BETTER CHOICE CO INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (type 10-Q)

The next dialogue contains forward-looking statements about our enterprise,
monetary situation and outcomes of operations, together with discussions about
administration's expectations for our enterprise. The monetary situation, outcomes of
operations and money flows mentioned on this Administration's Dialogue and Evaluation
of Monetary Situation and Outcomes of Operations are these of Higher Alternative
Firm Inc. and its consolidated subsidiaries, collectively, the "Firm,"
"Higher Alternative Firm," "we," "our," or "us". These statements symbolize
projections, beliefs, and expectations primarily based on present circumstances and
situations and in mild of latest occasions and traits, and you shouldn't construe
these statements both as assurances of efficiency or as guarantees of a given
plan of action. As an alternative, numerous identified and unknown elements are more likely to trigger
our precise efficiency and administration's actions to differ, and the outcomes of
these variances could also be each materials and hostile. Accordingly, readers are
cautioned to not place undue reliance on these forward-looking statements, which
mirror administration's evaluation solely as of the date hereof. We undertake no
obligation to publicly launch the outcomes of any revision to those
forward-looking statements which can be made to mirror occasions or circumstances
after the date hereof or to mirror the incidence of unanticipated occasions.

Overview and Outlook

Higher Alternative is a pet well being and wellness firm dedicated to main the
business shift towards pet services that assist canines and cats dwell
more healthy, happier and longer lives. Our mission is to turn out to be essentially the most
revolutionary premium pet meals firm on this planet, and we're motivated by our
dedication to creating merchandise with integrity and treating pets and their mother and father
with respect. We imagine that our broad portfolio of pet well being and wellness
merchandise are nicely positioned to profit from the traits of rising pet
humanization and an elevated shopper concentrate on well being and wellness, and have
adopted a laser targeted, channel-specific method to progress that's pushed by
new product innovation. Our government group has a confirmed historical past of success in
each pet and consumer-packaged items, and has over 50 years of mixed
expertise within the pet business and over 100 years of mixed expertise within the
consumer-packaged items business.

We promote our premium and super-premium merchandise (which we imagine typically
contains merchandise with a retail worth better than $0.20 per ounce) below the
Halo model umbrella, which incorporates Halo Holistic™, Halo Elevate® and the previous
TruDog model, which has been rebranded and efficiently built-in below the
Halo model umbrella through the third quarter of 2022. Our core merchandise offered
below the Halo model are made with high-quality, thoughtfully sourced
components for pure, science primarily based diet. Every revolutionary recipe is
formulated with main veterinary and diet specialists to ship optimum
well being. Our various and established buyer base has enabled us to penetrate
a number of channels of commerce, which we imagine allows us to ship on core
shopper wants and serve pet mother and father wherever they store. We group these channels
of commerce into 4 distinct classes: E-commerce, which incorporates the sale of
product to on-line retailers corresponding to Amazon and Chewy; Brick & Mortar, which
primarily contains the sale of product to Pet Specialty retailers corresponding to Petco,
Pet Provides Plus and neighborhood pet shops, in addition to to pick out grocery
chains; DTC, which incorporates the sale of product by means of our web site
halopets.com; and Worldwide, which incorporates the sale of product to overseas
distribution companions and to pick out worldwide retailers.

The International Pet Meals and Deal with Market

The U.S. represents the most important and most developed marketplace for pet meals globally,
with meals and treats accounting for roughly $39 billion of shopper gross sales
in 2019, or 36% of the entire U.S. pet care market, in response to AlphaWise and
Morgan Stanley Analysis. In keeping with the American Pet Product Affiliation,
between 66% and 70% of all households within the U.S. personal a pet, equating to a complete
pet inhabitants of greater than 130 million companion animals and a mean of 1.7
pets per family. Pet spending represents a good portion of family
spend on shopper merchandise, as this interprets to a mean annual spend on pet
care of greater than $1,500 per pet proudly owning family, with $460 of this spend
attributed to pet meals and treats.

Traditionally, shopper spending on pets grew at an roughly 3% CAGR within the
decade main as much as the COVID-19 pandemic, pushed by regular annual will increase in
family pet possession of roughly 1%, the continued premiumization of the
class and the humanization of pets. These business tailwinds have been
magnified within the post-COVID panorama, as stay-at-home orders have pushed a extra
than tripling of annual pet possession progress alongside basic modifications in
shopper buying conduct. This surge in pet acquisition has led to a
dramatic enhance within the forecasted progress of the pet care business over the
subsequent ten years.

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Past the estimated $3.9 billion everlasting enhance to annual spend on pet meals
and treats, this "Pet Growth" was pushed by the acceleration of pet possession by
millennial and Gen-Z households. From a demographic perspective, youthful pet
homeowners usually tend to spend a better share of their revenue on pets,
deal with their pet as an vital member of the household and to buy merchandise
from pet specialty and on-line retailers relatively than from grocery shops. Alongside
these strains, girls are 3.2 occasions extra fascinated about buying pet meals than
males, and are 2.4 occasions extra more likely to interact with search advertisements than males. Taken
holistically, these traits recommend a choice to buy extra premium and
super-premium pet meals and treats from manufacturers like Halo, with a bent to
buy merchandise within the channels the place we compete.

Globally, Asia is the second largest marketplace for pet merchandise, with China
representing the most important market alternative for progress. Just like the U.S., progress in
the Asian pet care business has been pushed by dramatic will increase in family
pet possession. We imagine that progress in Asia is fueled by rising ranges of
financial monetary standing and demand for premium, western manufactured merchandise
because of product high quality considerations. This demand has been supported by a
quickly rising center class in China, the place a latest McKinsey report estimated
that in 2018 roughly 730 million individuals in city areas fell into the revenue
classes of "aspirants" and "affluents," with the Brookings group estimating
that roughly 60 million individuals are added to those revenue classes every
yr. We imagine that this progress drove the rise within the variety of dog-owning
Chinese language households as measured by Euromonitor, which elevated from 12% in 2015
to twenty% in 2020, in response to Euromonitor. In keeping with Euromonitor, the Chinese language
marketplace for premium dry canine and cat meals is anticipated to develop at a 20% CAGR and
28% CAGR, respectively, from 2015 by means of 2025, suggesting that the Chinese language pet
market has important room for progress within the foreseeable future. We're targeted
on focusing on Chinese language pet homeowners with the very best willingness to pay, which have a tendency
to be city dwelling millennial and Gen-Z girls. In 2021, 80% of our merchandise
have been bought on-line, and roughly 50% of our end-consumers have been born
after 1990.

Our Progress Technique

•Sturdy Innovation Pipeline. We’ve a sturdy and rising pipeline of recent
merchandise, and imagine our dimension is a bonus as we’re nimble sufficient to
rapidly convey new merchandise to market, however giant sufficient to profit from sturdy
present buyer relationships and established economies of scale with our
co-manufacturers.

•Capability to Leverage Differentiated Omni-Channel Technique for Progress. We imagine
that we will leverage our differentiated omni-channel technique to design and promote
merchandise purpose-built for fulfillment in particular channels whereas sustaining our
skill to leverage advertising and gross sales assets cross-channel. We imagine that
this technique will permit us to ship on core shopper wants, maximize gross
margin and reply to altering channel dynamics which have accelerated in latest
years.

•Capitalize on Persevering with Developments of Humanization of Pets. We imagine our
mixture of revolutionary merchandise designed particularly for sure channels
can help our progress to turn out to be a pacesetter within the premium and super-premium
classes throughout canine and cat meals.

•Effectively Positioned to Capitalize on a As soon as-in-a-Technology Demographic Shift in
Asia. We imagine that Asia represents the most important macro-growth alternative in
the worldwide pet meals business. In China, the variety of households that personal a pet
has doubled within the final 5 years, with youthful pet homeowners main progress.

Latest Company Developments

On September 13, 2022, we introduced that Scott Lerner was stepping down from his
position as CEO, efficient September 14. Additionally on September 13, 2022, we introduced
that Lionel F. Conacher was appointed as Interim CEO, efficient September 14,
2022.

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Outcomes of Operations for the three and 9 months ended September 30, 2022 and
2021

The next desk units forth our consolidated outcomes for the intervals
introduced (in hundreds):

                                                     Three Months Ended                                                      9 Months Ended
                                                       September 30,                                                           September 30,
                                 2022              2021             Change              %                2022              2021              Change              %
Web gross sales                     $ 11,865          $ 13,200          $ (1,335)             (10) %       $  45,394          $ 35,019          $  10,375               30  %
Price of products offered               7,700             8,762            (1,062)             (12) %          31,795            22,407              9,388               42  %
Gross revenue                     4,165             4,438              (273)              (6) %          13,599            12,612                987                8  %
Working bills:
Promoting, normal and
administrative                  10,007             7,745             2,262               29  %          25,771            21,397              4,374               20  %
Share-based compensation           562               660               (98)             (15) %           2,454             3,517             (1,063)             (30) %
Complete working bills        10,569             8,405             2,164               26  %          28,225            24,914              3,311               13  %
Loss from operations            (6,404)           (3,967)           (2,437)             (61) %         (14,626)          (12,302)            (2,324)             (19) %
Different (expense) revenue:
Curiosity expense, internet             (142)              (79)              (63)              80  %            (324)           (3,148)             2,824              (90) %
Acquire on extinguishment of
debt, internet                            -                 -                 -                -  %               -               457               (457)            (100) %
Change in honest worth of
warrant liabilities                  -               590              (590)            (100) %               -            23,463            (23,463)            (100) %
Complete different (expense) revenue,
internet                               (142)              511              (653)            (128) %            (324)           20,772            (21,096)            (102) %
Web (loss) revenue earlier than
revenue taxes                    (6,546)           (3,456)           (3,090)             (89) %         (14,950)            8,470            (23,420)             277  %
Revenue tax expense                   1                 -                 1                -  %               4                 -                  4              100  %

Web (loss) revenue accessible
to widespread stockholders        $ (6,547)         $ (3,456)         $ (3,091)             (89) %       $ (14,954)         $  8,470          $ (23,424)             277  %


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Web gross sales

We promote our merchandise by means of on-line retailers, pet specialty retailers, our
on-line portal on to our shoppers and internationally to overseas
distribution companions (transacted in U.S. {dollars}). Typically, our gross sales
transactions are single efficiency obligations which can be recorded on the time
the product is shipped from our distribution facilities and when management transfers.
We provide a wide range of commerce promotions, reductions and incentives to our
clients, which impacts the transaction worth of our merchandise and our internet gross sales
accordingly. DTC internet gross sales embrace income derived from delivery charges and are
internet of loyalty factors earned (a portion of income is deferred on the time of
the sale as factors are earned and never acknowledged till the redemption of the
factors, estimated primarily based on historic expertise). We document a income reserve
primarily based on historic return charges to account for buyer returns.

Details about our income channels is as follows (in hundreds):

                                      Three Months Ended                                9 Months Ended
                                         September 30,                                     September 30,
                                2022                     2021                     2022                     2021
E-commerce (1)          $  3,530        30  %    $  4,742        36  %    $ 11,035        24  %    $ 11,644        33  %
Brick & Mortar (2)         1,342        11  %       1,816        14  %       9,632        21  %       5,408        16  %
DTC                        1,371        12  %       2,363        18  %       5,066        11  %       7,140        20  %
Worldwide (3)          5,622        47  %       4,279        32  %      19,661        44  %      10,827        31  %
Web Gross sales               $ 11,865       100  %    $ 13,200       100  %    $ 45,394       100  %    $ 35,019       100  %


(1)Our E-commerce channel contains two clients that amounted to better than
10% of our complete internet gross sales through the three and 9 months ended September 30,
2022. These clients had an mixture of $3.3 million and $10.6 million of internet
gross sales through the three and 9 months ended September 30, 2022, respectively.
Two clients amounted to better than 10% of our complete internet gross sales through the
three and 9 months ended September 30, 2021, respectively. These clients
had an mixture of $4.4 million and $10.8 million of internet gross sales through the three
and 9 months ended September 30, 2021, respectively.

(2)Our Brick & Mortar channel contains $4.3 million of internet gross sales from one
buyer that amounted to better than 10% of our complete internet gross sales through the
9 months ended September 30, 2022.

(3)One among our Worldwide clients that distributes merchandise in China
amounted to better than 10% of our complete internet gross sales through the three and 9
months ended September 30, 2022 and represented $5.3 million and $16.6 million
of internet gross sales, respectively. One among our Worldwide clients in China
represented better than 10% of internet gross sales through the three and 9 months ended
September 30, 2021 and represented $2.9 million and $6.7 million of internet gross sales,
respectively.

Web gross sales decreased $1.3 million, or 10%, to $11.9 million for the three months
ended September 30, 2022 in comparison with $13.2 million for the three months ended
September 30, 2021. The lower was pushed by softness in our E-commerce
channel as certainly one of our main clients considerably diminished its ranges of
on-hand stock and decrease buyer acquisition and retention advertising spend
as we put together for the Halo Holistic™ relaunch, softness in our DTC channel as we
started to re-introduce buyer acquisition advertising spend after finalizing the
rebranding of TruDog below the Halo umbrella, and a discount in our Brick &
Mortar channel as we exited choose grocery chains and shifted the main target of this
channel to the Halo Elevate® product line, partially offset by elevated
Worldwide gross sales. Web gross sales elevated $10.4 million, or 30%, to $45.4 million
for the 9 months ended September 30, 2022 in comparison with $35.0 million for the
9 months ended September 30, 2021. The rise was pushed by progress in our
Brick & Mortar channel pushed by the launch of Halo Elevate® and progress in our
Worldwide channel, partially offset by decrease E-commerce and DTC gross sales pushed
by an intentional discount in new buyer acquisition and retention advertising
spend in reference to our strategic rebranding of TruDog below the Halo
umbrella which was efficiently executed and applied in July 2022 and the
Halo Holistic™ relaunch. Our income progress and the gross sales for sure merchandise
was negatively impacted within the first half of 2022 by the availability chain points
being felt globally as we navigate by means of short-term shortages in uncooked supplies
in addition to manufacturing delays stemming from labor constraints.

Key elements that we count on to have an effect on our future gross sales progress embrace new product
innovation and launches, our growth technique in every of the gross sales channels
and our key provider relationships.

Gross revenue

Price of products offered consists primarily of the price of product obtained from
co-manufacturers, packaging supplies, freight prices for delivery stock to
the warehouse, in addition to third-party warehouse and order success prices. We
assessment stock available periodically to establish damages, gradual transferring
stock, and/or aged stock. Primarily based on this evaluation, we document inventories
on the decrease of value or internet realizable worth, with any discount in worth
expensed as value of products offered.

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Our merchandise are manufactured to our specs by our co-manufacturers
utilizing uncooked supplies. We work with our co-manufacturers to safe a provide of uncooked
supplies that meet our specs. Along with procuring uncooked supplies
that meet our formulation necessities, our co-manufacturers manufacture, check
and package deal our merchandise. We design our packaging for our co-manufacturers and
the packaging is shipped on to them.

Our gross revenue has been and can proceed to be affected by a wide range of
elements, primarily product gross sales combine, volumes offered, reductions supplied to newly
acquired and recurring clients, the price of our manufactured merchandise, and the
value of freight from the producer to the warehouse.

Throughout the three months ended September 30, 2022, gross revenue decreased $0.2
million, or 6%, to $4.2 million in comparison with $4.4 million through the three months
ended September 30, 2021. Gross revenue margin elevated 1% to 35% for the three
months ended September 30, 2022 in comparison with 34% for the three months ended
September 30, 2021. The rise in margin was pushed by value financial savings realized
attributable to transitioning the manufacturing of our dry kibble offered by means of our
Worldwide channel to our new co-manufacturer, which was partially offset by
a list write-off attributable to our Halo Holistic™ rebranding
initiatives. Throughout the 9 months ended September 30, 2022, gross revenue
elevated $1.0 million, or 8%, to $13.6 million in comparison with $12.6 million throughout
the three months ended September 30, 2021. Gross revenue margin decreased 6% to
30% for the 9 months ended September 30, 2022 in comparison with 36% for the 9
months ended September 30, 2021. The lower in margin was pushed primarily by
a number of value will increase from our main suppliers because of broad-scale
inflation within the business in addition to a list write-off attributable to our
Halo Holistic™ rebranding initiatives, which is partially offset by value financial savings
from transitioning a few of our main suppliers and worth will increase to
clients as described under. We count on these value financial savings offsets will
contribute to a better gross revenue realization going ahead.
We proceed to actively work with our co-manufacturer and freight companions to
generate future value financial savings, and have efficiently transitioned a few of our
main suppliers to assist notice improved gross revenue margins in future
intervals. Moreover, we started implementing worth will increase to our clients to
assist cowl these value will increase starting late within the third quarter of 2021. We
applied extra worth will increase throughout 2022, which grew to become efficient in
the second and third quarters of 2022. We might see continued margin variability
because of the present financial setting and pricing pressures attributable to
inflationary prices for each transportation and uncooked supplies. We'll proceed
to refine and optimize our general pricing technique as we consider the longer term
affect of inflation and align ourselves with the market.

Working bills

Our SG&A bills encompass the next:

•Gross sales and advertising prices for particular buyer promotional packages, paid
media, content material creation bills and our DTC promoting platform. Advertising and marketing prices
are geared in the direction of buyer acquisition and retention and constructing model
consciousness. Throughout the three months ended September 30, 2022, gross sales and advertising
prices elevated roughly $1.9 million or 54%, to $5.4 million from
$3.5 million through the three months ended September 30, 2021. Throughout the 9
months ended September 30, 2022, gross sales and advertising prices elevated
roughly $3.9 million or 49%, to $11.9 million from $8.0 million through the
9 months ended September 30, 2021. The will increase have been pushed primarily by
non-cash amortization associated to the utilization of the remaining pay as you go radio
commercial providers with iHeart, advertising and promoting company charges
associated to constructing and launching our new gross sales technique in addition to elevated
advertising spend in our Worldwide gross sales channel, partially offset by a
non permanent intentional lower in buyer acquisition and retention advertising
spend as we shift the main target of our investments to our longer-term gross sales
technique.

•Worker compensation and advantages elevated roughly $0.3 million or 19%
through the three months ended September 30, 2022 to $1.9 million from
$1.6 million through the three months ended September 30, 2021. Throughout the 9
months ended September 30, 2022, worker compensation and advantages elevated
roughly $0.4 million or 7% to $6.1 million from $5.7 million through the
9 months ended September 30, 2021. The will increase have been primarily associated to
the addition of a number of key members to our administration group through the second
half of 2021 which have important working expertise within the pet and
consumer-packaged good sectors which we imagine will allow us to efficiently
execute our progress technique, partially offset by greater severance prices throughout
the primary half of 2021.

•Freight, which is primarily associated to the delivery of DTC orders to clients,
remained flat at $0.3 million for each the three months ended September 30, 2022
and 2021. Freight additionally remained flat at $1.2 million for each the 9 months
ended September 30, 2022 and 2021. Freight prices are typically rising,
offset by our decrease DTC gross sales as described above.

•Non-cash costs together with depreciation, amortization, disposal or sale of
belongings and unhealthy debt expense elevated $0.1 million or 25% through the three
months ended September 30, 2022 to $0.5 million from $0.4 million for the three
months ended September 30, 2021. The rise was pushed by extra capital
expenditures. Throughout the 9 months ended September 30, 2022, non-cash costs
decreased roughly $0.1 million or 7% to $1.4 million from $1.5 million
through the 9 months ended September 30, 2021. The lower was pushed by
disposals of sure belongings throughout 2021, offset by extra capital
expenditures all through 2022.

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•Different normal and administrative prices for numerous normal company bills,
together with skilled providers, info expertise, insurance coverage, journey,
prices associated to service provider bank card charges, product improvement prices, lease, and
sure tax prices. Throughout each the three months ended September 30, 2022 and
September 30, 2021, different normal and administrative prices remained flat at
$1.9 million. Throughout the 9 months ended September 30, 2022, different normal and
administrative prices elevated $0.2 million, or 4% to $5.2 million in comparison with
$5.0 million for the 9 months ended September 30, 2021. The rise was
pushed by greater worldwide consulting charges, extra journey charges and
greater product improvement prices through the 9 months ended September 30,
2022, partially offset by a non-cash discount of our gross sales tax legal responsibility of
$0.6 million through the 9 months ended September 30, 2021 with no comparable
discount of expense through the 9 months ended September 30, 2022, in addition to
decrease skilled charges, decrease franchise taxes and a discount in lease expense
because of prior lease terminations.

Share-based compensation contains bills associated to fairness awards issued to
workers and non-employee administrators. Throughout the three months ended
September 30, 2022, share-based compensation decreased $0.1 million, or 15%, to
$0.6 million as in comparison with $0.7 million for the three months ended
September 30, 2021. The lower was primarily pushed by accelerated vesting of
sure inventory choice grants through the three months ended September 30, 2021.
Throughout the 9 months ended September 30, 2022, share-based compensation
decreased $1.0 million, or 30%, to $2.5 million as in comparison with $3.5 million for
the 9 months ended September 30, 2021. The lower was pushed by accelerated
vesting on sure inventory choice grants throughout 2021, partially offset by widespread
inventory issued for board service and accelerated vesting of a sure inventory choice
grant throughout 2022 and extra choice grants.

We've had no impairment expense associated to goodwill or intangible belongings
by means of September 30, 2022. Along with the rebranding of TruDog and
authorized merger with Halo, we carried out an evaluation of our reporting items and
concluded we've one reporting unit, and as such, we carried out a quantitative
goodwill evaluation as of July 1, 2022 that indicated no impairment.
Moreover, through the interval from July 2, 2022 by means of September 30, 2022,
there was a decline in our inventory worth and a change in CEO, and as such, we
decided there have been triggering occasions current through the interim interval. We
carried out a qualitative evaluation across the market worth and decided the
decline in inventory worth is just not indicative of our working outcomes and that the
decline in market worth from July 2,2022 to September 30, 2022 was not of
enough length to point impairment. Moreover, we carried out different
qualitative analyses which thought of the potential impacts of the change in CEO
and different identified info that would trigger a change within the assumptions utilized in
the July 1, 2022 evaluation. On account of our evaluation, we concluded that the
honest worth was more-likely-than-not above carrying worth. If world
macroeconomic or geopolitical situations worsen, projected income progress charges
or projected working margins decline, weighted common value of capital
will increase, or if we've a sustained decline in its inventory worth, it's potential
this might end in a probably materials goodwill impairment cost.

Curiosity expense, internet

Throughout the three months ended September 30, 2022, curiosity expense remained flat
at $0.1 million for each the three months ended September 30, 2022 and 2021.
Throughout the 9 months ended September 30, 2022, curiosity expense decreased $2.8
million to $0.3 million from $3.1 million for the 9 months ended
September 30, 2021. Curiosity expense for the three and 9 months ended
September 30, 2022 and three months ended September 30, 2021 is comprised of
curiosity on our Wintrust Credit score Facility and the amortization of debt issuance
prices. Curiosity expense for the 9 months ended September 30, 2021 is
comprised of curiosity on our Wintrust Credit score Facility, payable in-kind curiosity
on our earlier senior subordinated convertible notes, and the amortization of
debt issuance prices and accretion of debt reductions, together with $1.4 million
through the three months ended June 30, 2021 related to the remaining
low cost on the earlier convertible notes, which was totally accreted to curiosity
expense in reference to the conversion to widespread inventory ensuing from the
graduation of the buying and selling of our widespread inventory on the NYSE.

Acquire on extinguishment of debt, internet

Throughout the 9 months ended September 30, 2021, we incurred a internet acquire on
extinguishment of debt of $0.5 million, whereas there was no corresponding
exercise for the 9 months ended September 30, 2022. Acquire on extinguishment of
debt for the 9 months ended September 30, 2021 pertains to extinguishment
accounting utilized in reference to the forgiveness of our PPP loans,
partially offset by the loss on termination of a time period mortgage and ABL Facility.

Change in honest worth of warrant liabilities

Widespread inventory warrants categorized as liabilities are revalued at every steadiness
sheet date subsequent to the preliminary issuance and modifications within the honest worth are
mirrored within the Condensed Consolidated Statements of Operations as change in
honest worth of warrant liabilities. The change in honest worth for the three and
9 months ended September 30, 2021 pertains to the change within the honest worth of
widespread inventory warrants issued in reference to a non-public placement. Upon
consummation of our IPO on July 1, 2021, these warrants met the necessities to
be thought of fairness have been reclassified as such.

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Revenue taxes

Our revenue tax provision consists of an estimate of federal and state revenue
taxes primarily based on enacted federal and state tax charges, as adjusted for any
allowable credit, deductions and unsure tax positions as they come up. Throughout
the three and 9 months ended September 30, 2022, we recorded minimal revenue
tax expense. Throughout the three and 9 months ended September 30, 2021, we did
not document revenue tax expense because of the continued losses incurred by us. The
efficient tax fee is lower than 1% for the three and 9 months ended
September 30, 2022 and 0% for the three and 9 months ended September 30,
2021, which differs from the U.S. Federal statutory fee of 21% primarily
as a result of our losses have been totally offset by a valuation allowance attributable to
uncertainty of realizing the tax good thing about our NOLs.

Liquidity and capital assets

Traditionally, we've financed our operations primarily by means of the gross sales of
shares of our widespread inventory, warrants, most well-liked inventory, and loans. In connection
with our IPO on July 1, 2021, we issued and offered 8,000,000 shares of widespread
inventory at a worth of $5.00 per share and obtained complete internet proceeds of
roughly $36.1 million, after deducting underwriting reductions and
commissions of $2.8 million, and providing prices of roughly $1.1 million.
On September 30, 2022 and December 31, 2021, we had money and money equivalents
and restricted money of $12.6 million and $28.9 million, respectively.

We're topic to dangers widespread within the pet wellness shopper market together with,
however not restricted to, dependence on key personnel, aggressive forces, profitable
advertising and sale of our merchandise, the profitable safety of our proprietary
applied sciences, skill to develop into new markets, and compliance with authorities
laws. As of September 30, 2022, we've not skilled a big
hostile affect to our enterprise, monetary situation or money flows ensuing from
the COVID-19 pandemic, geopolitical actions or menace of cyber-attacks. Nonetheless,
we've seen hostile impacts to our gross revenue margin attributable to inflationary
pressures within the present financial setting. Uncertainties concerning the
continued financial affect of inflationary pressures, the COVID-19 pandemic,
geopolitical actions and menace of cyber-attacks are more likely to end in
sustained market turmoil, which might negatively affect our enterprise, monetary
situation, and money flows sooner or later.

Our skill to boost extra capital could also be adversely impacted by the
potential worsening of worldwide financial situations, together with inflationary
pressures, and the latest disruptions to, and volatility in, the credit score and
monetary markets in the USA and worldwide ensuing from the COVID-19
pandemic and geopolitical tensions. If we search extra financing to fund our
enterprise actions sooner or later, buyers or different financing sources could also be
unwilling to supply extra funding on commercially affordable phrases or at
all. If we're unable to boost the required funds when wanted or obtain
deliberate value financial savings, or different strategic goals should not achieved, we might not
be capable to proceed our operations, or we might be required to change our
operations that would gradual future progress.

We're required to keep up a minimal liquidity (as outlined within the Wintrust
Credit score Facility) of a minimum of $8.5 million examined on the final day of every
fiscal quarter starting September 30, 2022 and thereafter to adjust to our
monetary covenants. As of September 30, 2022, we have been in compliance with all
debt covenant necessities and there have been no occasions of default. We've
traditionally incurred losses and count on to proceed to generate working losses
and eat money assets within the close to time period; nevertheless, attributable to our excessive stage of
working capital, minimal debt and anticipated monetary efficiency sooner or later,
we count on to be in compliance with all required debt covenants and don't
anticipate substantial doubt about our skill to proceed as a going concern.
We've applied and proceed to implement plans to attain working
profitability, together with numerous margin enchancment initiatives, the
consolidation of and introduction of recent co-manufacturers, the optimization of
our pricing technique and ingredient profiles, and new product innovation.

A abstract of our money flows is as follows (in hundreds):

                                                                      9 Months Ended
                                                                        September 30,
                                                                 2022                  2021
Money flows (utilized in) supplied by:
Working actions                                        $    (17,972)         $     (8,320)
Investing actions                                                (198)                 (124)
Financing actions                                               1,843                37,716
Web (lower) enhance in money and money equivalents and
restricted money                                             $    (16,327)         $     29,272


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Money flows from working actions

Money utilized in working actions elevated $9.7 million, or 116%, through the
9 months ended September 30, 2022 in comparison with the 9 months ended
September 30, 2021. The rise in money utilized in working actions was
primarily pushed by important fluctuations in our working capital, together with a
comparative enhance in our stock steadiness of $8.3 million as we constructed
stock to assist the Halo Elevate® launch and the rebranding of TruDog and
Halo Holistic™. Moreover, internet (loss) revenue from operations adjusted for
non-cash bills was $(8.5) million for the 9 months ended September 30,
2022 in comparison with $(7.4) million for the 9 months ended September 30, 2021.
This enhance in working money outflows was primarily pushed by elevated
advertising spend associated to constructing and launching our new long-term gross sales
technique throughout 2022, which isn't anticipated to recur on the identical ranges in 2023.

Money flows from investing actions

Money utilized in investing actions was $0.2 million through the 9 months ended
September 30, 2022 and $0.1 million through the 9 months ended September 30,
2021. The money utilized in investing actions is said to the acquisition of mounted
belongings.

Money flows from financing actions
Money supplied by financing actions was $1.8 million for the 9 months ended
September 30, 2022 in comparison with money supplied by financing actions of $37.7
million through the 9 months ended September 30, 2021. The money supplied by
financing actions for the 9 months ended September 30, 2022 was associated to
internet proceeds from the revolving line of credit score of $2.5 million, partially offset
by funds on the time period mortgage of $0.7 million. The money supplied by financing
actions for the 9 months ended September 30, 2021 was primarily associated to
internet proceeds from the IPO of $36.2 million, proceeds from non-public placements of
$4.1 million and money obtained from warrant workouts of $1.7 million, partially
offset by internet funds on the time period loans of $2.4 million, internet funds on the
revolving line of credit score of $0.3 million, $0.1 million of debt issuance prices
and $1.3 million associated to share repurchases.

Indebtedness

As of September 30, 2022, our indebtedness consisted of a time period mortgage and a
revolving credit score facility. For added particulars in regards to the phrases, covenants and
restrictions contained within the Wintrust Credit score Facility, see "Word 7 - Debt" to
our interim condensed consolidated monetary statements included on this
Quarterly Report.

Essential Accounting Estimates

Our dialogue and evaluation of our monetary situation and outcomes of operations
are primarily based upon our unaudited condensed consolidated monetary statements, which
have been ready in accordance with GAAP. The preparation of our unaudited
condensed consolidated monetary statements and associated disclosures requires us
to make estimates, assumptions and judgments that have an effect on the reported quantities of
belongings, liabilities, internet gross sales, prices and bills and associated disclosures. We
imagine that the estimates, assumptions and judgements concerned within the
accounting insurance policies described under and in our Annual Report for the yr ended
December 31, 2021 have the best potential affect on our monetary statements
and, subsequently, we take into account these to be our important accounting estimates.
Accordingly, we consider our estimates and assumptions on an ongoing foundation. Our
precise outcomes might differ from these estimates below totally different assumptions and
situations. Apart from famous under, there have been no materials modifications to our
important accounting estimates in comparison with the descriptions in our Annual Report
for the yr ended December 31, 2021.

Goodwill Impairment

We consider goodwill for impairment a minimum of yearly on the reporting unit
stage. We monitor the existence of potential impairment indicators all through
the yr and can consider for impairment every time occasions or circumstances
point out that the honest worth of a reporting unit is under its carrying worth.
Impairment testing is predicated on our present enterprise technique in mild of current
business and financial situations, in addition to future expectations. Honest worth
measurements used within the impairment assessment of goodwill are Stage 3 measurements.

When evaluating goodwill for impairment, we've the choice to first assess
qualitative elements to find out whether or not it's extra seemingly than not the honest
worth of a reporting unit is lower than its carrying quantity. Qualitative elements
embrace macroeconomic situations, business and market situations, and general
firm monetary efficiency. If, after assessing the totality of occasions and
circumstances, we decide that it's extra seemingly than not the honest worth of
the reporting unit is bigger than its carrying quantity, a quantitative
impairment check is pointless. If the honest worth exceeds the carrying worth, we
conclude that no goodwill impairment has occurred. If the carrying worth of the
reporting unit exceeds its honest worth, we acknowledge an impairment loss in an
quantity equal to the surplus, to not exceed the carrying worth of the goodwill. We
take into account honest worth to be considerably in extra of carrying worth at a 20%
premium or better.


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When performing a quantitative impairment check, figuring out the honest worth of a
reporting unit includes the usage of important estimates and assumptions to
consider the affect of operational and macroeconomic modifications. If a quantitative
evaluation is deemed vital, we decide honest worth utilizing a weighted common
of broadly accepted valuation methods, together with the revenue method and
market method. The revenue method applies a good worth methodology primarily based on
discounted money flows, which incorporates uncertainties as a result of it requires
administration to make important assumptions and judgments together with estimation of
future money flows, which relies on inner forecasts, estimation of the
long-term fee of progress for our enterprise, estimation of the helpful life over
which money flows will happen, and willpower of our weighted common value of
capital or low cost fee, which is risk-adjusted to mirror the particular danger
profile of our enterprise. The market method contains figuring out applicable
comparable firms and making use of an estimated a number of to use to our
working outcomes. The first market multiples to which we evaluate are income
and earnings earlier than curiosity, taxes, depreciation, and amortization.

See "Word 6 - Goodwill and intangible belongings" to our unaudited condensed
consolidated monetary statements included on this Quarterly Report on Type 10-Q
for extra info concerning goodwill impairment evaluation accomplished throughout
the interval.

In performing our assessments, we imagine that we've made affordable estimates
primarily based on the info and circumstances that have been accessible. Nonetheless, the
willpower of honest worth contains assumptions which can be topic to danger and
uncertainty. If our future efficiency varies from present expectations,
assumptions, or estimates, together with these assumptions round inflationary
pressures on product and labor prices, our income progress charges and our general
profitability, in addition to our expectations across the length of our inventory
worth decline, might set off future impairment costs. We'll proceed to
monitor developments all through the rest of 2022, together with updates to our
forecasts in addition to our market capitalization, and an replace of our evaluation
and associated estimates could also be required sooner or later.

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