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. The U.S.
economy was largely shut down by mass quarantines and government mandated stay-at-home orders (the “Orders”) to halt
the spread of the virus. These 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. These Orders have adversely
impacted our customers such as restaurants, hotels, stadiums and airports in the United States, whereby average monthly revenue
for that line of our distribution business decreased by approximately 48% for the four months ended June 30, 2020 compared to the
first two months of 2020. We expect these lower sales levels for this line of business in our NewAge segment to continue until
the COVID-19 Orders are lifted and consumers resume visiting restaurants, attending stadium events, and traveling. In foreign jurisdictions,
which accounted for approximately 64% of our net revenue for the three months ended June 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 June 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. 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 our business as consumer demand for our products could decrease.
While these Orders were relaxed or lifted in different jurisdictions
at various times during the three months ended June 30, 2020, the overall impact of COVID-19 continues to have an adverse impact
on business activities across the world. There is no assurance that Orders that were previously relaxed or lifted will not be reinstated
as the spread of COVID-19 continues. For example, many jurisdictions reinstated masking orders in July 2020 after test results
showed a resurgence of the pandemic. Resurgence of the pandemic in some markets has slowed the reopening process. 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 our 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:
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Anticipated
operating results, including revenue and earnings.
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Our
expectations about the extent and duration of COVID-19 on our business.
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Volatility
in credit and market conditions.
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Our
belief that we have sufficient liquidity to fund our business operations over the next
12 months.
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Ability
to bring new products to market in an ever-changing and difficult regulatory environment.
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Ability
to re-patriate cash from certain foreign markets.
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Strategy
for customer retention and growth.
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Risk
management strategy.
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Expected
capital expenditure levels for 2020 and 2021.
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Ability
to successfully integrate acquisitions.
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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 2019 Annual Report on Form 10-K
as filed with the SEC on March 16, 2020 (the “2019 Form 10-K”), and 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, 2019 and 2018 set forth in Item 8 of our 2019 Form 10-K, and (iii) the related Management’s Discussion and
Analysis set forth in Item 7 of our 2019 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 is to inspire and educate 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 lead in healthy hydration and wellness, healthy appearance, and nutritional
performance platforms differentiating across the platforms with plant-based ingredients, Noni, CBD, and micro and phytonutrients.
We are focused on improving the lives of our consumers, and the livelihoods of our independent
product consultants, representatives and affiliates, while delivering sustainable profitable growth and enhanced shareholder value
by focusing on doing well by doing good.
We are a healthy consumer products and lifestyles purpose-driven
company engaged in the development and commercialization of a portfolio of organic, natural and other better-for-you products.
Those products are grouped into three category platforms, health & wellness, healthy appearance, and nutritional performance.
We focus on the development and commercialization of healthy, functionally-differentiated brands within those platforms utilizing
Noni, cannabidiol (“CBD”), plant-based ingredients, or phytonutrients as points of difference across the portfolio.
We also are one of a few companies in 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 in the 60 countries in which the Company operates,
including leverage of its independent product consultants (“IPCs”), a peer-to-peer selling group of approximately 260,000
independent contractor IPCs and customers worldwide.
We believe consumer awareness
of the benefits of healthier lifestyles and the availability of healthier 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 to traditional retail channels, with increasing demand for delivery direct to consumers’
homes.
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.
Our
brand portfolio consists of a range of owned brands and licensed brands that we commercialize through our omni-channel route to
market. The owned brands include Tahitian Noni Juice, Te Mana, Hiro, Xing, Búcha Live Kombucha, Coco Libre, Aspen Pure
and ‘Nhanced. The licensed brands include Nestea, Volvic, Evian, Illy and a range of specialty brands sold primarily in
specialty outlets and the natural channel and retailers.
Operating
Segments
The direct to consumer segment of our business acquired from
Morinda Holdings, Inc. (“Morinda”) is now rebranded Noni by NewAge. The Noni by NewAge 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 other nutritional, cosmetic and personal care products. The Noni by NewAge segment has manufacturing
operations in Tahiti, Germany, Japan, the United States, and China. The products of the Noni by NewAge segment are sold and distributed
in more than 60 countries using IPCs through our direct to consumer selling network and e-commerce business model. Asia Pacific
represents approximately 77% of this business, followed by North America at approximately 14%, with the Latin America, Europe,
Africa, Australia/ New Zealand and Delivery division comprising the remainder of 9%.
The NewAge segment manufactures, markets and sells a portfolio
of healthy beverage brands including Nestea, Illy, Xing, Búcha Live Kombucha, Aspen Pure, Coco-Libre, Evian, Volvic, and
a range of other imported specialty brands. These products are distributed through our DSD network and a hybrid of other routes
to market throughout the United States. The NewAge brands are sold in all channels of distribution including hypermarkets, supermarkets,
pharmacies, convenience, restaurants, hotels, airports, gas and other outlets.
Recent
Developments
Reference is made to Notes 4, 6, 7 and 14 to our condensed
consolidated financial statements included in Part I, Item 1 of this Report for a discussion of recent developments since January
1, 2020, including implementation of a restructuring plan designed to achieve selling, general and administrative cost reductions,
proceeds from the PPP Loan with EWB in an aggregate principal amount of approximately $6.9 million pursuant to the recently-enacted
U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), an amendment to the EWB Credit Facility
in March 2020, and sales of our common stock under the ATM Agreement that resulted in gross proceeds of $25.8 million for the six
months ended June 30, 2020. In addition, reference is made to Note 14 to our condensed consolidated financial statements for discussion
of the Fourth Amendment to the EWB Credit Facility, repurchase and retirement of shares for $1.2 million, and the Merger Agreement
with Ariix, LLC which we intend to acquire for total consideration in excess of $200 million based on the current price of our
Common Stock. These recent developments are also discussed below under the caption Liquidity and Capital Resources.
In
March 2020, we initiated a strategic review of our U.S. retail brands and the BWR division. This review is currently in process
and is expected to be completed by the end of the third quarter of 2020. We have not entered into any agreements or understandings
with any potential strategic partners in connection with such review.
Key
Components of Consolidated Statements of Operations
For
a description of the key components of our condensed consolidated statements of operations, please refer to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K.
Critical
Accounting Policies and Significant Judgments and Estimates
For
a discussion of our critical accounting policies, please refer to Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our 2019 Form 10-K.
Results
of Operations
Three
Months Ended June 30, 2020 and 2019
Our
consolidated statements of operations for the three months ended June 30, 2020 and 2019 are presented below (dollars in thousands):
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2020
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2019
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Change
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Percent
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Net revenue
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$
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62,637
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$
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66,348
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$
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(3,711)
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-6%
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Cost of goods sold
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24,559
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24,699
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(140)
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-1%
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Gross profit
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38,078
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41,649
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(3,571)
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-9%
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Gross margin
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61%
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63%
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Operating expenses:
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Commissions
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18,405
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19,607
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(1,202)
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-6%
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Selling, general and administrative
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26,277
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28,175
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(1,898)
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-7%
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Gain from change in fair value of earnout obligations
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-
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(6,665)
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6,665
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-100%
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Impairment of right-of-use assets
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400
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1,500
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(1,100)
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-73%
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Depreciation and amortization expense
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1,761
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2,017
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(256)
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-13%
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Total operating expenses
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46,843
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44,634
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2,209
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5%
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Operating loss
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(8,765)
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(2,985)
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(5,780)
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194%
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Non-operating income (expense):
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Gain (loss) from sale of property and equipment
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14
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-
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14
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n/a
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Interest expense
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(600)
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(756)
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156
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-21%
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Gain (loss) from change in fair value of derivatives
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20
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-
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20
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n/a
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Interest and other income (expense), net
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328
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(143)
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|
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471
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-329%
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Loss before income taxes
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(9,003)
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(3,884)
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(5,119)
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132%
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Income tax expense
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(551)
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(7,797)
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|
|
7,246
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-93%
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Net loss
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$
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(9,554)
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|
$
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(11,681)
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$
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2,127
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-18%
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Presented
below is our net revenue, cost of goods sold, gross profit and gross margin by segment for the three months ended June 30, 2020
and 2019 (dollars in thousands):
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Noni by NewAge Segment
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NewAge Segment
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2020
|
|
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2019
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|
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Change
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Percent
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|
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2020
|
|
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2019
|
|
|
Change
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|
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Percent
|
|
|
|
|
|
|
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|
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|
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|
|
|
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Net revenue
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|
$
|
46,861
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|
|
$
|
52,060
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|
|
$
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(5,199)
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|
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-10%
|
|
|
$
|
15,776
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|
|
$
|
14,288
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|
|
$
|
1,488
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|
|
|
10%
|
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Cost of goods sold
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10,958
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|
|
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11,591
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(633)
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-5%
|
|
|
|
13,601
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|
|
|
13,108
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|
|
|
493
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|
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
|
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Gross profit
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|
$
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35,903
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|
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$
|
40,469
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|
$
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(4,566)
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-11%
|
|
|
$
|
2,175
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|
|
$
|
1,180
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|
|
$
|
995
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|
|
|
84%
|
|
|
Gross margin
|
|
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77%
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|
|
|
78%
|
|
|
|
|
|
|
|
|
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14%
|
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
Net
Revenue. Net revenue decreased from $66.3 million for the three months ended June 30, 2019 to $62.6 million for the three
months ended June 30, 2020, a decrease of $3.7 million or 6%. For the three months ended June 30, 2020, this decrease consisted
of decreases in net revenue of $5.2 million for the Noni by NewAge segment, partially offset by an increase of $1.5 million for
the NewAge segment.
Net
revenue for the Noni by NewAge segment decreased by $5.2 million from $52.1 million for the three months ended June 30, 2019 to
$46.9 million for the three months ended June 30, 2020. We believe the decrease in net revenue for the Noni by NewAge segment
was primarily caused by decreased purchasing by consumers during the COVID-19 pandemic and the related Orders that were in effect
during the three months ended June 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. However, the COVID-19 pandemic required alternative selling approaches, such
as through social media which we believe are improving but still currently less effective than in-person selling in certain regions.
The impact of the pandemic was a significant contributing factor for the three months ended June 30, 2020 that resulted in decreases
in net revenue of 17% in China, 10% in Japan, and 18% in all other foreign countries as a group. However, Noni by
NewAge’s net revenue in the United States increased by 13% for the three months ended June 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 NewAge segment increased by $1.5 million
from $14.3 million for the three months ended June 30, 2019 to $15.8 million for the three months ended June 30, 2020. The increase
in net revenue for the NewAge segment for the three months ended June 30, 2020 was attributable to $2.3 million of net revenue
related to BWR, which was acquired in July 2019, partially offset by a decrease in net revenue for our U.S. retail brands business
of $0.8 million. The COVID-19 Orders have adversely impacted the Company’s customers such as restaurants, hotels, stadiums
and airports in the United States, whereby average monthly revenue for that line of the Company’s distribution business decreased
by approximately 48% for the four months ended June 30, 2020 compared to the first two months of 2020. We were able to partially
mitigate the reductions in sales as a result of increased sales of personal protective equipment and hand sanitizer by the DSD
division. We are currently evaluating our strategic alternatives with our U.S. retail brands and the BWR division which accounted
for a combined $3.4 million of the net revenue of the NewAge segment for the three months ended June 30, 2020.
Cost
of goods sold. Cost of goods sold decreased from $24.7 million for the three
months ended June 30, 2019 to $24.6 million for the three months ended June 30, 2020, a decrease of $0.1 million. For the three
months ended June 30, 2020, a decrease of $0.6 million was attributable to the Noni by NewAge segment, partially offset by an increase
of $0.5 million attributable to the NewAge segment.
The $0.6 million reduction in cost of goods sold for the Noni
by NewAge segment represents a reduction of 5% for the three months ended June 30, 2020. Cost of goods sold decreased primarily
due to lower product shipments associated with the reduction in sales, partially offset by the elimination of a charge of $0.8
million for the three months ended June 30, 2019 related to the Morinda business combination that closed on December 21, 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 in 2019. For the three months ended June 30, 2019, a portion of the closing date
inventories was sold, which resulted in a charge to cost of goods sold of approximately $0.8 million. The elimination of this $0.8
million charge in 2020 was partially offset by an increase in inventory-related charges of $0.2 million.
Cost of goods sold for the NewAge segment increased by 4% or
$0.5 million for the three months ended June 30, 2020. This increase was attributable to cost of goods sold of $1.7 million related
to BWR that was acquired in July 2019, partially offset by a reduction in write-offs related to excess and obsolete inventories
and lower product costs for the DSD and U.S. retail brands division for the three months ended June 30, 2020.
Gross
profit. Gross profit decreased from $41.6 million for the three months
ended June 30, 2019 to $38.1 million for the three months ended June 30, 2020, a decrease of $3.5 million or 9%. The decrease in
gross profit was due to the Noni by NewAge segment which decreased by $4.6 million due to net revenue that decreased by 10%, partially
offset by cost of goods sold that decreased by 5% as discussed above. The NewAge segment accounted for an increase in gross profit
of $1.0 million, driven by net revenue that increased by 10% whereas cost of goods sold only increased by 4%. We are currently
evaluating our strategic alternatives with our U.S. retail brands and the BWR division, which generated approximately break-even
gross profit during the three months ended June 30, 2020.
Consolidated gross margin decreased from 63% for the three
months ended June 30, 2019 to 61% for the three months ended June 30, 2020. For the three months ended June 30, 2020, gross margin
for our Noni by NewAge segment decreased by 1% whereas gross margin for the NewAge segment increased from 8% to 14%.
Commissions.
Commissions were $19.6 million for the three months ended June
30, 2019 compared to $18.4 million for the three months ended June 30, 2020, a decrease of $1.2 million. Substantially all of this
reduction was attributable to the Noni by NewAge segment which decreased from $19.2 million for the three months ended June 30,
2019 to $17.9 million for the three months ended June 30, 2020. The decrease in commissions of $1.3 million for the Noni by NewAge
segment was primarily attributable to lower net revenue for the three months ended June 30, 2020. Under Noni by NewAge’s
business model, commissions typically range between 37% and 39% of net revenue whereas commissions for the NewAge segment are typically
about 3% of net revenue.
Selling,
general and administrative expenses. Selling, general and administrative (“SG&A”)
expenses decreased from $28.2 million for the three months ended June 30, 2019 to $26.3 million for the three months ended June
30, 2020, a decrease of $1.9 million. The primary cost reductions consisted of occupancy costs of $1.5 million, marketing costs
of $0.8 million, travel costs of $0.3 million, and credit card transaction fees of $0.1 million. These decreases in SG&A expense
totaled $2.7 million and were partially offset by increases in professional fees of $0.6 million, general business expenses of
$0.1 million that was driven by higher director and officer insurance costs in 2020, and stock-based compensation of $0.1 million.
For the three months ended June 30, 2020, SG&A expenses include $0.3 million for due diligence and other costs related to potential
acquisition candidates and $0.3 million for additional professional fees.
In
April 2020, we initiated a restructuring plan that is designed to achieve selling, general and administrative cost reductions.
This restructuring plan is primarily focused on reductions in marketing and other personnel whereby we terminated approximately
100 employees in May and June 2020. We incurred severance costs of $0.9 million for the three months ended June 30, 2020.
For the three months ended June 30, 2020, our cash-based compensation was reduced by approximately $0.9 million due to the initial
results of the restructuring plan, but this savings was completely offset by the severance payments, whereby cash-based compensation
was unchanged compared to the three months ended June 30, 2019. As a result of our implementation of the restructuring plan, we
expect to achieve annualized cost savings of approximately $5.8 million related to the terminated employees, but no assurance
can be provided that this restructuring plan will be successful in achieving the intended cost reductions.
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
$6.7 million from $13.2 million as of March 31, 2019 to approximately $6.5 million as of June 30, 2019. This reduction in the
fair value of the Milestone Dividend resulted in an unrealized gain of approximately $6.7 million for the three months ended June
30, 2019. For the three months ended June 30, 2020, we did not have any gain or loss on the change in fair value of earnout obligations.
Impairment
expense. Impairment expense related to right-of-use assets (“ROU”) decreased from $1.5 million for the three
months ended June 30, 2019 to $0.4 million for the three months ended June 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 recognition of an impairment charge of
$1.5 million for the three months ended June 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 June 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 three months ended June 30, 2020. It is possible that further impairment charges will be incurred
if we are not able to locate a subtenant in the next six to eight months, or if the sublease terms are less favorable than our
current expectations.
Depreciation
and amortization expense. Depreciation and amortization expense included in operating expenses decreased from $2.0 million
for the three months ended June 30, 2019 to $1.8 million for the three months ended June 30, 2020, a decrease of $0.2 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 $0.8 million for the three
months ended June 30, 2019 to $0.6 million for the three months ended June 30, 2020, a decrease of $0.2 million. For the three
months ended June 30, 2020, interest expense was primarily attributable to (i) interest expense based on the contractual rates
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 $14.3 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, and (iv) cash settlements under our interest rate swap agreement, unused line fees
and other interest charges of $0.1 million. Based on the 1.0% contractual rate, interest expense related to our PPP Loan amounted
to approximately $14,000 for the six months ended June 30, 2020.
For the three months ended June 30, 2019, interest expense
was primarily attributable to (i) interest expense based on the contractual rates under the EWB Credit Facility of $0.2 million
based on a weighted average interest rate of 6.0% and weighted average borrowings outstanding of $15.6 million for the three months
ended June 30, 2019, (ii) accretion of discount for a total of $0.5 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.
Interest
and other income (expense), net. For the three months ended June 30, 2020, we had interest and
other income (expense), net that resulted in income of $0.3 million compared to expense of $0.1 million for the three months ended
June 30, 2019. 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. Interest and other income (expense), net for the three months ended
June 30, 2019 consisted of other non-operating expenses of $0.2 million, partially offset by interest income of $0.1 million.
Income
tax expense. For the three months ended June 30, 2020, we recognized income
tax expense of $0.6 million, which consisted of foreign income taxes associated with profitable foreign markets. Due to 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 three months ended June 30, 2019. For the three months ended June 30, 2019, we recognized income tax expense of $7.8 million,
which consisted of a $3.3 million valuation allowance, reversal of a domestic tax benefit of $4.1 million that was recognized for
the quarter ended March 31, 2019 that was no longer expected to be realized, and foreign tax expense of $0.4 million.
Six
Months Ended June 30, 2020 and 2019
Our
consolidated statements of operations for the six months ended June 30, 2020 and 2019 are presented below (dollars in thousands):
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
126,330
|
|
|
$
|
124,655
|
|
|
$
|
1,675
|
|
|
|
1%
|
|
|
Cost of goods sold
|
|
|
46,728
|
|
|
|
44,430
|
|
|
|
2,298
|
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
79,602
|
|
|
|
80,225
|
|
|
|
(623)
|
|
|
|
-1%
|
|
|
Gross margin
|
|
|
63%
|
|
|
|
64%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
37,920
|
|
|
|
37,645
|
|
|
|
275
|
|
|
|
1%
|
|
|
Selling, general and administrative
|
|
|
56,885
|
|
|
|
55,017
|
|
|
|
1,868
|
|
|
|
3%
|
|
|
Gain from change in fair value of earnout obligations
|
|
|
-
|
|
|
|
(6,665)
|
|
|
|
6,665
|
|
|
|
-100%
|
|
|
Impairment of right-of-use assets
|
|
|
400
|
|
|
|
1,500
|
|
|
|
(1,100)
|
|
|
|
-73%
|
|
|
Depreciation and amortization expense
|
|
|
3,542
|
|
|
|
4,253
|
|
|
|
(711)
|
|
|
|
-17%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
98,747
|
|
|
|
91,750
|
|
|
|
6,997
|
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(19,145)
|
|
|
|
(11,525)
|
|
|
|
(7,620)
|
|
|
|
66%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from sale of property and equipment
|
|
|
(66)
|
|
|
|
6,442
|
|
|
|
(6,508)
|
|
|
|
-101%
|
|
|
Interest expense
|
|
|
(1,172)
|
|
|
|
(2,402)
|
|
|
|
1,230
|
|
|
|
-51%
|
|
|
Gain (loss) from change in fair value of derivatives
|
|
|
(306)
|
|
|
|
470
|
|
|
|
(776)
|
|
|
|
-165%
|
|
|
Interest and other income (expense), net
|
|
|
791
|
|
|
|
(185)
|
|
|
|
976
|
|
|
|
-528%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(19,898)
|
|
|
|
(7,200)
|
|
|
|
(12,698)
|
|
|
|
176%
|
|
|
Income tax expense
|
|
|
(1,274)
|
|
|
|
(6,097)
|
|
|
|
4,823
|
|
|
|
-79%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,172)
|
|
|
$
|
(13,297)
|
|
|
$
|
(7,875)
|
|
|
|
59%
|
|
Presented
below is our net revenue, cost of goods sold, gross profit and gross margin by segment for the six months ended June 30, 2020
and 2019 (dollars in thousands):
|
|
|
Noni by NewAge Segment
|
|
|
NewAge Segment
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Percent
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
96,971
|
|
|
$
|
100,282
|
|
|
$
|
(3,311)
|
|
|
|
-3%
|
|
|
$
|
29,359
|
|
|
$
|
24,373
|
|
|
$
|
4,986
|
|
|
|
20%
|
|
|
Cost of goods sold
|
|
|
21,462
|
|
|
|
22,108
|
|
|
|
(646)
|
|
|
|
-3%
|
|
|
|
25,266
|
|
|
|
22,322
|
|
|
|
2,944
|
|
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
75,509
|
|
|
$
|
78,174
|
|
|
$
|
(2,665)
|
|
|
|
-3%
|
|
|
$
|
4,093
|
|
|
$
|
2,051
|
|
|
$
|
2,042
|
|
|
|
100%
|
|
|
Gross margin
|
|
|
78%
|
|
|
|
78%
|
|
|
|
|
|
|
|
|
|
|
|
14%
|
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
Net
Revenue. Net revenue increased from $124.7 million for the six months ended June 30, 2019 to $126.3 million for the six
months ended June 30, 2020, an increase of $1.7 million or 1%. For the six months ended June 30, 2020, higher revenues resulted
from an increase in net revenue of $5.0 million for the NewAge segment, partially offset by a reduction in net revenue of $3.3
million for the Noni by NewAge segment.
Net revenue for the Noni by NewAge segment decreased by $3.3
million from $100.3 million for the six months ended June 30, 2019 to $97.0 million for the six months ended June 30, 2020. We
believe the decrease in net revenue for the Noni by NewAge segment was primarily caused by decreased purchasing 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 we believe are improving but still currently less
effective than in-person selling in certain regions. As a result, Noni by NewAge’s net revenue decreased by 2% in China,
4% in Japan, and 8% in all other foreign countries as a group. However, Noni by NewAge’s net revenue in the United States
increased by 4% for the six months ended June 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 $5.0 million
from $24.4 million for the six months ended June 30, 2019 to $29.4 million for the six months ended June 30, 2020. The increase
in net revenue for the NewAge segment for the six months ended June 30, 2020 was primarily attributable to $4.9 million of net
revenue related to BWR that was acquired in July 2019, and an increase of $1.3 million in net revenue related to the DSD division,
primarily as a result of sales of personal protective equipment and hand sanitizer. These increases in net revenue total $6.2 million
and were partially offset by a decrease in net revenue for our U.S. retail brands business of $1.2 million. The COVID-19 Orders
have adversely impacted the Company’s customers such as restaurants, hotels, stadiums and airports in the United States,
whereby average monthly revenue for that line of the Company’s distribution business decreased by approximately 48% for the
four months ended June 30, 2020 compared to the first two months of 2020. We are currently evaluating our strategic alternatives
with our U.S. retail brands and the BWR division which accounted for a combined $6.7 million of the net revenue of the NewAge segment
for the six months ended June 30, 2020.
Cost
of goods sold. Cost of goods sold increased from $44.4 million for the six months ended June 30, 2019 to $46.7 million
for the six months ended June 30, 2020, an increase of $2.3 million. For the six months ended June 30, 2020, $2.9 million of this
increase was attributable to the NewAge segment, partially offset by a decrease of $0.6 million for the Noni by NewAge segment.
Cost of goods sold for the NewAge segment increased by 13%
or $2.9 million for the six months ended June 30, 2020. This increase was attributable to cost of goods sold of $4.1 million related
to BWR that was acquired in July 2019, partially offset by a reduction in write-offs related to excess and obsolete inventories
and lower product costs for the DSD and U.S. retail brands division for the six months ended June 30, 2020.
The $0.6 million reduction in cost of goods sold for the Noni
by NewAge segment represents a reduction of 3% for the six months ended June 30, 2020, which is consistent with the reduction in
net revenue. Cost of goods sold for each of the six months ended June 30, 2020 and 2019 included total charges of $1.6 million.
For the six months ended June 30, 2020, the Noni by NewAge segment had increased expense of $0.7 million for sales promotion costs
and $0.9 million for excess and obsolete and other inventory variances, for a total of $1.6 million. For the six months ended June
30, 2019, the Noni by NewAge segment had a non-recurring charge to cost of goods sold of $1.6 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 six months ended June 30, 2019.
Gross
profit. Gross profit decreased from $80.2 million for the six months
ended June 30, 2019 to $79.6 million for the six months ended June 30, 2020, a decrease of $0.6 million or 1%. The decrease in
gross profit was due to the Noni by NewAge segment that decreased by $2.7 million or 3%, partially offset by an improvement in
gross profit for the NewAge segment of $2.1 million. The reduction in gross profit for the Noni by NewAge segment was primarily
attributable to a $3.3 million reduction in net revenue due to the COVID-19 pandemic. The NewAge segment accounted for an increase
in gross profit of $2.0 million, driven by net revenue that increased by 20% whereas cost of goods sold only increased by 13%.
We are currently evaluating our strategic alternatives with our U.S. retail brands and the BWR division, which incurred a loss
of $0.1 million of gross profit during the six months ended June 30, 2020.
For the six months ended June 30, 2020, consolidated gross
margin decreased from 64% to 63%. Gross margin for our Noni by NewAge segment declined by less than 1%, whereas gross margin for
the NewAge segment increased from 8% for the six months ended June 30, 2019 to 14% for the six months ended June 30, 2020.
Commissions.
Commissions were $37.6 million for the six months ended June
30, 2019 compared to $37.9 million for the six months ended June 30, 2020, an increase of $0.3 million. Commissions for the Noni
by NewAge segment were unchanged at $36.9 million for the six months ended June 30, 2020 and 2019. Commissions related to the NewAge
segment increased by $0.3 million primarily due to net revenue from the BWR reporting unit that was acquired in July 2019 and increased
net revenue for the remainder of the NewAge segment.
Selling,
general and administrative expenses. SG&A expenses increased from $55.0 million for the six
months ended June 30, 2019 to $56.9 million for the six months ended June 30, 2020, an increase of $1.9 million. This increase
was comprised of (i) cash-based compensation and benefit costs of $2.2 million, primarily due to an increase in the number of employees
for most of the six months ended June 30, 2020, (ii) professional fees of $2.5 million that was driven by higher auditing, consulting
costs and legal fees in 2020, and (iii) an increase in general business expenses of $1.2 million that was partially driven by higher
director and officer insurance costs in 2020. These increases in SG&A expense totaled $5.9 million and were partially offset
by reductions in stock-based compensation expense of $1.9 million, occupancy costs of $1.7 million, marketing costs of $0.4 million,
and travel costs of $0.2 million. The increase in cash-based compensation and benefits of $2.2 million included severance costs
of $0.9 million incurred in connection with the restructuring plan that we initiated in April 2020. For the six months ended June
30, 2020, SG&A expenses include $0.4 million for due diligence and other costs related to potential acquisition candidates
and $0.9 million for additional professional fees.
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
$6.7 million from $13.2 million as of December 31, 2018 to approximately $6.5 million as of June 30, 2019. This reduction in the
fair value of the Milestone Dividend resulted in an unrealized gain of approximately $6.7 million for the six months ended June
30, 2019. For the six months ended June 30, 2020, we did not have any gain or loss on the change in fair value of earnout obligations.
Impairment
expense. Impairment expense related to ROU assets decreased from $1.5 million for the six months ended June 30, 2019 to
$0.4 million for the six months ended June 30, 2020, a decrease of $1.1 million. In June 2019, we began attempting to sublease
a portion of 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 six months ended June 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 June 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 six months
ended June 30, 2020. It is possible that further impairment charges will be incurred if we are not able to locate a subtenant
in the next six to eight months, or if the sublease terms are less favorable than our current expectations.
Depreciation
and amortization expense. Depreciation and amortization expense included in operating expenses decreased from $4.3 million
for the six months ended June 30, 2019 to $3.5 million for the six months ended June 30, 2020, a decrease of $0.7 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.
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 six months ended June 30, 2019. For the six months ended
June 30, 2020, a loss of $0.1 million was recognized due to the sale of equipment.
Interest
expense. Interest expense decreased from $2.4 million for the six months ended June 30, 2019 to $1.2 million for the
six months ended June 30, 2020, a decrease of $1.2 million. For the six months ended June 30, 2020, interest expense was
primarily attributable to (i) interest expense based on the contractual rates under the EWB Credit Facility of $0.4 million
based on a weighted average interest rate of 5.3% and weighted average borrowings outstanding of $14.5 million for the six
months ended June 30, 2020, (ii) accretion of discount for a total of $0.3 million related to the Morinda business
combination liabilities and the EWB Credit Facility, (iii) 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 charges of $0.1 million. Based on the 1.0% contractual rate, interest expense related to our PPP Loan
amounted to approximately $14,000 for the six months ended June 30, 2020.
For the six months ended June 30, 2019, interest expense 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 $1.1 million related to the Morinda business combination
liabilities and the EWB Credit Facility, and (iv) interest expense based on the contractual rates under the EWB Credit Facility
of $0.3 million based on a weighted average interest rate of 6.0% and weighted average borrowings outstanding of $8.3 million for
the six months ended June 30, 2019.
Gain
(loss) on change in fair value of derivatives. For the six months ended June 30, 2020, we recognized a loss from the change
in fair value of derivatives of $0.3 million whereas we recognized a gain of $0.5 million for the six months ended June 30, 2019.
In July 2019, we entered into an interest rate swap agreement with EWB. This swap agreement 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%. For the six months ended June 30, 2020, we had an unrealized loss of $0.3 million from this interest
rate swap agreement due to a decline in interest rates. For the six months ended June 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.
Interest
and other income (expense), net. Interest and other income (expense), net amounted to income of $0.8 million for the six
months ended June 30, 2020 and a net expense of $0.2 million for the six months ended June 30, 2019. For the six months ended
June 30, 2020, other income was primarily comprised of foreign exchange gains of $0.5 million and interest income of $0.1 million.
For the six months ended June 30, 2019, we incurred other debt financing expenses related to the Siena Revolver of $0.2 million.
Income
tax expense. For the six months ended June 30, 2020, we recognized income
tax expense of $1.3 million, which primarily consisted of foreign income taxes associated with profitable foreign markets. Due
to 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 six months ended June 30, 2020. For the six months ended June 30, 2019, we recognized income tax expense
of $6.1 million, which consisted of a $3.3 million valuation allowance and foreign tax expense of $2.8 million.
Liquidity
and Capital Resources
Overview
As of June 30, 2020, we had cash and cash equivalents of $40.7
million and working capital of $33.6 million. For the six months ended June 30, 2020, we incurred a net loss of $21.2 million and
we used cash in our operating activities of $23.6 million. For the six months ended June 30, 2020, approximately $13.1 million
of 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. As of June 30, 2020, we have debt and lease obligations due during the 12-months ending June 30,
2021 that will require (i) cash payments to the former stockholders of Morinda of $5.5 million, (ii) operating lease payments of
$8.6 million, and (iii) principal payments under the EWB Credit Facility 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. The Third Amendment is expected to have a significant impact on
our liquidity and capital resources for the 12-month period ending June 30, 2021. 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 $14.7 million
as of June 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 issuance and 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 six months ended June 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 July 20, 2020, we entered into an Agreement and Plan of
Merger (the “Merger Agreement”), by and among us, Ariel Merger Sub, LLC (“Merger Sub”), Ariix, LLC (“Ariix”),
certain members of Ariix (the “Sellers”) and Frederick Cooper, as primary shareholder and 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”). Under the Merger Agreement, which is discussed further below, we are required to make a cash payment
of $25.0 million on the closing date, which is expected to occur during the third quarter of 2020. In addition, on the closing
date, we will be required to issue short-term and long-term convertible notes that provide for future principal payments up to
$10.0 million and $141.3 million, respectively. Subject to approval by our stockholders, we may be able to settle all or part of
the convertible notes by issuing shares of our Common Stock. Otherwise, the principal balance of the long-term convertible notes
plus interest at 7.0% per annum will be payable in cash two years after the closing date. In order to fund the required cash payments
under the Merger agreement, we are currently evaluating various alternatives including an equity offering and the refinancing of
our EWB Credit Facility.
We believe our existing cash and cash equivalents of $40.7 million combined with expected future equity net
offering proceeds under the ATM Agreement, the potential refinancing of our EWB Credit Facility, and future cash expected to be
generated from operations, will be sufficient to fund business combination payments, debt and lease obligations, and working capital
requirements for the next 12 months. 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. Even if these
financing sources are available, they may be on terms that are not acceptable to our board of directors and stockholders.
Please refer to the following sections for further discussion
of the terms of the EWB Credit Facility, the ATM Agreement, the Acquisition, and the PPP Loan.
East
West Bank Credit Facility
On March 29, 2019, we entered into a credit facility with East
West Bank (the “EWB Credit Facility”). The EWB Credit Facility matures on March 29, 2023 (the “Maturity Date”)
and provides for (i) a term loan in the initial principal amount of $15.0 million (the “EWB Term Loan”) and (ii) a
$10.0 million revolving loan agreement (the “EWB Revolver”). As of June 30, 2020, we had outstanding borrowings of
$14.0 million under the EWB Term Loan and no borrowings were outstanding under the EWB Revolver. Our
obligations under the EWB Credit Facility are secured by substantially all of our assets and guaranteed by certain of 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
applicable 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 June 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, 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 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). Under the Third Amendment,
EWB waived all financial covenants for the 12-month period ended December 31, 2019, and as of June 30, 2020 we were in compliance
with all covenants under the EWB Credit Facility. 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 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.
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 six months ended June 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 agreed to pay the Agent a commission equal to 3% 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 June 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.
Ariix
Merger Agreement
On July 20, 2020, we entered into the Merger Agreement, pursuant
to which we agreed to acquire Ariix, which owns five brands in the e-commerce and direct selling channels. The Merger Agreement
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, subject to customary qualifications, and (iii)
material compliance by the parties with their respective covenants and obligations. In addition, the Merger Agreement contains
certain termination rights, including by us or the Sellers Agent in the event the closing has not occurred by September 30, 2020
(the “Outside Date”). Pursuant to the Merger Agreement, on the closing date (the “Closing Date”), Ariix
will merge with Merger Sub, with Ariix as the surviving entity and becoming one of our wholly-owned subsidiaries.
On the Closing Date, we will be required to pay the Sellers
$25.0 million in cash and issue (i) 18.0 million shares of Common Stock, (ii) a convertible promissory note for $10.0 million that
matures six months from the Closing Date (the “Six-Month Convertible Note”), and (iii) a convertible promissory note
for $141.25 million that matures 24 months from the Closing Date (the “Two-Year Convertible Note” and jointly
with the Six-Month Convertible Note, the “Convertible Notes”). The original principal balance of the Convertible Notes
will be subject to adjustment based on the working capital of Ariix at the Closing Date. In connection with the Acquisition and
subject to approval by our stockholders, we will issue to Frederick Cooper or his designees 7.0 million shares of Common Stock
in consideration of a three year non-competition, non-solicitation, invention assignment, and right of first refusal agreement
to buy or license any intellectual property developed during the term of the agreement.
The Convertible Notes will be subordinated to the EWC Credit
Facility and bear no interest if paid in full within six months of the Closing Date. If the Two-Year Convertible Note is not paid
in full within six months of the Closing Date, it will retroactively bear interest at 7.0% per annum through the maturity date.
Subject to approval by our stockholders and solely at our election, the Convertible Notes and any accrued interest will be convertible
into Common Stock with a conversion price floor of $2.00 per share of Common Stock, a conversion price cap of $6.00 per share of
Common Stock, and the automatic conversion into Common Stock if the market price of our Common Stock reaches $6.00 per share.
PPP
Loan
On April 14, 2020, we entered into the PPP Loan with EWB in
an aggregate principal amount of approximately $6.9 million. The PPP Loan bears interest at a fixed rate of 1.0% per annum and
provides for no principal payments until the maturity date in April 2022. The PPP Loan is unsecured and guaranteed by the U.S.
Small Business Administration. We intend to apply to the lender for forgiveness of the PPP Loan, with the amount which 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, calculated in accordance with the terms of the CARES Act. Our eligibility for the
PPP Loan, expenditures that qualify toward forgiveness, and the final balance of the PPP Loan that the lender may approve for forgiveness
are subject to audit and final approval by the SBA. To the extent that all or part of the PPP Loan is not forgiven, we will be
required to pay interest at 1.0% and, commencing in October 2020, interest payments will be required through the maturity date.
The terms 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.
Cash
Flows Summary
Presented
below is a summary of our operating, investing and financing cash flows for the six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(23,596)
|
|
|
$
|
(14,741)
|
|
|
$
|
(8,855)
|
|
|
Investing activities
|
|
|
(1,821)
|
|
|
|
33,507
|
|
|
|
(35,328)
|
|
|
Financing activities
|
|
|
20,748
|
|
|
|
21,546
|
|
|
|
(798)
|
|
Cash
Flows Provided by Operating Activities
For
the six months ended June 30, 2020 and 2019, net cash used in operating activities amounted to $23.6 million and $14.7 million,
respectively. The key components in the calculation of our net cash used in operating activities for the six months ended June
30, 2020 and 2019, are as follows (in thousands):
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Net loss
|
|
$
|
(21,172
|
)
|
|
$
|
(13,297
|
)
|
|
$
|
(7,875
|
)
|
|
Non-cash expenses
|
|
|
9,768
|
|
|
|
15,334
|
|
|
|
(5,566
|
)
|
|
Loss (gain) from change in fair value of derivatives
|
|
|
306
|
|
|
|
(470
|
)
|
|
|
776
|
|
|
Loss (gain) from sale of property and equipment
|
|
|
66
|
|
|
|
(6,442
|
)
|
|
|
6,508
|
|
|
Deferred income tax benefit
|
|
|
(173
|
)
|
|
|
(8,543
|
)
|
|
|
8,370
|
|
|
Change in fair value of earnout obligations
|
|
|
-
|
|
|
|
(6,665
|
)
|
|
|
6,665
|
|
|
Changes in operating assets and liabilities, net
|
|
|
(12,391
|
)
|
|
|
5,342
|
|
|
|
(17,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(23,596
|
)
|
|
$
|
(14,741
|
)
|
|
$
|
(8,855
|
)
|
For the six months ended June 30, 2020, our net loss was $21.2
million compared to a net loss of $13.3 million for the six months ended June 30, 2019. Please refer to Results of Operations
above for a discussion of the factors that resulted in our net loss for the six months ended June 30, 2020 and 2019.
For the six months ended June 30, 2020, non-cash expenses partially
mitigated the impact of our net loss by $9.8 million. These non-cash expenses consisted primarily of (i) depreciation and amortization
expense of $3.8 million, (ii) non-cash lease expense of $2.8 million, (iii) stock-based compensation expense of $2.5 million, (iv)
impairment of right-of-use lease assets of $0.4 million, and (v) accretion and amortization of debt discount and issuance costs
of $0.3 million. For the six months ended June 30, 2020, we also had an unrealized loss on the change in fair value of derivatives
of $0.3 million and a loss from the sale of property and equipment of $0.1 million.
For the six months ended June 30, 2020, changes in operating
assets and liabilities used $12.4 million of operating cash flows. The primary use of operating cash flows for the six months ended
June 30, 2020 was due to (i) a reduction in other accrued liabilities of $12.9 million, (ii) an increase in accounts receivable
of $2.3 million, and (iii) a decrease in accounts payable of $0.6 million. These changes that used operating cash flow totaled
$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 $2.8 million, and a reduction in prepaid expenses, deposits and other assets of $0.5 million.
The $13.2 million decrease in 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 building in Tokyo, Japan in March 2019 as discussed below.
For
the six months ended June 30, 2019, our net loss of $13.3 million, a deferred income tax benefit of $8.5 million, the change in
fair value of earnout obligations of $6.7 million, a gain of $6.4 million due to the sale of our land and building in Tokyo in
March 2019, and a non-cash gain of $0.5 million from the change in fair value of derivatives, resulted in combined negative operating
cash flow of $35.4 million. These amounts were partially offset by non-cash expenses of $15.3 million, and favorable changes in
operating assets and liabilities of $5.3 million to arrive at net cash used in operating activities of $14.7 million. For the
six months ended June 30, 2019, non-cash expenses of $15.3 million included stock-based compensation expense of $4.3 million,
depreciation and amortization expense of $4.4 million, non-cash lease expense of $3.0 million, accretion and amortization of debt
discount and issuance costs of $1.6 million, impairment of right-of-use assets of $1.5 million, and a cash expense for make-whole
applicable premium of $0.5 million that was classified as a financing cash outflow since it related to the prepayment of debt.
For the six months ended June 30, 2019, the net changes in
operating assets and liabilities provided $5.3 million of operating cash flows. This amount was primarily attributable to an increase
in accounts payable and accrued liabilities of $14.2 million and a reduction in inventories of $0.2 million. These increases in
operating cash flow totaled $14.4 million and were partially offset by a decrease in accounts receivable of $5.3 million as cash
collections lagged behind the increase in our trade receivables, and we spent $3.7 million for increased prepaid expenses, deposits
and other assets. The increase in accrued liabilities was primarily driven by an increase in accrued income taxes payable of $13.6
million which was primarily related to the sale of our land and building in Japan.
Cash
Flows from Investing Activities
For
the six months ended June 30, 2020, our investing cash flows consisted of cash payments for capital expenditures of $2.0 million,
partially offset by proceeds from the sale of equipment of $0.2 million. Our capital expenditures consisted of $1.8 million in
our Noni by NewAge segment and $0.2 million in our NewAge segment.
For
the six months ended June 30, 2019, cash provided by investing activities of $33.5 million was primarily driven by the sale leaseback
of our land and building in Tokyo. The gross selling price was $57.1 million. After deducting commissions and other selling expenses
of $1.9 million, the net proceeds amounted to $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 $37.5 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 six months ended June 30, 2019 included (i) capital expenditures for property and equipment of $1.2 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 for the six months ended June 30, 2019
included leasehold improvements related to our distribution facility in Aurora, Colorado of $0.3 million, transportation equipment
of $0.3 million, and computer and other equipment primarily related to our facilities in Colorado for a total of $0.4 million.
Cash
Flows from Financing Activities
Our financing activities generated positive net cash flows
of $20.7 million for the six months ended June 30, 2020, as compared to $21.5 million for the six months ended June 30, 2019. For
the six months ended June 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 the ATM Agreement, and cash proceeds
of $6.9 million under the PPP Loan. For the six months ended June 30, 2020, our cash outflows primarily consisted of principal
repayments under the EWB Credit Facility of $10.5 million, payments of $0.3 million related to the deferred lease financing obligation,
payments of $0.3 million related to business combination obligations, and total payments of $0.2 million for debt issuance costs
and offering costs related to the ATM Agreement. For the six months ended June 30, 2020, our principal payments included $0.8 million
under the EWB Term Loan and $9.7 million to repay the EWB Revolver.
For the six months ended June 30, 2019, the principal sources
of cash from our financing activities consisted of (i) $46.3 million of borrowings, including $35.0 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 $11.4 million from the issuance of approximately 2.2 million shares of Common
Stock issued pursuant to the ATM Agreement, and (iv) proceeds from the exercise of stock option of $0.4 million. These financing
cash proceeds totaled $75.7 million and were partially offset by (i) principal payments under debt agreements of $26.2 million,
including $10.0 million under the EWB Revolver and $16.2 million under the Siena Revolver, (ii) payment of Morinda business combination
liabilities of $26.0 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 $0.4 million, and (vi) cash payments of $0.1 million for deferred offering costs under the ATM Agreement. The Siena Revolver
was terminated in March 2019 and replaced with the EWB Credit Facility.
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 six months ended June 30, 2020 and 2019, $0.3 million
and $0.2 million, respectively, of our lease payments were allocated to reduce the financial liability.
Off-Balance
Sheet Arrangements
During
the six months ended June 30, 2020 and 2019, 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.
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 board of directors 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.
EBITDA
and Adjusted EBITDA. The calculation of our EBITDA and Adjusted EBITDA is presented below for the three and six months ended
June 30, 2020 and 2019 (in thousands):
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,554)
|
|
|
$
|
(11,681)
|
|
|
$
|
(21,172)
|
|
|
$
|
(13,297)
|
|
|
EBITDA Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
600
|
|
|
|
756
|
|
|
|
1,172
|
|
|
|
2,402
|
|
|
Income tax expense
|
|
|
551
|
|
|
|
7,797
|
|
|
|
1,274
|
|
|
|
6,097
|
|
|
Depreciation and amortization expense
|
|
|
1,873
|
|
|
|
2,211
|
|
|
|
3,752
|
|
|
|
4,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(6,530)
|
|
|
|
(917)
|
|
|
|
(14,974)
|
|
|
|
(357)
|
|
|
Adjusted EBITDA Non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
1,092
|
|
|
|
1,000
|
|
|
|
2,449
|
|
|
|
4,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(5,438)
|
|
|
$
|
83
|
|
|
$
|
(12,525)
|
|
|
$
|
3,930
|
|
EBITDA
is defined as net income (loss) adjusted to exclude GAAP amounts for interest expense, income tax expense, and depreciation and
amortization expense. For the calculation of Adjusted EBITDA, we also exclude the following item for the periods presented:
Stock-Based
Compensation Expense: Our compensation strategy includes the use of stock-based compensation to attract and retain employees,
directors and consultants. This strategy is principally aimed at aligning the employee interests with those of our stockholders
and to achieve long-term employee retention, rather than to motivate or reward operational performance for any particular period.
As a result, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance
in any particular period.
Included in our Adjusted EBITDA shown above for the three and
six months ended June 30, 2020 is a loss of $2.3 million and $5.3 million, respectively, related to our U.S. retail brands and
the BWR division for which we are currently evaluating our strategic alternatives.