the repricing, many of the Options had exercise prices well above the recent market prices of the Common Stock. The Options were repriced unilaterally, and the consent of holders was neither necessary nor obtained.

Stock and Warrant Issuance
 
On December 31, 2019, the Company issued 20,371 stock options at a strike price of $2.70 to Mr. Schulmeyer as a sign on bonus as per the employment agreement
 
On January 3, 2020, the Company issued 308,642 shares of Common Stock to an investor for net proceeds of $0.5 million, net of issuance costs of less than $0.1 million.

During January 2020, the Company issued shares below the exercise price of warrants acquired on May 6, 2019.  Pursuant to the warrant agreement, the Company is required to issue an additional 1,003,232 warrants to its warrant holders at a $1.62 exercise price and revise the existing warrants to an exercise price of $1.62.
 
The stock issued in conjunction with the Halo acquisition triggered an anti-dilution clause as part of an agreement with a third party. The Company will settle the required issuance of an additional 250,000 shares in the first quarter of 2020.

ABG Termination
 
On January 16, 2020, the Company terminated the Houndog licensing agreement (“Agreement”) with Associated Brands Group and Elvis Pressley Enterprises due to business judgment. As part of the termination, the Company agreed to the following: (1) to pay ABG One Hundred Thousand Dollars ($0.1 million) in cash upon the signing of this Agreement, (2) to issue to ABG Seventy Two Thousand Seven Hundred Twenty (72,720) shares of BTTR’s common stock, (3) to pay to ABG One Hundred Thousand Dollars ($0.1 million) in cash in four equal installments, (4) to issue to ABG Six Hundred Thousand Dollars ($0.6 million) in Subordinated Promissory Notes (the “Notes”), with the condition being that if the Company sells existing inventory in excess of One Hundred Thousand Dollars ($0.1 million), the Six Hundred Thousand Dollar ($0.6 million) Subordinated Promissory Note will be reduced on a dollar for dollar basis and (5) to issue to ABG a common stock purchase warrant (the “Warrants”) equating to a value of $150,000.
 
The Notes are scheduled to mature on June 30, 2023 (the “Maturity Date”) and accrue interest at 10.00% per annum from January 13, 2020, until the Maturity Date, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The interest shall be payable by increasing the aggregate principal amount of the Notes (such increase being referred to herein as “PIK Interest”). The Notes may be converted into shares of Common Stock at any time prior to the last Business Day immediately preceding the Maturity Date and shall be automatically converted into Common Stock upon an IPO (as defined in the Notes). The conversion price shall be equal to the lower of $4.00 per share or the price at which the Common Stock was sold in an IPO. In the event of a change of control, each holder of the Notes shall have the option to (i) convert all of the Notes held by such holder into a replacement note issued by the new issuer in an aggregate principal amount equal to 104% of the outstanding principal amount of, and all accrued interest on, of the Notes, held by such holder or (ii) require the Company to repay all of the outstanding principal amount of the Notes held by such holder at a redemption price of 4% of the sum of all outstanding principal amount of the Notes held by such holder plus all accrued interest thereon. If any such holder of Notes fails to make an election above within thirty days of receipt of written notice of the change of control, all principal and accrued interest under the Notes held by such holder shall automatically convert into Common Stock at the conversion price.
 
The Warrants are exercisable for 24 months from the date of the consummation of an IPO (as defined in the Warrants) at an exercise price equal to the greater of (i) $5.00 per share or (ii) the price at which the Common Stock was sold in the IPO.
 
No other recognized or non-recognized subsequent events were identified for recognition or disclosure in the financial statements.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview and Outlook
 
Better Choice Company is a holistic pet wellness company providing high quality raw Cannabidiol (“CBD”) infused and non-CBD infused food, treats, and supplements in addition to dental care products and 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 28, 2019, respectively, Better Choice Company entered into definitive agreements to acquire through stock exchange agreements, approximately 93% of the outstanding limited liability company interest of TruPet LLC and all of the outstanding shares of Bona Vida, Inc., an emerging hemp-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 and Bona Vida, Inc. 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 program 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 76% of DTC sales during the nine-month period ended September 30, 2019 and approximately 81% of DTC sales during the three-month period ended September 30, 2019 were from returning customers including TLC club members.
 
In order to obtain customers, we invest in advertising on social media sites and offer products to first time buyers at significant discounts.  Our goal is to blend different acquisition channels as efficiently as possible in our advertising so that we obtain the most customers for the least amount of spend while maintaining our target growth rates.  We are currently evaluating various long-term metrics for customer acquisition to determine the optimum mix of customer acquisition spend.
 
During 2018, we experienced two separate recalls of our products as a result of the detection 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 warehouse 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 approved a change fiscal year from August 31 to December 31 to align with TruPet 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.
 
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 wholesale 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 wholesale 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 at the time the order is shipped to the DTC customers and the majority of wholesale customers, as this is when control transfers, with the exception of the Company’s largest customer due to specific FOB designation shipping terms 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.
 
Operating Expenses
 
General and administrative expenses include management and office personnel compensation and bonuses, share-based compensation, corporate level information technology related costs, rent, travel, professional service fees, costs related to merchant credit card fees, shipping costs, 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.
 
Sales and marketing expenses include costs related to compensation for sales personnel, other costs related to the selling platform, as well as marketing, including paid media and content creation expenses.  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 expense to continue to grow as we actively acquire new online customers and begin to build our wholesales channel.
 
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.
 
Interest Expense
 
Interest expense originates from debt incurred under a under a revolving credit agreement entered into in May 2019, and under our note payable to a prior TruPet LLC member, corporate credit cards, our line of credit 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 three and nine-month periods ended September 30, 2019 and September 30, 2018, we did not record income tax expense.  TruPet was a limited liability company until the May 6, 2019 acquisitions. Subsequent to the consummation of the Acquisitions, the Company, as a corporation, is required to provide for income taxes.
 
Results of Operations
 
Three and Nine Months Ended September 30, 2019 Compared to Three and Nine Months Ended September 30, 2018
 
   
Nine Months Ended
   
Three Months Ended
 
$ in 000’s
 
2019
   
2018
   
% Change
   
2019
   
2018
   
% Change
 
Net Sales
 
$
11,567
   
$
11,045
     
5
%
 
$
3,932
   
$
3,981
     
(1
)%
Cost of Goods Sold
   
7,178
     
5,786
     
24
%
   
3,096
     
2,457
     
26
%
Gross Profit
   
4,389
     
5,259
     
(17
)%
   
836
     
1,524
     
(45
)%
General & Administrative
   
12,031
     
4,013
     
200
%
   
4,856
     
1,341
     
262
%
Share-Based Compensation
   
6,708
     
-
     
-
     
2,496
     
-
     
-
 
Sales & Marketing
   
8,452
     
4,061
     
108
%
   
2,856
     
1,242
     
130
%
Customer Service and Warehousing
   
854
     
927
     
(8
)%
   
303
     
350
     
(13
)%
Loss from Operations
 
$
(23,656
)
 
$
(3,742
)
   
532
%
 
$
(9,675
)
 
$
(1,409
)
   
587
%

Net Sales
 
Net sales increased $0.5 million, or 5%, to $11.6 million for the nine months ended September 30, 2019 compared to $11.0 million for the nine months ended September 30, 2018.
 
Net sales decreased less than $0.1 million, or 1%, to $3.9 million for the three months ended September 30, 2019 compared to $4.0 million for the three months ended September 30, 2018.
 
Net sales increased in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 as a result of increased media and acquisition spend and a shift to higher unit priced products. Our TruDog 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, food and topper products yield a better lifetime value as retention and repeat rates are higher. Over the nine-month period ended on September 30, 2019, 76% of our products sold were to repeat customers.
 
The decrease in net sales in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 were the result of a more competitive customer acquisition environment where we had to spend more on acquisition costs to achieve the same level of sales.  We continue to see high retention rates of returning customers either through our subscription offers or from repeat purchases. During the three-month period ended September 2019, 81% of sales were to repeat customers. Repeat customers earned and redeemed TLC loyalty points at a higher rate in the period ended September 30, 2019 than in any prior period. By focusing on repeat customers, we can reduce the initial discounting we offer first time customers, effectively raising our average unit revenue. We expect the share of returning sales to continue to grow as 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.
 
Cost of Goods Sold and Gross Profit
 
Cost of goods sold increased $1.4 million, or 24%, to $7.2 million for the nine months ended September 30, 2019 compared to $5.8 million for the nine months ended September 30, 2018. The increase in cost of goods sold was primarily due to a mix shift to food and topper products, which have higher costs than dental products offset by improved conversion costs from our manufacturing partners as we continue to negotiate and expect to see further cost reductions as we rationalize the product offering and gain scale in the remaining products. We also expensed $0.6 million in royalty expenses in the nine-month period ended in September 30, 2019 related to our licensing contract for the Houndog brand from Elvis Presley Enterprises. The cost of hemp derived CBD oils has declined in the market, thus, reducing our ingredient costs.  In the nine-month periods ended on September 30, 2019 and 2018, the inventory reserve taken was $0.4 million and $0.1 million, respectively, for slow moving and discontinued items. As a percentage of revenue, cost of goods sold increased to 62% during the nine months ended September 30, 2019 compared to 52% during the nine months ended September 30, 2018.
 
Cost of goods sold increased $0.6 million, or 26%, to $3.1 million for the three months ended September 30, 2019 compared to $2.5 million for the three months ended September 30, 2018.  During the three-months ended on September 30, 2019, we continued to negotiate for improved conversion costs from our manufacturing partners and saw the initial benefits of our reduction efforts. We also expensed $0.6 million in royalty expenses in the nine-month period ended in September 30, 2019 related to our licensing contract for the Houndog brand from Elvis Presley Enterprises. The inventory review at the end of the three-month period ended on September 30, 2019 led to an inventory reserve charge of $0.2 million for the quarter as compared to a reserve of less than $0.1 million for the three months ended September 30, 2018. As a percentage of revenue, cost of goods sold increased to 79% during the three months ended September 30, 2019 compared to 62% during the three months ended September 30, 2018.
 
During the nine months ended September 30, 2019, gross profit decreased $0.9 million, or 17%, to $4.4 million compared to $5.3 million during the nine months ended September 30, 2018.  Gross profit margin decreased to 38% from 48% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The ongoing shift into food and topper products from the dental products sold in 2018 and through the first half of 2019, the discounting of discontinued products and the Houndog royalty expense reduced the gross profit margin for the nine-month period ended September 30, 2019.
 
During the three months ended September 30, 2019, gross profit decreased $0.7 million, or 45%, to $0.8 million compared to $1.5 million for the three months ended September 30, 2018.  Gross profit margin also decreased to 21% from 38% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.  During the three-months ended on September 30, 2019, we incurred the Houndog royalty expense of $0.6 million.
 
Operating Expenses
 
During the nine months ended September 30, 2019, general and administrative expenses increased approximately $8.0 million, or 200% to $12.0 million compared to $4.0 million in the nine months ended September 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.  We saw higher than normal shipping costs during the nine months ended September 30, 2018 due to a product recall. During this period, we shipped partial orders and replacement product, increasing our shipping expenses.
 
During the three months ended September 30, 2019, general and administrative expenses increased approximately $3.5 million, or 262%, to $4.9 million compared to $1.3 million in the three months ended September 30, 2018.  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.  In the three months ended September 30, 2019, we achieved lower  unit shipping costs as we gain scale and shipping efficiency.
 
During the nine months ended September 30, 2019, we incurred share-based compensation of $6.7 million, as compared to share based compensation of $0 during the nine months ended in September 30, 2018. The increase in equity-based compensation was driven by awards issued as part of the Incentive Plan.
 
During the three months ended September 30, 2019, we incurred share-based compensation of $2.5 million, as compared to share based compensation of $0 during the three months ended in September 30, 2018. The increase in equity-based compensation was driven by awards issued as part of the 2019 Incentive Plan.
 
During the nine months ended September 30, 2019, sales and marketing expenses, including paid media, increased approximately $4.4 million, or 108%, to $8.5 million from $4.1 million during the nine months ended in September 30, 2018 as a result of increased new customer acquisition efforts. TruPet traditionally invested in Facebook advertisement to drive traffic to the site. We increased spending on Facebook and Google and began to invest in other media outlets to build brand awareness. In August 2019, we tested radio advertisement for our CBD infused pet treats to drive incremental demand for the products. We paused the radio advertising at the end of September 2019, as we did not see the expected pickup in CBD sales.
 
During the three months ended September 30, 2019, sales and marketing expenses, including paid media, increased approximately $1.6 million, or 130%, to $2.9 million from $1.2 million during the three months ended in September 30, 2018 primarily due to a shift in media spending towards Facebook and Google advertisements as well as retargeting lapsed customers. In August 2019, we tested radio advertisement for our CBD infused pet treats to drive incremental demand for the products. We paused the advertising at the end of September 2019, as we did not see the expected pickup in CBD sales.
 
During the nine months ended September 30, 2019, other customer service and warehousing costs decreased $0.1 million, or 8%, to $0.8 million compared to $0.9 million for the nine months ended September 30, 2018.  We rationalized the operations in our warehouse at the end of 2018, reducing the staff and operating costs. The reductions in customer service and warehousing costs during the nine months ended September 30, 2019 were offset by increased costs when we began renovating a new facility near Tampa, Florida to house our warehouse, fulfillment and administrative departments. Rent and associated utilities for this period are reflecting both the rent for the new facility as well as the existing facility.
 
During the three months ended September 30, 2019, customer service and warehousing costs decreased $0.1 million, or 13%, to $0.3 million compared to $0.4 million for the three months ended September 30, 2018. We rationalized the operations in our warehouse at the end of 2018, reducing staff and operating costs. The reductions in customer service and warehousing costs during the three months ended September 30, 2019 were offset by increased costs when we began renovating a new facility in Tampa, Florida to house our warehouse, fulfillment and administrative departments. Rent and associated utilities for this period are reflecting both the rent for the new facility as well as the existing facility.
 
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., We incurred less than $0.1 million of research and development expenses during the three and nine-month periods ended September 30, 2019 and $0 during the three-month and nine month periods ended September 30, 2018. We expect to continue incur research and development expenses during the remainder of 2019 and in future periods.  Research and development costs are included in general and administrative costs.
 
Interest Expense, Net
 
During the nine months ended September 30, 2019, interest expense increased $0.1 million, or 76% to $0.2 million compared to $0.1 million for the nine months ended September 30, 2018.  Interest expense increased primarily due to the refinancing of the Company’s line of credit agreement of $6.2 million on May 6, 2019 versus an interest free shareholder loan for the nine month period ended September 30, 2018.
 
During the three months ended September 30, 2019 and 2018, interest expense was less than $0.1 million.
 
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 limited liability company.  Subsequent to the acquisitions, the Company, as a corporation is required to provide 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 the Notes to the Unaudited Consolidated Financial Statements details the impact of the transaction on May 6, 2019.

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, loans and cash flows generated by operations. At September 30, 2019, we had cash and cash equivalents of $9.0 million (including restricted cash of $6.2 million) which represented an increase of $5.1 million from December 31, 2018.
 
The Company has incurred losses over the last three years and has an accumulated deficit. These operating losses create substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date these consolidated financial statements are issued.

The 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. We reviewed sales and profitability forecasts for the Company for the next fiscal year including the impact of the acquisition of Halo, Purely for Pets, Inc. on December 20, 2019.

The Company believes its available cash together with future capital raises and available borrowings, are sufficient to fund planned operations and operate its business for the next 12 months. The Company continues to have access to the public markets for additional funds for operations as well as refinancing of existing loans.
 
If the Company is unable to raise the necessary funds when needed or achieve planned cost savings, or other strategic objectives are not achieved, the Company may not be able to continue its operations or the Company could be required to modify its operations that could slow future growth. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
The following table presents a summary of our cash flow for the nine-month periods ended:
 
$ in thousands
 
September 30,
2019
   
September 30,
2018
 
Cash flows from (used in):
           
Operating activities
 
$
(13,224
)
 
$
(3,057
)
Investing activities
    364

   
(31
)
Financing activities
   
17,915
     
3,165
 
Net increase (decrease) in cash and cash equivalents
 
$
5,055
   
$
77
 

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 acquisitions, 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 $10.2 million, or over 100%, during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. Cash used in operating activities was $13.2 million for the nine months ended September 30, 2019, which consisted of the net loss from operations of $170.3 million, offset by $147.0 million from the loss on acquisitions, $6.7 million in share-based compensation expense and a combined $3.6 million of net cash generated via changes in operating assets and current liabilities. Cash used in operating activities was $3.1 million for the nine months ended September 30, 2018, which consisted of net loss of $3.8 million, offset by a combined $0.8 million net cash generated via changes in operating assets and current liabilities.
 
The decrease in working capital (deficit) during the nine months ended September 30, 2019 was primarily due to an increase of accrued liabilities of $3.3 million offset by an increase in inventories of $0.7 million.
 
The decrease in working capital (deficit) during the nine months ended September 30, 2018 was primarily due to an increase in accounts payable of $1.2 million offset by an increase in inventories of $0.5 million
 
Cash flows from Investing Activities
 
Cash from investing activities decreased by $0.4 million, during the nine months ended September 30, 2019 from less than $0.1 million during the nine months ended September 30, 2018. The change in cash from investing activities is the result of $0.4 million cash acquired in the acquisitions offset by acquisition costs and a small increase in cash spent for the acquisition of fixed assets.
 
Cash flows from Financing Activities
 
Cash from financing activities increased by $14.8 million, to $17.9 million, during the nine months ended September 30, 2019 from $3.2 million during the nine months ended September 30, 2018. The primary drivers of the overall cash from financing activities were net proceeds from a private placement of $15.8 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 are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting 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. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 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 amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to basis 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 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 as detailed in Note 1 to the financial statements contained 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 Item.
 
ITEM 4.
CONTROLS AND PROCEDURES
 
Evaluation of disclosure controls and procedures
 
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the quarter ended September 30, 2019. Based upon that evaluation, the Company’s Chief Executive and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2019 due to the material weakness described below.
 
A material weakness in internal control over financial reporting is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (United States) Auditing Standard No. 2), or a combination of control deficiencies, that result in there being more than a remote likelihood of material misstatement in the annual or interim financial statements would not be prevented or detected.
 
The matters involving internal controls and procedures that our management considered to be material weaknesses were: (1) The Company has not designed or implemented a system of internal controls. As a result, the Company does not have (i) segregation of duties and evidence of fiduciary oversight related to the financial statement close process, cash disbursements process, contract approval process and time and expense reimbursement process; (ii) formally documented accounting policies and procedures that are effective and consistently applied in accordance with GAAP; and (iii) effective controls and resources to address the accounting requirements for new accounting pronouncements. (2) The Company’s financial statement close process and disclosure controls and procedures, including the secondary review and approval of financial information generated to prepare the consolidated financial statements, and the functionality of underlying IT systems used to consolidate the Company’s subsidiaries, are ineffective.  As a result, the Company has been unable to close its books or fulfill its SEC reporting requirements in a timely manner. (3) The Company has ineffective controls for assessing its sales tax obligations, including timely payment and accrual recognition. The aforementioned material weaknesses were identified by our Chief Executive Officer and Chief Financial Officer in connection with the review of our consolidated financial statements as of September 30, 2019.
 
Management believes that the material weaknesses set forth above did impact our ability to report our financial results in a timely manner.
 
Management is in the process of determining how best to change our current system and implement a more effective system to ensure that information required to be disclosed in reports that must be filed with the Securities and Exchange Commission has been recorded, processed, summarized and reported accurately. Our management acknowledges the existence of this problem and intends to develop procedures to address this problem to the extent possible given limitations in financial and manpower resources. While management is working on a plan, no assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.
 
Changes in Internal Control over Financial Reporting
 
In September 2019, the Company hired a Controller as part of its efforts to address internal accounting personnel deficiencies. In November 2019, the Company integrated a sales tax solution into the direct to consumer platform to ensure accurate sales tax accruals. In December 2019, the Company acquired Halo, Purely for Pets, Inc. The existing Halo finance team will support the process of bringing current outsourced processes in house.  There were no other significant changes in internal control over financial reporting during the three month period ended September 30, 2019.
 
PART II. OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.  However, 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 any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
 
ITEM 1A.
RISK FACTORS
 
The Company qualifies as a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and is not required to provide information under this Item.
 
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, as amended.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5.
OTHER INFORMATION
 
None.
 
ITEM 6.
EXHIBITS
 
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
 
Stock Purchase Agreement, dated October 15, 2019, by and among Better Choice Company Inc., Halo, Purely For Pets, Inc., Thriving Paws, LLC and HH-Halo LP.
8-K
333-161943
2.1
10/18/19
 
 
Amendment No. 1 to Stock Purchase Agreement, dated November 22, 2019, by and among Better Choice Company Inc., Halo, Purely For Pets, Inc., Thriving Paws, LLC and HH-Halo LP.
8-K
333-161943
2.2
11/27/19
 
 
Amended and Restated Stock Purchase Agreement, dated December 18, 2019, by and among Better Choice Company Inc., Halo, Purely For Pets, Inc., Thriving Paws, LLC and HH-Halo LP.
8-K
333-161943
2.1
12/26/19
 
Exhibit
Number
   Description
Form
File No.
Exhibit
Filing Date
Filed/Furnished Herewith
3.1
 
Certificate of Incorporation.
10-Q
333-161943
3.1
4/14/2019
 
3.2
 
Certificate of amendment to Certificate of Incorporation.
10-Q
333-161943
3.2
7/14/17
 
3.3
 
Certificate of amendment to Certificate of Incorporation.
8-K
333-161943
3.1
3/22/18
 
3.4
 
Certificate of amendment to Certificate of Incorporation.
10-KT
333-161943
3.5
7/24/19
 
3.5
 
Bylaws.
10-Q
333-161943
3.5
4/15/19
 
4.1
 
Tranche 1 Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton.
8-K
333-161943
4.1
9/23/19
 
4.2
 
Tranche 2 Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton.
8-K
333-161943
4.2
9/23/19
 
4.3
 
Additional Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton.
8-K
333-161943
4.3
9/23/19
 
4.4
 
Form of Subordinated Convertible Promissory Note, dated November 11, 2019, by and among Better Choice Company Inc. and John M. Word and Edward Brown.
8-K
333-161943
4.1
11/15/2019
 
4.5
 
Form of Common Stock Purchase Warrant, dated November 11, 2019, by and among Better Choice Company Inc. and John M. Word and Edward Brown.
8-K
333-161943
4.2
11/15/2019
 
4.6
 
Form of Registration Rights Agreement, dated November 11, 2019, by and among Better Choice Company Inc. and John M. Word and Edward Brown.
8-K
333-161943
4.3
11/15/2019
 
4.7
 
Form of Subordinated Convertible Promissory Note, dated December 19, 2019, by and among Better Choice Company Inc. and the Halo Sellers listed on the signature pages thereto.
       
*
4.8
 
Form of Common Stock Purchase Warrant, dated December 19, 2019, by and among Better Choice Company Inc. and the Halo Sellers.
       
*
4.9
 
Form of Registration Rights Agreement, dated December 19, 2019, by and among Better Choice Company Inc. and the Halo Sellers.
       
*
 
Form of Common Stock Purchase Warrant, dated December 19, 2019, by and among Better Choice Company Inc. and the Shareholder Personal Guarantors.
       
*
 
Loan Facilities Credit Letter Agreement, dated December 19, 2019, by and among the Better Choice Company Inc., Halo, Purely for Pets, Inc., Bona Vida Inc., TruPet LLC and Bridging Finance Inc., as agent.
       
*
 
Pledge and Security Agreement, dated December 19, 2019, by and among Better Choice Company, Inc., Halo, Purely or Pets, Inc., Bona Vida, Inc., TruPet LLC and Bridging Finance Inc., as Administrative Agent.
       
*
 
Continuing Guaranty of Halo, Purely for Pets, Inc., Bona Vida Inc., TruPet LLC, dated December 19, 2019,
       
*
 
Continuing Personal Guaranty of John Word, Lori Taylor and Michael Young, dated December 19, 2019.
       
*
 
Form of Subscription Agreement, dated November 11, 2019, by and among Better Choice Company Inc. and the John M. Word and Edward Brown.
8-K
333-161943
 10.1 11/15/2019
 

Exhibit
Number
 
Description
Form
File No.
Exhibit
Filing Date
Filed/Furnished Herewith
 
Form of Subscription Agreement, dated December 19, 2019, by and among Better Choice Company Inc. and the Halo Sellers.
       
*
 
Independent Contractor Agreement, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton.
8-K
333-161943
10.1
9/23/19
 
 
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
       
*

*          Certain schedules and similar attachments to this agreement have been omitted in accordance with item 601(a)(5) of Regulation S-K. The company will furnish copies of any schedules or similar attachments to the SEC upon request.
 
***     Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such excluded information is not material and would likely cause competitive harm to the registrant if publicly disclosed.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
BETTER CHOICE COMPANY INC.
 
 
 
Date: January 31, 2020
By:
/s/ Damian Dalla-Longa
   
 
Damian Dalla-Longa Chief Executive Officer
 
 
 
Date: January 31, 2020
By:
/s/  Andreas Schulmeyer
   
 
Andreas Schulmeyer Chief Financial Officer


47


Exhibit 4.7

EXECUTION VERSION

THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF ARE SUBORDINATED TO ANY PRESENT OR FUTURE INDEBTEDNESS OWING FROM THE COMPANY UNDER THAT LOAN FACILITIES LETTER AGREEMENT DATED DECEMBER 19, 2019 AMONG THE COMPANY, BRIDGING FINANCE INC. (THE “SENIOR AGENT”) AND THE LENDERS PARTY THERETO, AND MAY BE ENFORCED ONLY IN ACCORDANCE WITH THAT CERTAIN SUBORDINATION AGREEMENT DATED DECEMBER 19, 2019 AMONG THE COMPANY, INVESTOR AND THE SENIOR AGENT.

THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

BETTER CHOICE COMPANY INC.

SUBORDINATED CONVERTIBLE PROMISSORY NOTE

$
   

December 19, 2019

FOR VALUE RECEIVED, BETTER CHOICE COMPANY INC., a Delaware corporation (the “Company”) promises to pay to                   , a Delaware limited partnership, or its registered assigns (“Investor”), in lawful money of the United States of America the principal sum of $                  , or such greater or lesser amount as shall equal the then outstanding principal amount hereof.  The Company promises to pay interest on this note at 10.00% per annum (the “Note Rate”) from December 19, 2019 until the Maturity Date.  The Company will pay interest quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, or if any such day is not a Business Day, on the next succeeding Business Day.  Interest shall be payable by increasing the aggregate principal amount of the Notes (such increase being referred to herein as “PIK Interest”).

Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from December 19, 2019 until the principal hereof is due. The first Interest Payment Date shall be March 31, 2020.  Interest will be computed on the basis of a 360−day year of twelve 30−day months.  All then outstanding principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on June 30, 2023 (the “Maturity Date”).

This Note is one of the Subordinated Convertible Promissory Notes designated as a Subordinated Convertible Promissory Note issued on the date hereof (collectively with such other Subordinated Convertible Promissory Notes issued by the Company at any time, the “Notes”).

1.            Definitions. As used in this Note, the following capitalized terms have the following meanings:

Business Day” means a day, other than a Saturday or Sunday, on which commercial banks in New York, New York are open for the general transaction of business.

Change of Control” means the occurrence of any of the following:


(a)         the direct or indirect sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to any Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision) (a “Group”) (other than to the Company or one or more Subsidiaries); or

(b)         any Person or Group shall become the beneficial owner, directly or indirectly, of more than 50% of the voting capital stock of the Company (measured by voting power rather than number of shares).

Conversion Price” is equal to the lower of (a) $4.00 per share or (b) the IPO Price.

Customary Documents” shall mean all or any of: a purchase agreement, an investor rights agreement, a voting agreement, a right of first refusal and co-sale agreement and/or other ancillary agreements, with customary representations and warranties and transfer restrictions (including, without limitation, a customary lock-up agreement in connection with an initial public offering) or other similar documents.

Default Interest Rate” means 12.00% per annum.

First Priority Notes” mean (a) all Notes held by HH-Halo and its permitted transferees and (b) that certain Note, $77,336.99 initial principal amount, issued by the Company to Werner von Pein on December 19, 2019.

Halo Acquisition” shall mean the acquisition by the Company of Halo, Purely For Pets, Inc., Thriving Paws, LLC, HH-Halo LP (the “Sellers”), pursuant to a Stock Purchase Agreement dated October 15, 2019, as amended.

HH-Halo” means HH-Halo LP, a Delaware limited partnership.

Indebtedness” means, without duplication, all obligations of the Company or any of its subsidiaries for (a) indebtedness for borrowed money or indebtedness issued in substitution for or exchange of indebtedness for borrowed money, (b) other indebtedness evidenced by notes, bonds, debentures, mortgages or other debt instruments or debt securities, (c) the deferred purchase price of property or other assets (including “earn-outs”), excluding ordinary course trade payables and accrued expenses, (d) obligations as arising under capital leases, (e) payment obligations under any interest rate swap agreements, interest rate hedge agreements or other derivative agreements to which the Company is a party to the extent such obligation is required to be paid in full at the Closing upon termination of any such agreement, (f) interest owed with respect to the indebtedness referred to above and prepayment penalties, premiums, breakage or fees related thereto, (g) all interest expense accrued but unpaid, and any penalties, costs (breakage or otherwise), premiums, overage charges, make-whole payments, indemnities and fees on or related to Indebtedness, (h) obligations under any performance bond or letter of credit and (i) indebtedness of another person or entity of the types described in clauses (a) and (h) guaranteed, directly or indirectly, in any manner by the Company or any of its subsidiaries; provided that, Indebtedness shall not include any intercompany accounts, payables or loans of any kind or nature.
Investors” shall mean the investors that are the registered holders of the Notes.

IPO” means the listing of the Company’s common stock, par value $0.001 (the “Common Stock”) on the NASDAQ, NYSE or other national securities exchange in the United States or Canada whether through a firm commitment underwritten public offering by the Company of shares of common stock pursuant to an effective registration statement under the Securities Act of 1933 or other uplist transaction permitted by the applicable exchange.

IPO Price” means the price at which the Company’s Common Stock was sold in an IPO.

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Lien” means any lien, encumbrance, pledge, mortgage, deed of trust, restriction on transfer or use, hypothecation, easement, right-of-way, defect in title, security interest, charge, option, right of first refusal or first offer, preemptive right, other transfer restriction or any similar claim.

Obligations” shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to Investor of every kind and description, now existing or hereafter arising under or pursuant to the terms of this Note, including all interest, fees, charges, expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable to and payable by the Company hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. Notwithstanding the foregoing, the term “Obligations” shall not include any obligations of Company under or with respect to any warrants to purchase Company’s capital stock.

Permitted Indebtedness” means Indebtedness incurred by the Company or its subsidiaries that is made expressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflected in a written agreement acceptable to the Required Investors and approved by the Required Investors in writing, and which Indebtedness does not provide at any time for the payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal or premium, if any, thereon, until 91 days after the Maturity Date or later.

Permitted Liens” means (a) mechanic’s, materialmen’s, carriers’, repairers’ and similar Liens arising in the ordinary course of business for amounts that are not yet due and payable or are being contested in good faith, (b) Liens for taxes, assessments or other governmental charges not yet due and payable as of the date of determination or which are being contested in good faith and for which adequate reserves have been established and maintained in accordance with GAAP, (c) encumbrances and restrictions on real property (including, but not limited to, easements, covenants, conditions, rights of way and similar restrictions) that do not, individually or in the aggregate, materially interfere with the Company’s or its subsidiaries’ present uses or occupancy of such property or the current operation of the business of the Company and its subsidiaries, (d) zoning, building codes and other land use laws imposed by a governmental entity affecting the use or occupancy of real property or the activities conducted thereon, (e) any right, interest, Lien or title of a licensor, sublicensor, licensee, sublicensee, lessor or sublessor under any license, sublicense, lease, sublease or other similar agreement or in the property being leased or licensed, in each case, in the ordinary course of business, (f) purchase money Liens and Liens securing rental payments under lease arrangements and (g) other Liens which do not materially impair the use or value of the underlying asset.

Person” shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.

Required Investors” shall mean (a) HH-Halo, (b) Investors holding more than 50% of the aggregate then outstanding principal amount of the Notes if no First Priority Notes remain outstanding or (c) Investors holding more than 60% of the aggregate then outstanding principal amount of the Notes in connection with any amendment, waiver or modification pursuant to Section 8(b) that would have a material and adverse effect on Investors (other than HH-Halo) that is disproportionate to its effect on HH-Halo.

Second Priority Notes” means Notes that are not First Priority Notes.

Senior Credit Agreement” has the meaning set forth in the Subordination Agreement.

Senior Debt” means (a) Senior Debt (as defined in the Subordination Agreement) and (b) any other Indebtedness to the extent the proceeds of which are used to repay all or a portion of the Indebtedness under the Senior Credit Agreement.

3

Subordination Agreement” means that certain Subordination Agreement dated December 19, 2019 among Bridging Finance Inc., Investor, the Company and the other parties thereto.

Trading Day” shall mean any day on which the Common Stock is traded on the Trading Market.

Trading Market” shall mean the principal securities exchange or securities market, including an over-the-counter market, on which the Common Stock is then traded in the United States.

Transaction Documents” means this Note, any other Notes and the Subscription Agreement, Registration Rights Agreement and Common Stock Purchase Warrant entered into and delivered in connection herewith.

2.            Payments. Subject to the terms of the Subordination Agreement:

(a)          Interest. Accrued interest on this Note shall be payable as set forth in the first paragraph of this Note.  In the event of a conversion hereunder, the accrued interest shall convert along with the outstanding principal amount.

(b)         Prepayment. The Company may prepay the Notes without penalty at any time prior to the Maturity Date; provided that the Company shall not prepay the Notes at any time within 90 days prior to a Change of Control; provided further that the Company shall prepay the Notes held by HH-Halo or its permitted transferees, if any, and any Notes pari passu in right of payment with HH-Halo pursuant to Section 7(a) prior to any prepayment of Notes held by any other Investor.

(c)         Change of Control. Subject to Section 5(c), in the event of a Change of Control, each Investor shall have the option to elect either (i) to convert all of the outstanding principal amount of, and all accrued interest on, the Notes held by such Investor into a replacement note issued by the new issuer resulting from the Change of Control in an aggregate principal amount equal to (A) 104% of the outstanding principal amount of Notes held by such Investor plus (B) accrued interest or (ii) to require the Company to repay all of the outstanding principal amount of the Notes held by such Investor plus all accrued interest thereon and pay a repayment premium equal to 4% of the sum of all outstanding principal amount of the Notes held by such Investor plus all accrued interest thereon.

(d)         Payments Generally. The Company will make all cash payments due under this Note in immediately available funds by 1:00 p.m. ET on the date such payment is due at the address for such purpose specified below Investor’s signature hereto, or at such other address, or in such other manner, as an Investor or other registered holder of a Note may from time to time direct in writing.

(e)          Treatment of Notes. Subject to Section 7(a), (i) all or any portion of the then outstanding principal amount of any First Priority Note and all interest thereon shall be (A) senior in right of payment and in all other respects to any Second Priority Notes and (B) pari passu in right of payment and in all other respects to any other First Priority Note; and (ii) all or any portion of the then outstanding principal amount of any Second Priority Note and all interest thereon shall be (A) junior in right of payment and in all other respects to all First Priority Notes and (B) pari passu in right of payment and in all other respects to any other Second Priority Note. If Investor receives payments in excess of its appropriate share of the Company’s payments to the holders of the Notes, then Investor shall hold in trust all such excess payments for the benefit of the holders of other Notes and shall pay such amounts held in trust to such other holders upon demand by such holders. Except in connection with incurrence of Senior Debt but subject to Section 7(b), no Notes issued after the date of this Note or any agreements or other instruments and documents entered into or delivered in connection therewith shall provide any Investor with rights and privileges that are more favorable in the aggregate to such Investor than the rights and privileges of Investor hereunder.

4

3.            Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note:

(a)         Failure to Pay. The Company shall fail to pay (i) when due any principal payment on the due date hereunder or (ii) any interest payment or other payment required under the terms of this Note on the due date hereunder and such payment shall not have been made within five (5) business days of the Company’s receipt of written notice to the Company of such failure to pay;

(b)       Other Breach. The Company shall breach, in any material manner, any representation, warranty or covenant or other term or condition of any Transaction Document (other than the Registration Rights Agreement), except, in the case of a breach of a covenant that is curable, only if such breach continues for a period of at least fifteen (15) consecutive days after written notice thereof is delivered to the Company.

(c)          Senior Debt Default. The occurrence of an Event of Default (as defined in the Senior Credit Agreement) or any Event of Default (or its equivalent) under any other Senior Debt.

(d)         Suspension from Trading. The suspension from trading or failure of the Common Stock to be listed on the OTC markets, the pink sheets, NASDAQ, NYSE or other national securities exchange in the United States or Canada for a period of five (5) consecutive days or for more than ten (10) days in any 365-day period.

(e)       Voluntary Bankruptcy or Insolvency Proceedings. The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its or any of its creditors, (iii) be dissolved or liquidated, (iv) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (v) take any action for the purpose of effecting any of the foregoing.

(f)          Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company, or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or any of its subsidiaries, if any, or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 60 days of commencement.

4.            Rights of Investor upon Default. Subject to the terms of the Subordination Agreement:

(a)        Upon the occurrence of any Event of Default (other than an Event of Default described in Sections 3(e) or 3(f)) and at any time thereafter during the continuance of such Event of Default, Investor may, with the written consent of the Required Investors, by written notice to the Company, declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein to the contrary notwithstanding. Upon the occurrence of any Event of Default described in Sections 3(e) and 3(f), immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence and during the continuance of any Event of Default, Investor may, with the written consent of the Required Investors, exercise any other right, power or remedy granted to it by this Note or otherwise permitted to it by law, either by suit in equity or by action at law, or both.

5

(b)       For so long as any Event of Default exists under this Note, regardless of whether or not there has been an acceleration of the Indebtedness evidenced by this Note, and in addition to all other rights and remedies of Investor hereunder, interest shall accrue on the Note principal at the Default Interest Rate, and such accrued interest shall be immediately due and payable. The Company acknowledges that it would be extremely difficult or impracticable to determine Investor’s actual damages resulting from any late payment or Event of Default, and such late charges and accrued interest are reasonable estimates of those damages and do not constitute a penalty.

5.            Conversion.

(a)         Automatic Conversion on IPO. If, on or prior to the Maturity Date, the Company consummates an IPO, then the then outstanding principal amount of this Note together with all accrued and unpaid interest under this Note shall automatically convert into Common Stock at the Conversion Price.

(b)        Elective Conversion.  At any time prior to 5:00 p.m. on the last Business Day immediately preceding the Maturity Date, each Investor shall have the option to convert all or part of the principal and accrued interest under the Notes into that number of shares of Common Stock equal to the quotient of (1) all principal and accrued interest under the Notes being so converted, divided by (2) the Conversion Price.

(c)          Automatic Conversion Upon Change of Control.  If any Investor fails to make an election in accordance with Section 2(c) within 30 days of receipt of written notice of the applicable Change of Control from the Company, all principal and accrued interest under the Notes held by such Investor shall automatically convert into that number of shares of Common Stock equal to the quotient of (1) all principal and accrued interest under the Notes being so converted, divided by (2) the Conversion Price.

(d)         Additional Shares of Common Stock Issuable In Certain Circumstances.  If the Company has not completed an IPO by December 31, 2020, then upon any conversion of Notes by an Investor thereafter, such Investor shall be entitled to an additional number of shares of Common Stock at a conversion price of $4.00 per share upon conversion equal to 10% of the number of shares of Common Stock originally issuable upon conversion.

(e)          Conversion Procedures.

(i)          Conversion Pursuant to Section 5(a). If this Note is to be automatically converted pursuant to Section 5(a), written notice shall be delivered to Investor at the address last shown on the records of the Company for Investor or given by Investor to the Company for the purpose of notice, notifying Investor of the general terms of the conversion to be effected, specifying the Conversion Price, the principal amount of the Note to be converted, together with all accrued and unpaid interest and the date on which such conversion is expected to occur and calling upon Investor to surrender to the Company, in the manner and at the place designated, this Note. Upon such conversion of this Note, Investor hereby agrees to execute and deliver to the Company all transaction documents entered into by other purchasers participating in the IPO, including but not limited to any Customary Documents. Investor also agrees to deliver the original of this Note (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement acceptable to the Company whereby the holder agrees to indemnify the Company from any loss incurred by it in connection with this Note) at the closing of the IPO for cancellation; provided, however, that upon the closing of the IPO, this Note shall be deemed converted and of no further force and effect, whether or not it is delivered for cancellation as set forth in this sentence. Any conversion of this Note pursuant to Section 5(a) shall be deemed to have been made immediately prior to the closing of the IPO and on and after such date the Persons entitled to receive the units issuable upon such conversion shall be treated for all purposes as the record holder of such units.

(ii)          Elective Conversion.

6

(1)         Prior to conversion of this Note pursuant to any elective conversion under this Section 5, Investor shall surrender this Note to the Company (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement acceptable to the Company whereby the holder agrees to indemnify the Company from any loss incurred by it in connection with this Note).  If the Required Investors elect to convert the Notes pursuant to this Section 5 (other than an automatic conversion under Section 5(a)), the Required Investors shall give written notice to the Company at least thirty (30) days prior to the event triggering the elective conversion at the Company’s principal corporate office of the election to convert the same pursuant to the applicable paragraph of this Section 5, and shall state therein the amount of the then outstanding principal amount of the Notes, together with all accrued and unpaid interest, to be converted.

(2)       Investor hereby agrees to execute and deliver to the Company upon such elective conversion of this Note all transaction documents entered into by other recipients of capital stock and, if applicable, any Customary Documents.

(3)         The Company shall, as soon as practicable thereafter, issue and deliver to such Investor a certificate or certificates (or a notice of issuance of uncertificated units, if applicable) for the number of units to which Investor shall be entitled upon such conversion, including a check payable to Investor for any cash amounts payable as described in Section 5(e)(iii). Any elective conversion of this Note shall be deemed to have been made upon the satisfaction of all of the conditions set forth in this Section 5(e)(ii) and on and after such date the Persons entitled to receive the units issuable upon such conversion shall be treated for all purposes as the record holder of such units.

(iii)        Fractional Units; Interest; Effect of Conversion. No fractional units shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional units to Investor upon the conversion of this Note, the Company shall pay to Investor an amount equal to the product obtained by multiplying the applicable conversion price by the fraction of a unit not issued pursuant to the previous sentence. In addition, to the extent not converted into units of capital stock, the Company shall pay to Investor any interest accrued on the amount converted and on the amount to be paid by the Company pursuant to the previous sentence. Upon conversion of this Note in full and the payment of the amounts specified in this paragraph, the Company shall be forever released from all its Obligations and liabilities under this Note and this Note shall be deemed of no further force or effect, whether or not the original of this Note has been delivered to the Company for cancellation. Notwithstanding anything herein to the contrary, Investor hereby waives the right to payment for fractional units pursuant to this Section 5(e)(iii) if the aggregate amount owed to Investor upon conversion of this Note is less than $5.00.

(f)         Notices of Record Date. In the event of any Change of Control, the Company will mail written notice of such event to Investor at least ten (10) days prior to the closing of a Change of Control, which notice period may be waived with the written consent of the Required Investors.

6.            Certain Adjustments

(a)         Stock Dividends and Splits.  If the Company, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Note), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company (collectively with the actions described in (i), (ii), (iii) and (iv), a “Share Reorganization”), then in each case the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Note shall be proportionately adjusted such that the aggregate Conversion Price of this Note shall remain unchanged.  Any adjustment made pursuant to this Section 6(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification, but if the Company shall legally abandon any such dividend, distribution, subdivision, combination or reclassification prior to effecting such action, no adjustment shall be made pursuant to this Section 6(a) in respect of such action.

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(b)          Pro Rata Distributions.  If the Company, at any time while this Note is outstanding, shall distribute to all or substantially all holders of Common Stock (and not to the Investors) evidences of its Indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than a Share Reorganization, then, in each such case, the Conversion Price shall be adjusted by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP (as defined below) determined as of the record date, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of Indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith; provided that in no event shall the Conversion Price be increased as a result of the application of this Section 6(b).  Simultaneously with any adjustment to the Conversion Price pursuant to this Section 6(b), the number of shares of Common Stock that may be issuable upon conversion of this Note shall be increased proportionately, so that after such adjustment the aggregate Conversion Price payable hereunder for the adjusted number of shares of Common Stock shall be the same as the aggregate Conversion Price in effect immediately prior to such adjustment (without regard to any limitations on exercise contained herein).  In either case the adjustments shall be described in a statement provided to the Investor that holds the portion of assets or evidences of Indebtedness so distributed or such subscription rights applicable to one share of Common Stock.  Such adjustments shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above, but if the Company shall legally abandon any such distribution prior to effecting such distribution, no adjustments shall be made pursuant to this Section 6(b) in respect of such action.  For purposes of this Section 6(b), “VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:00 p.m. (New York City time)), (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets Group, Inc.  (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Required Investors and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

(c)         Calculations.  All calculations under this Section 6 shall be made to the nearest cent or rounded down to the nearest whole share, as the case may be.  For purposes of this Section 6, any calculation of the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall not include treasury shares, if any.  Notwithstanding anything to the contrary in this Section 6, no adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least $0.01 per share in such price; provided, however, that any adjustments which by reason of the immediately preceding sentence are not required to be made shall be carried forward and taken into account in any subsequent adjustment.  In any case in which this Section 6 shall require that an adjustment in the Conversion Price be made effective as of a record date for a specified event, if an Investor converts this Note after such record date, the Company may elect to defer, until the occurrence of such event, the issuance of the shares of Common Stock and other capital stock of the Company in excess of the shares of Common Stock and other capital stock of the Company, if any, issuable upon such exercise on the basis of the Conversion Price in effect prior to such adjustment; provided, however, that in such case the Company shall deliver to the Investor a due bill or other appropriate instrument evidencing the Investor’s right to receive such additional shares and/or other capital securities upon the occurrence of the event requiring such adjustment.

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(d)         Par Value.  Notwithstanding anything to the contrary in this Note, in no event shall the Conversion Price be reduced below the par value of the Company’s Common Stock.

7.            Covenants.

(a)         November 2019 Notes. By January 6, 2020, the Company shall cause all Notes issued by the Company on or about November 11, 2019 to be amended and restated, or cancelled and exchanged, so that they are in form and substance identical in all respects to the Notes issued by the Company to Thriving Paws, LLC on the date hereof, except (i) with respect to their dates of issuance, the names of each Investor and their respective principal amounts and (ii), subject to Section 7(b)(i) such replacement Notes may be pari passu in right of payment with the First Priority Notes.

(b)        Incurrence of Debt. So long as this Note is outstanding, the Company shall not, and shall not permit any of its subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than (i) the Senior Debt not to exceed $30,000,000 in the aggregate together with all Notes that are First Priority Notes pursuant to Section 7(a)(ii), (ii) Indebtedness under this Note and all other Notes in the aggregate not to exceed $19,900,000 in initial principal amount and (iii) Permitted Indebtedness.

(c)         Existence of Liens. So long as this Note is outstanding, the Company shall not, and shall not permit any of its subsidiaries to, directly or indirectly, allow or suffer to exist Liens other than (i) pursuant to the Senior Debt and (ii) Permitted Liens.

(d)        Restricted Payments. The Company shall not, nor shall it permit any of its subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Permitted Indebtedness (other than the Senior Debt), whether by way of payment in respect of principal of (or premium, if any) or interest on, such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing.

(e)        Participation. Investor, as the holder of this Note, shall be entitled to receive such dividends paid and distributions made to the holders of Common Stock to the same extent as if Investor had converted this Note into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the record date for such dividends and distributions. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock.

(f)          Noncircumvention. The Company shall not, by amendment of its Certificate of Incorporation, Bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note and take all action as may be required to protect the rights of Investor.

8.            Miscellaneous.

(a)          Subordination.  This Note is subordinated to all Senior Debt but is and shall remain at all times senior in right of payment and in all other respects to any other Indebtedness.

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(b)        Waivers and Amendments. Subject to the terms of the Subordination Agreement, any provision of this Note may be amended, waived or modified only with the written consent of the Company and of the Required Investors; provided, however, that no such amendment, waiver or consent shall: (i) reduce the principal amount of any Note without the affected Investor’s written consent, or (ii) reduce the rate of interest of any Note without the affected Investor’s written consent. Any amendment or waiver effected in accordance with this paragraph shall be binding upon all of the parties hereto.

(c)         Governing Law. This Note and all actions arising out of or in connection herewith or therewith shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law provisions of the State of New York or of any other state.

(d)        Survival. The representations, warranties, covenants and agreements made herein shall survive the execution and delivery of this Note.

(e)          Jurisdiction and Venue. Investor and the Company irrevocably consent to the exclusive jurisdiction of, and venue in, the state courts in New York County in the State of New York or the United Stated District Court for the State of New York, in connection with any matter based upon or arising out of this Note or the matters contemplated herein or therein, and agree that process may be served upon them in any manner authorized by the laws of the State of New York for such Persons.

(f)          Waiver of Jury Trial; Judicial Reference. Investor hereby agrees and the Company hereby agrees to waive their respective rights to a jury trial of any claim or cause of action based upon or arising out of this Note.

(g)       Successors and Assigns. Subject to the restrictions on transfer set forth herein, the rights and obligations of the Company and Investor under this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

(h)       Transfer and Replacement of this Note. The Company will keep, at its principal executive office, books for the recordation of the Investors and recordation of transfer of this Note. Prior to presentation of this Note for transfer, the Company shall treat the Person in whose name this Note is recorded as the owner and holder of this Note for all purposes whatsoever, whether or not this Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to any restrictions on or conditions to transfer set forth in this Note, the holder of this Note, at its option, may in person or by duly authorized attorney surrender the same for exchange at the Company’s chief executive office, and promptly thereafter and at the Company’s expense, except as provided below, receive in exchange therefor this Note in the principal requested by such holder, dated the date to which interest shall have been paid on this Note or, if no interest shall have yet been so paid, dated the date of this Note and recorded in the name of such Person or Persons as shall have been designated in writing by such holder or its attorney for the same principal amount as the then unpaid principal amount of this Note. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Note and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it; or (b) in the case of mutilation, upon surrender thereof, the Company, at its expense, will execute and deliver in lieu thereof a new Note executed in the same manner as this Note, in the same principal amount as the unpaid principal amount of this Note and dated the date to which interest shall have been paid on this Note or, if no interest shall have yet been so paid, dated the date of this Note.

(i)         Transfer of this Note or Securities Issuable on Conversion Thereof. This Note may not be transferred by Investor without the prior written consent of the Company; provided that all or any portion of Investor’s rights in and to this Note may be sold, transferred or assigned by Investor at any time or from time to time to any person or entity who or which is an affiliate, partner, member, stockholder or other holder of equity securities of Investor or any of its controlling affiliates. Any shares of Common Stock of the Company into which this Note may be converted shall be subject to any transfer restrictions set forth in any Customary Documents.

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(j)          Assignment by the Company. The rights, interests or obligations of the Company hereunder may not be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Required Investors.

(k)         Entire Agreement. This Note and the Transaction Documents to which Investor is a party constitute and contain the entire agreement among the Company and Investor and supersedes any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter hereof.

(l)          Notices. All notices, requests, demands, consents, instructions or other communications required or permitted hereunder shall be in writing and faxed, mailed, emailed or delivered to each party as follows: (i) if to Investor, at Investor’s address, facsimile number or electronic mail address set forth beneath Investor’s name on the signature page hereto, or at such other address, facsimile number or electronic mail address as Investor shall have furnished the Company in writing, or (ii) if to the Company, at the Company’s address, facsimile number or electronic mail address set forth beneath the Company’s name on the signature page hereto, or at such other address, facsimile number or electronic mail address as the Company shall have furnished to Investor in writing. All such notices and communications will be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one business day after being deposited with an overnight courier service of recognized standing, (iv) four days after being deposited in the U.S. mail, first class with postage prepaid, (v) if sent via facsimile, upon confirmation of facsimile transfer or (vi) if sent via electronic mail, when directed to the relevant electronic mail address, if sent during normal business hours of the recipient, or if not sent during normal business hours of the recipient, then on the recipient’s next business day.

(m)        Expenses. The Company and Investor shall be responsible for their own legal fees and other expenses incurred in connection with the negotiation, drafting and execution of this Note. If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or Investor otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the reasonable costs incurred by Investor for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, reasonable attorneys’ fees and disbursements.

(n)        Severability of this Note. If any provision of this Note shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

(o)        Payment. Unless converted into the Company’s equity securities pursuant to the terms hereof, payment shall be made in lawful tender of the United States.

(p)        Usury. If any interest is paid on this Note that is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note.

(q)        Waivers. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument.

(r)         Counterparts. This Note may be executed in one or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. Facsimile or similar electronic copies (including .PDF format) of signed signature pages will be deemed binding originals.

(Signature Page Follows)

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The parties have caused this Note to be duly executed and delivered as of the date first written above.

COMPANY:
 
   
BETTER CHOICE COMPANY INC.
 
a Delaware corporation
 
   
By:
   
Name:
 
Title:
 
Address:
164 Douglas Rd E
Oldsmar, Florida 34677
 

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INVESTOR:

By:
 
 
 
By: