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. 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.
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 some of
these Orders were relaxed or lifted in different jurisdictions at various times during the three months ended September
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 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 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.
|
|
|
|
|
●
|
Our
expectations about the extent and duration of COVID-19 on our business.
|
|
|
|
|
●
|
Volatility
in credit and market conditions.
|
|
|
|
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●
|
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.
|
|
|
|
|
●
|
Ability
to re-patriate cash from certain foreign markets.
|
|
|
|
|
●
|
Strategy
for customer retention and growth.
|
|
|
|
|
●
|
Risk
management strategy.
|
|
|
|
|
●
|
Expected
capital expenditure levels for the remainder of 2020 and 2021.
|
|
|
|
|
●
|
Ability
to successfully complete and integrate acquisitions, including the expected acquisition of Ariix.
|
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”), 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, 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 be the leading social selling and
distribution company with a focus on wellness, healthy appearance, and nutritional performance platforms differentiating
across the platforms with plant-based ingredients, Noni, cannabidiol (“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 stockholder 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, 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 292,000 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, and this trend has accelerated under the environment of COVID-19.
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
current brand portfolio consists of a range of owned brands that we commercialize through our omni-channel route to market.
The owned brands include Tahitian Noni Juice, Te Mana, and Hiro.
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. For the three months ended September 30, 2020, Asia Pacific comprised 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 disposition
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 distributor of certain beverage products in Colorado and Wyoming.
Recent
Developments
Reference is made
to Notes 3, 4, 6, and 7 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 (i) our entry into the Amended Merger Agreement with
Ariix, LLC in September 2020, (ii) the disposition of our BWR subsidiary and substantially all U.S.
retail brands in September 2020, (iii) our initiation of restructuring plans in April and August 2020 that are designed
to achieve estimated 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 amount of approximately $6.9 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) sales of our common stock under the ATM Agreement that resulted in gross
proceeds of $25.8 million for the nine months ended September 30, 2020. These recent developments are also discussed below 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 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 September 30, 2020 and 2019
Our
unaudited condensed consolidated statements of operations for the three months ended September 30, 2020 and 2019 are presented
below (dollars in thousands):
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
62,719
|
|
|
$
|
69,828
|
|
|
$
|
(7,109
|
)
|
|
|
(10
|
)%
|
Cost of goods sold
|
|
|
25,224
|
|
|
|
29,532
|
|
|
|
(4,308
|
)
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,495
|
|
|
|
40,296
|
|
|
|
(2,801
|
)
|
|
|
(7
|
)%
|
Gross margin
|
|
|
60
|
%
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
17,458
|
|
|
|
21,185
|
|
|
|
(3,727
|
)
|
|
|
(18
|
)%
|
Selling, general and administrative
|
|
|
27,983
|
|
|
|
26,104
|
|
|
|
1,879
|
|
|
|
7
|
%
|
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
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50,638
|
|
|
|
43,286
|
|
|
|
7,352
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(13,143
|
)
|
|
|
(2,990
|
)
|
|
|
(10,153
|
)
|
|
|
340
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(521
|
)
|
|
|
(727
|
)
|
|
|
206
|
|
|
|
(28
|
)%
|
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
|
)%
|
Interest and other income (expense), net
|
|
|
291
|
|
|
|
(48
|
)
|
|
|
339
|
|
|
|
(706
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(13,521
|
)
|
|
|
(4,016
|
)
|
|
|
(9,505
|
)
|
|
|
237
|
%
|
Income tax expense
|
|
|
(612
|
)
|
|
|
(6,671
|
)
|
|
|
6,059
|
|
|
|
(91
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,133
|
)
|
|
$
|
(10,687
|
)
|
|
$
|
(3,446
|
)
|
|
|
32
|
%
|
On September 24,
2020, we sold our BWR subsidiary and substantially all U.S. retail brands (the “Divested Businesses”).
The Divested Businesses were components of our NewAge segment and are included in our operating results shown above. Presented
below is a summary of the operating results of the Divested Businesses for the period from July 1, 2020 until they were sold on
September 24, 2020, and for the three months ended September 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
|
)
|
As of September 30, 2020, the NewAge segment
is primarily comprised of our legacy DSD and ecommerce lines of business (the “Retained Businesses”).
Presented below is our net revenue, cost
of goods sold, gross profit (loss) and gross margin by segment for the three 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
|
|
$
|
46,585
|
|
|
$
|
54,843
|
|
|
$
|
(8,258
|
)
|
|
|
(15)%
|
|
|
$
|
16,134
|
|
|
$
|
14,985
|
|
|
$
|
1,149
|
|
|
|
8%
|
|
Cost of goods sold
|
|
|
11,120
|
|
|
|
11,555
|
|
|
|
(435
|
)
|
|
|
(4)%
|
|
|
|
14,104
|
|
|
|
17,977
|
|
|
|
(3,873
|
)
|
|
|
(22)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
$
|
35,465
|
|
|
$
|
43,288
|
|
|
$
|
(7,823
|
)
|
|
|
(18)%
|
|
|
$
|
2,030
|
|
|
$
|
(2,992
|
)
|
|
$
|
5,022
|
|
|
|
(168)%
|
|
Gross margin
|
|
|
76
|
%
|
|
|
79
|
%
|
|
|
|
|
|
|
|
|
|
|
13
|
%
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
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 $69.8 million for the three months ended September 30, 2019 to $62.7 million for the
three months ended September 30, 2020, a decrease of $7.1 million or 10%. For the three months ended September 30, 2020, we had
a decrease 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 million for the three months ended September 30, 2019 to $46.6 million
for the three 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 IPCs and consumers during the COVID-19 pandemic and the related Orders that
were in effect during 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. 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 NewAge segment increased by $1.1 million from $15.0 million for the three months ended September 30, 2019 to $16.1
million for the three months ended September 30, 2020. Net revenue for the Divested Businesses decreased 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. 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 $29.5 million for the three months ended September 30, 2019 to $25.2
million for the three months ended September 30, 2020, a decrease of $4.3 million. For the three months ended September 30, 2020,
cost of goods sold decreased by $0.4 million or 4% for the Noni by NewAge segment, and $3.9 million or 22% for the NewAge segment.
The
$0.4 million reduction in cost of goods sold for the Noni by NewAge segment was primarily due to reduced sales volume of
15%, and a charge related to the Morinda 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. 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 September 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%.
Cost
of goods sold for the NewAge segment decreased by $3.9 million from $18.0 million for the three months ended September 30, 2019
to $14.1 million for the three months ended September 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. The decrease in
cost of goods sold for the Retained Businesses 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% increase in net revenue.
Gross
profit. Gross profit decreased from $40.3 million for the three months ended September 30, 2019 to $37.5 million for the
three months ended September 30, 2020, a decrease of $2.8 million or 7%. Consolidated gross margin increased from 58% for the
three months ended September 30, 2019 to 60% for the three months ended September 30, 2020. We had a decrease in gross profit
of $7.8 million or 18% for the Noni by NewAge segment due to net revenue that decreased by 15%. For the three months ended September
30, 2020, we offered our customers additional discounts and promotions in order to stimulate sales. As a result, our gross
margin for the Noni by NewAge segment deceased from 79% for the three months ended September 30, 2019 to 76% for the three months
ended September 30, 2020.
For
the NewAge segment, we had an increase in gross profit of $5.0 million due to net revenue that increased by $1.1 million and cost
of goods sold that decreased by $3.9 million as discussed above. The increase in gross profit of $5.0 million for the NewAge segment
was driven by net revenue that increased by 8% whereas cost of goods sold decreased by 22%. Gross margin for the entire NewAge
segment increased from a loss of 20% for the three months ended September 30, 2019 to income of 13% for the three months ended
September 30, 2020. The Divested Businesses accounted for negative 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 million and gross margin of 8% for the three months ended September 30, 2019, compared to
gross profit of $2.8 million and gross margin of 20% for the three months ended September 30, 2020.
Commissions.
Commissions were $21.2 million for the three months ended September 30, 2019 compared to $17.5 million for the three months
ended September 30, 2020, a decrease of $3.7 million. Substantially all of this reduction was attributable to the Noni 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 decrease in commissions of $3.9 million for the Noni by NewAge segment was primarily attributable
to lower net revenue for the three months ended September 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 increased from
$26.1 million for the three months ended September 30, 2019 to $28.0 million for the three months ended September 30, 2020,
an increase of $1.9 million. This increase in our SG&A expenses was attributable to higher professional fees
of $1.5 million, including higher due diligence costs for investigation of acquisition opportunities, severance costs of
$1.7 million, occupancy costs of $0.7 million, and communications costs of $0.1 million. These increases in SG&A expense totaled
$4.0 million and were partially offset by decreases 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 million.
During
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 three months
ended September 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 of 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 million of our SG&A for the three months ended September 30, 2020 and 2019, respectively.
Gain
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 million for the year ended December 31, 2019. The estimated fair value of the
Milestone Dividend decreased from $6.4 million as of June 30, 2019 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 million for the three months ended
September 30, 2019. For the three 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 also incurred combined operating losses of $2.1 million
and $5.6 million for the three months ended September 30, 2020 and 2019, respectively.
Depreciation
and amortization expense. Depreciation and amortization expense included in operating expenses decreased from $2.2 million
for the three months ended September 30, 2019 to $1.8 million for the three months ended September 30, 2020, a decrease of $0.4
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 by $0.2 million from $0.7 million for the three months ended September 30, 2019 to
$0.5 million for the three months ended September 30, 2020. For the three months ended September 30, 2020, interest expense
of $0.5 million was 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 $14.0 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 million, (ii) accretion of discount for an aggregate 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.
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
|
)
|
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.
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 nine 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.
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 attributable to (i) interest expense based on the contractual rates under the EWB Credit Facility
of $0.6 million based on a weighted average interest rate of 5.3% and weighted average borrowings outstanding of $14.3 million
for the nine months ended September 30, 2020, (ii) accretion of discount for a total of $0.6 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, and (v) interest expense
under the EWB Credit Facility 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.
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 nine months ended September 30, 2020, we recognized a loss from the change
in fair value of derivatives of $0.4 million whereas we recognized a gain of $0.3 million for the nine months ended September
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 nine months ended September 30, 2020, we had an unrealized loss of $0.3 million from this
interest rate swap agreement due to a decline 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.
Interest and
other income (expense), net. Interest and other income (expense), net amounted to income of $1.1 million for the nine months
ended September 30, 2020 and a net expense of $0.2 million for the nine months ended September 30, 2019. For the nine months ended
September 30, 2020, other income was primarily comprised of foreign exchange gains of $0.7 million and interest income of $0.2
million. For the nine months ended September 30, 2019, we incurred other debt financing expenses related to the Siena Revolver
of $0.2 million.
Income tax
expense. For the nine months ended September 30, 2020, we recognized income tax expense of $1.9 million, which primarily
consisted of foreign income taxes associated with profitable foreign markets. Due to the establishment of a valuation allowance
applied against our domestic net deferred tax assets, we did not recognize a domestic income tax benefit for the nine months ended
September 30, 2020. For the nine months ended September 30, 2019, we recognized income tax expense of $12.8 million, which consisted
of the establishment of a valuation allowance for $8.3 million 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.
Liquidity
and Capital Resources
Overview
As of September 30,
2020, we had cash and cash equivalents of $26.9 million and working capital of $21.3 million. For the nine months ended September
30, 2020, we incurred a net loss of $35.3 million and we used cash in our operating activities of $29.9 million. For the
nine months ended September 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 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 include
operating lease payments of $8.3 million and 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.
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 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 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 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.
Please
refer to the following sections for further discussion of the terms of the EWB Credit Facility, the ATM Agreement, the Amended
Merger Agreement, 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 September 30, 2020, we had outstanding borrowings of $13.6 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 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, 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. 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 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 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.
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,
and (iii) material compliance by the parties with their respective covenants 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, on the closing date (the
“Closing Date”), Ariix will merge with Merger Sub, with Ariix as the surviving entity and be a wholly-owned subsidiary
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 Agent
|
|
|
7,000
|
|
Ariix employee severance consideration
|
|
|
1,667
|
|
Closing Date Anniversary:
|
|
|
|
|
12 Months
|
|
|
25,500
|
|
14 Months
|
|
|
2,900
|
|
|
|
|
|
|
Total
|
|
|
37,067
|
|
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.
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%, whereby all accrued interest and
principal will be payable on the maturity date in April 2022. 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 nine months ended September 30, 2020 and 2019
(in thousands):
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(29,853
|
)
|
|
$
|
(20,941
|
)
|
|
$
|
(8,912
|
)
|
Investing activities
|
|
|
(2,746
|
)
|
|
|
32,210
|
|
|
|
(34,956
|
)
|
Financing activities
|
|
|
13,506
|
|
|
|
13,327
|
|
|
|
179
|
|
Cash
Flows Provided by Operating Activities
For the nine months
ended September 30, 2020 and 2019, net cash used in operating activities amounted to $29.9 million and $20.9 million, respectively.
The key components in the calculation of our net cash used in operating activities for the nine months ended September 30, 2020
and 2019, are as follows (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
|
)
|
Nine months
ended September 30, 2020. For the nine months ended September 30, 2020, non-cash expenses partially mitigated the impact
of our net loss by $17.3 million. These non-cash expenses included (i) depreciation and amortization expense of $5.6 million,
(ii) non-cash lease expense of $3.9 million, (iii) 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
million, and (v) impairment of right-of-use lease assets of $0.4 million.
For the nine months
ended September 30, 2020, changes in operating assets and liabilities used $11.9 million of operating cash flows. The primary
use of operating cash flows for the nine months ended September 30, 2020 was due to (i) a reduction in other accrued liabilities
of $13.7 million, (ii) an increase in accounts receivable of $0.9 million, and (iii) a decrease in accounts payable of
$0.5 million. These changes that used operating cash flow totaled $15.1 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 million,
and a reduction in prepaid expenses, deposits and other assets of $0.5 million. The $13.7 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 building 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.
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
Our investing activities
used net cash flows of $2.7 million for the nine months ended September 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 amount consisted of cash payments for capital expenditures of $2.1 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 million
in our Noni by NewAge segment and $0.2 million in our NewAge 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 flows of $13.5 million for the nine months ended September 30, 2020, as compared to $13.3
million for the nine months ended September 30, 2019.
Nine months
ended September 30, 2020. For the nine months ended September 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 nine months ended September 30, 2020,
our cash outflows included principal repayments under the EWB Credit Facility of $10.8 million, payments of $5.8 million related
to business combination obligations, the purchase of stock for $1.2 million, payments of $0.5 million related to the deferred lease
financing obligation, and total payments of $0.3 million for debt issuance costs related to the EWB Credit Facility and offering
costs related to the ATM Agreement. For the nine months ended September 30, 2020, our principal payments included $1.1 million
under the EWB Term 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.
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.
Off-Balance
Sheet Arrangements
During
the nine months ended September 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 nine months ended
September 30, 2020 and 2019 (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.
|
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.