UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2020

For the Quarterly Period Ended June 30, 2021

☐Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from          to

For the Transition Period from   to 

 

Commission File Number: 001-38014

 

 NewAge, Inc. 
 (Exact Name of Registrant as Specified in its Charter) 

 

WashingtonDelaware 27-2432263

(State or other jurisdiction of


incorporation or organization)

 

(I.R.S. Employer


Identification No.)

   

2420 17th Street, Suite 220

Denver, CO

 80202
(Address of principal executive offices) (Zip Code)
   
Registrant’s telephone number, including area code: (303) 566-3030

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $0.001 per shareNBEVThe Nasdaq Capital MarketNASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐Accelerated filer☒
Non-accelerated filer ☐Smaller reporting company ☐☒
   Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

 

The registrant had 98,521,402136,788,047 shares of its common stock,Common Stock, $0.001 par value per share, outstanding as of NovemberAugust 6, 2020.2021.

 

 

 

 

NewAge, Inc.

Table of Contents

 

 Page
PART I. FINANCIAL INFORMATION
ITEM 1.Financial Statements 
 
ITEM 1.Financial Statements2
Unaudited Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20202021 and December 31, 201920202
 Unaudited Condensed Consolidated Statements of Operations and Comprehensive LossIncome (Loss) for the Three and Nine months ended SeptemberSix Months Ended June 30, 20202021 and 201920203
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the NineSix Months Ended SeptemberJune 30, 20202021 and 201920204
 Unaudited Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20202021 and 201920205
 
Notes to Unaudited Condensed Consolidated Financial Statements7
   
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations27
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk45
ITEM 4.Controls and Procedures4532
   
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk50
ITEM 4.Controls and Procedures50
PART II. OTHER INFORMATION 
   
ITEM 1.Legal Proceedings4651
ITEM 1A.Risk Factors4651
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds4951
ITEM 3.Defaults Upon Senior Securities4951
ITEM 4.Mine Safety Disclosures4951
ITEM 5.Other Information4951
ITEM 6.Exhibits5052
SIGNATURES 51
SIGNATURES53

 

1

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

 

NewAge, Inc.

 

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value per share)

 

 2021 2020 
 September 30, December 31,  June 30, December 31, 
 2020 2019  2021  2020 
ASSETS              
        
Current assets:                
Cash and cash equivalents $26,885  $60,842  $80,922  $43,711 
Accounts receivable, net of allowance of $361 and $535, respectively  10,334   11,012 
Trade accounts receivable, net of allowance of $590 and $582, respectively  10,470   12,341 
Inventories  30,567   36,718   44,219   48,051 
Assets held for sale  7,088   - 
Current portion of restricted cash  5,568   10,000 
Prepaid expenses and other  5,686   4,384   13,086   13,032 
        
Total current assets  73,472   112,956   161,353   127,135 
                
Long-term assets:                
Identifiable intangible assets, net  40,104   43,443 
Identifiable intangible assets, net of accumulated amortization  164,093   169,611 
Goodwill  55,281   54,993 
Right-of-use lease assets  36,585   38,458   29,741   38,764 
Property and equipment, net  27,571   28,443 
Property and equipment, net of accumulated depreciation  23,771   28,076 
Restricted cash, net of current portion  16,846   3,729   5,969   11,524 
Goodwill  10,284   10,284 
Deferred income taxes  9,735   9,128   7,476   7,782 
Deposits and other  5,161   4,689   4,771   5,297 
        
Total assets $219,758  $251,130  $452,455  $443,182 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY        
LIABILITIES, REDEEMABLE COMMON STOCK, AND STOCKHOLDERS’ EQUITY        
Current liabilities:                
Accounts payable $10,598  $13,259  $17,111  $22,774 
Accrued liabilities  40,083   49,451   65,009   70,007 
Operating lease liability related to right-of-use assets held for sale  4,707   - 
Current portion of business combination liabilities  -   5,508   1,140   11,750 
Current maturities of long-term debt  1,504   11,208   19,440   18,016 
        
Total current liabilities  52,185   79,426   107,407   122,547 
                
Long-term liabilities:                
Business combination liabilities, net of current portion  49,013   95,826 
Long-term debt, net of current maturities  18,469   12,802   12,063   16,181 
Operating lease liabilities, net of current portion:                
Lease liability  33,699   35,513   26,745   34,788 
Deferred lease financing obligation  16,049   16,541   15,543   15,882 
Warrant derivative liability  5,695   - 
Deferred income taxes  5,484   5,441   5,091   5,391 
Accrued employee benefits and other  9,491   9,132 
Other  8,295   8,313 
                
Total liabilities  135,377   158,855   229,852   298,928 
                
Contingencies (Note 10)  -   - 
Commitments and contingencies (Note 10)  -     
        
Redeemable Common Stock, 800 shares as of December 31, 2020  -   2,101 
                
Stockholders’ equity:                
Common Stock; $0.001 par value. Authorized 200,000 shares; issued and outstanding 98,490 and 81,873 shares as of September 30, 2020 and December 31, 2019, respectively  98   82 
Preferred stock, $0.001 par value per share. Authorized 1,000 shares; 0 shares issued  -   - 
Common Stock, $0.001 par value per share. Authorized 400,000 and 200,000 shares as of June 30, 2021 and December 31, 2020, respectively; issued and outstanding 136,606 and 99,146 shares as of June 30, 2021 and December 31, 2020, respectively  137   99 
Additional paid-in capital  232,175   203,862   340,937   236,732 
Obligation to issue 14,551 and 19,704 shares of Common Stock as of June 30, 2021 and December 31, 2020, respectively  30,263   54,186 
Note receivable for stock subscription  (1,250)  -   -   (1,250)
Accumulated other comprehensive income  1,134   802   3,478   4,201 
Accumulated deficit  (147,776)  (112,471)  (152,212)  (151,815)
Total stockholders’ equity  84,381   92,275   222,603   142,153 
Total liabilities and stockholders’ equity $219,758  $251,130 
Total liabilities, redeemable Common Stock, and stockholders’ equity $452,455  $443,182 

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

2

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except loss per share amounts)


  2021  2020  2021  2020 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2021  2020  2021  2020 
             
Net revenue $124,040  $62,637  $249,558  $126,330 
Cost of goods sold  40,241   24,559   78,358   46,728 
                 
Gross profit  83,799   38,078   171,200   79,602 
                 
Operating expenses:                
Commissions  43,320   18,405   90,717   37,920 
Selling, general and administrative  41,042   26,277   79,901   56,885 
Depreciation and amortization expense  4,723   1,761   9,398   3,542 
Loss on disposal of Divested Business  4,339   -   4,339   - 
Impairment of right-of-use assets  -   400   -   400 
                 
Total operating expenses  93,424   46,843   184,355   98,747 
                 
Operating loss  (9,625)  (8,765)  (13,155)  (19,145)
                 
Non-operating income (expense):                
Interest expense  (3,040)  (600)  (6,163)  (1,172)
Gain (loss) from change in fair value of derivatives  30,829   20   21,216   (306)
Interest and other income (expense), net  (53)  342   (405)  725 
                 
Income (loss) before income taxes  18,111   (9,003)  1,493   (19,898)
Income tax expense  (740)  (551)  (1,890)  (1,274)
                 
Net income (loss)  17,371   (9,554)  (397)  (21,172)
Other comprehensive income (loss):                
Foreign currency translation adjustments, net of tax  722   448   (723)  (943)
                 
Comprehensive income (loss) $18,093  $(9,106) $(1,120) $(22,115)
                 
Net income (loss) per share of Common Stock:                
Basic $0.11  $(0.10) $(0.00) $(0.24)
Diluted $(0.04) $(0.10) $(0.08) $(0.24)
                 
Weighted average number of shares of Common Stock outstanding:                
Basic  143,636   93,003   135,534   89,187 
Diluted  170,609   93,003   166,323   89,187 

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

3

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2021 and 2020

(In thousands)

 

  Shares  Amount  Capital  Stock  Subscription  Income (Loss)  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 (Loss)  Deficit  Total 
                         
Six Months Ended June 30, 2021                                
                                 
Balances, December 31, 2020  99,146  $99  $236,732  $54,186  $(1,250) $4,201  $(151,815) $142,153 
Issuance of Common Stock:                                
In Ariix business combination  19,704   20   54,166   (54,186)  -   -   -   - 
In Aliven business combination  1,072   1   2,587   -   -   -   -   2,588 
Private placement of Common Stock, net of issuance costs  14,636   15   39,635   -   -   -   -   39,650 
Upon vesting of restricted stock awards  560   1   (1)  -   -   -   -   - 
For exercise of stock options  288   -   528   -   -   -   -   528 
Reclassification of Redeemable Common Stock  1,200   1   3,160   -   -   -   -   3,161 
Reclassification of Fixed Shares derivative liability  -   -   -   30,263   -   -   -   30,263 
Stock-based compensation expense  -   -   4,130   -   -   -   -   4,130 
Allowance for Divested Business stock subscription receivable  -   -   -   -   1,250   -   -   1,250 
Net change in accumulated other comprehensive income (loss)  -   -   -   -   -   (723)  -   (723)
In ATM public offering, net of offering costs      -                         
In ATM public offering, net of offering costs, shares                                
Net loss  -   -   -   -   -   -   (397)  (397)
                                 
Balances, June 30, 2021  136,606  $137  $340,937  $30,263  $-  $3,478  $(152,212) $222,603 
                                 
Six Months Ended June 30, 2020                                
                                 
Balances, December 31, 2019  81,873  $82  $203,862  $-  $-  $802  $(112,471) $92,275 
Balances  81,873  $82  $203,862  $-  $-  $802  $(112,471) $92,275 
Issuance of Common Stock:                                
In ATM public offering, net of offering costs  16,130   16   25,012   -   -   -   -   25,028 
For exercise of stock options  2   -   4   -   -   -   -   4 
Upon vesting of restricted stock awards  437   -   -   -   -   -   -   - 
Stock-based compensation expense  -   -   2,323   -   -   -   -   2,323 
Net change in accumulated other comprehensive income (loss)  -   -   -   -   -   (943)  -   (943)
Net loss  -   -   -   -   -   -   (21,172)  (21,172)
                                 
Balances, June 30, 2020  98,442  $98  $231,201  $-  $-  $(141) $(133,643) $97,515 
Balances  98,442  $98  $231,201  $-  $-  $(141) $(133,643) $97,515 

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

4

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2021 and 2020

(In thousands)

  2021  2020 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(397) $(21,172)
Adjustments to reconcile net loss to net cash used in operating activities:        
Loss (gain) from change in fair value of derivatives, net  (21,216)  306 
Depreciation and amortization  9,596   3,752 
Non-cash lease expense  6,244   2,792 
Accretion of debt discount  4,372   302 
Stock-based compensation expense  4,149   2,449 
Allowance for uncollectible note receivable and accrued interest from Divested Business  2,701   - 
Impairment of right-of-use assets  -   400 
Deferred income tax benefit  (149)  (173)
Loss from sale of property and equipment  60   66 
Other  118   73 
Changes in operating assets and liabilities, net of effects of business combination:        
Accounts receivable  (37)  (2,276)
Inventories  4,681   2,819 
Prepaid expenses, deposits and other  1,640   517 
Accounts payable  (5,840)  (551)
Other accrued liabilities  (11,482)  (12,900)
         
Net cash used in operating activities  (5,560)  (23,596)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Cash payments for Ariix business combination  (10,000)  - 
Proceeds from sale of equipment  -   159 
Capital expenditures for property and equipment  (765)  (1,980)
         
Net cash used in investing activities  (10,765)  (1,821)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from private placement of Units, net of placement fee:        
Fair value of warrants to purchase 7,318 shares of Common Stock  14,128   - 
Residual fair value of 14,636 shares of Common Stock  39,673   - 
Proceeds from borrowings  -   6,868 
Principal payments on borrowings  (6,000)  (10,450)
Debt issuance costs paid  (21)  (85)
Proceeds from issuance of common stock  -   25,122 
Payments for deferred offering costs  (24)  (94)
Proceeds from exercise of stock options  528   4 
Principal payments on business combination obligations  (4,496)  (298)
Payments under deferred lease financing obligation  (329)  (319)
         
Net cash provided by financing activities  43,459   20,748 
         
Effect of foreign currency translation changes  90   (857)
         
Net change in cash, cash equivalents and restricted cash  27,224   (5,526)
Cash, cash equivalents and restricted cash at beginning of period  65,235   64,571 
         
Cash, cash equivalents and restricted cash at end of period $92,459  $59,045 

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

5

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2021 and 2020

(In thousands)

  2021  2020 
       
SUMMARY OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD:        
Cash and cash equivalents $80,922  $40,672 
Current portion of restricted cash  5,568   1,500 
Long-term portion of restricted cash  5,969   16,873 
         
Total $92,459  $59,045 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid for interest $1,092  $506 
Cash paid for income taxes $1,132  $14,739 
Cash paid for amounts included in the measurement of operating lease liabilities $5,235  $4,031 
Right-of-use assets acquired in exchange for operating lease liabilities $1,768  $2,452 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Issuance of Common Stock in Ariix business combination $54,186  $- 
Reclassification of Fixed Shares derivative liability to equity $30,263  $- 
Reclassification of 1,200 shares of Redeemable Common Stock to equity $3,161  $- 
Clarification Letter obligation in exchange for reduction of shares issuable for derivative liability $3,056  $- 
Issuance of Common Stock in Aliven business combination $2,588  $- 
Issuance of 400 shares of Redeemable Common Stock for Senior Notes amendment fee $1,060  $- 
Increase in payables for debt issuance costs $-  $150 

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

 

26

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except loss per share amounts)

  2020  2019  2020  2019 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2020  2019  2020  2019 
             
Net revenue $62,719  $69,828  $189,049  $194,483 
Cost of goods sold  25,224   29,532   71,952   73,962 
                 
Gross profit  37,495   40,296   117,097   120,521 
                 
Operating expenses:                
Commissions  17,458   21,185   55,378   58,830 
Selling, general and administrative  27,983   26,104   84,868   81,121 
Gain from change in fair value of earnout obligations  -   (6,244)  -   (12,909)
Loss on disposal of Divested Businesses  3,446   -   3,446   - 
Impairment of right-of-use assets  -   -   400   1,500 
Depreciation and amortization expense  1,751   2,241   5,293   6,494 
                 
Total operating expenses  50,638   43,286   149,385   135,036 
                 
Operating loss  (13,143)  (2,990)  (32,288)  (14,515)
                 
Non-operating income (expense):                
Interest expense  (521)  (727)  (1,693)  (3,129)
Gain (loss) from sale of property and equipment  (62)  (85)  (128)  6,357 
Gain (loss) from change in fair value of derivatives  (86)   (166)  (392)  304 
Interest and other income (expense), net  291   (48)  1,082   (233)
                 
Loss before income taxes  (13,521)  (4,016)  (33,419)  (11,216)
Income tax expense  (612)  (6,671)  (1,886)  (12,768)
                 
Net loss  (14,133)  (10,687)  (35,305)  (23,984)
Other comprehensive income (loss):                
Foreign currency translation adjustments, net of tax  1,275   (1,138)  332   (142)
                 
Comprehensive loss $(12,858) $(11,825) $(34,973) $(24,126)
                 
Net loss per share (basic and diluted) $(0.14) $(0.14) $(0.38) $(0.31)
                 
Weighted average number of shares of Common Stock outstanding (basic and diluted)  97,819   78,076   92,087   76,550 

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

3

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2020 and 2019

(In thousands)

     Amount  Capital  Note  Accumulated  Deficit  Total 
     Additional  Receivable  Other       
  Common Stock  Paid-in  For Stock  Comprehensive  Accumulated    
  Shares  Amount  Capital  Subscription  Income (Loss)  Deficit  Total 
Nine Months Ended September 30, 2020                            
Balances, December 31, 2019  81,873  $82  $203,862  $-  $802  $(112,471) $92,275 
Issuance of Common Stock:                            
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)  -   -   - 
Exercise of stock options  17   -   34   -   -   -   34 
Vesting of restricted stock awards  558   -   -   -   -   -   - 
Grant of restricted stock awards  -                         
Employee services  -                         
Purchase and retirement of stock  (780)  (1)  (1,192)  -   -   -   (1,193)
Stock-based compensation expense  -   -   3,280   -   -   -   3,280 
Fair value of warrant issued for license agreement                            
Other comprehensive income  -   -   -   -   332   -   332 
Net loss  -   -   -   -   -   (35,305)  (35,305)
                             
Balances, September 30, 2020  98,490  $98  $232,175  $(1,250) $1,134  $(147,776) $84,381 
                             
Nine Months Ended September 30, 2019                            
Balances, December 31, 2018  75,067  $75  $176,471  $-  $626  $(22,636) $154,536 
Issuance of Common Stock:                            
ATM public offering, net of offering costs  2,767   3   13,232   -   -   -   13,235 
Business combination with BWR  108       453               453 
Exercise of stock options  200   -   418   -   -   -   418 
Grant of restricted stock awards  126   -   576   -   -   -   576 
Employee services  6   -   31   -   -   -   31 
Stock-based compensation expense  -   -   4,086   -   -   -   4,086 
Fair value of warrant issued for license agreement  -   -   838   -   -   -   838 
Other comprehensive loss  -   -   -   -   (142)  -   (142)
Net loss  -   -   -   -   -   (23,984)  (23,984)
                             
Balances, September 30, 2019  78,274  $78  $196,105  $-  $484  $(46,620) $150,047 

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

4

 

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2020 and 2019

(In thousands)

  2020  2019 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(35,305) $(23,984)
Adjustments to reconcile net loss to net cash used in operating activities:       
Depreciation and amortization  5,607   6,776 
Non-cash lease expense  3,913   4,910 
Loss on disposal of Divested Businesses  

3,446

   - 
Stock-based compensation expense  3,415   5,278 
Accretion and amortization of debt discount and issuance costs  414   

1,796

 
Impairment of right-of-use lease assets  400   1,500 
Loss (gain) from change in fair value of derivatives  392   (304)
Loss (gain) from sale of property and equipment  128   (6,360)
Expense for make-whole premium and other  

73

   

511

 
Gain from change in fair value of earnout obligations  -   (12,909)
Deferred income tax benefit  (442)  (4,919)
Changes in operating assets and liabilities, net of effects of business acquisition and disposal:        
Accounts receivable  (932)  (1,912)
Inventories  2,741   1,190 
Prepaid expenses, deposits and other  519   (3,201)
Accounts payable  (484)  657 
Other accrued liabilities  (13,738)  10,030 
         
Net cash used in operating activities  (29,853)  (20,941)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Proceeds received from buyer of Divested Businesses, net of cash conveyed of $209  

381

   - 
Proceeds from sale of equipment  231   - 
Capital expenditures for property and equipment  (2,108)  (2,576)
Cash advance under unsecured promissory note  

(1,250

)  - 
Net proceeds from sale of land and building in Japan  -   37,548 
Security deposit under sale leaseback arrangement  -   (1,799)
Acquisition of BWR, net of cash acquired of $537  -   (963)
         
Net cash provided by (used in) investing activities  (2,746)  32,210 
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Net proceeds from issuance of common stock  25,122   13,529 
Proceeds from borrowings  6,868   52,068 
Proceeds from exercise of stock options  34   418 
Principal payments on borrowings  

(10,825

)  

(34,415

)
Payments on business combination obligations  (5,761)  (34,000)
Purchase and retirement of stock  (1,193)  -
Payments under deferred lease financing obligation  

(480

)  

(307

)
Payments for deferred offering costs  (164)  (195)
Debt issuance costs paid  

(95

)  

(931

)
Proceeds from deferred lease financing obligation  -   

17,640

 
Cash paid for make-whole premium  -   (480)
         
Net cash provided by financing activities  13,506   13,327 
         
Effect of foreign currency translation changes  (247)  1,578 
         
Net increase (decrease) in cash, cash equivalents and restricted cash  (19,340)  26,174 
Cash, cash equivalents and restricted cash at beginning of period  64,571   45,856 
         
Cash, cash equivalents and restricted cash at end of period $45,231  $72,030 

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

5

 

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows, Continued

Nine Months Ended September 30, 2020 and 2019

(In thousands)

  2020  2019 
       
SUMMARY OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:        
Cash and cash equivalents at end of period $26,885  $68,373 
Restricted cash at end of period:        
Current (included in prepaid expenses and other)  1,500   - 
Long-term  16,846   3,657 
         
Total $45,231  $72,030 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid for interest $726  $584 
Cash paid for income taxes $15,788  $2,388 
Cash paid for amounts included in the measurement of operating lease liabilities $7,131  $6,556 
Right-of-use assets acquired in exchange for operating lease liabilities $3,034  $26,899 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Other non-cash investing and financing activities:        
Issuance of common stock for unsecured promissory note receivable $1,250  $- 
Increase in payables for:        
Debt discount and issuance costs $150  $- 
Patents $-  $163 
Deferred offering costs $-  $99 
Fair value of warrants issued for license agreement $-  $838 
Restricted stock issued for prepaid compensation $-  $500 
         
Reconciliation of non-cash and cash consideration in BWR business combination:        
Fair value of assets acquired:        
Identifiable assets, excluding cash, cash equivalents and restricted cash $-  $6,517 
Goodwill  -   2,031 
Less liabilities assumed  -   (7,132)
Net assets acquired  -   1,416 
Issuance of common stock  -   (453)
         
Cash paid, net of cash acquired of $537 $-  $963 

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

6

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1 —BASIS OF PRESENTATION AND SIGNFICANTSIGNIFICANT ACCOUNTING POLICIES

 

Overview

 

NewAge, Inc. (the “Company”) was formed under the laws of the State of Washington on April 26, 2010. Effective May 24, 2021, NewAge, Inc. (the “Company”) reincorporated to the State of Delaware (the “Reincorporation”) under a plan of conversion, dated May 14, 2021 (the “Plan of Conversion”). Pursuant to the Plan of Conversion, the Company also adopted new bylaws (the “Delaware Bylaws”). As a result of the Reincorporation, each outstanding share of Common Stock of the Company as a Washington corporation automatically converted into an outstanding share of Common Stock of the Company as a Delaware corporation. In addition, each outstanding stock option and warrant, or right to acquire shares of Common Stock of the Company as a Washington corporation converted into an equivalent stock option, warrant, or right to acquire, upon the same terms and conditions and for the same number of shares of Common Stock of the Company as a Delaware corporation (including the vesting schedule and exercise or conversion price per share applicable to each such option, warrant or other convertible right).

Effective July 28, 2020, the Company amended its Articles of Incorporation to change its name from New Age Beverages Corporation to NewAge, Inc. Accordingly, all references herein have been changed to reflect the new name. The Company changed its name to NewAge, Inc. as it built out its distribution system and was in a position to drive a broader portfolio of products through that system that spans more than 50 markets worldwide with a network of more than 400,000 exclusive independent distributors (“Brand Partners”) and customers. The Company is a healthy and organic consumer products and lifestyle company engaged in the development and commercialization of a portfolio of organic, naturalbrands in three core category platforms including health and other better-for-youwellness, healthy beverages, liquid dietary supplements, cannabidiol (“CBD”) topical products,appearance, and other healthy lifestyle products.nutritional performance primarily in a direct-to-consumer route to market.

 

Segments

 

The Company’s chief operating decision maker (the “CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance. The Company’s CODM assesses performance and allocates resources based on the financial information of 2 operating segments, the Noni by NewAgeDirect / Social Selling segment and the NewAgeDirect Store segment. These two reportable segments focus on the sale of distinctly different products and are managed separately because they have different marketing strategies, customer bases, and economic characteristics. Please refer to Note 13 for additional information about the Company’s operating segments.

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly-owned subsidiaries, are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by U.S. GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. These unaudited condensed consolidated financial statements for the three and ninesix months ended SeptemberJune 30, 2021 and 2020 should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2019,2020, included in the Company’s 20192020 Annual Report on Form 10-K filed with the SEC on March 16, 2020 and as amended on April 28, 202018, 2021 (the “2019“2020 Form 10-K”).

 

The accompanying condensed consolidated balance sheet and related disclosures as of December 31, 20192020 have been derived from the Company’s audited financial statements. The Company’s financial condition as of SeptemberJune 30, 20202021 and its operating results for the three and ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2020.2021.

7

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 earnoutbusiness combination obligations and the related assets acquired in business combinations; valuation assumptions for stock options, warrants and other equity instruments issued for goods or services;instruments; the number of shares of restricted stock that will ultimately vest based on the future achievement of performance criteria; estimated useful lives for identifiable intangible assets and property and equipment; allowances for sales returns, chargebacks and inventory obsolescence; deferred income taxes and the related valuation 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.

7

��

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recent Accounting Pronouncements

 

The following accounting standards werestandard was adopted during the nine months ended September 30, 2020:effective January 1, 2021:

 

In June 2016,August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,2020-06, FinancialDebt – 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 - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.and Contracts in an Entity’s Own Equity). ASU 2016-13 amends2020-06 reduces the guidance onnumber of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the impairmenthost 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 financial instruments. This update addsconvertible instruments and contracts in an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2018, ASU 2016-13 was amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. ASU 2018-19 clarifies that operating lease receivables are not within the scope of Accounting Standards Codification (“ASC”) 326-20 and should instead be accounted for under the new leasing standard, ASC 842. ASU 2016-13 and ASU 2018-19 were effective forentity’s own equity. Effective January 1, 2021, the Company beginning inelected to adopt ASU 2020-06 using the first quarter of 2020. The adoption of ASU 2016-13 and ASU 2018-19modified retrospective transition method which did not have a material impact onresult in any changes to the Company’s results of operations or financial position.

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.statements upon adoption.

 

No other recently issued accounting pronouncements are currently expected to have a material impact on the Company’s consolidated financial statements.

 

NOTE 2 —LIQUIDITY AND GOING CONCERN

For the six months ended June 30, 2021, the Company incurred an operating loss of $13.2 million and cash used in operating activities was $5.6 million. For the year ended December 31, 2020, the Company incurred an operating loss of $34.9 million and cash used in operating activities was $34.3 million. As of SeptemberJune 30, 2020,2021, the Company had an accumulated deficit of $147.8 million and the Company incurred a net loss of $35.3152.2 million for the nine months ended September 30, 2020. Net cash used in operating activities amounted to $29.9 million for the nine months ended September 30, 2020, 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 5.million.

 

In March and July 2020,February 2021, the Company entered into a securities purchase agreement in connection with a private placement of units that consisted of an aggregate of approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares of Common Stock. At the Loan and Security Agreement (the “EWB Credit Facility”) discussed in Note 6 that requiredclosing, the Company to deposit an initial amountreceived net proceeds of approximately $15.1 53.8million in restricted cash accounts with East West Bank (“EWB”), and that require gross equity infusions million. As of $31.2 million for the year ending December 31, 2020. In addition, for any future amounts borrowed under the revolving loan facility with EWB,June 30, 2021, the Company is required to increase restricted cash deposits by the corresponding amount of the borrowings. The requirement to maintain increased levels of restricted cash deposits contributed to the decrease in availablehad cash and cash equivalents from of $60.8 80.9million asand the current portion of December 31, 2019 to restricted cash was $26.9 5.6million, asfor a total of September$86.5 million. As of June 30, 2020. During the nine months ended September 30, 2020,2021, the Company received gross proceedshad working capital of $25.8 53.9million under the ATM Agreement (as defined and discussed in Note 7). As a result, the Company’s commitment for additional equity infusions by December 31, 2020 has been reduced to $5.4 million.

 

Since March 2020,During the Company has been experiencing reduced sales as a result12-month period ending on June 30, 2022, cash payments will be required to settle certain obligations, including operating lease payments of $9.1 million, deferred consideration related to business combinations of $1.1 million, and up to $25.1 million of principal and interest under the COVID-19 pandemic as8.00% Original Issue Discount Senior Secured Notes discussed in Note 10. In April 2020, the Company entered into a loan with EWB in an aggregate principal amount of approximately $6.9 million under the Paycheck Protection Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As discussed in Note 6, the PPP Loan is unsecured, and the Company may apply to EWB for forgiveness of the loan in accordance with the terms of the CARES Act. No principal payments are required under the PPP Loan until the maturity date in April 2022.

The Company has begun a new product and marketing strategy to increase demand for the Company’s products. On September 24, 2020, the Company disposed of the Divested Businesses discussed in Note 3 that accounted for a net loss of $7.4 million and a loss on disposal of $3.4 million for the nine months ended September 30, 2020. Accordingly, the disposal of the Divested Businesses is expected to improve the Company’s overall financial performance and reduce cash flow needs in the future. As discussed in Note 4, 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.6. Management believes the Company’s existing cash resources and ongoing cost-cutting effortscash equivalents of $80.9 million and the current portion of restricted cash of $5.6 million will be sufficient to fund the Company’s operationscontractual obligations and to meet its obligations as they come dueworking capital requirements at least through November 2021.August 2022.

 

In September 2020, the Company entered into the Amended Merger Agreement (as defined and discussed in Note 3). The closing is required to occur by November 30, 2020 and will require the Company to make a cash payment of $20.0 million. The Company is seeking to refinance the EWB Credit Facility and obtain additional equity financing in order to make this cash payment in November 2020. No assurance can be provided that the Company will be successful in its efforts to obtain adequate funding to close the Amended Merger Agreement.

8

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 3 — BUSINESS COMBINATIONS AND DISPOSITIONS

 

Ariix Merger Agreement

 

On September 30, 2020, the Company entered into an Amended and Restated Agreement and Plan of Ariix Merger (the “Amended“Ariix Merger Agreement”), by and among the Company,Ariix, LLC (“Ariix”), Ariel Merger Sub, LLC (“Ariix Merger Sub”), Ariel Merger Sub 2, LLC (“Ariix Merger Sub 2”), Ariix, LLC (“Ariix”), certain membersMembers of Ariix (the “Sellers”), and Dr. Frederick W. Cooper, the principal shareholdermember of Ariix who serves as sellerssellers’ agent (the “Sellers’ Agent”), pursuant to which the Company agreed to acquire 100% of the equity interests of Ariix, which owns five brands in the e-commerce and direct selling channels (the “Acquisition”). The Amended Merger Agreement requires completion of an audit of Ariix’s financial statements for its last two fiscal years and containssubject to customary representations, warranties, covenants and indemnities byand closing conditions. The Company entered into the parties to such agreement and is subject to customary closing conditions, including, among other things, (i) the receipt of regulatory approvals, including applicable antitrust approvals, (ii) the accuracy of the respective parties’ representations and warranties, and (iii) material compliance by the parties with their respective covenants and obligations. In addition, the AmendedAriix Merger Agreement contains certain termination rights, including byto accelerate organic growth with its direct-to-consumer business model and to expand its portfolio of healthy products.

8

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

On November 16, 2020, the Company orentered into a letter agreement (the “Waiver Letter”), with Ariix and the Sellers’ Agent that resulted in closing of the event the closing has not occurred byAriix Merger on November 30,16, 2020 (the “Outside“Ariix Closing Date”). Pursuant to and the Amended Merger Agreement, onSellers’ Agent was appointed as a member of the closing date (the “Closing Date”),Company’s Board of Directors. On the Ariix will mergeClosing Date, Ariix merged with Ariix Merger Sub, with Ariix as the surviving entity and will be a wholly-ownedwholly owned subsidiary of the Company. Subsequently, Ariix will mergeMerger Sub was merged with and into Ariix Merger Sub 2 which will remain asand remains a wholly-ownedwholly owned subsidiary of the Company.

On the Closing Date, the Company will be required Ariix Merger Sub 2 was subsequently renamed “Ariix, LLC”. The preliminary purchase consideration to pay the Sellersacquire Ariix amounted to $20.0 155.1million, in cash andconsisting of (i) an obligation to issue 19.0 19.7million shares of Common Stock. On the six-month anniversary of the Closing Date, the Company will be required to either pay $10.0 million in cash or issue shares of Common Stock with a fair value of $10.0 million. Upon receipt$54.2 million, (ii) an obligation to pay $10.0 million in cash, and (iii) the fair value of stockholder approval,the aggregate derivative liability of $90.9 million as discussed below.

On January 29, 2021, the Company will also be requiredand the Sellers’ Agent entered into a letter of clarification (the “Clarification Letter”) to the Ariix Merger Agreement. The Clarification Letter explained the intent of the parties as of the Ariix Closing Date whereby (i) a cash account of Ariix with a Chinese bank that had a balance of $3.1 million was payable to the Sellers, and (ii) the number of shares of the Company’s Common Stock issuable to the Sellers on the first anniversary of the Ariix Closing Date was reduced by 0.5 million shares, from 25.5 million shares to 25.0 million shares. In addition, the impact of the $3.1 million reduction of cash reduced the number of shares issuable by 0.6 million shares due to the impact of the working capital adjustment discussed below. Effective January 29, 2021, the Company recognized a business combination liability for $3.1 million as a result of the Clarification Letter. During the six months ended June 30, 2021, the Company transferred $3.1 million of the cash balance to certain Sellers to settle this business combination liability. The Clarification Letter did not result in any change to goodwill. However, net assets acquired were reduced by $3.1 million, and the fair value of the derivative liability decreased by $3.1 million to $87.8 million.

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 up to 37.1 19.7million shares of Common Stock on the Ariix Closing Date, and to pay $10.0 million to the Sellers after certain post-closing conditions were satisfied. As of December 31, 2020, the obligation to issue the 19.7 million shares of Common Stock with a fair value of $54.2 million was included within stockholders’ equity and the obligation to pay $10.0 million to the Sellers was reflected as follows (in thousands): a current liability. During the first quarter of 2021, the 19.7 million shares of Common Stock were issued, and the post-closing conditions were satisfied whereby $10.0 million was paid to the Sellers.

SCHEDULE OF CONTINGENT SHARE ISSUANCES

Timing of Contingent Share Issuances
30 days after stockholder approval:
Sellers Agent7,000
Ariix employee severance consideration1,667
Closing Date Anniversary:
12 Months25,500
14 Months2,900
Total37,067

 

IfOn or before May 16, 2021, under the Amended Ariix Merger Agreement, the Company failswas required to obtain stockholder approval for the issuance of up to 37.1 million shares at up to three stockholder meetings held for the purpose of obtaining such approval, the Company will be required toeither pay up to an additional $163.310.0 million in cash consisting of approximately $141.0 million to the membersSellers or issue a variable number of Ariix, $12.3 million to the Sellers’ Agent, andshares of its Common Stock with a value up to $10.0 million for severance payments.(the “Interim Ariix Merger Consideration”). The cash paymentsInterim Ariix Merger Consideration was reduced to the membersextent that working capital of Ariix and the Sellers’ Agent would be payable within 90 dayswas less than $11.0 million as of the third stockholders’ meeting. TheAriix Closing Date. Based on the 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 Amended Ariix Merger Agreement. In addition, Ariix failed to repay $5.0 million of long-term accrued business combination liabilities by the Ariix Closing Date as agreed to by the parties. Accordingly, the requirement to pay the Interim Ariix Merger Consideration of $10.0 million was eliminated.

In addition to the 19.7 million shares of Common Stock issued in the first quarter of 2021, the Company was required to seek approval from its shareholders to issue up to an additional 39.6 million shares of Common Stock to settle the remainder of the merger consideration. Based on the post-closing adjustments discussed above, the number of shares of Common Stock issuable, or cash payable,remaining to be issued to the Sellers was reduced from 39.6 million shares to approximately 34.6 million shares, consisting of (i) approximately 14.5 million shares that are fixed whereby the only contingency is the passage of time (the “Fixed Shares”), and (ii) 20.1 million shares that are subject to adjustmentvariation based on the working capitaloutcome of Ariix atpotential indemnification claims (the “Variable Shares”). As of December 31, 2020, the Closing Date.obligation to issue shares of the Company’s Common Stock or pay $163.3 million of cash was accounted for as a derivative liability with an estimated fair value of $90.9 million, consisting of approximately $37.0 million allocable to the Fixed Shares and $53.9 million allocable to the Variable Shares.

On May 14, 2021, the Company’s shareholders approved the issuance of shares of Common Stock to settle the Fixed Shares and the Variable Shares. The Fixed Shares are issuable for 11.7 million shares as soon as the Sellers provide detailed issuance instructions, and the remaining 2.9 million shares are issuable by January 16, 2022. Since the conditions that required accounting for the Fixed Shares as a derivative liability were eliminated upon receipt of shareholder approval, the fair value of the Fixed Shares of $30.3 million was reclassified from a liability to a component of stockholders’ equity on May 14, 2021.

9

NewAge, Inc.

 

BWR Business CombinationNotes to Unaudited Condensed Consolidated Financial Statements

 

The Variable Shares are issuable on November 16, 2021. However, the number of shares is subject to subsequent adjustments based on the outcome of potential indemnification claims by either party. Under the Amended Ariix Merger Agreement, indemnification claims awarded to either party through November 16, 2021 will be settled by increasing or decreasing the number of Variable Shares based on a fixed conversion price of $5.53 per share. Accordingly, the Company completedis required to continue to account for the Variable Shares as a business combinationderivative liability until the number of shares is fixed. Please refer to Note 11 for further discussion of the treatment of the Fixed Shares and the Variable Shares for the calculation of basic and diluted earnings per share.

Aliven Business Combination

On June 1, 2021 (the “Aliven Closing Date”), the Company entered into an Asset Purchase Agreement (“APA”) with Brands Within Reach, LLCAliven, Inc. (“BWR”Aliven”) in July 2019 that was accounted for using the acquisition method of accounting under ASC 805, Business Combinations, and using the fair value concepts set forth in ASC 820, Fair Value Measurement. AsAliven is a resultJapan-based direct selling company. The Company entered into the APA to accelerate growth with its direct-to-consumer business model in Japan and to expand its portfolio of healthy products. Pursuant to the business combination with BWR,APA, the Company acquired certain key licensingthe assets and distribution rights inassumed the United States for someliabilities of Aliven on the world’s leading beverage brands.Aliven Closing Date. The total purchase consideration issued by the Company consisted of cash payments of $approximately 1.5 million and the issuance of 107,6021,072,000 shares of the Company’s Common Stock with an estimateda fair value of approximately $453,0002,588,000. The preliminary purchase price allocation is presented below (dollars in thousands):

SUMMARY OF PURCHASE PRICE ALLOCATION

Identifiable assets acquired:    
Accounts receivable, net $525 
Inventories    1,356(1)
Prepaid expenses and other assets  295 
Property and equipment  86 
Distributor sales force    1,590(2)
Trade name     400(2)
Total identifiable assets acquired  4,252 
Liabilities assumed:    
Accounts payable and accrued liabilities  (1,953)
Net identifiable assets acquired  2,299 
Goodwill     289(3)
     
Total purchase price allocation $2,588 

 

9(1)Based in part on the preliminary report of an independent valuation specialist, the fair value of work-in-process and finished goods inventories on the Aliven Closing Date exceeded the historical carrying value by approximately $0.1 million. This amount represents an element of built-in profit that is 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)Based in part on the preliminary report of an independent valuation specialist, 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. These intangible assets are being amortized over estimated useful lives of seven years for the distributor sales force and three years for the trade name, with an aggregate weighted average life of 6.2 years.
(3)Goodwill was recognized for the difference between the total purchase consideration transferred to consummate the business combination and the fair value of the net identifiable assets acquired. Goodwill primarily relates to expected synergies to be realized due to combining Aliven with the Company, and the value of the assembled workforce on the Aliven Closing Date. Goodwill is expected to be deductible for income tax purposes.

10

 

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

For the three and nine months ended September 30, 2020, the accompanying condensed consolidated statements of operations include net revenue and net losses related to the post-acquisition results of operations of BWR, as follows (in thousands): 

SCHEDULE OF NET REVENUE AND NET LOSS RELATED TO BUSINESS COMBINATIONS

  2020  2019  2020  2019 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2020  2019  2020  2019 
             
Net revenue (1) $1,507  $2,432  $6,417  $2,432 
Net loss (1) $(844)(2) $(855) $(3,490)(2) $(855)

(1)Net revenue and net loss exclude the operating results of all U.S. retail brands that were sold in a combined transaction with the BWR subsidiary on September 24, 2020 as discussed below.

(2)

Net loss excludes the loss on disposal of $3.4 million from the sale in a combined transaction of the BWR subsidiary and substantially all U.S. retail brands as discussed below.

Unaudited Pro Forma Disclosures

 

The following table summarizes the results of operations for the Company after giving effect to the pre-acquisition results of Ariix and Aliven on an unaudited pro forma basis the Company’s results of operations for the three and nine months ended September 30, 2019 giving effect to the BWR business combination as if it had occurred on January 1, 2019 (in thousands, except loss per share amount)amounts):

 SCHEDULE OF UNAUDITED PRO FORMA DISCLOSURES

  Three  Nine 
  Months  Months 
       
Net revenue $70,189  $203,007 
Net loss $(10,823) $(25,426)
Net loss per share- basic and diluted $(0.14) $(0.33)
Weighted average number of shares of common stock outstanding- basic and diluted  78,184   76,658
  2021  2020  2021  2020 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2021  2020  2021  2020 
             
Net revenue $125,922  $130,934  $255,073  $249,332 
Net income (loss)  17,005  $(6,835)  (982) $(19,321)
Net income (loss) per share:                
Basic $0.12  $(0.06) $0.01  $(0.18)
Diluted $(0.04) $(0.06) $(0.08) $(0.18)
Weighted average number of shares of common stock outstanding:                
Basic  154,951   113,779   136,427   109,963 
Diluted  171,323   113,779   167,216   109,963 

 

The pro forma financial results shown above reflect the historical operating results of the Company, including the unaudited pro forma results of BWRAriix and Aliven as if thisthese business combinationcombinations and the related equity issuances had occurred at the beginning of the first full calendar year preceding the acquisition date.dates. The calculations of pro forma net revenue and pro forma net lossincome (loss) give effect to the pre-acquisition operating results of BWRAriix and Aliven based on (i) the historical net revenue and net income (loss),of Ariix and Aliven, 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 pro forma information presented above 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.

 

Disposition of BWR and U.S. Retail BrandsBusiness Combination Liabilities

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 NewAge segment and are collectively referred to herein as the “Divested Businesses”. The remaining brands within the Brands Division that were not included in this transaction will be phased out before the end of 2020. All remaining assets in the Brands Division were adjusted to fair value as of September 30, 2020.

 

As consideration for the transaction, the Company received net cash in the amount of $June 30, 2021 and December 31, 2020, business combination liabilities were as follows (in thousands):

SCHEDULE OF BUSINESS COMBINATION LIABILITIES0.6 

  2021  2020 
       
Liabilities to former owners of Ariix:        
Fixed Shares derivative liability $-(2) $37,028(1)
Variable Shares derivative liability  44,773(3)  53,846(1)
Total derivative liabilities  44,773   90,874(1)
Short-term debt payable in cash  -   10,000 
Business combination liabilities assumed from Ariix:        
Fair value of deferred consideration payable:        
LIMU  3,495(4)  3,656 
Zennoa  1,885(5)  2,196 
Short-term debt for Zennoa  -   850 
Total  50,153   107,576 
Less current portion  1,140   11,750 
Long-term portion $49,013  $95,826 

(1)As of December 31, 2020, the Company had an obligation under the Amended Ariix Merger Agreement to issue the Fixed Shares and the Variable Shares, or pay $163.3 million of cash. These obligations were accounted for as derivative liabilities with an aggregate estimated fair value of $90.9 million as of December 31, 2020. Key valuation assumptions as of December 31, 2020 are set forth in Note 12 under the caption Recurring Fair Value Measurements.
(2)The conditions that required accounting for the Fixed Shares as a derivative liability were eliminated upon receipt of shareholder approval on May 14, 2021. Therefore, the fair value of the Fixed Shares derivative liability as of May 14, 2021 was reclassified to equity.
(3)The Variable Shares derivative liability provides for ongoing adjustments in the number of shares based on the outcome of any potential indemnification claims by either party to the Amended Ariix Merger Agreement. Accordingly, the Variable Shares derivative liability is being adjusted to fair value at the end of each reporting period until the underlying shares are issued in November 2021. Key valuation assumptions as of June 30, 2021 are set forth in Note 12 under the caption Recurring Fair Value Measurements.

million and an unsecured nonrecourse promissory note in the aggregate amount of approximately $

11

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 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.NewAge, Inc.

 

UnderNotes to Unaudited Condensed Consolidated Financial Statements

(4)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 June 30, 2021, payments of deferred consideration made by both Ariix and the Company amounted to a total of approximately $1.1 million, resulting in a remaining balance due to the former owners of LIMU of $3.9 million. This obligation is subject to a security agreement until the entire amount is paid in full. The net carrying value of $3.5 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.
(5)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 $1.9 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.

Changes in Business Combination Obligations

For 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 liabilitiessix months ended June 30, 2021, activity related to BWRthe Variable Shares and the U.S. retail brands in the aggregate amount of $0.9 million, which are included inFixed Shares derivative liabilities, and other accrued liabilities in the accompanying unaudited condensed consolidated balance sheetbusiness combination obligations were as of September 30, 2020.follows (in thousands):

SCHEDULE OF CHANGES IN BUSINESS COMBINATION OBLIGATIONS

  Variable  Fixed  Total  Other  Total 
  Derivative Liabilities       
  Variable  Fixed  Total  Other  Total 
                     
Balances, December 31, 2020 $53,846(1) $37,028(1) $90,874  $16,702  $107,576 
Reclassify Clarification Letter obligation  (3,056)(2)  -   (3,056)  3,056(2)  - 
Cash payments for:                    
Short-term debt paid to Sellers of Ariix  -   -   -   (10,000)  (10,000)
Clarification Letter obligation  -   -   -   (3,056)  (3,056)
LIMU and Zennoa deferred consideration  -   -   -   (590)  (590)
Zennoa short-term debt  -   -   -   (850)  (850)
Net gain on change in fair value of derivatives  (6,017)(3)  (6,765)(4)  (12,782)  -   (12,782)
Accretion of discount on deferred consideration  -   -   -   118   118 
Fixed Shares derivative liability reclassified to equity  -   (30,263)(5)  (30,263)  -   (30,263)
                     
Balances, June 30, 2021 $44,773  $-  $44,773  $5,380  $50,153 

 

(1)Represents the allocable fair value associated with the Variable Shares and the Fixed Shares derivative liabilities as of December 31, 2020.
(2)Represents the impact of the Clarification Letter entered into on January 29, 2021, whereby the number of shares subject to shareholder approval was reduced and a payable was recognized.
(3)Represents the gain recognized from changes in fair value of the Variable Shares derivative liability for the six months ended June 30, 2021.
(4)Represents the gain recognized from changes in fair value of the Fixed Shares derivative liability for the period from January 1, 2021 through May 14, 2021 when this derivative liability was reclassified to equity.
(5)The fair value of the Fixed Shares derivative liability as of May 14, 2021 was reclassified as a component of equity since shareholder approval to issue the shares eliminated the conditions that previously required liability treatment.

1012

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Disposition of BWR and U.S. Retail Brands

In connection with the disposition,September 2020, the Company entered into a Distributor Agreement with BWR, pursuant to which BWR appointed the Company as its exclusive distributor of certain beverage products in Coloradosold Brands Within Reach, LLC (“BWR”) and Wyoming. In addition, the Company and BWR entered into a Transition Services Agreement, under which the Company agreed to provide certain transitional services to BWR until December 31, 2020, unless such services are terminated earlier in accordance with the agreement.

The Company recognized a loss on the dispositionsubstantially all of the Divested Businesses of $3.4 million as follows (in thousands): 

SCHEDULE OF LOSS ON DISPOSITION OF DIVESTED BUSINESSES

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 assumed:    
Accounts payable and accrued liabilities  2,549 
Accrued compensation and other current liabilities  723 
Operating lease liabilities  606 
Fair value of consideration conveyed to Buyer  (3,665)
Commissions and other selling expenses  (371)
     
Loss on disposition $(3,446)

In connection withCompany’s legacy U.S. retail brands (collectively, the transaction, the Buyer“Divested Business”). Zachert Private Equity GmbH (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 forwith a principal balance of $2.5million that was issued in exchange for the Company’s $1.25 million cash payment and the issuance of shares of Common Stock with a fair value of $1.25 million. This promissory note bears interest at 10% per annum, matures three years from the BWR Closing Date,in September 2023, 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 $2.5million, or (iii) BWR recognizes net income of at least $2.5million for any 12-month period following the BWR Closingclosing date (the “Guaranty Note”). A portion of the consideration for the Guaranty Note was the issuance of approximately 691,953 692,000shares of the Company’s common stockCommon Stock issued to the Buyer with an estimated fair value of $1.25million. Accordingly, $1.25 million of the Guaranty Note iswas reflected as a reduction of stockholders’ equity and $1.25$1.25 million iswas included under the caption “Deposits and other” in the accompanying unaudited condensed consolidated balance sheetsheets as of September 30,December 31, 2020.

Based on recent communications with the Buyer, the Company determined that collection of the $2.5 million note receivable and accrued interest of $0.2 million is unlikely whereby a reserve for the entire balance was recognized as of June 30, 2021. Additionally, the Company recorded a liability for approximately $1.6 million of former supplier obligations. Accordingly, aggregate losses related to the Divested Business of $4.3 million were recognized for the three and six months ended June 30, 2021.

For the three months ended June 30, 2020, the operating results related to the Divested Business were included in the Direct Store segment and accounted for net revenue of $5.9 million and an operating loss of $2.5 million. For the six months ended June 30, 2020, the operating results related to the Divested Business were included in the Direct Store segment and accounted for net revenue of $10.7 million and an operating loss of $5.2 million.

 

NOTE 4 — OTHER FINANCIAL INFORMATION

Business CombinationInventories

As of June 30, 2021 and December 31, 2020, inventories consisted of the following (in thousands):

SCHEDULE OF INVENTORIES

  2021  2020 
       
Raw materials $12,065  $12,628 
Work-in-process  626   1,225 
Finished goods, net  31,528   34,198 
Total inventories $44,219  $48,051 

Other Accrued Liabilities

 

On December 21, 2018, the Company entered into a business combination with Morinda Holdings, Inc. (“Morinda”). The purchase consideration included the issuance of 43,804 shares of Series D Preferred Stock (the “Preferred Stock”) providing for the potential payment of up to $15.0 million (the “Milestone Dividend”) if the Adjusted EBITDA of Morinda was at least $20.0 million for the year ended December 31, 2019. If the Adjusted EBITDA of Morinda was less than $20.0 million, the Milestone Dividend was reduced whereby no Milestone Dividend was payable if actual Adjusted EBITDA was $17.0 million or lower. Adjusted EBITDA of Morinda for the year ended December 31, 2019 was less than $17.0 million and, accordingly, no Milestone Dividend was payable to the holders of the Preferred Stock.The Preferred Stock also provided for dividends at a rate of 1.5% per annum of the Milestone Dividend amount. The Preferred Stock terminated on April 15, 2020, and the Company paid accumulated cash dividends of approximately $0.3 million in May 2020. In July 2020, the Company paid the former Morinda stockholders the remainder of the Excess Working Capital (“EWC”) obligation of $5.5 million. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, other accrued liabilities consisted of the following is a summary of purchase consideration payable to the former stockholders of Morinda, and outstanding earnout obligations related to business combinations with Morinda in December 2018 (in thousands):

SUMMARY OF EARNOUT OBLIGATIONS

  2020  2019 
       
Payables to former Morinda stockholders:        
EWC, due July 2020, net of discount $-  $5,283 
Earnout under Series D preferred stock  -   225 
Total $              -  $5,508 

SCHEDULE OF OTHER ACCRUED LIABILITIES

  2021  2020 
 
Accrued commissions $22,236  $23,594 
Accrued compensation and benefits  9,468   9,443 
Accrued marketing events  6,972   8,212 
Deferred revenue  1,898   6,278 
Provision for sales returns  1,368   1,322 
Income taxes payable  3,619   3,461 
Current portion of operating lease liabilities  5,716   6,948 
Current portion of deferred lease financing obligation  671   659 
Other accrued liabilities  13,061   10,090 
         
Total accrued liabilities $65,009  $70,007 

1113

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4 — OTHER FINANCIAL INFORMATION

Inventories

Inventories consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):

SCHEDULE OF INVENTORIES

  2020  2019 
       
Raw materials $10,194  $12,848 
Work-in-process  1,932   872 
Finished goods, net  18,441   22,998 
Total inventories $30,567  $36,718 

Other Accrued Liabilities

As of September 30, 2020 and December 31, 2019, other accrued liabilities consisted of the following (in thousands): 

SCHEDULE OF OTHER ACCRUED LIABILITIES

  2020  2019 
       
Accrued commissions $7,951  $8,914 
Accrued compensation and benefits  6,645   5,868 
Accrued marketing events  7,376   4,568 
Deferred revenue  2,334   1,358 
Income taxes payable  1,005   15,227 
Current portion of operating lease liabilities  5,827   5,673 
Other accrued liabilities  8,945   7,843 
         
Total accrued liabilities $40,083  $49,451 

 

Depreciation and Amortization Expense

 

DepreciationFor the three and six months ended June 30, 2021 and 2020, depreciation expense related to property and equipment and amortization expense related to identifiable intangible assets, including amounts included incharged to cost of goods sold, arewere as follows (in thousands):

 

SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE

 2020 2019 2020 2019  2021  2020  2021  2020 
 Three Months Ended Nine Months Ended  Three Months Ended Six Months Ended 
 September 30,  September 30,  June 30,  June 30, 
 2020 2019 2020 2019  2021  2020  2021  2020 
                  
Depreciation $967  $972  $2,926  $2,815  $1,061  $977  $2,100  $1,959 
Amortization  888   1,363   2,681   3,961   3,761   896   7,496   1,793 
                                
Total $1,855  $2,335  $5,607  $6,776  $4,822  $1,873  $9,596  $3,752 

Accumulated depreciation of property and equipment amounted to $10.2 million as of June 30, 2021, and $8.8 million as of December 31, 2020. Accumulated amortization of identifiable intangible assets amounted to $16.0 million as of June 30, 2021, and $8.5 million as of December 31, 2020.

 

RestructuringGain (loss) on change in fair value of derivatives

For the three and six months ended June 30, 2021 and 2020, gain (loss) from changes in fair value of derivatives is comprised of the following (in thousands):

SCHEDULE OF LOSS FROM CHANGES IN FAIR VALUE OF DERIVATIVES

Description of Derivative 2021  2020  2021  2020 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
Description of Derivative 2021  2020  2021  2020 
             
Ariix business combination consideration:                
Fixed Shares derivative $11,380(1) $-  $6,765(1) $- 
Variable Shares derivative  12,743(1)  -   6,018(1)  - 
Warrants issued in private placement  6,706(2)  -   8,433(2)  - 
Interest rate swap  -   20   -   (306)
                 
Gain (loss) on change in fair value of derivatives $30,829  $20  $21,216  $(306)

(1)For further discussion of the Ariix Fixed Shares and Variable Shares derivative liabilities, please refer to Note 3.
(2)For further discussion of the derivative liability for warrants, please refer to Note 7 under the caption Private Placement of Units.

Severance and Restructuring Activities

On March 3, 2021, the Company and Gregory A. Gould, the former Chief Financial Officer of the Company, entered into a Modification and Transition Addendum to Employment Agreement and Indemnification Agreement (the “Gould Agreement”). The Gould Agreement amended an employment agreement with Mr. Gould, whereby he continued to serve as Chief Financial Officer of the Company until July 2, 2021 (the “Term”). As part of the transition, Mr. Gould was entitled to (i) a payment made in March 2021 for his 2020 performance bonus of $250,000, (ii) a target performance bonus of $650,000 for services through July 2, 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 Company-owned automobiles and a laptop computer that have been transferred to Mr. Gould.

14

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

In addition, the Company agreed to issue stock options for 125,000 shares of Common Stock to Mr. Gould that vested on July 2, 2021 and have an expiration date of three years after the issuance date. The Gould Agreement also provides that any unvested shares of restricted stock and stock options previously granted to Mr. Gould continued to vest on their existing schedules until July 2, 2021, when they became fully vested. Such stock options may be exercised at any time until their original stated expiration date. Under the Gould Agreement, each party 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 employment agreement remain in effect. The Gould Agreement also modifies the Indemnification Agreement, dated December 28, 2019, between the Company and Mr. Gould. For the three and six months ended June 30, 2021, the severance costs under the Gould Agreement are included in selling, general and administrative expense for $0.3 million and $1.6 million, respectively. As of June 30, 2021, the unpaid portion of accrued severance costs for Mr. Gould amounted to $1.4 million, which is included in accrued liabilities as of June 30, 2021.

 

In April and August 2020, the Company initiated a restructuring plans that areplan designed to achieve selling, general and administrative cost reductions. TheseThis restructuring plans areplan was primarily focused on reductions in marketing and other personnel. For the three and nine months ended SeptemberJune 30, 2020, the Company implemented headcount reductions of approximately 50 and 150100 employees respectively. These 150 employees whose employment was terminated accounted forthat had estimated annualized compensation and benefit costs of $9.6 5.8million. In connection with the termination of employees, the Company incurred severance costs of $1.7 0.9million and $2.6 million for the three and nine months ended September 30, 2020 and 2019, respectively. These expenseswhich are included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. operations for the three and six months ended June 30, 2020.

For the three and six months ended SeptemberJune 30, 2020, approximately $1.0 million2021 and $0.7 million of the severance costs related to the Noni by NewAge segment and the NewAge segment, respectively. For the nine months ended September 30, 2020, approximately $1.8 million and $0.7 million of the severance costs related to the Noni by NewAge segment and the NewAge segment, respectively. The unpaid portion of severance costs amounted to $1.1 million and is included in accrued liabilities as of September 30, 2020. Presented below is a summary of activity affecting the accrued liability for severance benefits for the three and nine months ended September 30, 2020all employees is summarized as follows (in thousands):

 SUMMARY OF ACTIVITY AFFECTING THE ACCRUED LIABILITY FOR SEVERANCE BENEFITS

 Three Nine  2021  2020  2021  2020 
 Months  Months  Three Months Ended Six Months Ended 
      June 30,  June 30, 
Accrued liability, beginning of period $-  $- 
 2021  2020  2021  2020 
         
Accrued severance, beginning of period $1,333  $-  $191  $- 
Severance expense incurred  1,658   2,543   325   885   1,697   885 
Cash payments  (527)  (1,412)  (209)  (885)  (439)  (885)
                        
Accrued liability, September 30, 2020 $1,131  $1,131 
Accrued severance, end of period $1,449  $-  $1,449  $- 

Assets Held for Sale

On June 30, 2021, the Company entered into a memorandum of understanding (the “MOU”) with TCI Co., Ltd. (“TCI”). Under the MOU, the Company and TCI intend to enter into definitive agreements to (i) sell certain manufacturing equipment to TCI for $3.5 million and a 3.0% share of TCI’s future revenue from third party customers for five years, (ii) transfer the Company’s lease for its facility in American Fork, Utah to TCI, and (iii) engage TCI to manufacture products currently manufactured at the leased property. All of the assets under the MOU are held in the Company’s Direct / Social Selling segment. The net carrying value of the manufacturing equipment subject to the MOU is $2.5 million. As of June 30, 2021, the Company has a right-of-use asset of $4.6 million and a corresponding operating lease liability of $4.7 million related to the leased facility in American Fork, Utah. This transaction, including any gain, will be recognized in the period in which a definitive agreement is executed.

 

No assurance can be providedLong-lived assets are classified as held for sale when the Company commits to a plan to sell the assets. Accordingly, the Company determined that the restructuring planMOU qualifies as a commitment whereby accounting for the assets as held for sale is appropriate. Such assets are classified within current assets if there is reasonable certainty that the sale will be successfultake place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated, and a measurement for impairment is performed to determine if there is any excess of carrying value over fair value less costs to sell. As of June 30, 2021, the Company determined that no impairment exists for the manufacturing equipment and the right-of-use asset whereby the aggregate net carrying value of $7.1 million is included as a current asset in achieving the annualized cost reductions.

accompanying unaudited condensed consolidated balance sheet. The Company has also classified the entire operating lease liability of $4.7 million related to the leased facility as a current liability in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2021.

 

1215

 

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 5 — LEASES

 

Sale Leaseback

On March 22, 2019, the Company entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $57.1million of the land and building in Tokyo that serves as the corporate headquarters of the Company’s Japanese subsidiary. Concurrently with the sale, the Company entered into a lease of this property for a term of 27 years with the option to terminate the lease any time after seven years. The monthly lease cost is ¥20.0 million (approximately $189,000 based on the exchange rate as of September 30, 2020) for the initial seven-year period of the lease term. Presented below is a summary of the selling price and resulting gain on sale calculation for the nine months ended September 30, 2019 (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 $6.4 million was attributable 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 condensed consolidated statement of operations for the nine months ended September 30, 2019.

The $17.6 million portion of the gain related to above-market rent is being accounted for as a deferred lease financing obligation. Accordingly, the operating lease payments are allocated to (i) reduce the operating lease liability, (ii) reduce the principal portion of the deferred lease financing obligation, and (iii) 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 future lease payments amounted to a gross operating lease liability of $31.9 million. After deducting the $17.6 million deferred lease financing obligations, the Company recognized an initial right-of-use (“ROU”) asset and operating lease liability of approximately $14.3 million.

Operating Leases

The Company leases various office and warehouse facilities, vehicles and equipment under non-cancellable operating lease agreements that expire between October 2020July 2021 and 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.component. For the three and six months ended June 30, 2021 and 2020, the Company did not incur any material amounts for variable and short-term lease expense. For the three months ended SeptemberJune 30, 20202021 and 2019,2020, the Company hadincurred operating lease expense of $2.52.8 million and $2.82.6 million, respectively. For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the Company hadincurred operating lease expense of $7.65.8 million and $8.15.1 million, respectively.

As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the weighted average remaining lease term under operating leases was 12.011.0 years and 12.511.5 years, respectively. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the weighted average discount rate for operating lease liabilities was 5.6% and 5.5%., respectively.

13

 

NewAge, Inc.Impairment of Right-Of-Use Asset

NotesIn June 2019, the Company began attempting to Unaudited Condensed Consolidated Financial Statementssublease a portion of its right-of-use 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 three and six months ended June 30, 2020. The Company is continuing its efforts to obtain subtenants for this space.

Future Lease Payments

 

As of SeptemberJune 30, 2020,2021, future payments under operating lease agreements, including a lease for the Company’s facility in American Fork, Utah that is discussed in Note 4 under the caption Assets Held for Sale, are as follows (in thousands):

SUMMARY OF FUTURE MINIMUM LEASE PAYMENTS

 

Year Ending December 31,   
Years Ending December 31,   
   
Remainder of 2020 $1,710 
2021  7,498 
Remainder of 2021 $4,736 
2022  5,891   7,147 
2023  5,304 
2023  5,940 
2024  4,943   5,472 
2025  5,346 
Thereafter  29,627   23,139 
        
Total operating lease payments  54,973   51,780 
Less imputed interest  (15,447)(1)  (14,612)(1)
        
Present value of operating lease payments $39,526  $37,168 

 

 (1)Calculated based on the term of the respective leases using discount rates ranging from 2.0% to 10.0%.

 

Impairment of ROU AssetNewAge, Inc.

 

In June 2019, the Company began attemptingNotes to sublease a portion of its right-of-use (“ROU”) assets previously used for warehouse space that are no longer needed for current operations. As a result, an impairment evaluation was completed that resulted in recognition of an impairment charge of $1.5 million for the nine months ended September 30, 2019. This evaluation was based on the expected time to obtain a suitable subtenant and current market rates for similar commercial properties. As of December 31, 2019, an updated impairment evaluation was performed that resulted in an additional impairment charge of $0.8million. 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 nine months ended September 30, 2020. As of September 30, 2020, the Company had recognized cumulative impairment charges of $2.7 million and was continuing its efforts to obtain a subtenant for this space.Unaudited Condensed Consolidated Financial Statements

 

NOTE 6 — DEBT

 

Summary of Debt

 

As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company’s debt consisted of the following (in(dollars in thousands):

SUMMARY OF DEBT

  2021  2020 
       
Senior Notes, net of discount of $4,609 as of June 30, 2021 and $7,900 as of December 31, 2020 $21,823  $24,532 
PPP Loan payable, interest at 1.0%, unsecured, due April 2022  6,868(1)  6,868 
Assumed PPP Loan payable, interest at 1.0%, unsecured, due May 2022  2,797(1)  2,781 
Installment notes payable  15   16 
Total  31,503   34,197 
Less current maturities  19,440(2)  18,016 
         
Long-term debt, less current maturities $12,063  $16,181 

 

  2020  2019 
       
EWB Credit Facility:        
Term loan, net of discount of $524 and $448 as of September 30, 2020 and December 31, 2019, respectively $13,100  $14,302 
Revolver  -   9,700 
PPP Loan payable, interest at 1.0%, unsecured, due April 2022  6,868   - 
Installment notes payable  5   8 
         
Total  19,973   24,010 
Less current maturities  (1,504)  (11,208)
         
Long-term debt, less current maturities $18,469  $12,802 

(1)As discussed in Note 14, the PPP Loans were forgiven in July 2021. Accordingly, these loans are included as a debt obligation until the date of forgiveness when the obligation will be eliminated.
(2)Current maturities of long-term debt include the aggregate principal payments of $24.0 million due under the Senior Notes, net of accretion of debt discount of approximately $4.6 million, expected for the 12 months ending June 30, 2022. Due to forgiveness of the PPP Loans in July 2021, they are excluded from current debt maturities.

 

NewAge, Inc.

Private Placement of Senior Notes to Unaudited Condensed Consolidated Financial Statements

Future Debt Maturities

 

As of SeptemberOn November 30, 2020, the scheduled future maturitiesCompany entered into a securities purchase agreement (the “November 2020 SPA”) for a private placement of long-term debt, exclusive(i) 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of discount accretion, were as follows:$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 indexed to the Company’s shares of Common Stock and otherwise meet the criteria for classification within stockholders’ equity. The closing for the private placement occurred on December 1, 2020. Please refer to Note 7 under the captions Private Placement of Units and Redeemable Common Stock for further discussion of the Warrants and the Commitment Shares.

 

SUMMARY FUTURE DEBT MATURITIESThe Senior Notes bear interest at an annual rate of 8.0

Year Ending December 31,   
    
Remainder of 2020 $376 
2021  1,503 
2022  8,368 
2023  10,250 
     
Total $20,497 

% applied to the stated principal balance with accrued interest payable monthly in cash. As of the closing date, the aggregate discount related to the Senior Notes was approximately $8.5

million that resulted in a net carrying value of $EWB Credit Facility23.9 million. The discount is being accreted to interest expense using the effective interest method that resulted in an overall effective interest rate of approximately 42.3% as of December 31, 2020.

 

On March 29, 2019,For the months of February 2021 through April 2021, the holders of the Senior Notes were entitled to request that the Company entered into EWB Credit Facility with EWB.make principal payments up to $1.0 million per month and these payments were made on a timely basis. Beginning in May 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. The EWB Credit Facility maturesholders of the Senior Notes requested principal payments of $1.0 million in May 2021 and $2.0 million in June 2021, and these payments were made on March 29, 2023 and provides for (i) a term loantimely basis. The maturity date of the Senior Notes is on December 1, 2022. However, if the holders of the Senior Notes exercise their rights to demand the maximum principal payments permitted in each future month, the aggregateSenior Notes will be repaid in full by August 2022. The Company may prepay all or a portion of the outstanding principal amount of $15.0 million, which may be increased to $25.0 millionthe Senior Notes at any time, subject to the satisfactiona prepayment fee of certain conditions (the “EWB Term Loan”) and (ii) a $10.0 million revolving loan facility (the “EWB Revolver”). The obligations3.0% of the Company under the EWB Credit Facility are secured by substantially all assets of the Company and guaranteed by certain subsidiaries of the Companyoutstanding stated principal balance through December 1, 2021.

 

Borrowings outstandingAs 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 EWB Credit Facility initially providedNovember 2020 SPA. 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. These shares were subject to the same redemption rights as the Commitment Shares discussed in Note 7. The amendment fee was accounted for as a modification that resulted in an additional discount of $1.1 million related to the Senior Notes. This amendment fee and other lender-initiated changes that affect the timing and amount of principal payments are accounted for prospectively as a revision of the effective interest atrate. Accordingly, as of June 30, 2021, the prime rate plus 0.50%. As of December 31, 2019, the primeoverall effective interest rate was approximately 4.7546.8%, including the 8.0% and the contractual rate applicable to outstanding borrowings under the EWB Credit Facility was 5.25%. Pursuant to the Third Amendment discussed below, the interest rate applicable to outstanding borrowings under the EWB Credit Facility increased from 0.5% to 2.0% in excess of the prime rate beginning on March 13, 2020. As of September 30, 2020, the prime rate was 3.25% 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.rate.

The EWB Credit Facility requires compliance with certain financial and restrictive covenants and includes customary events of default. Key financial covenants include maintenance of minimum Adjusted EBITDA and a maximum Total Leverage Ratio (all as defined and set forth in the EWB Credit Facility). On March 13, 2020, the Company entered into the third amendment (the “Third Amendment”) to the EWB Credit Facility. In addition to the change in interest rate discussed above, 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 future requirement to maintain restricted cash will be reduced by the amount of principal payments under the EWB Term Loan after the amendment date.As of September 30, 2020, the restricted cash deposit amounted to $14.1 million.
●For any future amounts borrowed under the EWB Revolver, the Company is required to increase restricted cash deposits by the corresponding amount of the borrowings.
●Less stringent requirements are applicable for future compliance with the minimum Adjusted EBITDA covenant, the maximum Total Leverage Ratio, and the Fixed Charge Coverage Ratio (each as defined and set forth in the EWB Credit Facility). Additionally, compliance with the maximum Total Leverage Ratio and the Fixed Charge Coverage Ratio have been delayed until June 30, 2021.
●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 ending December 31, 2020, and to $10.0 million per year for each calendar year thereafter.
●The Company was required to obtain equity infusions for at least $15.0 million for the nine months ended September 30, 2020. As discussed in Note 7, the Company received gross proceeds of $25.8 million for the nine months ended September 30, 2020.
●The Company was required to obtain equity infusions for gross proceeds of $30.0 million for the year ending December 31, 2020.

 

1517

 

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

On July 6, 2020, theThe Company entered into the fourth amendment (the “Fourth Amendment”)was required to the EWB Credit Facility. The Fourth Amendment reduced the amount ofmaintain 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 balances of $18.0 million as of shares of its Common Stock with a corresponding increase in the requirement of cash equity infusions from $30.0 million to approximately $31.2 million for the year ending December 31, 2020. Accordingly, equity infusions for gross proceeds of $31.2 million are now required for the year ending December 31, 2020. After deducting gross proceeds of $25.8 million received for the nine months ended September 30, 2020, additional equity infusions that resultBeginning in gross proceeds of $5.4 million must be received by December 31, 2020. The Company evaluated the terms of the Third Amendment and the Fourth Amendment and determined they should be accounted for as modifications, whereby additional debt discount and issuance costs of approximately $0.2 million were incurred. As of September 30, 2020, the Company was not in compliance with the minimum Adjusted EBITDA covenant under the EWB Credit Facility. As discussed in Note 14, 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 eliminateFebruary 2021, the requirement to comply withmaintain restricted cash balances was reduced to $8.0 million until such time that the minimum Adjusted EBITDA financial covenant in future periods.outstanding principal balance of the Senior Notes is reduced below $8.0 million without regard to the unaccreted discount, which is expected to occur during the second quarter of 2022. As of June 30, 2021, approximately $5.6 million of this restricted cash balance is classified as a current asset since those funds may be utilized to make principal payments that are classified within current maturities of long-term debt.

 

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 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. As of June 30, 2021, the Company was in compliance with all covenants related to the Senior Notes. 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 the contractual interest rate on the obligations increases from 8.0% to 12.0%.

PPP Loan

PPP Loans

On April 14, 2020, the Company entered into the PPP Loan pursuant

Pursuant to the Paycheck Protection Program (“PPP”) under the CARESCoronavirus Aid, Relief, and Economic Security Act with EWB(the “CARES Act”), the Company obtained a PPP loan (the “NewAge PPP Loan”) in an aggregate principal amount ofApril 2020 for approximately $6.9 million. In May 2020, Ariix obtained a PPP loan (the “Ariix PPP Loan”) for approximately $2.8million. million, and the Company assumed this obligation in connection with the business combination discussed in Note 3. The PPP Loan bearsLoans are unsecured and guaranteed by the SBA, bear interest at a fixed rate of 1.0% per annum and provide for maturity dates on the second anniversary of the respective loan agreements. The Company and Ariix applied to their lenders to request forgiveness of their PPP Loans, with the first six months of interest deferred, has a term of two years, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The Company intends to apply to the lender for forgiveness of the PPP Loan, with the amount whichamounts that may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company during the permitted period beginning on April 10, 2020,as calculated in accordance with the terms of the CARES Act. The Company’s eligibility for the PPP Loan,Loans, expenditures that qualify toward forgiveness, and the final balance of the PPP LoanLoans 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, As discussed in Note 14, the Company will be required to pay interest at 1.0% whereby allwas informed in July 2021 that forgiveness of its PPP Loans was approved by the SBA for an aggregate of approximately $9.7 million including accrued interest and principal will be payable on the maturity date in April 2022.through June 30, 2021. The terms of the PPP LoanLoans provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP LoanLoans may be accelerated upon the occurrence of an event of default, including if the SBA subsequently reaches an audit determination that the Company doeseligibility criteria were not meet the eligibility criteria.met.

 

The PPP Loan isLoans are being accounted for under ASCAccounting Standards Codification (“ASC”) 470, Debt whereby interest expense is beingwas accrued at the contractual rate and future debt maturities are based on the assumption that noneof 1.0% per annum. The Company will recognize forgiveness of the principal balance will be forgiven. Forgiveness, if any, will be recognized as a gain on extinguishment ifPPP Loans during the lender legally releasesthird quarter of 2021 when the Company based onwas released of its obligation to repay the criteria set forth in the debt agreement and the CARES Act.PPP Loans.

16

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 7 — STOCKHOLDERS’ EQUITY

 

Authorized Shares of Capital Stock

On May 14, 2021, the Company’s shareholders approved an increase in authorized shares of Common Stock and the Reincorporation discussed in Note 1. Accordingly, as a Delaware corporation, the Company has authority to issue up to 400.0 million shares of Common Stock and up to 1.0 million shares of Preferred Stock.

18

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Changes in Stockholders’ Equity

 

Changes in stockholders’ equity for the three months ended SeptemberJune 30, 20202021 and 20192020 were as follows (in thousands):

SCHEDULE OF CHANGES IN STOCKHOLDERS' EQUITY

  Shares  Amount  Capital  Stock  Subscription  Income (Loss)  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 (Loss)  Deficit  Total 
                         
Three Months Ended June 30, 2021                                
                                 
Balances, March 31, 2021  135,399  $135  $336,128  $-  $(1,250) $2,756  $(169,583) $168,186 
Issuance of Common Stock:                                
In Aliven business combination  1,072   1   2,587   -   -   -   -   2,588 
Upon vesting of restricted stock awards  112   1   (1)  -   -   -   -   - 
For exercise of stock options  23   -   43   -   -   -   -   43 
In ATM public offering, net                                
In ATM public offering, net, shares                                
Reclassification of Fixed Shares derivative liability  -   -   -   30,263   -   -   -   30,263 
Stock-based compensation expense  -   -   2,180   -   -   -   -   2,180 
Allowance for Divested Business stock subscription receivable  -   -   -   -   1,250   -   -   1,250 
Net change in accumulated other comprehensive income (loss)  -   -   -   -   -   722   -   722 
Net income  -   -   -   -   -   -   17,371   17,371 
                                 
Balances, June 30, 2021  136,606  $137  $340,937  $30,263  $-  $3,478  $(152,212) $222,603 
                                 
Three Months Ended June 30, 2020                                
                                 
Balances, March 31, 2020  87,245  $87  $213,385  $-  $-  $(589) $(124,089) $88,794 
Balances  87,245  $87  $213,385  $-  $-  $(589) $(124,089) $88,794 
Issuance of Common Stock:                                
In ATM public offering, net  11,191   11   16,731   -   -   -   -   16,742 
Upon vesting of restricted stock awards  6   -   -   -   -   -   -   - 
Stock-based compensation expense  -   -   1,085   -   -   -   -   1,085 
Net change in accumulated other comprehensive income (loss)  -   -   -   -   -   448   -   448 
Net loss  -   -   -   -   -   -   (9,554)  (9,554)
                                 
Balances, June 30, 2020  98,442  $98  $231,201  $-  $-  $(141) $(133,643) $97,515 
Balances  98,442  $98  $231,201  $-  $-  $(141) $(133,643) $97,515 

  Shares  Amount  Amount  Amount  Amount  Amount  Amount 
           Note  Accumulated       
     Additional  Receivable  Other       
  Common Stock  Paid-in  For Stock  Comprehensive  Accumulated    
  Shares  Amount  Capital  Subscription  Income (Loss)  Deficit  Total 
Three Months Ended September 30, 2020                            
Balances, June 30, 2020  98,442  $98  $231,201  $-  $(141) $(133,643) $97,515 
Issuance of Common Stock:                            
ATM Agreement, net of offering costs  -   -   (70)  -   -   -   (70)
In exchange for note receivable  692   1   1,249   (1,250)  -   -   - 
Exercise of stock options  15   -   30   -   -   -   30 
Vesting of restricted stock awards  121   -   -   -   -   -   - 
Business combination with BWR  -                         
Purchase and retirement of stock  (780)  (1)  (1,192)  -   -   -   (1,193)
Stock-based compensation expense  -   -   957   -   -   -   957 
Other comprehensive income  -   -   -   -   1,275   -   1,275 
Net loss  -   -   -   -   -   (14,133)  (14,133)
                             
Balances, September 30, 2020  98,490  $98  $232,175  $(1,250) $1,134  $(147,776) $84,381 
                             
Three Months Ended September 30, 2019                            
Balances, June 30, 2019  77,624  $77  $192,034  $-  $1,622  $(35,933) $157,800 
Issuance of Common Stock:                            
ATM Agreement, net of offering costs  542   1   2,093   -   -   -   2,094 
Business combination with BWR  108   -   453   -   -   -   453 
Stock-based compensation expense  -   -   1,525   -   -   -   1,525 
Other comprehensive loss  -   -   -   -   (1,138)  -   (1,138)
Net loss  -   -   -   -   -   (10,687)  (10,687)
                             
Balances, September 30, 2019  78,274  $78  $196,105  $-  $484  $(46,620) $150,047 

Stock Purchase

 

Private Placement of Units

On July 6, 2020,February 16, 2021, the Company purchased from the Company’s Chief Executive Officerentered into a totalsecurities purchase agreement (the “February 2021 SPA”) in connection with a private placement of units (the “Units”). The Units consisted of an aggregate of approximately 780,00014.6 million shares of Common Stock based onand warrants to purchase an aggregate of 7.3 million shares (the “Warrant Shares”) of Common Stock. At the closing marketon February 19, 2021, the gross proceeds from issuance of the Units amounted to approximately $58.0 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 $53.8 million.

The warrants have an initial exercise price of $1.53$5.00 per share.share, subject to adjustment in certain circumstances. The total purchase pricewarrants are exercisable until February 19, 2024, and exercise of approximately $1.2 million was accounted for asthe warrants is subject to a reductionbeneficial ownership limitation of stockholders’ equity for4.99% (or 9.99% at the three months ended September 30, 2020. The shares were immediately canceled and returnedoption of the purchasers). In the event of certain fundamental transactions described in the warrant agreements, the holders of the warrants could be entitled to a net cash settlement whereby the warrants are not considered to be indexed to the Company’s authorized but unissued shares of Common Stock. Accordingly, the warrants are required to be recorded at fair value and classified as liabilities in the Company’s balance sheet beginning on the issuance date. Future changes in the fair value of the warrant liabilities result in noncash gains and losses in the Company’s statements of operations. Since the warrants are required to be carried at fair value on a recurring basis, the net proceeds from the private placement of approximately $53.8 million were allocated as follows (in thousands):

SUMMARY OF RELATIVE FAIR VALUE ALLOCATION OF NET PROCEEDS

     Common    
Description Warrants  Stock  Total 
          
Fair value on issuance date $14,128(1) $46,105(2) $60,233 
Adjustment to reduce Common Stock to residual fair value  -   (6,455)(3)  (6,455)
             
Total $14,128(1) $39,650(3) $53,778(4)

 

(1)Fair value was determined on the issuance date using the Black-Scholes-Merton (“BSM”) option-pricing model. Key valuation inputs as of the issuance date included the closing price of $3.15 per share for the Company’s Common Stock, the exercise price of the warrants of $5.00 per share, historical volatility of 117%, and the contractual term of 3.0 years. Based on these valuation inputs, the weighted-average grant date fair value was $1.93 per share as of February 19, 2021.

19

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(2)Represents fair value of 14.6 million shares of Common Stock based on the closing price of $3.15 per share for the Company’s Common Stock as of February 19, 2021.
(3)Adjustment required to record shares of Common Stock at residual fair value since the total fair value of the warrants and shares of Common Stock exceeded the net proceeds received in the private placement.
(4)Represents the net proceeds received in the private placement.

As of June 30, 2021, the fair value of the warrants had decreased from $14.1 million to $5.7 million which resulted in the recognition of a noncash gain from changes in fair value of the warrant derivative liability of $8.4 million for the six months ended June 30, 2021. Please refer to Note 12 under the caption Recurring Fair Value Measurements for key valuation inputs as of June 30, 2021.

Pursuant to a registration rights agreement entered into concurrently, the Company filed an initial registration statement on Form S-3 covering the resale of the shares of Common Stock and the Warrant Shares with the SEC on March 18, 2021, and the registration statement was declared effective by the SEC on March 29, 2021. The Company also agreed to maintain effectiveness of the registration statement within prescribed deadlines set forth in the registration rights agreement. If the Company does not 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. The Company believes it is probable that compliance with the terms of the registration rights agreement will be maintained.

The February 2021 SPA provides that through August 15, 2021 the Company is generally not permitted to enter into any agreement that could result in the issuance of shares of Common Stock in a variable rate transaction. In addition, as a condition of the February 2021 SPA, each of the Company’s officers and directors entered into a Lock-up Agreement whereby they were prohibited from selling any of their shares of Common Stock through June 27, 2021.

Redeemable Common Stock

In connection with the November 2020 SPA and the January 2021 amendment discussed in Note 6, the Company issued Commitment Shares for an aggregate of 1.2 million shares of Common Stock. The holders of the Commitment Shares had the right to demand redemption if a registration statement for the shares was not declared effective by March 31, 2021. The redemption price was the greater of $3.36 per share and the volume weighted average price of the Company’s shares on the date prior to the date that the holders elect to demand redemption. Based on this redemption contingency, the Commitment Shares were classified as temporary equity as of December 31, 2020. Since the registration statement related to the Commitment Shares was declared effective by the SEC on February 8, 2021, the carrying value of the Commitment Shares was reclassified to permanent equity in February 2021. Presented below is a summary of activity for the Commitment Shares for the six months ended June 30, 2021 (in thousands):

SCHEDULE OF ELIMINATION OF REDEMPTION CONTINGENCY

  Number of  Carrying 
Description Shares  Value 
       
Balance, December 31, 2020  800  $2,101 
Amendment Fee  400   1,060 
         
Total reclassified to permanent equity  1,200  $3,161 

20

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

At the Market Offering AgreementAgreements

 

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 which the Company maycould offer and sell from time to time up to an aggregate of $100 million in shares of the Company’s Common Stock (the “Placement“2019 Placement Shares”) through the Agent. The amended ATM Agreement was scheduled to terminate when all of the 2019 Placement Shares had been sold, or earlier if elected by either party. Presented below is a summary of Common Stock issued pursuant to the ATM Agreement for the three and six months ended June 30, 2020 (in thousands, except per share amounts):

SUMMARY OF COMMON STOCK PURSUANT TO AGREEMENT

  Number  Gross Proceeds  Offering Costs  Net 
Three Months Ended Of Shares  Per Share  Amount  Commissions  Other  Proceeds 
                   
March 31, 2020  4,939  $1.73  $8,545  $(257) $(3) $8,285 
June 30, 2020  11,191  $1.54   17,270   (436)  (91)  16,743 
                         
Total  16,130  $1.60  $25,815  $(693) $(94) $25,028 

On February 9, 2021, the Company notified the Agent is actingof its election to terminate the ATM Agreement. On February 11, 2021, the Company entered into a sales agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners (the “Manager”), under which the Company may offer and sell from time-to-time up to an aggregate of approximately $53.5 million in shares of the Company’s Common Stock (the “2021 Placement Shares”) through the Manager. The Manager agreed to act as sales agent and is required to use commercially reasonable efforts to sell on the Company’s behalf all of the 2021 Placement Shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the AgentManager and the Company. On May 8, 2020, the ATM Agreement was amended and restated to eliminate the previous termination date of April 30, 2020. As amended and restated, the ATM Agreement will terminate when all of the Placement Shares have been sold, or earlier by the Company upon five business days’ notice to the Agent, at any time by the Agent, or by the mutual agreement of the parties.

17

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company has no obligation to sell any of the Placement Shares under the ATM Agreement. The Company intends to use the net proceeds from the offering for general corporate purposes, including working capital. Under the terms of the ATMSales Agreement, the Company agreed to pay the Agent a commission equal to 3.0% of the gross proceeds from the gross sales price of the Placement Shares up to $30 million, and 2.5% of the gross proceeds from the gross sales price of the Placement Shares in excess of $30 million. In addition, the Company has agreed to pay certain expenses incurred by the Agent in connection with the offering. Through September 30, 2020, an aggregate of approximately 22.1 million shares of Common Stock were sold for gross proceeds of approximately $46.5 million. For the nine months ended September 30, 2020, an aggregate of 16.1 millionno shares were sold for gross proceeds of $25.8 million. Total commissions and fees of $0.9 million were deducted from the gross proceeds for the ninesix months ended SeptemberJune 30, 2020. Presented below is a summary of Common Stock issued pursuant to the ATM Agreement for the three and nine months ended September 30, 2020 and 2019 (in thousands, except per share amounts):2021.

SUMMARY OF COMMON STOCK PURSUANT TO AGREEMENT

  Number  Gross Proceeds  Offering Costs  Net 
Description Of Shares  Per Share  Amount  Commissions  Other  Proceeds 
                   
Nine Months Ended September 30, 2020:                        
Three months ended March 31, 2020  4,939  $1.73  $8,545  $(257) $(3) $8,285 
Three months ended June 30, 2020  11,191  $1.54   17,270   (436)  (91)  16,743 
Three months ended September 30, 2020  -  $-   -   -   (70)  (70)
                         
Total  16,130  $1.60  $25,815  $(693) $(164) $24,958 
                         
Nine Months Ended September 30, 2019:                        
Three months ended March 31, 2019  -  $-  $-  $-  $-  $- 
Three months ended June 30, 2019  2,225  $5.27   11,733   (352)  (240)  11,141 
Three months ended September 30, 2019  542  $4.09   2,215   (66)  (55)  2,094 
                         
Total  2,767  $5.04  $13,948  $(418) $(295) $13,235 

NOTE 8 — STOCK OPTIONS AND WARRANTS

 

Stock Option Activity

 

The following table sets forth stock option activity under the Company’s stock option plans for the ninesix months ended SeptemberJune 30, 20202021 (shares in thousands):

SCHEDULE OF STOCK OPTION ACTIVITY

  Shares  Price (1)  Term (2) 
          
Outstanding, beginning of period  3,856  $2.72   8.2 
Grants  528   2.74     
Forfeited  (190)  3.10     
Exercised  (288)(3)  1.84     
             
Outstanding, end of period  3,906(4)  2.77   8.2 
             
Vested, end of period  1,586(4)  2.71   7.0 

  Shares  Price (1)  Term (2) 
          
Outstanding, December 31, 2019  3,551  $2.65   8.7 
Grants  458  $1.78     
Modifications  347(3) $2.09     
Forfeited  (1,001) $2.49     
Exercised  (18) $1.83     
             
Outstanding, September 30, 2020  3,337(4) $2.52   7.3 
             
Vested, September 30, 2020  1,377(4) $2.36   5.4 

 

 (1)Represents the weighted average exercise price.
 (2)Represents the weighted average remaining contractual term until the stock options expire.
 
(3)In connection withOn the restructuring activities discussed in Note 4,respective exercise dates, the Company agreedweighted average intrinsic value per share of Common Stock issued upon exercise of stock options amounted to extend$1.72 per share for a total of $0.5 million for the exercise period for options that would have otherwise expired unexercised. The Company accounted for these changes as improbable to probable modifications of the original awards, whereby compensation cost was remeasured on the date of the modification and expense was recognized immediately, or over the vesting period if applicable.six months ended June 30, 2021.
 (4)As of SeptemberJune 30, 2020,2021, based on the closing price of the Company’s Common Stock wasof $1.732.23 per share, resulting in nothe intrinsic value associated withamounted to $0.6 million for outstanding stock options and $0.3 million for vested stock options.

 

In connection with certain employee severance arrangements during the six months ended June 30, 2021, the Company agreed to accelerate vesting and extend the exercise period for options for a total of 0.2 million shares that would have otherwise expired unexercised. The Company accounted for these modifications of the original awards, whereby compensation cost was remeasured on the date of the modification resulting in an increase in fair value of $0.5 million. Accordingly, stock-based compensation expense related to modifications of $0.5 million was recognized for the six months ended June 30, 2021.

1821

 

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the six months ended June 30, 2021, the valuation assumptions for newly-granted stock options and modifications under the Company’s stock option plans were estimated on the respective date of grant or modification using the BSM option-pricing model with the following weighted-average assumptions:

SUMMARY OF STOCK OPTIONS WEIGHTED-AVERAGE ASSUMPTIONS

  Grants  Modifications 
       
Closing price of Common Stock on measurement date $2.74  $2.84 
Exercise price $2.74  $3.21 
Expected life (in years)  5.0   7.6 
Volatility  104%  111%
Dividend yield  0%  0%
Risk-free interest rate  0.6%  0.1%

Using the BSM option-pricing model based on the valuation inputs set forth above, the weighted-average grant date fair value was $2.00per share was $1.42for newly-granted stock options and $3.262.35 per share for modified stock options for the ninesix months ended SeptemberJune 30, 2020 and 2019, respectively. Using the BSM option-pricing model, the weighted-average modification date fair value per share was $0.14 and $3.40 for the nine months ended September 30, 2020 and 2019, respectively. The BSM model requires various 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. Because 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 for 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 through the grant date of the respective stock options.2021.

Restricted Stock Activity

 

The following table sets forth share activity related to grants of restricted stock under the Company’s stock option plans for the ninesix months ended SeptemberJune 30, 20202021 (in thousands):

SCHEDULE OF RESTRICTED STOCK AWARD ACTIVITY

  Type of Awards 
  Equity  Liability (1) 
 
Unvested shares, December 31, 2020  2,039   18 
Unvested awards granted to:        
Executive officer  2,275(2)  - 
Board members  187(3)  - 
Employees and Brand Partners  303(4)  - 
Forfeitures  (65)  (1)
Vested shares  (697)  - 
         
Unvested shares, June 30, 2021  4,042   17 
         
Intrinsic value, June 30, 2021 $9,015(5) $37(5)

 

  Type of Awards 
  Equity  Liability (1) 
 
Unvested shares, December 31, 2019  2,123        37 
Unvested awards granted to Board members  339(2)  - 
Other unvested awards granted  556(3)  - 
Forfeitures  (913)  (2)
Vested shares  (330)  - 
         
Unvested shares, September 30, 2020  1,775   35 
         
Intrinsic value, September 30, 2020 $3,070(4) $60(4)

 (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 condensed 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 thesethe awards vest. As of September 30, 2020 and December 31, 2019, the cumulative amount of compensation expense recognized is based on the progress toward vesting and the total fair value of the respective awards on those dates.
 (2)On March 10, 2021, the Board of Directors approved restricted stock grants to the Company’s Chief Executive Officer for (i) 175,000 shares that vest for one-third of the shares on each of the first, second and third anniversaries of the grant date, (ii) a grant of 350,000 shares up to 1,050,000 shares that vest to the extent that prescribed amounts of measurable merger synergies are realized by the Company over the three-year period ending December 31, 2023, and (iii) a grant of 350,000 shares up to 1,050,000 shares that vest if the Company achieves adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) margins ranging from 4.0% to 12.0% over the three-year period ending December 31, 2023. Adjusted EBITDA margin is a non-GAAP measure computed by dividing Adjusted EBITDA, as defined by the Board of Directors, by net revenue. The fair value of the Company’s Common Stock was $2.79 per share on the grant date, resulting in total compensation expense of $0.5 million that is being recognized over the 3-year service period for the award described in (i) above, and up to an aggregate of $5.9 million if the maximum performance targets are achieved for both awards described in (ii) and (iii) above whereby an aggregate of 2.1 million shares would vest. If the Company does not achieve the minimum targets set by the Board of Directors for merger synergies and Adjusted EBITDA margin, none of the 2.1 million shares will vest.

22

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the six months ended June 30, 2021, an aggregate of approximately $0.2 million of compensation expense was recognized for the awards described in (ii) and (iii) above, which was calculated assuming that an aggregate of 0.7 million shares will ultimately vest and that the performance criteria will not be achieved for an aggregate of 1.4 million shares that are included in the table. This compensation calculation was based on management’s estimate of the most likely outcome for the performance conditions and considering the portion of the service period that had been rendered through June 30, 2021. Compensation expense will be recomputed at the end of each reporting period with the future impact of changes in management’s estimates reflected prospectively.
(3)Represents grants of unvested awards to members of the Board of Directors in January 2021, whereby the shares of Common Stock will vest one year after the grant date. The fair value of the shares was recorded based on the closing price for the Company’s Common Stock ofwas $3.211.77 per share on the grant date.date, resulting in total compensation expense of $0.6 million that is being recognized over the one-year vesting period.
 (3)(4)Represents 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.
 
(4)(5)The intrinsic value is based on the closing price of the Company’s Common Stock of $1.732.23 per share on SeptemberJune 30, 2020.2021.

 

19

In connection with certain employee severance arrangements during the six months ended June 30, 2021, the Company modified certain restricted stock awards for 0.2

million shares that otherwise would have expired upon termination of employment. These modifications resulted in an increase in the fair value of the awards of $NewAge, Inc.0.7

Notes to Unaudited Condensed Consolidated Financial Statements million that was recognized as stock-based compensation expense for the six months ended June 30, 2021.

 

Stock-Based Compensation Expense

 

Substantially all stock-based compensation expense is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. The table below summarizes stock-based compensation expense related to stock options and restricted stock awards for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, and the unrecognized compensation expense as of SeptemberJune 30, 20202021 and 20192020 (in thousands):

SCHEDULE OF STOCK-BASED COMPENSATION EXPENSE 

  Three Months Ended  Six Months Ended  Unrecognized Expense 
  June 30:  June 30:  as of June 30: 
  2021  2020  2021  2020  2021  2020 
                   
Plan-based stock option awards $871  $471  $1,721  $1,096  $3,398(1) $3,680 
Plan-based restricted stock awards:                        
Equity-classified  1,309   614   2,409   1,340   5,104(2)  4,188 
Liability-classified  7   7   19   13   19   41 
                         
Total $2,187  $1,092  $4,149  $2,449  $8,521  $7,909 

  Stock-based Compensation Expense (Recovery)       
  Three Months Ended  Nine Months Ended  Unrecognized Expense 
  September 30,  September 30,  as of September 30, 
  2020  2019  2020  2019  2020  2019 
                   
Plan-based stock options awards $374  $1,102  $1,470  $2,040  $2,815  $3,729 
Plan-based restricted stock awards:                        
Equity-classified  583   597   1,923   2,870   2,453   2,348 
Liability-classified  9   (708)  22   304   38   125 
Non-plan equity-classified restricted stock awards  -   -   -   64   -   - 
                         
Total $966  $991  $3,415  $5,278  $5,306  $6,202 

(1)Includes $0.1 million related to stock options for an aggregate of 100,000 shares exercisable at $3.06 per share that vest upon achievement of cost savings of $25.0 million related to the successful integration of the Ariix business combination discussed in Note 3.
(2)Pursuant to the March 2021 grant of performance-based restricted stock to the Company’s Chief Executive Officer, the amount includes $1.7 million of unrecognized compensation. This amount is based on management’s estimate that 0.7 million shares will ultimately vest as discussed above under the caption Restricted Stock Activity. Accordingly, unrecognized compensation of $3.9 million related to an additional 1.4 million shares is excluded from the table based on management’s estimate that both performance conditions will be achieved at the target level. Accordingly, $3.9 million of additional stock-based compensation expense could be recognized if the maximum performance targets are achieved over the remaining performance period through December 2023.

 

As of SeptemberJune 30, 2020,2021, unrecognized stock-based compensation expense related to service-based awards is expected to be recognized on a straight-line basis over a weighted-average period of approximately 1.62.1 years for stock options, 1.61.9 years for equity-classified restricted stock awards, and 1.20.5 years for liability-classified restricted stock awards. For awards with performance-based vesting, compensation expense is recognized over the period that the performance criteria are expected to be achieved as discussed above under the caption Restricted Stock Activity.

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Warrants

The following table sets forth changes in outstanding warrants for the six months ended June 30, 2021 (shares in thousands):

SCHEDULE OF WARRANTS

  Shares  Price (1)  Term (2) 
          
Outstanding, beginning of period  1,803  $4.77   5.1 
Issuance in private placement of Units  7,318(3)  5.00     
             
Outstanding, end of period  9,121(4)  4.95   3.0 

(1)Represents the weighted average exercise price.
(2)Represents the weighted average remaining contractual term in years until the warrants expire.
(3)As discussed in Note 7, the Company completed a private placement of equity securities in February 2021 that included warrants to purchase an aggregate of 7.3 million shares of Common Stock at an exercise price of $5.00 per share.
(4)All warrants are vested and exercisable as of June 30, 2021.

The November 2020 SPA discussed in Note 6 included the issuance of September 30, 2020 and 2019, the Company had warrants outstanding forClass B Warrants to purchase 0.3750,000million shares of Common Stock with a weighted average exercise price ofexercisable at $4.805.75 per share. The warrants expireFebruary 2021 SPA discussed in Note 7 was considered a dilutive issuance that resulted in a reduction of the exercise price of the Class B Warrants from $5.75 per share to $5.53 per share. The change in fair value of the Class B Warrants as a result of this dilutive issuance was immaterial whereby the reduction of the exercise price for 0.1 million shares in February 2022 andthe Class B Warrants did not have any impact on the Company’s financial statements for 0.2 million shares in March 2029. For the three and ninesix months ended SeptemberJune 30, 2020 and 2019, no warrants were granted, exercised or expired.2021.

NOTE 9 — INCOME TAXES

 

The Company’s provision for income taxes for the three months ended SeptemberJune 30, 20202021 and 20192020 resulted in income tax expense of $0.60.7 million and $6.70.6 million, respectively. The effective tax rate as a percentage of pre-tax lossesincome (loss) before income taxes for the three months ended SeptemberJune 30, 2021 and 2020 and 2019 was negative 54%% and negative 1666%%, respectively, compared to the U.S. federal statutory rate of 2121%%. The negativedifference between the lower effective tax rate and the statutory rate for the three months ended SeptemberJune 30, 2021 and 2020 was primarily due to foreign income tax expense on profitable foreign operations and the impact of the domestic valuation allowance offsetting domestic income tax benefits. The difference between the negative effective tax rate of 166% for the three months ended September 30, 2019benefits and the U.S. federal statutory rate was primarily attributable toimpact of the establishmentgain (loss) from change in fair value of a valuation allowance applied to the Company’s domestic net deferredderivatives which has no income tax assets.effect.

 

The Company’s provision for income taxes for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 resulted in income tax expense of $1.9million and $12.81.3 million, respectively. The effective tax rate as a percentage of pre-tax lossesincome (loss) before income taxes for the ninesix months ended SeptemberJune 30, 2021 and 2020 and 2019 was negative 6127%% and negative 1146%%, respectively, compared to the U.S. federal statutory rate of 2121%%. The negativedifference between the effective tax rate and the statutory tax rate for the ninesix months ended SeptemberJune 30, 2021 and 2020 was primarily due to foreign income tax expense on profitable foreign operations and the impact of the domestic valuation allowance offsetting domestic income tax benefits. The difference between the negative effective tax rate of 114% for the nine months ended September 30, 2019benefits and the U.S. federal statutory rate was primarily attributable toimpact of the establishmentgain (loss) from change in fair value of a valuation allowance.derivatives which has no income tax effect.

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although the Company believes its tax estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.

20

NewAge, Inc.determinations.

 

Notes to Unaudited Condensed Consolidated Financial StatementsAs of June 30, 2021 and December 31, 2020, $1.1

The total outstanding balance for million of unrecognized income tax benefits is included in other long-term liabilities related towith the remainder of $4.3 million being offset with other deferred tax assets. As of June 30, 2021 and December 31, 2020, unrecognized tax benefits was $1.5 million asthat are classified in other long-term liabilities, would result in changes to the Company’s effective tax rate if recognized. As of SeptemberJune 30, 20202021 and December 31, 2019. These amounts are included in accrued employee2020, unrecognized tax benefits andthat were offset against other long-term liabilities indeferred tax assets, if recognized, would not affect the accompanying unaudited condensed consolidated balance sheets.Company’s effective tax rate since the tax benefits would increase a deferred tax asset that would be offset by a valuation allowance. The Company does not anticipate that unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

NOTE 10 —COMMITMENTS AND CONTINGENCIES

 

Litigation, Claims and Assessments

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.

24

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 independent product consultants (“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.

 

The Company has various legal and othernon-income tax contingencies in several countries. Such exposureexposures could be material depending upon the ultimate resolution of each situation. As of SeptemberJune 30, 20202021 and December 31, 2019, accrued2020, the Company has recorded current liabilities include a current liability determined under ASC 450, Contingencies,for non-income tax contingencies of approximately $1.9 1.2 million.

millionOn 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, the suspension of recruiting is resulting in a reduction in net revenue for the nine-month suspension period. According to the order, the Japanese Subsidiary may continue to sell products to customers through existing Brand Partners and $0.9 million, respectively.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.

 

From

In December 2020, the Company engaged external counsel, accountants, and other advisors to conduct an independent investigation of Ariix’s international business practices, during which the investigation team identified conduct that potentially was in violation of the FCPA. In August 2021, the Company made a voluntary self-disclosure to the U.S. Department of Justice (“DOJ”) and the SEC about these items and our investigation. Although the reporting to the DOJ and SEC is ongoing, the Company believes its investigation is substantially complete. The Company has initiated procedures to remediate such practices. These findings provide opportunity for targeted, enhanced controls and additional training and other remediation. The Company intends to fully cooperate with the DOJ and SEC, with the assistance of legal counsel, to conclude this matter.

The Company is unable at this time to time,predict when the government agencies’ review of these matters will be completed or what regulatory or other consequences may result. The ultimate outcome of this investigation, including potential claims that may arise from the matters under investigation, is uncertain and the Company may be a party to litigation and subject to claims incident tocannot reasonably estimate the ordinary courseamount 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 effectany potential loss 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.financial statements at this time.

 

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 someMany of these Orders werehave been relaxed or lifted in different jurisdictions at various times duringwhere large portions of the threepopulation have been vaccinated, but there is considerable uncertainty about whether the Orders will need to be reinstated due to the ongoing spread of new variants of COVID-19. A significant portion of the worldwide population remains unvaccinated, and nine months ended September 30, 2020,uncertainty also exists about whether existing vaccines will be effective as new variants of COVID-19 emerge. Accordingly, the overall impact of COVID-19 continues to have an adverse impact on global business activities across the world.activities. 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 62%78% and 68% of the Company’s net revenue for the threesix months ended SeptemberJune 30, 2020.2021 and the year ended December 31, 2020, respectively. The impact of COVID-19 was a significant contributing factor for much of the three monthsyear ended September 30,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 IPCBrand Partner sales force in close contact with customers, the pandemic has required alternative selling approaches such as through social media. Until a vaccinevaccines or other successful mitigation of COVID-19 is developed,have 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.

21

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 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.

25

Employment AgreementsNewAge, Inc.

 

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 requiredNotes 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.Unaudited Condensed 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 42,900 shares at an exercise price of $1.77 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 will provide up to 20 hours per week of consulting services to the Company for a six-month period and will receive $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.

NOTE 11 —NET LOSSINCOME (LOSS) PER SHARE

Net lossBasic and diluted net income (loss) per share (“EPS”) is computed by dividing (i) net lossincome (loss), as adjusted for certain gains and losses related to contingently issuable shares and the two-class method allocation of earnings (the “Numerator”), by (ii) the weighted average number of common shares outstanding during the period.period, as adjusted to give effect to certain contingently issuable shares (the “Denominator”). The calculation of diluted net loss per shareEPS also includes the dilutive effect, if any, of 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 three and ninesix months ended SeptemberJune 30, 20202021 and 2019, basic and diluted net loss per share were the same since2020, all Common Stock equivalents were anti-dilutive. AsPresented below are the calculations of September 30, 2020the Numerators and 2019, the following potential Common Stock equivalents were excluded from the computation ofDenominators for basic and diluted net lossEPS (in thousands, except per share since the impact of inclusion was anti-dilutive (in thousands)amounts):

SCHEDULE OF LOSS PER SHARE

  2021  2020  2021  2020 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2021  2020  2021  2020 
             
Calculation of Numerators:                
Net income (loss) $17,371  $(9,554) $(397) $(21,172)
Two-class method earnings allocation adjustment  (1,005)(1)  -   -(1)  - 
                 
Earnings for calculation of basic EPS  16,366   (9,554)  (397)  (21,172)
Reverse two-class method earnings allocation adjustment  1,005(1)  -   -(1)  - 
Eliminate derivative gains on Fixed Shares  (11,380)(2)  -   (6,765)(2)  - 
Eliminate derivative gains on Variable Shares  (12,743)(2)  -   (6,018)(2)  - 
                 
Earnings for calculation of diluted EPS $(6,752) $(9,554) $(13,180) $(21,172)
                 
Calculation of Denominators:                
Weighted average shares outstanding before adjustments  135,961   93,003   131,675   89,187 
Give effect to elimination of contingency on May 14, 2021:                
Fixed Shares  7,675(3)  -   3,859(3)  - 
Variable Shares  -(4)  -   -(4)  - 
                 
Weighted average shares for basic EPS  143,636   93,003   135,534   89,187 
Give effect to elimination of contingency at beginning of period:                
Fixed Shares  6,876(5)  -   10,692(5)  - 
Variable Shares  20,097(5)  -   20,097(5)  - 
                 
Weighted average shares for diluted EPS  170,609   93,003   166,323   89,187 
                 
Net income (loss) per share of Common Stock:                
Basic $0.11  $(0.10) $(0.00) $(0.24)
Diluted $(0.04) $(0.10) $(0.08) $(0.24)

 

  2020  2019 
       
Equity incentive plan awards:        
Stock options  3,337   2,646 
Restricted stock awards  1,810   1,161 
Common stock purchase warrants  311   200 
         
Total  5,458   4,007 

(1)The Company issued warrants in December 2020 and February 2021 for the purchase of an aggregate of 8.8 million shares of Common Stock (the “Participating Warrants”) whereby the holders are entitled to share in any dividends or distributions payable to holders of Common Stock on an as-converted basis. Accordingly, the calculation of basic EPS for the three months ended June 30, 2021 requires use of the two-class method whereby earnings for the reporting period were allocated between the holders of Common Stock and the Participating Warrants. This allocation is required regardless of whether a dividend is declared for such undistributed earnings. For all other periods, the impact of using the two-class method was antidilutive which resulted in the reversal of the amount allocated for basic EPS in the diluted EPS calculation for the three months ended June 30, 2021.
(2)As discussed under footnote (5) below, the Fixed Shares and the Variable Shares are included in the Denominator for the calculation of diluted EPS beginning on the first day of each of the three- and six-month periods ended June 30, 2021. Accordingly, it is necessary to adjust the Numerator to eliminate the related net gains from changes in fair value of the derivative liabilities associated with these shares for the three and six months ended June 30, 2021.

 

2226

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

(3)For purposes of the calculation of basic EPS, the Fixed Shares are treated as issued and outstanding beginning on May 14, 2021 when the shareholder approval contingency discussed in Note 3 was eliminated. This number represents the weighted average number of shares for the respective periods that the Fixed Shares were considered outstanding from May 14, 2021 through June 30, 2021.
(4)As discussed in Note 3 under the caption Business Combination Liabilities, the Variable Shares provide for the possibility of future adjustments in the number of shares based on the outcome of any potential indemnification claims by either party to the Amended Ariix Merger Agreement. Accordingly, the Variable Shares are required to be excluded from the calculation of basic EPS until the underlying shares are issued in November 2021.
(5)For purposes of the calculation of diluted EPS, the Fixed Shares and the Variable Shares are treated as issued and outstanding beginning on the first day of each of the three- and six-month periods ended June 30, 2021. This adjustment increases the number of shares in the basic EPS calculation to equal the total number of Fixed Shares and Variable shares that are considered outstanding for the entirety of the three and six months ended June 30, 2021 for the diluted EPS calculation.

As of June 30, 2021 and 2020, the following potential Common Stock equivalents were excluded from the computation of diluted net income (loss) per share since the impact of inclusion was anti-dilutive (in thousands):

SCHEDULE OF ANTIDILUTIVE SECURITIES

  2021  2020 
       
Equity Incentive Plan awards:        
Stock options  3,906   3,883 
Unvested restricted stock awards  4,042   2,499 
Common stock purchase warrants  9,121   311 
         
Total  17,069   6,693 

 

NOTE 12 — FINANCIAL INSTRUMENTS AND SIGNIFICANT 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 value 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 SeptemberJune 30, 20202021 and December 31, 2019,2020, the fair value of the Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximated 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 estimated fair value of the Senior Notes discussed in Note 6 is classified as Level 2 and amounted to approximately $24.4 million as of June 30, 2021 and $28.9 million as of December 31, 2020. The recorded amounts for short-term debts payable related to the Ariix Clarification Letter and the Zennoa business combination obligationsdiscussed in Note 3 and the debt obligations in Note 6 also approximated fair value due to the short-term maturities and lack of changes in the business combination liabilities, and the variable nature of the interest rates under the EWB Credit Facility. The notes receivable from BWR discussed in Note 3 were recorded at estimated fair value as of September 24, 2020.Company’s credit risk. Due to the U.S. government guarantee and the otherwise unique terms of the PPP LoanLoans discussed in Note 6, it was not possible to determine fair value of thisthese debt instrument.instruments. As discussed in Note 14, the Company was informed in July 2021 that forgiveness of its PPP Loans of approximately $9.7 million was approved.

 

27

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recurring Fair Value Measurements

 

Recurring measurements of the fair value of assets and liabilities as of SeptemberJune 30, 20202021 and December 31, 20192020 were as follows: follows (in thousands):

 

SCHEDULE OF FAIR VALUE OF ASSETS AND LIABILITIES

  2021  2020 
  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
                         
Derivative Liabilities:                                
Ariix Fixed Shares $-  $-  $-  $-  $-  $-  $37,028(1) $37,028 
Ariix Variable Shares  -   -   44,773(2)  44,773   -   -   53,846(1)  53,846 
Warrants  -   -   5,695(3)  5,695   -   -   -   - 
Deferred consideration payable:                                
LIMU  -   3,495(4)  -   3,495   -   3,656(4)  -   3,656 
Zennoa  -   1,885(4)  -   1,885   -   2,196(4)  -   2,196 
                                 
Total $-  $5,380  $50,468  $55,848  $-  $5,852  $90,874  $96,726 

  As of September 30, 2020  As of December 31, 2019 
  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
                         
Interest rate swap liability $-  $355  $-  $355  $-  $99  $-  $99 
Embedded derivative liability  -   -   136   136   -   -   -   - 
Earnout under Series D preferred stock -  -  -  -  -  -  225  225 
                                 
Total $   -  $355  $136  $491  $  -  $99  $225  $324 

(1)Please refer to Note 3 under the caption Business Combination Liabilities for further information related to the Ariix Fixed Shares and Variable Shares derivative liabilities. Key valuation assumptions to arrive at fair value of the derivative liability as of December 31, 2020 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%.
(2)Key valuation assumptions to arrive at fair value of the Ariix Variable Shares derivative liability as of June 30, 2021 included (i) historical volatility of the Company’s shares of Common Stock of 76%, and (ii) a risk-free interest rate of approximately 0.2%.
(3)Please refer to Note 7 under the caption Private Placement of Units for further information related to the Warrant derivative liability. Key valuation assumptions to arrive at fair value of the warrant derivative liability as of June 30, 2021 included the closing price of $2.23 per share for the Company’s Common Stock, the exercise price of the warrants of $5.00 per share, historical volatility of 90%, and the remaining contractual term of 2.6 years. Based on these valuation inputs, the weighted-average fair value of the warrants was $0.78 per share as of June 30, 2021.
(4)The fair value of deferred consideration related to the LIMU and Zennoa business combination obligations set forth in Note 3 are classified as Level 2. The estimated fair value of these liabilities was determined in November 2020 such that the carrying values and fair values were similar as of June 30, 2021 and December 31, 2020.

 

The interest rate swap agreement provides for a total notional amountAs of $10.0 millionJune 30, 2021 and December 31, 2020, the Company did not have any assets carried 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 0.50%, and is classified within Level 2 of the fair value hierarchy.on a recurring basis. 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 ninesix months ended SeptemberJune 30, 2020 and 2019,2021, the Company had nodid not have any transfers of its assets or liabilities between levels of the fair value hierarchy.

23

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Significant Concentrations

 

A significant portion of the Noni by NewAge business of 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. As set forth in Note 13, for the three and nine months ended SeptemberJune 30, 20202021 and 2019,2020, a significant portion of the Company’s consolidated net revenue was generated outside the United States, primarily in the Asia Pacific market.States. Most of the Noni by NewAge’sDirect / 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 comprised over 80%31% and 86% of the net revenue of the Noni by NewAgeDirect / Social Selling segment for the three and nine months ended SeptemberJune 30, 2021 and 2020, respectively. Tahitian Noni® Juice, MAX and 2019.other noni-based beverage products comprised over 33% and 86% of the net revenue of the Direct / Social Selling segment for the six months ended June 30, 2021 and 2020, respectively. 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%10% of its raw material purchases during the three and nine months ended SeptemberJune 30, 2021 and 2020. 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. For the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, no single customer accounted for 10%10% or more of the Company’s consolidated net revenue.

28

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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, may exceed the amount of insurance provided on such deposits. As of SeptemberJune 30, 2020,2021, the Company had cash and cash equivalents and restricted cash with twoa financial institutionsinstitution in the United States with balances of $11.4 million and $3.946.5 million, and two financial institutions in China with balances of $6.87.0 million and $6.06.6 million. As of December 31, 2019,2020, the Company had cash and cash equivalents with two financial institutions in the United States with balances of $22.28.2 million and $1.423.7 million, and two financial institutions in China with balances of $6.66.3 million and $3.67.3 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 allowancesreserves for potential bad debts.

NOTE 13 — SEGMENTS AND GEOGRAPHIC CONCENTRATIONS

 

Reportable Segments

 

The Company follows segment reporting in accordance with ASC Topic 280, Segment Reporting. TheSince the consummation of the business combination with Morinda Holdings, Inc. (“Morinda”) in December 2018, the Company’s operating segments consisthave 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 renamed this segment as the 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 Company’s legacy brands in September 2020, the Company has renamed the NewAge segment as the Direct Store segment.

 

The Noni by NewAgeDirect / Social Selling segment is engaged in the development, manufacturing, and marketing of Tahitian Noni® Juice, MAXa portfolio of healthy products in three core category platforms including health and other noni beverages as well as otherwellness, healthy appearance, and nutritional cosmeticperformance all sold primarily via e-commerce and personal care products.through a direct route to market. The Noni by NewAgeDirect / Social Selling segment has manufacturing operations in Tahiti, Germany, Japan, the United States, and China. The Noni by NewAgeDirect / Social Selling segment’s products are sold and distributed in more than 6050 countries using IPCs through its direct to consumer selling networkgroup of more than 400,000 Brand Partners and ecommerce business model.customers. Approximately 87% of the net revenue of the Direct / Social Selling segment was generated internationally for each of the three and six months ended June 30, 2021 and 2020.

 

As of September 30, 2020, the NewAgeThe Direct Store segment is a direct-store-distribution (“DSD”) business servicing Colorado and Wyoming.surrounding markets. Until September 24, 2020 when the Company disposed of the Divested BusinessesBusiness discussed in Note 3, the NewAge segment also marketed and sold a portfolio of healthy beverage brands including XingTea, Búcha® Live Kombucha, Coco-Libre, Evian, Nestea, Illy Coffee and Volvic. These products were distributed through a hybrid of routes to market throughout the United States and in a few countries around the world. The NewAge segment brands were sold in all channels of distribution including hypermarkets, supermarkets, pharmacies, convenience, gas and other outlets. In connection with the disposition of the Divested Businesses,Business, the Company entered into a Distributor Agreement, pursuant to which BWR appointed the Company as its exclusive distributor of certain beverage products in Coloradoselected territories in the United States.

Net revenue by reporting segment for the three and Wyoming.six months ended June 30, 2021 and 2020, was as follows (in thousands):

SUMMARY OF SEGMENT REPORTING

  Three Months Ended June 30,  Six Months Ended June 30, 
Segment 2021  2020  2021  2020 
             
Direct / Social Selling $109,752  $46,861  $224,214  $96,971 
Direct Store  14,288   15,776   25,344   29,359 
                 
Net revenue $124,040  $62,637  $249,558  $126,330 

 

2429

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Net revenueGross profit by reporting segment for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019, was as follows (in thousands): 

SUMMARY OF SEGMENT REPORTING

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
Segment 2020  2019  2020  2019 
             
Noni by NewAge $46,585  $54,843  $143,556  $155,125 
NewAge  16,134   14,985   45,493   39,358 
                 
Net revenue $62,719  $69,828  $189,049  $194,483 

Gross profit (loss) by reporting segment for the three and nine months ended September 30, 2020, and 2019, was as follows (in thousands):

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
Segment 2020  2019  2020  2019 
             
Noni by NewAge $35,465  $43,288  $110,974  $121,462 
NewAge  2,030   (2,992)  6,123   (941)
                 
Gross profit $37,495  $40,296  $117,097  $120,521 

  Three Months Ended June 30,  Six Months Ended June 30, 
Segment 2021  2020  2021  2020 
             
Direct / Social Selling $80,480  $35,903  $165,384  $75,509 
Direct Store  3,319   2,175   5,816   4,093 
                 
Gross profit $83,799  $38,078  $171,200  $79,602 

 

Assets by reporting segment as of SeptemberJune 30, 20202021 and December 31, 2019,2020, were as follows (in thousands):

 

Segment 2020  2019 
Noni by NewAge $178,911  $201,600 
NewAge  40,847   49,530 
         
Total assets $219,758  $251,130 

Segment 2021  2020 
       
Direct / Social Selling $385,963  $396,174 
Direct Store  66,492   47,008 
         
Total assets $452,455  $443,182 

 

Depreciation and amortization expense by reporting segment, including amounts charged to cost of goods sold for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, was as follows (in thousands):

 

 Three Months Ended Nine Months Ended 
 September 30,  September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
Segment 2020  2019  2020  2019  2021  2020  2021  2020 
                  
Noni by NewAge $1,713  $1,686  $5,157  $5,052 
NewAge  142   649   450   1,724 
Direct / Social Selling $4,721  $1,725  $9,396  $3,444 
Direct Store  101   148   200   308 
                        
Total depreciation and amortization $1,855  $2,335  $5,607  $6,776  $4,822  $1,873  $9,596  $3,752 

 

CapitalCash payments for capital expenditures for property and equipment and identifiable intangible assets by reporting segment for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, were as follows (in thousands):

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
Segment 2020  2019  2020  2019 
Noni by NewAge $128  $571  $1,881  $1,127 
NewAge  -   736   227   1,449 
                 
Total capital expenditures $128  $1,307  $2,108  $2,576 

  Three Months Ended June 30,  Six Months Ended June 30, 
Segment 2021  2020  2021  2020 
             
Direct / Social Selling $474  $286  $761  $1,753 
Direct Store  4   103   4   227 
                 
Total capital expenditures $478  $389  $765  $1,980 

 

25

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 regionfor each country that exceeded 10% of consolidated net revenue for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 (in thousands):

SCHEDULE OF NET REVENUE BY GEOGRAPHIC REGION

  Three Months Ended June 30,  Six Months Ended June 30, 
  2021  2020  2021  2020 
             
United States of America $28,729  $22,531  $53,776  $41,916 
Japan  24,238   20,940   49,472   41,807 
China  23,916   11,181   50,036   26,156 
Italy  13,279   69   31,009   155 
France  14,349   81   28,796   175 
Rest of World  19,529   7,835   36,469   16,121 
                 
Net revenue $124,040  $62,637  $249,558  $126,330 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2020  2019  2020  2019 
             
United States of America $23,638  $21,186(1) $65,554  $57,754(2)
Japan  21,268   22,167(1)  63,075   65,599(2)
China  10,169   17,320   36,325   43,882 
Other countries  7,644   9,155(1)  24,095   27,248(2)
                 
Net revenue $62,719  $69,828  $189,049  $194,483 

(1)For the three months ended September 30 2019, the previously reported amounts have been corrected to decrease net revenue attributable to Japan and other countries of $1.6 million, with a corresponding increase in net revenue attributable to the United States.
(2)For the nine months ended September 30, 2019, the previously reported amounts have been corrected to decrease net revenue attributable to Japan and other countries of $4.7 million, with a corresponding increase in net revenue attributable to the United States.

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the net carrying value of property and equipment located outside of the United States amounted to approximately $22.721.8 million and $22.123.6 million, respectively.

 

NOTE 14 — SUBSEQUENT EVENTS

Forgiveness of PPP Loan

 

Waiver Under EWB Credit Facility

As of September 30, 2020,In July 2021, the Company was notinformed that forgiveness of its PPP Loans was approved by the SBA for an aggregate of approximately $9.7 million, including accrued interest through June 30, 2021. The forgiveness of this PPP Loan will be recognized in compliance withJuly 2021 when the minimum adjusted EBITDA covenant underlender legally released the EWB Credit Facility discussed in Note 6. On November 5, 2020,Company of its obligation to repay the debt.

Employment Agreement

In July 2021, the Company entered into an employment agreement with Kevin Manion to serve as the Company’s Chief Financial Officer through January 1, 2024. Under the terms of the employment agreement, Mr. Manion will be paid an annual base salary of $550,000, and will be eligible to receive annual cash bonuses ranging from 80% to 160% of his annual base salary, based upon the attainment of certain performance metrics established by the Company’s Board of Directors. For 2021, Mr. Manion is entitled to a Fifth Amendmentminimum guaranteed cash bonus of $440,000 with additional bonus potential awarded if certain performance metrics are exceeded. As a sign-on bonus, Mr. Manion was paid $200,000 in cash in July 2021 and Waiver (the “Fifth Amendment”)received a restricted stock award for approximately 214,000 shares with a fair value of $400,000. This restricted stock award vests for 50% of the shares in July 2022 and 50% in July 2023. In January 2022, Mr. Manion will be eligible to receive annual restricted stock awards that will vest in three years to the EWB Credit Facility. Underextent that targets and performance metrics established by the Fifth Amendment, EWB waived non-complianceBoard of Directors are achieved.

If Mr. Manion’s employment is subsequently terminated by the Company due to its inability to achieve Adjusted EBITDAwithout Cause (as defined in the EWB Credit Facility)employment agreement) or he resigns with Good Reason (as defined in the employment agreement), vesting for certain equity awards will be accelerated and he is entitled to severance payments consisting of base compensation, target performance bonus at least $4.080% of base compensation, and health insurance benefits for a period up to 18 months. If Mr. Manion’s employment is terminated in connection with a change of control, vesting for certain equity awards will be accelerated and he is entitled to severance payments consisting of annual base compensation for 2 millionyears, performance bonuses equal to 360% of annual base compensation, and health insurance benefits for the three months ended September 30, 2020, and any default that may have occurred as a result thereof. The Fifth Amendment also removed the requirement to comply with the minimum Adjusted EBITDA financial covenant in future periods.

period of 18 months.

2631

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Special Note Regarding COVID-19

 

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 had resulted in a world-wide pandemic. TheBy March 2020, the U.S. economy washad been largely shut down by mass quarantines and government mandated stay-at-homestay-in-place orders (the “Orders”) to halt the spread of the virus. TheseMany of these Orders have been relaxed or lifted in jurisdictions where large portions of the population have been vaccinated, but there is considerable uncertainty about whether the Orders will need to be reinstated due to the ongoing spread of new variants of COVID-19. A significant portion of the worldwide population remains unvaccinated, and uncertainty also exists about whether existing vaccines will be effective as new variants of COVID-19 emerge. Accordingly, the overall impact of COVID-19 continues to have an adverse impact on global business activities. The Orders required some of ourthe Company’s employees to work from home when possible, and other employees have beenwere entirely prevented from performing their job duties until the Orders are relaxed or lifted. In foreign jurisdictions, which accounted for approximately 62% of our net revenue for the three months ended September 30, 2020, our direct-to-consumer selling model typically relies heavily on the use of our IPC sales force in close contact with our customers. The COVID-19 pandemic has required alternative selling approaches such as through social media. During the three months ended September 30, 2020, we saw reductions in our direct-to-consumer segment, and we may be unable to avoid future reductions in net revenue using these alternative selling approaches that avoid direct contact with our customers.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 ourthe Company’s business as consumer demand for ourits products could decrease.

 

While someForeign jurisdictions accounted for approximately 78% and 68% of these Orders were relaxed or lifted in different jurisdictions at various times during the threeCompany’s net revenue for the six months ended SeptemberJune 30, 2021 and the year ended December 31, 2020, the overallrespectively. The impact of COVID-19 continues towas a significant contributing factor for the year ended December 31, 2020, which 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 vaccines or other successful mitigation of COVID-19 have an adverse impact on business activities acrossbeen widely administered throughout the world. There isglobal population, no assurance can be provided that Ordersthe Company will be able to avoid future reductions in net revenue using alternative selling approaches that were previously relaxed or lifted will notavoid direct contact with customers. While the current disruption to the Company’s business is expected to be reinstated astemporary, the spread of COVID-19 continues. For example, many jurisdictions have recently reinstated masking orders 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 could be more prolonged and may become more severe. The long-term financial impact on ourthe Company’s business cannot be reasonably estimated at this time.

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this 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:

 

 ●AnticipatedOur anticipated operating results, including revenue and earnings.
 ●Our expected capital expenditure levels.
●The volatility in credit and market conditions.
●Our belief that we have sufficient liquidity to fund our business operations for the next 12 months.
●Our ability to bring new products to market in an ever-changing and difficult regulatory environment.
 ●Our expectations about the extent and duration of COVID-19 on our business.
 
●Volatility in credit and market conditions.
●

Our belief that we will be successful in raising additional equity proceeds pursuant to the ATM Agreement, and that we will have sufficient liquidity to fund our business operations over the next 12 months.

●Ability to bring new products to market in an ever-changing and difficult regulatory environment.
●Abilityability to re-patriate cash from certain foreign markets.
 
●StrategyOur strategy for customer retention and growth.
 ●Our risk management strategy.
 ●Risk management strategy.
Our ability to capture cost and revenue synergies, and successfully integrate our combination with Ariix.
 ●Expected capital expenditure levels for the remainder of 2020 and 2021.
Our ability to deliver profitable organic revenue growth.
 ●AbilityOur ability to successfully complete and integrate acquisitions, including the expected acquisition of Ariix.manage our growth.

 

2732

 

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 our 20192020 Annual Report on Form 10-K as filed with the SEC on March 16, 202018, 2021 (the “2019“2020 Form 10-K”), additional Risk Factors discussed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended June 30, 2020, and the additional Risk Factors discussed in Part II, Item 1A 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.

 

Overview

 

You should read the following discussion and analysis of our financial condition and results of operations together with (i) our financial statements and related notes included in Part I, Item 1 of this Report, (ii) our audited financial statements for the years ended December 31, 20192020 and 20182019 set forth in Item 8 of our 2019the 2020 Form 10-K, and (iii) the related Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of our 2019the 2020 Form 10-K.

 

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

 

Our mission isWe are an organic and healthy products company intending to inspire and educatebecome the planet to “live healthy,” and we support this mission in part, by providing healthier, better-for-you products, that support improvement in people’s lives and health. Our goal is to be theworld’s leading social selling and distribution companycompany. 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 a focus on wellness, healthy appearance,industry leading social selling tools and nutritional performance platforms differentiating acrosstechnologies. More than 72% of the platforms with plant-based ingredients, Noni, cannabidiol (“CBD”),Company’s revenue is ordered and microfulfilled online including auto-delivery subscriptions, and phytonutrients. We are focused on improving the livesmore than 85% of our consumers, and the livelihoods of our independent product consultants, representatives and affiliates, while delivering sustainable profitable growth and enhanced stockholder value by focusing on doing well by doing good.

products are delivered directly to consumers’ homes.

 

We are a healthy consumer products and lifestyles purpose-driven company engagedcompete in the development and commercialization of a portfolio of organic, natural and other better-for-you products. Those products are grouped into three major category platforms including health &and wellness, healthy appearance, and nutritional performance. Within the 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 onour functional differentiation utilizing different combinations of:

●Phytonutrients and micronutrients
●Plant-based ingredients
●CBD
●Noni
●Clean/non-toxic ingredients

33

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 $400 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 developmentbody’s protection against viruses. Also, within the health and commercialization of healthy, functionally-differentiatedwellness platform is our LIMU brand, a fucoidan-rich beverage sourced from seaweed. We have two core brands within those platforms utilizingthe healthy appearance platform including TeMana, a unique skin care portfolio that is infused with Tahitian Noni, CBD, plant-based ingredients, or phytonutrients as pointsand Lucim, a line of difference acrossclean skin care products expanding worldwide that was launched in 2020. In the portfolio. We alsonutritional performance platform, we commercialize a full line of weight management and other products including nutritional supplements and nutraceuticals and are one of a few companies inbuilding out our industry that commercializes its business across multiple channels, employing an omni-channel distinctive route to market, including products sold in traditional retail, ecommerce, direct to consumer, and via our direct-store-distribution (“DSD”) network. NewAge is building its omni-channel route to market incore brands within the 60 countries in which the Company operates, including leverage of its independent product consultants (“IPCs”), a peer-to-peer selling group of approximately 292,000 independent contractor IPCs and customers worldwide.

platform.

 

We believe that the 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 negate the historic advantage of healthier lifestyles and the availabilitytraditional manufacturers geared toward sale of healthiertheir products, is rapidly accelerating worldwide, and we are seeking to capitalize on that shift. We also believe consumer purchasing behavior is shifting with significantly greater purchases made via ecommerce and alternatives toutilizing traditional media, merchandized in traditional retail channels, with increasing demand for delivery direct to consumers’ homes, and this trend has accelerated under the environment of COVID-19.

28

To address the changes in consumer behaviors and opportunities presented by those shifts, NewAge implements a range of marketing and sales initiatives to capitalize on those shifts and build our brands with consumers. We intend for each of our brands to have superior functionality and efficacy versus their competitors, and at the same time, connect emotionally with their respective target audiences. We believe that building emotional connections with consumers, supported by functional points of difference, is critical to building brand loyalty.outlets.

 

Our current brandWe believe one of NewAge’s competitive advantages is its network of more than 400,000 Brand Partners and customers 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.

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 are buying consumable products is transforming. Commercializing our portfolio consists of healthy brands through primarily a rangedirect-route-to-market, utilizing proprietary and industry-leading social selling technology, and connecting with consumers on their terms with our team of owned brands that we commercialize through our omni-channel routemore than 400,000 Brand Partners and customers enables us to market. The owned brands include Tahitian Noni Juice, Te Mana, and Hiro.take advantage of the fundamental disintermediation happening in consumer product goods.

 

Operating SegmentsSegment 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 renamed this segment as the Direct / Social Selling segment to better reflect the overall characteristics shared by the business units that comprise this segment.

The direct to consumernet revenue and total assets of the Direct / Social Selling segment increased significantly with the closing of our business acquired from Morinda Holdings, Inc. (“Morinda”) is now rebranded Noni by NewAge.acquisition of Ariix on November 16, 2020. The Noni by NewAgeDirect / Social Selling segment is engaged in the development, manufacturing, and marketing of Tahitian Noni® Juice, a range of other noni-based beverages, the Te Mana portfolio of Healthy Appearance products as well as various otherin three core category platforms including health and wellness, healthy appearance, and nutritional cosmetic and personal care products.performance. The Noni by NewAgeDirect / Social Selling segment has manufacturing operations in Tahiti, Germany, Japan, the United States, and China. The Direct / Social Selling segment’s products of the Noni by NewAge segment are sold and distributed in more than 6050 countries using IPCsBrand Partners through our direct to consumerdirect-to-consumer selling network and e-commerce business model. For the three and six months ended SeptemberJune 30, 2020, Asia Pacific comprised2021, approximately 77% of this business, followed by North America at approximately 14%, with Latin America, Europe, Africa, and Australia/ New Zealand comprising the remainder of 9%.

The NewAge segment is a DSD business servicing Colorado and Wyoming. Until September 24, 2020 when we disposed of our BWR subsidiary and substantially all U.S. retail brands, the NewAge segment also marketed and sold a portfolio of healthy beverage brands including XingTea, Búcha® Live Kombucha, Coco-Libre, Evian, Nestea, Illy Coffee and Volvic. These products were distributed through a hybrid of routes to market throughout the United States and in a few countries around the world. The NewAge segment brands were sold in all channels of distribution including hypermarkets, supermarkets, pharmacies, convenience, gas and other outlets. In connection with the disposition87% of the BWR subsidiary and substantially all U.S. retail brands, we entered into a Distributor Agreement, pursuant to which BWR appointed us as its exclusive distributornet revenue of certain beverage products in Colorado and Wyoming.

the Direct / Social Selling segment was generated outside the Unites States.

 

With the changing economics in the retail brand beverage sector exacerbated by COVID-19, on September 24, 2020, we sold our Brands Within Reach, LLC (“BWR”) subsidiary and the rights to substantially all of our U.S. retail brands to focus on the more profitable, larger scale, higher potential Direct / Social Selling segment of our business. BWR and the U.S. retail brands were included in the Direct Store segment through the disposal date and are referred to herein as the “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 other products direct to stores in Colorado and surrounding states, to wholesale distributors, key account owned warehouses and international accounts using several distribution channels.

Recent Developments

 

Reference is madeOn May 14, 2021, our shareholders approved the issuance of shares of Common Stock to Notes 3, 4, 6, and 7settle the remaining merger consideration related to our condensed consolidated financial statements includedNovember 2020 business combination with Ariix. By obtaining approval to issue shares of Common Stock, we eliminated the possibility of being required to pay $163.3 million in Part I, Item 1cash. We will issue 11.7 million shares of our Common Stock as soon as the Sellers provide detailed issuance instructions, and 2.9 million shares are issuable by January 16, 2022. We are also obligated to issue 20.1 million shares of our Common Stock on November 16, 2021. However, this Report for a discussionnumber of recent developments since January 1, 2020, including (i) our entry intoshares is subject to subsequent adjustments based on the outcome of potential indemnification claims by either party. Under the Amended Ariix Merger Agreement, with Ariix, LLCindemnification claims awarded to either party will be settled by increasing or decreasing the number of shares based on a fixed conversion price of $5.53 per share. Accordingly, we are required to continue to account for the shares issuable on November 16, 2021 as a derivative liability until the number of shares is fixed.

34

On May 14, 2021, our shareholders approved an increase in September 2020, (ii)authorized shares of Common Stock and the dispositionReincorporation in Delaware. On May 24, 2021, we reincorporated to the State of Delaware under a plan of conversion, dated May 14, 2021. Pursuant to the plan of conversion, we also adopted new bylaws. As a result of the reincorporation, each outstanding share of our BWR subsidiaryCommon Stock as a Washington corporation automatically converted into an outstanding share of our Common Stock as a Delaware corporation. In addition, each outstanding stock option and substantially all U.S. retail brandswarrant, or right to acquire shares of our Common Stock as a Washington corporation converted into an equivalent stock option, warrant, or right to acquire, upon the same terms and conditions for the same number of shares of our Common Stock as a Delaware corporation. As a Delaware corporation, we have the authority to issue up to 400.0 million shares of Common Stock and up to 1.0 million shares of Preferred Stock.

On June 1, 2021, we entered into an Asset Purchase Agreement (“APA”) with Aliven, Inc. (“Aliven”) that was accounted for as a business combination. Aliven is a Japan-based direct selling company that we acquired to accelerate growth with our direct-to-consumer business model in September 2020, (iii)Japan and to expand our initiationportfolio of restructuring plans in April and August 2020 that are designed to achieve estimatedhealthy products. The total annualized selling, general and administrative cost reductions of $9.6 million, (iv) our receipt of proceeds from the PPP Loan with EWB in an aggregate principal amountpurchase consideration consisted of approximately $6.91.1 million pursuant to the U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), (v) our entry into two amendments to the EWB Credit Facility with EWB, and (vi) salesshares of our common stock underCommon Stock with a fair value of approximately $2.6 million.

In July 2021, we were informed that forgiveness of our PPP Loans was approved by the ATM Agreement that resultedSBA for approximately $9.7 million, including accrued interest through June 30, 2021. The forgiveness of these PPP Loans will be recognized in gross proceedsthe third quarter of $25.8 million for2021 when the nine months ended September 30, 2020. lender legally released us of our obligations to repay the debts.

These recent developments are also discussed belowfurther under the caption Liquidity and Capital Resources.

 

Key Components of Consolidated Statements of Operations

 

For a description of the key components of our condensed consolidated statements of operations, please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019the 2020 Form 10-K.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

For a discussion of our critical accounting policies, please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019the 2020 Form 10-K.

 

2935

 

Results of Operations

 

Three Months Ended SeptemberJune 30, 20202021 and 20192020

 

Our unaudited condensed consolidated statements of operations for the three months ended SeptemberJune 30, 20202021 and 20192020 are presented below (dollars in thousands):

 

 2020  2019  Change  Percent  2021  2020  Change  Percent 
                    
Net revenue $62,719  $69,828  $(7,109)  (10)% $124,040  $62,637  $61,403   98%
Cost of goods sold  25,224   29,532   (4,308)  (15)%  40,241   24,559   15,682   64%
                                
Gross profit  37,495   40,296   (2,801)  (7)%  83,799   38,078   45,721   120%
Gross margin  60%  58%          68%  61%        
                                
Operating expenses:                                
Commissions  17,458   21,185   (3,727)  (18)%  43,320   18,405   24,915   135%
Selling, general and administrative  27,983   26,104   1,879   7%  41,042   26,277   14,765   56%
Gain from change in fair value of earnout obligations  -  (6,244)  6,244   (100)%
Loss on disposal of Divested Businesses  3,446   -   3,446   n/a 
Depreciation and amortization expense  1,751   2,241   (490)  (22)%  4,723   1,761   2,962   168%
Loss on disposal of Divested Business  4,339   -   4,339   n/a 
Impairment of right-of-use assets  -   400   (400)  (100)%
                                
Total operating expenses  50,638   43,286   7,352   17%  93,424   46,843   46,581   99%
                                
Operating loss  (13,143)  (2,990)  (10,153)  340%  (9,625)  (8,765)  (860)  10%
                                
Non-operating income (expense):                                
Interest expense  (521)  (727)  206   (28)%  (3,040)  (600)  (2,440)  407%
Gain (loss) from sale of property and equipment  (62)  (85)  23   (27)%
Gain (loss) from change in fair value of derivatives  (86)  (166)  80   (48)%
Gain from change in fair value of derivatives  30,829   20   30,809   154045%
Interest and other income (expense), net  291   (48)  339   (706)%  (53)  342   (395)  (115)%
                                
Loss before income taxes  (13,521)  (4,016)  (9,505)  237%
Income (loss) before income taxes  18,111   (9,003)  27,114   (301)%
Income tax expense  (612)  (6,671)  6,059   (91)%  (740)  (551)  (189)  34%
                                
Net loss $(14,133) $(10,687) $(3,446)  32%
Net income (loss) $17,371  $(9,554) $26,925   (282)%

 

Presented below is our net revenue, cost of goods sold, gross profit and gross margin by segment for the three months ended June 30, 2021 and 2020 (dollars in thousands):

On

  Direct / Social Selling Segment  Direct Store Segment 
  2021  2020  Change  Percent  2021  2020  Change  Percent 
                         
Net revenue $109,752  $46,861  $62,891   134% $14,288  $15,776  $(1,488)  (9)%
Cost of goods sold  29,272   10,958   18,314   167%  10,969   13,601   (2,632)  (19)%
                                 
Gross profit $80,480  $35,903  $44,577   124% $3,319  $2,175  $1,144   53%
Gross margin  73%  77%          23%  14%        

As discussed above under the caption Operating Segment Overview, on September 24, 2020, we sold the Divested Business, which was a component of our Direct Store segment and included in our consolidated statements of operations through the disposal date. Accordingly, the Divested Business is excluded from our results of operations for the three months ended June 30, 2021. However, for the three months ended June 30, 2021, we did recognize an additional loss on disposal of the Divested Business of $4.3 million related to a note receivable we no longer expect to collect and certain disputed payables. Presented below is a summary of the operating loss of the Divested Business that is included in our historical results for the three months ended June 30, 2020 (in thousands):

Net revenue $5,938 
Cost of goods sold  6,269 
Gross loss  (331)
     
Operating expenses:    
Selling, general and administrative  (2,081)
Commissions  (40)
Depreciation and amortization expense  (31)
     
Operating loss $(2,483)

36

Since September 25, 2020, the Direct Store segment is primarily comprised of our legacy DSD and e-commerce lines of business (the “Retained Business”). 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 for the three months ended June 30, 2021 and 2020.

Net Revenue. Net revenue increased from $62.6 million for the three months ended June 30, 2020 to $124.0 million for the three months ended June 30, 2021, an increase of $61.4 million or 98%. For the three months ended June 30, 2021, the increase in net revenue was attributable to net revenue generated by Ariix for $65.7 million and Aliven for $1.6 million, partially offset by reductions in net revenue for our legacy businesses of $4.5 million.

Net revenue for the Direct / Social Selling segment increased by $62.9 million from $46.9 million for the three months ended June 30, 2020 to $109.8 million for the three months ended June 30, 2021. This increase was attributable to net revenue from our newly acquired businesses of $65.7 million for Ariix and $1.6 million for Aliven, for a total of $67.3 million. This increase due to our newly acquired businesses was partially offset by a reduction in net revenue of $4.5 million for the legacy portion of the Direct / Social Selling segment. The decrease in net revenue for the legacy portion of the Direct / Social Selling segment was a result of (i) closure and/or consolidation of a number of smaller, non-core, unprofitable markets on a standalone basis, and (ii) 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 have been in effect in varying degrees since March 2020.

Net revenue for the Direct Store segment decreased by $1.5 million from $15.8 million for the three months ended June 30, 2020 to $14.3 million for the three months ended June 30, 2021. This decrease was attributable to a reduction in net revenue of $5.9 million due to our disposal of the Divested Business in September 2020, partially offset by an increase in net revenue for the Retained Business of the Direct Store segment of $4.5 million or 45%. This increase in net revenue for the Retained Business of the Direct Store segment was attributable to new customers and expansion of the product portfolio for our DSD business.

Cost of goods sold. Cost of goods sold increased from $24.6 million for the three months ended June 30, 2020 to $40.2 million for the three months ended June 30, 2021, an increase of $15.7 million. Cost of goods sold for the Direct / Social Selling segment increased by $18.3 million, partially offset by a decrease in cost of goods sold of $2.6 million for the Direct Store segment. Cost of goods sold as a percent of net revenue improved to 32% for the three months ended June 30, 2021 as compared to 39% for the three months ended June 30, 2020. This seven-percentage point improvement was driven by a shift in segment product mix and target cost synergies associated with the merger with Ariix.

The increase in cost of goods sold for the Direct / Social Selling segment of $18.3 million was primarily attributable to the cost of products sold by Ariix for $19.1 million and Aliven for $0.2 million. Cost of goods sold for the legacy business of the Direct / Social Selling segment decreased by $1.1 million or 10% which was identical to the 10% reduction in net revenue for the legacy business of the Direct / Social Selling segment as discussed above. In order to partially mitigate the effects of COVID-19 for the three months ended June 30, 2021 and 2020, we offered additional discounts and promotions to the customers of the legacy business of the Direct / Social Selling Segment that are reflected in cost of goods sold.

For the three months ended June 30, 2021, the Direct / Social Selling segment also had a non-recurring charge to cost of goods sold of $0.2 million that related to the sale of inventories acquired as part of the Ariix business combination. The fair value of work-in-process and finished goods inventories on the closing date of the Ariix 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 a portion of the related inventories were sold for the three months ended June 30, 2021.

37

Cost of goods sold for the Direct Store segment decreased by $2.6 million from $13.6 million for the three months ended June 30, 2020 to $11.0 million for the three months ended June 30, 2021. The decrease in cost of goods sold for the Direct Store segment was due to the elimination of cost of goods sold related to the Divested Business which amounted to $6.3 million for the three months ended June 30, 2020. This decrease was partially offset by an increase in cost of goods sold for the Retained Business of $3.6 million or 50%, from $7.3 million for the three months ended June 30, 2020 to $11.0 million for the three months ended June 30, 2021. The increase in cost of goods sold for the Retained Business was primarily attributable to higher product costs associated with a 45% increase in net revenue.

Gross profit. Gross profit increased from $38.1 million for the three months ended June 30, 2020 to $83.8 million for the three months ended June 30, 2021, an increase of $45.7 million or 120%. The increase in gross profit consisted of $44.6 million attributable to the Direct / Social Selling segment and $1.1 million attributable to the Direct Store segment. The improvement in gross profit for the Direct / Social Selling segment was attributable to gross profit generated by Ariix for $46.6 million and $1.4 million for Aliven for a total of $48.0 million for the three months ended June 30, 2021. These increases attributable to our newly acquired businesses were partially offset by a reduction in gross profit of $3.4 million related to the legacy business of the Direct / Social Selling segment that resulted from lower sales caused by the COVID-19 pandemic. For each of the three months ended June 30, 2021 and 2020, gross margin for the legacy business of the Direct / Social Selling segment was 77%. For the three months ended June 30, 2021, the aggregate gross margin for the businesses acquired from Ariix and Aliven was 71%.

The Direct Store segment accounted for an increase in gross profit of $1.1 million for the three months ended June 30, 2021, driven by cost of goods sold that decreased by 19% whereas net revenue decreased by only 9%. The Divested Business accounted for approximately $0.3 million of negative gross profit for the three months ended June 30, 2020, whereas the Retained Business generated an additional $0.8 million of gross profit for the three months ended June 30, 2021. The Retained Business generated gross profit of approximately $2.5 million and gross margin of 25% for the three months ended June 30, 2020, compared to gross profit of $3.3 million and gross margin of 23% for the three months ended June 30, 2021.

Consolidated gross margin increased from 61% for the three months ended June 30, 2020 to 68% for the three months ended June 30, 2021. Gross margin for the Direct / Social Selling segment decreased from 77% for the three months ended June 30, 2020 to 73% for the three months ended June 30, 2021. Gross margin for the Direct Store segment increased from 14% for the three months ended June 30, 2020 to 23% for the three months ended June 30, 2021.

Commissions. Commissions were $43.3 million for the three months ended June 30, 2021 compared to $18.4 million for the three months ended June 30, 2020, an increase of $24.9 million. For the three months ended June 30, 2021, commissions for the Direct / Social Selling segment included an aggregate of $27.5 million related to the businesses acquired from Ariix and Aliven, partially offset by a reduction in commissions for our legacy businesses of $2.6 million. Commissions for our legacy businesses decreased by 14%, primarily due to the decrease in net revenue for the legacy portion of the Direct / Social Selling segment of 10% and the elimination of commissions related to the Divested Business.

Selling, general and administrative expenses. SG&A expenses increased from $26.3 million or 42% of net revenue for the three months ended June 30, 2020 to $41.0 million or 33% of net revenue for the three months ended June 30, 2021, an increase of $14.8 million that was partially offset by a reduction of $2.1 million related to the Divested Business. The reduction in SG&A as a percent of net revenue reflects the leverage of a consolidated growing business. The net increase in SG&A of $14.8 million was comprised of increases in compensation and benefits expense of $7.8 million, professional fees of $3.2 million, transaction fees related to the sale of products of $1.1 million, communications expenses of $1.0 million, market costs of $0.7 million, travel and other business expenses of $0.7 million, and occupancy costs of $0.3 million.

For the three months ended June 30, 2021, approximately $15.5 million of our SG&A expenses related to the businesses acquired from Ariix and Aliven, including compensation and benefits costs of $8.7 million, professional fees of $1.7 million, transaction fees related to the sale of products of $1.2 million, communications expenses of $0.8 million, and occupancy costs of $0.6 million. For the three months ended June 30, 2021, SG&A expenses related to corporate overhead activities and our legacy businesses decreased by $0.7 million which was primarily due to a reduction in compensation and benefits and marketing costs.

Depreciation and amortization expense. Depreciation and amortization expense included in operating expenses increased from $1.7 million for the three months ended June 30, 2020 to $4.7 million for the three months ended June 30, 2021, an increase of $3.0 million. This increase was primarily attributable to amortization expense of $2.9 million related to identifiable intangible assets of $131.8 million acquired in our business combination with Ariix in November 2020.

38

Loss on disposal of Divested Business. In September 2020, we sold our BWR subsidiary and substantially all U.S. retail brands (the “Divested Businesses”). The Divested Businessesand recognized a loss of $3.4 million. Based on recent communications with the Buyer, we determined that collection of a $2.5 million note receivable and accrued interest of $0.2 million is unlikely. Additionally, we were componentsinformed that BWR refuses to pay approximately $1.6 million of our NewAge segment and are included in our operating results shown above. Presented below is a summary ofsupplier obligations that we may ultimately be responsible to settle. Accordingly, we recognized additional losses related to the operating resultsdisposal of the Divested Businesses for the period from July 1, 2020 until they were sold on September 24, 2020, andBusiness of $4.3 million for the three months ended SeptemberJune 30, 2019 (in thousands):

  2020  2019 
       
Net revenue $2,443  $3,060 
Cost of goods sold  3,197   7,014 
Gross loss  (754)  (3,954)
         
Operating expenses:        
Commissions  19   27 
Selling, general and administrative  1,347   1,149 
Depreciation and amortization expense  23   435 
         
Net loss $(2,143) $(5,565)

2021.

 

Interest expense. Interest expense increased from $0.6 million for the three months ended June 30, 2020 to $3.0 million for the three months ended June 30, 2021, an increase of $2.4 million. For the three months ended June 30, 2021, interest expense of $3.0 million includes (i) interest expense paid in cash of $0.6 million based on the contractual rate of 8.0% under the Senior Notes entered into in December 2020, (ii) accretion of discount of $2.1 million related to the Senior Notes, and (iii) imputed interest expense of $0.2 million related to our deferred lease financing obligation and business combination obligations. As of SeptemberJune 30, 2021, the overall effective interest rate for the Senior Notes was approximately 46.8%, including the 8.0% stated rate.

For the three months ended June 30, 2020, interest expense was primarily attributable to (i) interest expense of $0.2 million based on the NewAge segment iscontractual rates under our former credit facility with East West Bank (the “EWB Credit Facility”) based on a weighted average interest rate of 5.3% and weighted average borrowings outstanding of $14.3 million, (ii) accretion of discount for a total of $0.2 million, (iii) imputed interest expense of $0.1 million related to our deferred lease financing obligation, and (iv) cash settlements under our interest rate swap agreement, unused line fees and other interest charges of $0.1 million.

Gain from change in fair value of derivatives. For the three months ended June 30, 2021, we recognized a gain from changes in fair value of derivatives of $30.8 million. This gain consisted of (i) $24.1 million related to the Ariix business combination derivative liabilities discussed in Note 3 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, and (ii) $6.7 million related to warrants issued in the February 2021 Private Placement as discussed in Note 7 to our unaudited condensed consolidated financial statements.

The fair value of derivative liabilities can be extremely volatile from period to period since the related valuations are heavily influenced by the then current market price of our Common Stock. The closing price for shares of our Common Stock decreased by 26% from $3.03 per share as of March 31, 2021 to $2.23 per share as of June 30, 2021. This decrease in the value of our shares was the principal factor that reduced fair value and resulted in the aggregate gains from changes in fair value of derivatives of $30.8 million for the three months ended June 30, 2021.

Interest and other income (expense), net. Interest and other income (expense), net amounted to a loss of $0.1 million for the three months ended June 30, 2021 and income of $0.3 million for the three months ended June 30, 2020. For the three months ended June 30, 2021, interest and other income (expense), net of $0.1 million was primarily comprised of our legacy DSDforeign exchange losses of $0.1 million and ecommerce linesa loss on the sale of business (the “Retained Businesses”).

property and equipment of $0.1 million, partially offset by interest income of $0.1 million. Interest and other income (expense), net for the three months ended June 30, 2020 consisted of foreign exchange gains of $0.2 million and interest income of $0.1 million.

 

30

Income tax expense. For the three months ended June 30, 2021 and 2020, we recognized income tax expense of $0.7 million and $0.6 million, respectively. Income tax expense primarily consisted of foreign income taxes associated with profitable foreign markets.

 

Inflation and changing prices. For the three months ended June 30, 2021 and 2020, the impact of inflation and changing prices have not had a significant impact on our net revenue, cost of goods sold and operating expenses.

39

Six Months Ended June 30, 2021 and 2020

Our unaudited condensed consolidated statements of operations for the six months ended June 30, 2021 and 2020 are presented below (dollars in thousands):

  2021  2020  Change  Percent 
             
Net revenue $249,558  $126,330  $123,228   98%
Cost of goods sold  78,358   46,728   31,630   68%
                 
Gross profit  171,200   79,602   91,598   115%
Gross margin  69%  63%        
                 
Operating expenses:                
Commissions  90,717   37,920   52,797   139%
Selling, general and administrative  79,901   56,885   23,016   40%
Depreciation and amortization expense  9,398   3,542   5,856   165%
Loss on disposal of Divested Business  4,339   -   4,339   n/a 
Impairment of right-of-use assets  -   400   (400)  (100)%
                 
Total operating expenses  184,355   98,747   85,608   87%
                 
Operating loss  (13,155)  (19,145)  5,990   (31)%
                 
Non-operating income (expense):                
Interest expense  (6,163)  (1,172)  (4,991)  426%
Gain (loss) from change in fair value of derivatives  21,216   (306)  21,522   (7033)%
Interest and other income (expense), net  (405)  725   (1,130)  (156)%
                 
Income (loss) before income taxes  1,493   (19,898)  21,391   (108)%
Income tax expense  (1,890)  (1,274)  (616)  48%
                 
Net loss $(397) $(21,172) $20,775   (98)%

Presented below is our net revenue, cost of goods sold, gross profit (loss) and gross margin by segment for the threesix months ended SeptemberJune 30, 20202021 and 20192020 (dollars in thousands):

  Direct / Social Selling Segment  Direct Store Segment 
  2021  2020  Change  Percent  2021  2020  Change  Percent 
                         
Net revenue $224,214  $96,971  $127,243   131% $25,344  $29,359  $(4,015)  (14)%
Cost of goods sold  58,830   21,462   37,368   174%  19,528   25,266   (5,738)  (23)%
                                 
Gross profit $165,384  $75,509  $89,875   119% $5,816  $4,093  $1,723   42%
Gross margin  74%  78%          23%  14%        

As discussed above, the Divested Business is excluded from our results of operations for the six months ended June 30, 2021 except for an additional loss on disposal of the Divested Business of $4.3 million related to a note receivable we no longer expect to collect and certain disputed payables. Presented below is a summary of the operating loss of the Divested Business that is included in our historical results for the six months ended June 30, 2020 (in thousands):

 Noni by NewAge Segment  NewAge Segment 
 2020  2019  Change  Percent  2020  2019  Change  Percent 
                        
Net revenue $46,585  $54,843  $(8,258)  (15)% $16,134  $14,985  $1,149   8% $10,722 
Cost of goods sold  11,120   11,555   (435)  (4)%  14,104   17,977   (3,873)  (22)%  11,342 
Gross loss  (620)
                                    
Gross profit (loss) $35,465  $43,288  $(7,823)  (18)% $2,030  $(2,992) $5,022   (168)%
Gross margin  76%  79%          13%  (20)%        
Operating expenses:    
Selling, general and administrative  (4,426)
Commissions  (105)
Depreciation and amortization expense  (62)
    
Operating loss $(5,213)

40

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 BusinessesBusiness and the Retained BusinessesBusiness of the NewAge segment.Direct Store segment for the six months ended June 30, 2021 and 2020.

Net Revenue. Net revenue decreasedincreased from $69.8$126.3 million for the threesix months ended SeptemberJune 30, 20192020 to $62.7$249.6 million for the threesix months ended SeptemberJune 30, 2020, a decrease2021, an increase of $7.1$123.2 million or 10%98%. For the threesix months ended SeptemberJune 30, 2021, the increase in net revenue was attributable to net revenue generated by Ariix for $133.9 million and Aliven for $1.6 million, partially offset by a reduction in net revenue for our legacy businesses of $8.2 million.

Net revenue for the Direct / Social Selling segment increased by $127.2 million from $97.0 million for the six months ended June 30, 2020 we hadto $224.2 million for the six months ended June 30, 2021. This increase was attributable to net revenue from our newly acquired businesses of $133.9 million for Ariix and $1.6 million for Aliven, for a decreasetotal of $135.5 million. This increase due to our newly acquired businesses was partially offset by a reduction in net revenue of $8.3 million or 15% for the Noni by NewAge segment, partially offset by an increase of $1.1 million or 8% for the NewAge segment.

Net revenue for the Noni by NewAge segment decreased by $8.3 million from $54.8$8.2 million for the three months ended September 30, 2019 to $46.6 million forlegacy portion of the three months ended September 30, 2020. We believe theDirect / Social Selling segment. The decrease in net revenue for the Noni by NewAgelegacy portion of the Direct / Social Selling segment was primarily caused bya result of (i) closure and/or consolidation of a number of smaller, non-core, unprofitable markets on a standalone basis, and (ii) lower quantities of products purchased by IPCs and consumers during the COVID-19 pandemic and the related Ordersmass quarantines and government mandated stay-in-place orders that werehave been in effect during the three months ended September 30,in varying degrees since March 2020. Our direct-to-consumer selling model typically relies heavily on the use of our IPC sales force in close contact with our customers. However, the COVID-19 pandemic required alternative selling approaches, such as through social media which is less effective than in-person selling in certain regions. The impact of the pandemic was a significant contributing factor for the three months ended September 30, 2020 that resulted in decreases in net revenue of 41% in China, 4% in Japan, and 17% in all other foreign countries as a group. However, Noni by NewAge’s net revenue in the United States increased by 21% for the three months ended September 30, 2020 due to improved social selling tools. For the three months ended September 30, 2019, net revenue in China was favorably impacted by higher net revenue due to a major qualification event. A similar qualification event did not occur for the three months ended September 30, 2020. We expect our consolidated sales levels will continue to be impacted by COVID-19 until a vaccine or other successful mitigation is developed. In addition to the impact of COVID-19, we believe our net revenue in China was negatively impacted by the introduction in May 2020 of a new compensation plan for our IPCs, which typically results in tentative buying patterns until the mechanics of the new plan are fully understood.

 

Net revenue for the NewAgeDirect Store segment increaseddecreased by $1.1$4.0 million from $15.0$29.3 million for the threesix months ended SeptemberJune 30, 20192020 to $16.1$25.3 million for the threesix months ended SeptemberJune 30, 2020. Net2021. This decrease was attributable to a reduction in net revenue forof $10.7 million due to our disposal of the Divested Businesses decreasedBusiness in September 2020, partially offset by approximately $0.6 million from $3.1 million for the three months ended September 30, 2019 to $2.4 million for the three months ended September 30, 2020. Net revenue for the Retained Businesses increased by $1.8 million from $11.9 million for the three months ended September 30, 2019 to $13.7 million for the three months ended September 30, 2020. Thean increase in net revenue for the Retained Businesses was primarily attributable to increasedBusiness of the Direct Store segment of $6.7 million or 36%. This increase in net revenue by our DSD business duefor the Retained Business of the Direct Store segment was attributable to new customers and expansion of the product portfolio.portfolio for our DSD business.

 

Cost of goods sold. Cost of goods sold decreasedincreased from $29.5$46.7 million for the threesix months ended SeptemberJune 30, 20192020 to $25.2$78.3 million for the threesix months ended SeptemberJune 30, 2020,2021, an increase of $31.6 million. Cost of goods sold for the Direct / Social Selling segment increased by $37.4 million, partially offset by a decrease of $4.3 million. For the three months ended September 30, 2020,in cost of goods sold decreased by $0.4of $5.7 million or 4% for the Noni by NewAge segment, and $3.9 million or 22%Direct Store segment. Cost of goods sold as a percent of net revenue improved to 31% for the NewAge segment.six months ended June 30, 2021 as compared to 37% for the six months ended June 30, 2020. This six-percentage point improvement was driven by a shift in segment product mix and target cost synergies associated with the merger with Ariix.

 

The $0.4 million reductionincrease in cost of goods sold for the Noni by NewAgeDirect / Social Selling segment of $37.4 million was primarily dueattributable to reduced sales volumethe cost of 15%,products sold by Ariix for $38.1 million and Aliven for $0.2 million. Cost of goods sold for the legacy business of the Direct / Social Selling segment decreased by $1.0 million or 5% in comparison to an 8% reduction in net revenue for the legacy business of the Direct / Social Selling segment as discussed above. In order to partially mitigate the effects of COVID-19, since March 2020 we have been offering additional discounts and promotions to the customers of the legacy business of the Direct / Social Selling Segment that are reflected in cost of goods sold.

For the six months ended June 30, 2021, the Direct / Social Selling segment also had a non-recurring charge to cost of goods sold of $0.7 million that related to the Morindasale of inventories acquired as part of the Ariix business combination of $0.4 million for the three months ended September 30, 2019 that did not recur for the three months ended September 30, 2020.combination. The fair value of work-in-process and finished goods inventories on the closing date of the MorindaAriix 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 a portion of the related inventories were sold in 2019. Forfor the threesix months ended SeptemberJune 30, 2019, a portion of the closing date inventories was sold, which resulted in a charge to cost of goods sold of approximately $0.4 million. For the three months ended September 30, 2020, we offered our customers additional discounts and promotions which resulted in increases in cost of goods sold as a percentage of net revenue. As a result of these increased discounts and promotions, cost of goods sold for Noni by NewAge decreased by only 4% in comparison to the decrease in net revenue of 15%.

2021.

 

3141

 

Cost of goods sold for the NewAgeDirect Store segment decreased by $3.9$5.7 million from $18.0$25.3 million for the threesix months ended SeptemberJune 30, 20192020 to $14.1$19.5 million for the threesix months ended SeptemberJune 30, 2020. Cost of goods sold for the Divested Businesses decreased by approximately $3.8 million from $7.0 million for the three months ended September 30, 2019 to $3.2 million for the three months ended September 30, 2020. This decrease for the three months ended September 30, 2020 was primarily attributable to a decrease in write downs related to excess and obsolete inventories of $1.3 million, and lower product costs associated with a 20% reduction in net revenue for the Divested Businesses. Cost of goods sold for the Retained Businesses decreased by $0.1 million from $11.0 million for the three months ended September 30, 2019 to $10.9 million for the three months ended September 30, 2020.2021. The decrease in cost of goods sold for the Direct Store segment was due to the elimination of cost of goods sold related to the Divested Business which amounted to $11.3 million for the six months ended June 30, 2020. This decrease was partially offset by an increase in cost of goods sold for the Retained BusinessesBusiness of $5.6 million or 40%, from $13.9 million for the six months ended June 30, 2020 to $19.5 million for the six months ended June 30, 2021. The increase in cost of goods sold for the Retained Business was primarily attributable to a reduction in write-offs related to cost of goods sold variances and excess and obsolete inventories of $0.6 million, partially offset by higher product costs associated with a 15%the 36% increase in net revenue.revenue discussed above.

Gross profit. Gross profit decreasedincreased from $40.3$79.6 million for the threesix months ended SeptemberJune 30, 20192020 to $37.5$171.2 million for the threesix months ended SeptemberJune 30, 2020, a decrease2021, an increase of $2.8$91.6 million or 7%115%. ConsolidatedThe increase in gross margin increased from 58%profit consisted of $89.9 million attributable to the Direct / Social Selling segment and $1.7 million attributable to the Direct Store segment. The improvement in gross profit for the threeDirect / Social Selling segment was attributable to gross profit generated by Ariix for $95.8 million and $1.4 million for Aliven, for a total of $97.2 million for the six months ended SeptemberJune 30, 20192021. These increases attributable to 60% for the three months ended September 30, 2020. We hadour newly acquired businesses were partially offset by a decreasereduction in gross profit of $7.8$7.3 million or 18%related to the legacy business of the Direct / Social Selling segment that resulted from lower sales caused by the COVID-19 pandemic. Gross margin for the Noni by NewAgelegacy business of the Direct / Social Selling segment due to net revenue that decreased by 15%.was 77% for the six months ended June 30, 2021 and 78% for the six months ended June 30, 2020. For the threesix months ended SeptemberJune 30, 2020, we offered our customers additional discounts and promotions in order to stimulate sales. As a result, our2021, the aggregate gross margin for the Noni by NewAge segment deceasedbusinesses acquired from 79% for the three months ended September 30, 2019 to 76% for the three months ended September 30, 2020.Ariix and Aliven was 72%.

 

For the NewAgeThe Direct Store segment we hadaccounted for an increase in gross profit of $5.0$1.7 million due to net revenue that increasedfor the six months ended June 30, 2021, driven by $1.1 million and cost of goods sold that decreased by $3.923% whereas net revenue decreased by only 14%. The Divested Business accounted for approximately $0.6 million as discussed above. The increase inof negative gross profit of $5.0 million for the NewAge segment was driven by net revenue that increased by 8%six months ended June 30, 2020, whereas costthe Retained Business generated an additional $1.1 million of goods sold decreased by 22%. Gross margingross profit for the entire NewAge segment increased from a loss of 20% for the threesix months ended SeptemberJune 30, 2019 to income of 13% for the three months ended September 30, 2020.2021. The Divested Businesses accounted for negativeRetained Business generated gross profit of approximately $0.8 million and $4.0 million for the three months ended September 30, 2020 and 2019, respectively. The Retained Businesses accounted for gross profit of approximately $1.0$4.7 million and gross margin of 8%25% for the threesix months ended SeptemberJune 30, 2019,2020, compared to gross profit of $2.8$5.8 million and gross margin of 20%23% for the threesix months ended SeptemberJune 30, 2020.2021.

 

Consolidated gross margin increased from 63% for the six months ended June 30, 2020 to 69% for the six months ended June 30, 2021. Gross margin for the Direct / Social Selling segment decreased from 78% for the six months ended June 30, 2020 to 74% for the six months ended June 30, 2021. Gross margin for the Direct Store segment increased from 14% for the six months ended June 30, 2020 to 23% for the six months ended June 30, 2021.

Commissions. Commissions were $21.2$90.7 million for the threesix months ended SeptemberJune 30, 20192021 compared to $17.5$37.9 million for the threesix months ended SeptemberJune 30, 2020, a decreasean increase of $3.7$52.8 million. Substantially allFor the six months ended June 30, 2021, commissions for the Direct / Social Selling segment included an aggregate of this reduction was attributable$57.3 million related to the Nonibusinesses acquired from Ariix and Aliven, partially offset by NewAge segment, which decreased from $20.8 million for the three months ended September 30, 2019 to $16.9 million for the three months ended September 30, 2020. The decreasea reduction in commissions for our legacy businesses of $3.9 million$4.5 million. Commissions for our legacy businesses decreased by 12%, primarily due to the Noni by NewAge segment was primarily attributable to lowerdecrease in net revenue for the three months ended September 30, 2020. Under Noni by NewAge’s business model,legacy portion of the Direct / Social Selling segment of 8% and the elimination of commissions typically range between 37% and 39% of net revenue whereas commissions forrelated to the NewAge segment are typically about 3% of net revenue.Divested Business.

 

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”)&A expenses increased from $26.1$56.9 million or 45% of net revenue for the threesix months ended SeptemberJune 30, 20192020 to $28.0$79.9 million or 32% of net revenue for the threesix months ended SeptemberJune 30, 2020,2021, an increase of $1.9 million. This$23.0 million that was partially offset by a reduction of $4.4 million related to the Divested Business. The reduction in SG&A as a percent of net revenue reflects the leverage of a consolidated growing business. The net increase in our SG&A expensesof $23.0 million was attributable to highercomprised of increases in compensation and benefits expense of $14.0 million, professional fees of $1.5$5.0 million, including higher due diligence costs for investigationtransaction fees related to the sale of acquisition opportunities, severance costsproducts of $2.2 million, communications expenses of $1.7 million, occupancy costs of $0.7$1.1 million, and communications coststravel and other business expenses of $0.1 million. These increases in SG&A expense totaled $4.0$0.4 million, and were partially offset by decreasesis net of a reduction in marketing costs of $0.8 million, a decrease in cash-based compensation and benefits of $0.9 million, primarily due to savings from the restructuring plans discussed below, travel costs of $0.3 million, and credit card transaction fees of $0.1$1.4 million.

 

DuringFor the fourth quarter of 2019 and the first quarter of 2020, we incurred increased compensation and benefits for newly-hired executives and employees engaged in marketing initiatives, whereby no compensation was incurred for these employees for the threesix months ended SeptemberJune 30, 2019. The increase in compensation and benefits related to these employees was offset by savings from the restructuring plans discussed below, resulting in a net decrease in cash-based compensation and benefits of $0.9 million for the three months ended September 30, 2020. In August 2020, we initiated a restructuring plan that resulted in the termination of2021, approximately 50 employees. Total severance costs of $1.7 million were incurred under this restructuring plan for the three months ended September 30, 2020. When combined with an earlier restructuring plan initiated in April 2020 that resulted in termination of approximately 100 employees, the annualized compensation cost for all 150 employees amounts to approximately $9.6 million. In addition, the Divested Businesses accounted for approximately $1.3 million and $1.1$28.9 million of our SG&A forexpenses related to the threebusinesses acquired from Ariix and Aliven, including compensation and benefits costs of $16.5 million, professional fees of $3.3 million, transaction fees related to the sale of products of $2.3 million, occupancy costs of $1.5 million, and communications expenses of $1.6 million. For the six months ended SeptemberJune 30, 20202021, SG&A expenses related to corporate overhead activities and 2019, respectively.our legacy businesses decreased by $5.8 million which was primarily due to a reduction in marketing costs and compensation and benefits.

 

GainDepreciation and amortization expense. Depreciation and amortization expense included in operating expenses increased from change in fair value of earnout obligations. In connection with the Morinda business combination that closed in December 2018, 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 least $20.0$3.5 million for the yearsix months ended December 31, 2019. The estimated fair value of the Milestone Dividend decreased from $6.4 million as of June 30, 20192020 to approximately $0.2 million as of September 30, 2019. This reduction in the fair value of the Milestone Dividend resulted in a gain of approximately $6.2$9.4 million for the threesix months ended SeptemberJune 30, 2019. For the three months ended September 30, 2020, we did not have any gain or loss on the change2021, an increase of $5.9 million. This increase was primarily attributable to amortization expense of $5.7 million related to identifiable intangible assets of $131.8 million acquired in fair value of earnout obligations.our business combination with Ariix in November 2020.

42

Loss on disposal of Divested Businesses. Business.On In 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 also incurred combined operatingBased on recent communications with the Buyer, we determined that collection of a $2.5 million note receivable and accrued interest of $0.2 million is unlikely. Additionally, we were informed that BWR refuses to pay approximately $1.6 million of supplier obligations that we may ultimately be responsible to settle. Accordingly, we recognized additional losses related to the disposal of $2.1 million and $5.6the Divested Business of $4.3 million for the threesix months ended SeptemberJune 30, 2020 and 2019, respectively.2021.

 

Depreciation and amortizationInterest expense. Depreciation and amortizationInterest expense included in operating expenses decreasedincreased from $2.2$1.2 million for the threesix months ended SeptemberJune 30, 20192020 to $1.8$6.2 million for the threesix months ended SeptemberJune 30, 2020, a decrease2021, an increase of $0.4$5.0 million. This decrease was primarily attributable to impairment charges of $21.7 million recorded in December 2019 that eliminatedFor the net carrying value of substantially all of the intangible assets of the NewAge segment.

32

Interest expense. Interest expense decreased by $0.2 million from $0.7 million for the threesix months ended SeptemberJune 30, 20192021, interest expense of $6.2 million includes (i) interest expense paid in cash of $1.2 million based on the contractual rate of 8.0% under our Senior Notes, (ii) accretion of discount of $4.4 million related to $0.5 million for the three months ended September 30, 2020. For the three months ended September 30, 2020,Senior Notes, and (iii) imputed interest expense of $0.5 million related to our deferred lease financing obligation and business combination obligations.

As of December 31, 2020, the overall effective interest rate on the Senior Notes was approximately 42.3%, including the 8.0% stated rate. On January 4, 2021, the lenders agreed to amend the Senior Notes 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. This amount was accounted for as a modification of the Senior Notes that resulted in an additional discount of $1.1 million. This amendment fee and other lender-initiated changes that affect the timing and amount of principal payments are accounted for prospectively as a revision of the effective interest rate. Accordingly, as of June 30, 2021, the overall effective interest rate was approximately 46.8%, including the 8.0% stated rate.

For the six months ended June 30, 2020, interest expense was primarily attributable to (i) interest expense of $0.2 million based on the contractual rates under theour former EWB Credit Facility of $0.2 million based on a weighted average interest rate of 5.3% and weighted average borrowings outstanding of $14.0 million, (ii) accretion of discount and amortization of debt issuance costs for a total of $0.2 million related to the Morinda business combination liabilities and the EWB Credit Facility, (iii) imputed interest expense of $0.1 million related to our deferred lease financing obligation. Based on the 1.0% contractual rate, interest expense related to our PPP Loan amounted to approximately $14,000 for the three months ended September 30, 2020.

For the three months ended September 30, 2019, interest expense of $0.7 million was attributable to (i) interest expense under the EWB Credit Facility of $0.2 million based on a weighted average interest rate of 5.3% and weighted average borrowings outstanding of $15.2$14.3 million, (ii) accretion of discount for an aggregatea total of $0.2 million, related to the Morinda business combination liabilities and the EWB Credit Facility, and (iii) imputed interest expense of $0.1 million related to our deferred lease financing obligation and (iv) cash settlements under our interest rate swap agreement, unused line fees and other interest charges of $0.2 million.

Interest and other income (expense), net. For the three months ended September 30, 2020, we had interest and other income (expense), net that resulted in income of $0.3 million compared to expense of $48,000 for the three months ended September 30, 2019. Interest and other income (expense), net for the three months ended September 30, 2020 consisted of foreign exchange gains of $0.2 million and interest income of $0.1 million.

Income tax expense. For the three months ended September 30, 2020, we recognized income tax expense of $0.6 million, which consisted of foreign income taxes associated with profitable foreign markets. For the three months ended September 30, 2019, we recognized income tax expense of $6.7 million, which consisted of foreign tax expense of $2.2 million, and the establishment of a domestic valuation allowance of $4.9 million. The valuation allowance was partially offset by $0.4 million related to the acquisition of BWR.

33

Nine months ended September 30, 2020 and 2019

Our unaudited condensed consolidated statements of operations for the nine months ended September 30, 2020 and 2019 are presented below (dollars in thousands):

  2020  2019  Change  Percent 
             
Net revenue $189,049  $194,483  $(5,434)  (3)%
Cost of goods sold  71,952   73,962   (2,010)  (3)%
                 
Gross profit  117,097   120,521   (3,424)  (3)%
Gross margin  62%  62%        
                 
Operating expenses:                
Commissions  55,378   58,830   (3,452)  (6)%
Selling, general and administrative  84,868   81,121   3,747   5%
Gain from change in fair value of earnout obligations  -   (12,909)  12,909   (100)%
Loss on disposal of Divested Businesses  3,446   -   3,446   n/a 
Impairment of right-of-use assets  400   1,500   (1,100)  (73)%
Depreciation and amortization expense  5,293   6,494   (1,201)  (18)%
                 
Total operating expenses  149,385   135,036   14,349   11%
                 
Operating loss  (32,288)  (14,515)  (17,773)  122%
                 
Non-operating income (expense):                
Interest expense  (1,693)  (3,129)  1,436   (46)%
Gain (loss) from sale of property and equipment  (128)  6,357   (6,485)  (102)%
Gain (loss) from change in fair value of derivatives  (392)  304   (696)  (229)%
Interest and other income (expense), net  1,082   (233)  1,315   (564)%
                 
Loss before income taxes  (33,419)  (11,216)  (22,203)  198%
Income tax expense  (1,886)  (12,768)  10,882   (85)%
                 
Net loss $(35,305) $(23,984) $(11,321)  47%

The Divested Businesses were components of our NewAge segment and are included in the unaudited condensed consolidated statements of operations shown above. Presented below is a summary of the combined results of operations of the Divested Businesses for the period from January 1, 2020 until they were sold on September 24, 2020, and for the nine months ended September 30, 2019 (in thousands):

  2020  2019 
       
Net revenue $9,603  $7,120 
Cost of goods sold  10,975   14,048 
Gross loss  (1,372)  (6,928)
         
Operating expenses:        
Commissions  125   67 
Selling, general and administrative  5,772   1,790 
Depreciation and amortization expense  85   1,168 
         
Net loss $(7,354) $(9,953)

34

Presented below is our net revenue, cost of goods sold, gross profit (loss) and gross margin by segment for the nine months ended September 30, 2020 and 2019 (dollars in thousands):

  Noni by NewAge Segment  NewAge Segment 
  2020  2019  Change  Percent  2020  2019  Change  Percent 
                         
Net revenue $143,556  $155,125  $(11,569)  (7)% $45,493  $39,358  $6,135   16%
Cost of goods sold  32,582   33,663   (1,081)  (3)%  39,370   40,299   (929)  (2)%
                                 
Gross profit (loss) $110,974  $121,462  $(10,488)  (9)% $6,123  $(941) $7,064   (751)%
Gross margin  77%  78%          13%  (2)%        

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 Businesses and the Retained Businesses of the NewAge segment.

Net Revenue. Net revenue decreased from $194.5 million for the nine months ended September 30, 2019 to $189.1 million for the nine months ended September 30, 2020, a decrease of $5.4 million or 3%. For the nine months ended September 30, 2020, the decrease in net revenue was primarily attributable to a decrease in net revenue of $11.6 million for the Noni by NewAge segment, partially offset by an increase in net revenue of $6.1 million for the NewAge segment.

Net revenue for the Noni by NewAge segment decreased by $11.6 million from $155.1 million for the nine months ended September 30, 2019 to $143.6 million for the nine months ended September 30, 2020. We believe the decrease in net revenue for the Noni by NewAge segment was primarily caused by lower quantities of products purchased by consumers during the COVID-19 pandemic and the related Orders that were in effect beginning in March 2020. Our direct-to-consumer selling model typically relies heavily on the use of our IPC sales force in close contact with our customers. However, the COVID-19 pandemic required alternative selling approaches, such as through social media, which is less effective than in-person selling in certain regions. As a result, Noni by NewAge’s net revenue decreased by 17% in China, 4% in Japan, and 12% in all other foreign countries as a group. However, Noni by NewAge’s net revenue in the United States increased by 9% for the nine months ended September 30, 2020. In addition to the impact of COVID-19, we believe our net revenue in China was negatively impacted by the introduction in May 2020 of a new compensation plan for our IPCs, which typically results in tentative buying patterns until the mechanics of the new plan are fully understood.

Net revenue for the NewAge segment increased by $6.1 million from $39.4 million for the nine months ended September 30, 2019 to $45.5 million for the nine months ended September 30, 2020. For the nine months ended September 30, 2020, net revenue for the Divested Businesses increased by approximately $2.5 million from $7.1 million for the nine months ended September 30, 2019 to $9.6 million for the nine months ended September 30, 2020. This increase in net revenue for the Divested Businesses was due to a $6.7 million increase in net revenue related to BWR that was acquired in July 2019, partially offset by a reduction of $4.2 million in net revenue related to our U.S. retail brands. Net revenue for the Retained Businesses increased by $3.7 million from $32.2 million for the nine months ended September 30, 2019 to $35.9 million for the nine months ended September 30, 2020. The increase in net revenue for the Retained Businesses was primarily attributable to increased net revenue by our DSD business due to new customers and expansion of the product portfolio.

Cost of goods sold. Cost of goods sold decreased from $74.0 million for the nine months ended September 30, 2019 to $72.0 million for the nine months ended September 30, 2020, a decrease of $2.0 million. For the nine months ended September 30, 2020, $1.1 million of this decrease was attributable to the Noni by NewAge segment and $0.9 million was attributable to the NewAge segment.

The $1.1 million reduction in cost of goods sold for the Noni by NewAge segment represents a reduction of 3% for the nine months ended September 30, 2020. For the nine months ended September 30, 2020, the Noni by NewAge segment recognized an increase in excess and obsolete and other inventory variances of $0.9 million compared to the nine months ended September 30, 2019. For the nine months ended September 30, 2019, the Noni by NewAge 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 nine months ended September 30, 2019. In order to partially mitigate the effects of COVID-19 for the nine months ended September 30, 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 nine months ended September 30, 2019 contributed to a smaller decrease in cost of goods sold of 3%, whereas net revenue for Noni by NewAge decreased by 7%.

Cost of goods sold for the NewAge segment decreased by $0.9 million from $40.3 million for the nine months ended September 30, 2019 to $39.4 million for the nine months ended September 30, 2020. Cost of goods sold for the Divested Businesses decreased by approximately $3.0 million from $14.0 million for the nine months ended September 30, 2019 to $11.0 million for the nine months ended September 30, 2020. This decrease was primarily attributable to a reduction in write-offs related to cost of goods sold variances and excess and obsolete inventories of $3.2 million, partially offset by higher product costs associated with a 35% increase in net revenue for the Divested Businesses. Cost of goods sold for the Retained Businesses increased by $2.1 million or 8%, from $26.3 million for the nine months ended September 30, 2019 to $28.4 million for the nine months ended September 30, 2020. The increase in cost of goods sold for the Retained Businesses was primarily attributable to higher product costs associated with an 11% increase in net revenue.

35

Gross profit. Gross profit decreased from $120.5 million for the nine months ended September 30, 2019 to $117.1 million for the nine months ended September 30, 2020, a decrease of $3.4 million or 3%. This decrease in gross profit was attributable to the Noni by NewAge segment that decreased by $10.5 million or 9%, partially offset by an improvement in gross profit for the NewAge segment of $7.1 million. The reduction in gross profit and gross margin for the Noni by NewAge segment was due to a 7% reduction in net revenue due to the COVID-19 pandemic in combination with a 3% decrease in cost of goods sold due to our increased use of discounts and promotions.

The NewAge segment accounted for an increase in gross profit of $7.1 million, driven by net revenue that increased by 16% whereas cost of goods sold decreased by 2%. The Divested Businesses accounted for approximately $1.4 million and $6.9 million of negative gross profit for the nine months ended September 30, 2020 and 2019, respectively. The Retained Businesses accounted for gross profit of approximately $6.0 million and gross margin of 19% for the nine months ended September 30, 2019, compared to gross profit of $7.5 million and gross margin of 21% for the nine months ended September 30, 2020.

 

For the ninesix months ended September 30, 2020 and 2019, consolidated gross margin was unchanged at approximately 62%. Gross margin for the Noni by NewAge segment declined by 1%, whereas gross margin for the NewAge segment increased from negative 2% for the nine months ended September 30, 2019 to 13% for the nine months ended September 30, 2020.

Commissions. Commissions were $58.8 million for the nine months ended September 30, 2019 compared to $55.4 million for the nine months ended September 30, 2020, a decrease of $3.5 million. For the nine months ended September 30, 2020, commissions for the Noni by NewAge segment decreased by $3.9 million or 7% that was consistent with the 7% decrease in net revenue discussed above. This decrease was partially offset by higher commissions related to the NewAge segment of $0.4 million that was associated with increased net revenue for that segment.

Selling, general and administrative expenses. SG&A expenses increased from $81.1 million for the nine months ended September 30, 2019 to $84.9 million for the nine months ended September 30, 2020, an increase of $3.8 million. This increase was comprised of (i) professional fees of $4.1 million that was driven by higher auditing, consulting costs and legal fees and higher due diligence costs for investigation of acquisition opportunities, (ii) severance costs of $2.6 million, (iii) an increase in general business expenses of $1.1 million that was partially driven by higher director and officer insurance costs in 2020, (iv) an increase in cash-based compensation and benefits of $0.4 million, and (iv) communications expense of $0.2 million. These increases in SG&A expense totaled $8.4 million and were partially offset by reductions in stock-based compensation expense of $1.8 million, occupancy costs of $1.1 million, marketing costs of $1.2 million, and travel costs of $0.5 million. For the nine months ended September 30, 2020, cash-based compensation and benefits increased due to (i) BWR being included in our results for nearly nine months in 2020 and less than three months in 2019, (ii) increased compensation and benefits for newly-hired executives and employees engaged in marketing initiatives that were hired in the fourth quarter of 2019 and the first quarter of 2020, whereas no compensation was incurred in 2019 for these employees. These increases were partially offset by savings from the restructuring plans initiated in April and August 2020, resulting in a net increase in cash-based compensation and benefits of $0.4 million for the nine months ended September 30, 2020.

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 $9.6 million. In addition, the Divested Businesses accounted for approximately $5.8 million and $1.8 million of our SG&A for the nine months ended September 30, 2020 and 2019, respectively. Accordingly, we expect our SG&A expenses will decrease in future periods.

Gain from change in fair value of earnout obligations. 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 least $20.0 million for the year ended December 31, 2019. The estimated fair value of the Milestone Dividend decreased by approximately $12.9 million from $13.1 million as of December 31, 2018 to approximately $0.2 million as of September 30, 2019. This reduction in the fair value of the Milestone Dividend resulted in a gain of approximately $12.9 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, we did not have any gain or loss on the change in fair value of earnout obligations.

Loss on disposal of Divested Businesses. 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 $9.9 million for the nine months ended September 30, 2020 and 2019, respectively.

Impairment expense. Impairment expense related to right-of-use (“ROU”) assets decreased from $1.5 million for the nine months ended September 30, 2019 to $0.4 million for the nine months ended September 30, 2020, a decrease of $1.1 million. In June 2019, we began attempting to sublease a portion of our ROU assets previously used for warehouse space that were no longer needed for current operations. As a result, an impairment evaluation was completed that resulted in an impairment charge of $1.5 million for the nine months ended September 30, 2019. This evaluation was based on the expected time to obtain a suitable subtenant and current market rates for similar commercial properties. As of September 30, 2020, we are continuing our efforts to obtain a subtenant for this space. Due to longer than expected timing to obtain a subtenant that we believe was at least partially attributable to the economic shut down related to COVID-19, we completed an updated impairment evaluation that resulted in an additional impairment charge of $0.4 million for the nine months ended September 30, 2020. It is possible that further impairment charges will be incurred if we are not able to locate a subtenant in the next several months, or if the sublease terms are less favorable than our current expectations.

36

Depreciation and amortization expense. Depreciation and amortization expense included in operating expenses decreased from $6.5 million for the nine months ended September 30, 2019 to $5.3 million for the nine months ended September 30, 2020, a decrease of $1.2 million. This decrease was primarily attributable to impairment charges of $21.7 million recorded in December 2019 that eliminated the net carrying value of substantially all of the intangible assets of the NewAge segment.

Interest expense. Interest expense decreased from $3.1 million for the nine months ended September 30, 2019 to $1.7 million for the nine months ended September 30, 2020, a decrease of $1.4 million. For the nine months ended September 30, 2020, interest expense of $1.7 million was primarily attributable to (i) interest expense based on the contractual rates under the EWB Credit Facility of $0.6$0.4 million based on a weighted average interest rate of 5.3% and weighted average borrowings outstanding of $14.3$14.5 million, for the nine months ended September 30, 2020, (ii) accretion of discount for a total of $0.6$0.3 million related to the Morinda business combination liabilities and the EWB Credit Facility, (iii) imputed interest expense of $0.5 million related to our deferred lease financing obligation. Based on the 1.0% contractual rate, interest expense related to our PPP Loan amounted to approximately $32,000 for the nine months ended September 30, 2020.

For the nine months ended September 30, 2019, interest expense of $3.1 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 write-off of debt issuance costs of $0.5 million related to the Siena Revolver, (iii) accretion of discount of $1.2 million related to the Morinda business combination liabilities and the EWB Credit Facility, (iv) imputed interest expense of $0.3 million related to our deferred lease financing obligation, (iv) cash settlements under our interest rate swap agreement of $0.1 million, and (v) unused line fees and other interest expense under the EWB Credit Facilitycharges of $0.4 million based on a weighted average interest rate of 5.4% and weighted average borrowings outstanding of $10.7 million for the nine months ended September 30, 2019.$0.1 million.

 

Gain (loss) from sale of property and equipment. On March 22, 2019, we entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $57.0 million of the land and building in Tokyo that serves as the corporate headquarters of our Japanese subsidiary. Concurrently with the sale, we entered into a lease of this property for an expected term of 20 years with an extension option for an additional seven years. The sale of this property resulted in a gain of $24.1 million. We determined that $17.6 million of the gain was the result of above-market rent inherent in the leaseback arrangement. This portion of the gain is being accounted for as a lease financing obligation whereby the gain will result in a reduction of rent expense of approximately $0.9 million per year over the 20-year lease term. The remainder of the gain of $6.4 million was attributable to the highly competitive process among the entities that bid to purchase the property and, accordingly, was recognized as a gain in our condensed consolidated statements of operations for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, a loss of $0.1 million was recognized due to the sale of equipment.

Gain (loss) on change in fair value of derivatives. For the ninesix months ended SeptemberJune 30, 2020,2021, we recognized a lossgain from the changechanges in fair value of derivatives of $0.4$21.2 million whereas we recognizedcompared to a gainloss of $0.3 million for the ninethree months ended SeptemberJune 30, 2019. In July 2019,2020. This gain of $21.2 million consisted of (i) $12.8 million related to the Ariix business combination derivative liabilities discussed in Note 3 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, and (ii) $8.4 million related to warrants issued on February 16, 2021, as discussed in Note 7 to our unaudited condensed consolidated financial statements.

The fair value of derivative liabilities can be extremely volatile from period to period since the related valuations are heavily influenced by the current market price of our Common Stock. The closing price for shares of our Common Stock decreased by 15% from $2.63 per share as of December 31, 2020, to $2.23 per share as of June 30, 2021. This 15% decrease in the value of our shares was the principal factor that reduced fair value and resulted in the $12.8 million gain related to the Ariix business combination derivative liabilities for the six months ended June 30, 2021. The closing price for shares of our Common Stock decreased by 37% from $3.52 per share as of February 16, 2021 when the warrants were issued, to $2.23 per share as of June 30, 2021. This 37% decrease in the value of our shares was the principal factor that resulted in the $8.4 million gain related to the warrant derivative liability for the six months ended June 30, 2021.

For the six months ended June 30, 2020, we entered intowere subject to an interest rate swap agreement entered into in connection with EWB. Thisour former EWB Credit Facility. The fair value of this derivative liability increased by $0.3 million due to a decline in interest rates which resulted in our recognition of a loss for $0.3 million. The swap agreement providesprovided 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%. For the nine months ended September 30, 2020, we had an unrealized loss of $0.3 million fromWe terminated this interest rate swap agreement due to a declinewhen we terminated the EWB Credit Facility in interest rates, and a loss of $0.1 million related to an embedded derivative in our EWC Credit Facility. For the nine months ended September 30, 2019, we recognized a gain of $0.5 million from the change in fair value of embedded derivatives related to the Siena Revolver that was terminated in March 2019, partially offset by an unrealized loss from our interest rate swap agreement of approximately $0.2 million.

December 2020.

 

43

Interest and other income (expense), net. Interest and other income (expense), net amounted to incomea loss of $1.1$0.4 million for the ninesix months ended SeptemberJune 30, 20202021 and a net expenseincome of $0.2$0.7 million for the ninesix months ended SeptemberJune 30, 2019.2020. For the ninesix months ended SeptemberJune 30, 2020,2021, interest and other income (expense), net was primarily comprised of foreign exchange losses of $0.7 million, and a loss of $0.1 million related to the sale of property and equipment, partially offset by interest income of $0.3 million. Interest and other income (expense), net for the six months ended June 30, 2020 consisted of foreign exchange gains of $0.7$0.6 million and interest income of $0.2 million. For the nine months ended September 30, 2019, we incurred other debt financing expenses$0.1 million, partially offset by a loss of $0.1 million related to the Siena Revolversale of $0.2 million.

property and equipment.

 

37

Income tax expense. For the ninesix months ended SeptemberJune 30, 2021 and 2020, we recognized income tax expense of $1.9 million whichand $1.3 million, respectively. Income tax expense primarily consisted of foreign income taxes associated with profitable foreign markets. Due to

Inflation and changing prices. For the establishment of a valuation allowance applied against our domestic net deferred tax assets, we did not recognize a domestic income tax benefit for the ninesix months ended SeptemberJune 30, 2020. For2021 and 2020, the nine months ended September 30, 2019, we recognized income tax expenseimpact of $12.8 million, which consistedinflation and changing prices have not had a significant impact on our net revenue, cost of the establishment of a valuation allowance for $8.3 milliongoods sold and foreign income tax expense of $4.9 million. The valuation allowance for the nine months ended September 30, 2019 was partially offset by $0.4 million from the acquisition of BWR. 

operating expenses.

Liquidity and Capital Resources

 

Overview

 

For the six months ended June 30, 2021, we incurred an operating loss of $13.2 million and cash used in our operating activities was $5.6 million. For the year ended December 31, 2020, we incurred an operating loss of $34.9 million and cash used in our operating activities was $34.3 million. As of SeptemberJune 30, 2020,2021, we had an accumulated deficit of $152.2 million.

In February 2021, we entered into a securities purchase agreement in connection with a private placement of units that consisted of an aggregate of approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares of Common Stock. At the closing, we received net proceeds of approximately $53.8 million. As of June 30, 2021, we had cash and cash equivalents of $26.9$80.9 million and the current portion of restricted cash was $5.6 million, for a total of $86.5 million. As of June 30, 2021, we had working capital of $21.3$53.9 million. For

During the nine months ended September12-month period ending on June 30, 2020, we incurred a net loss of $35.3 million and we used2022, cash in our operating activities of $29.9 million. For the nine months ended September 30, 2020, approximately $13.1payments will be required to settle certain obligations, including up to $25.1 million of principal and interest under our cash used in operating activities was attributable to March 2020 income tax payments related to the sale leaseback of our Tokyo, Japan land and building that was entered into in March 2019. As of September 30, 2020, we have debt and lease obligations due during the 12-months ending September 30, 2021 that includeSenior Notes discussed below, operating lease payments of $8.3$9.1 million, and principal payments under the EWB Credit Facilitydeferred consideration related to business combinations of $1.5 million (which will be paid from our restricted cash deposits).

We entered into the third amendment and waiver (the “Third Amendment”) to the EWB Credit Facility on March 13, 2020. Beginning in March 2020, the Third Amendment required us to deposit an initial amount of $15.1 million in restricted cash balances with EWB, which was reduced to $14.1 million as of September 30, 2020. In addition, for any future amounts borrowed under the EWB Revolver, we are required to increase restricted cash deposits by the corresponding amount of the borrowings. The Third Amendment required equity infusions of at least $15.0 million for the first six months of 2020. We complied with this requirement through the sale of 16.1 million shares of Common Stock for gross proceeds of $25.8 million through June 30, 2020 under our ATM Agreement.

On July 6, 2020, we entered into the Fourth Amendment (the “Fourth Amendment”) to the EWB Credit Facility. The Fourth Amendment reduced the amount of restricted cash that we are required to maintain in China with a corresponding increase in restricted cash in the United States. The Fourth Amendment also permitted our repurchase of shares of our Common Stock valued at approximately $1.2 million in July 2020, with a corresponding increase in required cash equity infusions from $30.0 million to approximately $31.2 million by December 31, 2020. After deducting gross proceeds of $25.8 million received for the nine months ended September 30, 2020, remaining gross equity infusions of $5.4 million are required by December 31, 2020.

On April 14, 2020, we entered into a loan pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act with EWB in an aggregate principal amount of approximately $6.9 million (the “PPP Loan”). We may apply to EWB for forgiveness of the loan based on our actual expenditures for payroll, rent, interest and utilities during the permitted period following the funding of the loan. To the extent that all or part of the loan is not forgiven, we are required to pay interest at 1.0% through the maturity date in April 2022.

On September 30, 2020, we entered into the Amended Merger Agreement discussed below under Ariix Merger Agreement. Under the Amended Merger Agreement, on the closing date we will be required to make a cash payment of $20.0 million and issue 19.0 million shares of Common Stock. Subsequent to the closing date, we will be required to transfer additional cash or equity consideration up to $173.3$1.1 million. Subject to approval by our stockholders, we may be able to settle all or part of the post-closing consideration by issuing shares of our Common Stock. In order to fund the required $20.0 million cash payment due on the closing date, we are currently evaluating various alternatives, including refinancing of our EWB Credit Facility with a third party lender, which would give us the ability to pay off the EWB facility in full and make the $20.0 closing cash payment to the Ariix stockholders.

We believe our existing cash and cash equivalents of $26.9$80.9 million combined with expected future equity net offering proceeds underand the ATM Agreement, the potential refinancingcurrent portion of our EWB Credit Facility, and futurerestricted cash expected to be generated from operations,of $5.6 million will be sufficient to fund business combination payments, debt and leaseour contractual obligations and working capital requirements for the next 12 months. There are no assurances that we will be able to obtain additional funding by refinancing the EWB Credit Facility, equity offerings, including under the ATM Agreement, and debt financings in the future. Even if these financing sources are available, they may be on terms that are not acceptable to our board of directors and stockholders. Accordingly, we may not be able to effect the closing of the Acquisition of Ariix.

at least through August 2022.

38

 

Please refer to the following sections below for further discussion of the terms of the EWB Credit Facility, the ATM Agreement, the Amended Merger Agreement,about our recent financing activities and the PPP Loan.

business combination obligations.

East West Bank Credit Facility

February 2021 Private Placement

 

On March 29, 2019,February 16, 2021, we entered into a credit facilitysecurities purchase agreement in connection with East West Banka private placement for the issuance of an aggregate of approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares (the “EWB Credit Facility”“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 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 $53.8 million.

The EWB Credit Facility matureswarrants have an initial exercise price of $5.00 per share, subject to adjustment in certain circumstances. The warrants are exercisable until March 29, 2024. In the event of certain fundamental transactions, the holders of the warrants could be entitled to a net cash settlement whereby the warrants are not considered to be indexed to our shares of Common Stock. Accordingly, the warrants are required to be recorded at fair value and classified as derivative liabilities. The net proceeds from the private placement of approximately $53.8 million were allocated to the initial fair value of the warrants for $14.1 million and the remainder of $39.7 million was allocated to the shares of Common Stock.

Pursuant to the registration rights agreement, we filed a registration statement covering the resale of the shares of Common Stock and the Warrant Shares that was declared effective by the SEC on March 29, 20232021 and that has continued to remain effective since that date. If we fail to maintain the effectiveness of the registration statement, the investors would be entitled to liquidated damages equal to 2.0% of the aggregate subscription amount on each 30-day anniversary of such failure.

44

Senior Notes

On November 30, 2020, we entered into a securities purchase agreement for a private placement of (i) 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million (the “Maturity Date”“Senior Notes”), (ii) 800,000 shares of Common Stock referred to as Commitment Shares, (iii) Class A Warrants to purchase 750,000 shares of Common Stock exercisable at $3.75 per share, and provides(iv) Class B Warrants to purchase 750,000 shares of Common Stock exercisable at $5.75 per share. 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 monthly.

For the months of February 2021 through April 2021, the holders of the Senior Notes requested that we make principal payments up to $1.0 million per month which were paid timely. Beginning in May 2021 and continuing for (i)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. The holders of the Senior Notes requested principal payments of $1.0 million in May 2021 and $2.0 million in June 2021 that we paid timely. The maturity date of the Senior Notes is on December 1, 2022. However, if the holders of the Senior Notes exercise their rights to demand the maximum principal payments permitted in each future month, the Senior Notes would be repaid in full by August 2022. We may prepay all or a term loan inportion of the initialoutstanding principal amount of $15.0the Senior Notes at any time, subject to a prepayment fee of 3.0% of the outstanding principal balance through December 1, 2021.

We were required to maintain restricted cash balances of $18.0 million (the “EWB Term Loan”)until February 2021. Beginning in February 2021, the requirement to maintain restricted cash balances was reduced to $8.0 million until such time and (ii) a $10.0to the extent that the outstanding stated principal balance of the Senior Notes is reduced below $8.0 million. Assuming the holders of the Senior Notes continue to exercise their rights to demand the maximum principal payments permitted in each month, the stated principal balance is expected to exceed $8.0 million revolving loan agreement (the “EWB Revolver”).until April 2022. As of SeptemberJune 30, 2020, we had outstanding borrowings2021, approximately $5.6 million of $13.6 million under the EWB Term Loan and no borrowings were outstanding under the EWB Revolver. this restricted cash balance is classified as a current asset since those funds may be utilized to make principal payments that are classified within current maturities of long-term debt.

Our obligations under the EWB Credit FacilitySenior Notes are secured by substantially all of our assets, including all personal property and guaranteed byall proceeds and products thereof, goods, contract rights and other general intangibles, accounts receivable, intellectual property, equipment, and deposit accounts and a lien on certain ofreal estate. The Senior Notes contain certain restrictions and covenants, which restrict our subsidiaries.

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 applicableability to outstanding borrowings under the EWB Credit Facility was 5.25%. Pursuant to the Third Amendment, the interest rate applicable to outstanding borrowings under the EWB Credit Facility increased from 0.5% to 2.0% in excess of the prime rate beginning on March 13, 2020. As of September 30, 2020, the prime rate was 3.25% 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. We may elect to prepay the EWB Term Loan before the Maturity Date on 10 business days’ notice to EWB subject to a prepayment fee of 1.0% of the principal balance of the EWB Term Loan for any prepayment through March 29, 2021. In the event the EWB Revolver is terminated prior to the Maturity Date,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 would be required to pay an early termination fee in the amount of 0.50% of the revolving line. The EWB Revolver also provides for an unused line fee equal to 0.50% per annum of the undrawn portion.

The EWB Credit Facility requires compliancecomply with certain financial covenants, including maintaining minimum cash, minimum adjusted EBITDA, minimum revenue, and restrictivea maximum ratio of cash in foreign bank accounts to cash in U.S. deposit accounts subject to account control agreements. As of June 30, 2021, we were in compliance with all covenants and includesrelated to the Senior Notes. The Senior Notes contain customary events of default. Key financial covenants include maintenance of minimum Adjusted EBITDA and a maximum Total Leverage Ratio (all as defined and set forth in the EWB Credit Facility). Under the Third Amendment, EWB waived all financial covenants for the 12-month period ended December 31, 2019. In addition, less stringent requirements will be applicable for future compliance with the minimum Adjusted EBITDA covenant, the maximum Total Leverage Ratio, and the Fixed Charge Coverage Ratio. Additionally, compliance with the maximum Total Leverage Ratio and the Fixed Charge Coverage Ratio (each as defined in the EWB Credit Facility) have been delayed until June 30, 2021. Finally, 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, and $10.0 million per year for each calendar year thereafter. Pursuant to the Third Amendment we are required to maintain restricted cash deposits as collateral, of which $12.6 million is classified in long-term assets and $1.5 million is classified in current assets as of September 30, 2020.

As of September 30, 2020, we were not in compliance with the minimum Adjusted EBITDA covenant under the EWB Credit Facility. On November 5, 2020, we entered into a Fifth Amendment and Waiver (the “Fifth Amendment”) to the EWB Credit Facility. Under the Fifth Amendment, EWB waived non-compliance by us due to our inability to achieve Adjusted EBITDA of at least $4.0 million for the three months ended September 30, 2020, and any default, that may have occurred as a result thereof. The Fifth Amendment also removed the requirement to comply with the minimum Adjusted EBITDA financial covenant in future periods.

At the Market Offering Agreement

On April 30, 2019, we entered into an At the Market Offering Agreement (the “ATM Agreement”) with Roth Capital Partners, LLC (the “Agent”), under which we may offer and sell from time to time up to an aggregate of $100 million in shares of our Common Stock (the “Placement Shares”), through the Agent. We have no obligation to sell any of the Placement Shares under the ATM Agreement. We intend to use the net proceeds from the offering for general corporate purposes, including working capital. For the nine months ended September 30, 2020, we sold an aggregate of approximately 16.1 million shares of Common Stock for gross proceeds of approximately $25.8 million. Total commissions and other offering costs deducted from the proceeds were $0.8 million resulting in net proceeds of $25.0 million.

Under the ATM Agreement, we agreedfailure to pay the Agent a commission equalany principal or interest when due, failure to 3%perform or observe covenants, breaches of the gross proceeds from the gross sales price of the Placement Shares up to $30.0 million, and 2.5% of the gross proceeds from the gross sales price of the Placement Shares in excess of $30.0 million. Through September 30, 2020, the cumulative gross proceeds totaled $46.5 million and all future commissions are at 2.5% of the gross proceeds. On May 8, 2020, the ATM Agreement was amended and restated to eliminate the previous termination date of April 30, 2020. As amended and restated, the ATM Agreement will terminate (i) when all of the Placement Shares have been sold, (ii) if we elect to terminate upon five business days’ notice to the Agent, (iii) at any time by the Agent, or (iv) by the mutual agreement of the parties.

39

Ariix Merger Agreement

On September 30, 2020, we entered into an Amended and Restated Agreement and Plan of Merger (the “Amended Merger Agreement”), by and among us, Ariel Merger Sub, LLC (“Merger Sub”), Ariel Merger Sub 2, LLC (“Merger Sub 2”), Ariix, LLC, certain members of Ariix (the “Sellers”), and the principal shareholder of Ariix who serves as sellers agent (the “Sellers’ Agent”), pursuant to which we agreed to acquire Ariix, which owns five brands in the e-commerce and direct selling channels (the “Acquisition”). The Amended Merger Agreement requires completion of an audit of Ariix’s financial statements for its last two fiscal years and contains customary representations, warranties, covenants and indemnities by the parties to such agreement and is subject to customary closing conditions, including, among other things, (i) the receipt of regulatory approvals, including applicable antitrust approvals, (ii) the accuracy of the respective parties’ representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults, material adverse effect defaults, change of management defaults, and (iii) material compliance bya change in control. Upon the parties with their respective covenantsoccurrence of an event of default, the outstanding obligations may be accelerated and obligations. In addition, the Amended Merger Agreement contains certain termination rights, including by us or the Sellers’ Agent in the event the closing has not occurred by November 30, 2020 (the “Outside Date”). Pursuant to the Amended Merger Agreement,become immediately due and payable and interest on the closing date (the “Closing Date”), Ariix will merge with Merger Sub, with Ariix as the surviving entity and be a wholly-owned subsidiaryobligations increases to an annual rate of us. Subsequently, Ariix will merge with and into Merger Sub 2, which will remain as a wholly-owned subsidiary of us.

On the Closing Date, we will be required to pay the Sellers $20.0 million in cash and issue 19.0 million shares of Common Stock. On the six-month anniversary of the Closing Date, we will be required to either pay $10.0 million in cash or issue shares of Common Stock with a value of $10.0 million. Upon receipt of stockholder approval, we will also be required to issue up to 37.1 million shares of Common Stock as follows (in thousands):

Timing of Contingent Share Issuances
30 days after stockholder approval:
Sellers Agent7,000
Ariix employee severance consideration1,667
Closing Date Anniversary:
12 Months25,500
14 Months2,900
Total37,067

If we fail to receive stockholder approval for the issuance of up to 37.1 million shares at up to three stockholder meetings held for the purpose of obtaining such approval, we will be required to pay up to $163.3 million in cash, consisting of approximately $141.0 million to the members of Ariix, $12.3 million to the Sellers’ Agent, and up to $10.0 million for severance payments. The cash payments to the members of Ariix and the Sellers’ Agent would be payable within 90 days of the third stockholders’ meeting. The number of shares of Common Stock issuable, or cash payable, is subject to adjustment based on the working capital of Ariix at the Closing Date.12.0%.

 

PPP LoanLoans

On April 14, 2020,Pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we entered into theobtained a PPP Loan with EWB in an aggregate principal amount ofApril 2020 for approximately $6.9 million. TheIn May 2020, Ariix obtained a PPP Loan bearsloan for approximately $2.8 million, and we assumed this obligation in connection with the business combination. These PPP Loans are unsecured and guaranteed by the SBA, bear interest at a fixed rate of 1.0% per annum and providesprovide for no principal payments untilmaturity dates on the maturity date in April 2022. The PPP Loan is unsecured and guaranteed bysecond anniversary of the U.S. Small Business Administration.respective loan agreements. We intend to applyapplied to the lender forrespective lenders to request forgiveness of theboth PPP Loan,Loans, with the amount whichamounts that may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by us during the permitted period beginning on April 10, 2020,as calculated in accordance with the terms of the CARES Act. OurThe eligibility for the PPP Loan,Loans, expenditures that qualify toward forgiveness, and the final balance of the PPP LoanLoans that the lender may approve for forgivenessbe forgiven are subject to audit and final approval by the SBA. To

In July 2021, we were informed that forgiveness of both PPP Loans was approved by the extent that all or partSBA for approximately $9.7 million including accrued interest through June 30, 2021. We will recognize forgiveness of the PPP LoanLoans during the third quarter of 2021 when the lender legally released us of our obligation to repay the PPP Loans.

45

Business Combination Liabilities

On November 16, 2020 (the “Ariix Closing Date”), we completed a business combination with Ariix, LLC (“Ariix”) for total purchase consideration of $155.1 million that consisted of (i) 19.7 million shares of Common Stock with a fair value of $54.2 million, (ii) $10.0 million payable in cash, (iii) fair value of $37.0 million related to 14.5 million shares of Common Stock that were subject to shareholder approval (the “Fixed Shares”), and (iv) fair value of $53.9 million related to up to 25.5 million shares of Common Stock that are subject to variation based on the outcome of working capital adjustments and potential indemnification claims (the “Variable Shares”). If our shareholders had failed to approve the issuance of the Fixed Shares and the Variable Shares, we would have been required to make cash payments of $163.3 million to the sellers (the “Sellers”) of Ariix. Accordingly, we accounted for the obligations to issue the Fixed Shares and the Variable Shares or pay $163.3 million of cash as derivative liabilities with an aggregate fair value of $90.9 million on the Ariix Closing Date. During the first quarter of 2021, we issued the 19.7 million shares of Common Stock and made the $10.0 million cash payment.

In January 2021, we entered into a letter of clarification (the “Clarification Letter”) that explained the intent of the parties, whereby a cash account of Ariix with a Chinese bank that had a balance of $3.1 million remained an asset of the Sellers, and the number of shares of our Common Stock issuable to the Sellers was reduced by 0.5 million shares. Based on the terms of the Clarification Letter, a $29.0 million working capital shortfall on the opening balance sheet of Ariix, and the failure of Ariix to repay $5.0 million of business combination liabilities prior to the closing date, the number of Variable Shares issuable to the Sellers has been reduced from 25.5 million shares to approximately 20.1 million shares. In addition, we were obligated to pay up to $10.0 million of interim merger consideration on May 16, 2021, but this payment was eliminated as a result of the working capital shortfall.

On May 14, 2021, our shareholders approved the issuance of the Fixed Shares and the Variable Shares. The Fixed Shares are issuable for 11.7 million shares as soon as the Sellers provide detailed issuance instructions, and the remaining 2.9 million shares are issuable by January 16, 2022. Since the conditions that required accounting for the Fixed Shares as a derivative liability were eliminated upon receipt of shareholder approval, the fair value of the Fixed Shares of $30.3 million as of May 14, 2021, has been reclassified from a liability to a component of stockholders’ equity.

The Variable Shares are issuable on November 16, 2021. However, the number of shares is not forgiven,subject to subsequent adjustments based on the outcome of potential indemnification claims by either party, whereby indemnification claims awarded to either party through November 16, 2021 will be settled by increasing or decreasing the number of Variable Shares based on a fixed conversion price of $5.53 per share. Accordingly, we willare required to continue to account for the Variable Shares as a derivative liability until the number of shares becomes fixed. As of June 30, 2021, the fair value of the Variable Shares derivative liability amounted to $44.8 million. While the Variable Shares are accounted for as a derivative liability, there are no circumstances under which we could be required to pay interest at 1.0%, whereby all accrued interestcash to the Sellers to settle this liability. As of June 30, 2021 and principal will be payable on the maturity date in April 2022. The termsDecember 31, 2020, our business combination liabilities consisted of the PPP Loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loan may be accelerated upon the occurrence of an event of default, including if the SBA subsequently reaches an audit determination that we do not meet the eligibility criteria.following (in thousands):

  2021  2020 
       
Liabilities to former owners of Ariix:        
Fair value of Fixed Shares derivative liability $-  $37,028 
Fair value of Variable Shares derivative liability  44,773   53,846 
Total derivative liabilities  44,773   90,874 
Short-term debt payable in cash  -   10,000 
Business combination liabilities assumed from Ariix:        
Fair value of deferred consideration payable:        
LIMU  3,495   3,656 
Zennoa  1,885   2,196 
Short-term debt for Zennoa  -   850 
Total  50,153   107,576 
Less current portion  1,140   11,750 
         
Long-term portion $49,013  $95,826 

46

Aliven Business Combination

 

40

On June 1, 2021 (the “Aliven Closing Date”) we entered into an Asset Purchase Agreement (“APA”) with Aliven, Inc. (“Aliven”) that was accounted for using the acquisition method of accounting under ASC 805, Business Combinations, and using the fair value concepts set forth in ASC 820, Fair Value Measurement. Aliven is a Japan-based direct selling company. We entered into the APA to accelerate growth with its direct-to-consumer business model in Japan and to expand its portfolio of healthy products. Pursuant to the APA, we acquired the assets and assumed the liabilities of Aliven for total purchase consideration that consisted of approximately 1.1 million shares of our Common Stock with a fair value of approximately $2.6 million.

Cash Flows Summary

 

Presented below is a summary of our operating, investing and financing cash flows for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 (in thousands):

 

 2020 2019 Change  2021  2020 
       
Net cash provided by (used in):                    
Operating activities $(29,853) $(20,941) $(8,912) $(5,560) $(23,596)
Investing activities  (2,746)  32,210   (34,956)  (10,765)  (1,821)
Financing activities  13,506   13,327   179   43,459   20,748 

Cash Flows Provided byUsed in Operating Activities

 

For the ninesix months ended SeptemberJune 30, 2020 and 2019,2021, we recognized a net cash used in operating activities amountedloss of $0.4 million compared to $29.9a net loss of $21.2 million and $20.9 million, respectively.for the six months ended June 30, 2020. 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 ninesix months ended SeptemberJune 30, 20202021 and 2019, are as follows2020 (in thousands):

 

  2020  2019  Change 
 
Net loss $(35,305) $(23,984) $(11,321)
Non-cash expenses  17,268   20,771   (3,503)
Loss (gain) from change in fair value of derivatives  392   (304)  696 
Loss (gain) from sale of property and equipment  128   (6,360)  6,488 
Deferred income tax benefit  (442)  (4,919)  4,477 
Gain from change in fair value of earnout obligations  -   (12,909)  12,909 
Changes in operating assets and liabilities, net  (11,894)  6,764   (18,658)
             
Total $(29,853) $(20,941) $(8,912)
  2021  2020 
       
Net loss $(397) $(21,172)
Non-cash expenses, net of deferred tax benefit  27,091   9,661 
Non-cash loss (gain) from change in fair value of derivatives  (21,216)  306 
Net changes in operating assets and liabilities  (11,038)  (12,391)
         
Net cash used in operating activities $(5,560) $(23,596)

 

NineFor the six months ended SeptemberJune 30, 2020. For the nine months ended September 30,2021 and 2020, we incurred net non-cash expenses partially mitigated the impact of our net loss by $17.3 million. These$27.1 million and $9.7 million, respectively. Significant non-cash expenses included (i)include depreciation and amortization expense, of $5.6 million, (ii) non-cash lease expense, accretion of $3.9debt discount, and stock-based compensation expense. For the six months ended June 30, 2021, non-cash expenses include $9.6 million (iii)of depreciation and amortization expense, $6.2 million of non-cash lease expense, $4.4 million of accretion of debt discount related to the Senior Notes, stock-based compensation expense of $3.4 million, (iv) loss on disposal of the Divested Businesses of $3.4 million, (v) accretion and amortization of debt discount and issuance costs of $0.4$4.2 million, and (v) impairmenta loss related to an uncollectible note receivable of right-of-use$2.7 million. For the six months ended June 30, 2021, we recognized a non-cash gain from changes in the fair value of derivative liabilities of $21.2 million.

Net changes in our operating assets and liabilities can have a significant impact on operating cash flow. For the six months ended June 30, 2021, changes in operating assets and liabilities used $11.0 million of operating cash flows. This amount consisted of (i) reductions in accounts payable of $5.8 million primarily due to payments to Ariix’s suppliers and service providers, (ii) a reduction in accrued liabilities of $11.5 million, including cash payments related to operating lease liabilities of $5.2 million, a reduction in deferred revenue of $4.4 million, and a reduction in accrued commissions of $1.4 million. The total reduction in accounts payable and accrued liabilities was $17.3 million, which was partially offset by reductions in (i) inventories of $4.7 million that were primarily due to the integration of Ariix where we adjusted purchasing activity based on product demand planning, and (ii) prepaid expenses and other assets of $0.4 million.$1.6 million, to arrive at $11.0 million of net cash outflows due to changes in operating assets and liabilities.

47

For the ninesix months ended SeptemberJune 30, 2020, changes in operating assets and liabilities used $11.9$12.4 million of operating cash flows. The primary useuses of operating cash flows for the ninesix months ended SeptemberJune 30, 2020 was due towere from (i) a reduction in other accrued liabilities of $13.7$12.9 million, (ii) an increase in accounts receivable of $0.9$2.3 million, and (iii) a decrease in accounts payable of $0.5$0.6 million. These changes that used operating cash flow totaled $15.1$15.8 million and were partially offset by changes in operating assets and liabilities that increased our operating cash flows, including a decrease in inventories of $2.7$2.8 million, and a reduction in prepaid expenses, deposits and other assets of $0.5 million. The $13.7$13.2 million decrease in other accrued liabilities was primarily attributable to payment of income tax liabilities of $13.1 million in March 2020 that arose from the sale of our land and buildingreal estate in Tokyo, Japan in March 2019 as discussed below.

Nine months ended September 30, 2019. For the nine months ended September 30, 2019, non-cash expenses partially mitigated the impact of our net loss by $20.8 million. These non-cash expenses included (i) depreciation and amortization expense of $6.8 million, (ii) stock-based compensation expense of $5.3 million, (iii) non-cash lease expense of $4.9 million, (iv) impairment of ROU lease assets of $1.5 million, (v) accretion and amortization of debt discount and issuance costs of $1.8 million, and (vi) make-whole premium of $0.5 million. These non-cash expenses total $20.8 million and were partially offset by a deferred income tax benefit of $4.9 million, and a gain from changes in fair value of earnout obligations of $12.9 million, a gain from the sale of property and equipment of $6.4 million, and a gain from changes in fair value of derivatives for $0.3 million.

41

For the nine months ended September 30, 2019, changes in operating assets and liabilities provided $6.8 million of operating cash flows. Changes that increased operating cash flows include (i) a net increase in accounts payable and accrued liabilities of $10.7 million that was driven by the increase in income taxes payable related to the gain on sale of our building in Japan in March 2019, and (ii) a reduction in inventories of $1.2 million. These increases in operating cash flow totaled $11.9 million and were partially offset by reductions in operating cash flow of $1.9 million due to an increase in our trade receivables, and $3.2 million for higher cash payments related to prepaid expenses, deposits and other assets.

Cash Flows from Investing Activities

 

OurFor the six months ended June 30, 2021, cash used in investing activities used netwas $10.8 million. This amount was attributable to a cash flowspayment for merger consideration of $2.7$10.0 million pursuant to our business combination with Ariix, and (ii) purchases of equipment of $0.8 million primarily for the nineDirect / Social Selling segment.

For the six months ended SeptemberJune 30, 2020, as compared to net cash generated from investing activities of $32.2 million for the nine months ended September 30, 2019.

Nine months ended September 30, 2020. For the nine months ended September 30, 2020, we used cash flows of $2.7 million related to our investing activities. This amountcash flows consisted of cash payments for capital expenditures of $2.1$2.0 million, and approximately $1.3 million advanced as a portion of the consideration for a $2.5 million promissory note receivable from BWR. These cash payments totaled $3.4 million and were partially offset by cash received of $0.4 million in connection with our disposal of the Divested Businesses and proceeds from the sale of equipment of $0.2 million. Our capital expenditures consisted of $1.9$1.8 million in our Noni by NewAgeDirect / Social Selling segment and $0.2 million in our NewAgeDirect Store segment.

Nine months ended September 30, 2019. For the nine months ended September 30, 2019, cash provided by investing activities of $32.2 million was primarily driven by the sale leaseback of our land and building in Tokyo in March 2019. The gross selling price was $57.1 million. After deducting commissions and other selling expenses of $1.9 million, the net proceeds amounted to $55.2 million. The net proceeds attributable to investing activities included $35.9 million that was attributable to the sale of the property, and $1.7 million that was designated to fund future repair obligations for a total of $37.6 million. The remainder of the net proceeds of $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 nine months ended September 30, 2019 included (i) capital expenditures for property and equipment of $2.6 million, (ii) a security deposit of $1.8 million withheld by the purchaser in the sale leaseback, and (iii) a loan receivable related to our July 2019 business combination with BWR for $1.0 million. Our capital expenditures included equipment for our Noni by NewAge segment of $1.1 million, and $1.5 million for our New Age segment that consisted of leasehold improvements related to a new distribution facility, and transportation, furniture and office equipment.

Cash Flows from Financing Activities

 

Our financing activities generated net cash flowsproceeds of $13.5$43.5 million and $20.7 million for the ninesix months ended SeptemberJune 30, 2021 and 2020, as compared to $13.3 millionrespectively. The principal sources of cash from our financing activities for the ninesix months ended SeptemberJune 30, 2019.2021 consisted of (i) net proceeds of $53.8 million from our February 2021 private placement that resulted in the issuance of an aggregate of approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares, and (ii) proceeds of $0.5 million from the exercise of stock options that resulted in the issuance of approximately 288,000 shares of Common Stock. These sources of cash flow from financing activities totaled $54.3 million and were partially offset by cash outflows for (i) principal payments under the Senior Notes of $6.0 million, (ii) a $4.5 million payment of business combination liabilities primarily related to our acquisition of Ariix, and (iii) an aggregate of $0.4 million of payments for offering costs and reductions in our deferred lease financing obligation.

 

NineFor the six months ended September 30, 2020. For the nine months ended SeptemberJune 30, 2020, the principal source of cash from our financing activities consisted of net cash proceeds of $25.1 million from the issuance of approximately 16.1 million shares of Common Stock pursuant to our former At the ATMMarket Offering Agreement (the “ATM Agreement”) with Roth Capital Partners, LLC, and cash proceeds of $6.9 million under thea PPP Loan.Loan obtained in April 2020. For the ninesix months ended SeptemberJune 30, 2020, our cash outflows includedprimarily consisted of principal repayments under theour former EWB Credit Facility of $10.8$10.5 million, payments of $5.8 million related to business combination obligations, the purchase of stock for $1.2 million, payments of $0.5$0.3 million related to the deferred lease financing obligation, payments of $0.3 million related to business combination obligations, and total payments of $0.3$0.2 million for debt issuance costs related to the EWB Credit Facility and offering costs related to the ATM Agreement. For the ninesix months ended SeptemberJune 30, 2020, our principal payments under our former EWB Credit Facility included $1.1$0.8 million under the EWB Term Loanterm loan and $9.7 million to repay the EWB Revolver.

Nine months ended September 30, 2019. For the nine months ended September 30, 2019, the principal sources of cash from our financing activities consisted of (i) $52.1 million of borrowings, including $40.8 million under the EWB Credit Facility and $11.3 million under the Siena Revolver that was terminated in March 2019, (ii) proceeds from the deferred lease financing obligation of $17.6 million, (iii) net proceeds of $13.5 million from the issuance of approximately 2.8 million shares of Common Stock issued pursuant to the ATM Agreement, and (iv) proceeds from the exercise of stock options of $0.4 million. These financing cash proceeds totaled $83.6 million and were partially offset by (i) principal payments under debt agreements of $34.4 million, including $19.7 million under the EWB Credit Facility, $9.7 million under the Siena Revolver, $2.6 million to repay the mortgage upon the sale of our land and building in 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) payments for debt issuance costs of $0.9 million to obtain the EWB Credit Facility, (iv) payment of make-whole premium of $0.5 million to terminate the Siena Revolver, (v) payments under the deferred lease financing obligation of $0.3 million, and (vi) cash payments of $0.2 million for deferred offering costs under the ATM Agreement. The Siena Revolver was terminated in March 2019 and replaced with the EWB Credit Facility.

42

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 nine months ended September 30, 2020 and 2019, $0.5 million and $0.3 million, respectively, of our lease payments were allocated to reduce the financial liability.revolver.

 

Off-Balance Sheet Arrangements

 

During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.

 

Recent Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed in Note 1 to our condensed consolidated financial statements included in Part I, Item 1 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. For additional information on recently issued accounting standards, and our plans for adoption of those standards, please refer to the section titled Recent Accounting Pronouncements under Note 1 to our condensed consolidated financial statements.

48

 

Non-GAAP Financial Measures

 

The primary purpose of using non-GAAP financial measures is to provide supplemental information that we believe may be 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.

We provide in the tables below a reconciliation from the most directly comparable GAAP financial measure to each non-GAAP financial measure presented. Due to a valuation allowance for our deferred tax assets, there were no income tax effects associated with any of our non-GAAP adjustments.

 

43

EBITDA and Adjusted EBITDA. The calculation of our EBITDA and Adjusted EBITDA is presented below for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 (in thousands):

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2020  2019  2020  2019 
             
Net loss(1) $(14,133) $(10,687) $(35,305) $(23,984)
EBITDA Non-GAAP adjustments:                
Interest expense  521   727   1,693   3,129 
Income tax expense  612   6,671   1,886   12,768 
Depreciation and amortization expense  1,855   2,335   5,607   6,776 
                 
EBITDA  (11,145)  (954)  (26,119)  (1,311)
Adjusted EBITDA Non-GAAP adjustment:                
Stock-based compensation expense  966   991   3,415   5,278 
                 
Adjusted EBITDA (1) $(10,179) $37  $(22,704) $3,967 

(1)Our net losses and Adjusted EBITDA for the three and nine months ended September 30, 2020 include charges for (i) severance expenses of $1.7 million and $2.6 million for the three and nine month periods, respectively, and (ii) a loss on disposal of the Divested Businesses of $3.4 million for each of the three and nine month periods. In addition, prior to the disposal of the Divested Businesses, we incurred operating losses from the Divested Businesses, exclusive of depreciation and amortization expense, of $2.1 million and $5.1 million for the three months ended September 30, 2020 and 2019, respectively, and $7.3 million and $8.8 million for the nine months ended September 30, 2020 and 2019, respectively.
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2021  2020  2021  2020 
             
Net income (loss) $17,371  $(9,554) $(397) $(21,172)
EBITDA Non-GAAP adjustments:                
Interest expense  3,040   600   6,163   1,172 
Income tax expense  740   551   1,890   1,274 
Depreciation and amortization expense  4,822   1,873   9,596   3,752 
                 
EBITDA  25,973   (6,530)  17,252   (14,974)
Adjusted EBITDA Non-GAAP adjustments:                
Stock-based compensation expense  2,187   1,092   4,149   2,449 
Loss on disposal of Divested Business  4,339   -   4,339   - 
Loss (gain) from change in fair value of derivatives  (30,829)  (20)  (21,216)  306 
                 
Adjusted EBITDA $1,670  $(5,458) $4,524  $(12,219)

 

EBITDA is defined as net income (loss) adjusted to exclude amounts recorded under GAAP amounts for interest expense, income tax expense, and depreciation and amortization expense. For the calculation of Adjusted EBITDA, we also exclude the following itemitems for the periods presented:

Stock-Based Compensation ExpenseStock-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 stockholdersshareholders 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.

Loss on disposal of Divested Business: We have excluded the loss on disposal of Divested Business that was primarily related to an uncollectible note receivable and certain liabilities to former suppliers. As a result, this loss was unrelated to current operational decisions and performance.

Loss (gain) from change in fair value of derivatives: We have excluded derivative gains and losses since they can be highly volatile from period to period based on factors that are outside the control of our core business activities. Specifically, the variations that impact fair value heavily depend on the trading price of our Common Stock and global interest rates. As a result, gains and losses from changes in the fair value of derivatives vary for reasons that are generally unrelated to operational decisions and performance in any particular period.

 

4449

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Foreign CurrencyWe are a smaller reporting company as defined by Rule 12b-2 of the Exchange RiskAct and are not required to provide the information under this item.

 

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Japanese Yen, Chinese Yuan, and Euro. We generated approximately 65% and 70% of our revenue from our international business for the nine months ended September 30, 2020 and 2019, respectively. Increases in the relative value of the U.S. Dollar to other currencies may negatively affect our 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 the costs and benefits of initiating such a program and we may in the future hedge selected significant transactions denominated in currencies other than the U.S. Dollar.

For the nine months ended September 30, 2020 and 2019, after considering the net impact on our net revenue and operating expenses, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our condensed consolidated financial statements.

Interest Rate Sensitivity

As of September 30, 2020, our EWB Credit Facility provided for total borrowings of up to $23.6 million. The interest rate applicable to outstanding borrowings under the EWB Credit Facility is currently 2.0% in excess of the prime rate. We have also entered into an interest rate swap agreement with EWB that provides 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%. Therefore, as interest rates fluctuate, we will experience changes in interest expense that will impact our financial results. Assuming outstanding borrowings of $23.6 million, as a result of the $10.0 million swap we would only be subject to market risk for borrowings up to $13.6 million. Accordingly, if interest rates were to increase or decrease by one percentage point, the result would be an increase or decrease in annual interest expense of approximately $0.1 million. Accordingly, significant increases in future interest rates could adversely impact our future interest expense.

As of September 30, 2020, we hold cash, cash equivalents and restricted cash of $44.8 million. The weighted average interest rate on these temporary investments is substantially less than 1.0% and we earned interest income of $0.2 million for the nine months ended September 30, 2020. Assuming weighted average investments of $44.8 million, if interest rates were to increase by one percentage point, the result would be an increase in annual interest income of $0.4 million.

Inflation Risk

We do not believe that inflation currently has a material effect on our business.

ITEM 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company’sOur management, with the participation of the Company’s Chief Executive Officerour chief executive officer (“CEO”) and Chief Financial Officer,chief financial officer (“CFO”), evaluated the effectiveness of the Company’sour disclosure controls and procedures (asas of June 30, 2021 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) as of September 30, 2020. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, the Company’s disclosureAct, means controls and other procedures were effectiveof a company that are designed to ensure that information required to be disclosed by a company in the reports the Companythat it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SECthe SEC’s rules and forms,forms. Disclosure controls and (ii)procedures include, without limitation, controls and procedures designed to ensure that 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 the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Any controlsBased upon the evaluation completed as of June 30, 2021, our CEO and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In light of changes in business practices in response to the COVID-19 pandemic, management evaluated the Company’s disclosure controls and procedures and determinedCFO concluded that no changes in suchour disclosure controls and procedures were necessary.

not effective since the material weakness in internal controls over financial reporting discussed below has not yet been remediated.

 

In the course of preparing this Quarterly Report on Form 10-Q, our management completed additional procedures designed to mitigate the underlying conditions related to the material weakness discussed below. Based on these procedures and other remediation efforts to date, we believe that our unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with U.S. GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-Q, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-Q.

Material Weakness

As of June 30, 2021, a material weakness exists related to the Company’s failure to design and implement monitoring activities over the acquisition of Ariix that resulted in the inability to issue our consolidated financial statements for inclusion in the 2020 Form 10-K by the required due date. Specifically, due to the size and timing of the acquisition of Ariix, we 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.

In connection with the preparation of our unaudited condensed consolidated financial statements, we determined that this material weakness in internal control over financial reporting that was identified and reported in our 2020 Form 10-K still exists. 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.

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 before 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 U.S. GAAP accounting to support the growth of the Company while enhancing the overall competency level of the acquired company’s accounting staff.

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during our thirdsecond fiscal quarter of 20202021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

4550

PART II - OTHER INFORMATION

 

ITEM 1. 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 judgment, defense and settlement costs, diversion of management resources and other factors.

 

ITEM 1A. Risk Factors.

 

The following additional risk factors relating to COVID-19 and our pending business combination with Ariixfactor should be read in conjunction with the risk factors set forth under “Item 1A. Risk Factors” in our 20192020 Form 10-K and in Part II, Item 1A of our quarterly report for fiscal quarter ended March 31, 2020 (the “2020 First Quarter Report”), and Item 1A of our quarterly report for fiscal quarter ended June 30, 2020 (the “2020 Second Quarter Report”).10-K. The developments described in this additional risk factor have heightened, or in some cases manifested, certain of the risks disclosed in the risk factor section of our 20192020 Form 10-K, and such risk factors are further qualified by the information relating to COVID-19 that is described in this Report, including in the additional risk factor below.10-K. Except as described herein, there have been no material changes with respect to the risk factors disclosed in our 20192020 Form 10-K, our 2020 First Quarter Report, and our 2020 Second Quarter Report.

10-K.

 

You should carefully consider the risks cross-referenced abovedescribed below and described below,in our 2020 Form 10-K in addition to the other information set forth in this Report and in our 20192020 Form 10-K, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations sections and the consolidated financial statements and related notes. These risks, some of which have occurred and any of which may occur in the future, can have a material adverse effect on our business, financial condition, results of operations or the prices of our publicly traded securities. The risks cross-referenceddescribed below and described hereinin our 2020 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may occur or become material in the future and adversely affect our business, reputation, financial condition, results of operations or the prices of our publicly traded securities. Therefore, historical operating results, financial and business performance, events and trends are often not a reliable indicator of future operating results, financial and business performance, events or trends.

 

The recent COVID-19 pandemic has negatively affectedWe are subject to the Foreign Corrupt Practices Act of 1977 (the “FCPA”) and will continue to negatively affectother similar anti-corruption, anti-bribery and anti-kickback laws and regulations, and any noncompliance with those laws or regulations by us or others acting on our behalf could materially hurt our business, financial condition and results of operations.

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.

The public health crisis caused by

If we are found liable for violations of the COVID-19 pandemic andFCPA 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 measures that have been takenacts or that may be taken in the future by governments, businesses,inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including us, and the public at large to limit COVID-19’s spread have had, and we expect will continue toreputational harm, which could materially negatively affecthurt 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 that we are not able to 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 that have been taken, or may be taken in the future, in response to the pandemic, and changes in consumer behavior in response to the pandemic, some of which may be more than just temporary.operations.

 

Our global operations expose usIn December 2020, we engaged external counsel, accountants, and other advisors to risks associatedconduct an independent investigation of Ariix’s international business practices, during which the investigation team identified conduct that potentially was in violation of the FCPA. In August 2021, we made a voluntary self-disclosure to the U.S. Department of Justice (“DOJ”) and the SEC about these items and our investigation. Although our reporting to the DOJ and SEC is ongoing, we believe our investigation is substantially complete. We have initiated procedures to remediate such practices. These findings provide opportunity for targeted, enhanced controls and additional training and other remediation. We intend to fully cooperate with the COVID-19 pandemic, which has resulted in challenging operating environments. COVID-19 has spread acrossDOJ and SEC, with the globeassistance of legal counsel, to almost all ofconclude this matter. We are unable at this time to predict when the countries in which our products are made, manufactured, distributed or sold. Authorities in manygovernment agencies’ review of these markets have implemented numerous measures to stall the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter in place orders, and business shutdowns. These measures have impacted andmatters will further impact us, our customers, consumers, employees, contract manufacturers, distributors, suppliers andbe completed or what regulatory or other third parties with whom we do business. Due to these measures, we have experienced, and expect to continue to experience, a significant 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 products from very large, well-established companies with large market share. In foreign jurisdictions, which account for approximately 65% of our net revenue for the nine months ended September 30, 2020, our direct-to-consumer selling model typically relies heavily on the use of our IPC sales force in close contact with our customers.

consequences may result.

46

Stay-at-home and social distancing orders have required some of our employees to work from home when possible, and other employees have been entirely prevented from performing their job duties until the orders are relaxed or lifted. 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 would likely have a material adverse effect on our business as consumer demand for our products would likely decrease.

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 that 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 could be more prolonged and may become more severe. While we have initially experienced increased sales in the Noni by NewAge 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 NewAge segment while social distancing mandates or recommendations are in effect. The long-term financial impact on our business cannot be reasonably estimated at this time.

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 as a result 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, consumers, 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 are not able to perform their job functions remotely. If a significant percentage of our or our business partners’ workforce continues to be unable to work, including because of illness, facility closures, quarantine, curfews, shelter in place orders, travel restrictions or other governmental restrictions, our operations will be negatively impacted. 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 adversely affect our business. In addition, the increase in certain of 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 adversely affect 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, do not generate any corresponding revenue.

Public concern regarding the risk of contracting COVID-19 impacts demand from consumers, including 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 as a result of measures taken in response to the pandemic. As we sell a wide variety of products worldwide, the profile of the products we sell and the amount of revenue attributable to such products varies by jurisdiction and changes in demand as a result of COVID-19 will vary in scope and timing across these markets. Any reduced demand for our products or change in consumer purchasing and consumption patterns, as well as continued economic uncertainty, can adversely affect 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.

47

There can be no assurance that we will be successful in our efforts to mitigate the negative impact of COVID-19, and as a result, our business, financial condition and results of operations and the prices of our publicly traded securities may be adversely affected.

There can be no assurance that we will complete the acquisition of Ariix.

On July 20, 2020, we signed a definitive merger agreement to acquire Ariix, which we expected to close by September 30, 2020. On September 30, 2020, we entered into an amended and restated definitive merger agreement to acquire Ariix. The amended and restated merger agreement contains certain termination rights if the acquisition does not close by November 30, 2020. The amended and restated merger agreement is subject to a number of conditions that must be fulfilled in order to complete the Ariix acquisition. Those conditions include continued accuracy of the representations and warranties by both parties and the performance by both parties of their covenants and agreements, absence of orders prohibiting the completion of the acquisition and certain other conditions specified in the merger agreement. In order to fund the required cash payments under the amended and restated merger agreement, we are currently evaluating various alternatives including an equity offering and the refinancing of our EWB Credit Facility. There are no assurances that we will be able to obtain additional financing through refinancing the EWB Credit Facility, equity offerings, including under the ATM Agreement, and debt financings in the future. In addition, both we and Ariix have rights to terminate the amended and restated merger agreement under certain circumstances specified in the amended and restated merger agreement. We have begun integrating certain of our sales, management, and technology functions with those of Ariix. If we do not complete the Ariix acquisition, we will likely need to unwind such integrations, which could cause significant disruptions and expenses and have a material adverse effect on our business, operating results and financial condition. We cannot assure you that the Ariix acquisition will be completed.

Any failure to successfully integrate Ariix's business and operations or fully realize potential synergies from the Ariix acquisition in the expected time frame would adversely affect 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 fully realize the anticipated benefits and potential synergies from combining our business with Ariix’s business. To realize these anticipated benefits and potential synergies, we must successfully combine these businesses. If we are unable to 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 result in the loss of key employees, loss of key customers, decreases in revenue and increases in operating costs, as well as the disruption of each company’s ongoing businesses, any or all 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. In addition, we have begun integrating certain of our sales, management, and technology functions with those of Ariix. If we do not complete the Ariix acquisition, we will likely need to unwind such integrations, which could cause significant disruptions and expenses and have a material adverse effect on our business, operating results and financial condition. We cannot assure you that the Ariix acquisition will be completed.

48

We have incurred and will incur significant transaction expenses and acquisition-related integration costs in connection with the Ariix acquisition.

We have incurred, and expect to continue to incur, significant transaction costs relating to the negotiation and completion of the Ariix acquisition. Except in limited circumstances, we will have to bear these costs whether or not the Ariix acquisition is completed. We are developing a plan to integrate the operations of Ariix with our own after the completion of the Ariix acquisition. In connection with that plan, we anticipate that we will incur certain non-recurring charges in connection with this integration; however, we cannot identify the timing, nature and amount of all such charges at this time. These transaction expenses and integration costs will be charged as an expense in the period incurred. The significant transaction costs and acquisition-related integration costs could materially affect our results of operations in the period in which such charges are recorded.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In connectionOn June 1, 2021, we issued 1,071,500 shares of Common Stock with a fair value of approximately $2,588,000 pursuant to an Asset Purchase Agreement that resulted in our acquisition of the assets of Aliven, Inc., a Japan-based direct selling company. For additional information, please refer to our Current Report on Form 8-K that we filed with the disposition of the Divested Businesses,SEC on September 24, 2020 we issued 691,953 shares of our Common Stock to the Buyer with a value of $1,250,000. June 3, 2021.

These sharessecurities were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act. There were no other unregistered sales of our equity securities during the three months ended SeptemberJune 30, 2020.2021.

ITEM 3. Defaults Upon Senior Securities.

 

None.

 

ITEM 4. Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5. Other Information.

 

On March 29, 2019, the Company and EWB entered into the EWB Credit Facility, as amended by the First Amendment, Waiver and Consent to Loan and Security Agreement, dated July 11, 2019, the Second Amendment and Waiver to Loan and Security Agreement, dated October 9, 2019, the Third Amendment and Waiver to Loan and Security Agreement, dated March 13, 2020, and the Fourth Amendment to Loan and Security Agreement, dated July 6, 2020. The EWB Credit Facility provides for (i) a term loan in the aggregate principal amount of $15.0 million, which may be increased to $25.0 million, subject to the satisfaction of certain conditions and (ii) a $10.0 million revolving loan facility.

On November 5, 2020, the Company entered into a Fifth Amendment and Waiver (the “Fifth Amendment”) to the EWB Credit Facility. Under the Fifth Amendment, EWB waived non-compliance by the Company due to its inability to achieve Adjusted EBITDA (as defined in the EWB Credit Facility) of at least $4.0 million for the three months ended September 30, 2020 and any default that may have occurred as a result thereof. The Fifth Amendment deleted Section 7.12(a), which set forth the minimum Adjusted EBITDA financial covenant. The Fifth Amendment also amended and restated the Compliance Certificate attached as Exhibit B to the EWB Credit Facility.

This summary of the Fifth Amendment is qualified by reference to the full text of the Fifth Amendment, which is included as Exhibit 10.3 to this Report and incorporated herein by reference.Not applicable.

 

4951

ITEM 6. Exhibits.

 

The following exhibits are incorporated by reference or filed as part of this Quarterly Report on Form 10-Q:

 

Exhibit
Number		 Description
2.1
2.1Agreement and Plan of Merger,Conversion of NewAge, Inc. dated as of July 20, 2020, by and among NewAge, Inc., Ariel Merger Sub, LLC, Ariix, LLC, certain members of Ariix, LLC, and Frederick Cooper, as Sellers AgentMay 24, 2021 (Incorporatedincorporated by reference to Exhibit 2.1 of our Form 8-K filed with the SEC on July 20, 2020)May 24, 2021).
2.2 AmendedAsset Purchase Agreement, dated June 1, 2021, between NewAge, Inc. and Restated Agreement and Plan of Merger, dated as of September 30, 2020, by and among NewAge,Aliven, Inc., Ariel Merger Sub, LLC, Ariel Merger Sub2, LLC, Ariix, LLC, certain members of Ariix, LLC, and Frederick Cooper, as Sellers Agent (Incorporatedincorporated by reference to Exhibit 2.1 of our Form 8-K filed with the SEC on October 1, 2020)June 3, 2021).
3.1 Articles of Amendment to ArticlesConversion, effective May 24, 2021, as filed by NewAge, Inc. with the Secretary of Incorporation, filed on July 24, 2020State of the State of Washington (Incorporatedincorporated by reference to Exhibit 3.1 of our Form 8-K filed with the SEC on July 29, 2020)May 24, 2021).
10.13.2 Fourth Amendment to Loan and Security Agreement, dated July 6, 2020, betweenCertificate of Conversion, effective May 24, 2021, as filed by NewAge, Inc. and East West Bankwith the Secretary of State of the State of Delaware (Incorporatedincorporated by reference to Exhibit 10.1 to3.2 of our Form 8-K filed with the SEC on July 7, 2020)May 24, 2021).
10.23.3 Membership Interest Purchase Agreement, datedCertificate of Incorporation, effective May 24, 2021, as of September 24, 2020, betweenfiled by NewAge, Inc. and Zachert Private Equity GmbHwith the Secretary of State of the State of Delaware (Incorporatedincorporated by reference to Exhibit 10.1 to3.3 of our Form 8-K filed with the SEC on September 29, 2020)May 24, 2021).
10.3*Fifth Amendment to Loan and Security Agreement, dated November 5, 2020, between NewAge, Inc. and East West Bank
31.1*3.4 Bylaws, effective May 24, 2021 (incorporated by reference to Exhibit 3.4 of our Form 8-K filed with the SEC on May 24, 2021).
31.1*Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2* Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1* Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.2* Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
101.INS101.INS* Inline XBRL Instance Document– the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.Document
101.SCH101.SCH* Inline XBRL Taxonomy Extension Schema
101.CAL101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB101.LAB* Inline XBRL Taxonomy Extension Label Linkbase
101.PRE101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase
104Cover Page Interactive Data File, formatted in Inline XBRL and contained in(included as Exhibit 101
101)

 

* Filed herewith.

 

5052

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 NewAge, Inc.
  
Date: NovemberAugust 9, 20202021/s/ Brent Willis
 Name:Brent Willis
 Title:Chief Executive Officer
 (Principal Executive Officer)

 

Date: NovemberAugust 9, 20202021/s/ Gregory A. GouldKevin Manion
 Name:Gregory A. GouldKevin Manion
 Title:Chief Financial Officer
 (Principal Financial and Accounting Officer)

5153