EQUITY REPORT

August 26, 2021

BETTER CHOICE COMPANY INC. (NYSEAM: BTTR)

BUSINESS DESCRIPTION KEY STATISTICS Better Choice is a rapidly growing animal health and wellness company that sells premium alternatives to traditional pet food. We believe that Better Choice is well Key Stock Statistics positioned to capitalize on the recession-proof global trends of growing pet ownership, Recent price (8/23/21) $3.56 consumer spending on pets, and expanding consumer focus on pet health and wellness. 52 week high/low $10.80 - $1.44 Better Choice has an experienced management team, with a multi-decade track record Common Shares Outstanding (M) 29.6 in the packaged goods space, including animal health. It also has strong e-commerce Market cap (M) $105 capabilities that allow pet owners to easily learn about and order its products. Dividend Nil Better Choice sells through retail-partner channels, which include Amazon, Yield Nil Chewy, PetSmart, and Petco, as well as its own direct-to-consumer online web platform. According to market research firm Packaged Facts, online purchases of pet Sector Overview food has increased to approximately 30%, expanding from 7% of U.S. pet product Sector Consumer Staples sales in 2015. The firm projects that online will comprise more than half of an overall Sector % of S&P 500 5.8% retail pet product sector that will near $95 billion in sales by 2025. We expect Better

Choice to take advantage of this trend by focusing on new product innovation to Financials ($M) attract consumers who already purchase frequently online, rather than by investing Cash & Mkt Securities 2.5 resources to convert traditional brick-and-mortar consumers to online shopping. Debt 10.9 Approximately 60% of its revenues are being generated through online channels. Working Capital ($M) -7.1 In 2020, Better Choice reported gross sales of $51 million and $43 million in Current Ratio 0.7 net sales. That compares with $15.6 million in 2019, with the strong increase attrib- Total Debt/Equity (%) 77% utable to a full-year of sales from a portfolio of brands acquired in 2019. E-commerce Payout ratio NM accounted for 34% of sales, direct-to-consumer (DTC) accounted for 25%, brick and Revenue (M) TTM 42.2 mortar accounted for 21% of sales, and international via distribution partners accounted Net Income (M) TTM NM for 20% of sales. Better Choice has targeted gross sales of $100 million by 2023. Net Margin NM Better Choice’s primary brands are Halo and TruDog. Halo, is a premium, natural pet-nutrition brand with a full line of dry kibble, canned wet food, treats, and Risk supplements for dogs and cats. TruDog, , is an ultra-premium, boutique, direct-to-con- Beta -0.73 (continued on next page) Inst. ownership 15%

Valuation PRICE CHART P/E forward EPS NA

Price/Sales (TTM) 2.5 Price/Book (TTM) NA

Top Holders Cavalry Fund Management LLC

Brandywine Global Investment Management LLC Putnam LLC

Management Chief Executive Officer Mr. Scott Lerner Chief Financial Officer Ms. Sharla Cook EVP of Sales Mr. Donald Young Company website http://betterchoicecompany.com

COMPANY SPONSORED REPORT. SEE LAST PAGE FOR DISCLOSURES.

A R G U S R E S E A R C H C O M P A N Y • 6 1 B R O A D W A Y • N E W Y O R K, N.Y. 1 0 0 0 6 EQUITY REPORT sumer brand that offers raw freeze-dried dog food, toppers, treats, innovation pipeline. In our view, this should help drive margin and supplements. Both Halo and TruDog have a commitment to expansion and position Better Choice for continued growth and, product quality, and their sustainably sourced kibble, canned wet, ultimately, profitability. freeze-dried and dehydrated raw foods are derived only from whole Better Choice should also benefit from strong growth in pet meat and minimally processed raw-diet ingredients. In total, Better ownership and spending on pet supplies, irrespective of macroeco- Choice offers more than 100 product SKU’s across its portfolio. nomic trends. The American Pet Products Association estimates Halo, founded in 1986, was acquired by Better Choice in that the U.S. has nearly 85 million pet-owning families (67% of December 2019. Halo’s dog and cat products are sold in the Unit- all households), representing an approximate $100 billion annual ed States and Canada, as well as in , , China, market for spending on pets, which it projects could nearly triple Taiwan, , and the Philippines. E-commerce is the largest to $275 billion by the end of the decade. Similarly, a recent report and fastest-growing distribution channel for Halo, though the brand published by Frost & Sullivan noted that China had approximately also appears at brick-and-mortar stores such as Petco and PetSmart. 100 million pet owners in 2018, which represented approximately In August 2021, Better Choice entered into an agreement with Pet 22% of households in China. According to trade organization Pet Supplies Plus (the third-largest pet specialty retailer in the United Fair Asia, spending on pets in China totaled approximately $25 States, with more than 560 locations across 36 states) to launch a billion in 2019, which we think is being supported by a younger new brand of super premium, natural pet food, Halo Elevate, in population of pet owners that increasingly purchase online, making early 2022. pet ownership and care easier. Unlike many other kibble and canned products, Halo uses Like most companies, Better Choice was significantly impact- whole meat (with no rendered meat meal) from animals raised ed by the COVID-19 pandemic in the first half of 2020. However, on sustainable farms, and non-GMO fruits and vegetables. sales had largely returned to normal levels by mid-year, helped by Foods sold under the TruDog and Halo product lines meet The the company’s strong e-commerce presence and DTC channels. Association of American Feed Control Officials (“AAFCO”) With Packaged Foods’ recent increase of the projected 2021 growth guidelines. TruDog was founded in 2013, and was acquired by rate for U.S. retail sales of pet food and supplies (from 5.3% to Better Choice in May 2019. Its products use natural ingredients 7.6%) and its citation of 35% growth in the sale of pet food and and are oven-baked and preserved through freeze drying or gentle supplies online in 2020, results from Better Choice reinforce our air dehydration to eliminate the need for artificial preservatives view of the recession-proof nature of its business and the broader and chemicals. Historically, TruDog products have been sold pet food industry. exclusively online. These acquisitions have enabled Better Choice to enter COMPETITIVE ADVANTAGE new, fast-growing international markets, particularly in Asia. The The pet health and wellness industry is highly competitive, as international segment, which accounts for more than 20% of net more companies focus on enhancing product quality while also sales, saw 95% growth in China and 48% growth overall, during working to build brand awareness and customer loyalty. We view the first half of 2021. We expect the percentage of international Better Choice as a leader in the fastest-growing segments of the sales to continue to increase, with China the company’s largest industry, as evidenced by its strong online business. We also note growth market in the near term. Despite the impact of tariffs and that recurring subscription revenue has accounted for more than the trade dispute with the U.S., sales in China continue to provide half of the company’s online sales (including with partners). solid contribution margins to Better Choice and its distribution Better Choice generates approximately 60% of revenue in partners. the e-commerce and DTC channels, above the industry average In March 2021, Better Choice announced that it plans to of 25%-30%. The company expects the e-commerce channel to consolidate and rebrand its product portfolio under one Halo brand, grow by more than 20% annually, driven by a blended online with a relaunch in early 2022. We expect this integration to simplify subscription rate of about 50% and a focus on establishing brand the company’s marketing messaging and maximize economies of loyalty. The company’s DTC strategy leverages one-on-one cus- scale and supply chain efficiency. In addition, we see opportunity tomer relationships and uses consumer behavior data to guide its for Better Choice to streamline the number of SKUs offered, as the company optimizes its portfolio while executing on a multi-year (continued on next page)

PEER COMPARISON

Recent 52-Week 52-Week Mkt. Cap 1-yr Price 1-yr Rev 1 YR EPS Company Ticker Price ($) High ($) Low ($) ($MIL) Change (%) Growth (%) Growth (%) P/E Ratio Beta Yield (%)

BETTER CHOICE COMPANY INC NYSEAM: BTTR 3.56 10.80 1.44 105 -4 174 NM NM -0.73 NA

FRESHPET INC NASDAQ: FRPT 128.01 186.98 101.35 5551 12 30 NM NM 0.74 NA

PETMED EXPRESS INC NASDAQ: PETS 27.39 57.00 24.75 538 -21 0 NM 19.8 0.56 4.5

CENTRAL GARDEN AND PET CO NASDAQ: CENTA 47.52 62.91 35.96 2460 14 13 37 15.6 0.60 NA

A R G U S R E S E A R C H C O M P A N Y • 6 1 B R O A D W A Y • N E W Y O R K, N.Y. 1 0 0 0 6 EQUITY REPORT marketing efforts and lower customer acquisition costs (relative to fundamental valuation than BTTR. As of August 2021, Fresh Pet traditional marketing efforts such as product discounting). Better traded at an enterprise value/revenue multiple of 16.5-times its Choice also tailors its marketing to reach specific demographic 2020 revenues, while Better Choice traded at less than 2-times groups, including women, millennials, and middle-class consumers 2020 revenues. in emerging economies. Management believes that these groups Over time, we expect Better Choice’s valuation to benefit are more likely to become pet owners and purchase pet products from the strong market outlook for premium pet food, and believe through online shopping sites. that the discount to FRPT will narrow as the company executes on In our view, the acquisition of Halo and the sales expansion its business model, integrates its recent acquisitions, and achieves through the retail channel represent key, underappreciated areas greater awareness among investors from its uplist to the NYSE of distinction for Better Choice. With a brick-and-mortar presence American exchange. in approximately 3,000 specialty retailers and pet stores, Better Choice seeks to leverage the customer data and behavior informa- ANALYST COMMENTARY: EARNINGS tion it gathers from its DTC efforts and apply these lessons to the For the year ended December 31, 2020, Better Choice reported retail offerings, most notably the pet specialty channel. In addition, net sales of $42.6 million, up from revenue of $15.6 million in Halo’s established sales channels position Better Choice to sell 2019 representing 173% growth, year-over-year, and reflecting other current and future product lines more effectively through full-year contributions from the TruDog and Halo acquisitions in the retail channels. 2020. Before discounts and other adjustments, gross sales were Lastly, Halo’s established commercial foothold in high $51 million in 2020. Adjusted gross margin in 2020 was 40%, and growth markets, including China, should enable Better Choice Better Choice forecasts a long-term range of 40%-45%, which we to expand its product reach more broadly. Notably, in June 2020, believe underscores the favorable market dynamics for its premium the company received approval from the Chinese Ministry of products. In 2020, the company recorded an adjusted EBITDA loss Agriculture to ship 15 diets directly to mainland China. To date in of $1.6 million, excluding non-cash and non-recurring charges, 2021, Better Choice has agreed to aggregate minimum purchases which highlights the strong cash flow potential for the business as it of more than $100 million with its key Asian distribution partners continues to increase sales, expand its geographic and distribution through the end of 2025. In addition, the company has recently channels, and consolidate operations to drive enhanced efficiencies. entered into a strategic investment agreement with Boqii Holding, We are encouraged by management’s target to achieve $100 million China’s largest pet-focused retail platform and a retail partner to in gross revenues by 2023, driven by the re-launch of a consolidated Better Choice, which we think validates its opportunity in China. Halo brand across its multi-channel distribution network. The company has built a portfolio of brands that can address In October 2020, Better Choice consolidated its warehouse changing consumer trends, such as an extension of the Halo brand and fulfilment operations at one location near Nashville, Tennessee. that includes vegan alternatives. In our view, this platform, through The consolidation is expected to lower annualized expenses by which Better Choice plans to expand with new innovative products, approximately $600,000. is supported by a supply-and-distribution infrastructure that typi- As of June 30, 2020, Better Choice had $2.5 million in cash/ cally can develop, manufacture and commercialize new products restricted cash on its balance sheet, $17.9 million in current assets, within 90 days. We expect Better Choice to continue to expand and current liabilities of $25.0 million. Nearly 70% of the latter is its portfolio of innovative products under a recently announced comprised of Series F warrant liabilities, which were extinguished three-year innovation pipeline. in conjunction with the subsequent uplist to NYSE American, Better Choice is working to educate consumers and build which occurred at the beginning of July. Notably, subsequent to awareness about its portfolio. These efforts include the use of social quarter-end, Better Choice raised gross proceeds of $40 million influence marketing, which can better reach its tech-focused target from an underwritten equity offering in conjunction with its uplist customers, in addition to other technology-focused and social me- to the NYSE American stock exchange. With this enhanced net dia and influencer campaigns. To that end, the company announced cash position, the conversion of $23 million in convertible notes in April 2021 an investment and long-term partnership with Major into equity, and only 29.6 million shares outstanding, Better Choice League Baseball All-Star player Justin Turner, a longtime customer appears to be on solid financial footing to invest in its growth plan, of the Halo brand. both organically and potentially through M&A activity. The pet wellness industry has experienced significant con- solidation, and has recently seen a flurry of acquisitions, which we MANAGEMENT believe underscore its attractive dynamics. One industry leader, Scott Lerner has served Better Choice’s chief executive officer WellPet, itself the product of a series of acquisitions, was acquired since January 2021. He has over 20 years of brand management by private equity investor Clearlake Equity Group in November experience in the consumer-packaged goods industry, including 2020. The same month, another peer (Solid Gold Pet) was acquired with brands focused on health and wellness. Mr. Lerner was most by -based H&H Group for $163 million. recently CEO of food brand Farmhouse Culture, and has previously Because of this industry consolidation, Better Choice now served in leadership roles with renowned global brands including has few publicly traded peers, making performance and valuation PepsiCo, ConAgra Foods, Kimberly-Clark and Parkay Margarine. comparisons more difficult. The company has one true public Mr. Lerner has also led two companies, including one as founder, to peer, Fresh Pet (FRPT), which currently trades at a much higher significant value and creation and successful exits, via acquisition.

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Donald Young joined Better Choice in January 2021 as exec- warehouse and fulfillment operations and sales expansion, partic- utive vice president of sales, and has nearly 30 years of experience ularly internationally), position the company to achieve adjusted, leading sales organizations of prominent pet specialty pet food non-GAAP profitability in the near-term. brands, including The Nutro Company and Merrick Pet Care Inc. In July 2021, Better Choice completed an underwritten equity Mr. Young directly led a turnaround at Merrick’s Pet Specialty offering that raised gross proceeds of $40 million. In conjunction business from 2010-2020, expanding from a niche brand to the with this offering and its listing on the NYSE American exchange, #3 natural player in the pet specialty retail channel by more than Better Choice converted approximately $23 million of convertible quadrupling sales to over $500 million, and culminated in Mer- notes into equity, resulting in a pro-forma net cash position of greater rick Pet Care’ sale to the Nestle Purina Company. Mr. Young was than $30 million to execute on its growth strategy, both domestically named one of Pet Age Magazine’s 2019 ICON Winners, among and internationally, and a $12 million credit facility bearing interest other peer-recognized awards for his record of success. of LIBOR plus 250 basis points as the only debt remaining on its Rob Sauermann joined Better Choice in December 2019, balance sheet. and serves as executive vice president of strategy & finance. Prior We are encouraged by Better Choice’s management showing to joining Halo full-time as chief strategy officer, Mr. Sauermann confidence in its long-term prospects. Management and its board served as an investment professional at Pegasus Capital Advisors. have increased their ownership during open window periods for During this time, he served on Halo’s board from 2017 through insiders, and account for approximately 26% of the company’s 2019, and led a successful restructuring and its sale to Better aggregate equity holdings, following the July 2021 offering and Choice. At Pegasus, he deployed approximately $100 million of convertible note conversion. Further, in August 2021, its board growth equity capital across various sectors, with a focus on animal authorized a stock repurchase program for up to $2 million by the health and wellness investments. end of 2021. To date in 2021, Better Choice has appointed new executives RECENT DEVELOPMENTS across multiple corporate functions to its leadership team. First, Over the past two years, Better Choice has become a leader in the Better Choice first appointed Scott Lerner, as chief executive of- premium pet-food industry, acquiring its flagship Halo and TruDog ficer, replacing Werner von Pein, Halo’s founder, who helped lead brands. In 2020, the company focused on integrating these acqui- the integration of the Halo Brand into the Better Choice portfolio. sitions and identifying synergies across its commercial footprint. To drive Better Choice’s sales growth across the Pet Specialty In 2021 to date, the company has started to implement a plan for channel, the company also appointed Donald Young to a newly product innovation and corporate efficiency, with the planned created position as executive vice president of sales. Additionally, consolidation and re-launch of its portfolio under the Halo brand Better Choice has appointed Jenny Condon and Alex Vournas as in early 2022. We believe that efficiencies from these initiatives executive vice president of digital sales and vice president of supply (as well as those resulting from the late-2020 consolidation of its chain and logistics, respectively.

Steve Silver

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INCOME STATEMENT

Growth Analysis ($MIL) 2018 2019 2020 1Q 2021 2Q 2021 Revenue 14.8 15.6 42.6 10.8 11.0 Gross Profit 7.3 5.9 17.0 4.3 3.9 SG&A 11.0 29.9 34.5 6.9 6.8 Stock Compensation Expense 0.4 10.3 8.9 2.5 0.3 Operating Income -5.2 -36.3 -26.4 -5.1 -3.2 Interest Expense 0.9 0.7 9.2 0.9 2.2 Pretax Income NA NA NA -12.9 24.8 Tax Rate (%) NA NA NA NA NA Net income -6.0 -37.1 -36.7 -12.9 24.8 Diluted Shares 11.5 33.2 51.3 19.6 21.4 EPS -0.52 -1.12 -0.76 -0.63 1.19 Dividend NA NA NA NA NA

Growth Rates (%) Revenue NA 5% 173% NA NA Operating Income NA NA NA NA NA Net Income NA NA NA NA NA EPS NA NA NA NA NA

Valuation Analysis Price ($): High NA NA NA NA NA Price ($):Low NA NA NA NA NA PE: High NA NA NA NA NA PE: Low NA NA NA NA NA PS: High NA NA NA NA NA PS: Low NA NA NA NA NA Yield: High NA NA NA NA NA Yield: Low NA NA NA NA NA

Financial & Risk Analysis ($MIL) Cash 3.9 2.6 3.9 4.3 2.5 Working Capital -3.1 -15.4 -37.0 -35.2 -7.1 Current Ratio 0.7 0.5 0.3 0.4 0.7 LTDebt/Equity (%) NA NA NA NA 70 Total Debt/Equity (%) NA NA NA NA 77

Ratio Analysis Gross Profit Margin 49% 38% 40% 39% 35% Operating Margin NA NA NA NA NA Net Margin NA NA NA NA NA Return on Assets (%) NA NA NA NA NA Return on Equity (%) NA NA NA NA NA Op Inc/Int Exp NA NA NA NA NA Div Payout NA NA NA NA NA

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