UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | |
| For the Fiscal Year Ended December 31, | |
| ☐ | |
| For the Transition Period from to |
Commission File Number 001-38014
(Exact Name of | ||||
| Washington | 27-2432263 | |||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
2420 17th Street, Suite 220, Denver, CO | ||||
(Address of principal executive offices) | (Zip Code) | |||
| Registrant’s telephone number, including area code: | (303) | |||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each | Trading symbol(s) | Name of each exchange on which | ||
| Common | Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☑☐ NO ☐
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Companyregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YES ☑days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post 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, and an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, andor “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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑
As of June 29, 2018,30, 2020, the last business day of the second fiscal quarter, the aggregate market value of the Registrant’sregistrant’s voting stock held by non-affiliates, was approximately $58,271,000, $145,157,000, based on the last reported sales price of $1.87$1.53 as quoted on the Nasdaq Capital Market on such date.
The registrant had 75,357,742 shares of its $0.001 par value common stockCommon Stock outstanding as of March 29, 2019.
Documents incorporated by reference
The Registrant’spreliminary proxy statement for our 2021 Annual Meeting of Stockholders was filed with the SEC on March 10, 2021, and we expect to file the definitive Proxy Statement for theour 2021 Annual Meeting of Stockholders (the “2019“2021 Proxy Statement”) by March 31, 2021. The 2021 Proxy Statement is incorporated by reference in Part III of this Form 10-K to the extent stated herein. The 2019 Proxy Statement, or an amendment to this Form 10-K, will be filed with the SEC within 120 days after December 31, 2018. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.
TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended or the Securities Act,(the “Securities Act”), and Section 21E of the Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Report, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to, information concerning:
| ● | Anticipated operating results, including revenue and earnings. | |
| ● | The expectation that our stockholders will approve the issuance of up to 40.1 million shares of our Common Stock to provide the remainder of the consideration due for our business combination with Ariix, LLC. | |
| ● | Expected capital expenditure levels for 2021. | |
| ● | Volatility in credit and market conditions. | |
| ● | Our belief that we have sufficient liquidity to fund our business operations in 2021. | |
| ● | Ability to bring new products to market in an ever-changing and difficult regulatory environment. | |
| ● | Ability to re-patriate cash from certain foreign markets. | |
| ● | Strategy for customer retention and growth. | |
| ● | Our expectation that the disruptive impact of coronavirus on our business will be temporary. | |
| ● | Risk management strategy. | |
| ● | Our ability to capture cost and revenue synergies from the combination with Ariix and other acquisitions. | |
| ● | Our ability to deliver profitable organic revenue growth. | |
| ● | Our ability to manage our growth. | |
| ● | Our ability to successfully integrate acquisitions. |
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A. “Risk Factors” of this Report. Moreover, we operate in very competitive and rapidly changing markets. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The forward-looking statements in this Report are made as of the date of the filing, and except as required by law, we disclaim and do not undertake any obligation to update or revise publicly any forward-looking statements in this Report. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission (“SEC”) with the understanding that our actual future results, levels of activity and performance, as well as other events and circumstances, may be materially different from what we expect.
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PART I
As used in this Report and unless otherwise indicated, the terms “we,” “us,” “our,” “New Age,”“we”, “us”, “our”, “NewAge”, or the “Company” referrefers to New Age Beverages CorporationNewAge, Inc. and our subsidiaries. “Morinda” refers to our wholly-ownedwholly owned subsidiary, Morinda Holdings, Inc., and its subsidiaries in the U.S. and around the world. “Ariix” refers to our wholly owned subsidiary, Ariix, LLC and its subsidiaries in the U.S. and around the world. Unless otherwise specified, all dollar amounts are expressed in United States dollars.
Effective July 28, 2020, we amended our Articles of Incorporation to change our name from New Age Beverages Corporation to NewAge, Inc. Accordingly, all references herein have been changed to reflect the New Agenew name. NewAge, Inc., the NewAge logo, Morinda, Noni by NewAge, Tahitian Noni, TeMana, Ariix and its portfolio of brands, LIMU, MaVie, and other related companies and trademarks or service marks of New AgeNewAge appearing in this Report are the property of New Age Beverages CorporationNewAge, Inc. or its subsidiaries. Trade names, and other related trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the property of their respective holders.
Item 1. Business
Business Overview
We are a Colorado and Utah-based healthy beverages and lifestyles company engaged in the development and commercialization of a portfolio of organic, natural and other better-for-you healthy beverages, liquid dietary supplements, and other healthy lifestyle products. We compete in the growth segments of the beverage industry as a leading one-stop shop supplier for major retailers and distributors. We also are one of few competitors that commercializes its business across multiple channels including traditional retail, e-commerce, direct to consumer, and the medical channel. We market a full portfolio of Ready-to-Drink (“RTD”) better-for-you beverages including competitive offerings in the kombucha, tea, coffee, functional waters, relaxation drinks, energy drinks, rehydrating beverages, and functional medical beverage segments. We also offer liquid dietary supplement products, including Tahitian Noni® Juice, through a direct-to-consumer model using independent distributors called independent product consultants (“IPCs”). We differentiate our brands through functional performance characteristics and ingredients and offer products that are 100%an organic and natural, with no high-fructose corn syrup (“HFCS”), no genetically modified organisms (“GMOs”), no preservatives, and only natural flavors, fruits, and ingredients. We rank as one of largest healthy beverage companies in the world as well as one of the fastest growing beverage companies according to Beverage Industry Magazine annual rankings and Markets and Markets. Our goal isproducts company intending to become the world’s leading social selling and distribution company. We are a purpose-driven firm dedicated to providing healthy beverage company, with leading brands for consumers, leading growth for retailersproducts to customers and distributors, and leading return on investment for shareholders. Our target market is health conscious consumers, who are becoming more interested and better educated on what is included in their diets, causinginspiring them to shift away“Live Healthy.” We commercialize our portfolio of products across more than 50 countries worldwide and strive to disrupt traditional markets with industry leading social selling tools and technologies. More than 75% of our revenue is ordered and fulfilled online with the products delivered direct to customers’ homes.
We compete in three major category platforms including health and wellness, healthy appearance, and nutritional performance. Within our category platforms, we develop and market a portfolio of science-based, functionally differentiated, and superior performing products and brands. We differentiate our products utilizing our patents, proprietary formulas and production process, and trade secrets and focus our functional differentiation using different combinations of:
| ● | Phytonutrients and micronutrients | |
| ● | Plant-based ingredients | |
| ● | CBD | |
| ● | Noni | |
| ● | Clean/non-toxic ingredients |
Tahitian Noni is our largest brand and has accounted for more than $7.0 billion in sales since its inception, including approximately $360 million cumulatively recognized by us since our acquisition of Morinda in December 2018. There are multiple studies and human trials validating Tahitian Noni’s efficacy and benefits for reducing inflammation and strengthening the body’s protection against viruses. Also, within the health and wellness platform is our LIMU brand, a fucoidan-rich beverage sourced from lessseaweed. We have two core brands within the healthy options such as carbonated soft drinks orappearance platform including TeMana, a unique skin care portfolio that is infused with Tahitian Noni, and Lucim, a line of clean skin care products that was launched in 2020. In our nutritional performance platform, we commercialize a full line of weight management products and other high caloric beveragesnutritional supplements and towards alternative beverage choices. nutraceuticals and are expanding our core brands within the platform.
We believe that a major trend in consumer awarenessgoods is direct delivery, e-commerce ordering, and fulfillment, with purchase intent being driven by social media and friends and family. According to Euromonitor International’s 2019 Lifestyles Survey, the largest driver of purchase intent in every major region of the benefitsworld was friends and family recommendations and related social media posts. We further believe that these fundamental trends limit the historic advantage of healthier lifestylestraditional manufacturers geared toward sale of their products, using traditional media, merchandized in traditional retail outlets.
We believe one of our competitive advantages is our network of more than 400,000 brand partners (“Brand Partners”) around the world, and our own direct-store-delivery (“DSD”) delivery system that provides near captive distribution in our respective market areas. We have developed a robust infrastructure and set of execution capabilities across more than 50 countries, with a primary focus on our core markets of Japan, Greater China, Western Europe, and North America. We are selectively invested in emerging market areas whereby the combination of the business opportunity and consumer demographics intersect to form an attractive investment profile for our model. These markets include the Russia and the availabilityCIS countries, the Southern Cone of heathier beverages is rapidly accelerating worldwide,Africa, and we are capitalizing on that shift.selected markets in Latin America and South East Asia.
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Corporate History
NewAge, Inc. was formedincorporated under the laws of the State of Washington onin April 26, 2010, under the name American Brewing Company, Inc. (“American Brewing”).
In 2018, we completed a business combination with Morinda wherebythat provided us with incremental scale, and the resources, team, and global execution capabilities to further our expansion and distribution of healthy products. Morinda became a wholly-owned subsidiary of the Company. Morinda is a Utah-based healthy lifestylesbeverage and beverageproducts company founded in 1996 with infrastructure and operations in more than 6050 countries around the world, and manufacturing operations in Tahiti, the U.S., China, Japan, and Germany. Morinda was the first company to produce andcommercially globally sell products derived from the noni plant, an antioxidant-rich, natural resource found in French Polynesia that we believe sustains the well-being of those who consume or use it.Polynesia. Morinda is primarily a direct-to-consumer and e-commerce business.
In July 2019, we completed a business combination with Brands Within Reach, LLC (“BWR”). BWR owned key licensing and works with over 300,000 independent contractor IPCs worldwide. More than 70% of its business is generateddistribution rights in the United States for some of the world’s leading beverage brands including Nestea®, Volvic®, Evian® and Illy® Ready-to-Drink Coffee. In 2020, with the impact of COVID and the change in economics of retail brand beverages, we divested our initial portfolio of retail brands, to focus exclusively on our higher margin, higher potential brands sold direct to customers. All of these divested assets were included in the Direct Store segment from the date of acquisition through the disposal date and are referred to herein as the “Divested Business”. For periods after the disposal of the Divested Business, this segment is primarily comprised of our Direct Store Distribution (“DSD”) network that distributes beverages, snacks, and other products to retail customers in Colorado and surrounding states, and sells the portfolio of brands to wholesale distributors, key Asia Pacific markets of Japan, China, Korea, Taiwan,account owned warehouses, and Indonesia.
On November 16, 2020, we completed a business combination with Morinda providesAriix whereby Ariix became one of our wholly owned subsidiaries. Ariix was formed in Utah in January 2011 and grew from inception to more than $200 million in net revenue in its nine-year history, making it one of the fastest growing companies in the direct selling industry over that time period. Ariix evolved through a combination of organic growth and acquisitions and brought to the combination with us a portfolio of healthy beverages, with multi-channel penetrationgrowth brands spanning traditional retail,weight loss management, water and air filtration, personal care and skincare products. Ariix also included the standalone companies of LIMU, Zennoa, MaVie, and others in direct sales and e-commerce, and in-home, and hybrid route-to-market spanning direct-store-delivery (DSD), wholesale, and direct-to-consumer.
We currently have four wholly-owned subsidiaries:direct subsidiaries, all of which are wholly owned. These subsidiaries consist of Morinda, Ariix, NABC, Inc., and NABC Properties, LLC (NABC(“NABC Properties”), New Age Health Sciences, and Morinda.. NABC, Inc. is oura Colorado-based operating company that consolidates performance and financial results of ourthe Company’s segments, subsidiaries, and divisions. NABC Properties administers the New Age buildings, physical properties, and warehouses. New Age Health Sciences includes all of our patents and the operating performance for the medical and hospital channels. Utah-based Morinda provides us an additional direct-to-consumer sales channel and access to key international markets.
Principal Products
Our core business is developing, marketing, selling, and distributing a portfolio of healthy products sold primarily through a direct to develop,customer business model using a team of more than 400,000 Brand Partners and distributors to help market and sell the portfolio of brands. We compete in three primary category platforms including health and distributewellness, healthy liquid dietary supplementsappearance, and ready-to-drink beverages.nutritional performance. The product segments and subsegments within these categories represent large addressable growing markets. According to industry sources, the health and wellness industry comprises $4.2 trillion in annual revenue, and the beverage industry comprises $1 trillion in annual revenuerevenue. Our brands Tahitian Noni, LIMU, and Zennoa compete in this industry segment. Within the beverage industry, energy drinks constitute $80 billion in annual sales, where our brands LIMU Blue Frog and Hiro Natural Energy Drinks compete. Skincare and cosmetics constitute an industry of $650 billion in annual sales and we have two lead brands in this subsegment, TeMana and Lucim. Weight management is a $204 billion industry segment where our nutritional supplements and Slenderiize products compete. Personal care is a $250 billion industry segment where our brands Reviive and Puritii compete. The diagnostics industry is a $29 billion industry segment, where we compete with our DNA testing and diagnostic kits and products under our MaVie brand.
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We also compete in the emerging CBD category and believe we have differentiated technology, especially when CBD is combined with our Tahitian Noni. Our studies have shown an increase in the receptivity in the endocannabinoid system in the body for CBD in combination with Noni by opening additional pathways and reducing inhibitors. We use this technology in our NONI+CBD shots that we commercialize in Japan, where we have gained first mover advantage, and according to Euromonitor and Booz & Company and is highly competitive with three to four major multibillion-dollar multinationals that dominate the sector. We compete by differentiating our brands as healthier and better-for-you alternatives that are natural, organic, and/or have no artificial ingredients or sweeteners. Our brands include Tahitian Noni Juice, TruAge, Xing Tea, Aspen Pure®, Marley, Búcha® Live Kombucha, PediaAde, Coco Libre, BioShield, and ‘NHANCED Recovery, all competing in the existing growth and newly emerging dynamic growth segments of the beverage industry. Morinda also has several additional consumer product offerings, including a TeMana line of skin care and lip products, a Noni + Collagen ingestible skin care product, wellness supplements, and a line of essential oils.
Sales and Marketing
We market our RTD beverageportfolio of healthy products using a range of marketing media, but given the significant shift in how customers are buying and what marketing mediums including in-store merchandisingare influencing their purchase decisions, we have adjusted to evolve with changing consumer patterns to communicate using the most effective ways. As such, we primarily use our team of more than 400,000 Brand Partners worldwide for sales and promotions, experiential marketing, events, and sponsorships, digital marketing and are empowering them with the latest social media, direct marketing,selling tools and traditional media including print, radio, outdoor, and TV.
Supporting these 400,000 Brand Partners is variable and performance-based. Each sales team member has individual targets for increasing “base” volume through distribution expansion, and “incremental” volume through promotions and other in-store merchandising and display activity. As distribution to new major customers, new major channels, or new major markets increases, we will expand thea full-scale sales and marketing team on a variable basis.
We use a direct selling model toalso market our Tahitian Noniportfolio of affiliate or distributed brands through our DSD distribution system. To support these brands, we have an in-house team of more than 100 sales, marketing, and TeMana products through 300,000 IPCs in over 60 countries around the world. Morindamerchandising associates inexclusively focused on the United States and 25 other countries motivate, educate, and assist IPCsStates.
Distribution
The products in their efforts.
Brand Partners
Our team of more than 400,000 Brand Partners worldwide are independent business professionals. Brand Partners are our independent representatives that have signed agreements with us and have the United States directly through customer’s warehouses, throughability to earn commissions, as well as direct customers who have purchased products from our network of DSD partners and through our network of brokers and distributors. Ourwebsite. The individuals that comprise these groups have purchased products are sold through multiple channels including major grocery retail, natural food retail, specialty outlets, hypermarkets, club stores, pharmacies, convenience stores and gas stations—and also direct to consumers through individual independent distributor IPCs and E-commerce.
After becoming a nominal price averaging $35. No other investment is required to become an IPC.
Although our global compensation plan is designed generally to payment of a nominal annual renewal fee (which can be substituted by the sale of Morinda product through the IPC’s account at the time of renewal), IPCs may continuepermit Brand Partners to purchaseestablish their sales organizations without country or border limitations, our products at member pricing and recruit a sales organization provided they comply with our policies and procedures.
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Brand Partner Compensation
Our compensation plan for Brand Partners is performance-based, consistent with our overall philosophy of how internal/direct associates are compensated whereby a significant portion of their total compensation is performance-based and at risk. Our compensation plan for Brand Partners has several attractive features and provides several opportunities for IPCsBrand Partners to earn compensation. IPCs understand that success comes from the effort, dedication, resources, and time they commit to their business. The commission-based compensation opportunities require that IPCs consistently work at building, training, and retainingsystem rewards Brand Partners for their sales organizationsand marketing efforts and is comparable to sell Morinda products to consumers. Each compensation opportunity is designed to reward dedicated IPCs for directlythe combined sales and indirectly generating product sales through their sales organization and to consumers.marketing expenses of a traditional consumer goods company. All compensation is conditioned on the IPC’sBrand Partners’ good standing and compliance with the Company’s policies and procedures and the laws of the country where the IPCBrand Partner does business
Customers
The Direct / Social Selling segment is focused on e-commerce and direct product sales to customers. We believe our compensation plan is one ofoffer customers the most attractive and lucrative offered by any direct selling company—and is thus a significant aspect of our ability to expand internationally.
Business to Business Distribution
Our Direct / Social Selling segment is augmented by our Direct Store segment, which is a business-to-business model, and serves major traditional retail outlets in the United States including grocery retail, natural food retail, specialty outlets, hypermarkets, club stores, pharmacies, convenience stores, and gas stations. The compensation for associates in this model is also highly variable and performance-based, based on their sales and performance against established objectives.
Manufacturing and Distribution of Noni-Based Products
Our manufacturing and bottling facilities are in Rongchang,American Fork, Utah; Mataiea, Tahiti; Chongqing, China; Tianjin, China; and Alamosa, Colorado, with contract manufacturing in Tokyo, Japan; Bad Liebenwerda, Germany; Ho Chi Minh City, Vietnam; Alamosa, Colorado; American Fork, Utah and in 10more than ten other contract manufacturing facilities throughout the US.U.S. with preferred and qualified manufacturing partners that meet our stringent criteria for quality and safety. Each of our products are produced to exacting specifications and standards, and subject to strict quality control procedures.
Our Coco-librelargest brand, of coconut waterand related sourcing, manufacturing, bottling, and distribution system is sourced from young coconuts on the southeastern coast of the country, which we believe produces the sweetest and most complex flavored coconut water of any major competitor. Xing, Búcha, and Marley products are produced using our proprietary blends and production processes.
The noni fruit is then shipped to our 85,000 square foot processing plant in Mataiea, Tahiti, where the fruit is again checked before being processed. This facility, as well as all facilities that produce products for us, adheres to the Good Manufacturing Practices as established by the FDA.U.S. Food and Drug Administration (“FDA”). The Tahiti facility is well-maintained, and the buildings and equipment are kept clean and in good repair. Technologyrepair and technology is up-to-date.up to date. The facility is regularly inspected by the French Polynesian authorities and by the United States FDA.
At this processing facility, the seeds are separated from the fruit. The seeds are later preparedprocessed for oil extraction. The fruit is extensively inspected, pasteurized, and turned into puree, which is the key component of our Tahitian Noni Juice. The pasteurized puree is checked for quality and placed intohermetically sealed in tote bins which are shipped by sea to a West Coast port ofports in the United States, Japan, China orand Germany for use in manufacturing our products. Each day the equipment used at this facility is automatically cleaned by a three step Clean-in-Place (CIP)clean-in-place system. This system ensures the cleanliness of the equipment, tanks, and pipes used in the processing of the puree.
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Reliance on Third-Party Suppliers and Distributors
Except as noted in the previous section,above, we rely on various suppliers for the raw and packaging materials, production, sale, and distribution of our products. Our third-party distribution providers are for certain areas of the country that are outside of our owned DSD distribution network. The material terms of these relationships are typically negotiated annually and include pricing, quality standards, delivery times and conditions, purchase orders, and payment terms. Payment terms are typically net 30, meaning that the total invoiced amount is expected to be paid in full within 30 days from the date the products or services are provided. We believe that we have sufficient options and redundant supply options for each of our raw and packaging material needs, as well as our third-party distribution needs and alsoneeds. We have long-term relationships with each of our suppliers and distributors, resulting in consistency in quality and supply. We also believe that we have sufficient breadth of retail relationships with distribution in both large and small retailers and independents and across multiple channels (mass, club, pharmacies, convenience, and small and large format retailers) throughout the United States.
The contractual arrangements with all third parties, including suppliers, manufacturers, distributors, and retailers are typical of the beverage industry with standard terms. We have no long-term obligations with any of the third partiesparty suppliers, manufacturers, distributors, and retailers, nor do any of them have long-term obligations with us. The third-party supplier, manufacturing and distribution agreements were entered into in the normal course of business within the guidelines of industry practices and are not deemed material and definite.
Competition
Our business spans multiple sectors with competitors having similar product portfolios, similar routes-to-market, similar scales and the direct selling industries are multi-billion dollar industries which are highly competitive. We face intense competition from very large, international corporations, as well as from local and national companies. In addition, we face competition from well-known companies that have large market share. We also face stiff competition for the services of our IPCs that sell our direct-to-consumer products.
| - Similar business model/e-commerce marketplace companies: | ETSY, Pluralsight | |
| - Similar CPG Brand Portfolio companies: | Hain Celestial, Caleres | |
| - Similar CBD/Cannabis exposure companies: | Aphria, Canopy | |
| - Similar Route to Market companies: | USANA, NuSkin | |
| - Similar IP/Product type companies: | Denali Therapeutics, ELF Beauty, Simply Good Foods |
Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, andas such, have more name recognition than we have. However, we believe that with our diverse product line, consisting of noni juice, kombucha tea, green tea, water, energy beverages, and new CBD-infused beverages, we will have the ability to obtainpurpose-driven identity as a large market share, and continue to generate sales and compete in the industry.
Research and Development Activities
Our goal is to provide healthy, functionally differentiated, and superior performing products for customers worldwide. Historically, our research and development (“R&D”) efforts are focused on two primary paths. The first is to continually review our existing formulas and production processes and structure to evaluate opportunities for quality, efficacy, or cost of goods sold improvements, without degrading the quality or fundamentally changing the consumercustomer appeal taste profile of our existing products. The second major research and development effort is in the development of fundamentally new and differentiated products, based on consumercustomer insights and trends and competitive intensity in those segments. The Company’s mission to only provide healthy functional beverages governs our development efforts.
Our Direct / Social Selling segment has an R&D group that is closely aligneddrives our mission to provide healthy functional products across our three core category platforms, health and wellness, healthy appearance, and nutritional performance with and seamlessly supports the goals and plans of the Company.real efficacy for consumers. In addition to developing new healthy and scientifically sounddifferentiated products and reviewing and improving existing formulas and processes for improvement and cost reductions, Morindaour R&D group continues to conduct and publish new, cutting edge benefits research on noni and other new products in order to maintain a distinct advantage in the healthy beverage and skin care categories. Morindaproducts. R&D is an integral part of theour global corporate structure, providing timely technical, regulatory, quality, processing and scientific standards, data, and expertise as needed and requested. MorindaOur R&D group, in partnership with many of itsother departments, maintains an extensive intellectual property database of patents, publications, formulations, and ideas that help protect and keep the Company in the forefront of healthy beverageproduct offerings and product development. MorindaOur R&D group administers laboratories that provide analytical, chemical, microbiological, nutritional, and biochemical capabilitiescapabilities. We believe that are both standardized, as well as, on the cutting edge of knowledge. Wewe own the only lab in the world dedicated to the study of the noni plant and pioneering new innovative applications for noni.noni, and as such continue to publish studies and insights into noni’s applications and benefits, as well as insights into all of our products and their benefits for fundamental human needs states.
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Patents and Trademarks
We hold numerous issued U.S. patents and trademarks and have rights to additional intellectual property under license agreements with others. We also hold issued patents and trademarks in other countries. In addition, we have pending U.S. and international patent applications that cover numerous inventions. We also maintain trademarks in the U.S. and other countries, as well as, pending trademark applications in the U.S. and other countries and have rights to additional U.S. and international trademarks under license agreements.
We believe our intellectual property portfolio to be a core asset of the firm, and one which we expect to further develop and commercialize in our current and future portfolio offerings. We also rely on trade secrets and unique expertise and know how to protect our proprietary technology and may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know how.
Government and Industry Regulation
We are required to comply, and it is our policy to comply, with all applicable laws in the numerous countries throughout the world in which we do business. In the United States, the safety, production, transportation, distribution, advertising, labeling and sale of our Company’s products and their ingredients are subject to the Federal Food, Drug, and Cosmetic Act; the Federal Trade Commission Act; the Lanham Act; state consumer protection laws; competition laws; federal, state and local workplace health and safety laws; various federal, state and local environmental protection laws; privacy and personal data protection laws; and various other federal, state and local statutes and regulations. Outside the United States, our business is subject to numerous similar statutes and regulations, as well as other legal and regulatory requirements.
Under a California law known as Proposition 65, if the state has determined that a substance causes cancer or harms human reproduction, a warning must be provided for any product sold in the state that exposes consumers to that substance, unless the conditions of an exemption (described below) can be met. The state maintains lists of these substances and periodically adds other substances to these lists. The detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not require a warning if the manufacturer of a product can demonstrate that the use of that product exposes consumers to a daily quantity of a listed substance that is:
| ● | below a “safe harbor” threshold that may be established; | |
| ● | naturally occurring; | |
| ● | the result of necessary cooking; or | |
| ● | subject to another applicable exemption. |
One or more substances that are currently on the Proposition 65 lists, or that may be added in the future, can be detected in certain Company products at low levels that are safe. With respect to substances that have not yet been listed under Proposition 65, the Company takes the position that listing is not scientifically justified. With respect to substances that are already listed, the Company takes the position that the presence of each such substance in Company products is subject to an applicable exemption from the warning requirement or that the product is otherwise in compliance with Proposition 65. The state of California and other parties, however, have in the past taken a contrary position and may do so in the future.
We use nonrefillable recyclable containers in the United States and various other markets around the world. We also offer and use refillable containers, which are also recyclable. Legal requirements apply in various jurisdictions in the United States and overseas requiring that deposits or certain ecotaxes or fees be charged in connection with the sale, marketing and use of certain packaging containers. The precise requirements imposed by these measures vary. Other types of statutes and regulations relating to beverage container deposits, recycling, ecotaxes and/or product stewardship also apply in various jurisdictions in the United States and overseas. We anticipate that additional such legal requirements may be proposed or enacted in the future at local, state and federal levels, both in the United States and elsewhere.
Our facilities and other operations in the United States and elsewhere around the world are subject to various environmental protection statutes and regulations, including those relating to the use of water resources and the discharge of wastewater. Our policy is to comply with all such legal requirements. Compliance with these provisions has not had, and we do not expect such compliance to have, any material adverse effect on our Company’s capital expenditures, net income, or competitive position.
We are also subject to various federal, state and international laws and regulations related to privacy and data protection, including the European Union’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, and the California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020. The interpretation and application of data privacy and data protection laws and regulations are often uncertain and are evolving in the United States and internationally. We monitor pending and proposed legislation and regulatory initiatives to ascertain their relevance to and potential impact on our business and develop strategies to address regulatory trends and developments, including any required changes to our privacy and data protection compliance programs and policies.
Seasonality
Sales of our products are somewhat seasonal but with a portfolio of global markets seasonality is significantly diminished. Peak summer months account for a slightly higher level of sales, with the winter months being our lowest level of sales due to holidays in the Americas and Europe in December, holidays in January in Japan, and Chinese New Year in February impacting our business in the Greater China markets.
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Environment, Sustainability and Governance
As a global social selling and distributor of health and wellness products operating in more than 50 countries, the values of environment, sustainability, and governance (“ESG”) are important issues that we are in the process of integrating into our business strategy and performance.
We maintain sufficient amountsunderstand the impact that good socially responsible companies can make in their global communities. At NewAge, we take this responsibility very seriously and have efforts underway to implement best in class practices to improve our social and environmental impacts. Our focus is to make sustainable decisions in every area of inventory in stockbusiness, from selecting our raw materials, to our product design, to our manufacturing and shipping practices, to ensure that our planet’s finite resources are used efficiently. Accordingly, reducing our carbon footprint and helping to protect our natural resources is integral to our ESG plan. We will continue to focus on new ways to conserve water, recycle plastic, and save energy at each of our global offices, improving our social responsibility on a world-wide basis.
We also know that people come first. Each and every day we work to provide a high levelsafe work environment, to empower people around the world with accessible technology while creating a diverse work environment where we all respect the human rights of serviceeveryone’s lives that we touch. We will continue to identify opportunities for sustainable growth and manage our customers withrisks alongside our key products. Substantial inventories are required to fulfill our dual role as manufactureremployees, Brand Partners, business partners, and distributor of some of our products. We also watch seasonal markets and may purchase ahead of normal demand to hedge against cost increases and supply risks.
Employees
As of December 31, 2018,2020, we had 8891,127 employees globally.globally, including 36 that worked for us on a part time basis. We also engage temporary employees and consultants as needed. We have not experienced any work stoppages, and we consider our relations with our employees to be very good.
Information about our acquisition of Xing. We hold the United States trademarks, serial numbers 85243126 for Coco Libre®. We hold licensed rights to use the United States trademarks, serial numbers 85066981, 85767476, 86709724, and 86681878 for Marley branded beverages.
The following table sets forth the names, ages and positions of our executive officers as of March 29, 2019:
| Name | Age | Position | ||
| Brent Willis | Chief Executive Officer | |||
Gregory A. Gould | Chief Financial Officer |
Brent Willis
was appointed as Chief Executive Officer, and as a member ofGregory A. Gould
has served as our Chief Financial Officer since October 2018. Prior to joining the Company, Mr. Gould served as Chief Financial Officer of Therapure—Products (Evolve Biologics), a subsidiary of Therapure BioPharma, Inc., from November 2017 until October 2018. Mr. Gould also served as Chief Financial Officer, Treasurer and Secretary of Aytu BioScience, Inc., or Aytu (NASDAQ: AYTU), from April 2015 until November 2017, and he was the Chief Financial Officer, Secretary and Treasurer of Ampio Pharmaceuticals, Inc., or Ampio (NASDAQ: AMPE), from June 2014 until June 2017.| 7 |
Item 1A - Risk Factors
Our business, financial condition, results of operations and cash flows are subject to a number of risk factors that may adversely affect our business, financial condition, results of operations or cash flows. If any significant adverse developments resulting from these risk factors should occur, the trading price of our securities could decline, and moreover, investors in our securities could lose all or part of their investment in our securities.
You should refer to the explanation of the qualifications and limitations on forward-looking statements under “Special Note Regarding Forward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.
Risks Related to our Business, Operations,Liquidity and Industry Debt
If our shareholders fail to approve the issuance of an aggregate of up to 40.1 million shares of Common Stock at up to three shareholder meetings, we will have to make cash payments of $163.3 million to settle the remaining merger consideration under our business combination with Ariix.
Under our amended and restated merger agreement with Ariix, we issued 19.7 million shares of our Common Stock and paid $10.0 million in cash to the Sellers in February and March 2021. In addition, we must seek approval from our shareholders to issue up to an aggregate of 40.1 million shares of our Common Stock as additional consideration under the amended and restated merger agreement with Ariix and a related non-compete agreement. If our shareholders fail to approve the issuance of an aggregate of up to 40.1 million shares of Common Stock, subject to working capital and post-closing adjustments, at up to three shareholder meetings held after the Ariix Closing Date, we will have to make cash payments of $163.3 million within 90 days after the third shareholder meeting.
If our shareholders fail to approve the settlement of the remaining merger consideration with shares of our Common Stock, we likely will not have sufficient funds to satisfy such cash obligations and, in such circumstances, may not be able to arrange the necessary financing to satisfy such cash obligations on favorable terms or at all. In addition, our ability to satisfy such cash obligations may be limited by applicable law and the terms of the Senior Notes expressly prohibit a cash settlement. Our failure to pay such cash obligations would constitute an event of default under the amended and restated merger agreement.
Our Senior Notes and the related SPA contain financial covenants that require us to maintain certain financial metrics and restrictive covenants that limit our flexibility. A breach of those covenants may cause us to be in default under the Senior Notes and our other indebtedness, and our lenders could foreclose on our assets.
Under our Senior Notes, we were required to maintain restricted cash balances of $18.0 million as of December 31, 2020, which was reduced to $8.0 million in February 2021. Our Senior Notes also require us to achieve earnings before interest, taxes, depreciation and amortization, as defined in the Senior Notes (“EBITDA”), in excess of certain specified thresholds. A failure to increase our revenue levels or an inability to control costs or capital expenditures could negatively impact our ability to meet our financial covenants. If we breach such covenants or the restrictive covenants described below, the lenders could accelerate the repayment of any outstanding borrowings under the Senior Notes. We may not have sufficient assets to repay such indebtedness upon a default. If we cannot repay the indebtedness, the lenders could initiate a bankruptcy proceeding or collection proceedings with respect to our assets.
As of January 4, 2021, we entered in an Amendment Agreement with the lenders to extend the deadline to provide audited annual and unaudited interim financial statements of Ariix LLC from January 4, 2021 until January 31, 2021. As consideration for the concession to enter into the amendment, we were required to issue to the lenders 400,000 shares of our Common Stock with an estimated fair value of approximately $1.1 million. There is no assurance that we will be able to avoid future defaults and financial covenant violations or, if any occur, that the lenders will waive future instances of noncompliance.
The Senior Notes and the related SPA also contain certain restrictive covenants that limit and in some circumstances prohibit, our ability to, among other things, incur additional debt, sell, lease or transfer our assets, pay dividends on our common stock, make capital expenditures and investments, guarantee debt or obligations, create liens, repurchase our common stock, enter into transactions with our affiliates and enter into certain merger, consolidation or other reorganization transactions. These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise, any of which could place us at a competitive disadvantage relative to our competitors.
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We have incurred losses to date and maywill likely continue to incur losses.
We have incurred net losses since we commenced operations. For the years ended December 31, 20182020 and 2017,2019, our net losses were $12.1$39.3 million and $3.5$89.8 million, respectively.
We may not have the cash necessary to satisfy our cash obligations under our Senior Notes.
On November 30, 2020, we entered into a Securities Purchase Agreement (“SPA”) for a private placement (the “Private Placement”) of (i) 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million (the “Senior Notes”), (ii) 800,000 shares of common stock (the “Commitment Shares”), (iii) Class A Warrants to purchase 750,000 shares of Common Stock at an exercise price of $3.75 per share, and (iv) Class B Warrants to purchase 750,000 shares of Common Stock at an exercise price of $5.75 per share. We received gross proceeds of $30.0 million from the purchasers (the “Purchasers”) in the Private Placement that closed on December 1, 2020. The Senior Notes are collateralized under a security agreement (the “Security Agreement”) in favor of the Purchasers. The initial principal balance of the Senior Notes bears interest at 8.0% payable monthly in cash, and the effective interest rate is approximately 42.3%. The Senior Notes are collateralized by a lien on substantially all of our combination with Morinda, we potentially oweassets.
Beginning in February 2021, the former Morinda shareholdersPurchasers may require us to make monthly principal payments in cash up to $15 million$1.0 million. Beginning in June 2021, the Purchasers may require us to make monthly principal payments in cash up to $2.0 million. We may not have sufficient funds to satisfy such cash obligations and, in such circumstances, may not be able to arrange the necessary financing to satisfy such cash obligations on favorable terms or registered stock (plus interest) basedat all. In addition, our ability to satisfy such cash obligations may be limited by applicable law or the terms of other instruments governing our indebtedness. Our failure to pay such cash obligations would constitute an event of default under the Note and security agreement, which in turn could constitute an event of default under any of our outstanding indebtedness, resulting in the acceleration of such indebtedness and required prepayment and further restricting our ability to satisfy such cash obligations.
Our ability to make scheduled payments of the principal and interest on Morinda standalone 2019 results.the Senior Notes, or to refinance the Senior Notes, depends on our future performance, which is subject to prevailing economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we cannot generate such cash flow, we may have to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in these activities or engage in these activities on desirable terms, which could cause a default on our debt obligations.
Business Environment and Competition Risks
The recent COVID-19 pandemic has negatively affected and will continue to hurt our business, financial condition, and results of operations.
The public health crisis caused by the COVID-19 pandemic and the measures that have been taken or that may be taken by governments, businesses, including us, and the public at large to limit COVID-19’s spread have had, and we expect will continue to materially negatively affect our business, financial condition, and results of operation. The extent of the impact of the COVID-19 pandemic on our business and financial results will depend on numerous evolving factors we cannot accurately predict and which all will vary by market, including the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions taken, or may be taken, in response to the pandemic, and changes in consumer behavior in response to the pandemic, some of which may be more than just temporary.
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Our global operations expose us to risks associated with the Morinda combination,COVID-19 pandemic, which has resulted in challenging operating environments. COVID-19 has spread across the Company issued 43,804 shares of Series D Preferred Stock providing for the potential payment of up to $15 millionglobe to the former Morinda shareholders contingent upon Morinda achieving certain post-closing milestones. The holderscountries in which our products are made, manufactured, distributed or sold. Authorities in many of these markets have implemented numerous measures to stall the preferred stockspread of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter in place orders, and business shutdowns. These measures have impacted and will be entitledfurther impact us, our customers, employees, contract manufacturers, distributors, suppliers, and other third parties with whom we do business. Due to receivethese measures, we have experienced, and expect to continue to experience, a dividendsignificant decrease in revenues associated with restaurants, hotels, airports, and stadiums. In addition, due to the pandemic, some retailers have opted to reduce or stop carrying our products in favor of up to an aggregateproducts from very large, well-established companies with large market share. In foreign jurisdictions, which account for approximately 68% of $15 million (the “Milestone Dividend”) if the Adjusted EBITDA of Morinda standalone is at least $20 millionour net revenue for the year ended December 31, 2019.2020, our direct-to-consumer selling model typically relies heavily on our Brand Partner sales force in close contact with our customers.
Stay-at-home and social distancing orders have required some of our employees to work from home when possible, and other employees have been prevented from performing their job duties until the orders are relaxed or lifted. The Milestone Dividend is payable on April 15, 2020 (the “Dividend Payment Date”). If the Adjusted EBITDA of Morinda standalone is less than $20 million, the Milestone Dividend will be adjusted downward based on applying a five-times multipleworld-wide response to the difference betweenpandemic has resulted in a significant downturn in economic activity and there is no assurance that government stimulus programs will restore the Adjusted EBITDA of $20 million and actual Adjusted EBITDA for the year ended December 31, 2019. Additionally, the Company is required to pay an annual dividendeconomy to the holders oflevels that existed before the Preferred Stock equal topandemic. If an aggregate of 1.5% of the Milestone Dividend amount, payable on a pro rata basis. The Company may pay the Milestone Dividend and/economic recession or the annual dividend in cash or in kind, provided that if the Company chooses to pay in kind, the shares of common stock issued as payment therefore must be registered under the Securities Act of 1933, as amended (the “Securities Act”). The Preferred Stock will terminate on the Dividend Payment Date.
In certain jurisdictions, the stay-at-home orders have been relaxed but considerable uncertainty remains about the ultimate impact on our business. Even if the orders are lifted, there is no assurance they will not be reinstated if the spread of COVID-19 resumes. For example, many jurisdictions have recently reinstated orders requiring people to wear masks in public after test results have showed a resurgence of the pandemic. Resurgence of the pandemic in some markets has slowed the reopening process of businesses in those areas, including Europe where additional lockdowns have been recently reinstated. If COVID-19 infection trends continue to reverse and the pandemic intensifies and expands geographically, its negative impacts on our sales results of operations,could be more prolonged and may become more severe. While we have initially experienced increased sales in the Direct /Direct / Social Selling segment during the crisis, such increased sales levels have not, and we expect will not, fully offset the sales pressures we have experienced, and we expect will continue to experience in the Direct Store segment while social distancing mandates or recommendations are in effect. The long-term financial impact on our business and financial condition.
The COVID-19 pandemic has required alternative selling approaches that are less effective, such as through social media. We may continue to experience reductions in net revenue using these alternative selling approaches that avoid direct contact with our customers.
There is considerable uncertainty regarding how these measures and future measures in response to the pandemic will impact our business, including whether they will result in further changes in demand for our products, further increases in operating costs (whether because of changes to our supply chain or increases in employee costs or otherwise), how they will further impact our supply chain and whether they will result in further reduced availability of air or other commercial transport, port closures or border restrictions, each or all of which can impact our ability to make, manufacture, distribute, and sell our products. In addition, measures that impact our ability to access our offices, plants, warehouses, distribution centers or other facilities, or that impact the ability of our customers, employees, contract manufacturers, distributors, suppliers, and other third parties to do the same, may impact the availability of our and their employees, many of whom cannot perform their job functions remotely. If a significant percentage of our or our business partners’ workforce cannot work, including because of illness, facility closures, quarantine, curfews, shelter in place orders, travel restrictions or other governmental restrictions, our operations will be negatively affected. Any sustained interruption in our or our business partners’ operations, distribution network or supply chain or any significant continuous shortage of raw materials or other supplies as a result of these measures, restrictions or disruptions can impair our ability to make, manufacture, distribute or sell our products. Compliance with governmental measures imposed in response to COVID-19 has caused and may continue to cause us to incur additional costs, and any inability to comply with such measures can subject us to restrictions on our business activities, fines, and other penalties, any of which can hurt our business. In addition, the increase in certain thatof our employees working remotely has amplified certain risks to our business, including increased demand on our information technology resources and systems, increased phishing and other cybersecurity attacks as cybercriminals try to exploit the uncertainty surrounding the COVID-19 pandemic, and an increase in the number of points of potential attack, such as laptops and mobile devices (both of which are now being used in increased numbers), to be secured, and any failure to effectively manage these risks, including to timely identify and appropriately respond to any cyberattacks, may hurt our business. Further, we experienced, and will continue to experience, costs associated with continuing to pay certain employees who are unable to work due to the travel bans and restrictions, quarantines, curfews, shelter in place orders and, therefore, generate no corresponding revenue.
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Public concern regarding the risk of contracting COVID-19 impacts demand from consumers, due to consumers not leaving their homes or otherwise shopping in a different manner than they historically have or because some of our consumers have lower discretionary income due to unemployment or reduced or limited work because of measures taken in response to the pandemic. Because we sell a wide variety of products worldwide, the profile of the products that we offersell and the revenue attributable to such products varies by jurisdiction and changes in demand as a result of COVID-19 will become,vary in scope and timing across these markets. Any reduced demand for our products or continuechange in consumer purchasing and consumption patterns, and continued economic uncertainty, can hurt our customers’ and business partners’ financial condition, resulting in an inability to pay for our products, reduced or canceled orders of our products, closing of stores, restaurants, airports, hotels, entertainment or sports complexes or other venues where our products are sold, or our business partners’ inability to supply us with ingredients or other items necessary for us to make, manufacture, distribute or sell our products. Such adverse changes in our customers’ or business partners’ financial condition may also result in our recording additional impairment charges for our inability to recover or collect any accounts receivable, owned or leased assets, including certain equipment, or prepaid expenses. In addition, economic uncertainty associated with the COVID-19 pandemic has resulted in volatility in the global capital and credit markets which can impair our ability to access these markets on terms commercially acceptable to us, or at all.
There can be appealingno assurance we will succeed in our efforts to mitigate the negative impact of COVID-19, and as a result, there may not be any demand for these products and our sales could decrease, which would result in a loss of revenue. Additionally, there is no guarantee that interest in our products will continue, which could adversely affect our business and revenues.
We face strong and adversely impacted,variedcompetition.
Our products and industry are subject to strong and varied competition. Such competitors include: (1) large multinational corporations in the health and wellness, healthy appearance and nutritional performance industries, including but not limited to companies that have established loyal customer bases over several decades; (2) healthy product companies that have an established customer base, and have the same or a similar business plan as we do and may be looking to expand; (3) a variety of other local and national healthy product companies; and (4) multinational corporations in the direct selling business that have large, loyal independent distributor bases.
Many of our current and potential competitors are well established and have longer operating histories, greater financial and operational resources, and greater name and brand recognition than we have. These competitors may have greater credibility with both existing and potential customers. They also may offer more products and more aggressively promote and sell their products. Our competitors may also support more aggressive pricing than we can, which could resulthurt sales, cause us to decrease our prices to remain competitive, or otherwise reduce the overall gross profit earned on our products. We may not develop or sustain a market position or expand our business. We anticipate that the intensity of competition will increase.
Economic uncertainties or downturns in the lossgeneral economy could disproportionately affect the demand for our products and services and negatively affect our results of your entire investment.operations.
General worldwide economic conditions have experienced significant fluctuations in recent years, and market volatility and uncertainty remain widespread. During challenging economic times, our distribution customers may face issues with their cash flows and in gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to pay us and hurt our revenue. If such conditions occur, we may have to increase our allowances for doubtful accounts and write-offs of accounts receivable, and our results of operations would be harmed. An economic turndown could also decrease demand for our products due to pricing concerns. The economic conditions in the U.S. and the countries in which we do business also affect foreign exchange rates. We cannot predict the timing, strength, or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy or markets in which we operate worsen, our business could be harmed. In addition, even if the overall economy remains relatively strong, the market for our products and services may not experience growth.
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Operational Risks
Failure to achieve and maintain effective internal controls could have a material adverse effect onmaterially hurt our business.
If we cannot provide reliable financial reports, our operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on our evaluations, our managementAs of December 31, 2020, we did not maintain effective controls over business acquisitions. Specifically, due to the size and timing of the acquisition of Ariix, in combination with the lack of adequate personnel at Ariix with requisite expertise to transition from a privately-held to a publicly-held company, we were not able to file this Report by the required due date. Accordingly, we concluded that there were nothis control deficiency constitutes a material weaknesses in our internal control over financial reporting for the years ended December 31, 2018 and 2017, respectively. weakness. We have developed a plan to remediate this material weakness as soon as possible.
A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Failure to comply with Section 404(a)maintain our internal controls could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.
A substantial portion of our total assets are classified as long-lived assets and goodwill that we face is varied and strong.
Under our accounting policies, we consider whether events and circumstances have occurred that would indicate if it is no guarantee“more likely than not” that an impairment of our long-lived assets has occurred. We also perform an annual goodwill impairment evaluation during the fourth quarter of each calendar year. Evaluating whether impairment exists involves substantial judgment and estimation. If we can developproject a sustained decline in a reporting unit’s revenues and earnings, it will have a significant negative impact on the fair value of the reporting unit which could result in material impairment charges. Such a decline could be driven by, among other things: (i) changes in strategic priorities; (ii) anticipated decreases in product pricing, sales volumes, and long-term growth rates as a result of competitive pressures or sustainother factors; and (iii) the inability to achieve, or delays in achieving the goals of our strategic initiatives and synergies. Adverse changes to macroeconomic factors, such as increases to long-term interest rates, would also negatively affect the fair value of our reporting units.
During 2019, we determined that our long-lived assets were impaired for an aggregate of $47.2 million. In connection with our acquisition of Ariix in November 2020, we acquired long-lived assets of $135.9 million and we recognized goodwill of $44.7 million. As of December 31, 2020, approximately $291.4 million of our total assets are subject to future impairment evaluations. Future impairment charges could have a market positionmaterial adverse impact on our results of operations.
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We have made certain assumptions relating to the Ariix acquisition that may prove to be materially inaccurate.
We have made certain assumptions relating to the Ariix acquisition that may prove to be inaccurate, including as the result of the failure to realize the expected benefits of the Ariix acquisition, failure to realize expected revenue growth rates, higher than expected operating, transaction and integration costs, as well as general economic and business conditions that adversely affect the combined company following the Ariix acquisition. These assumptions relate to numerous matters, including:
| ● | projections of Ariix’s future revenue and revenue growth rates; | |
| ● | the amount of goodwill and intangibles that will result from the Ariix acquisition; | |
| ● | certain other purchase accounting adjustments that we expect will be recorded in our financial statements in connection with the Ariix acquisition; | |
| ● | our ability to maintain, develop and deepen relationships with customers and independent distributors of Ariix; and | |
| ● | other financial and strategic risks of the Ariix acquisition. |
The ultimate impact of these matters include, but are not limited to, an increased likelihood that future impairment charges related to the goodwill and long-lived assets of Ariix will be required, and that certain financial covenants in our debt agreements may not be adhered to in future reporting periods.
Any failure to successfully integrate Ariix’s business and operations or expandfully realize potential synergies from the Ariix acquisition in the expected time frame would hurt our business, operating results, and financial condition.
The success of the Ariix acquisition will depend, in part, on our ability to successfully integrate Ariix’s business and operations and realize the anticipated benefits and potential synergies from combining our existing business with Ariix’s business. To realize these anticipated benefits and potential synergies, we must combine these businesses. If we cannot achieve these objectives following the Ariix acquisition, the anticipated benefits and potential synergies of the Ariix acquisition may not be realized fully or at all, or may take longer to realize than expected. Any failure to timely realize these anticipated benefits would have a material adverse effect on our business, operating results and financial condition. The integration process could cause the loss of key employees, loss of key customers, decreases in revenue and increases in operating costs, and the disruption of each company’s ongoing businesses, any of which could limit our ability to achieve the anticipated benefits and synergies of the Ariix acquisition and have a material adverse effect on our business, operating results and financial condition.
We anticipate that we will incur certain non-recurring charges in connection with this integration; however, we cannot identify the intensitytiming, nature and amount of competitionall such charges. These integration costs are charged to expense in the future will increase.
Our China business accounts for a significant part of our revenue and healthy beverage industries,anticipated growth. Any decline in sales in China would harm our business results, as would any adverse regulatory action. Repatriation of profits from China may not be ensured.
Our operations in China are conducted by our Ariix subsidiary in Hong Kong, and our other wholly owned subsidiary, Tahitian Noni Beverages (China) Company Limited (“TNI China”) based in Shanghai. TNI China received a direct selling license from the Chinese Ministry of Commerce in 2015. Our China sales were growing at a double-digit rate prior to 2019, making China our second largest market. If we cannot continue to grow sales through our TNI China business, it will hurt our global results.
China is a large and vibrant market but doing business in China requires navigation of a difficult regulatory environment. China has published regulations governing direct selling—and several administrative methods and proclamations have been issued. These regulations require TNI China to use a business model different from the one we offer in other markets. For TNI China to operate under these regulations, we have created and implemented a model specifically for China. However, it is possible that interpretations of direct selling laws could adversely affect our business in China or lead to fines against us or our Brand Partners.
It can take one to three years to obtain product registrations in China. The lengthy process for obtaining product registrations often prevents us from launching new product initiatives in China on the same timelines as other markets around the world.
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Chinese regulations prevent persons who are not Chinese nationals from selling in China. Our Brand Partners that do not have a China presence or Brand Partners or wholesalers in China may have engaged or may engage in activities that violate our policies in this market, or that violate Chinese law or other applicable law, and therefore result in regulatory action and adverse publicity.
Our operations in China are subject to risks and uncertainties related to general economic and political conditions, epidemics such as coronavirus discussed above, and legal developments in China. For example, as a result of negative media coverage about the healthcare-related product claims made by a competitor in the direct selling industry in China, in 2019 the government increased its scrutiny of activities within the healthcare market, including direct selling. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling foreign exchange, and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies, thatand issuing necessary licenses to conduct business. Any adverse change in the Chinese economy, the Chinese legal system, or Chinese governmental, economic, or other policies could have established loyal customer bases overa material adverse effect on our business in China and our prospects generally.
Over the past several decades; (2) healthy beverage companies thatyears, the Company has received periodic license fees and annual dividends from TNI China. However, there is no guarantee this will continue, and any change in government policy affecting payment of license fees or repatriation of profits could harm the results and financial performance of the Company and reduce our access to cash resources.
Our business is susceptible to risks associated with global operations.
We have an established customer base,subsidiaries and have the same or a similar business plan as we dooffice locations in more than 25 countries. Our current global operations and may be looking to expand nationwide; (3)future initiatives involve a variety of risks, including:
| ● | changes in the political or economic conditions of a specific country or region, | |
| ● | natural disasters and outbreak of disease, including the outbreak and spreading of coronavirus, political and economic instability, including wars, terrorism and political unrest, boycotts, curtailment of trade and other business restrictions, | |
| ● | changes in regulatory requirements, taxes, currency control laws, or trade laws, | |
| ● | more stringent regulations relating to data security (e.g., the EU General Data Protection Regulation (GDPR)), such as where and how data can be housed, accessed, and used, and the unauthorized use of, or access to, commercial and personal information, | |
| ● | differing labor regulations, especially in countries and geographies where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations, | |
| ● | challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement systems, policies, benefits, and compliance programs, | |
| ● | increased travel, real estate, infrastructure, and legal compliance costs associated with global operations, | |
| ● | currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering hedging transactions if we do so, | |
| ● | limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries, | |
| ● | laws and business practices favoring local competitors or general preferences for local vendors, | |
| ● | limited or insufficient intellectual property protection, | |
| ● | political instability or terrorist activities, | |
| ● | exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions, | |
| ● | treaties or lack of treaties between countries, and change of government structures (such as the UK leaving the European Union) or government withdrawals from trade agreements (such as NAFTA), and | |
| ● | adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. |
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If we cannot address the risks that may arise in connection with a global business, our financial condition and national healthy beverage companies withbusiness result will be hurt.
We have experienced significant growth resulting in changes to our organization and structure, which we either currently or may, in the future, compete; and (4) multinational corporations in the direct selling business thatif not effectively managed, could have a large, loyal independent distributor bases.
Our headcount and operations have grown substantially in recent years. We increased the number of full-time employees over the past three years from 172 employees on December 31, 2017 to 1,127 employees on December 31, 2020. We believe that our corporate culture has been a critical component of our currentsuccess. We have invested substantial time and potential competitors are well establishedresources in building our team and nurturing our culture. As we expand our business and operate as a public company, we may find it difficult to maintain our corporate culture while managing our employee growth. Any failure to manage our anticipated growth and related organizational changes to preserve our culture could negatively affect growth and achievement of our business objectives.
In addition, our organizational structure has become more complex because of our significant growth. We have longer operating histories, significantly greateradded employees and may need to continue to scale and adapt our operational, financial, and management controls, and our reporting systems and procedures. The expansion of our systems and infrastructure may require us to commit additional financial, operational, and management resources before our revenue increases and greater namewith no assurances that our revenue will increase. If we fail to manage our growth, we likely will be unable to execute our business strategy, which could have a negative impact on our business, financial condition, and results of operations.
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our financial condition may suffer.
We believe that the development of our trade names and various brands are critical to achieving widespread awareness of our products, and is important to attracting new customers and maintaining existing customers. We also believe that the importance of brand recognition thanwill increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable products at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we have. As a result, these competitors may have greater credibility with both existing and potential customers. They also may be ableincurred in building our brand. If we fail to offer more products and more aggressively promote and sell their products. Our competitors may alsomaintain our brand, our business could be able to support more aggressive pricing than we will be able to, which could adversely affect sales, cause us to decrease our prices to remain competitive, or otherwise reduce the overall gross profit earned on our products.
If we are unable tocannot attract and retain active IPCsBrand Partners and Customers,customers in our Direct / Social Selling segment, our business may be harmed.
We distribute our Tahitian Noni,TruAge, and TeMana products through approximately 300,000 independent contractor IPCs,a network of over 400,000 Brand Partners and customers, and we depend upon them directly for a substantial amount of our sales.revenue. To increase our revenue, we must increase the number of, and the productivity of, our IPCs.Brand Partners. Thus, our success in thisthe Direct / Social Selling segment depends in part upon our ability to attract, retain, and motivate a large base of IPCs.Brand Partners. We cannot accurately predict how the number and productivity of our IPCsBrand Partners may fluctuate, because we are relying primarily on our IPCBrand Partner leaders to recruit, train, and motivate new IPCs.Brand Partners. Several related factors affect retention and motivation, including general business and economic conditions, adverse publicity, investigations or legal proceedings, government regulations or actions, public perceptions about dietary supplementour products, and other competing direct-to-consumerdirect / social selling companies that are larger than us and compete fiercely for a limited number offew persons who desire to become independent distributors.Brand Partners.
We depend on attracting, retaining, developing, and motivating key personnel, including a small number of key management personnel, and losing them could hurt our business.
Success in our industry, specifically as it relates to our healthy products, does and will continue to require highly talented and experienced employees. Due to the growth in this market segment, such personnel and the talent and experience they possess is in high demand. We may be unable to attract and retain these employees. If we fail to attract, train, motivate, and retain talented personnel, our business, financial condition, and operating results may be materially hurt.
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In addition, we rely on a small number of key individuals to manage our business and operations. We do not carry key person insurance covering members of management. Our Chief Financial Officer, Gregory Gould, has announced that he is terminating employment with us on July 2, 2021 and we are currently searching for his replacement. The competition for qualified personnel for our industry is intense. We will need to hire additional personnel as we continue to expand. We may not attract, retain, and develop quality personnel on acceptable terms due to the competition for such personnel, which could have an adverse effect on our business operations, financial condition and operating results.
Uncertainty about the effect of the Ariix acquisition on our and Ariix’s employees may have an adverse effect on us or Ariix and, consequently, the combined business resulting from the Ariix acquisition. This uncertainty may impair our and Ariix’s ability to attract, retain and motivate key personnel until the Ariix acquisition is integrated, or longer for the combined entity. Employee retention may be particularly challenging during the ongoing integration period as our and Ariix’s employees may experience uncertainty about their future roles with the combined business. Additionally, certain of Ariix’s officers and employees own Ariix membership interests and will be entitled to receive a portion of the consideration for the Ariix acquisition, the payment of which could provide sufficient financial incentive for certain officers and employees to no longer pursue employment with the combined business. If key employees depart because of issues relating to the uncertainty and difficulty of integration, financial incentives, or a desire not to become employees of the combined business, we may incur significant costs in identifying, hiring and retaining replacements for departing employees, which could substantially reduce or delay our ability to realize the anticipated benefits of the Ariix acquisition.
In our direct-to-consumer business,Direct / Social Selling segment, Tahitian Noni Juice, TruAge® MAX, Nutrifii and MAXSlenderiiz constitute a significant portion of our sales.
Tahitian Noni Juice, TruAge® MAX, Nutrifii and MAXSlenderiiz constitute a significant portion of our Morinda business unitDirect / Social Selling segment sales, accounting for 85%, 85%,approximately 70% and 87% in 2018, 2017,82% of our net revenue for 2020 and 2016,2019, respectively. We face a high degree ofstrong competition from other companies producing noni and other superfruit products. If consumer demand for these products shifts or declines significantly or our competition iscompetitors are more successful in the markets in which we do business, then our financial condition and operating results would be harmed.
We depend on a limited number of suppliers of raw and packaging materials.
We rely upon a limited number of suppliers for raw and packaging materials used to make and package our products. Our success will dependdepends in part upon our ability to successfully secureconsistently obtain such materials from suppliers that are delivered with consistency and at a quality that meets our requirements. The price and availability of these materials are subject to market conditions. Increases in the price of our products due to the increase in the cost of raw materials could have a negative effect on our business.
If we are unable tocannot obtain sufficient quantities of raw and packaging materials, delays or reductions in product shipments could occur which would have a material adverse effect on our business, financial condition, and results of operations. The supply and price of raw materials used to produce our products can be affected by a number ofseveral factors beyond our control, such as frosts, droughts, other weather conditions, economic factors affecting growing decisions, various plant diseases and pests, transportation interruption, and foreign imposed restrictions. If any of the foregoing were to occur, no assurance can be given that such condition would notmay have a material adverse effect on our business, financial condition, and results of operations. In addition, our results of operations are dependentdepend upon our ability to accurately forecast our requirements of raw materials. Any failure by us to accurately forecast our demand for raw materials could result in an inability to meet higher than anticipated demand for products or producing excess inventory, either of which may adversely affecthurt our results of operations.
The noni we use in our Direct / Social Selling segment is grown and harvested exclusively in French Polynesia. Noni fruit is the most important raw material used in our Tahitian Noni and TeMana products, and it is important to the success of our Company.success. If the government of French Polynesia were to prohibitprohibited the exportation or use of noni, or, if we were unable tocould not source noni fruit in French Polynesia in sufficient quantities to meet demand for our products due to adverse weather, natural disasters, soil overuse, labor shortages, or any other reason, our financial condition and results would be harmed. Any adverse publicity regarding the quality of noni grown in French Polynesia would also have an adverse impacthurt our results of operations and financial condition.
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We depend on our results and financial condition.
Our processing plant in Mataiea, Tahiti produces all the noni puree used in our Tahitian Noni Juice, MAX, and many other noni-based products. Noni puree is sent to our Company-owned and contracted manufacturing facilities in American Fork, Utah, Japan, Germany, and China. As a result, we are dependentWe depend upon the uninterrupted and efficient operation of our processing plant in Mataiea, Tahiti. The Tahiti operation is subject to power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, labor strikes, and the need to comply with the requirements or directives of government agencies, including the FDA. The occurrence of these or any other operational problems at our facility may have a material adverse effect on our business, financial condition, and results of operations.
We depend on a small number of large retailers for a significant portion of our sales.
A portion of our sales revenue is dependentdepends on third partythird-party manufacturers that we do not control. The majority of these manufacturers’ business comes from producing and/or selling either their own products or our competitors’ products. As independent companies, these manufacturers make their own business decisions. They may have the right to determine whether, and to what extent, they manufacture our products, our competitors’ products, and their own products. They may devote more resources to other products or take other actions detrimental to our brands. In most cases, they are able toOur third-party manufacturers can usually terminate their manufacturing arrangements with us without cause. We may need to increase support for our brands in their territories and may not be able to pass on price increases to them. Their financial condition could also be adversely affectedhurt by conditions beyond our control, and our business could suffer as a result.suffer. Deteriorating economic conditions could negatively impactaffect the financial viability of third-party manufacturers. Any of theseThese factors could negatively affect our business and financial performance.
We face various operating hazards that could adversely affect our business.
Our distributors may also provide distribution services to competing brands, as well as larger, national or international brands, and may be to varying degrees influenced by their continued business relationships with other larger beverage, and specifically, healthy beverage companies. Our independent distributors may be influenced by a large competitor if they rely on that competitor for a significant portion of their sales. There can be no assurance that our distributors will continue to effectively market and distribute our products. The loss of any distributor or the inability to replace a poorly performing distributor in a timely fashion could have a material adverse effect on our business, financial condition and results of operations. Furthermore, no assurance can be given that we will successfully attract new distributors as they increase their presence in their existing markets or expand into new markets.
Growth of operations will depend on the acceptance of our products and consumer discretionary spending.
The acceptance of our healthy products by both consumers and by retailers to gain distribution is critically important to our success. Our business could be harmed if there are shifts in retailer priorities and shifts in user preferences away from our products, and if we cannot develop effective healthy products that appeal to both retailers and consumers. Our success depends to a significant extent on discretionary user spending, which is influenced by general economic conditions and the availability of discretionary income. We may experience an inability to generate revenue during economic downturns or during periods of uncertainty, where users may havepurchase products that are cheaper or forego purchasing any healthy products. Any material decline in discretionary spending could hurt our sales, results of operations, business, and financial condition.
Demand for products we sell depends on many factors, including the number of customers we can attract and retain over time, the competitive environment in the healthy products industry. Lack of demand may force us to delay commercializationreduce prices below our desired pricing level or increase promotional spending, and the inability to anticipate changes in user preferences and to meet consumer needs in a timely cost-effective manner could result in immediate and longer-term declines in the demand for an extended period of time. CBDthe products will also be subject to registration and/or approval in foreign jurisdictions inwe offer, which the Company does business. It is uncertain how a delay in commercializingcould hurt our CBD products would impact our Company.sales, cash flows and overall financial condition.
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Our ongoing investment in new product lines and products and technologies is inherently risky and could disrupt our ongoing businesses.
We have invested and expect to continue to invest in new product lines, products, and technologies. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings willmay not be successful and will not adversely affect our reputation, financial condition, and operating results.
Substantial disruption to production at our manufacturing and distribution facilities could occur.
A disruption in production at our beverageproduct manufacturing facilities could have a material adverse effect on our business. In addition, a disruption could occur at any of our other facilities or those of our suppliers, bottlers, or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, water scarcity, manufacturing problems, disease, strikes, transportation or supply interruption, government regulation, cybersecurity attacks or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more, or may take a significant time to start production, each of which could negatively affect our business and financial performance.
We are subject to seasonality related to sales of our products.
Our business is subject to substantial seasonal fluctuations. Historically, a significant portion of our net salesrevenue and net earnings has been realized during the period from May through September. Accordingly, ourOur operating results may vary significantly from quarter to quarter. Our operating results for any particular quarter are not necessarily indicative of any other results. If for any reason our sales were to be substantially below seasonal norms, our annual revenues and earnings could be materially hurt.
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Legal, Regulatory and adversely affected.
We may have experienced ownership changes in the pastviolate government laws and may experience ownership changes in the future and/or subsequent shifts in our stock ownership (some of which shiftsregulations.
We are outside our control). As a result, if we generate net taxable income, our ability to use our pre-change NOLs to offset such taxable income could be subject to limitations. Similar provisions of state tax law may also apply. As a result, even if we attain profitability, we may be unable to use a material portion of our NOL’s and other tax attributes. We plan to perform an IRC Section 382 analysis to determine if there are currently any limitations on the future use of our net operating loss carryforwards.
In certain jurisdictions, these legal and regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions, and may result in our inability to provide certain products and services to customers or prospective clients or clients.customers. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, or if clients madecustomers make claims against us for compensation, our business, financial condition, and results of operations could be harmed. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees and costs. Enforcement actions and sanctions could further harm our business, financial condition, and results of operations.
For example, on November 19, 2020, Ariix’s subsidiary in Japan (the “Japanese Subsidiary”) received an order from the Japan Consumer Affairs Agency notifying it of a nine-month suspension for recruiting new distributors in Japan. For the first nine months of 2020 and 2019, Ariix recognized net revenue related to the Japanese Subsidiary of $33.7 million and $31.1 million, respectively. Since the entire suspension period will be reported in our operating results, this suspension of recruiting and the related sanction may result in a significant part of our revenue and anticipated growth. Any declinematerial reduction in sales in China would harm our business results, as would any adverse regulatory action. Repatriation of profits from China may not be ensured.
Our Brand Partners could violate marketing or advertising laws or regulations.
In our Direct / Social Selling segment, we sell through Brand Partners. Brand Partners sign an agreement with a business unit within the Direct / Social Selling segment agreeing to comply with all our policies and procedures, including without limitation our Policy Manual. Our policies prohibit false and misleading advertising and making improper health and income claims. We require Brand Partners to clear all promotional materials in advance with our Compliance Department. However, despite our efforts, occasionally Brand Partners violate our policies and publish inappropriate marketing materials describing our products or programs. It is impossible to monitor all social media outlets and all Brand Partner communications. Our Compliance Department takes commercially reasonable means, including a computer program that actively searches for improper advertising, to find improper Brand Partner advertising—and when we find such advertising, we require the Brand Partner to correct it. Some such promotional communications have lingered for years making China Morinda’s second largest market. Ifin obscure places on the internet and, by the time we arefind them, the Brand Partner is no longer affiliated with us and is not ablecooperative in removing the offending advertising. These violations by Brand Partners could lead to continue to grow sales through our TNI China business, it willactions against us by regulatory agencies, states’ attorney generals, and private parties and could have an adverse impact on our globalbusiness, financial condition, and operational results.
We cannot guarantee that any of our IPCs that do not have a China presence or any of IPCs or wholesalers in China have not engaged or will not engage in activities that violate our policies in this market, or that violate Chinese law or other applicable law, and therefore result in regulatory action and adverse publicity.
The FCPA and other similar anti-corruption and anti-bribery laws and regulations in other jurisdictions generally prohibit companies and their intermediaries from offering or providing improper things of value to foreign officials for the purpose of obtaining or retaining business or securing regulatory benefits. Under these laws, we may become liable for the actions of employees, officers, directors, agents, representatives, consultants, or other intermediaries, or our strategic or local partners, including those over whom we may have little actual control. We are continuously engaged in transacting business, including in new locations, around the world. Because we will maintain and intend to grow our international sales and operations, we have contacts with foreign public officials, and therefore potential exposure to liability under laws such as the FCPA.
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If we are found liable for violations of the FCPA or other similar anti-corruption, anti-bribery, or anti-kickback laws or regulations, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could materially hurt our business, financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuationscondition, and affect our reported results of operations.
Litigation and Exchange Commission (the “SEC”)publicity concerning product quality, health, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices mayother issues could adversely affect our reportedresults of operations, business, and financial condition.
Our business could be hurt by litigation and complaints from customers or government authorities resulting from product defects or contamination, operations, workplace inspections, alleged data breaches, or other issues. Adverse publicity about these allegations may negatively affect us, whether or not the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities if a lawsuit or claim results in a decision against us, or litigation costs, regardless of the way we conductresult. Further, any litigation may distract our key employees or cause them to expend resources and time normally devoted to the operation of our business.
Our CBD product line is subject to varying, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumers perceptions and we may be unable to meetcommercialize our CBD-infused beverages.
We have announced the obligationslaunch of various financial covenants that are containeda new product line consisting of CBD-infused beverages. Our intention is to commercialize the new line of beverages when legally permitted in our loan agreementlocal markets. In February 2020, we launched a CBD beverage shot in Japan. The CBD and cannabis industry in Japan, the U.S. and elsewhere is evolving and subject to varying, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. For example, the Agriculture Improvement Act of 2018 removes hemp from the Controlled Substances Act and permits the production and marketing of hemp and derivatives of cannabis with our senior lender, East West Bank.
It is difficult and costly to protect and enforce our proprietary rights.
Our commercial success will depend in part on obtaining and maintaining trademark protection, patent protection, and trade secret protection of our products and brands, as well asand successfully defending that intellectual property against third-party challenges. We willcan only be able to protect our intellectual property related to our trademarks, patents, and brands to the extent thatif we have obtained rights under valid and enforceable trademarks, patents, or trade secrets that cover our products and brands. Changes in either the trademark and patent laws or in interpretations of trademark and patent laws in the U.S. and other countries may diminish the value of our intellectual property. Accordingly, weWe cannot predict the breadth of claims that may be allowed or enforced in our issued trademarks or our issued patents. The degree of futureFuture protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
We may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in our loss of significant rights and the assessment of treble damages.
From time to time, we may face intellectual property infringement, misappropriation, or invalidity/non-infringement claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect us negatively. For example, wereaif a third party to succeed onprevailed in an infringement claim against us, we may be requiredhave to pay substantial damages (including up to treble damages if such infringement were found to bewas willful). In addition, we could face an injunction, barring us from conducting the allegedly infringing activity. The outcome of the litigation could require us to enter into a license agreement which may not be under acceptable, commercially reasonable, or practical terms or we may be precluded from obtaining a license at all.license. It is also possible that an adverse finding of infringement against us may require us to dedicate substantial resources and time in developing non-infringing alternatives, which may or may not be possible. In the case ofWith diagnostic tests, we would also need to include non-infringing technologies which would require us to re-validate our tests. Any such re-validation, in addition tobesides being costly and time consuming, may be unsuccessful.
Finally, we may initiate claims to assert or defend our own intellectual property against third parties. Any intellectual property litigation, irrespective of whether we are the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert our management’s attention from our business and negatively affect our operating results or financial condition.
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Limits on the sales compensation we can pay to our Brand Partners in certain countries could harm our business and cause regulatory risks.
Certain markets, including China, Korea, Indonesia, and Vietnam, impose limits on the sales compensation we can pay our Brand Partners. For example, in Korea, local regulations limit sales compensation to 35% of our total revenue in Korea. These regulations may inhibit persons from becoming Brand Partners or cause interested persons to join competitors not focused on compliance. We may be subjecthave had to claims by third parties asserting thatmodify our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
General Risk Factors
Future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and be a distraction to management.
We may seek to acquire or invest in foreign exchange rates;
Our stock price has in the past and may in the future fluctuate based on developments in the cannabis industry.
To raise additional capital, we may in the future offer additional shares of our common stockCommon Stock or other securities convertible into or exchangeable for our common stock. Common Stock. For example, we issued an aggregate of approximately 56.8 million shares of our Common Stock in public offerings and 2.1 million shares of our Common Stock in business combinations during the three-year period ended December 31, 2020. In addition, we must seek approval from our shareholders in 2021 to issue up to an aggregate of 40.1 million shares of our Common Stock as additional consideration under the amended and restated merger agreement with Ariix and a related non-compete agreement.
We cannot assure you that we willmay be ableunable to sell shares or other securities in any other offering at a price per share that is equal to or greater than the most recently publicly-traded price or the price per share paid by existing investors, and investors purchasing our shares or other securities in the future could have rights superior to existing stockholders.shareholders. The price per share at which we sell additional shares of our common stockCommon Stock or other securities convertible into or exchangeable for our common stockCommon Stock in future transactions may be higher or lower than the price per share at this time.
Our failure to meet the continued listing requirements of the Nasdaq Capital Market could cause a delisting of our Common Stock.
If we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may delist our Common Stock. Such a delisting would likely have a negative effect on the price of our Common Stock and would impair your ability to sell or purchase our Common Stock when you wish to do so. If our Common Stock is delisted, our Common Stock may not become listed again.
Events such as severe weather conditions, natural disasters, regional and global epidemics, government policies and treaties, hostilities, and social unrest, among others, can hurt our results and prospects.
Severe weather conditions, natural disasters, hostilities and social unrest, any shifting climate patterns, terrorist activities, health epidemics or pandemics (or expectations about them), including the COVID-19 outbreak, social unrest, and changes in government policies and treaties can hurt consumer spending and confidence levels and product supply availability and costs, and the local operations in affected markets, all of which can affect our results and prospects. Neither the duration nor scope from the COVID-19 pandemic can be predicted. Therefore, while we expect this outbreak will continue to negatively affect our results, the related future financial impact cannot be reasonably estimated.
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The price of our Common Stock may be volatile and hurt by many factors.
The market price of our Common Stock could fluctuate significantly in response to various factors and events, including without limitation:
| ● | our ability to integrate operations, products, and services related to our acquisition of Ariix, | |
| ● | our ability to execute our business plan, | |
| ● | operating results below expectations, | |
| ● | litigation regarding product contamination, | |
| ● | our issuance of additional securities, including debt or equity or a combination thereof, which may be necessary to fund our operating expenses, | |
| ● | announcements of new or similar products by us or our competitors, | |
| ● | loss of any strategic relationship, including raw material provider or distributor relationships, | |
| ● | period-to-period fluctuations in our financial results, | |
| ● | changes in foreign exchange rates, | |
| ● | developments about intellectual property rights, | |
| ● | changes in legal, regulatory, and enforcement frameworks affecting our products, | |
| ● | material weaknesses in our internal control over financial reporting, | |
| ● | the addition or departure of key personnel, | |
| ● | announcements by us or our competitors of acquisitions, investments, or strategic alliances, | |
| ● | actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry, | |
| ● | the level and changes in our year-over-year revenue growth rate, | |
| ● | the failure of securities analysts to publish research about us, or shortfalls in our results of operations compared to levels forecast by securities analysts, | |
| ● | any delisting of our Common Stock from Nasdaq due to any failure to meet listing requirements, | |
| ● | economic and other external factors, and | |
| ● | the general state of the securities market. |
These market and industry factors may materially reduce the market price of our Common Stock, regardless of our operating performance. Securities markets have from time-to-time experienced significant price and volume fluctuations unrelated to the performance of particular companies.
Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affecthurt the price and trading volume of our common shares.
Securities research analysts may establish and publish their own periodic projections for us. These projections may vary widely and may not accurately predict the results we actually achieve. Our share price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline. If no analysts commence coverage of us, the market price and volume for our common shares could be adversely affected.
Our ability to use our net operating loss carryforwards may be limited.
We have incurred net operating losses (“NOLs”) for U.S. income tax purposes during our history. If we continue to generate taxable losses, unused losses will carry forward to offset future taxable income until such unused losses expire. Under Internal Revenue Code (“Code”) Section 382, if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percent change (by value) in its equity ownership by certain shareholders over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, (and other pre-change tax attributes as applicable) to offset its post change income may be limited. We may have experienced ownership changes in the past and may experience ownership changes and/or subsequent shifts in our stock ownership (some of which shifts are outside our control). If we generate net taxable income, our ability to use our pre-change NOLs to offset such taxable income is expected to be subject to limitation under Code Section 382. Similar provisions of state tax law may also apply. Even if we attain profitability, we may be unable to use a material portion of our NOL’s and other tax attributes.
We have not and may never pay dividends to shareholders.
We have not declared or paid any cash dividends or distributions on our capital stock.stock and our Senior Notes prohibit us from paying dividends. We currently intend to retain our future earnings if any, to support operations and to finance expansion, and therefore we do not anticipate paying any cash dividends on our common stockCommon Stock in the foreseeable future.
The declaration, payment, and amount of any future dividends will be made at the discretion of the boardour Board of directors,Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the boardBoard of directorsDirectors considers relevant. There is no assurance that future dividends willDividends may never be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.dividend is unknown. If we do not pay dividends, our common stockCommon Stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We believe our current physical properties are sufficient and adequate to meet our current and projected requirements. Presented below is a discussion about our key properties by operating segment.
Direct Store Segment
In January 2019, we entered into a lease for our corporate headquarters consisting of approximately 11,200 square feet of office space in the lower downtown area of Denver, Colorado at 2420 17th Street. Our monthly obligation for base rent averages approximately $33,500 per month over the remaining lease term which expires in December 2029. In December 2019, we agreed to sublease approximately 3,300 square feet of this office space at base rent that averages approximately $8,200 over the term of the sublease that expires in December 2022.
In April 2019, we entered into a lease for a new facility in Aurora, Colorado where we conduct operations, packaging, distributions and administrative activities for our Direct Store segment. This building consists of approximately 156,000 square feet and provides for average monthly rent of approximately $68,000 over the remaining lease term which expires in April 2029.
We are currently attempting to sublease our former corporate headquarters and distribution are currently being conducted from a buildingfacility located at 1700 E. 68th Avenue in Denver, Colorado. The leasemonthly rent for this building provides for monthly rent of $53,040 throughaverages approximately $58,500 over the expiration dateremaining lease term that expires in March 2027. We intend to sublease for a portion of this space after our planned relocation of our corporate offices to downtown Denver in the second quarter of 2019.
Direct/ Social Selling Segment
The Direct/ Social Selling segment’s headquarters is in American Fork, Utah, in a 140,000 square foot office, manufacturing, warehouse, and shipping facility custom built on a 12-acre parcel for our exclusive use.
In March 2019, we entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $57.1 million of the land and building in Tokyo that serves as the corporate headquarters of Morinda’s Japanese subsidiary. Concurrently with the sale, we entered into a lease of this property for a term of 27 years with the option to terminate any time after seven years. The monthly lease cost is ¥20.0 million (approximately $194,000 based on the exchange rate as of December 31, 2020) for the initial seven-year period of the lease term. After the seventh year of the lease term, either party may elect to adjust the monthly lease payment to the then current market rate for similar buildings in Tokyo. In order to secure our obligations under the lease, we provided a refundable security deposit of approximately $1.8 million. At any time after the seventh year of the lease term, we may elect to terminate the lease. However, if the lease is terminated before the 20th anniversary of the lease inception date, then we will be obligated to perform certain restoration obligations, which we considered to be a significant penalty whereby there is reasonable certainty that we will not elect to terminate the lease prior to the 20-year anniversary.
We have a manufacturing, office and warehouse facility in Chongquing,Chongqing, China, consisting of three buildings totaling approximately 64,500 square feet which are located on about three acres of land leased from the government through July 2060. Additional store and office facilities are leased in many cities in China, including Shanghai, Beijing, Taiyuan, Fuzhou, Hangzhou, Guangzhou, Weihai, Nanjing, and Shenyang.
Item 3. Legal Proceedings.
From time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. We are not aware of any material proceedings in which our companythe Company, or any of our directors, officers, or affiliates, or any registered or beneficial stockholder is a party adverse to our company,us, or has a material interest adverse to our company.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Our common stockCommon Stock began trading on the NASDAQNasdaq Capital Market on February 17, 2017, under the symbol “NBEV.” The following tables set forth the high and low closing prices for our common stock as reported on the Nasdaq Capital Market for the quarterly periods indicated. These prices do not include retail markups, markdowns, or commissions.
2018 | 2017 | |||
| Year ended December 31, | High | Low | High | Low |
| First Quarter | $3.92 | $2.12 | $5.55 | $3.51 |
| Second Quarter | 2.50 | 1.70 | 6.72 | 3.71 |
| Third Quarter | 7.85 | 1.32 | 5.09 | 3.41 |
| Fourth Quarter | 8.95 | 3.13 | 3.35 | 1.99 |
Dividends
The payment of any dividends is generally at the discretion of our Board of Directors. However, we are currently prohibited from paying dividends under our Senior Notes, and we have not paid any cash dividends on our common stockCommon Stock to date. The payment of any future cash dividends will be dependent upon our revenue, earnings and financial condition from time to time. The payment of any dividends will be within the discretion of our board of directors. It is presently expected that we will retain all earnings for use in our business operations and, accordingly, it is not expected that our boardBoard of directorsDirectors will declare any dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
Reference is made to “
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”which is incorporated by reference toRecent Sales of Unregistered Securities
Pursuant to the closing of our amended and restated merger agreement with Ariix on November 16, 2020, we issued an aggregate of 417,822agreed to issue 19,703,703 shares of our common stock upon exerciseCommon Stock that were issued in February 2021. For additional information, please refer to our Current Report on Form 8-K that we filed with the SEC on November 16, 2020.
On December 1, 2020, we issued 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of previously granted options to purchase$32,432,000, 800,000 shares of our common stock.
All of these securities were issued in reliance upon an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve public offerings of securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On July 6, 2020, we purchased from Brent Willis, our Chief Executive Officer, a total of 780,000 shares of Common Stock based on the closing market price of $1.53 per share. The total purchase price was approximately $1,193,000. The shares were immediately canceled and returned to the Company’s authorized but unissued shares of Common Stock.
Item 6. Selected Financial Data.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in Item 8 of this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.”Statements” at the beginning of this Report. Our actual results may differ materially from those described below. You should also read the “Risk Factors” section set forth in Item 1A of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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Certain figures, such as interest rates and other percentages included in this section, have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage and dollar amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
Our Business Model
We are a Colorado-based healthy beverage company engaged in the development and commercialization of a portfolio of organic, natural and other better-for-you healthy beverages. We market a full portfolio of Ready-to-Drink (“RTD”) better-for-you beverages including competitive offerings in the kombucha, tea, coffee, functional waters, relaxation drinks, energy drinks, rehydrating beverages, and functional medical beverage segments. We also offer liquid dietary supplement products, including Tahitian Noni® Juice, through a direct-to-consumer model using independent distributors called independent product consultants (“IPCs”). We differentiate our brands through superior functional performance characteristics and ingredients and offer products that are 100%an organic and natural, with no high-fructose corn syrup (“HFCS”), no genetically modified organisms (“GMOs”), no preservatives, and only natural flavors, fruits, and ingredients. We rank as one of largest healthy beverage companies in the world as well as one of the fastest growing beverage companies according to Beverage Industry Magazine annual rankings and Markets and Markets. Our goal isproducts company intending to become the world’s leading social selling and distribution company. NewAge, Inc. is a purpose-driven firm dedicated to providing healthy products to consumers and inspiring them to “Live Healthy.” We commercialize our portfolio of products across more than 50 countries worldwide and strive to disrupt with industry leading social selling tools and technologies. More than 75% of the company’s revenue is ordered and fulfilled online, and more than 75% of our products are delivered directly to consumers’ homes.
We compete in three major category platforms including health and wellness, healthy appearance, and nutritional performance. Within its category platforms, we develop and market a portfolio of science-based, functionally differentiated, and superior performing products and brands. The Company differentiates its products utilizing its patents, proprietary formulas and production process and trade secrets and focuses its functional differentiation utilizing different combinations of:
| ● | Phytonutrients and micronutrients | |
| ● | Plant-based ingredients | |
| ● | CBD | |
| ● | Noni | |
| ● | Clean/non-toxic ingredients |
Utilizing these functionally differentiated ingredients, we intend to build ‘hundred-million dollar’ focus brands in each of our respective platforms. For example, Tahitian Noni already meets this standard, is our largest brand, and has sold more than $7.0 billion since its inception, including approximately $360 million cumulatively recognized by us since our acquisition of Morinda in December 2018. We have multiple studies and human trials validating Tahitian Noni’s efficacy and benefits for reducing inflammation and strengthening the body’s protection against viruses. Also, within the health and wellness platform is our LIMU brand, a fucoidan-rich beverage company,sourced from seaweed. We have two core brands within the healthy appearance platform including TeMana, a unique skin care portfolio that is infused with leadingTahitian Noni, and Lucim, a line of clean skin care products expanding worldwide that was launched in 2020. In the nutritional performance platform, we commercialize a full line of weight management and other human needs states addressing nutritional supplements and nutraceuticals and are building out our core brands within the platform.
We believe that the major trend in consumer goods is direct delivery, e-commerce ordering and fulfillment, with purchase intent being driven by social media and friends and family. According to Euromonitor International’s 2019 Lifestyles Survey, the largest driver of purchase intent in every major region of the world was friends and family recommendations and related social media posts. The Company further believes that these fundamental trends negate the historic advantage of traditional manufacturers geared toward sale of their products, utilizing traditional media, merchandized in traditional retail outlets.
We believe one of NewAge’s competitive advantages is its network of more than 400,000 Brand Partners around the world, and its own DSD system that provides near captive distribution in our respective market areas. We have developed a robust infrastructure and set of execution capabilities across more than 50 countries, with a primary focus on our core markets of Japan, Greater China, Western Europe, and North America. We are selectively invested in emerging market areas whereby the combination of the business opportunity and consumer demographics intersect to form an attractive investment profile for our model. These markets include Russia and the CIS countries, the Southern Cone of Africa, and selected markets in Latin America and South East Asia.
NewAge has the scale and infrastructure underpinning what we believe to be a differentiated and disruptive business strategy. NewAge believes that what, where, when and how consumers leading growth for retailersare buying consumable products is transforming. Commercializing its portfolio of healthy brands through primarily a direct-route-to-market, utilizing proprietary and distributors,industry-leading social selling technology, and leading returnconnecting with consumers on investment for shareholders. Our target markettheir terms with our team of more than 400,000 Brand Partners enables us to take advantage of the fundamental disintermediation happening in consumer product goods.
Operating Segment Overview
Since the consummation of the business combination with Morinda in December 2018, our operating segments have consisted of the Noni by NewAge segment and the NewAge segment. Upon completion of the business combination with Ariix, which comprised a portion of the Noni by NewAge segment, we rebranded this segment as the Direct / Social Selling segment to better reflect the overall characteristics shared by the business units that comprise this segment.
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The net revenue and total assets of the Direct / Social Selling segment increased significantly with the closing of our acquisition of Ariix on November 16, 2020. The Direct / Social Selling segment is engaged in the development, manufacturing, and marketing of products in three core category platforms including health conscious consumers, whoand wellness, healthy appearance, and nutritional performance. The Direct /Direct / Social Selling segment has manufacturing operations in Tahiti, Germany, Japan, the United States, and China. The Direct / Social Selling segment’s products are becomingsold and distributed in more interestedthan 50 countries using Brand Partners through our direct-to-consumer selling network and better educatede-commerce business model. Over 60% of the net revenue of the Direct /Direct / Social Selling segment is generated in the key Asia Pacific markets of Japan, China, Taiwan, and Indonesia.
On July 10, 2019, we completed a business combination with Brands Within Reach, LLC (“BWR”) whereby BWR became a wholly owned subsidiary. With the changing economics in the retail brand beverage sector exacerbated by COVID-19, on what isSeptember 24, 2020, we sold BWR and the related rights to the brands with substantially all of our U.S. retail brands to focus on the more profitable, larger scale, higher potential Direct /Direct / Social Selling segment of our business. BWR and the U.S. retail brands are included in their diets, causing themthe Direct Store segment from the date of acquisition through the disposal date and are referred to shift away from less healthy options suchherein as carbonated soft drinks or other high caloricthe “Divested Business”. For periods after disposal of the Divested Business, the Direct Store segment is primarily comprised of our DSD network that distributes snacks, beverages, and towards alternative beverage choices. Consumer awarenessother products direct to stores in Colorado and surrounding states, to wholesale distributors, key account owned warehouses and international accounts using several distribution channels. In addition, the Direct Store segment includes substantially all of the benefits of healthier lifestyles and the availability of heathier beverages is rapidly accelerating worldwide, and we are capitalizing on that shift.
Recent Developments
On November 16, 2020, we completed our business combination with Ariix for total purchase consideration with an estimated fair value of approximately $155.1 million. Ariix is an international direct selling business that provides products in the health and wellness industry for complete and balanced nutrition, weight loss management, water and air filtration, personal care products, essential oils, and anti-aging skincare. To fund the cash payments required under the amended and restated merger agreement with Ariix, we replaced our debt agreement with East West Bank Loan Agreement
On MarchJanuary 29, 2019,2021, we entered into a Loan and Security Agreementletter of clarification (the “Loan Agreement”“Clarification Letter”) with East West Bank (“EWB”).to the Ariix merger agreement. The Loan Agreement matures on March 29, 2023 and provides forClarification Letter explained the intent of the parties as of the Ariix Closing date whereby (i) a term loan inrestricted cash account of Ariix with a Chinese bank that had a balance of $3.1 million as of the aggregate principal amountAriix Closing Date remained an asset of $15.0 million, which may be increased to $25.0 subjectthe Sellers and, accordingly, was not conveyed to the satisfaction of certain conditions (the “Term Loan”)Company, and (ii) a $10.0 million revolving loan facility (the “Revolving Loan Facility”). Atthe number of shares of our Common Stock issuable to the sellers on the first anniversary of the closing EWB funded $25.0date was reduced by 0.5 million to us consistingshares. In addition, the impact of the $15.0$3.1 million Term Loan and $10.0 as an advance underreduction of restricted cash reduced the Revolving Loan Facility.
On February 9, 2021, we notified Roth Capital Partners LLC of our assetselection to terminate the ATM Agreement that was a significant source of liquidity in 2019 and guaranteed by certain of our subsidiaries
On February 16, 2021, we entered into a securities purchase agreement in connection with a private placement for an initial noncancelable termaggregate of seven years,approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares of our Common Stock. At the closing on February 22, 2021, we received gross proceeds of approximately $58.0 million. After deducting placement agent fees, we received net proceeds of approximately $53.9 million.
On March 3, 2021, we entered into a Modification and Transition Addendum to Employment Agreement and Indemnification Agreement with an option atGregory A. Gould, our discretionChief Financial Officer (the “Gould Agreement”). The Gould Agreement amends the employment agreement with Mr. Gould whereby he will continue to extendserve as our Chief Financial Officer until July 2, 2021. The Agreement also modifies the lease termIndemnification Agreement, dated December 28, 2019, between the Company and Mr. Gould. As part of the transition, Mr. Gould will receive additional cash compensation and a grant of stock options for 20 additional years. The monthly lease cost is ¥20125,000 shares of Common Stock that vest on July 2, 2021.
On March 4, 2021, we entered into a letter of intent to acquire Aliven Inc. (“Aliven”), a Japan-based direct selling company. Aliven currently generates approximately $20 million (approximately $181,000 asin annualized net revenue with more than 100,000 customers and Brand Partners. Aliven sells a portfolio of March 22, 2019)differentiated healthy products including skin care products infused with cultured stem cells, nutritional products, and their patented far-infrared technology products designed for reduction of localized pain. Consideration for the initial seven-year term.
These recent developments are obligated to pay $25.0 million to the former stockholders of Morinda to eliminate the contingent financing liability incurreddiscussed further under the business combination. After these payments, income taxes, post-closing repair obligations,caption Liquidity and transaction costs, the net proceeds from the sale leaseback are expected to be between $9.0 million and $12.0 million.
Key Components of Consolidated Statements of Operations
Net Revenue.
Cost of goods sold.
Cost of goods sold primarily consists ofSelling, general and administrative expenses.
Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for our administrative, human resources, finance and accounting employees, and executives. General and administrative expenses also include contract labor and consulting costs,Commissions. Commissions earned by our Brand Partners are charged to expense in the same period that the related sales transactions are recognized.
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Depreciation and amortization expense. Depreciation and amortization expense is comprised of depreciation expense related to property and equipment, amortization expense related to leasehold improvements, and amortization expense related to identifiable intangible assets.
Loss on disposal of Divested Business. In September 2020, we sold our BWR reporting unit along with substantially all of our U.S. retail brands. The loss that resulted from the disposal is presented as a separate component of our operating expenses.
Business combination expenses.
When we enter into business combinations, the acquisition-related transaction costs are accounted for as expenses in the periods in which such costs are incurred.Impairment expense.
Interest expense.
Interest expense is incurred under our revolving credit facilities, term debt, Senior Notes, and other debt obligations. The components of interest expense include the amount of interest payable in cash at the stated interest rate,Gain (loss) on change in fair value of embedded derivatives.
Interest and other income (expense), net.
Gain from sale of property and equipment.
Gains from the sale of property and equipment are reflected in the period that the sale transaction closes.Income tax expense.
The provision for income taxes is based on the amount of our taxable income and enacted federal, state and foreign tax rates, as adjusted for allowable credits and deductions.| 27 |
Results of Operations
Comparison of Years ended December 31, 2020 and 2019
Our consolidated statements of operations for the years ended December 31, 20182020 and 2017,2019 are presented below (dollars in thousands):
| 2020 | 2019 | Change | ||||||||||
| Net revenue | $ | 279,471 | $ | 253,708 | $ | 25,763 | ||||||
| Cost of goods sold | 101,982 | 101,001 | 981 | |||||||||
| Gross profit | 177,489 | 152,707 | 24,782 | |||||||||
| Gross margin | 64 | % | 60 | % | ||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | 113,209 | 114,982 | (1,773 | ) | ||||||||
| Commissions | 85,877 | 75,961 | 9,916 | |||||||||
| Depreciation and amortization expense | 8,515 | 8,382 | 133 | |||||||||
| Loss on disposal of Divested Business | 3,446 | - | 3,446 | |||||||||
| Business combination expense (gain): | ||||||||||||
| Financial advisor and other transaction costs | 895 | - | 895 | |||||||||
| Gain on change in fair value of earnout obligations | - | (13,809 | ) | 13,809 | ||||||||
| Long-lived asset impairment expense: | ||||||||||||
| Right-of-use assets | 400 | 2,265 | (1,865 | ) | ||||||||
| Goodwill and identifiable intangible assets | - | 44,925 | (44,925 | ) | ||||||||
| Total operating expenses | 212,342 | 232,706 | (20,364 | ) | ||||||||
| Operating loss | (34,853 | ) | (79,999 | ) | 45,146 | |||||||
| Non-operating income (expense): | ||||||||||||
| Interest expense | (4,036 | ) | (3,677 | ) | (359 | ) | ||||||
| Gain (loss) from change in fair value of derivatives, net | (213 | ) | 371 | (584 | ) | |||||||
| Interest and other income (expense), net | 1,653 | (227 | ) | 1,880 | ||||||||
| Gain from sale of property and equipment | - | 6,365 | (6,365 | ) | ||||||||
| Loss before income taxes | (37,449 | ) | (77,167 | ) | 39,718 | |||||||
| Income tax expense | (1,895 | ) | (12,668 | ) | 10,773 | |||||||
| Net loss | $ | (39,344 | ) | $ | (89,835 | ) | $ | 50,491 | ||||
Presented below is our net revenue, cost of goods sold, gross profit (loss) and gross margin by segment for the years ended December 31, 2020 and 2019 (dollars in thousands):
| Direct / Social Selling Segment | Direct Store Segment | |||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | Percent | 2020 | 2019 | Change | Percent | |||||||||||||||||||||||||
| Net revenue | $ | 222,130 | $ | 200,708 | $ | 21,422 | 11 | % | $ | 57,341 | $ | 53,000 | $ | 4,341 | 8 | % | ||||||||||||||||
| Cost of goods sold | 53,105 | 45,023 | 8,082 | 18 | % | 48,877 | 55,978 | (7,101 | ) | (13 | )% | |||||||||||||||||||||
| Gross profit (loss) | $ | 169,025 | $ | 155,685 | $ | 13,340 | 9 | % | $ | 8,464 | $ | (2,978 | ) | $ | 11,442 | (384 | )% | |||||||||||||||
| Gross margin | 76 | % | 78 | % | 15 | % | (6 | )% | ||||||||||||||||||||||||
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As discussed above under the caption Operating Segment Overview, on September 24, 2020, we sold BWR and the Brands Division. The Divested Business was a component of our Direct Store segment and is included in our consolidated statements of operations from the date of acquisition through the disposal date. Presented below is a summary of the combined operating loss of the Divested Business for the years ended December 31, 2020 and 2019 (in thousands):
| 2020 | 2019 | |||||||
| Net revenue | $ | 10,707 | $ | 11,244 | ||||
| Cost of goods sold | 12,085 | 22,670 | ||||||
| Gross loss | (1,378 | ) | (11,426 | ) | ||||
| Operating expenses: | ||||||||
| Selling, general and administrative | (5,772 | ) | (4,147 | ) | ||||
| Commissions | (125 | ) | (159 | ) | ||||
| Depreciation and amortization expense | (85 | ) | (1,620 | ) | ||||
| Gain from change in fair value of earnout obligations | - | 900 | ||||||
| Long-lived asset impairment expense | - | (44,925 | ) | |||||
| Operating loss | $ | (7,360 | ) | $ | (61,377 | ) | ||
Beginning on September 25, 2020, the Direct Store segment is primarily comprised of our legacy DSD and e-commerce lines of business (the “Retained Business”) and our corporate overhead activities. Please refer to the captions below for further discussion with respect to our net revenue, cost of goods sold, gross profit and gross margin by segment, including the results of operations of the Divested Business and the Retained Business of the Direct Store segment.
Net Revenue. Net revenue increased from $253.7 million for the year ended December 31, 2019 to $279.5 million for the year ended December 31, 2020, an increase of $25.8 million or 10%. For the year ended December 31, 2020, the increase in net revenue was primarily attributable to $32.0 million of net revenue generated by Ariix for the period from the closing date for this acquisition on November 16, 2020 through December 31, 2020.
Net revenue for the Direct / Social Selling segment increased by $21.4 million from $200.7 million for the year ended December 31, 2019 to $222.1 million for the year ended December 31, 2020. This increase was attributable to $32.0 million of net revenue from the Ariix reporting unit, partially offset by a reduction in net revenue of $10.6 million for the legacy portion of the Direct / Social Selling segment. We believe the decrease in net revenue for the legacy portion of the Direct / Social Selling segment was primarily caused by lower quantities of products purchased by consumers during the COVID-19 pandemic and the related mass quarantines and government mandated stay-in-place orders that were in effect beginning in March 2020. Our direct-to-consumer selling model typically relies heavily on the use of our Brand Partner sales force in close contact with our customers. However, the COVID-19 pandemic required alternative selling approaches, such as through social media, which was less effective than in-person selling in certain regions. As a result, the legacy portion of the Direct / Social Selling segment’s net revenue decreased by 5% for the year ended December 31, 2020. The geographic breakdown of this decrease was 18% in China, 2% in Japan, and 11% in all other foreign countries as a group. However, the legacy portion of the Direct / Social Selling segment’s net revenue in the United States increased by 12% for the year ended December 31, 2020. In addition to the impact of COVID-19, we believe our net revenue in China related to the legacy portion of the Direct / Social Selling segment was negatively impacted by the introduction in May 2020 of a new compensation plan for our Brand Partners, which typically results in tentative buying patterns until the mechanics of the new plan are fully understood.
Net revenue for the Direct Store segment increased by $4.3 million from $53.0 million for the year ended December 31, 2019 to $57.3 million for the year ended December 31, 2020. This increase was primarily attributable to an increase in net revenue for the Retained Business of the Direct Store segment of $4.9 million from $41.7 million for the year ended December 31, 2019 to $46.6 million for the year ended December 31, 2020. The increase in net revenue for the Retained Business of the Direct Store segment was primarily attributable to increased net revenue by our DSD business due to new customers and expansion of the product portfolio. For the year ended December 31, 2020, net revenue for the Divested Business of the Direct Store segment decreased by approximately $0.5 million from $11.2 million for the year ended December 31, 2019 to $10.7 million for the year ended December 31, 2020. This decrease in net revenue for the Divested Business of the Direct Store segment was due to a reduction of $2.0 million in net revenue related to our U.S. retail brands, partially offset by an increase of $1.5 million in net revenue related to BWR that was included in our operating results for approximately nine months in 2020 compared to six months in 2019.
Cost of goods sold. Cost of goods sold increased from $101.0 million for the year ended December 31, 2019 to $102.0 million for the year ended December 31, 2020, an increase of $1.0 million. Cost of goods sold for the Direct/ Social Selling segment increased by $8.1 million, partially offset by a decrease in cost of goods sold of $7.1 million for the Direct Store segment.
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Cost of goods sold for the Direct / Social Selling segment increased by $8.1 million or 18% for the year ended December 31, 2020. This increase was primarily attributable to the cost of products sold by Ariix of $8.1 million after the closing date on November 16, 2020. Cost of goods sold for the legacy business of the Direct / Social Selling segment was unchanged in comparison to the 5% reduction in net revenue as discussed above. For the year ended December 31, 2020, the legacy business of the Direct / Social Selling segment recognized an increase in excess and obsolete and other inventory variances of $0.9 million compared to the year ended December 31, 2019. For the year ended December 31, 2019, the Direct / Social Selling segment also had a non-recurring charge to cost of goods sold of $2.1 million that related to the sale of inventories acquired as part of the Morinda business combination that closed in December 2018. The fair value of work-in-process and finished goods inventories on the closing date of the Morinda business combination exceeded the historical carrying value, which represented an element of built-in profit on the closing date that was charged to cost of goods sold as the related inventories were sold for the year ended December 31, 2019. In order to partially mitigate the effects of COVID-19 for the year ended December 31, 2020, we offered additional discounts and promotions that are reflected in cost of goods sold. The effects of these higher discounts and promotions compared to the year ended December 31, 2019 contributed to cost of goods sold that were unchanged, whereas net revenue for the legacy business of the Direct / Social Selling segment decreased by 5%.
Cost of goods sold for the Direct Store segment decreased by $7.1 million from $56.0 million for the year ended December 31, 2019 to $48.9 million for the year ended December 31, 2020. Cost of goods sold for the Divested Business decreased by approximately $10.6 million from $22.7 million for the year ended December 31, 2019 to $12.1 million for the year ended December 31, 2020. This decrease was primarily attributable to a reduction in write-offs related to cost of goods sold and excess and obsolete inventories of $6.0 million, plus a reduction in product costs associated with a 5% decrease in net revenue for the Divested Business. Cost of goods sold for the Retained Business increased by $3.5 million or 10%, from $33.3 million for the year ended December 31, 2019 to $36.8 million for the year ended December 31, 2020. The increase in cost of goods sold for the Retained Business was primarily attributable to higher product costs associated with a 12% increase in net revenue.
Gross profit. Gross profit increased from $152.7 million for the year ended December 31, 2019 to $177.5 million for the year ended December 31, 2020, an increase of $24.8 million or 16%. The increase in gross profit consisted of $13.3 million for the Direct/ Social Selling segment and $11.4 million for the Direct Store segment. The improvement in gross profit for the Direct/ Social Selling segment was attributable to $24.0 million of gross profit generated by Ariix after the closing date for this acquisition on November 16, 2020. The legacy business of the Direct/ Social Selling segment experienced a 7% reduction in gross profit due to lower sales due to the COVID-19 pandemic in combination with our increased use of discounts and promotions.
The Direct Store segment accounted for an increase in gross profit of $11.4 million for the year ended December 31, 2020, driven by net revenue that increased by 8% whereas cost of goods sold decreased by 13%. The Divested Business accounted for approximately $1.4 million and $11.4 million of negative gross profit for the years ended December 31, 2020 and 2019, respectively. The Retained Business accounted for gross profit of approximately $8.4 million and gross margin of 20% for the year ended December 31, 2019, compared to gross profit of $9.8 million and gross margin of 21% for the year ended December 31, 2020.
Consolidated gross margin improved from 60% for the year ended December 30, 2019 to 64% for the year ended December 31, 2020. Gross margin for the Direct/ Social Selling segment decreased from 78% to 76%, whereas gross margin for the Direct Store segment increased from negative 6% for the year ended December 31, 2019 to positive 15% for the year ended December 31, 2020.
Selling, general and administrative expenses. SG&A expenses decreased from $115.0 million for the year ended December 31, 2019 to $113.2 million for the year ended December 31, 2020, a decrease of $1.8 million. This decrease was comprised of reductions in marketing costs of $7.1 million, stock-based compensation expense of $1.7 million, occupancy costs of $1.0 million, and travel costs of $0.8 million. These decreases in SG&A expense totaled $10.6 million and were partially offset by increases in (i) severance costs of $2.6 million, (ii) professional fees of $2.5 million that was driven by higher auditing, consulting costs and legal fees, (iii) cash-based compensation of $1.8 million, (iv) general business expenses of $0.9 million that was partially driven by higher director and officer insurance costs in 2020, and (v) communications expense of $0.8 million.
We incurred severance costs of $2.6 million in connection with restructuring plans initiated in April and August 2020 that resulted in the termination of approximately 150 employees. The annualized compensation cost for these terminated employees amounted to approximately $9.6 million. In addition, the Divested Business accounted for approximately $5.7 million and $5.8 million of our SG&A for the years ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2020, cash-based compensation and benefits increased due to the addition of Ariix employees which accounted for $3.9 million of compensation costs, and approximately $0.7 million related to BWR. These increases totaling $4.6 million were partially offset by approximately $2.8 million that was primarily related to savings from the restructuring plans initiated in April and August 2020, resulting in a net increase in cash-based compensation and benefits of $1.8 million for the year ended December 31, 2020.
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Change | ||||
2018 | 2017 | Amount | Percent | |
| Net revenue | $52,160 | $52,188 | $(28) | 0% |
| Cost of goods sold | 42,865 | 39,788 | 3,077 | 8% |
| Gross profit | 9,295 | 12,400 | (3,105) | -25% |
| Operating expenses: | ||||
| Commissions | 2,781 | 1,456 | 1,325 | 91% |
| General and administrative | 20,288 | 15,387 | 4,901 | 32% |
| Business combination expenses: | ||||
| Financial advisor and other transaction costs | 3,189 | 232 | 2,957 | (1) |
| Change in fair value of earnout obligations | 100 | - | 100 | (1) |
| Depreciation and amortization expense | 2,310 | 1,606 | 704 | 44% |
| Total operating expenses | 28,668 | 18,681 | 9,987 | 53% |
| Operating loss | (19,373) | (6,281) | (13,092) | 208% |
| Non-operating income (expenses): | ||||
| Interest expense | (1,068) | (228) | (840) | 368% |
| Loss from change in fair value of embedded derivatives | (470) | - | (470) | (1) |
| Other income (expense), net | (151) | (300) | 149 | -50% |
| Gain from sale of building | - | 3,273 | (3,273) | -100% |
| Loss before income taxes | (21,062) | (3,536) | (17,526) | 496% |
| Income tax expense | 8,927 | - | 8,927 | (1) |
Net loss | $(12,135) | $(3,536) | $(8,599) | 243% |
Commissions. Commissions were $85.9 million for the year ended December 31, 2020 compared to $76.0 million for the year ended December 31, 2019, an increase of $9.9 million. For the year ended December 31, 2020, commissions for the Direct / Social Selling segment consisted of $13.7 million related to our November 2020 acquisition of Ariix and $70.1 million for the legacy business of the Direct / Social Selling segment. Commissions for the legacy business decreased by $4.3 million or 6%, which was in line with the 5% decrease in net revenue discussed above. Commissions related to the Direct Store segment increased by $0.5 million primarily due to increased net revenue for the Retained Business of that segment.
Depreciation and amortization expense. Depreciation and amortization expense included in operating expenses increased from $8.4 million for the year ended December 31, 2019 to $8.5 million for the year ended December 31, 2020, an increase of $0.1 million. This increase was attributable to amortization expense of $1.4 million related to identifiable intangible assets of $131.8 million acquired in our business combination with Ariix in November 2020. The increase in amortization expense related to the Ariix acquisition was offset by lower amortization expense related to the Direct Store segment due to impairment charges in December 2019 that eliminated the net carrying value of substantially all of the intangible assets of the Direct Store segment.
Loss on disposal of Divested Business. On September 24, 2020, we sold our BWR subsidiary and substantially all U.S. retail brands and recognized a loss of $3.4 million. These businesses incurred combined operating losses of $7.4 million and $61.4 million for the years ended December 31, 2020 and 2019, respectively.
Business combination expense (gain). We incurred acquisition related expenses of $0.9 million for the year ended December 31, 2020 whereas no amountsacquisition related expenses were incurred for the year ended December 31, 2017.
In connection with the Morinda business combination, we were obligated to make an earnout payment referred to as a Milestone Dividend up to an aggregate of $15.0 million if the Adjusted EBITDA of Morinda was at $52.2 million for the years ended December 31, 2018 and 2017. Net revenue for the New Age segment decreased from $52.2least $20.0 million for the year ended December 31, 20172019. The estimated fair value of the Milestone Dividend decreased by approximately $12.9 million from $13.1 million as of December 31, 2018 to $48.3approximately $0.2 million as of December 31, 2019. This reduction in the fair value of the Milestone Dividend resulted in a gain of approximately $12.9 million for the year ended December 31, 2018, a decrease of $3.8 million or 7%. The decrease in net revenue for the New Age segment was primarily attributable to an increase in discounts and allowances of $2.5 million which was driven by the negative impact related to working capital constraints during 2018, which severely constricted inventory levels and the Company’s ability to meet the demands of major distributors and retailers. The other major impact between gross and net revenue level was an increase in billbacks and discounts from one of our major distributors where we were impacted by significant charges on shipments we shorted because of our inventory challenges, and we faced a high level of changeover charges related to the Coco-Libre brand.2019. For the year ended December 31, 2018,2020, we did not have any gain or loss on the Morinda acquisition contributed net revenuechange in fair value of $3.8 million forearnout obligations.
Impairment expense. During the post acquisition period from December 21, 2018 throughfourth quarter of 2020, we performed our annual goodwill impairment testing and determined that no impairment of goodwill existed as of December 31, 2018.
During the fourth quarter of 2019, we performed our annual goodwill impairment testing. Our qualitative assessment indicated that impairment may exist for each reporting unit within the Direct Store segment. Therefore, as of December 31, 2019 we also performed a quantitative assessment of the fair value of each of our reporting units within the Direct / Social Selling and Direct Store segments. The primary basis for our quantitative assessment was based in part on a valuation report for all of our reporting units that was performed by an increaseindependent specialist. The result of $2.2this valuation resulted in an aggregate impairment charge of $44.9 million or 5%. This increase in costto eliminate the net carrying value of goods sold was due to higher product costs since we were making smaller production runsall goodwill and buying raw materials in smaller amounts on the spot market, so we were not getting economies of scale with our product which wassubstantially all identifiable intangible assets related to our working capital constraints during 2018.
Interest expense. Interest expense increased from December 21, 2018 through December 31, 2018.
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For the year ended December 31, 2019, interest expense of $3.7 million was primarily attributable to (i) termination of the revolving credit facility with Siena Lending Group LLC (the “Siena Revolver”) which resulted in a make-whole prepayment penalty of $0.5 million, (ii) accretion of discount and amortization expense.
Gain (loss) from change in fair value of derivatives, net. For the year ended December 31, 2020, we recognized a loss from the change in fair value of derivatives of $0.2 million whereas we recognized a gain of $0.4 million for the year ended December 31, 2018,2019. In July 2019, we entered into an increaseinterest rate swap agreement with EWB (as defined below). This swap agreement provided for a total notional amount of $0.7 million. This increase was$10.0 million at a fixed interest rate of approximately 5.4% through May 1, 2023, in exchange for a floating rate indexed to the prime rate plus 0.5%. For the year ended December 31, 2020, we recognized a loss of $0.2 million from this interest rate swap agreement due to (i) an increasea decline in interest rates. In December 2020, we terminated the swap agreement in connection with the termination of the EWB Credit Facility.
For the year ended December 31, 2019, we recognized a gain of $0.5 million due to full yearfrom the change in fair value of amortization expense in 2018 related to approximately $20.0 million of identifiable intangible assets associated with the Maverick, PMC and Marley acquisitions that closed in the first half of 2017, and (ii) approximately $0.2 million of depreciation and amortizationembedded derivatives related to the Morinda acquisition for the post acquisition period from December 21, 2018 through December 31, 2018. DueSiena Revolver that was terminated in March 2019, partially offset by a loss related to the Morinda acquisition, we expect a significant increase in depreciationour interest rate swap agreement of approximately $0.1 million.
Interest and amortization expense for the year ending December 31, 2019.
Gain from sale of building.
Income tax expense.
For the year ended December 31, 2020, we recognized income tax expense of $1.9 million, which primarily consisted of foreign income taxes associated with profitable foreign markets. Due to the establishment of a valuation allowanceFor the year ended December 31, 2018,2019, we recognized anincome tax expense of $12.7 million, which consisted of foreign income taxes of $17.6 million, partially offset by a net deferred income tax benefit of $8.9$4.9 million. Foreign income taxes consisted of approximately $11.9 million that was incurred in March 2019 due to our sale leaseback of the building that serves as Morinda’s Japanese headquarters, and the remaining $5.7 million was primarily attributable to profitable operations in foreign jurisdictions.
Inflation and changing prices. For the years ended December 31, 2020 and 2019, the impact of inflation and changing prices have not had a result of deferred income tax liabilities of $9.9 million recorded in connection with the Morinda business combination. We determined thatsignificant impact on our net revenue, cost of goods sold and operating loss carryforwards will offset any income tax expense related the deferred income tax liabilities for Morinda. Accordingly, we recognized an $8.9 million deferred income tax benefit forexpenses.
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Liquidity and Capital Resources
Overview
For the year ended December 31, 2018.
On November 16, 2020, we completed our business combination with Ariix for total purchase consideration with an estimated fair value of approximately $155.1 million. As a result of the closing, we were obligated to issue 19.7 million shares of our Common Stock and to pay $10.0 million to the Sellers. These shares were issued and substantially all of the cash was paid in February 2021. Pursuant to the amended merger agreement and exclusive of the impact of the working capital adjustment discussed below, we were required to seek approval from our stockholders to issue up to 40.1 million shares of $40.9 million. Forour Common Stock to settle the year ended December 31, 2018,remainder of the merger consideration. If our stockholders fail to approve the issuance of the aggregate of up to 40.1 million shares of Common Stock at up to three stockholder meetings held after the closing date, we incurred a net losswill be required to make cash payments of $12.1$163.3 million andwithin 90 days after the third stockholder meeting.
On May 16, 2021, we are required to either pay up to $10.0 million in cash used in operating activities was $22.0 million.
On January 29, 2021, entered into a letter of clarification that explained the intent of the parties whereby (i) a restricted cash account of Ariix with a Chinese bank that had a balance of $3.1 million remained an asset of the Sellers, and (ii) the number of shares of our Common Stock issuable to the Sellers on the first anniversary of the closing date was reduced by 0.5 million shares. In addition, the impact of the $3.1 million reduction of restricted cash reduced the number of shares issuable by 0.6 million shares due to the impact of the working capital adjustment.
On November 30, 2020, we entered into a securities purchase agreement for a private placement of our (i) 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million (the “Senior Notes”), (ii) 800,000 shares of Common Stock (the “Commitment Shares”), (iii) Class A Warrants to purchase 750,000 shares of Common Stock exercisable at $3.75 per share (the “Class A Warrants”), and (iv) Class B Warrants to purchase 750,000 shares of Common Stock exercisable at $5.75 per share (the “Class B Warrants,” and together with the Class A Warrants, the “Warrants”). The Warrants are exercisable until December 1, 2025. At the closing, we received net proceeds of $28.7 million from the private placement. Approximately $14.1 million of the proceeds was used to repay all outstanding principal to terminate our Credit Facility with East West Bank, including the termination of an interest rate swap agreement for $0.4 million and a prepayment fee of $0.1 million.
On February 16, 2021, we entered into a securities purchase agreement in connection with a private placement of an aggregate of approximately 14.6 million shares of our Common Stock and warrants to purchase an aggregate of 7.3 million shares of our Common Stock. At the closing, we received net proceeds of approximately $53.9 million.
On March 3, 2021, we entered into the Gould Agreement with Gregory A. Gould, our Chief Financial Officer that amends the employment agreement with Mr. Gould whereby he will onlycontinue to serve as our Chief Financial Officer until July 2, 2021. The Agreement also modifies the Indemnification Agreement, dated December 28, 2019, between the Company and Mr. Gould. As part of the transition, Mr. Gould will receive additional cash compensation in excess of $1.4 million and a grant of stock options for 125,000 shares of Common Stock that vest on July 2, 2021. Pursuant to the Senior Notes, we are required to replace Mr. Gould with a suitable candidate to serve as our Chief Financial Officer within 120 days of Mr. Gould’s termination date. The failure to replace Mr. Gould with an individual reasonably acceptable to the lenders would result in an event of default under the Senior Notes. We expect to hire a suitable replacement for Mr. Gould by the prescribed deadline.
On March 4, 2021, we entered into a letter of intent to acquire Aliven, a Japan-based direct selling company that currently generates approximately $20 million in annualized net revenue with more than 100,000 customers and Brand Partners. Consideration for the acquisition of Aliven is approximately 1.1 million shares of our Common Stock with no material cash payments expected. Completion of the proposed transaction is subject to negotiation and execution of a definitive agreement and the satisfaction of customary conditions to closing.
As shown below under the caption Contractual Obligations, cash payments will be required to satisfy $25.8settle obligations of approximately $42.2 million of these contractual obligations from our existing capital resources as the $25.0 million payable is netted from the sales proceeds from the sale leaseback of our Japanese building that is discussed in Note 16 to our consolidated financial statements included in Item 8 of this Report. We expect the net proceeds from the sale leaseback will range between $9.0 million and $12.0 million.
We believe the current portion of our cash and restricted cash resources of $42.5$53.7 million, (ii) up to $12.0 million of net proceeds fromcombined with the Japanese sale leaseback, and (iii) net proceeds of approximately $22.4$53.9 million from the East West Bank loan (net of payoff of the Siena Revolver) as discussed below,private placement completed in February 2021, will be sufficient to fund our contractual obligations and working capital requirements andfor the remainder ofnext 12 months.
Please refer to the sections below for further discussion about our net contractual obligations of $19.1 million.
February 2021 Private Placement
On February 16, 2021, we entered into a loansecurities purchase agreement in connection with a private placement for the issuance of an aggregate of approximately 14.6 million shares of Common Stock and security agreement with Siena Lending Groupwarrants to purchase an aggregate of 7.3 million shares (the “Warrant Shares”) of Common Stock. At the closing on February 19, 2021, we received gross proceeds of approximately $58.0 million. Roth Capital Partners, LLC (“Siena”) that providedacted as the exclusive placement agent in exchange for a $12.0fee equal to 7% of the gross proceeds. After deducting the placement agent fees, the net proceeds were approximately $53.9 million.
The warrants have an initial exercise price of $5.00 per share, subject to adjustment in certain circumstances. The warrants are exercisable until the third anniversary of the effectiveness of a registration statement required to be filed within 30 days after the closing pursuant to a separate registration rights agreement. Exercise of the warrants is subject to a beneficial ownership limitation of 4.99% (or 9.99% at the option of the Purchasers).
Pursuant to the registration rights agreement, we agreed to file an initial registration statement on Form S-3 covering the resale of the shares of Common Stock and the Warrant Shares with the SEC by March 18, 2021. We also agreed that the registration statement must be declared effective by the SEC and effectiveness must be maintained within prescribed deadlines set forth in the registration rights agreement. If we fail to comply with these requirements, the investors are entitled to liquidated damages equal to 2.0% of the aggregate subscription amount on each 30-day anniversary of such failure.
Senior Notes
The Senior Notes bear interest at an annual rate of 8.0% applied to the contractual principal balance with such accrued interest payable in cash commencing on December 31, 2020 and continuing monthly thereafter. The aggregate discount related to the Senior Notes was approximately $8.5 million revolving credit facility (the “Siena Revolver”) with a scheduledbased on the contractual principal balance of $32.4 million and the net carrying value of $23.9 million on the closing date. The discount is being accreted to interest expense using the effective interest method that results in an overall effective interest rate of approximately 42.3%, including the 8.0% stated rate.
For the months of February 2021 through May 2021, the holders of the Senior Notes are entitled to request that we make principal payments up to $1.0 million per month. Beginning in June 2021 and continuing for each subsequent month, the holders of the Senior Notes are entitled to request that we make principal payments of up to $2.0 million per month. All principal payments are required to be paid within five business days of the date that notice is provided by the holders of the Senior Notes. The maturity date of the Senior Notes is on December 1, 2022. However, if the holders of the Senior Notes continue to exercise their rights to demand the maximum principal payments permitted in each month, the Senior Notes would be repaid in full by August 10,2022. We may prepay all or a portion of the outstanding principal amount of the Senior Notes at any time, subject to a prepayment fee of 3.0% of the outstanding principal balance through December 1, 2021.
Our obligations under the Senior Notes are secured by substantially all of our assets, including all personal property and all proceeds and products thereof, goods, contract rights and other general intangibles, accounts receivable, intellectual property, equipment, and deposit accounts and a lien on certain real estate. We were required to maintain restricted cash balances of $18.0 million until February 2021. Beginning in February 2021, the requirement to maintain restricted cash balances was reduced to $8.0 million until such time that the outstanding principal balance of the Senior Notes is reduced below $8.0 million without regard to the unaccreted discount. The Senior Notes contain certain restrictions and covenants, which restrict the Company’s ability to incur additional debt or make guarantees, sell assets, make investments or loans, make distributions or create liens or other encumbrances. The Senior Notes also require that we comply with certain financial covenants, including maintaining minimum cash, minimum adjusted EBITDA, minimum revenue, and a maximum ratio of cash in foreign bank accounts to cash in U.S. deposit accounts subject to account control agreements.
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The Senior Notes contain customary events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults, material adverse effect defaults, change of management defaults, and a change in control. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become immediately due and payable and interest on the obligations increases to an annual rate of 12.0%.
As a post-closing deliverable, we were required to provide certain historical financial statements of Ariix to the lenders by January 4, 2021. The required financial statements were not available by the deadline, which would have resulted in a default under the securities purchase agreement. The lenders agreed to amend the Senior Notes to extend the deadline in exchange for the issuance of 400,000 shares of Common Stock with a fair value of approximately $1.1 million as of the issuance date. The amendment fee of $1.1 million will be accounted for as an additional discount related to the Senior Notes in the first quarter of 2021.
PPP Loans
Pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “Maturity Date”“CARES Act”), we obtained a PPP Loan in April 2020 for approximately $6.9 million. Ariix also obtained a PPP loan for approximately $2.8 million that we assumed in connection with our business combination that closed on November 16, 2020. The PPP Loans are unsecured and guaranteed by the U.S. Small Business Administration (“SBA”), bear interest at a fixed rate of 1.0% per annum and provide for a maturity date in two years. Ariix applied for forgiveness of its PPP loan in 2020 and we intend to apply for forgiveness of our other PPP Loan in 2021. The amount that is subject to forgiveness is equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred during the permitted period as calculated in accordance with the terms of the CARES Act. The eligibility for the PPP Loans, expenditures that qualify toward forgiveness, and the final balance of the PPP Loans that may be forgiven are subject to audit and final approval by the SBA. To the extent that all or part of the PPP Loan is not forgiven, all accrued interest and principal will be payable on the maturity dates in the second quarter of 2022. The terms of the PPP Loans provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loans may be accelerated upon the occurrence of an event of default, including if the SBA subsequently reaches an audit determination that the eligibility criteria were not met.
ATM Offering
Pursuant to an At the Market Offering Agreement (the “ATM Offering Agreement”) with Roth Capital Partners, LLC (“Roth”), we sold an aggregate of 16.1 million shares of Common Stock for gross proceeds of approximately $25.8 million for the year ended December 31, 2020. Total commissions and other offering costs deducted from the gross proceeds were $0.8 million, resulting in net proceeds of $25.0 million. On February 9, 2021, we notified Roth of our election to terminate the ATM Agreement. On February 11, 2021, we entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), under which we may offer and sell from time-to-time up to an aggregate of approximately $53.5 million in shares of our Common Stock through AGP. However, the maximum number of shares that may be sold is currently limited to less than 3.0 million shares based on the number of authorized shares of Common Stock available as of February 28, 2021. Accordingly, we do not expect ATM Offerings will be a significant source of liquidity for us until such time that our stockholders approve an increase in the authorized number of shares of Common Stock.
East West Bank Credit Facility
On March 29, 2019, we entered into a credit facility with East West Bank (the “EWB Credit Facility”). Outstanding borrowingsThe EWB Credit Facility was scheduled to mature on March 29, 2023. However, on December 1, 2020 we terminated the EWB Credit Facility and repaid all outstanding principal, interest and fees from the proceeds received from the private placement consisting of the Senior Notes, Commitment Shares and the Warrants. The EWB Credit Facility provided for (i) a term loan in the original principal amount of $15.0 million (the “EWB Term Loan”) and (ii) a $10.0 million revolving loan agreement (the “EWB Revolver”). As of December 31, 2019, the outstanding principal balances were $14.8 million under the EWB Term Loan and $9.7 million under the EWB Revolver.
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Borrowings outstanding under the EWB Credit Facility initially provided for interest at the greater of (i) 7.5% or (ii) the prime rate plus 2.75%. AsPrime Rate (4.25% as of December 31, 2018,2019) plus 0.5%. Borrowing requests under the effective interest rate was 8.25%. Beginning in November 2018, weEWB Revolver were requiredsubject to pay interest onvarious customary conditions precedent, including satisfaction of a minimum of $2.0 million of borrowings, regardless of whether such funds had been borrowed.borrowing base test. The SienaEWB Revolver also provided for an unused line fee equal to 0.5% per annum of the undrawn portion of the $12.0 million commitment.portion. The Siena Revolver was subject to availability based on eligible accounts receivables and eligible inventory of the Company.
Our obligations under the endEWB Credit Facility were secured by substantially all of each fiscal year, commencingour assets. The EWB Credit Facility required compliance with the fiscal year endingcertain financial and restrictive covenants and included customary events of default. Key financial covenants included maintenance of minimum Adjusted EBITDA and a maximum Total Leverage Ratio. As of December 31, 2019, we are requiredwere not in compliance with the minimum Adjusted EBITDA covenant.
On March 13, 2020, we entered into the Third Amendment to make a payment towards the outstanding principal amountEWB Credit Facility whereby EWB waived our failure to comply with the minimum Adjusted EBITDA covenant for the 12-month period ended December 31, 2020. In addition, the Third Amendment modified the EWB Credit Facility as follows:
| ● | We were required to maintain an aggregate of $15.1 million in restricted cash accounts with EWB with subsequent reductions equal to future principal payments under the EWB Term Loan. | |
| ● | Less stringent requirements were applicable for future compliance with the minimum adjusted EBITDA covenant, the maximum total leverage ratio, and the fixed charge coverage ratio. | |
| ● | The existing provisions related to “equity cures” that may be employed to maintain compliance with financial covenants were increased from $5.0 million to $15.0 million for the year ending December 31, 2020. | |
| ● | We were required to obtain equity infusions for at least $15.0 million for the first six months of 2020, and a total of $30.0 million for the year ended December 31, 2020. | |
| ● | The interest rate applicable to our outstanding borrowings under the EWB Term Loan and the EWB Revolver increased to 2.0% in excess of the prime rate. |
Business Combination Liabilities
The table below summarizes the net carrying value and the range of cash settlements for the Term Loan in an amount equal to 35%Ariix business combination liabilities as of the Excess Cash Flow (as defined in the Loan Agreement), if the Total Leverage Ratio is less than 1.50 to 1.00 or (i) 50% of the Excess Cash Flow if the Total Leverage Ratio is greater than or equal to 1.50 to 1.00.
| Net | Maximum | |||||||
| Carrying | Cash | |||||||
| Value | Settlement | |||||||
| Business combination obligations to former owners of Ariix: | ||||||||
| Derivative liability | $ | 90,874 | (1) | $ | 163,265 | (1) | ||
| Consideration payable in cash in February 2021 | 10,000 | 10,000 | ||||||
| Assumed business combination obligations from Ariix: | ||||||||
| Variable payments in LIMU acquisition | 3,656 | (2) | 4,151 | (2) | ||||
| Variable payments in Zennoa acquisition | 2,196 | (3) | 2,500 | (3) | ||||
| Zennoa consideration payable in May 2021 | 850 | 850 | ||||||
| Total | $ | 107,576 | $ | 180,766 | ||||
| (1) | Pursuant to the Amended Ariix Merger Agreement (as defined in Note 4 to our consolidated financial statements included in Item 8 of this Report), we are required to seek approval from our shareholders to issue up to an aggregate of 40.1 million shares of Common Stock at up to three shareholder meetings held after November 16, 2020 (the “Ariix Closing Date”). If our shareholders fail to approve the settlement in shares of Common Stock, we will be required to make cash payments of $163.3 million within 90 days after the third shareholder meeting. This obligation to issue shares or pay cash is accounted for as derivative liability as of the Ariix Closing Date with a fair value of approximately $90.9 million. Key valuation assumptions included (i) historical volatility of our shares of Common Stock of 77%, (ii) a risk-free interest rate of approximately 0.1%, and (iii) the weighted average cost of capital for us of 16.5%. |
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| (2) | On May 31, 2019, Ariix completed a business combination with The LIMU Company, LLC (“LIMU”) that provided for a cash payment of $3.0 million on the closing date and $5.0 million of deferred consideration payable based on 5.0% of monthly post-closing sales related to the LIMU business. Through December 31, 2020, total payments made by Ariix and us amounted to approximately $0.8 million, resulting in a remaining balance due to the former owners of LIMU of $4.2 million. This obligation is collateralized and subject to a security agreement until the entire amount is paid in full. The net carrying value of $3.7 million represents the estimated fair value of this obligation. |
| (3) | On November 27, 2019, Ariix completed a business combination with Zennoa, LLC (“Zennoa”) that provided for fixed cash payments of $2.25 million and deferred consideration of $2.5 million that is payable based on annualized sales from the Zennoa business for the latest completed month (the “Zennoa Sales Metric”). Payments related to the deferred consideration commence in December 2020 and are computed using a variable percentage based on the Zennoa Sales Metric. No amounts are payable if the Zennoa Sales Metric is less than $6.0 million, and payments ranging from 3% to 5% of monthly sales are payable if the Zennoa Sales Metric exceeds $6.0 million. The net carrying value of the Zennoa deferred consideration of $2.2 million represents the estimated fair value of this obligation. |
Cash Flows Summary
Presented below is a summary of our operating, investing and financing cash flows for the years ended December 31, 2020 and 2019 (in thousands):
2018 | 2017 | Change | |
| Net cash provided by (used in): | |||
| Operating activities | $(21,831) | $(8,411) | $(13,420) |
| Investing activities | (29,438) | 6,227 | (35,665) |
| Financing activities | 96,401 | 1,940 | 94,461 |
| 2020 | 2019 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (34,251 | ) | $ | (31,801 | ) | ||
| Investing activities | 4,479 | 29,429 | ||||||
| Financing activities | 28,544 | 19,394 | ||||||
Cash Flows Provided byUsed in Operating Activities
For the years ended December 31, 20182020 and 2017,2019, we recognized net cash flows used in operating activities amounted to $21.8losses of $39.3 million and $8.4$89.8 million, respectively. The key components in the calculation offollowing adjustments are taken into account to reconcile our net loss to net cash used in operating activities for the years ended December 31, 20182020 and 2017, are as follows2019 (in thousands):
2018 | 2017 | Change | |
| Net loss | $(12,135) | $(3,536) | $(8,599) |
| Deferred income tax benefit | (8,927) | - | (8,927) |
| Non-cash and non-operating expenses, net | 7,596 | 163 | 7,433 |
| Changes in operating assets and liabilities, net | (8,365) | (5,038) | (3,327) |
| Total | $(21,831) | $(8,411) | $(13,420) |
| 2020 | 2019 | |||||||
| Net loss | $ | (39,344 | ) | $ | (89,835 | ) | ||
| Non-cash expenses | 25,311 | 71,840 | ||||||
| Non-cash gains | - | (25,489 | ) | |||||
| Net changes in operating assets and liabilities | (20,218 | ) | 11,683 | |||||
| Total | $ | (34,251 | ) | $ | (31,801 | ) | ||
For the years ended December 31, 2020 and 2019, we incurred total non-cash expenses of $25.3 million and $71.8 million, respectively. Significant non-cash expenses include long-lived asset impairment expense, depreciation and amortization expense, non-cash lease expense, and stock-based compensation expense. For the year ended December 31, 2018, our net loss2019, we recognized non-cash gains of $12.1$25.5 million that consisted of gains from changes in the fair value of earnout obligations of $13.8 million, a gain on sale of property and equipment of $6.4 million, and a non-cash deferred income tax benefit of $8.9 million resulted$4.9 million. We did not have any non-cash gains for the year ended December 31, 2020.
Net changes in combined negativeour operating assets and liabilities can have a significant impact on operating cash flow of $21.1 million. However, non-cash expenses partially mitigated this impact by $7.6 million.flow. For the year ended December 31, 2018, non-cash expenses2019, changes in operating assets and liabilities provided $11.7 million of $7.6 million included depreciation and amortization expenseoperating cash flow which was primarily due to an increase in foreign income taxes due to our sale of $2.3 million, stock-based compensation expense of $2.5 million, acquisition costs settledreal estate in shares of Common Stock for $1.2 million, accretion and amortization of debt discount and issuance costs of $0.8 million, and a loss from changeJapan in fair value of embedded derivatives of $0.5 million. Additionally, a cash expense for make-whole applicable premium of $0.2 million was classified as a financing cash outflow since it related to the prepayment of debt.
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Cash Flows from Investing Activities
For the year ended December 31, 2017,2020, cash flows usedprovided by investing activities was $4.5 million. This amount consisted of cash acquired in operatingour acquisition of Ariix of $7.4 million, net cash received from the buyer of the Divested Business of $0.4 million, and proceeds from the sale of equipment for $0.4 million for a total of $8.2 million. Investing cash outflows for the year ended December 31, 2020 consisted of capital expenditures for property and equipment of $2.5 million and a cash payment of $1.3 million in exchange for an unsecured promissory note received in connection with our sale of the Divested Business. Our capital expenditures included property and equipment for our Direct / Social Selling segment of $2.2 million, and capital expenditures for our Direct Store segment of $0.3 million. Capital expenditures for the Direct / Social Selling segment included manufacturing line improvements of $0.8 million in our China facility, and leasehold improvement of $1.1 million for a leased facility in Japan.
For the year ended December 31, 2019, cash provided by investing activities of $29.4 million was primarily driven by the sale leaseback of our land and building in Tokyo. The gross selling price was $57.1 million. After deducting commissions and other selling expenses of $1.9 million, the net proceeds amounted to $8.4$55.2 million. While we recognizedThe net proceeds attributable to investing activities included $36.2 million related to the sale of the property, and $1.3 million that was designated to fund future repair obligations for a total of $37.5 million. The remainder of the net lossproceeds of $3.5$17.6 million was a financial inducement to enter into a 20-year operating lease as discussed under Cash Flows from Financing Activities.
Investing cash outflows for the year ended December 31, 2019 included (i) capital expenditures for property and equipment of $5.4 million, (ii) a security deposit of $1.8 million withheld by the purchaser in the sale leaseback, and (iii) cash paid for our business combination with BWR for $1.0 million. Our capital expenditures included property and equipment for our Direct/ Social Selling segment of $4.2 million, and capital expenditures for our Direct Store segment of $1.2 million. Capital expenditures for the Direct/ Social Selling segment included leasehold improvements of $2.0 million to the Tokyo, Japan headquarters facility, manufacturing line improvements of $0.4 million in our China facility, and leasehold improvement for a new leased facility in Shanghai, China. Capital expenditures for the Direct Store segment included leasehold improvements related to our new distribution facility in Aurora, Colorado of $0.3 million, transportation equipment of $0.2 million, and furniture and office equipment primarily related to our new leased facilities in Aurora and Denver, Colorado for a total of $0.4 million.
Cash Flows from Financing Activities
Our financing activities generated net cash proceeds of $28.5 million for the year ended December 31, 2017, net non-cash expenses of $0.2 million mitigated the cash impact of our net loss. For the year ended December 31, 2017, non-cash expenses amounted to $3.4 million including depreciation and amortization expense of $1.6 million, stock-based compensation expense of $1.7 million, and accretion and amortization of debt discount and issuance costs of $0.1 million. These non-cash expenses of approximately $3.4 million were partially offset by a $3.3 million gain from sale of our building in Denver, Colorado.
Our financing activities generated net cash proceeds of $19.4 million for the year ended December 31, 2019. The principal sources of cash from our financing activities during 2019 consisted of (i) $61.3 million of borrowings, including $51.7 million under the EWB Credit Facility and $9.6 million under the Siena Revolver that was terminated in March 2019, (ii) net proceeds of $20.1 million from the issuance of approximately 6.0 million shares of Common Stock pursuant to the ATM Offering Agreement, (iii) proceeds of $17.6 million for the deferred lease financing obligation related to the sale leaseback of our land and building in Tokyo, and (iv) proceeds from the exercise of stock options of $0.6 million. These financing cash proceeds totaled $99.6 million and were partially offset by (i) principal payments under debt agreements of $43.9 million, including $29.2 million under the EWB Credit Facility, $9.7 million under the Siena Revolver, $2.6 million to repay a previous revolving line of credit for $5.7 million, (ii) principal payments of $4.8 million under athe mortgage that was repaid uponon the sale of our land and building in Denver, Colorado,Tokyo, and $2.4 million to terminate the line of credit assumed in the business combination with BWR, (ii) payment of Morinda business combination liabilities of $34.0 million, (iii) principalpayments for debt issuance costs of $1.0 million to obtain the EWB Credit Facility, (iv) payment of make-whole premium of $0.5 million as a result of the termination of the Siena Revolver, (v) cash payments of $4.5$0.5 million under a note payablefor offering costs related to the former ownersATM Offering Agreement, and (vi) cash payments to reduce a deferred lease financing obligation of Xing Beverage LLC$0.5 million as discussed below. The Siena Revolver was terminated on March 29, 2019 and was replaced by the EWB Credit Facility.
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As discussed above, the net proceeds received from the buyer of our land and building in Tokyo included $17.6 million that represented an inducement to enter into the related leaseback financing arrangement. Since we agreed to pay above market lease payments for the 20-year lease term in exchange for an up-front cash payment included in the selling price, we have recognized a deferred lease financing obligation for this amount. For financial reporting purposes, a portion of the monthly operating lease payments is not being recognized as rent expense, but rather is allocated to reduce this financial liability and recognize imputed interest expense. For the year ended December 31, 2019, $0.5 million of our lease payments was acquired in 2016, and (iv) principal payments on other installment notes payable of $0.6 million.
Contractual Obligations
The following table summarizes our contractual obligations on an undiscounted basis as of December 31, 2018,2020, and the period in which each contractual obligation is due:
| Year Ending December 31: | ||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||
| Operating lease obligations | $ | 9,283 | $ | 6,835 | $ | 5,939 | $ | 5,599 | $ | 5,487 | $ | 25,214 | $ | 58,357 | ||||||||||||||
| Business combination obligations: | ||||||||||||||||||||||||||||
| Former owners of Ariix: | ||||||||||||||||||||||||||||
| Cash payment due in February 2021 | 10,000 | - | - | - | - | - | 10,000 | |||||||||||||||||||||
| Derivative liability (1) | - | 163,265 | - | - | - | - | 163,265 | |||||||||||||||||||||
| Ariix LIMU and Zennoa acquisitions (2) | 1,750 | 900 | 900 | 900 | 900 | 1,352 | 6,702 | |||||||||||||||||||||
| Senior Notes: | ||||||||||||||||||||||||||||
| Principal (3) | 18,000 | 14,432 | - | - | - | - | 32,432 | |||||||||||||||||||||
| Interest expense (4) | 2,025 | 328 | - | - | - | - | 2,353 | |||||||||||||||||||||
| PPP loans | ||||||||||||||||||||||||||||
| Principal (5) | - | 9,649 | - | - | - | - | 9,649 | |||||||||||||||||||||
| Interest expense (5) | - | 193 | - | - | - | - | 193 | |||||||||||||||||||||
| Installment notes payable | 16 | - | - | - | - | - | 16 | |||||||||||||||||||||
| Unrecognized tax benefits (6) | - | - | - | - | - | 1,102 | 1,102 | |||||||||||||||||||||
| Employment agreements (7) | 1,150 | - | - | - | - | - | 1,150 | |||||||||||||||||||||
| Total | $ | 42,224 | $ | 195,602 | $ | 6,839 | $ | 6,499 | $ | 6,387 | $ | 27,668 | $ | 285,219 | ||||||||||||||
Year Ending December 31: | |||||||
2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | |
| Operating lease obligations | $6,328 | $4,480 | $3,040 | $2,672 | $2,261 | $5,611 | $24,392 |
| Earn-outs in business combinations: | |||||||
Morinda (1) | - | 13,134 | - | - | - | - | 13,134 |
| Marley (2) | - | - | 625 | 313 | 312 | - | 1,250 |
| Payables to former Morinda stockholders: | |||||||
Excess working capital (EWC) (3) | 9,000 | 5,463 | - | - | - | - | 14,463 |
Contingent on financing event (4) | 25,000 | - | - | - | - | - | 25,000 |
Siena Revolver (5): | |||||||
| Principal balance | 2,000 | - | - | - | - | - | 2,000 |
| Interest expense | 41 | - | - | - | - | - | 41 |
| Collateral monitoring fees | 93 | - | - | - | - | - | 93 |
| Early termination penalty | 480 | - | - | - | - | - | 480 |
| Mortgage payable to foreign bank | 1,275 | 1,353 | - | - | - | - | 2,628 |
| Installment notes payable | 54 | 12 | - | - | - | - | 66 |
Employment agreements (6) | 1,650 | - | - | - | - | - | 1,650 |
| Open purchase orders | 4,796 | - | - | - | - | - | 4,796 |
| Total | $50,717 | $24,442 | $3,665 | $2,985 | $2,573 | $5,611 | $89,993 |
| (1) | Represents the maximum amount payable in cash if our shareholders fail to approve the issuance of approximately 35.7 million shares (after adjustment for Ariix’s working capital deficit) to settle the remainder of the Ariix merger consideration. If a cash payment is ultimately required, the estimated payment date is expected to be in the second quarter of 2022. As of December 31, 2020, the fair value of this obligation was $90.9 million. |
| (2) | Represents deferred consideration payable for Ariix’s acquisitions of LIMU and Zennoa in 2019. The deferred consideration is payable based on a percentage of sales from the acquired distribution networks of LIMU and Zennoa. Future cash payments are estimates based on sales projections. |
| (3) | For the months of February 2021 through May 2021, the holders of the Senior Notes are entitled to request that we make principal payments up to $1.0 million per month that would be payable within five business days of each such notice. Beginning in June 2021 and continuing for each subsequent month, the holders of the Senior Notes are entitled to request that we make principal payments up to $2.0 million per month. Amounts payable in 2021 and 2022 were determined based on the assumption that the Senior Note holders demand the maximum principal payments each month. The maturity date for the Senior Notes is on December 1, 2022. However, assuming the holders demand the maximum principal payments the Senior Notes will be repaid in full by August 2022. |
| (4) | Interest on the Senior Notes is payable in cash based on the stated interest rate of 8.0% applied to the contractual principal balance. Interest has been calculated based on the assumption that the holders demand the maximum principal payments each month. |
| (5) | Assumes that none of the PPP Loans are forgiven and that interest at the contractual interest rate of 1.0% is due a maturity. |
| (6) | Approximately $1.1 million of unrecognized tax benefits, including interest and penalties, have been recorded as liabilities. We are uncertain if and when such amounts may be settled. |
| (7) | Amount is based on employment agreements in effect as of December 31, 2020, consisting of base salary payable to Mr. Willis and Mr. Gould under employment agreements that renew annually for successive one-year terms, unless terminated by either party. As discussed under the Overview above, on March 3, 2021, we entered into an amendment to the employment agreement with Mr. Gould whereby he will no longer serve as our Chief Financial Officer after July 2, 2021. The impact of this amendment is not reflected in this table. |
Off-Balance Sheet Arrangements
During the fair value of earnout consideration under the Series D Preferred Stock as discussed further in Note 3 to the consolidated financial statements included in Item 8 of this Report. The cash payment is due in the second quarter of 2020.
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Foreign Currency Risks
We have foreign currency risks related to our net revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euro, Chinese Yuan and Japanese Yen. We generated approximately 68% of our net revenue from our international business for the year ended December 31, 2020. Increases in the relative value of the U.S. Dollar to other currencies may negatively affect our net revenue, partially offset by a positive impact to operating expenses in other currencies as expressed in U.S. Dollars. We have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains or losses related to revaluing certain current asset and current liability balances, including intercompany receivables and payables, which are denominated in currencies other than the functional currency of the entities in which they are recorded. While we have not engaged in the hedging of our foreign currency transactions to date, we are evaluating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. Dollar.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported net revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies that are described in Note 2 to our consolidated financial statements included in Item 8 of this Report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Acquisition Method of Accounting for Business Combinations
We allocate the purchase price of acquired companies to the tangible and Intangible Assets
Significant estimates in valuing certain intangible assets include but are not limited to the projected financial information related to each individual asset, particularly forecasted net revenue, cash flows, market-based royalty rates and estimated discount rates. Developed technology and trademarks are valued using the relief-from-royalty method, and customer relationships are valued using the multi-period excess earnings model. The relief-from-royalty method is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. The multi-period excess earnings method supposes that the owner of the intangible asset is able to achieve a return in excess of that received without the intangible asset through enhanced revenues or cost savings. Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account our operating plans and strategies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our intangible assets, acquired.which would adversely affect our operating results in the period of impairment.
Accounting for Complex Financings
In order to account for complex financing transactions, we are required to make judgments, assumptions, and estimates to determine the appropriate amounts reported in our consolidated financial statements. These financing transactions typically involve entering into several distinct legal agreements, whereby we are required to identify and account for each freestanding financial instrument separately. The freestanding financial instruments may be classified as debt, temporary equity or permanent equity instruments depending on the results of our evaluation. In addition, we evaluate if any of the financial instruments contain features that are required to be accounted for as embedded derivatives at fair value. Each freestanding financial instrument is required to be recognized at fair value on the closing date of the financing. The fair value of warrants is determined using the Black-Scholes-Merton valuation model and the fair value of Common Stock is based on the trading price of our shares on the closing date. In order to determine the fair value of debt instruments, we review peer companies with similar credit rating by considering the interest rates and other market terms in their debt instruments.
If the fair value of all of the financial instruments in the financing transaction exceeds the net proceeds received and if none of the freestanding financial instruments will subsequently be measured at fair value, then we record each financial instrument based on its relative fair value. This results in each of the financial instruments being recognized at its proportional fair value in relation to the aggregate net proceeds received in the financing transaction. If we are contingently liable to redeem shares of our Common Stock, we classify those shares and the related allocated fair value as temporary equity until such time that the contingency is eliminated.
For financial instruments classified as debt, a discount is recognized if the stated principal balance exceeds the initial allocation of fair value as of the closing date. This discount is accreted to interest expense using the interest method that results in recognition of interest expense at a fixed rate through the expected maturity date.
Impairment of Goodwill and other intangibles with indefinite useful lives areLong-lived Assets
Goodwill is not amortized but tested for impairment annually, or more frequently when events or circumstances indicatesindicate that the carrying value of a reporting unit more likely than not exceeds its fair value. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered more likely than not that the fair value of the reporting unit is greater than the carrying amount, further testing of goodwill for impairment is not required. In the course of preparing our annual goodwill impairment testing, if we project a sustained decline in a reporting unit’s revenues and earnings, it will have a significant negative impact on the fair value of the reporting unit which could result in material future impairment charges for our goodwill and long-lived assets. Such a decline could be driven by, among other things: (i) changes in strategic priorities; (ii) anticipated decreases in product pricing, sales volumes, and long-term growth rates as a result of competitive pressures or other factors; and (iii) the inability to achieve, or delays in achieving the goals of our strategic initiatives and synergies. Adverse changes to macroeconomic factors, such as increases to long-term interest rates, would also negatively impact the fair value of our reporting units. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
Long-lived assets include identifiable intangible assets, acquired in business combinations are recorded at the estimated acquisition date fair value. Finite lived intangible assets are amortized over the shorter of the contractual life or their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.
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Revenue Recognition
We recognize revenueproduct sales when we satisfy our performance obligations are satisfied. Our primary performance obligation (the distribution and saletransfer control of beverage products) is satisfied upon the shipment or delivery ofpromised products to our customers, which generally occurs over a very short period of time. Performance obligations are typically satisfied by shipping or delivering products to customers, which is also the point when controltitle transfers to customers. Revenue is transferred. Merchandising activities that are performed after a customer obtains controlmeasured as the amount of consideration expected to be received in exchange for transferring the related products.
Net revenue consists of the product,gross sales price, less estimated returns and allowances for which provisions are made at the time of sale, and less certain other discounts, allowances, and personal rebates that are accounted for as fulfillment of our performance obligation to ship or deliver producta reduction from gross revenue. Shipping and handling charges that are billed to our customers are included as a component of revenue. Costs incurred by us for shipping and handling charges are recordedincluded in selling, general and administrative expenses. Merchandising activities are immaterial in the contextcost of our contracts.
Payments received for undelivered or back-ordered products are recorded as deferred revenue. Our policy is to defer revenue related to distributorBrand Partner convention fees, payments received on products ordered in the current period but not delivered until the subsequent period, initial independent product consultants (“IPCs”)Brand Partner fees, IPCBrand Partner renewal fees and internet subscription fees until the products or services have been provided.
Customers are permitted to return products in unused condition during a period of six to twelve months after the cost of employee and director services received in exchange for all equity awards granted, including stock options, basedoriginal sale date, depending on the fair marketbusiness unit that originated the sale. The amount refunded is generally offset by a reduction in commissions and incentives related to the original sale. Brand Partners may be terminated if they return more than $250 of products within a rolling six-month period unless otherwise agreed to by the Company. If a Brand Partner elects to terminate their account, they may return all unused products purchased within the past 12 months. Sales returns have historically been less than 1.0% of annual sales.
Inventories
Inventories are adjusted to the lower of cost and net realizable value, of the award as of the grant date. We compute the fair value of options using the Black-Scholes-Merton (“BSM”) option pricing model. We recognize thefirst-in, first-out method. The components of inventory cost include raw materials, labor and overhead. The determination of the equity awards over the period that servicesnet realizable value involves various assumptions related to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning, and market conditions. If future demand and market conditions are provided to earn the award, usually the vesting period. For awards granted which contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was,less favorable than our assumptions, additional inventory adjustments could be required in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred income tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred income tax asset will not be realized based on the weight of available evidence, including expected future earnings.
We recognize an uncertain tax position in our financial statements when we conclude that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. Interest and penalties related to income taxes are recognized in the provision for income taxes.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed in Note 2 to our consolidated financial statements included in Item 8 of this Report, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
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Non-GAAP Financial Measures
The primary purpose of using non-GAAP financial measures is to provide supplemental information that we believe may provebe useful to investors and to enable investors to evaluate our results in the same way we do. We also present the non-GAAP financial measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis, as well as comparing our results against the results of other companies, by excluding items that we do not believe are indicative of our core operating performance. Specifically, we use these non-GAAP measures as measures of operating performance; to prepare our annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our business strategies; to provide consistency and comparability with past financial performance; to facilitate a comparison of our results with those of other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and in communications with our boardBoard of directorsDirectors concerning our financial performance. Investors should be aware however, that not all companies define these non-GAAP measures consistently.
EBITDA and Adjusted EBITDA. The calculation of our Non-GAAP Financial MeasuresEBITDA and Adjusted EBITDA is presented below for the years ended December 31, 20182020 and 2017:
2018 | 2017 | |
| Gross Revenue: | ||
| Net revenue | $52,160 | $52,188 |
| Non-GAAP adjustment: | ||
| Discounts and allowances, net of recoveries | 6,959 | 4,448 |
Non-GAAP gross revenue | $59,119 | $56,636 |
| Non-GAAP EBITDA and Adjusted EBITDA reconciliation: | ||
| Net loss | $(12,135) | $(3,536) |
| Non-GAAP adjustments: | ||
| Interest expense | 1,068 | 228 |
| Income tax benefit | (8,927) | - |
| Depreciation and amortization expense | 2,310 | 1,606 |
| EBITDA | (17,684) | (1,702) |
| Non-GAAP adjustments: | ||
| Business combination financial advisor and other transaction costs | 3,189 | 232 |
| Stock-based compensation expense | 2,533 | 1,731 |
| Loss from change in fair value of embedded derivatives | 470 | - |
| Other expense, net | 151 | 300 |
| Gain from sale of building | - | (3,273) |
Adjusted EBITDA | $(11,341) | $(2,712) |
| 2020 | 2019 | |||||||
| Net loss | $ | (39,344 | ) | $ | (89,835 | ) | ||
| EBITDA Non-GAAP adjustments: | ||||||||
| Interest expense | 4,036 | 3,677 | ||||||
| Income tax expense | 1,895 | 12,668 | ||||||
| Depreciation and amortization expense | 8,928 | 8,759 | ||||||
| EBITDA | (24,485 | ) | (64,731 | ) | ||||
| Adjusted EBITDA Non-GAAP adjustments: | ||||||||
| Stock-based compensation expense | 4,638 | 6,388 | ||||||
| Impairment of goodwill and identifiable intangible assets | - | 44,925 | ||||||
| Adjusted EBITDA | $ | (19,847 | ) | $ | (13,418 | ) | ||
EBITDA is defined as net income (loss) adjusted to exclude GAAP amounts for interest expense, income tax expense, and depreciation and amortization expense. For the calculation of Adjusted EBITDA, we also exclude the following items for the periods presented:
Stock-Based Compensation Expense
: Our compensation strategy includes the use of stock-based compensation to attract and retain employees, directors and consultants. This strategy is principally aimed at aligning the employee interests with those of our stockholders and to achieve long-term employee retention, rather than to motivate or reward operational performance for any particular period. As a result, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period.Impairment of Embedded Derivatives:
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are a “smallersmaller reporting company”company as defined by Item 10Rule 12b-2 of Regulation S-K, wethe Exchange Act and are not required to provide the information required byunder this Item.item.
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Item 8. Financial Statements and Supplementary Data.
TABLE OF CONTENTS
| Page | ||
| Report of Independent Registered Public Accounting Firm | 43 | |
Financial Statements: | ||
| Consolidated balance sheets as of December 31, | 44 | |
| 2019 | 45 | |
| 2019 | 46 | |
| Consolidated statements of cash flows for the years ended December 31, | 47 | |
| Notes to consolidated financial statements | 49 | |
| Financial Statement Schedule: | ||
| Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2020 and 2019 | 89 |
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Report of Independent Registered Public Accounting Firm
To the shareholders and the Board of Directors and Stockholders
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NewAge, Inc. (formerly New Age Beverages CorporationCorporation) and subsidiaries (the Company)“Company”) as of December 31, 20182020 and 2017, and2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows, for each of the two years in the two-year period ended December 31, 2018,2020, and the related notes and the schedule listed in the Index at Item 8 (collectively referred to as the financial statements)“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the two years in the two-year period ended December 31, 2018,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2021, expressed an adverse opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Business Combinations — Refer to Note 4 to the financial statements
Critical Audit Matter Description
The Company completed the acquisition of Ariix, LLC (Ariix) for $155.1 million on November 16, 2020. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including the sales and distribution network intangible of $79.6 million, trade names intangible of $20.0 million, and internal-use software intangible of $13.2 million. Management estimated the fair value of these intangible assets using variations of the “income approach,” which is based on the present value of the future after-tax cash flows attributable to each identifiable intangible asset. The fair value determination of these intangible assets required management to make key assumptions consisting of estimates of future net revenue and an appropriate discount rate.
We identified the valuation of the sales and distribution network, the trade names, and the internal-use software intangibles as a critical audit matter because of the estimates and assumptions management makes to determine the fair value these assets. The valuation of these intangible assets required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of future net revenue and estimated discount rate including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the future net revenue and estimated discount rate for the acquired intangible assets included the following, among others:
| ● | We made inquiries of management to obtain an understanding of management’s key assumptions in developing the future net revenue. |
| ● | We assessed the reasonableness of management’s future net revenue by comparing the projections to historical results of the acquired company and certain comparable peer companies. |
| ● | We evaluated whether the estimated future net revenue was consistent with evidence obtained in other areas of the audit. |
| ● | With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by: |
| – | Testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation. | |
| – | Developing a range of independent estimates and comparing those to the discount rate selected by management. | |
| – | We compared the estimated weighted average return on assets, internal rate of return, and the discount rate used in the valuation models and evaluated whether they were consistent with each other. |
| /s/ Deloitte & Touche LLP | |
| Salt Lake City, UT | |
| March 18, 2021 | |
| We have served as the Company’s auditor since 2019. |
| 43 |
NewAge, Inc.
Consolidated Balance Sheets
December 31, 20182020 and 2017
(In thousands, except par value per share amounts)
| ASSETS | 2018 | 2017 |
| Current assets: | ||
| Cash and cash equivalents | $42,517 | $285 |
| Accounts receivable, net of allowance of $134 and $52, respectively | 9,837 | 7,462 |
| Inventories | 37,148 | 7,042 |
| Prepaid expenses and other | 6,473 | 1,435 |
| Total current assets | 95,975 | 16,224 |
| Long-term assets: | ||
| Identifiable intangible assets, net | 67,830 | 23,556 |
| Property and equipment, net | 57,281 | 1,895 |
| Goodwill | 31,514 | 21,230 |
Right-of-use lease assets | 18,489 | 4,065 |
Deferred income taxes | 8,908 | - |
Restricted cash and other | 6,935 | 702 |
| Total assets | $286,932 | $67,672 |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||
| Current liabilities: | ||
| Accounts payable | $8,960 | $4,370 |
| Accrued liabilities | 34,019 | 2,394 |
Current portion of business combination liabilities | 8,718 | - |
Current maturities of long-term debt | 3,369 | 3,549 |
| Total current liabilities | 55,066 | 10,313 |
| Long-term liabilities: | ||
| Business combination liabilities, net of current portion | 43,412 | 800 |
| Long-term debt, net of current maturities | 1,325 | - |
| Right-of-use lease liability, net of current portion | 13,686 | 3,821 |
| Deferred income taxes | 9,747 | - |
| Other | 9,160 | - |
| Total liabilities | 132,396 | 14,934 |
Commitments and contingencies (Note 11) | ||
| Stockholders’ equity: | ||
| Series B Preferred stock, $0.001 par value per share. Authorized 300 shares; | ||
| 169 shares issued and outstanding in 2017 (none in 2018) | - | - |
| Common Stock; $0.001 par value. Authorized 100,000 shares; issued and outstanding | ||
75,067 and 35,172 shares as of December 31, 2018 and 2017, respectively | 75 | 35 |
| Additional paid-in capital | 176,471 | 63,204 |
| Accumulated other comprehensive income | 626 | - |
| Accumulated deficit | (22,636) | (10,501) |
| Total stockholders’ equity | 154,536 | 52,738 |
| Total liabilities and stockholders’ equity | $286,932 | $67,672 |
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 43,711 | $ | 60,842 | ||||
| Trade accounts receivable, net of allowance of $582 and $535, respectively | 12,341 | 11,012 | ||||||
| Inventories | 48,051 | 36,718 | ||||||
| Current portion of restricted cash | 10,000 | - | ||||||
| Prepaid expenses and other | 13,032 | 4,384 | ||||||
| Total current assets | 127,135 | 112,956 | ||||||
| Long-term assets: | ||||||||
| Identifiable intangible assets, net | 169,611 | 43,443 | ||||||
| Goodwill | 54,993 | 10,284 | ||||||
| Right-of-use lease assets | 38,764 | 38,458 | ||||||
| Property and equipment, net | 28,076 | 28,443 | ||||||
| Restricted cash, net of current portion | 11,524 | 3,729 | ||||||
| Deferred income taxes | 7,782 | 9,128 | ||||||
| Deposits and other | 5,297 | 4,689 | ||||||
| Total assets | $ | 443,182 | $ | 251,130 | ||||
| LIABILITIES, REDEEMABLE COMMON STOCK, AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 22,774 | $ | 13,259 | ||||
| Accrued liabilities | 70,007 | 49,451 | ||||||
| Current portion of business combination liabilities | 11,750 | 5,508 | ||||||
| Current maturities of long-term debt | 18,016 | 11,208 | ||||||
| Total current liabilities | 122,547 | 79,426 | ||||||
| Long-term liabilities: | ||||||||
| Business combination liabilities, net of current portion | 95,826 | - | ||||||
| Long-term debt, net of current maturities | 16,181 | 12,802 | ||||||
| Operating lease liabilities, net of current portion: | ||||||||
| Lease liability | 34,788 | 35,513 | ||||||
| Deferred lease financing obligation | 15,882 | 16,541 | ||||||
| Deferred income taxes | 5,391 | 5,441 | ||||||
| Other | 8,313 | 9,132 | ||||||
| Total liabilities | 298,928 | 158,855 | ||||||
| Commitments and contingencies (Note 14) | - | - | ||||||
| Redeemable Common Stock, shares as of December 31, 2020 | 2,101 | - | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value per share. Authorized shares; shares issued and outstanding | - | - | ||||||
| Common Stock; $ par value. Authorized shares; issued and outstanding and shares as of December 31, 2020 and 2019, respectively | 99 | 82 | ||||||
| Additional paid-in capital | 236,732 | 203,862 | ||||||
| Obligation to issue shares of Common Stock as of December 31, 2020 | 54,186 | - | ||||||
| Note receivable for stock subscription | (1,250 | ) | - | |||||
| Accumulated other comprehensive income | 4,201 | 802 | ||||||
| Accumulated deficit | (151,815 | ) | (112,471 | ) | ||||
| Total stockholders’ equity | 142,153 | 92,275 | ||||||
| Total liabilities, redeemable Common Stock, and stockholders’ equity | $ | 443,182 | $ | 251,130 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 44 |
NewAge, Inc.
Consolidated Statements of Operations and Comprehensive Loss
Years Ended
December 31,(In thousands, except loss per share amounts)
2018 | 2017 | |
| Net revenue | $52,160 | $52,188 |
| Cost of goods sold | 42,865 | 39,788 |
| Gross profit | 9,295 | 12,400 |
| Operating expenses: | ||
| Commissions | 2,781 | 1,456 |
| Selling, general and administrative | 20,288 | 15,387 |
| Business combination expenses: | ||
| Financial advisor and other transaction costs | 3,189 | 232 |
| Change in fair value of earnout obligations | 100 | - |
| Depreciation and amortization expense | 2,310 | 1,606 |
| Total operating expenses | 28,668 | 18,681 |
| Operating loss | (19,373) | (6,281) |
| Non-operating income (expenses): | ||
| Interest expense | (1,068) | (228) |
| Loss from change in fair value of embedded derivatives | (470) | - |
| Other expense, net | (151) | (300) |
| Gain from sale of building | - | 3,273 |
| Loss before income taxes | (21,062) | (3,536) |
Income tax benefit | 8,927 | - |
| Net loss | (12,135) | (3,536) |
| Other comprehensive income: | ||
| Foreign currency translation adjustments, net of tax | 626 | - |
| Comprehensive loss | $(11,509) | $(3,536) |
| Net loss per share attributable to common stockholders (basic and diluted) | $(0.26) | $(0.12) |
| Weighted average number of shares of Common Stock outstanding (basic and diluted) | 46,448 | 30,617 |
| 2020 | 2019 | |||||||
| Net revenue | $ | 279,471 | $ | 253,708 | ||||
| Cost of goods sold | 101,982 | 101,001 | ||||||
| Gross profit | 177,489 | 152,707 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 113,209 | 114,982 | ||||||
| Commissions | 85,877 | 75,961 | ||||||
| Depreciation and amortization expense | 8,515 | 8,382 | ||||||
| Loss on disposal of Divested Business | 3,446 | - | ||||||
| Business combination expense (gain): | ||||||||
| Financial advisor and other transaction costs | 895 | - | ||||||
| Gain on change in fair value of earnout obligations | - | (13,809 | ) | |||||
| Long-lived asset impairment expense: | ||||||||
| Right-of-use assets | 400 | 2,265 | ||||||
| Goodwill and identifiable intangible assets | - | 44,925 | ||||||
| Total operating expenses | 212,342 | 232,706 | ||||||
| Operating loss | (34,853 | ) | (79,999 | ) | ||||
| Non-operating income (expense): | ||||||||
| Interest expense | (4,036 | ) | (3,677 | ) | ||||
| Gain (loss) from change in fair value of derivatives, net | (213 | ) | 371 | |||||
| Interest and other income (expense), net | 1,653 | (227 | ) | |||||
| Gain from sale of property and equipment | - | 6,365 | ||||||
| Loss before income taxes | (37,449 | ) | (77,167 | ) | ||||
| Income tax expense | (1,895 | ) | (12,668 | ) | ||||
| Net loss | (39,344 | ) | (89,835 | ) | ||||
| Other comprehensive income: | ||||||||
| Foreign currency translation adjustments, net of tax | 3,399 | 176 | ||||||
| Comprehensive loss | $ | (35,945 | ) | $ | (89,659 | ) | ||
| Net loss per share attributable to common stockholders (basic and diluted) | $ | (0.41 | ) | $ | (1.16 | ) | ||
| Weighted average number of shares of Common Stock outstanding (basic and diluted) | 96,348 | 77,252 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 45 |
NewAge, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended
December 31,(In thousands)
Accumulated | ||||||||
Additional | Other | |||||||
Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | ||||
Shares | Amount | Shares | Amount | Capital | Income | Deficit | Total | |
| Balances, December 31, 2016 | 535 | $1 | 21,900 | $22 | $11,821 | $- | $(6,965) | $4,879 |
| Issuance of Common Stock in: | ||||||||
| Public offering | - | - | 4,929 | 5 | 15,394 | - | - | 15,399 |
| Business combinations: | ||||||||
| Maverick Brands, LLC | - | - | 2,200 | 2 | 9,084 | - | - | 9,086 |
| Marley Beverage Company, LLC | - | - | 3,000 | 3 | 18,597 | - | - | 18,600 |
| PMC Holdings, Inc. | - | - | 1,200 | 1 | 5,495 | - | - | 5,496 |
| Restricted stock awards and other services | - | - | 645 | 1 | 2,501 | - | - | 2,502 |
| Stock-based compensation | - | - | - | - | 162 | - | - | 162 |
| Issuance of shares upon exercise of warrants | - | - | 373 | - | 150 | - | - | 150 |
| Conversion of Series B Preferred Stock | (116) | (1) | 925 | 1 | - | - | - | - |
| Recission of Series A Preferred Stock | (250) | - | - | - | - | - | - | - |
| Net loss | - | - | - | - | - | - | (3,536) | (3,536) |
| Balances, December 31, 2017 | 169 | - | 35,172 | 35 | 63,204 | - | (10,501) | 52,738 |
| Issuance of Common Stock for: | ||||||||
| Conversion of Series B Preferred Stock | (169) | - | 1,354 | 1 | (1) | - | - | - |
| Conversion of Series B promissory notes | - | - | 794 | 1 | 1,487 | - | - | 1,488 |
| Public offerings, net of offering costs | - | - | 34,684 | 35 | 97,606 | - | - | 97,641 |
| Debt issuance costs | - | - | 226 | - | 470 | - | - | 470 |
| Transaction costs in business combination | - | - | 214 | - | 1,166 | - | - | 1,166 |
| Cashless exercise of stock options and warrants | - | - | 449 | 1 | (1) | - | - | - |
| Grant of restricted stock awards, net of forfeitures | - | - | 158 | - | 353 | - | - | 353 |
| Common Stock exchanged for Series C Preferred Stock | 7 | - | (6,900) | (7) | - | - | - | (7) |
| Series C Preferred Stock converted to Common Stock | (7) | - | 6,900 | 7 | - | - | - | 7 |
| Common Stock issued in business combination with Morinda | - | - | 2,016 | 2 | 10,968 | - | - | 10,970 |
| Stock-based compensation expense related to stock options | - | - | - | - | 1,219 | - | - | 1,219 |
| Net change in other comprehensive income | - | - | - | - | - | 626 | - | 626 |
| Net loss | - | - | - | - | - | - | (12,135) | (12,135) |
| Balances, December 31, 2018 | - | $- | 75,067 | $75 | $176,471 | $626 | $(22,636) | $154,536 |
| Shares | Amount | Capital | Stock | Subscription | Income | Deficit | Total | |||||||||||||||||||||||||
| Obligation | Note | Accumulated | ||||||||||||||||||||||||||||||
| Additional | to Issue | Receivable | Other | |||||||||||||||||||||||||||||
| Common Stock | Paid-in | Common | For Stock | Comprehensive | Accumulated | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Subscription | Income | Deficit | Total | |||||||||||||||||||||||||
| Balances, December 31, 2018 | 75,067 | $ | 75 | $ | 176,471 | $ | - | $ | - | $ | 626 | $ | (22,636 | ) | $ | 154,536 | ||||||||||||||||
| Issuance of Common Stock: | ||||||||||||||||||||||||||||||||
| In Ariix business combination | ||||||||||||||||||||||||||||||||
| ATM public offering, net of offering costs | 5,957 | 6 | 19,517 | - | - | - | - | 19,523 | ||||||||||||||||||||||||
| In exchange for note receivable | - | |||||||||||||||||||||||||||||||
| Grant of restricted stock awards | 91 | - | 500 | - | - | - | - | 500 | ||||||||||||||||||||||||
| Vesting of restricted stock awards | 269 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Business combination with BWR | 108 | - | 453 | - | - | - | - | 453 | ||||||||||||||||||||||||
| Employee services | 16 | - | 65 | - | - | - | - | 65 | ||||||||||||||||||||||||
| Acquisition of patents | 60 | - | 163 | - | - | - | - | 163 | ||||||||||||||||||||||||
| Exercise of stock options | 305 | 1 | 623 | - | - | - | - | 624 | ||||||||||||||||||||||||
| Purchase and retirement of common stock | - | - | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | 5,232 | - | - | - | - | 5,232 | ||||||||||||||||||||||||
| Fair value of warrants issued for identifiable intangible assets | - | - | 838 | - | - | - | - | 838 | ||||||||||||||||||||||||
| Net change in accumulated other comprehensive income | - | - | - | - | - | 176 | - | 176 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (89,835 | ) | (89,835 | ) | ||||||||||||||||||||||
| Balances, December 31, 2019 | 81,873 | 82 | 203,862 | - | - | 802 | (112,471 | ) | 92,275 | |||||||||||||||||||||||
| Balances, December 31, 2019 | 81,873 | 82 | 203,862 | - | - | 802 | (112,471 | ) | 92,275 | |||||||||||||||||||||||
| Issuance of Common Stock: | ||||||||||||||||||||||||||||||||
| In Ariix business combination | - | - | - | 54,186 | - | - | - | 54,186 | ||||||||||||||||||||||||
| In ATM public offering, net of offering costs | 16,130 | 16 | 24,942 | - | - | - | - | 24,958 | ||||||||||||||||||||||||
| In exchange for note receivable | 692 | 1 | 1,249 | - | (1,250 | ) | - | - | - | |||||||||||||||||||||||
| For exercise of stock options | 331 | - | 655 | - | - | - | - | 655 | ||||||||||||||||||||||||
| Upon vesting of restricted stock awards | 900 | 1 | (1 | ) | - | - | - | - | - | |||||||||||||||||||||||
| Issuance of Class A and Class B Warrants | - | - | 2,738 | - | - | - | - | 2,738 | ||||||||||||||||||||||||
| Purchase and retirement of common stock | (780 | ) | (1 | ) | (1,192 | ) | - | - | - | - | (1,193 | ) | ||||||||||||||||||||
| Stock-based compensation expense | - | - | 4,479 | - | - | - | - | 4,479 | ||||||||||||||||||||||||
Net change in accumulated other comprehensive income | - | - | - | - | - | 3,399 | - | 3,399 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (39,344 | ) | (39,344 | ) | ||||||||||||||||||||||
| Balances, December 31, 2020 | 99,146 | $ | 99 | $ | 236,732 | $ | 54,186 | $ | (1,250 | ) | $ | 4,201 | $ | (151,815 | ) | $ | 142,153 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 46 |
NewAge, Inc.
Consolidated Statements of Cash Flows
Years Ended
December 31,(In thousands)
2018 | 2017 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||
| Net loss | $(12,135) | $(3,536) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Depreciation and amortization | 2,310 | 1,606 |
| Accretion and amortization of debt discount and issuance costs | 780 | 99 |
| Change in fair value of contingent consideration payable in business combination | 100 | - |
| Loss from change in fair value of embedded derivatives | 470 | - |
| Stock-based compensation expense | 2,533 | 1,731 |
| Deferred income taxes | (8,927) | - |
| Issuance of Common Stock for: | ||
| Acquisition costs related to business combination | 1,166 | - |
| Accrued interest | 61 | - |
| Make-whole premium on early payment of Convertible Note | 176 | - |
| Gain from sale of building | - | (3,273) |
| Changes in operating assets and liabilities, net of effects of business combinations: | ||
| Accounts receivable | 1,286 | (2,301) |
| Inventories | (3,374) | (299) |
| Prepaid expenses, deposits and other | (1,838) | (470) |
| Accounts payable | (3,583) | (1,779) |
| Other accrued liabilities | (856) | (189) |
| Net cash used in operating activities | (21,831) | (8,411) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||
| Payments for acquisition of businesses, net of cash, cash equivalents and | ||
| restricted cash acquired | (28,694) | (2,000) |
| Capital expenditures for property and equipment | (744) | (563) |
| Proceeds from sale of building | - | 8,790 |
| Net cash provided by (used in) investing activities | (29,438) | 6,227 |
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||
| Net proceeds from issuance of Common Stock | 99,857 | 15,399 |
| Payments for deferred offering costs | (2,217) | - |
| Proceeds from borrowings | 9,526 | 2,000 |
| Principal payments on borrowings | (9,955) | (15,610) |
| Proceeds from exercise of Common Stock purchase warrant | - | 151 |
| Debt issuance costs paid | (634) | - |
| Make-whole premium on early payment of Convertible Note | (176) | - |
| Net cash provided by financing activities | 96,401 | 1,940 |
| Effect of foreign currency translation changes | 439 | - |
| Net change in cash, cash equivalents and restricted cash | 45,571 | (244) |
| Cash, cash equivalents and restricted cash at beginning of year | 285 | 529 |
| Cash, cash equivalents and restricted cash at end of year | $45,856 | $285 |
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (39,344 | ) | $ | (89,835 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 8,928 | 8,759 | ||||||
| Non-cash lease expense | 5,341 | 7,086 | ||||||
| Loss on disposal of Divested Business | 3,446 | - | ||||||
| Stock-based compensation expense | 4,638 | 6,388 | ||||||
| Long-lived asset impairment expense | 400 | 47,190 | ||||||
| Accretion and amortization of debt discount and issuance costs | 1,705 | 1,937 | ||||||
| Loss (gain) from change in fair value of derivatives | 213 | (371 | ) | |||||
| Expense for make-whole premium and other | 206 | 480 | ||||||
| Deferred income tax expense (benefit) | 192 | (4,944 | ) | |||||
| Gain on change in fair value of derivative and earnout obligations | - | (13,809 | ) | |||||
| Loss (gain) from sale of property and equipment | 242 | (6,365 | ) | |||||
| Changes in operating assets and liabilities, net of effects of business combinations: | ||||||||
| Accounts receivable | 1,511 | (501 | ) | |||||
| Inventories | 5,758 | 2,792 | ||||||
| Prepaid expenses, deposits and other | 95 | 902 | ||||||
| Accounts payable | (4,683 | ) | 907 | |||||
| Other accrued liabilities | (22,899 | ) | 7,583 | |||||
| Net cash used in operating activities | (34,251 | ) | (31,801 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds received from buyer of Divested Businesses, net of cash conveyed of $209 | 381 | - | ||||||
| Capital expenditures for property and equipment | (2,471 | ) | (5,357 | ) | ||||
| Cash advance under unsecured promissory note | (1,250 | ) | - | |||||
| Cash acquired in Ariix business combination | 7,408 | - | ||||||
| Proceeds from sale of equipment | 411 | - | ||||||
| Net proceeds from sale of land and building in Japan | - | 37,548 | ||||||
| Security deposit under sale leaseback arrangement | - | (1,799 | ) | |||||
| Cash paid in business combinations, net of cash acquired | - | (963 | ) | |||||
| Net cash provided by investing activities | 4,479 | 29,429 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from private placement of Senior Notes, Common Stock and Warrants | 30,000 | - | ||||||
| Proceeds from borrowings | 6,868 | 61,288 | ||||||
| Principal payments on borrowings | (24,450 | ) | (43,887 | ) | ||||
| Debt issuance costs paid | (1,717 | ) | (951 | ) | ||||
| Cash paid for make-whole premium on early prepayment of debt | (134 | ) | (480 | ) | ||||
| Proceeds from issuance of common stock | 25,122 | 20,102 | ||||||
| Payments for deferred offering costs | (164 | ) | (479 | ) | ||||
| Proceeds from exercise of stock options | 655 | 624 | ||||||
| Purchase and retirement of shares of Common Stock | (1,193 | ) | - | |||||
| Principal payments on business combination obligations | (5,802 | ) | (34,000 | ) | ||||
| Payments under deferred lease financing obligation | (641 | ) | (463 | ) | ||||
| Proceeds from deferred lease financing obligation | - | 17,640 | ||||||
| Net cash provided by financing activities | 28,544 | 19,394 | ||||||
| Effect of foreign currency translation changes | 1,892 | 1,693 | ||||||
| Net change in cash, cash equivalents and restricted cash | 664 | 18,715 | ||||||
| Cash, cash equivalents and restricted cash at beginning of year | 64,571 | 45,856 | ||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 65,235 | $ | 64,571 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 47 |
NewAge, Inc.
Consolidated Statements of Cash Flows, Continued
Years Ended
December 31,(Dollars inIn thousands)
2018 | 2017 | |
| SUMMARY OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | ||
| Cash and cash equivalents at end of year | $42,517 | $285 |
| Restricted cash at end of year | 3,339 | - |
| Total | $45,856 | $285 |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||
| Cash paid for interest | $386 | $228 |
| Cash paid for income taxes | $- | $- |
| Cash paid under right-of-use lease obligations | $2,080 | $644 |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND | ||
| FINANCING ACTIVITIES: | ||
| Reconciliation of non-cash and cash consideration in business combinations: | ||
| Fair value of assets acquired: | ||
| Identifiable assets, excluding cash, cash equivalents and restricted cash | $151,902 | $23,353 |
| Goodwill | 10,284 | 16,335 |
| Less liabilities assumed | (109,388) | (3,706) |
| Net assets acquired | 52,798 | 35,982 |
| Issuance of common stock in business combinations | (10,970) | (33,182) |
| Liability for contingent consideration | (13,134) | (800) |
| Cash paid, net of cash, cash equivalents and restricted cash acquired | $28,694 | $2,000 |
| Other non-cash investing and financing activities: | ||
| Exchange of 6,900,000 shares of Common Stock for 6,900 shares | ||
| of Series C Preferred Stock | $- | $- |
| Issuance of Common Stock for conversion of: | ||
| Principal under Series B notes payable | $1,427 | $- |
| 169,234 shares of Series B Preferred Stock | $- | $- |
| 6,900 shares of Series C Preferred Stock | $- | $- |
| Restriced stock granted for prepaid compensation, net of forfeitures | $353 | $- |
| Debt issuance costs paid from proceeds of borrowings | $170 | $- |
| Issuance of Common Stock for debt discount | $470 | $- |
| Right-of-use lease assets obtained in exchange for right-of-use lease obligations | $1,569 | $4,274 |
| Fair value of warrants issued with convertible debt | $- | $18 |
| 2020 | 2019 | |||||||
| SUMMARY OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | ||||||||
| Cash and cash equivalents at end of year | $ | 43,711 | $ | 60,842 | ||||
| Current portion of restricted cash at end of year | 10,000 | - | ||||||
| Long-term portion of restricted cash at end of year | 11,524 | 3,729 | ||||||
| Total | $ | 65,235 | $ | 64,571 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | 1,529 | $ | 719 | ||||
| Cash paid for income taxes | $ | 15,820 | $ | 3,462 | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 9,577 | $ | 8,942 | ||||
| Right-of-use assets acquired in exchange for operating lease liabilities | $ | 6,642 | $ | 29,368 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of Common Stock for unsecured promissory note receivable | $ | 1,250 | $ | - | ||||
| Increase in payables for capital expenditures | $ | 80 | $ | - | ||||
| Fair value of warrants issued for license agreement | $ | - | $ | 838 | ||||
| Restricted stock granted for prepaid compensation | $ | - | $ | 500 | ||||
| Issuance of common stock in business combinations | $ | - | $ | 453 | ||||
| Issuance of shares of Common Stock for patents | $ | - | $ | 163 | ||||
| Increase in payables for deferred offering costs | $ | - | $ | 100 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 48 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Overview
NewAge, Inc. (the “Company”) was formed under the laws of the State of Washington on April 26, 2010 under the name American Brewing Company, Inc. In April 2015,2010. Effective July 28, 2020, the Company acquired the assetsamended its Articles of B&R Liquid Adventure ("B&R"), which included the brand Búcha® Live Kombucha. In June 2016, the Company acquired the combined assets of Xing Beverage, LLC, Aspen Pure®, LLC,Incorporation to change its name from New Age Beverages LLC, and New Age Properties, LLC andCorporation to NewAge, Inc. Accordingly, all references herein have been changed to reflect the Company’snew name. The Company changed its name to New Age Beverages Corporation.
Legal Structure, Regulation and personal care products. Consolidation
The majorityCompany has four direct subsidiaries, all of Morinda’s products havewhich are wholly owned. These subsidiaries consist of NABC, Inc., NABC Properties, LLC (“NABC Properties”), Morinda Holdings, Inc. (“Morinda”) and Ariix LLC (“Ariix”). NABC, Inc. is a componentColorado-based operating company that consolidates performance and financial results of the Noni plant,Company’s subsidiaries and divisions. NABC Properties administers a building owned by the Company in southern Colorado. Morinda Citrifolia (“Noni”) as a common element.was acquired in December 2018 and Ariix was acquired in November 2020. In addition, Morinda primarily sells and distributes its products to independent product distributors through a direct to consumer selling network. Morinda is basedAriix have numerous subsidiaries that are in the United States and markets and sells its products in more than 60 countries throughout the world.
The Company and its subsidiaries are subject to regulation fromby a number of governmental agencies, including the U.S. Food and Drug Administration; Federal Trade Commission; Consumer Product Safety Commission; federal, state, and local taxing agencies; and others. In addition, the Company and its subsidiaries are subject to regulations fromregulation by a number of foreign governmentgovernmental agencies.
The consolidated financial statements, which include the accounts of the Company and its four wholly-ownedwholly owned subsidiaries, are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany balances and transactions have been eliminated.
Segments
The accompanying audited consolidatedCompany’s chief operating decision maker (the “CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial statements and related footnotes have been prepared in accordance with applicable rules and regulationsinformation of the SecuritiesCompany. The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and Exchange Commission (“SEC”).assessing financial performance. The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”),Company’s CODM assesses performance and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires the Company to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. The Company bases its estimates and assumptions on currentexisting facts, historical experience, and various other factors that it believes are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant accounting estimates include, but are not necessarily limited to, impairment of goodwill and long-lived assets; valuation assumptions for business combination obligations and the related assets acquired in business combinations; valuation assumptions for stock options, warrants and equity instruments issued for goods or services; estimated useful lives for identifiable intangible assets and property and equipment, impairment of goodwill and long-lived assets, valuation assumptions for stock options, warrants and equity instruments issued for goods or services, the allowance for doubtful accounts receivable, inventory obsolescence, the allowanceequipment; allowances for sales returns, chargebacks and chargebacks,inventory obsolescence; deferred income taxes and the related valuation allowances,allowances; and the evaluation and measurement of contingencies. Additionally, the full impact of COVID-19 is unknown and cannot be reasonably estimated. However, the Company has made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are material differences between the Company’s estimates and the actual results, the Company’s future consolidated results of operation will be affected.
| 49 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three months or less that are freely available for the Company’s immediate and general business use are classified as cash and cash equivalents. Cash and cash equivalents consist primarilyconsists of demand deposits with financial institutions.
Allowance for Doubtful Accounts
Effective January 1, 2020, the Company recordsadopted ASU 2016-13 that requires an impairment model known as the “current expected credit losses” model that is based on expected losses rather than incurred losses. Under the “current expected credit losses” model, an entity recognizes, as an allowance, its estimate of expected credit losses. Through December 2019, the Company recorded a provision for doubtful accounts based on historical experience and a detailed assessment of the collectability of its trade accounts receivable. In estimating the allowance for doubtful accounts, the Company considers,considered, among other factors, the aging of the accounts receivable, its historical write-offs, the credit worthiness of customers, and general economic conditions. AccountUnder both methods, account balances are charged off against the allowance for doubtful accounts when the Company believes that it is probable that the receivable will not be recovered. Actual write-offs may either be in excess or less than the estimated allowance. Recoveries of any accounts receivable previously written off are recorded as a reduction of expense when received.
Inventories
Inventories are stated atadjusted to the lower of cost orand net realizable value, using the first-in, first-out method. Provisions forThe components of inventory cost include raw materials, labor and overhead. The determination of net realizable value involves various assumptions related to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning, and market conditions. If future demand and market conditions are less favorable than management’s assumptions, additional inventory adjustments could be required in future periods.
Identifiable Intangible Assets
Identifiable intangible assets are recorded at the estimated acquisition date fair value. Finite lived intangible assets are amortized over the shorter of the contractual life or their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the intangible asset are expected to be generated.
In connection with the Company’s business combinations, identifiable intangible assets were acquired that were recorded at estimated fair value on the date of acquisition. These assets are being amortized using the straight-line method over the estimated useful lives as follows:
IDENTIFIABLE INTANGIBLE ASSETS ESTIMATED USEFUL LIFE
| Brand Partner distribution and sales network | 10-13 |
| Trade names | 5-15 |
| Manufacturing know-how and other | 15 |
| Non-compete agreements | 3-5 |
| China direct selling license | 15 |
| Patents and other | 10-12 |
Leases
The Company determines if contractual arrangements are considered a lease at inception. Operating leases are included in costright-of-use (“ROU”) assets, whereas assets related to finance leases are included in property and equipment. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the related obligations to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of goods soldlease payments over the lease term. Most of the Company’s leases do not set forth an implicit interest rate, which requires use of the Company’s estimated incremental borrowing rate to determine the present value of lease payments. The Company has a central treasury function and have historically been immaterial. determines the incremental borrowing rate based on local economic conditions in the jurisdiction of the related leased property.
| 50 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When lease terms include options to extend or terminate the lease that are considered reasonably certain to be exercised, the ROU calculations give effect to the expected exercise of such options. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Some of the Company’s lease agreements contain lease and non-lease components, which are generally accounted for separately. However, for certain leases, the Company elects to account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, the Company applies a portfolio approach to account for the ROU assets and operating lease liabilities.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, as follows:
PROPERTY AND EQUIPMENT ESTIMATED USEFUL LIFE
| Years | |
| Buildings and improvements | |
| Machinery and equipment | |
| Leasehold improvements | 1-20 |
| Office furniture and equipment | |
Leasehold improvements are amortized over the remaining lease term or the estimated useful life of the asset, whichever is shorter. As of December 31, 2018, leasehold improvements are being amortized over lives ranging from 1 to 10 years. Maintenance and repairs are expensed as incurred. Depreciation commences when assets are initially placed into service for their intended use.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the identifiable net assets acquired. Goodwill and other intangibles with indefinite useful lives areis not amortized but tested for impairment annually on December 31 of each year, or more frequently when events or circumstances indicatesindicate that the carrying value of a reporting unit more likely than not exceeds its fair value. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered more likely than not that the fair value of the reporting unit is greater than the carrying amount, further testing of goodwill for impairment is not required. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company performed a qualitative assessment and determined there was no impairment
Impairment of goodwill for the years ended December 31, 2018 and 2017.
Long-lived assets acquired in business combinations are recorded at the estimated acquisition date fair value. Finite lived intangible assets are amortized over the shorterconsist of the contractual life or their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.
Number of Years | ||
Weighted | ||
Range | Average | |
| License agreements | ||
| China direct selling license | 15 | 15.0 |
| Other | 15(1) | 15.0 |
| Trade names | 15 | 15.0 |
| Manufacturing processes and recipes | 15 | 15.0 |
| Independent product consultants distribution network | 10 | 10.0 |
| Customer relationships | 3-15 | 14.5 |
| Patents | 15 | 15.0 |
| Non-compete agreements | 3 | 3.0 |
Debt Issuance Costs and Discounts
Debt issuance costs are costs incurred to obtain new debt financing or modify existing debt financingagreements and consist of incremental direct costs incurred for professional fees and due diligence services, including reimbursement of similar costs incurred by the lenders. Amounts paid to the lenders when a financing is consummated are a reduction of the proceeds and are treated as a debt discount. Except for revolving lines of credit, debt issuance costs and discounts are presented in the accompanying consolidated balance sheets as a reduction in the carrying value of the debt and are accreted to interest expense using the effective interest method. Debt issuance costs related to revolving lines of credit are presented in the accompanying consolidated balance sheets as a long-term asset and are amortized using the straight-line method over the contractual term of the debt agreement. Unamortized deferred debt issuance costs are not charged to expense when the related debt becomes a demand obligation due to the violation of terms so long as it is probable that the lenders will either waive the violation or will agree to amend or restructure the terms of the indebtedness. If either circumstance is probable, the deferred debt issuance costs continue to be amortized over the remaining term of the initial amortization period. If it is not probable, the costs will be charged to expense.
| 51 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Offering Costs
Commissions, legal fees and other costs that are directly associated with equity offerings are capitalized as deferred offering costs, pending a determination of the success of the offering. Deferred offering costs related to successful offerings are charged to additional paid-in capital in the period it is determined that the offering was successful. Deferred offering costs related to unsuccessful equity offerings are recorded as expense in the period when it is determined that an offering is unsuccessful.
Revenue Recognition
Product sales are recognized when ourthe Company satisfies its performance obligations are satisfied. Our primary performance obligation (the distribution and saletransfers control of beverage products) is satisfied upon the shipment or delivery ofpromised products to ourits customers, which generally occurs over a very short period of time. Performance obligations are typically satisfied by shipping or delivering products to customers, which is also the point when controltitle transfers to customers. Revenue is transferred. Merchandising activities that are performed after a customer obtains controlmeasured as the amount of consideration expected to be received in exchange for transferring the product, are accounted for as fulfillment of our performance obligation to ship or deliver product to our customers and are recorded in selling, general and administrative expenses. Merchandising activities are immaterial in the context of our contracts.
Revenue consists of the gross sales price, less estimated returns and allowances for which provisions are made at the time of sale, and less certain other discounts, allowances, and personal rebates that are accounted for as a reduction from gross revenue. Shipping and handling charges that are billed to customers are included as a component of revenue.revenue and amounted to $7.3 million and $5.7 million for the years ended December 31, 2020 and 2019, respectively. Costs incurred by the Company for shipping and handling charges are included in cost of goods sold.
Payments received for undelivered or back-ordered products are recorded as deferred revenue. The Company’s policy is to defer revenue related to distributor convention fees, payments received on products ordered in the current period but not delivered until the subsequent period, initial independent product consultants (“IPCs”)Brand Partner fees, IPCBrand Partner renewal fees and internet subscription fees until the products or services have been provided. Deferred revenue is included in other accrued liabilities in the accompanying consolidated balance sheets.
Customers are permitted to return products in unused condition during a period of six to twelve months after the original sale date, depending on the business unit that originated the sale. The amount refunded is generally offset by a reduction in commissions and incentives related to the original sale. Brand Partners may be terminated if they return more than $250 of products within a rolling six-month period unless otherwise agreed to by the Company. If a Brand Partner elects to terminate their account, they may return all unused products purchased within the past 12 months. Sales returns have historically been less than 1.0% of annual sales.
Customer Programs and Incentives
The Company incurs customer program costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to revenue or as advertising, promotional and selling expenses, based on the nature of the expenditure. The Company accounts for volume rebates made to its independent product consultants (“IPCs”)Brand Partners, and similar discounts and incentives, as a reduction of revenue in the accompanying consolidated statements of operations.
Sales and Marketing Expenses
Promotional and selling expenses consisted of sales salaries, tap handles, media advertising costs, sales and marketing expenses, and promotional activity expenses and are recognized in the period incurred.
| 52 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development
Research and development costs are primarily related to development of new product formulas. All research and development costs are expensed as incurred. Researchincurred and development costs were not material for the years endedamounts incurred through December 31, 20182020 have not been material.
Loss and 2017.
The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. An estimated loss contingency is accrued when it is probable that an asset has been impaired, or a liability has been incurred, and the amount of loss can be reasonably estimated. If some amount within a range of loss appears to be a better estimate than any other amount within the range, the Company accrues that amount. Alternatively, when no amount within a range of loss appears to be a better estimate than any other amount, the Company accrues the lowest amount in the range. If the Company determines that a loss is reasonably possible and the range of the loss is estimable, then the Company discloses the range of the possible loss. If the Company cannot estimate the range of loss, it will disclose the reason why it cannot estimate the range of loss. The Company regularly evaluates current information available to it to determine whether an accrual is required, an accrual should be adjusted and if a range of possible loss should be disclosed. Legal fees related to contingencies are charged to general and administrative expense as incurred. Contingencies that may result in gains are not recognized until realization is assured, which typically requires collection in cash.
Stock-Based Compensation
The Company measures the cost of employee and director services received in exchange for all equity awards granted, including stock options, based on the fair market value of the award as of the grant date. The Company computes the fair value of options using the Black-Scholes-Merton (“BSM”) option pricing model. The Company recognizes the cost of the equity awards over the period that services are provided to earn the award, usually the vesting period. For awards granted which contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was,were, in substance, a single award. The Company recognizes the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation.
Derivatives
Derivative financial instrument in the form of an interest rate swap. The Company uses interest rate swaps to economically convert variable interest rate debt on a foreign mortgage to a fixed rate. The Company has not designated these derivatives as hedging instruments. The interest rate swapsinstruments are recorded in the accompanying consolidated financial statementsbalance sheets at their fair value with the unrealized gains and losses recorded in interest expense.
Income Taxes
The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes, under the asset and liability method. Under this method,which deferred income tax assets and liabilitiestaxes are determinedrecognized based on the estimated future tax effects of differences between the financial reportingstatement and tax bases of assets and liabilities and are measured usinggiven the provisions of enacted tax rateslaws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers the relevant tax laws that are expectedand regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to be in effect whenimplement tax-planning strategies vary, adjustments to the differences are expected to be recovered or settled. Realizationcarrying value of deferred income tax assets is dependent upon future taxable income.and liabilities may be required. A valuation allowance is recognized ifrecorded when it is more likely than not that some portion or all of a deferred income tax asset will not be realizedrealized. The recorded valuation allowance is based on significant estimates and judgments and if the weight of available evidence, including expected future earnings.
| 53 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
The Company’s reporting currency is the U.S. Dollar, while the functional currencies of its foreign subsidiaries are their respective local currencies. A majority of Morinda’sthe Direct / Social Selling segment’s business operations occur outside the United States. The local currency of each of the Morinda’sDirect / Social Selling segment’s international subsidiaries and branches is used as its functional currency. All assets and liabilities are translated into U.S. dollars at exchange rates existing at the consolidated balance sheet date, and net revenue and expenses are translated at monthly average exchange rates. The resulting net foreign currency translation adjustments are recorded in accumulated other comprehensive income as a separate component of stockholders’shareholders’ equity in the consolidated balance sheets. Gains and losses from foreign currency transactions and remeasurement gains (losses) on short-term intercompany borrowings, are recorded in other income and expense in the consolidated statements of operations and comprehensive loss. The tax effect has not been material to date.
Basic net loss per common share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding for each period presented. Diluted net loss per common share is computed by giving effect to all potential shares of Common Stock, including unvested restricted stock awards, stock options, convertible debt, Preferred Stock, and warrants, to the extent dilutive.
Recent Accounting Pronouncements
Recently Adopted Standards.
The followingIn AugustJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15,
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The adoption of ASU 2018-13 did not have a material impact on the Company’s results of operations, financial position, or related disclosures.
Standards Required to be Adopted in Future Years. The following accounting standard is not yet effective and will be adopted in the first quarter of 2021.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. ASU 2020-06 allows entities to use a modified or full retrospective transition method and is effective for fiscal years beginning after December 15, 2021,2023, including interim periods within those fiscal years. Further, the ASU clarifies that operating lease receivables are not within the scope of ASC 326-20 and should instead be accounted for under the new leasing standard, ASC 842. The Company has not yet determined the effect that ASU 2018-19 will have on its results operations, balance sheets or financial statement disclosures.
| 54 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption is permitted. The Company isuntil a future date are not currently evaluatingexpected to have a material impact on the impact of this ASU on its consolidatedCompany’s financial statements and related disclosures.
NOTE 3 — LIQUIDITY AND GOING CONCERN
As of December 31, 2020, the Company had working capital of $4.6 million and an accumulated deficit of $151.8 million. Since March 2020, many of the Company’s business units have been experiencing reduced sales as a result of the COVID-19 pandemic discussed in Note 14. For the year ended December 31, 2020, the Company incurred a net loss of $39.3 million and net cash used in operating activities amounted to $34.3 million, of which approximately $13.1 million was attributable to income tax payments paid in March 2020 related to the sale leaseback that was entered into in March 2019 as discussed in Note 8.
During 2020, the Company began a new product and marketing strategy to increase demand for the Company’s products. In September 2020, the Company disposed of the Divested Business discussed in Note 5 that accounted for an operating loss of $7.4 million and a loss on disposal of $3.4 million for the year ended December 31, 2020. The Divested Business also accounted for an operating loss of $61.4 million for the year ended December 31, 2019. Accordingly, the disposal of the Divested Business is expected to improve the Company’s overall financial performance and reduce cash flow needs in the future. As discussed in Note 6, the Company implemented restructuring plans in April and August 2020 that are designed to achieve future annualized selling, general and administrative cost reductions estimated at approximately $9.6 million.
On November 16, 2020, the Company closed its acquisition of Ariix as discussed in Note 4. A portion of the consideration is issuable in shares of Common Stock that are subject to approval by the Company’s stockholders. If the Company’s stockholders fail to provide approval at up to three meetings, the Company will be required to make a cash payment of approximately $163.3 million. The timing of this payment would be due ninety days after the third stockholder meeting. While no assurance can be provided, management believes the Company’s stockholders will provide the necessary approval to settle this obligation in shares of Common Stock.
As discussed in Note 9, the Company entered into a securities purchase agreement on November 30, 2020 that resulted in a private placement of (i) 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million, (ii) shares of Common Stock, (iii) Class A Warrants to purchase 750,000 shares of Common Stock exercisable at $3.75 per share, and (iv) Class B Warrants to purchase 750,000 shares of Common Stock exercisable at $5.75 per share At the closing, the Company received net proceeds of $28.7 million from the private placement. Approximately $14.1 million of the proceeds was used to repay all outstanding principal to terminate the credit facility with East West Bank as discussed in Note 10. As of December 31, 2020, the Company had cash and cash equivalents of $43.7 million and the current portion of restricted cash balances was $10.0 million, for a total of $53.7 million.
In February 2021, the Company entered into a securities purchase agreement in connection with a private placement of an aggregate of approximately million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares of Common Stock. At the closing, the Company received net proceeds of approximately $53.9 million.
During the year ending December 31, 2021, cash payments will be required to settle certain obligations, including cash payable to the former owners of Ariix of $10.0 million, up to $20.0 million of principal and interest under the 8.00% Original Issue Discount Senior Secured Notes, and total operating lease payments of $9.3 million. In addition, the Company expects to obtain the approval from its stockholders to issue an aggregate of up to million shares of Common Stock as discussed in Note 4, whereby the Company would not be required to make cash payments of $163.3 million.
Management believes the current portion of the Company’s existing cash and restricted cash resources, combined with the net proceeds of $53.9 million from the private placement completed in February 2021, will be sufficient to fund the Company’s contractual obligations and working capital requirements at least through the first quarter of 2022.
NOTE 4 — BUSINESS COMBINATIONS
The Company completed business combinations with MorindaAriix in December 2018,November 2020 and Maverick, PMC and Marley during 2017.BWR in July 2019. Each of these business combinations was accounted for using the acquisition method of accounting based onunder ASC 805, Business Combinations, and using the fair value concepts set forth in ASC 820, Fair Value Measurement. The key terms of each of these business combinations are discussed below.
| 55 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ariix Merger Agreement
On DecemberSeptember 30, 2020, the Company entered into an Amended and Restated Agreement and Plan of Ariix Merger (the “Ariix Merger Agreement”), by and among Ariix, LLC (“Ariix”), Ariel Merger Sub, LLC (“Ariix Merger Sub”), Ariel Merger Sub 2, 2018,LLC (“Ariix Merger Sub 2”), certain Members of Ariix (the “Sellers”), and Dr. Frederick W. Cooper, the principal member of Ariix who serves as sellers’ agent (the “Sellers’ Agent”), pursuant to which the Company agreed to acquire 100% of the equity interests of Ariix, subject to customary representations, warranties, covenants and indemnities and closing conditions. The Company entered into the Ariix Merger Agreement to accelerate organic growth with its direct-to-consumer business model and to expand its portfolio of healthy products.
On November 16, 2020, the Company entered into a Planletter agreement (the “Waiver Letter”), with Ariix and the Sellers’ Agent that resulted in closing of the Ariix Merger on November 16, 2020 (the “Merger“Ariix Closing Date”) and the Sellers’ Agent was appointed as a member of the Company’s Board of Directors. On the Ariix Closing Date, Ariix merged with Ariix Merger Sub, with Ariix as the surviving entity and a wholly owned subsidiary of the Company. Subsequently, Ariix Merger Sub was merged with and into Ariix Merger Sub 2 and remains a wholly owned subsidiary of the Company. Ariix Merger Sub 2 was subsequently renamed “Ariix, LLC”.
Pursuant to the Ariix Merger Agreement as modified by the Waiver Letter and the Clarification Letter (the “Amended Ariix Merger Agreement”), the Company was obligated to issue million shares of its Common Stock on the Ariix Closing Date, subject to delivery by Sellers’ Agent of issuance instructions, and to pay $10.0 million to the Sellers within two business days of the later of the dates that (i) Ariix delivers to the Company certain audited annual financial statements and unaudited interim financial statements, and (ii) the Company receives new debt financing and repays its debt agreement with MorindaEast West Bank. These conditions were satisfied by February 1, 2021. The obligation to issue the million shares is included within stockholders’ equity and New Age Health Sciences Holdings,the obligation to pay $10.0 million to the Sellers is reflected as a current liability as of December 31, 2020. This obligation to issue million shares has a fair value of $54.2 million and, along with the $10.0 million obligation to pay cash, is included as part of the purchase consideration.
Pursuant to the Amended Ariix Merger Agreement and exclusive of the impact of the working capital adjustment discussed below, as of December 31, 2020 the Company was required to seek approval from its stockholders to issue (i) up to million shares of its Common Stock as additional consideration required under the Amended Ariix Merger Agreement, (ii) up to million shares for consideration payable to designees of the Sellers’ Agent, and (iii) million shares of Common Stock to the Seller’s Agent in consideration of a non-competition, non-solicitation, invention assignment, and right of first refusal agreement with a term that extends for five years (the “Non-Compete Agreement”). If the Company’s stockholders approve the issuance of shares of Common Stock to settle this portion of the merger consideration, the Company will be required to issue (i) approximately million shares within 30 days after stockholder approval is received, (ii) up to million shares upon the later of one year after the Ariix Closing Date or 30 days after shareholder approval is received, and (iii) million shares upon the later of 14 months after the Ariix Closing Date or 30 days after shareholder approval is received. If the Company’s stockholders fail to approve the issuance of the aggregate of up to million shares of Common Stock at up to three stockholder meetings held after the Ariix Closing Date, the Company will be required to make cash payments of $163.3 million, within 90 days after the third stockholder meeting. These cash payments consist of approximately $141.0 million to the Sellers, up to $10.0 million for payments to certain designees of the Seller’s Agent, and a payment to the Seller’s Agent of approximately $12.3 million.
On May 16, 2021, the Company is required to either pay up to $10.0 million in cash to the Sellers or issue a variable number of shares of its Common Stock with a value up to $10.0 million (the “Interim Ariix Merger Consideration”). The terms of the Company’s Senior Notes discussed in Note 10 require that if this payment is made that it must be paid in shares of Common Stock. The Interim Ariix Merger Consideration is reduced to the extent that working capital of Ariix is less than $11.0 million as of the Ariix Closing Date. Based on the preliminary balance sheet provided by Ariix as of the Ariix Closing Date, working capital of Ariix amounted to a negative $18.0 million, resulting in a $29.0 million shortfall of the targeted working capital per the merger agreement. Ariix also had $5.0 million of long-term accrued business combination liabilities as of the closing date of the transaction which were required to be repaid pursuant to the Amended Merger Agreement. Based on Ariix’s failure to meet the working capital requirements of the Amended Ariix Merger Agreement, the Company expects to eliminate the requirement to pay the Interim Ariix Merger Consideration of $10.0 million. Therefore, there is no fair value associated with the Interim Ariix Merger Consideration. Based on the preliminary working capital shortfall, the Company expects that there will be a reduction in the number of shares issuable on the first anniversary of the Ariix Closing Date from million shares to approximately million shares based on the agreed value of $per share set forth in the Amended Ariix Merger Agreement. As discussed in Note 18, the Company and the Seller’s Agent entered into a letter of clarification on January 29, 2021 that further reduced the number of shares issuable on the first anniversary of the Ariix Closing Date by million shares. This arrangement to provide up to million shares or $163.3 million in cash meets the definition of a derivative with an estimated fair value of $90.9 million that comprises a portion of the purchase consideration.
| 56 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brands Within Reach Merger Agreement
On May 30, 2019, the Company and BWR Acquisition Corp., a newly formed Utah corporation and wholly-ownedwholly owned subsidiary of the Company (“BWR Merger Sub”) entered into an Agreement and Plan of Merger (the “BWR Merger Agreement”) with Brands Within Reach, LLC (“BWR”), and Olivier Sonnois, the sole owner of BWR (“Mr. Sonnois”). On December 21, 2018At the closing on July 10, 2019 (the “Closing“BWR Closing Date”), the transactions contemplated by the BWR Merger Agreement were completed.completed resulting in the merger of BWR Merger Sub was merged with and into MorindaBWR, and MorindaBWR became a wholly-ownedwholly owned subsidiary of the Company. This closing of the transaction is referredwas accounted for using the acquisition method of accounting based on ASC 805, Business Combinations, and using the fair value concepts set forth in ASC 820, Fair Value Measurement. The Company entered into the BWR Merger Agreement primarily to herein asacquire certain key licensing and distribution rights in the “Merger.”
In connection with the BWR Merger Agreement, the Company paidmade a loan to Morinda’s equity holders (i) $75.0BWR in the amount of $1.0 million in cash; (ii) 2,016,480June 2019. The BWR Merger Agreement provided that if BWR’s working capital set forth on its opening balance sheet was negative, then the number of shares of Common Stock issuable by the Company would be reduced from shares to account for the deficiency. The opening balance sheet resulted in negative working capital of approximately $2.5 million, which resulted in a reduction of the number of shares issued at closing to shares. Accordingly, the estimated fair value of the shares was approximately $453,000 based on the fair value of the Company’s Common Stock with an estimated fair valueof $ per share on the closing Date of approximately $11.0 million, (iii) 43,804 shares of Series D Preferred Stock (the “Preferred Stock”) providingBWR Closing Date. The BWR Merger Agreement also provided for the potentiala cash payment of up to $15$0.5 million contingent upon Morinda achieving certain post-closing milestones, as discussed below.
Summary of Purchase Consideration
Presented below is a summary of the total purchase consideration for thesethe Ariix and BWR business combinations (in(dollars in thousands):
SCHEDULE OF PURCHASE CONSIDERATION
| Ariix | BWR | |||||||
| 2020 | 2019 | |||||||
| Pre-closing cash advance | $ | - | $ | 1,000 | ||||
| Cash paid to former owners | - | 500 | ||||||
| Fair value of: | ||||||||
| Common stock issuable for million shares | 54,186 | 453 | ||||||
| Short-term cash consideration | 10,000 | - | ||||||
| Derivative liability to issue shares or cash | 90,874 | - | ||||||
| Total purchase consideration | $ | 155,060 | $ | 1,953 | ||||
| 57 |
2018 | 2017 | ||||
Morinda | Maverick | PMC | Marley | Total | |
| Purchase consideration: | |||||
| Cash paid | $75,000 | $2,000 | $- | $- | $2,000 |
| Fair value of: | |||||
| Common stock issued | 10,970(1) | 9,086 | 5,496 | 18,600 | 33,182 |
| Contingent consideration payable | 13,134(2) | - | - | 800 | 800 |
| Total purchase consideration | $99,104 | $11,086 | $5,496 | $19,400 | $35,982 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Price Allocations
Presented below is a summary of the purchase price allocations for thesethe Ariix and BWR business combinations (in thousands):
2018 | 2017 | ||||
Morinda | Maverick | PMC | Marley | Total | |
| Current assets: | |||||
| Cash and cash equivalents | $42,647 | $- | $- | $- | $- |
| Accounts receivable | 4,250 | 246 | - | 187 | 433 |
| Inventories | 26,733(1) | 1,523 | - | 798 | 2,321 |
| Prepaid expenses and other | 3,985 | 211 | 2 | 199 | 412 |
| Total current assets acquired | 77,615 | 1,980 | 2 | 1,184 | 3,166 |
| Property and equipment | 55,389(2) | 68 | 55 | 22 | 145 |
| Identifiable intangible assets | 45,886(3) | 6,661 | 4,100 | 9,281 | 20,042 |
| Right-of-use lease asset and other | 19,318(4) | - | - | - | - |
| Total identifiable assets acquired | 198,208 | 8,709 | 4,157 | 10,487 | 23,353 |
| Current liabilities assumed: | |||||
| Current maturities of notes payable | (1,291) | - | (401) | - | (401) |
| Stockholder payables | (8,701)(5) | - | - | - | - |
| Accounts payable, accrued liabilities and other | (40,364) | (1,345) | (28) | (505) | (1,878) |
| Long-term liabilities assumed: | |||||
| Notes payable, less current maturities | (1,578) | (1,427) | - | - | (1,427) |
Stockholder payables | (43,356)(5) | - | - | - | - |
| Other long-term liabilities | (14,098) | - | - | - | - |
| Net identifiable assets acquired | 88,820 | 5,937 | 3,728 | 9,982 | 19,647 |
| Goodwill | 10,284(6) | 5,149 | 1,768 | 9,418 | 16,335 |
| Total purchase price allocation | $99,104 | $11,086 | $5,496 | $19,400 | $35,982 |
SUMMARY OF PURCHASE PRICE ALLOCATION
| Ariix | BWR | |||||||
| 2020 | 2019 | |||||||
| Identifiable assets acquired: | ||||||||
| Cash, cash equivalents and restricted cash | $ | 7,408 | $ | 537 | ||||
| Accounts receivable, net | 4,740 | 1,293 | ||||||
| Inventories | 20,084 | (1) | 2,398 | (1) | ||||
| Prepaid expenses and other assets | 7,418 | 452 | ||||||
| Non-compete agreement | 19,085 | (2) | 120 | |||||
| Other identifiable intangible assets | 112,730 | (3) | 1,410 | (3) | ||||
| Right-of-use assets | 3,309 | 708 | ||||||
| Property and equipment | 789 | 136 | ||||||
| Total identifiable assets acquired | 175,563 | 7,054 | ||||||
| Liabilities assumed: | ||||||||
| Accounts payable and accrued liabilities | (50,893 | ) | (4,071 | ) | ||||
| Business combination liabilities | (6,743 | ) | - | |||||
| Mortgage and notes payable | (2,779 | ) | (2,353 | )(5) | ||||
| Deferred income taxes | (1,488 | )(4) | - | (4) | ||||
| Operating lease liabilities | (3,309 | ) | (708 | ) | ||||
| Net identifiable assets acquired | 110,351 | (78 | ) | |||||
| Goodwill | 44,709 | (6) | 2,031 | (6) | ||||
| Total purchase price allocation | $ | 155,060 | $ | 1,953 | ||||
| (1) | Based in part on the preliminary report of an independent valuation specialist for Ariix and a final report for BWR, the fair value of work-in-process and finished goods inventories on the closing dates exceeded the historical carrying value by approximately $0.9 million for Ariix and $0.2 million for BWR. These amounts represent an element of built-in profit on the closing dates and are being charged to cost of goods sold as the related inventories are subsequently sold. The fair value of inventories was determined using both the “cost approach” and the “market approach”. | |
| (2) | The fair value of the Ariix non-compete agreement was determined based on the fair value for million shares of the Company’s Common Stock issuable in exchange for the non-compete agreement as of the Ariix Closing Date. The fair value was discounted using a credit adjusted risk free interest rate of approximately 2.0%. | |
| (3) | Based in part on the preliminary report of an independent valuation specialist for Ariix and a final report for BWR, the fair value of identifiable intangible assets was determined primarily using variations of the “income approach,” which is based on the present value of the future after-tax cash flows attributable to each identifiable intangible asset. | |
| (4) | The U.S. operations of Ariix and BWR were previously taxed on the owners’ individual income tax returns. Adjustments of approximately $8.0 million for Ariix and $0.4 million for BWR have been reflected for net deferred income tax liabilities that resulted from differences between the financial reporting basis and the income tax basis of such assets and liabilities on the respective closing dates. | |
| (5) | The Company assumed BWR’s obligations under its existing line of credit in connection with the business combination. Shortly after the closing date, the Company paid an aggregate of $2.5 million to terminate the BWR line of credit and repay certain other liabilities. | |
| (6) | Goodwill was recognized for the difference between the total purchase consideration transferred to consummate the business combinations and the fair value of the net identifiable assets acquired. Goodwill primarily relates to expected synergies to be realized due to combining the respective businesses with the Company, and the value of assembled workforces on the closing dates. Goodwill in connection with the Ariix and BWR business combinations is not expected to be deductible for income tax purposes. |
| 58 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has recognized provisional amounts for deferred income taxes, certain working capital adjustments, and is still evaluating possible obligations of Morinda’s real estate properties amountedlicensed operations and other operational obligations in key foreign jurisdictions which we expect to $44.4 million and was based upon real estate appraisals prepared by an independent firm, primarily usingbe completed during the “income approach”one-year period after the Ariix Closing Date (the “Measurement Period”). Fair value
Identifiable Intangible Assets Acquired
Presented below are the details of other property and equipment amounted to $10.9 million and was based primarily on the report of an independent valuation specialist with fair value determined using both the “cost approach” and the “market approach”.
SUMMARY OF IDENTIFIABLE ASSETS ACQUIRED
| Fair | Useful | |||||||
| Value | Lives | |||||||
| Brand Partner sales and distribution network | $ | 79,550 | 13.0 | |||||
| Brand and trade names | 19,970 | 14.5 | ||||||
| Internal use software | 13,210 | 15.0 | ||||||
| Sub-total | 112,730 | 13.5 | ||||||
| Non-compete agreement | 19,085 | 5.0 | ||||||
| Total | $ | 131,815 | 12.3 | |||||
Business Combination Liabilities
As of such U.S. assetsDecember 31, 2020 and liabilities.
SCHEDULE OF BUSINESS COMBINATION LIABILITIES
| 2020 | 2019 | |||||||
| Liabilities to former owners of Ariix: | ||||||||
| Derivative liability payable in cash or shares | $ | 90,874 | (1) | $ | - | |||
| Short-term debt payable in cash | 10,000 | - | ||||||
| Business combination liabilities assumed from Ariix: | ||||||||
| Fair value of deferred consideration payable: | ||||||||
| LIMU | 3,656 | (2) | - | |||||
| Zennoa | 2,196 | (3) | - | |||||
| Short-term debt for Zennoa, due May 2021 | 850 | - | ||||||
| Morinda business combination liabilities: | ||||||||
| Excess working capital payable in July 2020, net of discount of $179 in 2019 | - | 5,283 | ||||||
| Earnout under Series D preferred stock | - | 225 | (4) | |||||
| Total | 107,576 | 5,508 | ||||||
| Less current portion | 11,750 | 5,508 | ||||||
| Long-term portion | $ | 95,826 | $ | - | ||||
| (1) | Pursuant to the Amended Ariix Merger Agreement, the Company is required to seek approval from its stockholders to issue up to an aggregate of million shares of Common Stock at up to three stockholder meetings held after the Ariix Closing Date. Based on the expected working capital adjustment set forth in the Amended Merger Agreement, the aggregate shares issuable were revised to an aggregate of million shares as of December 31, 2020. If stockholders fail to approve the settlement in shares of Common Stock, the Company will be required to make cash payments of $163.3 million within 90 days after the third stockholder meeting. This obligation to issue approximately million shares or pay cash of $163.3 million is accounted for as derivative liability with a fair value of $90.9 million. Key valuation assumptions included (i) historical volatility of NewAge shares of Common Stock of 77%, (ii) a risk-free interest rate of approximately 0.1%, and (iii) the weighted average cost of capital for the Company of 16.5%. | |
| (2) | On May 31, 2019, Ariix completed a business combination with The LIMU Company, LLC (“LIMU”) that provided for a cash payment of $3.0 million on the closing date and $5.0 million of deferred consideration payable based on 5.0% of monthly post-closing sales related to the LIMU business. Through December 31, 2020, total payments of deferred consideration made by Ariix and the Company amounted to approximately $0.8 million, resulting in a remaining balance due to the former owners of LIMU of $4.2 million. This obligation is subject to a security agreement until the entire amount is paid in full. The net carrying value of $3.7 million represents the fair value of this obligation based on a discount rate of 4.5%. This discount is being accreted using the effective interest method. | |
| (3) | On November 27, 2019, Ariix completed a business combination with Zennoa, LLC (“Zennoa”) that provided for fixed cash payments of $2.25 million and deferred consideration of $2.5 million that is payable based on annualized sales from the Zennoa business for the latest completed month (the “Zennoa Sales Metric”). Payments related to the deferred consideration commenced in December 2020 and are computed using a variable percentage based on the Zennoa Sales Metric. No amounts are payable if the Zennoa Sales Metric is less than $6.0 million, and payments ranging from 3% to 5% of monthly sales are payable if the Zennoa Sales Metric exceeds $6.0 million. | |
| After the stated purchase price of $4.75 million is paid in full, the Company is obligated to begin making Growth Incentive Payments (“GI Payments”) through November 2026. The amount of GI Payments due for each month is based on varying percentages starting at 2.0% if the Zennoa Sales Metric is at least $25.0 million, up to a maximum of 3.0% if the Zennoa Sales Metric is $45.0 million or higher. The Company determined that the probability of the Zennoa Sales Metric exceeding $25.0 million is remote. The net carrying value of the Zennoa deferred consideration of $2.2 million represents the fair value of the Company’s obligations to pay the stated purchase price and the GI Payments based on a discount rate of 3.9%. This discount is being accreted using the effective interest method. | ||
| (4) | As of December 31, 2019, it was determined that Morinda’s EBITDA for the year ended December 31, 2019 was less than $17.0 million and therefore no Milestone Dividend was payable. Accordingly, the fair value of the Morinda earnout of $0.2 million was solely attributable to the 1.5% dividend set forth in the Series D Preferred Stock. The Preferred Stock terminated on April 15, 2020, and the Company paid accumulated cash dividends of approximately $0.3 million in May 2020. |
| 59 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future Maturities of Business Combination Liabilities
As of earnoutDecember 31, 2020, the estimated future cash and derivative settlements for business combination obligations relatedwere as follows:
SCHEDULE OF FUTURE MATURITIES OF BUSINESS COMBINATION OBLIGATIONS
| Type of Obligation | ||||||||||||||||
| Year Ending December 31, | Debt | Deferred Consideration | Derivative | Total | ||||||||||||
| 2021 | $ | 10,850 | $ | 900 | $ | - | $ | 11,750 | ||||||||
| 2022 | - | 900 | 90,874 | 91,774 | ||||||||||||
| 2023 | - | 900 | - | 900 | ||||||||||||
| 2024 | - | 900 | - | 900 | ||||||||||||
| 2025 | - | 900 | - | 900 | ||||||||||||
| Thereafter | - | 1,352 | - | 1,352 | ||||||||||||
| Total | $ | 10,850 | $ | 5,852 | $ | 90,874 | $ | 107,576 | ||||||||
Net Revenue and Net Loss Related to Business Combinations
For the Marley and Morinda business combinations and payables to the former stockholders of Morinda (in thousands):
2018 | |||||
Total | Discount | Accretion | Net | 2017 | |
| Marley earnout obligation | $900(1) | $- | $- | $900 | $800 |
Payables to former Morinda stockholders: | |||||
| EWC payable in April 2019 | 1,000(2) | (16)(5) | 2 | 986 | - |
| EWC payable in July 2019 | 8,000(2) | (283)(5) | 15 | 7,732 | - |
| EWC payable in July 2020 | 5,463(2) | (497)(5) | 10 | 4,984 | - |
| Earnout under Series D preferred stock | 13,134(3) | - | - | 13,134 | - |
| Contingent on financing event | 25,000(4) | (644)(5) | 46 | 24,394 | - |
| Total | 53,497 | (1,440) | 73 | 52,130 | 800 |
| Less current portion | 9,000 | (299) | 17 | 8,718 | - |
| Long-term portion | $44,497 | $(1,141) | $56 | $43,412 | $800 |
SCHEDULE OF NET REVENUE AND NET LOSS RELATED TO BUSINESS COMBINATIONS
| 2020 | BWR | |||||||||||
| Ariix | BWR | 2019 | ||||||||||
| Net revenue | $ | 31,970 | $ | 9,173 | $ | 4,938 | ||||||
| Net income (loss) | $ | 2,080 | $ | (3,952 | ) | $ | (5,460 | ) | ||||
Unaudited Pro Forma Disclosures
The following table summarizes on an unaudited pro forma basis, the Company’s results of operations for the years ended December 31, 2018.
SCHEDULE OF UNAUDITED PRO FORMA DISCLOSURES
| 2020 | 2019 | |||||||
| Net revenue | $ | 499,272 | $ | 485,169 | ||||
| Net loss | $ | (37,477 | ) | $ | (89,304 | ) | ||
| Net loss per share- basic and diluted | $ | (0.32 | ) | $ | (0.91 | ) | ||
| Weighted average number of shares of common stock outstanding- basic and diluted | 116,052 | 97,747 | ||||||
The following unaudited pro forma financial results reflectsshown above reflect the historical operating results of the Company, including the unaudited pro forma results of Morinda, Maverick, PMCAriix and MarleyBWR as if each of these business combinations and the related equity issuances had occurred at the beginning of the first full calendar year preceding the acquisition date. As applicable for the years presented, the calculations of pro forma net revenue and pro forma net loss give effect to the pre-acquisition operating results of Ariix and BWR based on (i) the historical net revenue and net income (loss), and (ii) incremental depreciation and amortization based on the fair value of property, equipment and identifiable intangible assets acquired and the related estimated useful lives. The potential impact of settling the Ariix derivative liability in shares has not been given effect in the calculation of the weighted average number of shares since the impact was anti-dilutive for the years ended December 31, 20182020 and 2017, respectively, as if each of these four business combinations had occurred as of January 1, 2017. The pro forma financial information set forth below reflects adjustments to the historical data of the Company to give effect to each of these acquisitions and the related equity issuances as if each had occurred on January 1, 2017.2019. The pro forma information presented belowabove does not purport to represent what the actual results of operations would have been for the periods indicated, nor does it purport to represent the Company’s future results of operations. The following table summarizes on an unaudited pro forma basis the Company’s results of operations for the years ended December 31, 2018 and 2017 (in thousands, except per share amounts):
| 60 |
2018 | 2017 | |
| Net revenue | $287,119 | $285,297 |
| Net loss | $(10,210) | $(1,774) |
| Net loss per share- basic and diluted | $(0.21) | $(0.05) |
| Weighted average number of shares of common | ||
| stock outstanding- basic and diluted | 48,617 | 35,222 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — DIVESTED BUSINESS
On September 24, 2020 (the “BWR Closing Date”), the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Zachert Private Equity GmbH (the “Buyer”), pursuant to which the Company sold its (i) BWR subsidiary, including the rights to distribute the Nestea, Volvic, Evian, Illy Coffee, Kusmi Tea, Saint Geron and Found brands , (ii) substantially all U.S. retail brands owned by the Brands Division, including XingTea, Búcha® Live Kombucha, Aspen Pure and Coco-Libre brands, and (iii) certain machinery, equipment and other assets necessary for the distribution of such brands. All of these assets and the related results of operations are included in the Direct Store segment and are collectively referred to herein as the “Divested Business”. The remaining brands within the Brands Division that were not included in this transaction were phased out during the fourth quarter of 2020.
As consideration for the transaction, the Company received net cash in the amount of $0.6 million and an unsecured nonrecourse promissory note in the aggregate amount of approximately $3.3 million that related to inventory of BWR that was pre-paid by the Company, bears no interest, and matures nine months from the BWR Closing Date (the “Nonrecourse Note”). The Nonrecourse Note was issued by the Buyer through its newly acquired subsidiary BWR, is payable solely by BWR, and bears no interest. As of the BWR Closing Date, the Company determined that there was no fair value associated with the Nonrecourse Note, since the Buyer did not guarantee the note and there is no collateral. Accordingly, the Company will recognize future gains to the extent that cash is collected on the Nonrecourse Note.
Under the terms of the Purchase Agreement, on the third anniversary of the BWR Closing Date, the Company has the right to purchase 10% of the membership interests of BWR for $2.5 million. The Company determined that there is no fair value associated with this purchase option based on the current operating results of the business. The Company agreed to certain non-competition and non-solicitation provisions for a period of three years beginning on the BWR Closing Date. The Company has agreed to retain certain contingent liabilities related to BWR and the U.S. retail brands in the aggregate amount of $0.9 million, which are included in other accrued liabilities in the accompanying consolidated balance sheet as of December 31, 2020.
| 61 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognized a loss on the disposition of the Divested Business of $3.4 million as follows (in thousands):
SCHEDULE OF RECOGNIZED A LOSS ON THE DISPOSITION OF THE DIVESTED BUSINESS
| Carrying value of consideration received: | ||||
| Cash received | $ | 590 | ||
| Nonrecourse Note, face amount of $3.3 million, due June 2021 | - | |||
| Total fair value of consideration received | 590 | |||
| Carrying value of assets conveyed: | ||||
| Cash | (209 | ) | ||
| Accounts receivable | (1,900 | ) | ||
| Inventories | (3,891 | ) | ||
| Identifiable intangible assets | (657 | ) | ||
| Right-of-use and other assets | (761 | ) | ||
| Property and equipment | (125 | ) | ||
| Liabilities conveyed: | ||||
| Accounts payable and accrued liabilities | 2,549 | |||
| Accrued compensation and other current liabilities | 723 | |||
| Operating lease liabilities | 606 | |||
| Total consideration conveyed to Buyer | (3,665 | ) | ||
| Commissions and other selling expenses | (371 | ) | ||
| Loss on disposition | $ | (3,446 | ) | |
In connection with the transaction, the Buyer issued to the Company an unsecured promissory note payable by BWR in exchange for $1.25 million in cash and $1.25 million in equity. This promissory note provides for a principal balance of $2.5 million, bears interest at 10% per annum, matures three years from the BWR Closing Date, and is fully guaranteed by the Buyer until the earlier of such time that (i) the promissory note is repaid in full, (ii) the Buyer makes equity contributions to BWR of at least $2.5 million, or (iii) BWR recognizes net income of at least $2.5 million for any 12-month period following the BWR Closing date (the “Guaranty Note”). A portion of the consideration for the Guaranty Note was the issuance of shares of the Company’s common stock issued to the Buyer with an estimated fair value of $1.25 million. Accordingly, $1.25 million of the Guaranty Note is reflected as a reduction of stockholders’ equity and $1.25 million is included under the caption “Deposits and other” in the accompanying consolidated balance sheet as of December 31, 2020.
Concurrent with the BWR Merger Agreement discussed in Note 4, the Company entered into an independent contractor agreement (“ICA”) that provided for the former sole owner of BWR to serve as president of the Company’s North American Brands Division (“NABD”). Under the ICA, the Company was required to (i) pay base compensation of $ per year, (ii) make certain grants of restricted stock and stock options that vested over years, and (iii) pay annual short term performance bonuses and other incentives if criteria established by the Company were achieved. No special performance bonuses or incentives were earned and due to the sale of the Divested Business, the ICA is no longer in effect.
NOTE 4 6 —OTHER FINANCIAL INFORMATION
Inventories
Inventories consistconsisted of the following as of December 31, 20182020 and 20172019 (in thousands):
SCHEDULE OF INVENTORIES
| 2020 | 2019 | |||||||
| Raw materials | $ | 12,628 | $ | 12,848 | ||||
| Work-in-process | 1,225 | 872 | ||||||
| Finished goods, net | 34,198 | 22,998 | ||||||
| Total inventories | $ | 48,051 | $ | 36,718 | ||||
| 62 |
2018 | 2017 | |
| Raw materials | $12,538 | $6,302 |
| Work-in-process | 907 | - |
| Finished goods | 23,703 | 740 |
| Total inventories | $37,148 | $7,042 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepaid Expenses and Other Current Assets
Prepaid expenses and other consisted of the following as of December 31, 2020 and 2019 (in thousands):
SCHEDULE OF PREPAID EXPENSES AND OTHER
| 2020 | 2019 | |||||||
| Prepaid expenses and deposits | $ | 11,255 | $ | 4,150 | ||||
| Supplier and other receivables | 1,777 | 122 | ||||||
| Prepaid stock-based compensation | - | 112 | ||||||
| Total | $ | 13,032 | $ | 4,384 | ||||
Property and Equipment
As of December 31, 20182020 and 2017, prepaid expenses and other current assets consist of the following (in thousands):
2018 | 2017 | |
| Prepaid expenses and deposits | $4,982 | $309 |
| Prepaid stock-based compensation | 347 | 963 |
| Supplier and other receivables | 1,144 | 163 |
| Total | $6,473 | $1,435 |
2018 | 2017 | |
| Land | $25,726 | $37 |
| Buildings and improvements | 19,822 | 481 |
| Leasehold improvements | 4,398 | 858 |
| Machinery and equipment | 5,208 | 439 |
| Office furniture and equipment | 2,087 | 55 |
| Transportation equipment | 1,727 | 787 |
| Total property and equipment | 58,968 | 2,657 |
| Less accumulated depreciation | (1,687) | (762) |
| Property and equipment, net | $57,281 | $1,895 |
SCHEDULE OF PROPERTY AND EQUIPMENT
| 2020 | 2019 | |||||||
| Land | $ | 37 | $ | 37 | ||||
| Buildings and improvements | 18,098 | 16,686 | ||||||
| Machinery and equipment | 5,837 | 5,307 | ||||||
| Leasehold improvements | 7,100 | 5,019 | ||||||
| Office furniture and equipment | 4,809 | 3,964 | ||||||
| Transportation equipment | 1,039 | 1,733 | ||||||
| Total property and equipment | 36,920 | 32,746 | ||||||
| Less accumulated depreciation | (8,844 | ) | (4,303 | ) | ||||
| Property and equipment, net | $ | 28,076 | $ | 28,443 | ||||
Repairs and amortization expense related to property and equipmentmaintenance costs amounted to $0.7$1.3 million and $0.6$2.2 million for the years ended December 31, 20182020 and 2017,2019, respectively. Repairs and maintenance costs amounted to $0.8 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively.
Other
As of December 31, 20182020 and 2017, restricted cash and2019, other long-term assets consistaccrued liabilities consisted of the following (in thousands):
2018 | 2017 | |
Restricted cash (1) | $3,339 | $- |
| Debt issuance costs, net | 548 | - |
| Prepaid stock-based compensation | 210 | 555 |
| Deposits and other | 2,838 | 147 |
| Total | $6,935 | $702 |
SCHEDULE OF OTHER ACCRUED LIABILITIES
| 2020 | 2019 | |||||||
| Accrued commissions | $ | 23,594 | $ | 8,914 | ||||
| Accrued compensation and benefits | 9,443 | 5,868 | ||||||
| Accrued marketing events | 8,212 | 4,568 | ||||||
| Deferred revenue | 6,278 | 1,358 | ||||||
| Provision for sales returns | 1,322 | 461 | ||||||
| Income taxes payable | 3,461 | 15,227 | ||||||
| Current portion of operating lease liabilities | 6,948 | 5,673 | ||||||
| Other accrued liabilities | 10,749 | 7,382 | ||||||
| Total accrued liabilities | $ | 70,007 | $ | 49,451 | ||||
Restructuring
In April and August 2020, the Company initiated restructuring plans that are designed to achieve selling, general and administrative cost reductions. These restructuring plans are primarily represents long-term cash deposits heldfocused on reductions in a bankmarketing and other personnel. For the year ended December 31, 2020, the Company implemented headcount reductions of approximately 150 employees. These 150 employees whose employment was terminated accounted for a foreign governmental agency. This depositestimated annualized compensation and benefit costs of $9.6 million. In connection with the termination of employees, the Company incurred severance costs of $2.6 million for the year ended December 31, 2020. Severance costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations. For the year ended December 31, 2020, approximately $1.9 million and $0.7 million of the severance costs related to the Direct/ Social Selling segment and the Direct Store segment, respectively. The unpaid portion of severance costs amounted to $0.2 million is required to maintain the Company’s direct selling license to do businessincluded in China.
SUMMARY OF ACTIVITY AFFECTING THE ACCRUED LIABILITY FOR SEVERANCE BENEFITS
| Accrued liability, December 31, 2019 | $ | - | ||
| Severance expense incurred | 2,543 | |||
| Cash payments | (2,352 | ) | ||
| Accrued liability, December 31, 2020 | $ | 191 |
No assurance can be provided that the restructuring plan will be successful in achieving the annualized cost reductions.
| 63 |
2018 | 2017 | |
| Accrued commissions | $9,731 | $86 |
| Current portion of right-of-use lease liability | 4,798 | 239 |
| Accrued compensation and benefits | 4,715 | 1,059 |
| Accrued marketing events | 3,757(1) | - |
| Deferred revenue | 2,701 | - |
| Income taxes payable | 1,670 | - |
| Embedded derivative liability | 470 | - |
| Other accrued liabilities | 6,177 | 1,010 |
| Total other accrued liabilities | $34,019 | $2,394 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and 2017 (in thousands):
| Reporting Unit | 2018 | 2017 |
| Morinda | $10,284 | $- |
| Marley | 9,418 | 9,418 |
| Maverick | 5,149 | 5,149 |
4,506 | 4,506 | |
| PMC | 1,768 | 1,768 |
| B&R | 389 | 389 |
| Total Goodwill | $31,514 | $21,230 |
Depreciation expense related to property and 2017, identifiable intangible assets consist of the following (in thousands):
December 31, 2018 | December 31, 2017 | |||||
Accumulated | Net Book | Accumulated | Net Book | |||
| Identifiable Intangible Asset | Cost | Amortization | Value | Cost | Amortization | Value |
| License agreements | ||||||
| China direct selling license | $20,420 | $40 | $20,380 | $- | $- | $- |
| Other | 6,089 | 418 | 5,671 | 5,990 | 74 | 5,916 |
| Manufacturing processes and recipes | 11,610 | 380 | 11,230 | 3,530 | 132 | 3,398 |
| Trade names | 12,301 | 584 | 11,717 | 4,861 | 243 | 4,618 |
| IPC distributor sales force | 9,760 | 29 | 9,731 | - | - | - |
| Customer relationships | 6,444 | 1,194 | 5,250 | 6,444 | 760 | 5,684 |
| Patents | 4,100 | 433 | 3,667 | 4,100 | 160 | 3,940 |
| Former Morinda shareholder non-compete agreements | 186 | 2 | 184 | - | - | - |
| Total identifiable intangible assets | $70,910 | $3,080 | $67,830 | $24,925 | $1,369 | $23,556 |
SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE
| 2020 | 2019 | |||||||
| Depreciation | $ | 3,999 | $ | 3,402 | ||||
| Amortization | 4,929 | 5,357 | ||||||
| Total | $ | 8,928 | $ | 8,759 | ||||
NOTE 7 —IDENTIFIABLE INTANGIBLE ASSETS AND GOODWILL
Identifiable Intangible Assets
As of December 31, 20182020 and 2017, respectively. 2019, identifiable intangible assets consisted of the following (in thousands):
SCHEDULE OF IDENTIFIABLE INTANGIBLE ASSETS
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| Identifiable Intangible Asset | Cost | Amortization | Value | Cost | Amortization | Value | ||||||||||||||||||
| Brand Partner distribution and sales network | $ | 89,310 | $ | (2,644 | ) | $ | 86,666 | $ | 9,760 | $ | (1,005 | ) | $ | 8,755 | ||||||||||
| Trade names | 27,433 | (1,291 | ) | 26,142 | 7,485 | (545 | ) | 6,940 | ||||||||||||||||
| Manufacturing know-how and other | 21,290 | (1,203 | ) | 20,087 | 8,080 | (555 | ) | 7,525 | ||||||||||||||||
| Non-compete agreements | 19,271 | (603 | ) | 18,668 | 186 | (64 | ) | 122 | ||||||||||||||||
| China direct selling license | 20,420 | (2,763 | ) | 17,657 | 20,420 | (1,401 | ) | 19,019 | ||||||||||||||||
| Patents and other | 418 | (27 | ) | 391 | 1,107 | (25 | ) | 1,082 | ||||||||||||||||
| Total identifiable intangible assets | $ | 178,142 | $ | (8,531 | ) | $ | 169,611 | $ | 47,038 | $ | (3,595 | ) | $ | 43,443 | ||||||||||
Assuming no future impairments or disposals, amortization expense for the above intangiblesidentifiable intangible assets for the next five years is set forth below (in thousands):below:
SCHEDULE OF FUTURE AMORTIZATION EXPENSES OF IDENTIFIABLE INTANGIBLE ASSETS
| Year Ending December 31, | ||||
| 2021 | $ | 15,755 | ||
| 2022 | 15,694 | |||
| 2023 | 15,694 | |||
| 2024 | 15,694 | |||
| 2025 | 15,191 | |||
| Thereafter | 91,583 | |||
| Total | $ | 169,611 | ||
| 64 |
| Year ending December 31: | |
| 2019 | $4,785 |
| 2020 | 4,785 |
| 2021 | 4,783 |
| 2022 | 4,723 |
| 2023 | 4,723 |
| Thereafter | 44,031 |
| Total | $67,830 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill by reporting unit consists of the following (in thousands):
SUMMARY OF GOODWILL
December 31, | 2020 | December 31, | ||||||||||
| Reporting Unit | 2019 | Additions | 2020 | |||||||||
| Ariix | $ | - | $ | 44,709 | $ | 44,709 | ||||||
| Morinda | 10,284 | - | 10,284 | |||||||||
| Total goodwill | $ | 54,993 | $ | 10,284 | $ | 54,993 | ||||||
Impairment Assessment
During the fourth quarter of 2020, the Company performed its annual goodwill impairment testing and determined that no impairment of goodwill existed as of December 31, 2020. During the fourth quarter of 2019, the Company performed its annual goodwill impairment testing in conjunction with its annual budget process to reassess strategic priorities and forecast future operating performance and capital spending. Accordingly, the Company performed a quantitative assessment of the fair value of each of its reporting units in the Direct/ Social Selling and Direct Store segments as of December 31, 2019. Fair value of the reporting units was determined using the fair value concepts set forth in ASC 820, Fair Value Measurement based in part on the report of an independent valuation specialist. The valuation approach attributable to each reporting unit used a weighted average from the “income approach” based on the present value of the future after-tax cash flows, and the “market approach” using the public company method.
As a result of the 2019 valuation assessment, the Company recorded a cumulative impairment charge of $44.9 million to eliminate the net carrying value of all goodwill and substantially all identifiable intangible assets for all reporting units in the Direct Store segment. For the year ended December 31, 2019, the changes in the net carrying value of identifiable intangible assets and goodwill are as follows (in thousands):
SCHEDULE OF IDENTIFIABLE INTANGIBLE ASSETS AND GOODWILL
| Balance | Changes in Net Carrying Value | Balance | ||||||||||||||||||
| December 31, | Amortization | Impairment | December 31, | |||||||||||||||||
| Intangible Asset | 2018 | Additions(1) | Expense | Write-Offs(2) | 2019 | |||||||||||||||
| Identifiable intangible assets: | ||||||||||||||||||||
| License agreements | ||||||||||||||||||||
| China direct selling license | $ | 20,380 | $ | - | $ | (1,361 | ) | $ | - | $ | 19,019 | |||||||||
| Other | 5,671 | 838 | (529 | ) | (5,980 | ) | - | |||||||||||||
| Manufacturing know-how and other | 11,230 | - | (796 | ) | (2,909 | ) | 7,525 | |||||||||||||
| Trade names | 11,717 | 300 | (886 | ) | (4,191 | ) | 6,940 | |||||||||||||
| Brand Partner sales and distribution network | 9,731 | - | (976 | ) | - | 8,755 | ||||||||||||||
| Customer relationships | 5,250 | 420 | (439 | ) | (5,231 | ) | - | |||||||||||||
| Patents | 3,667 | 163 | (274 | ) | (3,244 | ) | 312 | |||||||||||||
| Product distribution rights and other | - | 795 | (25 | ) | - | 770 | ||||||||||||||
| Non-compete agreements | 184 | 119 | (72 | ) | (109 | ) | 122 | |||||||||||||
| Total identifiable intangible assets | 67,830 | 2,635 | (5,358 | ) | (21,664 | ) | 43,443 | |||||||||||||
| Goodwill | 31,514 | 2,031 | - | (23,261 | ) | 10,284 | ||||||||||||||
| Total intangible assets | $ | 99,344 | $ | 4,666 | $ | (5,358 | ) | $ | (44,925 | ) | $ | 53,727 | ||||||||
| (1) | Additions include identifiable intangible assets of $1.5 million and goodwill of $2.0 million in connection with the BWR business combination in July 2019, as discussed in Note 4. Identifiable intangible assets of $0.8 million and goodwill of $2.0 million related to BWR are included in the impairment write-offs. |
| (2) | All impairment write-offs were attributable to the Direct Store segment. |
| 65 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 68 —LEASES
The Company leases various office and warehouse facilities, vehicles and equipment under non-cancellable operating lease agreements that expire between January 20192021 and May 2030. March 2039. The Company has made accounting policy elections (i) to not apply the recognition requirements for short-term leases and (ii) for facility leases, when there are lease and non-lease components, such as common area maintenance charges, to account for the lease and non-lease components as a single lease component.For the years ended December 31, 20182020 and 2017,2019, the Company had operating lease expense of $1.6 $8.4 million and $0.7 $10.6 million, respectively.
As of December 31, 20182020 and 2017,2019, the carrying value of right-of-use ("ROU") leaseROU assets and the related operating lease obligations were as follows (in thousands):
December 31, 2018 | |||||
Denver ROU | Lease Additions in 2018 | Ending | December 31, | ||
Asset (1) | Morinda (2) | Other | Balance | 2017 (1) | |
| Right-of-Use Lease Assets: | |||||
| Cost basis | $4,274 | $13,369 | $1,578 | $19,221 | $4,274 |
| Accumulated amortization | (449) | (101) | (182) | (732) | (209) |
| Net | $3,825 | $13,268 | $1,396 | $18,489 | $4,065 |
| Right-of-Use Lease Liabilities: | |||||
| Current | $277 | $4,167 | $354 | $4,798 | $239 |
| Long-term | 3,543 | 9,101 | 1,042 | 13,686 | 3,821 |
| Total | $3,820 | $13,268 | $1,396 | $18,484 | $4,060 |
SUMMARY OF CARRYING VALUE OF OPERATING LEASE ROU lease asset entered into in connection with the sale leaseback transaction discussed below.
| 2020 | 2019 | |||||||
| Right-of-Use Assets | $ | 38,764 | $ | 38,458 | ||||
| Operating Lease Liabilities: | ||||||||
| Current | $ | 6,948 | $ | 5,673 | ||||
| Long-term | 34,788 | 35,513 | ||||||
| Total | $ | 41,736 | $ | 41,186 | ||||
| Deferred Lease Financing Obligation: | ||||||||
| Current | $ | 659 | $ | 637 | ||||
| Long-term | 15,882 | 16,541 | ||||||
| Total | $ | 16,541 | $ | 17,178 | ||||
As of December 31, 20182020 and 2017,2019, the weighted average remaining lease term under ROUoperating leases was 5.911.5 years and 9.212.5 years, respectively. As of December 31, 20182020 and 2017,2019, the weighted average discount rate for ROU operating lease liabilities was approximately 7%5.5% and 10%5.6%, respectively.
| 66 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future Lease Payments
As of December 31, 2020, future payments under operating lease agreements are as follows (in thousands):
SUMMARY OF FUTURE MINIMUM LEASE PAYMENTS
| Years Ending December 31, | ||||
| 2021 | $ | 9,283 | ||
| 2022 | 6,835 | |||
| 2023 | 5,939 | |||
| 2024 | 5,599 | |||
| 2025 | 5,487 | |||
| Thereafter | 25,214 | |||
| Total operating lease payments | 58,357 | |||
| Less imputed interest | (16,621 | )(1) | ||
| Present value of operating lease payments | $ | 41,736 | ||
| (1) | Calculated based on the term of the respective leases using corporate borrowing rates ranging from 2.0% to 10.0%. |
Impairment of ROU Asset
In June 2019, the Company began attempting to sublease a portion of its ROU assets previously used for warehouse space that are no longer needed for current operations. As a result, impairment evaluations were completed during 2019 that resulted in the recognition of an impairment charge of $2.3 million. These evaluations were based on the expected time to obtain a suitable subtenant and current market rates for similar commercial properties. Due to longer than expected timing to obtain a subtenant, an updated impairment evaluation was completed in June 2020 that resulted in recognition of an additional impairment charge of $0.4 million for the year ended December 31, 2020. Through December 31, 2020, the Company had recognized cumulative impairment charges of $2.7 million and is continuing its efforts to obtain a subtenant for this space.
Sale Leaseback
On January 10, 2017,March 22, 2019, the Company entered into an agreement with an unaffiliated third partya major Japanese real estate company resulting in the sale for $8.9approximately $57.1 million of the land and building in Tokyo that serves as the Company’s corporate headquarters in Denver, Colorado.of Morinda’s Japanese subsidiary. Concurrently with the sale, the Company entered into a lease of this property for an initiala term of ten27 years with two optionsthe option to extend for successive five-year periods.terminate the lease any time after seven years. The monthly lease cost is $52,000¥20.0 million (approximately $194,000 based on the exchange rate as of December 31, 2020) for the initial seven-year period of the lease term. After the seventh year with 2% annual increasesof the lease term, either party may elect to adjust the monthly lease payment to the then current market rate for eachsimilar buildings in Tokyo. In order to secure its obligations under the lease, the Company provided a refundable security deposit of approximately $1.8 million. At any time after the seventh year thereafter.of the lease term, the Company may elect to terminate the lease. However, if the lease is terminated before the 20th anniversary of the lease inception date, then the Company will be obligated to perform certain restoration obligations. The Company determined that the restoration obligation is a significant penalty whereby there is reasonable certainty that the Company will not elect to terminate the lease prior to the 20-year anniversary. Therefore, the lease term was determined to be 20 years.
In connection with this transaction, qualified as a sale under ASU 2016-02 (“Leases”), which$2.6 million mortgage on the building was repaid at closing, the refundable security deposit of $1.8 million was paid at closing, and the Company adopted effective January 1, 2017. Therefore,became obligated to pay $25.0 million to the former stockholders of Morinda to settle the full amount of the contingent financing liability. Other cash payments were made include transaction costs of $1.9 million, post-closing repair obligations of $1.7 million, and Japanese income taxes of $11.9 million.
| 67 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Presented below is a summary of the selling price and resulting gain on sale calculation (in thousands):
SUMMARY OF SELLING PRICE AND RESULTING GAIN ON SALE
| Gross selling price | $ | 57,129 | ||
| Less commissions and other expenses | (1,941 | ) | ||
| Less repair obligations | (1,675 | ) | ||
| Net selling price | 53,513 | |||
| Cost of land and building sold | (29,431 | ) | ||
| Total gain on sale | 24,082 | |||
| Portion of gain related to above-market rent concession | (17,640 | ) | ||
| Recognized gain on sale | $ | 6,442 |
The Company determined that $17.6 million of the $24.1 million gain on the sale of this property was the result of above-market rent inherent in the leaseback arrangement. The remainder of the gain of approximately $3.3$6.4 million was recognizedattributable to the highly competitive process among the entities that bid to purchase the property and is included in gain from sale of property and equipment in the accompanying consolidated statement of operations for the year ended December 31, 2017. In connection with2019.
The $17.6 million portion of the leaseback,gain related to above-market rent is being accounted for as a deferred lease financing obligation. Accordingly, the Company recognized an ROUoperating lease asset and a corresponding ROUpayments are allocated to (i) reduce the operating lease liability, for approximately $4.3 million.(ii) reduce the principal portion of the deferred lease financing obligation, and (iii) to recognize imputed interest expense at an incremental borrowing rate of 3.5% on the deferred lease financing obligation over the 20-year lease term. The present value of the ROUfuture lease payments amounted to a gross operating lease liability of $25.0 million. After deducting the $17.6 million deferred lease financing obligations, the Company recognized an initial ROU asset and operating lease liability of approximately $7.4 million.
NOTE 9 — PRIVATE PLACEMENT OF DEBT AND EQUITY SECURITIES
On November 30, 2020, the Company entered into a securities purchase agreement (the “SPA”) for a private placement of its (i) 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million (the “Senior Notes”), (ii) shares of its Common Stock (the “Commitment Shares”), (iii) Class A Warrants to purchase 750,000 shares of Common Stock exercisable at $3.75 per share (the “Class A Warrants”), and (d) Class B Warrants to purchase 750,000 shares of Common Stock exercisable at $5.75 per share (the “Class B Warrants,” and together with the Class A Warrants, the “Warrants”). The Warrants are exercisable until December 1, 2025. Exercise of the Warrants is permitted on a cashless basis if the underlying shares are not subject to an effective registration statement, and the shares are subject to a beneficial ownership limitation of % (or % at the option of the Purchasers). The holders of the Commitment Shares had the right to demand redemption if a registration statement for the shares was basednot declared effective by March 31, 2021. The redemption price was the greater of $ per share and the volume weighted average price of the Company’s shares on the Company’s implicit borrowing ratedate prior to the date that the holders elect to demand redemption. Based on this redemption contingency, the Commitment Shares are classified as temporary equity as of 10.0%December 31, 2020. The Company filed a Form S-3 registration statement for the Commitment Shares and the Warrants in February 2021, and the registration statement was declared effective by the SEC on February 8, 2021. Accordingly, the closing date.
| 68 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company received net proceeds of $28.7 million from the private placement at the closing on December 1, 2020 (the “SPA Closing Date”). Approximately $14.1 million of the proceeds was used to repay all outstanding principal to terminate the Company’s Credit Facility with East West Bank as discussed in Note 10, including the termination of an interest rate swap agreement for $0.4 million and a prepayment fee of $0.1 million. The net proceeds of $28.7 million were allocated between the Senior Notes, the Commitment Shares and the Warrants based on the relative fair value of each instrument as of the SPA Closing Date as set forth below (in thousands):
SUMMARY OF RELATIVE FAIR VALUE ALLOCATION OF NET PROCEEDS
| Warrants | Commitment | Senior | ||||||||||||||||||
| Class A | Class B | Shares | Notes | Total | ||||||||||||||||
| Fair value on closing date | $ | 1,795 | (1) | $ | 1,646 | (1) | $ | 2,640 | (2) | $ | 30,000 | (3) | $ | 36,081 | ||||||
| Percentage of total fair value | 5.0 | % | 4.6 | % | 7.3 | % | 83.1 | % | 100.0 | % | ||||||||||
| Relative fair value allocation of net proceeds | $ | 1,428 | (4) | $ | 1,310 | (4) | $ | 2,101 | (4) | $ | 23,871 | (4) | $ | 28,710 | ||||||
| (1) | Fair value of the Warrants was computed using the Black-Scholes-Merton valuation model. Key assumptions included the respective exercise prices, the five-year term, the market price of the Company’s shares of Common Stock of $ per share on the SPA Closing Date, historical volatility of 101% and the risk-free interest rate of 0.4%. |
| (2) | The fair value of the Commitment Shares was based on the market price of the Company Shares of $ per share on the SPA Closing Date. |
| (3) | The fair value of the standalone Senior Notes debt instrument was determined by reference to market rates paid for debt by borrowers with a similar credit rating as the Company. |
| (4) | The relative fair value allocation is determined by multiplying the $28.7 million of net proceeds by the percentage that the fair value each financial instrument bears to the aggregate fair value of all of the financial instruments. |
As discussed in Note 18, the Company completed a private placement on February 16, 2021 that resulted in the issuance of an aggregate of approximately million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares of Common Stock at an exercise price of $5.00 per share. Pursuant to the terms of the Warrants, the securities issued in the private placement constitute a dilutive issuance that resulted in a reduction of the exercise price of the Class B Warrant from $5.75 per share to $5.53 per share.
NOTE 10 — DEBT
Summary of Debt
As of December 31, 2020 and 2019, the Company’s debt consisted of the following (in thousands):
SUMMARY OF DEBT
| 2020 | 2019 | |||||||
| Senior Notes, net of discount of $7,900 in 2020 | $ | 24,532 | $ | - | ||||
| PPP Loan payable, interest at 1.0%, unsecured, due April 2022 | 6,868 | - | ||||||
| PPP Loan payable, interest at 1.0%, unsecured, due May 2022 | 2,781 | - | ||||||
| EWB Credit Facility: | ||||||||
| Term loan, net of discount of $448 in 2019 | - | 14,302 | ||||||
| Revolver | - | 9,700 | ||||||
| Installment notes payable | 16 | 8 | ||||||
| Total | 34,197 | 24,010 | ||||||
| Less current maturities | 18,016 | 11,208 | ||||||
| Long-term debt, less current maturities | $ | 16,181 | $ | 12,802 | ||||
Future minimum lease payments under non-cancellable ROU operating lease agreementsDebt Maturities
As of December 31, 2020, the scheduled future maturities of long-term debt, exclusive of discount accretion, are as follows (in thousands):
SUMMARY FUTURE DEBT MATURITIES
| Years Ending December 31, | 2020 | |||
| 2021 | $ | 18,016 | ||
| 2022 | 24,081 | |||
| Total | $ | 42,097 | ||
| 69 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Notes
As discussed in Note 9, the Senior Notes were issued pursuant to a private placement that closed on December 1, 2020. The Senior Notes bear interest at an annual rate of 8.0% applied to the contractual principal balance with such accrued interest payable in cash commencing on December 31, 2020 and continuing monthly thereafter. The aggregate discount related to the Senior Notes was approximately $8.5 million based on the contractual principal balance of $32.4 million and the net carrying value of $23.9 million on the closing date. The discount is being accreted to interest expense using the effective interest method that results in an overall effective interest rate of approximately 42.3%, including the 8.0% stated rate.
As a post-closing deliverable, the Company was required to provide certain historical financial statements of Ariix to the lenders by January 4, 2021. The required financial statements were not available by the deadline, which would have resulted in a default under the SPA. The lenders agreed to amend the Senior Notes to extend the deadline in exchange for the issuance of shares of Common Stock with a fair value of approximately $1.1 million as of the issuance date. These shares were subject to the same redemption rights as the Commitment Shares discussed in Note 9. The amendment fee of $1.1 million will be accounted for as an additional discount related to the Senior Notes in the first quarter of 2021.
For the months of February 2021 through May 2021, the holders of the Senior Notes are entitled to request that the Company make principal payments up to $1.0 million per month. Beginning in June 2021 and continuing for each subsequent month, the holders of the Senior Notes are entitled to request that the Company make principal payments up to $2.0 million per month. All principal payments are required to be paid within five business days of the date that notice is provided by the holders of the Senior Notes. The maturity date of the Senior Notes is on December 1, 2022. However, if the holders of the Senior Notes continue to exercise their rights to demand the maximum principal payments permitted in each month, the Senior Notes would be repaid in full by August 2022. The Company may prepay all or a portion of the outstanding principal amount of the Senior Notes at any time, subject to a prepayment fee of 3.0% of the outstanding principal balance through December 1, 2021.
The obligations of the Company under the Senior Notes are secured by substantially all of the assets of the Company and its subsidiaries, including all personal property and all proceeds and products thereof, goods, contract rights and other general intangibles, accounts receivable, intellectual property, equipment, and deposit accounts and a lien on certain real estate. The Company was required to maintain restricted cash balances of $18.0 million until the lender approved the prior year Ariix financial statements. After approval in February 2021, the requirement to maintain restricted cash balances was reduced to $8.0 million until such time that the outstanding principal balance of the Senior Notes is reduced below $8.0 million without regard to the unaccreted discount. The Senior Notes contain certain restrictions and covenants, which restrict the Company’s ability to incur additional debt or make guarantees, sell assets, make investments or loans, make distributions or create liens or other encumbrances. The Senior Notes also require that the Company comply with certain financial covenants, including maintaining minimum cash, minimum adjusted EBITDA, minimum revenue, and a maximum ratio of cash in foreign bank accounts to cash in U.S. deposit accounts subject to account control agreements.
The Senior Notes contain customary events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults, material adverse effect defaults, change of management defaults, and a change in control. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become immediately due and payable and interest on the obligations increases to an annual rate of 12.0%.
PPP Loans
Pursuant to the Paycheck Protection Program (“PPP”) under the CARES Act, the Company obtained a PPP Loan in April 2020 for approximately $6.9 million. In May 2020, Ariix obtained a PPP loan for approximately $2.8 million, and the Company assumed this obligation in connection with the business combination discussed in Note 4. The PPP Loans are unsecured and guaranteed by the U.S. Small Business Administration (“SBA”), bear interest at a fixed rate of 1.0% per annum and provide for a maturity date in two years. The Company and Ariix have both applied to their lenders for forgiveness of their PPP Loans, with the amounts that may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred during the permitted period as calculated in accordance with the terms of the CARES Act. The eligibility for the PPP Loans, expenditures that qualify toward forgiveness, and the final balance of the PPP Loans that may be forgiven are subject to audit and final approval by the SBA. To the extent that all or part of the PPP Loan is not forgiven, all accrued interest and principal will be payable on the maturity dates in the second quarter of 2022. The terms of the PPP Loans provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loans may be accelerated upon the occurrence of an event of default, including if the SBA subsequently reaches an audit determination that the eligibility criteria were not met.
| 70 |
| Year ending December 31: | |
| 2019 | $6,328 |
| 2020 | 4,480 |
| 2021 | 3,040 |
| 2022 | 2,672 |
| 2023 | 2,261 |
| Thereafter | 5,611 |
| Total minimum lease payments | 24,392 |
| Less imputed interest | (5,908) |
| Present value of minimum lease payments | $18,484 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The PPP Loans are being accounted for under ASC 470, Debt whereby interest expense is being accrued at the contractual rate and future debt maturities are based on the assumption that none of the principal balance will be forgiven. Forgiveness, if any, will be recognized as a gain on extinguishment if the lender legally releases the Company based on the criteria set forth in the debt agreement and the CARES Act.
EWB Credit Facility
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “EWB Credit Facility”) with East West Bank (“EWB”). The EWB Credit Facility provided for (i) a term loan in the aggregate principal amount of $15.0 million (the “EWB Term Loan”) and (ii) a $10.0 million revolving loan facility (the “EWB Revolver”). At the closing, EWB funded $25.0 million to the Company consisting of the $15.0 million EWB Term Loan and $10.0 million as an advance under the EWB Revolver. The obligations of the Company under the EWB Credit Facility were secured by substantially all assets of the Company and guaranteed by certain subsidiaries of the Company. The EWB Credit Facility required compliance with certain financial and restrictive covenants and included customary events of default.
Borrowings outstanding under the EWB Credit Facility initially provided for interest at the prime rate plus 0.50%. As of December 31, 2019, the prime rate was 4.75% and the contractual rate applicable to outstanding borrowings under the EWB Credit Facility was 5.25%. Payments under the EWB Term Loan were interest-only through September 30, 2019, followed by monthly principal payments of $125,000 plus interest through the stated maturity date of the EWB Term Loan. On March 13, 2020, the Company entered into the third amendment (the “Third Amendment”) to the EWB Credit Facility whereby the interest rate applicable to outstanding borrowings increased from 0.5% to 2.0% in excess of the prime rate. In addition to the change in interest rate, the Third Amendment modified the Credit Facility as follows:
| ● | In March 2020, the Company made an initial deposit of $15.1 million in restricted cash accounts designated by EWB. The requirement to maintain restricted cash was reduced by the amount of principal payments under the EWB Term Loan after the amendment date. |
| ● | The Company was required to increase restricted cash deposits by the corresponding amount of any borrowings under the EWB Revolver whereby no amounts were borrowed after the amendment date. |
| ● | Less stringent requirements were applicable for future compliance with certain financial covenants. |
| ● | The existing provision related to “equity cures” that may be employed to maintain compliance with financial covenants was increased from $5.0 million to $15.0 million for the year ended December 31, 2020. |
| ● | The Company was required to obtain equity infusions for gross proceeds of $30.0 million for the year ended December 31, 2020. |
On July 6, 2020, the Company entered into the fourth amendment (the “Fourth Amendment”) to the EWB Credit Facility. The Fourth Amendment reduced the amount of restricted cash in China with a corresponding increase in restricted cash in the United States. The Fourth Amendment also permitted the Company to purchase up to $1.2 million of shares of its Common Stock with a corresponding increase in the requirement for cash equity infusions from $30.0 million to approximately $31.2 million for the year ending December 31, 2020. As of September 30, 2020, the Company was not in compliance with the minimum Adjusted EBITDA covenant under the EWB Credit Facility. The Company entered into an amendment and waiver to the EWB Credit Facility on November 5, 2020, pursuant to which EWB provided a waiver and agreed to eliminate the requirement to comply with the minimum Adjusted EBITDA financial covenant in future periods.
The EWB Credit Facility was scheduled to mature in March 2023. As discussed in Note 9, the Company paid the EWB Credit Facility in full and terminated the EWB Credit Facility on December 1, 2020.
| 71 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Siena Revolver
On August 10, 2018, (the “Closing Date”), the Company entered into a loan and security agreement with Siena Lending Group LLC (“Siena”) that providesprovided for a $12.0$12.0 million revolving credit facility (the “Siena Revolver”) with a scheduled maturity date of August 10, 2021 (the “Maturity Date”). Outstanding borrowings bear interest at the greater of (i) 7.5% or (ii) the prime rate plus 2.75%.2021. As of December 31, 2018, the effective interest rate was 8.25%8.25%. Beginning on November 7, 2018, the Company was required to pay interest on a minimum of $2.0 million of borrowings, regardless of whether such funds had been borrowed. The Siena Revolver also provides for an unused line fee equal to 0.5% per annum of the undrawn portion of the $12.0 million commitment. The Siena Revolver is subject to availability based on eligible accounts receivables and eligible inventory of the Company.
2018 | 2017 | |
| Siena Revolver | $2,000 | $- |
| Mortgage payable to a foreign bank | 2,628(1) | - |
| Installment notes payable | 66(2) | 122 |
| U.S. Bank Revolver | - | 2,000(3) |
| Series B notes assumed in Maverick business combination | - | 1,427(4) |
| Total | 4,694 | 3,549 |
| Less current maturities | (3,369) | (3,549) |
| Long-term debt, less current maturities | $1,325 | $- |
| Year Ending December 31, | |
| 2019 | $3,369 |
| 2020 | 1,322 |
| 2021 | 3 |
| Total | $4,694 |
NOTE 11 — STOCKHOLDERS’ EQUITY
Common Stock
In May 2019, the Company’s stockholders approved an amendment to this convertible note.
Preferred Stock
The Company is authorized to issue shares of preferred stock in one or more series, each having a par value of $0.001
Series A Preferred
Series B Preferred
Series C Preferred
Series D Preferred
Public Offerings of Common Stock
On April 30, 2019, the Company entered into an At the Market Offering Agreement (“ATM Agreement”) with Roth Capital Partners, LLC (the “Agent”), pursuant to Note 3 for additional informationwhich the Company could offer and sell from time to time up to an aggregate of $ million in shares of the Company’s Common Stock (the “Placement Shares”) through the Agent. The Agent acted as sales agent and was required to use commercially reasonable efforts to sell on the consideration issued inCompany’s behalf all of the Morinda business combinationPlacement Shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the Agent and the valuationCompany. On May 8, 2020, the
| 72 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the Series D Preferred.
Presented below is a summary of activity for each equity classified series of PreferredCommon Stock issued pursuant to the ATM Agreement for the years ended December 31, 20182020 and 2017:
Equity Classified Preferred Stock | |||||||
Series A | Series B Preferred | Series C Preferred | Total | ||||
Shares | Shares | Conversion | Shares | Conversion | Preferred | Conversion | |
Issued | Issued | Ratio (1) | Issued | Ratio (2) | Shares | Ratio | |
| Balances, December 31, 2016 | 250,000 | 284,807 | 2,278,456 | - | - | 534,807 | 2,278,456 |
| Recission of Series A shares | |||||||
| for no consideration | (250,000) | - | - | - | - | (250,000) | - |
| Conversion of Series B Preferred | |||||||
| Stock to Common Stock | - | (115,573) | (924,584) | - | - | (115,573) | (924,584) |
| Balances, December 31, 2017 | - | 169,234 | 1,353,872 | - | - | 169,234 | 1,353,872 |
| Conversion of Series B Preferred | |||||||
| Stock to Common Stock | - | (169,234) | (1,353,872) | - | - | (169,234) | (1,353,872) |
| Issuance of Series C Preferred Stock | - | - | - | 6,900 | 6,900,000 | 6,900 | 6,900,000 |
| Conversion of Series C Preferred | |||||||
| Stock to Common Stock | - | - | - | (6,900) | (6,900,000) | (6,900) | (6,900,000) |
| Balances, December 31, 2018 | - | - | - | - | - | - | - |
Number | Gross | Offering Costs | Net | ||
| Description | of Shares | Proceeds | Commissions | Other | Proceeds |
| April 2018 Offering | 2,560 | $4,480 | $(269) | $(448) | $3,763 |
| August 2018 Offering | 9,200 | 11,776 | (824) | (647) | 10,305 |
| ATM Offering | 8,089 | 37,533 | (1,126) | (603) | 35,804 |
| November 2018 Offering | 14,835 | 51,922 | (3,635) | (518) | 47,769 |
| Total | 34,684 | $105,711 | $(5,854) | $(2,216) | $97,641 |
SUMMARY OF COMMON STOCK PURSUANT TO AGREEMENT
| Number | Gross | Offering Costs | Net | |||||||||||||||||
| Year Ended December 31: | Of Shares | Proceeds | Commissions | Other | Proceeds | |||||||||||||||
| 2020 | 16,130 | $ | 25,815 | $ | (693 | ) | $ | (164 | ) | $ | 24,958 | |||||||||
| 2019 | 5,957 | $ | 20,724 | $ | (622 | ) | $ | (579 | ) | $ | 19,523 | |||||||||
Equity Incentive Plans
On May 30, 2019, the Company’s stockholders voted to approve the 2019 Equity Incentive Plan (the “2019 Plan”). On August 3, 2016, the Company’s stockholders approved and implemented the New Age Beverages CorporationNewAge, Inc. 2016-2017 Long Term Incentive Plan (the “LTI Plan”). The 2019 Plan and the LTI Plan are collectively referred to as the “Equity Incentive Plans”.
2019 Plan. A total of up to million shares of Common Stock may be issued under the 2019 Plan. Participation in the 2019 Plan is limited to employees, non-employee directors, and consultants. The 2019 Plan will terminate in April 2029. The 2019 Plan provides for grants of both incentive stock options, or “ISOs”, which are subject to special income tax treatment, and non-statutory options, or “NSOs.” Eligibility for ISOs is limited to employees of the Company and its subsidiaries. The exercise price of ISOs and NSOs generally cannot be less than the fair market value of the Common Stock at the time of grant. In addition, the expiration date for ISOs and NSOs cannot be more than ten years after the date of the original grant. The administrator also determines all other terms and conditions related to the exercise of an option, including the consideration to be paid, if any, for the grant of the option, the time at which options may be exercised and conditions related to the exercise of options.
The 2019 Plan also provides for awards of shares of restricted Common Stock and restricted stock units. Awards of restricted stock may be made in exchange for services or other lawful consideration. Generally, awards of restricted stock are subject to the requirement that the shares be forfeited or resold to the Company unless specified conditions are met. Subject to these restrictions, conditions and forfeiture provisions, any recipient of a vested award of restricted stock will have all the rights of a stockholder of the Company, including the right to vote the shares and to receive dividends. The 2019 Plan also provides for deferred grants (“deferred stock”) entitling the recipient to receive shares of Common Stock in the future on such conditions as the administrator may specify. As of December 31, 2020, million shares under the 2019 Plan were available for future grants of stock options, restricted stock and similar instruments.
LTI Plan. The LTI Plan provides for stock options to be granted to employees, directors and consultants at an exercise price not less than 100%100% of the fair value of the Company’s Common Stock on the grant date. The options granted generally have a maximum term of from the grant date and are exercisable upon vesting. Option grants generally vest over a period between and after the grant date of such award. As of December 31, 2018, approximately 0.2 million shares were available for future grants of stock options, restricted stock and similar instruments under the LTI Plan. The number of shares reserved for grants is adjusted annually on the first day of January whereby a maximum of 10%% of the Company’s outstanding shares of Common Stock are available for grant under the LTI Plan. Accordingly, asAs of January 1, 2019, an additional 4.0December 31, 2020, approximately million shares of Common Stock becamewere available for future grants of stock options, restricted stock and similar instruments under the LTI Plan.
| 73 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Activity
SCHEDULE OF STOCK OPTION ACTIVITY
| 2020 | 2019 | |||||||||||||||||||||||
| Shares | Price (1) | Term (2) | Shares | Price (1) | Term (2) | |||||||||||||||||||
| Outstanding, beginning of year | 3,551 | $ | 2.65 | 8.7 | 2,786 | $ | 2.84 | 9.0 | ||||||||||||||||
| Grants | 1,498 | 2.67 | 1,489 | 2.37 | ||||||||||||||||||||
Forfeited | (862 | ) | 2.61 | (418 | ) | 2.81 | ||||||||||||||||||
Exercised | (331 | )(3) | 1.98 | (306 | )(3) | 2.00 | ||||||||||||||||||
| Outstanding, end of year | 3,856 | (4) | 2.72 | 8.2 | 3,551 | (4) | 2.65 | 8.7 | ||||||||||||||||
| Vested, end of year | 1,918 | (5) | 2.59 | 7.1 | 1,365 | (5) | 2.46 | 7.7 | ||||||||||||||||
2018 | 2017 | |||||
| �� | Shares | Price (1) | Term (2) | Shares | Price (1) | Term (2) |
| Outstanding, beginning of year | 2,491 | $1.93 | 9.4 | 1,019 | $1.79 | 9.6 |
| Granted | 926 | $4.63 | 1,472 | $ 2.02 | ||
| Forfeited | (213) | $2.00 | - | $ - | ||
| Exercised | (418) | $1.79 | - | $ - | ||
Outstanding, end of year (3) | 2,786 | $2.84 | 9.0 | 2,491 | $ 1.93 | 9.4 |
Vested, end of year (4) | 943 | $1.94 | 8.4 | 343 | $ 1.79 | 8.6 |
| (1) | Represents the weighted average exercise price. |
| (2) | Represents the weighted average remaining contractual term until the stock options expire. |
| (3) | On the respective exercise dates, the aggregate intrinsic value of shares of Common Stock issued upon exercise of stock options amounted to $ million and $ million for the years ended December 31, 2020 and 2019, respectively. |
| (4) | As of December 31, 2020 and 2019, the aggregate intrinsic value of stock options outstanding was $ million and $, respectively. |
| (5) | As of December 31, 2020 and 2019, the aggregate intrinsic value of vested stock options was $ million and $, respectively. |
During 2020, the Company modified certain stock options for approximately 0.3 million shares. These modifications resulted in incremental compensation cost of approximately $due to the extension of the exercise period for employees that terminated employment. In July 2019, the Company entered into a modification agreement for approximately shares of outstanding stock options. The modification resulted in an extension of the exercise period from July 2019 until July 2020, which increased the fair value of the stock options expire.
Year Ended December 31, | ||
2018 | 2017 | |
| Grant date fair value of common stock (exercise price) | $4.63 | $1.79 |
| Expected life (in years) | 6.0 | 3.0 |
| Volatility | 121% | 100% |
| Dividend yield | 0% | 0% |
| Risk-free interest rate | 2.8% | 0.9% |
SUMMARY OF STOCK OPTIONS WEIGHTED-AVERAGE ASSUMPTIONS
| 2020 | 2019 | |||||||||||||||
| Grants | Modifications | Grants | Modifications | |||||||||||||
| Grant or modification date closing price of Common Stock | $ | 2.66 | $ | 1.54 | $ | 2.38 | $ | 4.75 | ||||||||
| Expected life (in years) | ||||||||||||||||
| Volatility | 102 | % | 82 | % | 107 | % | 138 | % | ||||||||
| Dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
| Risk-free interest rate | 0.7 | % | 0.1 | % | 1.7 | % | 1.9 | % | ||||||||
Based on the assumptions set forth above, the weighted-average grant date fair value per share of employeefor stock options duringgranted for the years ended December 31, 20182020 and 20172019 was $4.05$ and $1.11,$, respectively. With respect to stock options for approximately shares modified in 2019, the fair value of the modified options had a weighted average fair value of $ per share in comparison to the weighted average fair value of the stock options immediately before the modification of $1.59 per share. With respect to stock options for approximately shares modified in 2020, the fair value of the modified options was $ per share, whereas the modified stock options did not have any fair value immediately before the modification.
| 74 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The BSM model requires various highly subjective assumptions that represent management’s best estimates of the fair value of the Company’s Common Stock, volatility, risk-free interest rates, expected term, and dividend yield. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. SinceBecause the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. The Company has never declared or paid cash dividends and does not plan to pay cash dividends in the foreseeable future; therefore, the Company used an expected dividend yield of zero. The risk-free interest rate is based on U.S. Treasury rates in effect duringfor maturities based on the expected term of the grant. The expected volatility is based on the historical volatility of the Company’s Common Stock for the period beginning in August 2016 when its shares were first publicly traded on the Nasdaq OTC Market through the grant date of the respective stock options.
Restricted Stock
SCHEDULE OF RESTRICTED STOCK AWARD ACTIVITY
| Equity-Classified Awards | Liability-Classified Awards (1) | |||||||||||||||||||||||
| Number of | Per | Unvested | Number of | Per | Unvested | |||||||||||||||||||
| Shares | Share (2) | Compensation | Shares | Share (2) | Compensation | |||||||||||||||||||
| Outstanding, December 31, 2018 | 1,151 | $ | 3.46 | $ | 3,987 | 474 | $ | 5.25 | $ | 2,489 | ||||||||||||||
| Shares issued to Board members | 91 | (3) | 5.49 | 500 | (3) | - | - | - | ||||||||||||||||
| Unvested awards granted to employees | ||||||||||||||||||||||||
| with service vesting criteria | 2,085 | (4) | 2.42 | 5,036 | (4) | - | - | - | ||||||||||||||||
| Forfeitures | (220 | ) | 4.63 | (1,019 | ) | (322 | ) | 5.26 | (1,693 | ) | ||||||||||||||
| Fair value adjustments and other | - | - | (27 | ) | - | (519 | )(1) | |||||||||||||||||
| Vested shares and expense | (984 | )(5) | 3.93 | (3,872 | )(5) | (115 | )(5) | 1.83 | (210 | )(5) | ||||||||||||||
| Outstanding, December 31, 2019 | 2,123 | 2.17 | 4,605 | 37 | 1.81 | 67 | ||||||||||||||||||
| Outstanding, December 31, 2019 | 2,123 | 2.17 | 4,605 | 37 | 1.81 | 67 | ||||||||||||||||||
| Shares issued to Board members | 339 | (3) | 1.87 | 633 | (3) | - | - | - | ||||||||||||||||
| Unvested awards granted to employees | ||||||||||||||||||||||||
| with service vesting criteria | 1,259 | (4) | 2.43 | 3,060 | (4) | - | - | - | ||||||||||||||||
| Forfeitures | (975 | ) | 1.94 | (1,893 | ) | (2 | ) | 1.50 | (3 | ) | ||||||||||||||
| Fair value adjustments and other | (35 | ) | 0.97 | (34 | ) | - | - | 28 | (1) | |||||||||||||||
| Vested shares and expense | (672 | )(5) | 3.68 | (2,472 | )(5) | (17 | )(5) | 2.65 | (45 | )(5) | ||||||||||||||
| Outstanding, December 31, 2020 | 2,039 | 1.91 | $ | 3,899 | 18 | 2.61 | $ | 47 | ||||||||||||||||
| Intrinsic value, December 31, 2020 | $ | 5,363 | (6) | $ | 47 | (6) | ||||||||||||||||||
2018 | 2017 | |||
Number of | Unvested | Number of | Unvested | |
Shares | Compensation | Shares | Compensation | |
| Outstanding, beginning of year | 1,823 | $1,518 | 1,876 | $534 |
| Restricted shares issued | 193(1) | 429 | 588(2) | 1,339 |
| Forfeited | (35) | (76) | - | - |
| Vested | (963) | (1,314) | (641) | (355) |
Outstanding, end of year (2) | 1,018 | $557(3) | 1,823 | $1,518(4) |
| Intrinsic value, end of year | $5,294(4) | $3,956(4) | ||
| Balance sheet classification of | ||||
| unvested compensation cost: | ||||
| Prepaid expenses- current | $347 | $963 | ||
| Prepaid expenses- long-term | 210 | 555 | ||
| Total | $557 | $1,518 | ||
| (1) | Certain awards granted to employees in China are not permitted to be settled in shares, which requires classification as a liability in the Company’s consolidated balance sheets. This liability is adjusted based on the closing price of the Company’s Common Stock at the end of each reporting period until these awards vest. As of December 31, 2020, the cumulative amount of compensation expense recognized is based on the progress toward vesting and the total fair value of the respective awards on that date. |
| 75 |
Number of Shares | Unvested Compensation (6) | |||||||
Only | Cash or | Only | Only | Cash or | Only | |||
Cash (4) | Shares (5) | Shares (5) | Total | Cash | Shares | Shares | Total | |
Performance grants (1) | - | 216 | - | 216 | $- | $1,123 | $- | $1,123 |
| Service-based grants: | - | |||||||
One-year vesting(2) | - | 319 | 555 | 874 | - | 1,659 | 2,886 | 4,545 |
Three-year vesting (3) | 43 | 96 | - | 139 | 224 | 499 | - | 723 |
| Total | 43 | 631 | 555 | 1,229 | $224 | $3,281 | $2,886 | $6,391 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (2) | Represents the weighted average price. | |
| (3) | Represents grants to members of the Board of Directors whereby the shares of Common Stock were issued with cliff vesting one year after the grant date. |
| (4) | Restricted stock awards that generally vest over three years with fair value determined based on the closing price of the Company’s Common Stock on the respective grant dates. |
| (5) | The “Number of Shares” column reflects shares that vested due to achievement of the service condition during the year. The “Unvested Compensation” column reflects the stock-based compensation expense recognized for vested and unvested awards during the year. |
| (6) | The intrinsic value is based on the closing price of the Company’s Common Stock of $ per share on December 31, 2020. |
In addition, restricted stock awards for approximately shares that were not granted under the Equity Incentive Plans became vested in March and April 2019. The Company recognized compensation expense related to these awards of approximately $ for the year ended December 31, 2018, the remaining unrecognized costs are expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.6 years for stock options and 1.6 years for restricted stock awards.
Stock-Based Compensation Expense
Expense Recognized Year Ended December 31: | Unrecognized Expense as of December 31: | |||
2018 | 2017 | 2018 | 2017 | |
| Stock options | $1,219 | $162 | $6,811 | $3,035 |
| Restricted stock awards | 1,314 | 1,569 | 557 | 1,442 |
| Total | $2,533 | $1,731 | $7,368 | $4,477 |
SCHEDULE OF STOCK-BASED COMPENSATION EXPENSE
| Expense Recognized for | Unrecognized Expense | |||||||||||||||
| Year Ended December 31: | as of December 31: | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Plan-based stock option awards: | $ | 2,121 | $ | 2,240 | $ | 4,389 | $ | 4,803 | ||||||||
| Plan-based restricted stock awards: | ||||||||||||||||
| Equity-classified | 2,472 | 3,872 | 3,899 | 4,605 | ||||||||||||
| Liability-classified | 45 | 210 | 47 | 67 | ||||||||||||
Non-plan equity-classified restricted stock awards | - | 64 | - | - | ||||||||||||
| Warrants | - | 2 | - | - | ||||||||||||
| Total | $ | 4,638 | $ | 6,388 | $ | 8,335 | $ | 9,475 | ||||||||
As of December 31, 2016, the Company had warrants outstanding for 372,974 shares of Common Stock with an exercise price of $0.40 per share. For the year ended December 31, 2017, these warrants were exercised for proceeds2020, unrecognized stock-based compensation expense is expected to be recognized on a straight-line basis over a weighted-average period of approximately $150,000. No warrants were granted years for stock options and equity-classified restricted stock awards, and years for liability-classified restricted stock awards.
Warrants
The following table sets forth warrant activity for the years ended December 31, 20182020 and 2017, and no warrants are outstanding as of December 31, 2018 and 2017.
SCHEDULE OF WARRANTS
| 2020 | 2019 | |||||||||||||||||||||||
| Shares | Price (1) | Term (2) | Shares | Price (1) | Term (2) | |||||||||||||||||||
| Outstanding, beginning of year | 311 | $ | 4.80 | 6.7 | 103 | $ | 4.38 | 3.2 | ||||||||||||||||
| Grants | 1,500 | (3) | 4.75 | 208 | 5.01 | |||||||||||||||||||
| Forfeited | (8 | ) | 1.83 | - | - | |||||||||||||||||||
| Outstanding, end of year | 1,803 | (4) | 4.77 | 5.1 | 311 | 4.80 | 6.7 | |||||||||||||||||
| (1) | Represents the weighted average exercise price. |
| (2) | Represents the weighted average remaining contractual term until the warrants expire. |
| (3) | Grant of Warrants in connection with the private placement discussed in Note 9. |
| (4) | All warrants are vested and exercisable as of December 31, 2020. |
| 76 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — INCOME TAXES
Income Tax Expense
For the years ended December 31, 20182020 and 2017,2019, loss before income taxestax expense is as follows (in thousands):
SCHEDULE OF LOSS BEFORE INCOME TAX EXPENSE
| 2020 | 2019 | |||||||
| Domestic | $ | (50,361 | ) | $ | (96,159 | ) | ||
| International | 12,912 | 18,992 | ||||||
| Loss before income taxes | $ | (37,449 | ) | $ | (77,167 | ) | ||
| 77 |
2018 | 2017 | |
| Domestic | $(20,529) | $(3,536) |
| International | (533) | - |
| Loss before income taxes | $(21,062) | $(3,536) |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 20182020 and 2017,2019, the reconciliation between the income tax benefit computed by applying the statutory U.S. federal income tax rate to the pre-tax loss before income taxes, and total income tax expense recognized in the financial statements is as follows (in thousands):
2018 | 2017 | |
| Income tax benefit at statutory U.S. federal rate | $4,423 | $1,202 |
| Income tax benefit attributable to U.S. states | 1,063 | 108 |
| Stock-based compensation | 1,367 | - |
| Non-deductible expenses | (351) | (1) |
| Change in prior year deferred taxes and other | 300 | |
| Foreign rate differential | (27) | - |
| Change in valuation allowance | 2,152 | (1,309) |
| Total income tax benefit | $8,927 | $- |
SCHEDULE OF RECONCILIATION OF INCOME TAX BENEFIT
| 2020 | 2019 | |||||||
| Income tax benefit at statutory U.S. federal rate | $ | 7,864 | $ | 16,205 | ||||
| Income tax benefit attributable to U.S. states | 2,114 | 3,914 | ||||||
Change in state tax rates | 2,449 | - | ||||||
| Stock-based compensation | (229 | ) | 774 | |||||
| Remeasurement of acquired taxes payable | 974 | - | ||||||
| Subpart F income | (952 | ) | - | |||||
| Other | 257 | 720 | ||||||
| Code section 162(m) excess compensation | (13 | ) | (703 | ) | ||||
| Non-deductible expenses | (421 | ) | (725 | ) | ||||
| Change in fair value earnouts | - | 2,900 | ||||||
| Benefit of foreign taxes | - | 717 | ||||||
| Foreign deferred tax adjustments | 94 | 2,194 | ||||||
| Foreign tax credit | 3,324 | 6,146 | ||||||
| Foreign withholding/prior year tax | (668 | ) | (1,414 | ) | ||||
| Foreign rate differential | 34 | (5,561 | ) | |||||
| Change in valuation allowance | (16,722 | ) | (37,835 | ) | ||||
| Total income tax expense | $ | (1,895 | ) | $ | (12,668 | ) | ||
For the years ended December 31, 20182020 and 2017,2019, the Company did not recognize any current income tax expense. DeferredCompany’s income tax expense consisted of the following components (in thousands):
SCHEDULE OF COMPONENTS OF INCOME TAX EXPENSE
| 2020 | 2019 | |||||||
| Current income tax benefit (expense): | ||||||||
| U.S. Federal | $ | 975 | $ | - | ||||
| U.S. States | (44 | ) | (5 | ) | ||||
| Foreign | (2,762 | ) | (17,563 | ) | ||||
| Total current income tax benefit (expense) | (1,831 | ) | (17,568 | ) | ||||
| Deferred income tax benefit (expense): | ||||||||
| U.S. Federal | 631 | (8,419 | ) | |||||
| U.S. States | - | - | ||||||
| Foreign | (695 | ) | 13,319 | |||||
| Total deferred income tax benefit (expense) | (64 | ) | 4,900 | |||||
| Total income tax expense | $ | (1,895 | ) | $ | (12,668 | ) | ||
| 78 |
2018 | 2017 | |
| U.S. Federal | $7,891 | $- |
| U.S. States | 1,063 | - |
| Foreign | (27) | - |
| Total deferred income tax benefit | $8,927 | $- |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Income Tax Assets and Liabilities
As of December 31, 20182020 and 2017,2019, the income tax effects of temporary differences that give rise to significant deferred income tax assets and liabilities are as follows (in thousands):
2018 | 2017 | |
| Deferred income tax assets: | ||
| Identifiable intangible assets | $- | $128 |
| Accrued liabilities | 5,224 | 53 |
| Embedded derivative liabilities | 112 | - |
| Other | 26 | - |
| Stock-based compensation | 435 | - |
| Net operating loss carryforwards | 9,295 | 2,689 |
| Gross deferred income tax assets | 15,092 | 2,870 |
| Valuation allowance for deferred income tax assets | - | (2,870) |
| Net deferred income tax assets | 15,092 | - |
| Deferred income tax liabilities: | ||
| Goodwill and identifiable intangible assets | (12,405) | - |
| Property and equipment, net | (3,200) | - |
| Notes payable | (326) | - |
| Gross deferred income tax liabilties | (15,931) | - |
| Net deferred income tax liability | $(839) | $- |
SCHEDULE OF DEFERRED INCOME TAX ASSETS AND LIABILITIES
| 2020 | 2019 | |||||||
| Deferred income tax assets: | ||||||||
| Foreign tax credits | $ | 18,847 | $ | 14,079 | ||||
| Net operating loss carryforwards | 29,785 | 15,348 | ||||||
| Accrued liabilities | 11,877 | 8,670 | ||||||
| Accrued pension | 1,680 | 1,927 | ||||||
| Operating lease liabilities | 15,378 | 16,596 | ||||||
| Above market lease | 10,063 | 10,370 | ||||||
| Property and equipment, net | 1,362 | 363 | ||||||
| Other | 3,344 | 758 | ||||||
| Gross deferred income tax assets | 92,336 | 68,111 | ||||||
| Valuation allowance for deferred income tax assets | (64,721 | ) | (43,465 | ) | ||||
| Net deferred income tax assets | 27,615 | 24,646 | ||||||
| Deferred income tax liabilities: | ||||||||
| Goodwill and identifiable intangible assets | (10,226 | ) | (5,117 | ) | ||||
| Operating lease, right-of-use assets | (14,518 | ) | (15,842 | ) | ||||
Other | (480 | ) | - | |||||
| Total deferred income tax liabilities | (25,224 | ) | (20,959 | ) | ||||
Net deferred income tax asset | $ | 2,391 | $ | 3,687 | ||||
As of December 31, 2020 and 2019, the Company’s net deferred income tax asset consisted of the following components (in thousands):
| 2020 | 2019 | |||||||
| Foreign deferred income tax assets | $ | 7,782 | $ | 9,128 | ||||
| Foreign deferred income tax liabilities | (5,391 | ) | (5,441 | ) | ||||
| Net deferred income tax asset | $ | 2,391 | $ | 3,687 | ||||
Net deferred income tax assets consist solely of foreign net deferred income tax assets which are expected to be realized in the future, and liabilities as of December 31, 2018 and 2017that are presentedincluded in long-term assets in the accompanying consolidated balance sheets as follows (in thousands):
2018 | 2017 | |
| Deferred income tax assets | $8,908 | $- |
| Deferred income tax liabilities | (9,747) | - |
| Net deferred income tax liability | $(839) | $- |
NOL Carryforwards and Other Matters
As of December 31, 2018,2020, the Company has federal NOL carryforwardshad unused net operating loss (“NOL”) carryovers for income tax purposes of approximately $36.3 $138.7million of which $24.9 with approximately $73.1million does not expirerelating to foreign subsidiaries and $11.4 approximately $65.6million will beginrelating to expire in 2023. Additionally, the Company has varying amounts ofU.S. entities. The federal and state NOL carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets recognized for those NOLs are presented net of these unrecognized tax benefits. The NOLs will expire at various dates from 2021 through 2040, with the exception of $50.0 million related to United States and those in some foreign jurisdictions where there is no expiration. The U.S. states in which it does business that start to expire in 2023.NOLs have a full valuation allowance recorded against them. Of the $73.1 million of foreign NOLs, all but $5.4 million have a valuation allowance recorded against them. Federal and state laws impose substantial restrictions on the utilization of NOL and tax credit carryforwards in the event of an ownership change for income tax purposes, as defined in Section 382 of the Internal Revenue Code.
| 79 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of netthe existing deferred tax assets. When weighing all available evidence, associated with the realizability of its deferred tax assets, in particular, uncertainties related to the future generation of taxable income, the recent negative trends in certain operating loss carryforwards. The Company’s ability to use its remaining net operating loss carryforwards may be further limited ifmarkets, and the cumulative losses in certain jurisdictions, the Company experiencesdetermined that it was not “more likely than not” that it would be able to realize the tax benefits associated with certain of its net deferred tax assets. On the basis of this evaluation, a Section 382 ownership change in connection with future changesvaluation allowance against the U.S. and other foreign jurisdictions deferred tax assets has been recorded to recognize only the portion of deferred tax assets that is more likely than not to be realized. The Company will continue to monitor its historical and forecast operating results in the Company’s stock ownership.
As discussed above,of December 31, 2020, the impositionCompany has continued its position to return all foreign earnings to the U.S. parent company and has recorded deferred tax liabilities of $0.5 million for foreign withholding taxes associated with foreign retained earnings and cross-border payments.
Unrecognized Tax Benefits
As of December 31, 2020, $1.1 million of unrecognized income tax benefits is included in other long-term liabilities with the one-time Transition Tax may reduce or eliminate U.S. federalremainder of $4.3 million being offset with other deferred tax assets. As of December 31, 2019, the total outstanding balance for liabilities related to unrecognized income taxes ontax benefits is included in other long-term liabilities and amounted to $1.5 million. As of December 31, 2020, unrecognized tax benefits of $1.1 million, if recognized, would affect the unremitted earningseffective tax rate. As of December 31, 2020, unrecognized tax benefits of $4.3 million, if recognized, would not affect the Company’s foreign subsidiaries. However,effective tax rate since the Company may still be liable for withholding taxes or other income taxestax benefits would increase a deferred tax asset that might be incurred upon the repatriation of foreign earnings. is currently fully offset by a full valuation allowance.
The Company has made a provisionaccounts for additional income taxes on undistributed earningsinterest expense and penalties associated with unrecognized tax benefits as part of its foreign subsidiaries becauseincome tax expense. The unrecognized tax benefit as of December 31, 2020 includes an aggregate of approximately $0.1 million for interest and penalties, all of which was recognized for the year ended December 31, 2020. The Company does not intendanticipate any significant changes related to permanently reinvest these earnings outsideunrecognized tax benefits in the United States.
The following table summarizes changes in unrecognized tax benefits for the years ending December 31, 2020 and 2019 (in thousands):
SCHEDULE OF UNRECOGNIZED TAX BENEFITS
| 2020 | 2019 | |||||||
| Balance, beginning of year | $ | 1,545 | $ | 430 | ||||
| Increase related to: | ||||||||
| Prior tax positions | 4,500 | 1,163 | ||||||
| Current tax positions | 15 | 22 | ||||||
| Decreases related to prior tax positions | (613 | ) | (46 | ) | ||||
| Settlements | - | (24 | ) | |||||
| Balance, end of year | $ | 5,447 | $ | 1,545 | ||||
The Company files income tax returns in the U.S. federal, and various states as well as the following foreign jurisdictions: Australia, Austria, Canada, Chile, China, Colombia, Germany, Hong Kong, Hungary, Indonesia, Ireland, Italy, Japan, Korea, Malaysia, Malta, Mexico, New Zealand, Norway, Peru, Poland, Russia, Singapore, Sweden, Switzerland, Thailand, Tahiti, Taiwan, the UK and Vietnam. The Company’s federal and state tax years for 20152017 and forward are subject to examination by taxing authorities, due to unutilized NOL’s.authorities. All foreign jurisdictions tax years are also subject to examination baseddepending on thetheir relative statutestatutes of limitations.
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NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1114 — COMMITMENTS AND CONTINGENCIES
Executive Deferred Compensation Plan
Morinda’s Board of Directors implemented an unfunded executive deferred compensation plan in 2009 for certain executives of Morinda. All financial performance targets under the plan were achieved as ofprior to the Morinda acquisition date in December 31, 2018, and a long-term liability of $4.1 million is included in the accompanying consolidated balance sheets.2018. After the executives retire,retired, the deferred compensation obligation is payable over a period up to 20 years.
401(k) Plan
Since December 2018, the Company has had a defined contribution employee benefit plan under section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all eligible U.S. employees of Morinda whothat are entitled to participate at the beginning of the first full quarter following commencement of employment. MorindaThe Company matches the entire amount of the employee contributions up to 3% of the participating employee’s compensation, and then 50% of employee contributions between 4% and 5% of the participating employee’s compensation. Morinda’sThese matching contributions vest over four years with 0% vested throughfor 100% when the end of the first year of service and 33% vesting upon completion of each of the next three years of service.matching contributions are made. Total contributions by Morinda to the 401(k) Plan were insignificantamounted to $0.9 million and $0.7 million for the period from December 21, 2018 throughyears ended December 31, 2018. Effective January 1,2020 and 2019, the Company extended the right to participate in the 401(k) Plan to all of the Company’s eligible employees.
Foreign Benefit Plans
The Company has an unfunded retirement benefit plan for the Company’sits Japanese branchsubsidiary that entitles substantially all employees in Japan, other than directors, to retirement payments. MorindaThe Company also has an unfunded retirement benefit plan in Indonesia that entitles all permanent employees to retirement payments.
Upon termination of employment, the Morinda employees of the Japanese branchsubsidiary are generally entitled to retirement benefits determined by reference to basic rates of pay at the time of termination, years of service, and conditions under which the termination occurs. If the termination is involuntary or caused by retirement at the mandatory retirement age of 65, the employee is entitled to a greater payment than in the case of voluntary termination. MorindaThe employees in Indonesia whose service is terminated are generally entitled to retirement benefits determined by reference to basic rates of pay at the time of termination, years of service and conditions under which the termination occurs. The unfunded benefit obligation for these defined benefit pension plans was approximately $3.0$2.9 million and $3.5 million as of December 31, 2018.2020 and 2019, respectively. Of this amount,these amounts, approximately $2.9$3.1 million isand $3.4 million are included in other long-term liabilities in the accompanying consolidated balance sheetsheets as of December 31, 2018.
Litigation, Claims and Assessments
The Company’s operations are subject to numerous governmental rules and regulations in each of the countries it does business. These rules and regulations include a complex array of tax and customs regulations as well as restrictions on product ingredients and claims, the commissions paid to the Company’s IPCs,Brand Partners, labeling and packaging of products, conducting business as a direct-selling business, and other facets of manufacturing and selling products. In some instances, the rules and regulations may not be fully defined under the law or are otherwise unclear in their application. Additionally, laws and regulations can change from time to time, as can their interpretation by the courts, administrative bodies, and the tax and customs authorities in each country. The Company actively seeks to be in compliance, in all material respects, with the laws of each of the countries in which it does business and expects its IPCsBrand Partners to do the same. The Company’s operations are often subject to review by local country tax and customs authorities and inquiries from other governmental agencies. No assurance can be given that the Company’s compliance with governmental rules and regulations will not be challenged by the authorities or that such challenges will not result in assessments or required changes in the Company’s business that could have a material impact on its business, consolidated financial statements and cash flow.
On November 19, 2020, Ariix’s subsidiary in Japan (the “Japanese Subsidiary”) received an order from the Japan Consumer Affairs Agency notifying it of a nine-month suspension from recruiting new Brand Partners in Japan. In comparison to pre-acquisition levels of net revenue generated by the Japanese subsidiary, management expects that the suspension of recruiting could result in a material reduction in net revenue for the nine-month suspension period.
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NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
According to the order, the Japanese Subsidiary may continue to sell products to customers through existing Brand Partners and may continue to attract new customers. Accordingly, the Japanese Subsidiary has refocused its efforts to attract new customers by introducing new products and a new customer program. The Japanese Subsidiary has terminated non-compliant distributors whose actions led to the sanction, and many other distributors have elected to terminate their relationship with the Japanese Subsidiary.
The Company has various non-income tax contingencies in several countries. Such exposure could be material depending upon the ultimate resolution of each situation. As of December 31, 2018,2020 and 2019, the Company has recorded a current liability under Accounting Standards Codification (ASC)ASC 450, Contingencies, of approximately $0.8 million.
From time to time, the Company may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus resulted in a world-wide pandemic. By March 2020, the U.S. economy had been largely shut down by mass quarantines and government mandated stay-in-place orders (the “Orders”) to halt the spread of the virus. While some of these Orders were relaxed or lifted in different jurisdictions at various times during the year ended December 31, 2020, the overall impact of COVID-19 continues to have an adverse impact on business activities across the world. The Orders required some of the Company’s employees to work from home when possible, and other employees were entirely prevented from performing their job duties at times. The world-wide response to the pandemic has resulted in a significant downturn in economic activity and there is no assurance that government stimulus programs will successfully restore the economy to the levels that existed before the pandemic. If an economic recession or depression is sustained, it could have a material adverse effect on the Company’s business as consumer demand for its products could decrease.
Foreign jurisdictions accounted for approximately 68% of the Company’s net revenue for the year ended December 31, 2020. The impact of COVID-19 was a significant contributing factor for the year ended December 31, 2020 that resulted in decreases in net revenue in foreign countries as a group. While the Company’s direct-to-consumer selling model typically relies heavily on the use of its Brand Partner sales force in close contact with customers, the pandemic has required alternative selling approaches such as through social media. Until an effective vaccine or other successful mitigation of COVID-19 has been widely administered throughout the population, no assurance can be provided that the Company will be able to avoid future reductions in net revenue using alternative selling approaches that avoid direct contact with customers.
In most jurisdictions, the Orders have been relaxed or lifted but considerable uncertainty remains about whether the Orders will need to be reinstated as the spread of new variants of COVID-19 continues. While the current disruption to the Company’s business is expected to be temporary, the long-term financial impact on the Company’s business cannot be reasonably estimated at this time.
Employment and Severance Agreements
On May 8, 2020, the Company entered into employment agreements with three executive officers, Brent Willis, Gregory Gould, and David Vanderveen. The employment agreements provide for aggregate annual base compensation of $650,000, $500,000, and $550,000 plus target annual performance bonuses of 100%, 50%, and 50% of annual base compensation for Mr. Willis, Mr. Gould, and Mr. Vanderveen, respectively. The agreements expire on January 1, 2023 and provide for annual renewal periods thereafter. If the employment agreements are terminated by the Company for Cause (as defined in the employment agreements) or an officer resigns without Good Reason (as defined in the employment agreements), becomes disabled, or dies before the expiration date, the Company is required to pay base salary through the termination date plus reimbursement of business expenses and unused vacation. If the Company terminates the employment agreements with Messrs. Willis or Gould without Cause or they resign for Good Reason, the Company will be required to make severance payments of 18 months and 12 months of base compensation and health insurance benefits, for Mr. Willis and Mr. Gould, respectively, plus the target performance bonus that would have been otherwise payable for the year in which termination occurs.
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NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 4, 2020, the Company and David Vanderveen entered into a Confidential Settlement Agreement and Release (the “Settlement Agreement”) in connection with his resignation from the Company, which was deemed effective as of August 1, 2020. Under the Settlement Agreement, Mr. Vanderveen’s employment agreement discussed above was cancelled and he agreed to release any and all claims he may have against the Company in exchange for receiving (i) $0.4 million payable upon his entry into the Settlement Agreement, (ii) weekly salary continuation payments up to a maximum of approximately $0.3 million until the earlier of the completion of 65 weeks or the date when Mr. Vanderveen obtains new employment; and (iii) payment of up to 18 months of premiums for continued health benefit coverage. The Settlement Agreement also provided for the immediate vesting of 41,250 shares of restricted common stock and modification of certain stock options for shares at an exercise price of $ that will now expire on September 4, 2021. In connection with his resignation, Mr. Vanderveen entered into a consulting agreement with the Company under which he provided up to 20 hours per week of consulting services to the Company for a six-month period in exchange for $22,500 per month. Mr. Vanderveen is also eligible to receive a finder’s fee for any potential business acquisition candidates brought to the Company in accordance with the terms of the consulting agreement. As discussed in Note 18, Mr. Gould’s employment agreement was amended in March 2021.
Guarantee Deposits
The Direct / Social Selling segment has deposits in Korea that serve as collateral for collateral on IPCBrand Partner returns dictated by law related to future customer returns, and collateral to credit card companies for guarantee of IPCBrand Partner payments. As of December 31, 2018, approximately $0.8Approximately $0.9 million of guarantee deposits are included in other long-term assets in the accompanying consolidated balance sheet.
Royalty Agreement
In March 2015, the Company borrowed $60,000 from a member of management. The note provided for interest at 10% per annum and matured on March 31, 2020. Payments of interest were required quarterly. This note was repaid in full in February 2017.
| 83 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net loss per share is computed by dividing loss attributable to common stockholders by the weighted average number of common shares outstanding during the year. The calculation of diluted net loss per share includes dilutive stock options, unvested restricted stock awards, and other Common Stock equivalents computed using the treasury stock method, in order to compute the weighted average number of shares outstanding. For the years ended December 31, 20182020 and 2017,2019, basic and diluted net loss per share were the same since all Common Stock equivalents were anti-dilutive. As of December 31, 20182020 and 2017,2019, the following potential Common Stock equivalents were excluded from the computation of diluted net loss per share since the impact of inclusion was anti-dilutive (in thousands):
2018 | 2017 | |
| Series B Preferred Stock | - | 1,354 |
| Stock options | 2,786 | 2,491 |
| Restricted stock awards under LTI Plan: | ||
| Unvested shares of Common Stock issued | 1,018 | 1,823 |
| Unissued and unvested awards to Morinda employees | 1,229 | - |
| Total | 5,033 | 5,668 |
| 2020 | 2019 | |||||||
| Equity Incentive Plan awards: | ||||||||
| Stock options | 3,856 | 3,551 | ||||||
| Unissued and unvested restricted stock awards | 2,057 | 2,069 | ||||||
| Common stock purchase warrants | 1,803 | 311 | ||||||
| Total | 7,716 | 5,931 | ||||||
NOTE 1416 — FINANCIAL INSTRUMENTS AND SIGNFICANTSIGNIFICANT CONCENTRATIONS
Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date
Level 2—Other than quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly through market collaboration, for substantially the full term of the asset or liability
Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any market activity for the asset or liability at measurement date
As of December 31, 2020 and 2019, the fair value of the Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities payables to former Morinda shareholders, and notes payable approximateapproximated their carrying values due to the short-term nature of these instruments. Cash equivalents consist of short-term certificates of deposit that are classified as Level 2. The fair value of the short-term debts for business combination obligations in Note 4 are classified as Level 2 and were recently determined whereby the carrying value and fair value as of December 31, 20182020 are the same. The estimated fair value of the Senior Notes discussed in Notes 9 and 2017. 10 is classified as Level 2 and amounted to approximately $28.9 million as of December 31, 2020. The contingent consideration obligations incurrednotes receivable from BWR discussed in the business combinations with Marley and Morinda areNote 5 were recorded at estimated fair value as of December 31, 2018 and 2017. In addition, the net assets acquired in theSeptember 24, 2020. The recorded amounts for debt payable pursuant to business combinations discussed in Note 3 were generally recorded at4 approximated fair market value ondue to the daterelatively short-term maturities and lack of closing. Thechanges in the Company’s credit risk. Due to the U.S. government guarantee and the otherwise unique terms of the PPP Loan discussed in Note 10, it was not possible to determine fair value of this debt instrument.
Recurring Fair Value Measurements
SCHEDULE OF FAIR VALUE OF LIABILITIES
For the years ended December 31, 2020 and 2019, the Company did not have any other nonrecurring assets and liabilities measured atrecurring measurements for the fair value of assets. Recurring measurements of the fair value of liabilities as of December 31, 20182020 and 2017.
| 2020 | 2019 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Ariix derivative liability | $ | - | $ | - | $ | 90,874 | $ | 90,874 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
| Interest rate swap liability | - | - | - | - | - | 99 | - | 99 | ||||||||||||||||||||||||
| Total | $ | - | $ | - | $ | 90,874 | $ | 90,874 | $ | - | $ | 99 | $ | - | $ | 99 | ||||||||||||||||
The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the years ended December 31, 20182020 and 2017,2019, the Company had no transfers of its assets or liabilities between levels of the fair value hierarchy.Presented below is further information about the Ariix derivative liability and the interest rate swap shown in the table above.
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NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Liability
As discussed in Note 4, the years endedCompany is required to seek approval from its stockholders to issue up to an aggregate of million shares of Common Stock at up to three stockholder meetings. Based on the expected working capital adjustment set forth in the Amended Merger Agreement, the aggregate shares issuable were revised to an aggregate of million shares as of December 31, 2018 and 2017, one customer comprised2020. If stockholders fail to approve the settlement in shares of Common Stock, the Company will be required to make cash payments of $163.3 million within 90 days after the third stockholder meeting. This obligation to issue approximately 11% and 10%, respectively,35.7 million shares or pay cash of $163.3 million is accounted for as derivative liability. Key valuation assumptions to arrive at fair value of the derivative liability included (i) historical volatility of the Company’s shares of Common Stock of 77%, (ii) a risk-free interest rate of approximately 0.1%, and (iii) the weighted average cost of capital of 16.5%. This derivative liability is classified within Level 3 of the fair value hierarchy.
Interest Rate Swap Agreement
The Company entered into an interest rate swap agreement with EWB dated July 31, 2019. This swap agreement provided for a total notional amount of $10.0 million at a fixed interest rate of approximately 5.4% through May 1, 2023, in exchange for a floating rate indexed to the prime rate plus 0.5%. As of December 31, 2019, the Company had an unrealized loss from this interest rate swap agreement of approximately $0.1 million that is included in other long-term liabilities in the accompanying consolidated net revenue.
Significant Concentrations
A substantial portion of the business acquired from Morindarelated to the Direct / Social Selling segment is conducted in foreign markets, exposing the Company to the risks of trade or foreign exchange restrictions, increased tariffs, foreign currency fluctuations and similar risks associated with foreign operations. Approximately 70%For the years ended December 31, 2020 and 2019, approximately 68% and 72%, respectively, of the Company’s consolidated net revenue and 90% of Morinda’s net revenue for 2019 is expected to bewas generated outside the United States, primarily in the Asia Pacific market. Morinda’sMany of the Direct/ Social Selling segment’s products have a component of the noni plant, Morinda Citrifolia (“Noni”) as a common element. Tahitian Noni®Noni® Juice, MAX and other noni-based beverage products are expected to comprise over 85%approximately 70% of Morinda’s net revenue of the Direct/ Social Selling segment for 2019.the foreseeable future. However, if consumer demand for these products decreases significantly or if the Company ceases to offer these products without a suitable replacement, the Company’s consolidated financial condition and operating results would be adversely affected. The Company purchases fruit and other Noni-based raw materials from French Polynesia, but these purchases of materials are from a wide variety of individual suppliers with no single supplier accounting for more than 10% of its raw material purchases during 2018.2020 and 2019. However, as the majority of the raw materials are consolidated and processed at the Company’s plant in Tahiti, the Company could be negatively affected by certain governmental actions or natural disasters if they occurred in that region of the world.
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. The Company maintains its cash, cash equivalents and restricted cash at high-quality financial institutions. Cash deposits, including those held in foreign branches of global banks, oftenmay exceed the amount of insurance if any, provided on such deposits. As of December 31, 2018,2020, the Company had cash and cash equivalents with a singletwo financial institutioninstitutions in the United States with a balancebalances of $6.5$8.2 million and $23.7 million, and two financial institutions in China with balances of $14.5$6.3 million and $8.0$7.3 million. The Company also had $3.2 million of restricted cash in China asAs of December 31, 2018.2019, the Company had cash and cash equivalents with two financial institutions in the United States with balances of $22.2 million and $1.4 million, and two financial institutions in China with balances of $6.6 million and $3.6 million. The Company has never experienced any losses related to its investments in cash, cash equivalents and restricted cash.
Generally, credit risk with respect to accounts receivable is diversified due to the number of entities comprising the Company’s customer base and their dispersion across different geographies and industries. The Company performs ongoing credit evaluations on certain customers and generally does not require collateral on accounts receivable. The Company maintains reserves for potential bad debts and historically such losses have been insignificant. As of December 31, 2017, one customer comprised approximately 11% of accounts receivable, net.
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NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1517 — SEGMENTS AND GEOGRAPHIC CONCENTRATIONS
Reportable Segments
The Company follows segment reporting in accordance with ASC Topic 280, Segment Reporting. As a resultSince the consummation of the business combination with Morinda in December 2018, the Company’s operating segments have consisted of the Noni by NewAge segment and the NewAge segment. Upon completion of the business combination with Ariix, which comprised a portion of the Noni by NewAge segment, the Company rebranded this segment as discussedthe Direct/ Social Selling segment to better reflect the overall characteristics shared by the business units that comprise this segment. Also, as a result of the divestiture of the BWR reporting unit and substantially all of the Brands Division in Note 3,September 2020, the Company has changed its operating segments to consist ofrebranded the Morinda segment and the New Age segment. The New Age segment was previously comprised of the Brands segment and the DSD segment which are now combined as a singleNewAge segment as they are operating withthe Direct Store segment.
The Direct / Social Selling segment is engaged in the development, manufacturing, and marketing of a single management team. After the Morinda business combination, the Company’s CODM began assessingportfolio of healthy products in three core category platforms including health and wellness, healthy appearance, and nutritional performance all sold primarily via e-commerce and allocating resources based on the financial information of these two reporting segments. Accordingly, the Company’s previousthrough a direct route to market. The Direct / Social Selling segment disclosures have been restated for the year ended December 31, 2017.
As of December 31, 2020, the Direct Store segment is a direct-to-consumerdirect-store-distribution (“DSD”) business servicing Colorado and e-commerce businesssurrounding markets. Until September 24, 2020 when the Company disposed of the Divested Business discussed in Note 4, the segment also marketed and sold a portfolio of healthy beverage brands including XingTea, Búcha® Live Kombucha, Coco-Libre, Evian, Nestea, Illy Coffee and Volvic. In connection with over 70%the disposition of the Divested Business, the Company entered into a Distributor Agreement, pursuant to which BWR appointed the Company as its business generatedexclusive distributor of certain beverage products in selected territories in the key Asia Pacific markets of Japan, China, Korea, Taiwan, and Indonesia.
Net revenue by reporting segment for the years ended December 31, 20182020 and 2017, is2019, was as follows (in thousands):
2018 | 2017 | |
| New Age | $48,335 | $52,188 |
| Morinda | 3,825 | - |
| Total Revenue | $52,160 | $52,188 |
SUMMARY OF SEGMENT REPORTING
| Segment | 2020 | 2019 | ||||||
| Direct/ Social Selling | $ | 222,130 | $ | 200,708 | ||||
| Direct Store | 57,341 | 53,000 | ||||||
| Net revenue | $ | 279,471 | $ | 253,708 | ||||
Gross profit (loss) by reporting segment for the years ended December 31, 20182020 and 2017, is2019, was as follows (in thousands):
2018 | 2017 | |
| New Age | $6,380 | $12,400 |
| Morinda | 2,915 | - |
| Total gross profit | $9,295 | $12,400 |
SCHEDULE OF NET REVENUE BY GEOGRAPHIC REGION
| Segment | 2020 | 2019 | ||||||
| Direct/ Social Selling | $ | 169,025 | $ | 155,685 | ||||
| Direct Store | 8,464 | (2,978 | ) | |||||
| Total gross profit | $ | 177,489 | $ | 152,707 | ||||
Assets by reporting segment as of December 31, 20182020 and 2017, are2019, were as follows (in thousands):
| Segment | 2020 | 2019 | ||||||
| Direct/ Social Selling | $ | 396,174 | $ | 201,600 | ||||
| Direct Store | 47,008 | 49,530 | ||||||
| Total assets | $ | 443,182 | $ | 251,130 | ||||
| 86 |
2018 | 2017 | |
| New Age | $61,265 | $61,646 |
| Morinda | 206,222 | - |
| Other | 19,445 | 6,026 |
| Total assets | $286,932 | $67,672 |
NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense by reporting segment for the years ended December 31, 20182020 and 2017, are2019, was as follows (in thousands):
2018 | 2017 | |
| New Age | $81 | $666 |
| Morinda | 56,133(1) | - |
| General corporate | 12 | - |
| Total capital expenditures | $56,226 | $666 |
| Segment | 2020 | 2019 | ||||||
| Direct/ Social Selling | $ | 8,362 | $ | 6,782 | ||||
| Direct Store | 566 | 1,977 | ||||||
| Total depreciation and amortization | $ | 8,928 | $ | 8,759 | ||||
Cash payments for capital expenditures for property and equipment of $55.4 million acquired inand identifiable intangible assets by reporting segment for the business combination with Morindayears ended December 31, 2020 and post-closing additions of $0.7 million.
| Segment | 2020 | 2019 | ||||||
| Direct/ Social Selling | $ | 2,188 | $ | 4,204 | ||||
| Direct Store | 283 | 1,153 | ||||||
| Total capital expenditures | $ | 2,471 | $ | 5,357 | ||||
Geographic Concentrations
The Company attributes net revenue to geographic regions based on the location of its customers’ contracting entity. The following table presents net revenue by geographic region for the years ended December 31, 20182020 and 20172019 (in thousands):
SCHEDULE OF NET REVENUE BY GEOGRAPHIC REGION
| 2020 | 2019 | |||||||
| United States of America | $ | 89,079 | $ | 77,084 | ||||
| Japan | 87,968 | 87,151 | ||||||
| China | 51,419 | 52,985 | ||||||
| Rest of World | 51,005 | (1) | 36,488 | (1) | ||||
| Net revenue | $ | 279,471 | $ | 253,708 | ||||
Year Ended December 31, | ||
2018 | 2017 | |
| United States of America | $48,460 | $52,188 |
| International | 3,700 | - |
| Total revenue | $52,160 | $52,188 |
| (1) | No individual country in the Rest of World group exceeds 10% of consolidated net revenue. |
As a result of the recently completed acquisition of Ariix, it is not currently practicable to disclose a breakdown of consolidated sales information by product type.
As of December 31, 2018,2020, the net carrying value of property and equipment located outside of the United States amounted to approximately $23.6 million. As of December 31, 2019, the net carrying value of the Company’s property and equipment located outside of the United States amounted to approximately $50.6$22.1 million.
NOTE 18 — SUBSEQUENT EVENTS
Clarification Letter
On January 29, 2021, the Company and the Sellers’ Agent entered into a letter of clarification (the “Clarification Letter”) to the Ariix Merger Agreement discussed in Note 4. The Clarification Letter explained the intent of the parties as of the Ariix Closing date whereby (i) a restricted cash account of Ariix with a Chinese bank that had a balance of $3.1 million including approximately $30.7 million located in Japan. Asas of December 31, 2017, substantially allthe Ariix Closing Date remained an asset of the Sellers and, accordingly, was not conveyed to the Company, and (ii) the number of shares of the Company’s assets and operations were locatedCommon Stock issuable to the Sellers on the first anniversary of the Ariix Closing Date was reduced by shares, from million shares to million shares. In addition, the impact of the $3.1 million reduction of restricted cash reduced the number of shares issuable by million shares due to the impact of the working capital adjustment discussed in Note 4.
ATM Sales Agreement
On February 9, 2021, the United States.
The Company has no obligation to sell any of the Placement Shares under the Sales Agreement. The Sales agreement may be terminated by the Company upon five business days’ notice to the Manager and at any time by the Manager or by the mutual agreement of the parties. If not earlier terminated, the Sales Agreement will remain in effect until all of the Placement Shares are sold. Under the Sales Agreement, the Company will pay the Manager a commission equal to of the gross proceeds from the sale of the Placement Shares. In addition, the Company has agreed to pay certain conditionsexpenses incurred by the Manager in connection with the offering.
Private Placement of Equity Securities
On February 16, 2021, the Company entered into a securities purchase agreement in connection with a private placement for the issuance of an aggregate of approximately million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares (the “Term Loan”“Warrant Shares”) and (ii) a $10.0 million revolving loan facility (the “Revolving Loan Facility”).of Common Stock. At the closing EWB funded $25.0 millionon February 19, 2021, the Company received gross proceeds of approximately $ million. Roth Capital Partners, LLC acted as the exclusive placement agent in exchange for a fee equal to 7% of the gross proceeds. After deducting the placement agent fees, the net proceeds were approximately $ million.
The warrants have an initial exercise price of $5.00 per share, subject to adjustment in certain circumstances. The warrants are exercisable until the third anniversary of the effectiveness of a registration statement required to be filed within 30 days after the closing pursuant to a separate registration rights agreement. Exercise of the warrants is subject to a beneficial ownership limitation of (or at the option of the Purchasers).
Pursuant to the registration rights agreement, the Company consistingagreed to file an initial registration statement on Form S-3 covering the resale of the $15.0 million Term Loanshares of Common Stock and $10.0 as an advance under the Revolving Loan Facility.
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NewAge, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gould Agreement
On March 3, 2021, the Company and Gregory A. Gould, the Chief Financial Officer of the Company, entered into a Modification and Transition Addendum to 1.00, borrowings will bear interest at the Prime Rate plus 0.50%Employment Agreement and Indemnification Agreement (the “Gould Agreement”). The Company may voluntarily prepay amounts outstanding underGould Agreement amends the Revolving Loan Facility on ten business days’ prior noticeemployment agreement with Mr. Gould discussed in Note 14, whereby he will continue to EWB without prepayment charges. In the event the Revolving Loan Facility is terminated prior to its maturity,serve as Chief Financial Officer of the Company would be required to pay an early termination fee in the amount of 0.50%until July 2, 2021 (the “Term”). As part of the revolving line. Additional borrowing requests undertransition, Mr. Gould will receive (i) a payment in March 2021 for his 2020 performance bonus of $250,000, (ii) a target performance bonus of $650,000 for his work in 2021 payable in July 2021, (iii) severance compensation of one year of base salary of $500,000 plus target bonus of $250,000 pursuant to his employment agreement, (iv) payment of health insurance premiums for one year, and (v) title to his Company automobiles and laptop computer will be transferred to Mr. Gould.
In addition, the Revolving Loan Facility are subjectCompany agreed to various customary conditions precedent, including satisfactionissue stock options for shares of a borrowing base test as more fully described inCommon Stock that vest on and have an expiration date of years after the Loan Agreement.issuance date. The Revolving Loan FacilityGould Agreement also provides for an unused line fee equalthat any unvested shares of restricted stock and stock options previously granted to 0.5% per annumMr. Gould will continue to vest on their existing schedules until July 2, 2021, when they will become fully vested. Mr. Gould may exercise any options at any time before their original stated expiration date. Under the Agreement, each party has agreed to release any and all claims such party may have against the other party. The confidentiality, non-disparagement and non-solicitation provisions of the undrawn portion.Employment Agreement remain in effect. The Loan Agreement includes a lockbox arrangement wherealso modifies the Indemnification Agreement, dated December 28, 2019, between the Company and Mr. Gould.
Pursuant to the Senior Notes discussed in Note 10, the Company is required to direct its customersreplace Mr. Gould with a suitable candidate to remit paymentsserve as the Chief Financial Officer within 120 days of Mr. Gould’s termination date. The failure to a restricted bank account, whereby all available funds are usedreplace Mr. Gould with an individual reasonably acceptable to pay down the outstanding principal balancelenders would result in an event of default under the Revolving Loan Facility.
Business Combination
On March 22, 2019, the Company entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $55 million of the land and building in Tokyo that serves as the corporate headquarters of Morinda’s Japanese subsidiary. Concurrently with the sale,4, 2021, the Company entered into a leaseletter of this propertyintent to acquire Aliven Inc. (“Aliven”), a Japan-based direct selling company. Aliven currently generates approximately $20 million in annualized net revenue with more than 100,000 customers and Brand Partners. Aliven sells a portfolio of differentiated healthy products including skin care products infused with cultured stem cells, nutritional products, and their patented far-infrared technology products designed for an initial noncancelable termreduction of seven years, with an option at the Company’s discretion to extend the lease term for 20 additional years. The monthly lease cost is ¥20 million (approximately $181,000 as of March 22, 2019)localized pain. Consideration for the initial seven-year term.
Restricted Stock Grant
On March 12, 2019, the Company granted restricted stock awards to members of10, 2021, the Board of Directors approved restricted stock grants to the Company’s Chief Executive Officer for an aggregate of 90,910 (i) shares of Common Stock. The fair value of these shares was $0.5 million based on the closing pricethat vest for one-third of the Company’s Common Stockshares on each of the first, second and third anniversaries of the grant date. Compensation expense will be recognized untildate,
| 88 |
NewAge, Inc.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
SCHEDULE OF SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
| Additions | Provisions | Effect of | ||||||||||||||||||||||
| Balance at | Charged to | Assumed in | Amounts | Foreign | Balance at | |||||||||||||||||||
| Beginning | Costs and | Business | Written | Currency | End of | |||||||||||||||||||
| Description | of Year | Expenses | Combinations | Off | Translation | Year | ||||||||||||||||||
| Year Ended December 31, 2020: | ||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 534 | $ | 196 | $ | - | $ | (148 | ) | $ | - | $ | 582 | |||||||||||
| Allowance for sales returns | 461 | 8 | 2,500 | (1,647 | ) | - | 1,322 | |||||||||||||||||
| Income tax valuation allowance | 43,465 | 17,880 | 4,038 | (662 | ) | - | 64,721 | |||||||||||||||||
| Year Ended December 31, 2019: | ||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 134 | $ | 455 | $ | 114 | $ | (169 | ) | $ | - | $ | 534 | |||||||||||
| Allowance for sales returns | 200 | 261 | - | - | - | 461 | ||||||||||||||||||
| Income tax valuation allowance | 5,197 | 38,682 | - | (433 | ) | 19 | 43,465 | |||||||||||||||||
| 89 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020 pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by isa company in the reports we filethat it files or submitsubmits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’sSEC’s rules and forms,forms. Based upon the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2020 due to a material weakness in internal controls over financial reporting, described below. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to ourthe company’s management, including our Chief Executive Officerits principal executive and our Chief Financial Officer, or persons performing similar functions,principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Following identification of the material weakness and prior to filing this Form 10-K, we completed substantive procedures for the year ended December 31, 2020. Based on these procedures, management including our Chief Executive Officer and Chief Financial Officer, does not expectbelieves that our disclosure controlsconsolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and procedures (as definedCFO have certified that, based on their knowledge, the financial statements, and other financial information included in Rules 13a-15(e)this Form 10-K, fairly present in all material respects the financial condition, results of operations and 15d-15(e)cash flows of the Exchange Act)Company as of, and for, the periods presented in this Form 10-K.
Changes in Internal Control over Financial Reporting
We acquired certain assets and liabilities constituting the Ariix, LLC (“Disclosure Controls”Ariix”) will prevent all errorsbusiness on November 16, 2020. Because Ariix utilizes separate information and all fraud. Aaccounting systems, we have implemented internal controls over financial reporting for acquisition-related accounting and disclosures. The acquisition of Ariix represents a material change in internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectivesover financial reporting since management’s last assessment of the Company’s internal control systemover financial reporting, which was completed as of December 31, 2019.
We are met. Further,reviewing and evaluating internal control procedures and the design of athose control system must reflectprocedures related to the factAriix acquisition in order to determine when we will complete an evaluation and review of Ariix’s internal controls over financial reporting. Except as described above, there has been no change in our internal control over financial reporting that there are resource constraints, and the benefits of controls must be considered relativeoccurred during our fiscal quarter ended December 31, 2020, that has materially affected, or is reasonably likely to their costs. Because of the inherent limitations in allmaterially affect, our internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls will be modified as systems change and conditions warrant.
Management’s Report on Internal Control overOver Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rulesby Rule 13a-15(f) and 15d-15(f) ofunder the Exchange Act). In order to evaluateassessing the effectiveness of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002,December 31, 2020, our management with the participation of our principal executive officer and principal financial officer has conducted an assessment, including testing, usingused the criteria in Internal Control – Integrated Framework, issuedset forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013)(2013 framework). Our systemWe excluded Ariix from our assessment of the effectiveness of the Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliabilityas of financial reportingDecember 31, 2020. Ariix constitutes 50% of total assets and the preparation11% of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. This assessment included reviewrevenue of the documentationconsolidated financial statement amounts as of controls,and for the year ended December 31, 2020.
Based on the evaluation of the design effectiveness of controls, testing of the operating effectiveness ofour disclosure controls and a conclusion on this evaluation.
Material Weakness
In connection with the preparation of our disclosure controls and proceduresconsolidated financial statements, we identified a material weakness in internal control over financial reporting. Under standards established by the Public Company Accounting Oversight Board of the United States, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As of December 31, 2020, a material weakness exists related to all risk areasthe Company’s failure to design and expect to continually improveimplement monitoring activities over the acquisition of Ariix, LLC (“Ariix”) resulting in the next calendar year, including identifying specific areas within our governance, accountingCompany’s inability to issue its financial statements for inclusion in its Form 10-K by the required due date. Specifically, due to the size and financial reporting processes to add adequatetiming of the acquisition of Ariix, the Company did not have sufficient resources to mitigate any potential weaknesses.
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in its report that is included herein.
Plan of Remediation of Material Weakness
The Company has taken or will take the following steps to remediate the material weakness:
| ● | We will alter the design of our controls over acquisitions to better evaluate the potential financial reporting impact relating to the timing of future acquisitions, including evaluating the adequacy and competency of the accounting function of the potential company being acquired. In addition, we will give careful consideration to waiving due diligence requirements, such as requiring audited financial statements, prior to closing future acquisitions. | |
| ● | The Company will hire additional personnel with the requisite technical skills in US GAAP accounting to support the growth of the Company while enhancing the overall competency level of the acquired company’s accounting staff. |
Inherent Limitation on the Effectiveness of Internal Control
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and ourthe inability to eliminate misconduct completely. Accordingly, any system of internal controlscontrol over financial reporting, on an ongoing basisincluding ours, no matter how well designed and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
| 90 |
Report of Independent Registered Public Accounting Firm
To the shareholders and the Board of our registered public accounting firm regardingDirectors of NewAge, Inc. (formerly New Age Beverages Corporation)
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting.reporting of NewAge, Inc. (formerly New Age Beverages Corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 18, 2021, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Ariix LLC (“Ariix”), which was acquired on November 16, 2020, and whose financial statements constitute 50% of total assets and 11% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2020. Accordingly, our audit did not include the internal control over financial reporting at Ariix.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment:
As of December 31, 2020, a material weakness exists related to the Company’s failure to design and implement monitoring activities over the acquisition of Ariix, LLC resulting in the Company’s inability to issue its financial statements for inclusion in its Form 10-K by the required due date. Specifically, due to the size and timing of the acquisition of Ariix, the Company did not have sufficient resources to adequately monitor the consolidation of the financial information and purchase allocation of Ariix in order to prevent or detect material misstatements on a timely basis.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2020, of the Company, and this report does not affect our report on such financial statements.
| /s/ Deloitte & Touche LLP | |
| Salt Lake City, Utah | |
| March 18, 2021 |
| 91 |
Item 9B. Other Information
None.
| 92 |
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to the 2019our 2021 Proxy Statement, which is expected to be filed with the SEC within 120 days afterin March 2021.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to our 2021 Proxy Statement, which is expected to be filed with the end of the year ended December 31, 2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to the 2019our 2021 Proxy Statement, which is expected to be filed with the SEC within 120 days after the end of the year ended December 31, 2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to the 2019our 2021 Proxy Statement, which is expected to be filed with the SEC within 120 days after the end of the year ended December 31, 2018.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to the 2019our 2021 Proxy Statement, which is expected to be filed with the SEC within 120 days after the end of the year ended December 31, 2018.in March 2021.
| 93 |
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) and (a)(2) Financial Statements and Financial Statement Schedules:
| (1) | Financial Statements. The financial statements are set forth under Item 8, “Financial Statements and Supplementary Data,” of this Report. |
| (2) | Financial Statement Schedules. For the years ended December 31, 2020 and 2019, Schedule II is included under Item 8, “Financial Statements and Supplementary Data,” of this Report. All other financial statement schedules are omitted because they are not applicable, or the amounts are immaterial, not required, or the required information is presented in the financial statements and notes thereto in Item 8 of this Report. |
(b) Exhibits.
Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
| ● | may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements, |
| ● | may apply standards of materiality that differ from those of a reasonable investor, and |
| ● | were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
The exhibits listed in the following Exhibit Index are filed or incorporated by reference as part of this Report. The following are exhibits to this Report and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included.
| 94 |
EXHIBIT INDEX
| 95 |
| 96 |
| 97 |
| List of subsidiaries of the Registrant. | ||
| 23.1+ | Consent of | |
| 31.1+ | Certification of Brent Willis, Chief Executive Officer Pursuant to Rule 13a-14(a) | |
| 31.2+ | Certification of Gregory Gould, Chief Financial Officer Pursuant to Rule 13a-14(a) | |
| 32.1+ | Certification of Brent Willis, Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | |
| 32.2+ | Certification of Gregory Gould, Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | |
| 101.INS + | Inline XBRL Instance Document | |
| 101.SCH + | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL + | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF + | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB + | Inline XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE + | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | The cover page from the NewAge, Inc. Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL (included as Exhibit 101) |
+ Filed herewith
* Management contract or compensation plan or arrangement.
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
Item 16. Form 10-K Summary.
Not applicable.
| 98 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| NewAge, Inc. | |||
| Date: | By: | /s/ Brent Willis | |
| Brent Willis | |||
Chief Executive Officer (Principal Executive Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Date: | By: | /s/ Brent Willis |
Brent Willis | ||
Chief Executive Officer and Director | ||
| (Principal Executive Officer) | ||
| Date: | By: | /s/ Gregory A. Gould |
| Gregory A. Gould | ||
Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| Date: | By: | /s/ |
| Chairman of the Board and Director |
| Date: | By: | /s/ Ed Brennan |
Ed Brennan | ||
| Director | ||
| Date: March 18, 2021 | By: | /s/ Timothy J. Haas |
| Timothy J. Haas | ||
| Director | ||
| Date: March 18, 2021 | By: | /s/ Amy L. Kuzdowicz |
| Amy L. Kuzdowicz | ||
| Director | ||
| Date: March 18, 2021 | By: | /s/ Alicia Syrett |
Alicia Syrett | ||
| Director | ||
| Date: March 18, 2021 | By: | /s/ Fred W. Cooper |
| Fred W. Cooper | ||
| Director |
| 99 |