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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the Quarterly Period Ended June 30, 2020

 

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

 

For the Transition Period from _____________ to ____________

 

Commission File Number: 001-38014

 

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

 

Washington   27-2432263
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     

2420 17th Street, Suite 220

Denver, CO

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

 

New Age Beverages Corporation

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

 

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

 

Title of each class   Trading symbol(s)   Name of each exchange on which registered
Common stock, par value $0.001 per share   NBEV                              The Nasdaq Capital Market NASDAQ

 

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

 

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

 

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

 

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

 

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

 

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

 

The registrant had 97,720,103 shares of its common stock, $0.001 par value per share, outstanding as of August 6, 2020.

 

 

 

   

 

 

Explanatory Note Regarding Name Change

 

Effective July 28, 2020, New Age Beverages Corporation amended its Articles of Incorporation to change its name to NewAge, Inc. Accordingly, all references herein have been changed to reflect the new name.

 

 

 

 

NewAge, Inc.

Table of Contents

 

      Page
       
PART I. FINANCIAL INFORMATION  
       
  ITEM 1. Financial Statements  
    Unaudited Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 2
    Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019 3
    Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2020 and 2019 4
    Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 5
    Notes to Unaudited Condensed Consolidated Financial Statements 7
       
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 41
  ITEM 4. Controls and Procedures 41
       
PART II. OTHER INFORMATION  
  ITEM 1. Legal Proceedings 42
  ITEM 1A. Risk Factors 42
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
  ITEM 3. Defaults Upon Senior Securities 45
  ITEM 4. Mine Safety Disclosures 45
  ITEM 5. Other Information 45
  ITEM 6. Exhibits 46
       
SIGNATURES 47

 

  1  

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements.

 

NewAge, Inc.

 

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value per share)

 

    June 30,     December 31,  
    2020     2019  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 40,672     $ 60,842  
Accounts receivable, net of allowance of $634 and $535, respectively     13,189       11,012  
Inventories     33,972       36,718  
Prepaid expenses and other     5,540       4,384  
                 
Total current assets     93,373       112,956  
                 
Long-term assets:                
Identifiable intangible assets, net     41,649       43,443  
Right-of-use lease assets     37,718       38,458  
Property and equipment, net     28,223       28,443  
Restricted cash, net of current portion     16,873       3,729  
Goodwill     10,284       10,284  
Deferred income taxes     9,452       9,128  
Deposits and other     4,440       4,689  
                 
Total assets   $ 242,012     $ 251,130  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 12,708     $ 13,259  
Accrued liabilities     40,125       49,451  
Current portion of business combination liabilities     5,437       5,508  
Current maturities of long-term debt     1,505       11,208  
                 
Total current liabilities     59,775       79,426  
                 
Long-term liabilities:                
Long-term debt, net of current maturities     18,792       12,802  
Operating lease liabilities, net of current portion:                
Lease liability     34,695       35,513  
Deferred lease financing obligation     16,214       16,541  
Deferred income taxes     5,554       5,441  
Accrued employee benefits and other     9,467       9,132  
                 
Total liabilities     144,497       158,855  
                 
Contingencies (Note 10)                
                 
Stockholders’ equity:                
Common Stock; $0.001 par value. Authorized 200,000 shares; issued and outstanding 98,442 and 81,873 shares as of June 30, 2020 and December 31, 2019, respectively     98       82  
Additional paid-in capital     231,201       203,862  
Accumulated other comprehensive income (loss)     (141)       802  
Accumulated deficit     (133,643)     (112,471)
Total stockholders’ equity     97,515       92,275  
Total liabilities and stockholders’ equity   $ 242,012     $ 251,130  

 

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

 

  2  

 

 

NewAge, Inc.

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except loss per share amounts)

 

    2020     2019     2020     2019  
   

Three Months Ended

June 30,

    Six Months Ended
June 30,
 
    2020     2019     2020     2019  
                         
Net revenue   $ 62,637     $ 66,348     $ 126,330     $ 124,655  
Cost of goods sold     24,559       24,699       46,728       44,430  
                                 
Gross profit     38,078       41,649       79,602     80,225  
                                 
Operating expenses:                                
Commissions     18,405       19,607       37,920       37,645  
Selling, general and administrative     26,277       28,175       56,885       55,017  
Gain from change in fair value of earnout obligations     -       (6,665)     -       (6,665)
Impairment of right-of-use assets     400       1,500       400       1,500  
Depreciation and amortization expense     1,761       2,017       3,542       4,253  
                                 
Total operating expenses     46,843       44,634       98,747       91,750  
                                 
Operating loss     (8,765)     (2,985)     (19,145)     (11,525)
                                 
Non-operating income (expense):                                
Gain (loss) from sale of property and equipment     14       -       (66)     6,442  
Interest expense     (600)     (756)     (1,172)     (2,402)  
Gain (loss) from change in fair value of derivatives     20       -       (306)     470  
Interest and other income (expense), net     328       (143)     791       (185)
                                 
Loss before income taxes     (9,003)     (3,884)     (19,898)     (7,200)
Income tax expense     (551)     (7,797)     (1,274)     (6,097)
                                 
Net loss     (9,554)     (11,681)     (21,172)     (13,297)
Other comprehensive income (loss):                                
Foreign currency translation adjustments, net of tax     448       569       (943)     996  
                                 
Comprehensive loss   $ (9,106)   $ (11,112)   $ (22,115)   $ (12,301)
                                 
Net loss per share (basic and diluted)   $ (0.10)   $ (0.15)   $ (0.24)   $ (0.18)
                                 
Weighted average number of shares of Common Stock outstanding (basic and diluted)     93,003       76,331       89,187       75,780  

 

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

 

  3  

 

 

NewAge, Inc.

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2020 and 2019

(In thousands)

 

    Shares     Amount     Amount     Amount     Amount     Amount  
    Common Stock     Additional Paid-in     Accumulated Other Comprehensive     Accumulated        
    Shares     Amount     Capital     Income (Loss)     Deficit     Total  
Six Months Ended June 30, 2020                                                
                                                 
Balances, December 31, 2019     81,873     $ 82     $ 203,862     $ 802     $ (112,471)   $ 92,275  
Issuance of Common Stock:                                                
ATM public offering, net of offering costs     16,130       16       25,012       -       -       25,028  
Exercise of stock options     2       -       4       -       -       4  
Vesting of restricted stock awards     437       -       -       -       -       -  
Stock-based compensation expense     -       -       2,323       -       -       2,323  
Net change in other comprehensive income     -       -       -       (943)     -       (943)
Net loss     -       -       -       -       (21,172)     (21,172)
                                                 
Balances, June 30, 2020     98,442     $ 98     $ 231,201     $ (141)     $ (133,643)   $ 97,515  
                                                 
Six Months Ended June 30, 2019                                                
                                                 
Balances, December 31, 2018     75,067     $ 75     $ 176,471     $ 626     $ (22,636)   $ 154,536  
Issuance of Common Stock:                                                
ATM public offering, net of offering costs     2,225       2       11,139       -       -       11,141  
Exercise of stock options     200       -       418       -       -       418  
Grant of restricted stock awards     126       -       576       -       -       576  
Employee services     6       -       31       -       -       31  
Stock-based compensation expense     -       -       2,561       -       -       2,561  
Fair value of warrant issued for license agreement     -       -       838       -       -       838  
Net change in other comprehensive income     -       -       -       996       -       996  
Net loss     -       -       -       -       (13,297)     (13,297)
                                                 
Balances, June 30, 2019     77,624     $ 77     $ 192,034     $ 1,622     $ (35,933)   $ 157,800  

 

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

 

  4  

 

 

NewAge, Inc.

 

Unaudited Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2020 and 2019

(In thousands)

 

    2020     2019  
             
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (21,172)     $ (13,297)  
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     3,752       4,441  
Non-cash lease expense     2,792       2,986  
Stock-based compensation expense     2,449       4,287  
Impairment of right-of-use lease assets     400       1,500  
Loss (gain) from change in fair value of derivatives     306       (470)  
Accretion and amortization of debt discount and issuance costs     302       1,609  
Loss (gain) from sale of property and equipment     66       (6,442)  
Gain from change in fair value of earnout obligations     -       (6,665)  
Deferred income tax benefit     (173)       (8,543)  
Expense for make-whole premium and other     73       511  
Changes in operating assets and liabilities:                
Accounts receivable     (2,276)       (5,340)  
Inventories     2,819       205  
Prepaid expenses, deposits and other     517       (3,703)  
Accounts payable     (551)       308  
Other accrued liabilities     (12,900)       13,872  
                 
Net cash used in operating activities     (23,596)       (14,741)  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Proceeds from sale of equipment     159       -  
Capital expenditures for property and equipment     (1,980)       (1,241)  
Net proceeds from sale of land and building in Japan     -       37,548  
Security deposit under sale leaseback arrangement     -       (1,800)  
Loan receivable from BWR     -       (1,000)  
                 
Net cash provided by (used in) investing activities     (1,821)       33,507  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Principal payments on borrowings     (10,450)       (26,211)  
Proceeds from borrowings     6,868       46,250  
Net proceeds from issuance of common stock     25,122       11,380  
Proceeds from deferred lease financing obligation     -       17,640  
Payments under deferred lease financing obligation     (319)       (382)  
Proceeds from exercise of stock options     4       418  
Payments on business combination obligations     (298)       (26,000)  
Debt issuance costs paid     (85)       (929)  
Payments for deferred offering costs     (94)       (140)  
Cash paid for make-whole premium     -       (480)  
                 
Net cash provided by financing activities     20,748       21,546  
                 
Effect of foreign currency translation changes     (857)       1,188  
                 
Net increase (decrease) in cash, cash equivalents and restricted cash     (5,526)       41,500  
Cash, cash equivalents and restricted cash at beginning of period     64,571       45,856  
                 
Cash, cash equivalents and restricted cash at end of period   $ 59,045     $ 87,356  

 

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

 

  5  

 

 

NewAge, Inc.

 

Unaudited Condensed Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30, 2020 and 2019

(In thousands)

 

    2020     2019  
             
SUMMARY OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:                
Cash and cash equivalents at end of period   $ 40,672     $ 83,580  
Restricted cash at end of period:                
Current (included in prepaid expenses and other)     1,500       -  
Long-term     16,873       3,776  
                 
Total   $ 59,045     $ 87,356  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid for interest   $ 506     $ 217  
Cash paid for income taxes   $ 14,739     $ 1,936  
Cash paid for amounts included in the measurement of operating lease liabilities   $ 4,031     $ 4,205  
Right-of-use assets acquired in exchange for operating lease liabilities   $ 2,452     $ 26,796  
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Fair value of warrants issued for license agreement   $ -     $ 838  
Restricted stock issued for prepaid compensation   $ -     $ 576  
Increase in payables for:                
Debt discount and issuance costs   $ 150     $ 654  
Capital expenditures   $ -     $ 128  

 

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

 

  6  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1 — BASIS OF PRESENTATION AND SIGNFICANT ACCOUNTING POLICIES

 

Overview

 

NewAge, Inc. (the “Company”) was formed under the laws of the State of Washington on April 26, 2010. Effective July 28, 2020, the Company amended its Articles of Incorporation to change its name from New Age Beverages Corporation to NewAge, Inc. Accordingly, all references herein have been changed to reflect the new name. The Company is a healthy consumer products and lifestyle company engaged in the development and commercialization of a portfolio of organic, natural and other better-for-you healthy beverages, liquid dietary supplements, cannabidiol (“CBD”) topical products, and other healthy lifestyle products.

 

Segments

 

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

 

 

Basis of Presentation

 

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

 

The accompanying condensed consolidated balance sheet and related disclosures as of December 31, 2019 have been derived from the Company’s audited financial statements. The Company’s financial condition as of June 30, 2020 and operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2020.

 

 

Use of Estimates

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires the Company to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant accounting estimates include, but are not necessarily limited to, impairment of goodwill and long-lived assets; valuation assumptions for earnout obligations and assets acquired in business combinations; valuation assumptions for stock options, warrants and equity instruments issued for goods or services; estimated useful lives for identifiable intangible assets and property and equipment; allowances for sales returns, chargebacks and inventory obsolescence; deferred income taxes and the related valuation allowances; and the evaluation and measurement of contingencies. Additionally, the full impact of COVID-19 is unknown and cannot be reasonably estimated. However, the Company has made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are material differences between the Company’s estimates and the actual results, the Company’s future consolidated results of operation will be affected.

 

  7  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Recent Accounting Pronouncements

 

The following accounting standards were adopted during the six months ended June 30, 2020:

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2018, ASU 2016-13 was amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. ASU 2018-19 clarifies that operating lease receivables are not within the scope of Accounting Standards Codification (“ASC”) 326-20 and should instead be accounted for under the new leasing standard, ASC 842. ASU 2016-13 and ASU 2018-19 were effective for the Company beginning in the first quarter of 2020. The adoption of ASU 2016-13 and ASU 2018-19 did not have a material impact on the Company’s results of operations or financial position.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The adoption of ASU 2018-13 did not have a material impact on the Company’s results of operations, financial position, or related disclosures.

 

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

 

 

NOTE 2 — LIQUIDITY AND GOING CONCERN

 

As of June 30, 2020, the Company had an accumulated deficit of $133.6 million and the Company incurred a net loss of $21.2 million for the six months ended June 30, 2020. Net cash used in operating activities amounted to $23.6 million for the six months ended June 30, 2020, of which approximately $13.1 million was attributable to income tax payments paid in March 2020 related to the sale leaseback discussed in Note 5.

 

As discussed in Notes 6 and 14, the Company entered into the third amendment and waiver (the “Third Amendment”) to the EWB Credit Facility (as defined below) in March 2020 and the fourth amendment (the “Fourth Amendment”) to the EWB Credit Facility in July 2020. The Third Amendment is expected to have a significant impact on the Company’s liquidity and capital resources for the 12-month period ending June 30, 2021. The Third Amendment required the Company to deposit an initial amount of $15.1 million in restricted cash balances with East West Bank (“EWB”) in March 2020, and requires the Company to obtain gross equity infusions of $30.0 million through December 2020. In addition, for any future amounts borrowed under the EWB Revolver (as defined below), the Company is required to increase restricted cash deposits by the corresponding amount of the borrowings. Partially due to the restricted cash deposits, the Company’s available cash and cash equivalents decreased from $60.8 million as of December 31, 2019 to $40.7 million as of June 30, 2020. The Fourth Amendment permitted the Company to repurchase shares of its common stock, par value $0.001 per share (“Common Stock”) up to $1.2 million with a corresponding increase in the requirement for equity infusions from $30.0 million to approximately $31.2 million. During the six months ended June 30, 2020, the Company received gross proceeds of $25.8 million under the ATM Agreement (as defined below). As a result, the Company’s commitment for additional equity infusions by December 31, 2020 has been reduced to $5.4 million.

 

  8  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Since March 2020, the Company has been experiencing reduced sales as a result of the COVID-19 pandemic as discussed in Note 10. In April 2020, the Company entered into a loan with EWB in an aggregate principal amount of approximately $6.9 million under the Paycheck Protection Program (the “PPP Loan”) pursuant to the recently enacted U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As discussed in Note 6, the PPP Loan is unsecured, and the Company may apply to EWB for forgiveness of the loan in accordance with the terms of the CARES Act. No principal payments are required under the PPP Loan until the maturity date in April 2022.

 

The Company has begun a new product and marketing strategy to increase demand for the Company’s products. The Company is also actively pursuing strategic alternatives relating to the U.S retail brands and the BWR division (as defined below), which could significantly improve its overall financial performance and reduce cash flow needs. As discussed in Note 4, the Company has implemented a restructuring plan that is designed to achieve future annualized selling, general and administrative cost reductions of approximately $5.8 million.

 

Management believes the existing cash resources and ongoing cost-cutting efforts will be sufficient to fund the Company’s operations and to meet its obligations as they come due through August 2021.

 

NOTE 3 — BUSINESS COMBINATIONS

 

BWR Business Combination

 

The Company completed a business combination with Brands Within Reach, LLC (“BWR”) in July 2019 that was accounted for using the acquisition method of accounting under ASC 805, Business Combinations, and using the fair value concepts set forth in ASC 820, Fair Value Measurement. As a result of the business combination with BWR, the Company acquired certain key licensing and distribution rights in the United States for some of the world’s leading beverage brands. The purchase consideration consisted of cash payments of $1.5 million and the issuance of 107,602 shares of Common Stock with an estimated fair value of approximately $453,000.

 

For the three and six months ended June 30, 2020, the accompanying condensed consolidated statements of operations include net revenue related to the post-acquisition results of operations of BWR of $2.8 million and $4.9 million, respectively. For the three and six months ended June 30, 2020, the accompanying condensed consolidated statements of operations include net losses related to the post-acquisition results of operations of BWR of $0.3 million and $2.6 million, respectively.

 

Unaudited Pro Forma Disclosures

 

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

  

    Three     Six  
    Months     Months  
Net revenue   $ 70,054     $ 132,818  
Net loss   $ (12,918)     $ (14,603)  
Net loss per share- basic and diluted   $ (0.17)     $ (0.19)  
Weighted average number of shares of common stock outstanding- basic and diluted     76,439       75,888  

 

The pro forma financial results shown above reflect the historical operating results of the Company, including the unaudited pro forma results of BWR as if this business combination and the related equity issuances had occurred at the beginning of the first full calendar year preceding the acquisition date. The calculations of pro forma net revenue and pro forma net loss give effect to the pre-acquisition operating results of BWR based on (i) the historical net revenue and net income (loss), and (ii) incremental depreciation and amortization based on the fair value of property, equipment and identifiable intangible assets acquired and the related estimated useful lives. The pro forma information presented above does not purport to represent what the actual results of operations would have been for the periods indicated, nor does it purport to represent the Company’s future results of operations.

 

  9  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Business Combination Liabilities

 

On December 21, 2018, the Company entered into a business combination with Morinda Holdings, Inc. (“Morinda”). The purchase consideration included the issuance of 43,804 shares of Series D Preferred Stock (the “Preferred Stock”) providing for the potential payment of up to $15.0 million (the “Milestone Dividend”) if the Adjusted EBITDA of Morinda was at least $20.0 million for the year ended December 31, 2019. If the Adjusted EBITDA of Morinda was less than $20.0 million, the Milestone Dividend was reduced whereby no Milestone Dividend was payable if actual Adjusted EBITDA was $17.0 million or lower. Adjusted EBITDA of Morinda for the year ended December 31, 2019 was less than $17.0 million and, accordingly, no Milestone Dividend was payable to the holders of the Preferred Stock. The Preferred Stock also provided for dividends at a rate of 1.5% per annum of the Milestone Dividend amount. The Preferred Stock terminated on April 15, 2020, and the Company paid accumulated cash dividends of approximately $0.3 million in May 2020.

 

As of June 30, 2020 and December 31, 2019, the following is a summary of purchase consideration payable to the former stockholders of Morinda, and outstanding earnout obligations related to business combinations with Morinda in December 2018 (in thousands):

 

    2020     2019  
Payables to former Morinda stockholders:                
Excess Working Capital (“EWC”) payable in July 2020, net of discount   $ 5,437     $ 5,283  
Earnout under Series D preferred stock     -       225  
Total   $ 5,437     $ 5,508  

 

NOTE 4 — OTHER FINANCIAL INFORMATION

 

Inventories

 

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

 

    2020     2019  
             
Raw materials   $ 9,125     $ 12,848  
Work-in-process     2,393       872  
Finished goods, net     22,454       22,998  
Total inventories   $ 33,972     $ 36,718  

  

Other Accrued Liabilities

 

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

 

    2020     2019  
             
Accrued commissions   $ 8,600     $ 8,914  
Accrued compensation and benefits     6,011       5,868  
Accrued marketing events     6,269       4,568  
Deferred revenue     2,576       1,358  
Income taxes payable     1,747       15,227  
Current portion of operating lease liabilities     6,057       5,673  
Other accrued liabilities     8,865       7,843  
                 
Total accrued liabilities   $ 40,125     $ 49,451  

 

  10  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Depreciation and Amortization Expense

 

Depreciation expense related to property and equipment and amortization expense related to identifiable intangible assets are as follows for the three and six months ended June 30, 2020 and 2019 (in thousands):

 

    2020     2019     2020     2019  
    Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2020      2019      2020      2019  
Depreciation   $ 977     $ 888     $ 1,959     $ 1,843  
Amortization     896       1,323       1,793       2,598  
                                 
Total   $ 1,873     $ 2,211     $ 3,752     $ 4,441  

 

Restructuring

 

In April 2020, the Company 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. For the three months ended June 30, 2020, the Company implemented headcount reductions of approximately 100 employees that had estimated annualized compensation and benefit costs of $5.8 million. In connection with the termination of employees, the Company incurred severance costs of $0.9 million which are included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2020. Substantially all of the severance costs related to the Noni by NewAge segment, and the related restructuring costs were incurred and paid during the three months ended June 30, 2020. No assurance can be provided that the restructuring plan will be successful in achieving the intended cost reductions.

 

NOTE 5 — LEASES

 

Sale Leaseback

 

On March 22, 2019, the Company entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $57.1 million of the land and building in Tokyo that serves as the corporate headquarters of the Company’s Japanese subsidiary. Concurrently with the sale, the Company entered into a lease of this property for a term of 27 years with the option to terminate the lease any time after seven years. The monthly lease cost is ¥20.0 million (approximately $186,000 based on the exchange rate as of June 30, 2020) for the initial seven-year period of the lease term. Presented below is a summary of the selling price and resulting gain on sale calculation for the six months ended June 30, 2019 (in thousands):

 

Gross selling price   $ 57,129  
Less commissions and other expenses     (1,941)
Less repair obligations     (1,675)
Net selling price     53,513  
Cost of land and building sold     (29,431)
Total gain on sale     24,082  
Portion of gain related to above-market rent concession     (17,640)
         
Recognized gain on sale   $ 6,442  

 

The Company determined that $17.6 million of the $24.1 million gain on the sale of this property was the result of above-market rent inherent in the leaseback arrangement. The remainder of the gain of $6.4 million was attributable to the highly competitive process among the entities that bid to purchase the property, and is included in gain from sale of property and equipment in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2019.

 

The $17.6 million portion of the gain related to above-market rent is being accounted for as a deferred lease financing obligation. Accordingly, the operating lease payments are allocated to (i) reduce the operating lease liability, (ii) reduce the principal portion of the deferred lease financing obligation, and (iii) recognize imputed interest expense at an incremental borrowing rate of 3.5% on the deferred lease financing obligation over the 20-year lease term. The present value of the future lease payments amounted to a gross operating lease liability of $31.9 million. After deducting the $17.6 million deferred lease financing obligations, the Company recognized an initial right-of-use (“ROU”) asset and operating lease liability of approximately $14.3 million.

 

  11  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Operating Leases

 

The Company leases various office and warehouse facilities, vehicles and equipment under non-cancellable operating lease agreements that expire between July 2020 and March 2039. The Company has made accounting policy elections (i) to not apply the recognition requirements for short-term leases and (ii) for facility leases, when there are lease and non-lease components, such as common area maintenance charges, to account for the lease and non-lease components as a single lease component. For the three months ended June 30, 2020 and 2019, the Company had operating lease expense of $2.6 million and $2.9 million, respectively. For the six months ended June 30, 2020 and 2019, the Company had operating lease expense of $5.1 million and $5.2 million, respectively. As of June 30, 2020 and December 31, 2019, the weighted average remaining lease term under operating leases was 12.0 and 12.5 years, respectively. As of June 30, 2020 and December 31, 2019, the weighted average discount rate for operating lease liabilities was 5.6%.

 

Future Lease Payments

 

As of June 30, 2020, future payments under operating lease agreements are as follows (in thousands):

 

 

Year Ending December 31,      
Remainder of 2020   $ 3,991  
2021     7,401  
2022     5,863  
2023     5,334  
2024     5,011  
Thereafter     29,191  
         
Total operating lease payments     56,791  
Less imputed interest     (16,039) (1)
         
Present value of operating lease payments   $ 40,752  

 

 

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

 

  12  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Impairment of ROU Asset

 

In June 2019, the Company began attempting to sublease a portion of its ROU assets previously used for warehouse space that are no longer needed for current operations. As a result, an impairment evaluation was completed that resulted in recognition of an impairment charge of $1.5 million for the three and 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 December 31, 2019, an updated impairment evaluation was performed that resulted in an additional impairment charge of $0.8 million. As of June 30, 2020, the Company was continuing its efforts to obtain a subtenant for this space. Due to longer than expected timing to obtain a subtenant, an updated impairment evaluation was completed that resulted in recognition of an additional impairment charge of $0.4 million for the three and six months ended June 30, 2020.

 

NOTE 6 — DEBT

 

Summary of Debt

 

As of June 30, 2020 and December 31, 2019, debt consisted of the following (in thousands):

 

 

    2020     2019  
EWB Credit Facility:                
Term loan, net of discount of $576 and $448 as of June 30, 2020 and December 31, 2019, respectively   $ 13,424     $ 14,302  
Revolver     -       9,700  
PPP Loan payable, interest at 1.0%, unsecured, due April 2022     6,868       -  
Installment notes payable     5       8  
                 
Total     20,297       24,010  
Less current maturities     (1,505)     (11,208)
                 
Long-term debt, less current maturities   $ 18,792     $ 12,802  

 

Future Debt Maturities

 

As of June 30, 2020, the scheduled future maturities of long-term debt, exclusive of discount accretion, were as follows:

 

 

Year Ending December 31,      
       
Remainder of 2020   $ 752  
2021     1,503  
2022     8,368  
2023     10,250  
         
Total   $ 20,873  

 

EWB Credit Facility

 

On March 29, 2019, the Company entered into a Loan and Security Agreement (the “EWB Credit Facility”) with EWB. The EWB Credit Facility matures on March 29, 2023 and provides for (i) a term loan in the aggregate principal amount of $15.0 million, which may be increased to $25.0 million subject to the satisfaction of certain conditions (the “EWB Term Loan”) and (ii) a $10.0 million revolving loan facility (the “EWB Revolver”). The obligations of the Company under the EWB Credit Facility are secured by substantially all assets of the Company and guaranteed by certain subsidiaries of the Company.

 

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 discussed below, the interest rate applicable to outstanding borrowings under the EWB Credit Facility increased from 0.5% to 2.0% in excess of the prime rate beginning on March 13, 2020. As of 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.

 

  13  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

The EWB Credit Facility requires compliance with certain financial and restrictive covenants and includes customary events of default. Key financial covenants include maintenance of minimum Adjusted EBITDA and a maximum Total Leverage Ratio (all as defined and set forth in the EWB Credit Facility). On March 13, 2020, the Company entered into the Third Amendment to the EWB Credit Facility. As of June 30, 2020, the Company was in compliance with all of the terms under the EWB Credit Facility, as amended. In addition to the change in interest rate discussed above, the Third Amendment modified the Credit Facility as follows:

 

  In March 2020, the Company made an initial deposit of $15.1 million in restricted cash accounts designated by EWB. The future requirement to maintain restricted cash will be reduced by the amount of principal payments under the EWB Term Loan after the amendment date. As of June 30, 2020, the restricted cash deposit amounted to $14.7 million.
  For any future amounts borrowed under the EWB Revolver, the Company is required to increase restricted cash deposits by the corresponding amount of the borrowings.
  Less stringent requirements are applicable for future compliance with the minimum adjusted EBITDA covenant, the maximum total leverage ratio, and the fixed charge coverage ratio. Additionally, compliance with the maximum total leverage ratio and the fixed charge coverage ratio have been delayed until June 30, 2021.  
  The existing provision related to “equity cures” that may be employed to maintain compliance with financial covenants was increased from $5.0 million to $15.0 million for the year ending December 31, 2020, and to $10.0 million per year for each calendar year thereafter.
  The Company was required to obtain equity infusions for at least $15.0 million for the six months ended June 30, 2020. As discussed in Note 7, the Company received gross proceeds of $25.8 million for the six months ended June 30, 2020.
  The Company was required to obtain equity infusions for gross proceeds of $30.0 million for the year ending December 31, 2020. Pursuant to the Fourth Amendment discussed in Note 14, this amount was increased by up to $1.2 million if the Company redeems shares of its Common Stock for the year ending December 31, 2020. The Company made stock repurchases for approximately $1.2 million in July 2020 whereby equity infusions for gross proceeds of $31.2 million are now required for the year ending December 31, 2020. After deducting gross proceeds of $25.8 million received for the six months ended June 30, 2020, additional equity infusions that result in gross proceeds of $5.4 million must be received by December 31, 2020.

 

The Company evaluated the terms of the Third Amendment and determined it should be accounted for as a modification, whereby additional debt discount and issuance costs of approximately $0.2 million were incurred.

 

PPP Loan

 

On April 14, 2020, the Company entered into the PPP Loan pursuant to the Paycheck Protection Program under the CARES Act 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, with the first six months of interest deferred, has a term of two years, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The Company intends to apply to the lender for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company during the permitted period beginning on April 10, 2020, calculated in accordance with the terms of the CARES Act. The Company’s eligibility for the PPP Loan, expenditures that qualify toward forgiveness, and the final balance of the PPP Loan that may be forgiven are subject to audit and final approval by the SBA. To the extent that all or part of the PPP Loan is not forgiven, the Company will be required to pay interest at 1.0% and, commencing in October 2020, interest payments will be required through 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 the Company does not meet the eligibility criteria.

 

The PPP Loan is being accounted for under ASC 470, Debt whereby interest expense is being accrued at the contractual rate and future debt maturities are based on the assumption that none of the principal balance will be forgiven. Forgiveness, if any, will be recognized as a gain on extinguishment if the lender legally releases the Company based on the criteria set forth in the debt agreement and the CARES Act.

 

  14  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 7 — STOCKHOLDERS’ EQUITY

 

Changes in Stockholders’ Equity

 

Changes in stockholders’ equity for the three months ended June 30, 2020 and 2019 were as follows (in thousands):

 

 

    Shares     Amount     Amount     Amount     Amount     Amount  
    Common Stock     Additional Paid-in     Accumulated Other Comprehensive
Income
    Accumulated        
Three Months Ended June 30, 2020   Shares     Amount     Capital     (Loss)     Deficit     Total  
                                     
Balances, March 31, 2020     87,245     $ 87     $ 213,385     $ (589)   $ (124,089)   $ 88,794  
Issuance of Common Stock:                                                
ATM Agreement, net of offering costs     11,191       11       16,731       -       -       16,742  
Exercise of stock options     -       -       -       -       -       -  
Vesting of restricted stock awards     6       -       -       -       -       -  
Stock-based compensation expense     -       -       1,085       -       -       1,085  
Net change in other comprehensive income     -       -       -       448       -       448  
Net loss     -       -       -       -       (9,554)     (9,554)
                                                 
Balances, June 30, 2020     98,442     $ 98     $ 231,201     $ (141)   $ (133,643)   $ 97,515  
                                                 
Three Months Ended June 30, 2019                                                
Balances, March 31, 2019     75,393     $ 75     $ 179,592     $ 1,053     $ (24,252)   $ 156,468  
Issuance of Common Stock:                                                
ATM Agreement, net of offering costs     2,225       2       11,139       -       -       11,141  
Employee services     6       -       31       -       -       31  
Stock-based compensation expense     -       -       434       -       -       434  
Fair value of warrant issued for license agreement     -       -       838       -       -       838  
Net change in other comprehensive income     -       -       -       569       -       569  
Net loss     -       -       -       -       (11,681)     (11,681)
                                                 
Balances, June 30, 2019     77,624     $ 77     $ 192,034     $ 1,622     $ (35,933)   $ 157,800  

 

At the Market Offering Agreement

 

On April 30, 2019, the Company entered into an At the Market Offering Agreement (“ATM Agreement”) with Roth Capital Partners, LLC (the “Agent”), pursuant to which the Company may offer and sell from time to time up to an aggregate of $100 million in shares of the Company’s Common Stock (the “Placement Shares”) through the Agent. The Agent is acting as sales agent and is required to use commercially reasonable efforts to sell on the Company’s behalf all of the Placement Shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the Agent and the Company. On May 8, 2020, the ATM Agreement was amended and restated to eliminate the previous termination date of April 30, 2020. As amended and restated, the ATM Agreement will terminate when all of the Placement Shares have been sold, or earlier by the Company upon five business days’ notice to the Agent, at any time by the Agent, or by the mutual agreement of the parties.

 

  15  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

The Company has no obligation to sell any of the Placement Shares under the ATM Agreement. The Company intends to use the net proceeds from the offering for general corporate purposes, including working capital. Under the terms of the ATM Agreement, the Company agreed to pay the Agent a commission equal to 3.0% of the gross proceeds from the gross sales price of the Placement Shares up to $30 million, and 2.5% of the gross proceeds from the gross sales price of the Placement Shares in excess of $30 million. In addition, the Company has agreed to pay certain expenses incurred by the Agent in connection with the offering. Through June 30, 2020, an aggregate of approximately 22.1 million shares of Common Stock were sold for gross proceeds of approximately $46.5 million. For the six months ended June 30, 2020, an aggregate of 16.1 million shares were sold for gross proceeds of $25.8 million. Total commissions and fees of $0.8 million were deducted from the gross proceeds for the six months ended June 30, 2020. Presented below is a summary of Common Stock issued pursuant to the ATM Agreement for the three and six months ended June 30, 2020 and 2019 (in thousands, except per share amounts):

 

 

    Number     Gross Proceeds     Offering Costs     Net  
Description   Of Shares     Per Share    

Amount

   

Commissions

   

Other

   

Proceeds

 
                                     
Six Months Ended June 30, 2020:                                                
Three months ended March 31, 2020     4,939     $ 1.73     $ 8,545     $ (257)   $ (3)   $ 8,285  
Three months ended June 30, 2020     11,191     1.54       17,270       (436)     (91)     16,743  
                                                 
Total   16,130     1.60     $ 25,815     $ (693)   $ (94)   $ 25,028  
                                                 
Six Months Ended June 30, 2019:                                                
Three months ended March 31, 2019     -     $ -     $ -     $ -     $ -     $ -  
Three months ended June 30, 2019     2,225     5.27       11,733       (352)     (240)     11,141  
                                                 
Total     2,225     5.27     $ 11,733     $ (352)   $ (240)   $ 11,141  

 

 

NOTE 8 — STOCK OPTIONS AND WARRANTS

 

Stock Option Activity

 

The following table sets forth stock option activity under the Company’s stock option plans for the six months ended June 30, 2020 (shares in thousands):

    Shares     Price (1)     Term (2)  
                   

Outstanding, December 31, 2019

    3,551     $ 2.65       8.7  
Grants     427     1.80          
Forfeited     (290)   3.28          
Exercised     (2)   1.79          
                         

Outstanding, June 30, 2020

    3,686 (3)   2.50       8.0  
                         

Vested, June 30, 2020

    1,372 (3)   2.41       6.1  

 

 

(1) Represents the weighted average exercise price.
(2) Represents the weighted average remaining contractual term until the stock options expire.
(3) As of June 30, 2020, the closing price of the Company’s Common Stock was $1.53 per share, resulting in no intrinsic value associated with any outstanding stock options.

 

For the six months ended June 30, 2020, the valuation assumptions for stock options granted to employees and non-employees under the Company’s equity incentive plans were estimated on the date of grant using the BSM option-pricing model with the following weighted-average assumptions:

 

 

Grant date closing price of Common Stock   $ 1.79  
Expected life (in years)     5.8  
Volatility     104%
Dividend yield     0%
Risk-free interest rate     1.2%

 

  16  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Based on the assumptions set forth above, the weighted-average grant date fair value per share for stock options granted for the six months ended June 30, 2020 and 2019 was $1.43 and $4.65, respectively. The BSM model requires various subjective assumptions that represent management’s best estimates of the fair value of the Company’s Common Stock, volatility, risk-free interest rates, expected term, and dividend yield. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Because the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. The Company has never declared or paid cash dividends and does not plan to pay cash dividends in the foreseeable future; therefore, the Company used an expected dividend yield of zero. The risk-free interest rate is based on U.S. Treasury rates in effect for maturities based on the expected term of the grant. The expected volatility is based on the historical volatility of the Company’s Common Stock for the period beginning in August 2016 when its shares were first publicly traded through the grant date of the respective stock options.

 

Restricted Stock Activity

 

The following table sets forth activity related to grants of restricted stock under the Company’s stock option plans for the six months ended June 30, 2020 (in thousands):

 

                Liability-Classified Awards(1)     Liability-Classified Awards(1)  
    Equity-Classified Awards     Liability-Classified Awards(1)  
    Number of     Unvested     Number of     Unvested  
    Shares     Compensation     Shares     Compensation  
                         
Outstanding, December 31, 2019     2,123     $ 4,605       37     $ 67  
Shares issued to Board members     339 (2)      600 (2)      -       -  
Grants of unvested awards     258 (3)     442 (3)      -       -  
Forfeitures     (62)     (128)     (1)     (2)
Fair value adjustments and other                        -       9       (1)     (11) (1)
Vested shares and expense     (209) (4)     (1,340) (4)     - (4)     (13) (4)
                                 
Outstanding, June 30, 2020     2,449     $ 4,188       35     $ 41  
                                 
Intrinsic value, June 30, 2020   $ 3,747 (5)                            $ 54 (5)         

  

 

  (1) Certain awards granted to employees in China are not permitted to be settled in shares, which requires classification as a liability in the Company’s condensed consolidated balance sheets. This liability is adjusted based on the closing price of the Company’s Common Stock at the end of each reporting period until these awards vest. As of June 30, 2020 and December 31, 2019, the cumulative amount of compensation expense recognized is based on the progress toward vesting and the total fair value of the respective awards on those dates.
  (2) Represents grants to members of the Board of Directors whereby the shares of Common Stock will be issued upon vesting, which occurs one year after the grant date. The fair value of the shares was recorded based on the closing price for the Company’s Common Stock of $1.77 per share on the grant date.
  (3) Represents restricted stock awards that generally vest over three years with fair value determined based on the closing price of the Company’s Common Stock on the respective grant dates.
  (4) The “Number of Shares” column reflects shares that vested due to achievement of service conditions during the six months ended June 30, 2020. The “Unvested Compensation” column reflects the stock-based compensation expense recognized for both vested and unvested awards during the period.
  (5) The intrinsic value is based on the closing price of the Company’s Common Stock of $1.53 per share on June 30, 2020.

 

  17  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Stock-Based Compensation Expense

 

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

 

    Stock-based Compensation Expense (Recovery)     Unrecognized Expense  
    Three Months Ended June 30,     Six Months Ended June 30,     as of June 30,  
    2020     2019     2020     2019     2020     2019  
                                     
Plan-based stock options awards   $ 471     $ (377)   $ 1,096     $ 938     $ 3,680     $ 3,860  
Plan-based restricted stock awards:                                                
Equity-classified     614       920       1,340       2,273       4,188       2,281  
Liability-classified     7       447       13       1,012       41       1,194  
Non-plan equity-classified                                                
restricted stock awards     -       10       -       64       -       -  
                                                 
Total   $ 1,092     $ 1,000     $ 2,449     $ 4,287     $ 7,909     $ 7,335  

 

As of June 30, 2020, unrecognized stock-based compensation expense is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.0 years for stock options, 1.8 years for equity-classified restricted stock awards, and 1.5 years for liability-classified restricted stock awards.

 

Warrants

 

As of June 30, 2020 and 2019, the Company had warrants outstanding for 0.3 million shares of Common Stock. For the three and six months ended June 30, 2020 and 2019, no warrants were granted, exercised or expired.

 

NOTE 9 — INCOME TAXES

 

The Company’s provision for income taxes for the three months ended June 30, 2020 and 2019 resulted in income tax expense of $0.6 million and $7.8 million, respectively. The effective tax rate as a percentage of pre-tax losses for the three months ended June 30, 2020 and 2019 was negative 6% and negative201%, respectively, compared to the U.S. federal statutory rate of 21%. The negative effective tax rate for the three months ended June 30, 2020 was primarily due to foreign income tax expense on profitable foreign operations and the impact of the domestic valuation allowance offsetting domestic income tax benefits. The difference between the negative effective tax rate of 201% for the three months ended June 30, 2019 and the U.S. federal statutory rate was primarily attributable to the establishment of a valuation allowance applied to the Company’s domestic net deferred tax assets.

 

The Company’s provision for income taxes for the six months ended June 30, 2020 and 2019 resulted in income tax expense of $1.3 million and $6.1 million, respectively. The effective tax rate as a percentage of pre-tax losses for the six months ended June 30, 2020 and 2019 was negative 6% and negative 85%, respectively, compared to the U.S. federal statutory rate of 21%. The negative effective tax rate for the six months ended June 30, 2020 was primarily due to foreign income tax expense on profitable foreign operations and the impact of the domestic valuation allowance offsetting domestic income tax benefits. The difference between the negative effective tax rate of 85% for the six months ended June 30, 2019 and the U.S. federal statutory rate was primarily attributable to the establishment of a valuation allowance.

 

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

 

The total outstanding balance for liabilities related to unrecognized tax benefits was $1.5 million as of June 30, 2020 and December 31, 2019. The Company does not anticipate that unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

  18  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 10 —CONTINGENCIES

 

Litigation, Claims and Assessments

 

The Company’s operations are subject to numerous governmental rules and regulations in each of the countries it does business. These rules and regulations include a complex array of tax and customs regulations as well as restrictions on product ingredients and claims, the commissions paid to the Company’s independent product consultants (“IPCs”), labeling and packaging of products, conducting business as a direct-selling business, and other facets of manufacturing and selling products. In some instances, the rules and regulations may not be fully defined under the law or are otherwise unclear in their application. Additionally, laws and regulations can change from time to time, as can their interpretation by the courts, administrative bodies, and the tax and customs authorities in each country. The Company actively seeks to be in compliance, in all material respects, with the laws of each of the countries in which it does business and expects its IPCs to do the same. The Company’s operations are often subject to review by local country tax and customs authorities and inquiries from other governmental agencies. No assurance can be given that the Company’s compliance with governmental rules and regulations will not be challenged by the authorities or that such challenges will not result in assessments or required changes in the Company’s business that could have a material impact on its business, consolidated financial statements and cash flow.

 

The Company has various non-income tax contingencies in several countries. Such exposure could be material depending upon the ultimate resolution of each situation. As of June 30, 2020 and December 31, 2019, the Company has recorded a current liability under ASC 450, Contingencies, of approximately $1.9 million and $0.9 million, respectively.

 

From time to time, the Company may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.

 

COVID-19 Pandemic

 

In December 2019, a novel strain of coronavirus known as COVID-19 was reported to have surfaced in China, and by March 2020 the spread of the virus resulted in a world-wide pandemic. By March 2020, the U.S. economy had been largely shut down by mass quarantines and government mandated stay-in-place orders (the “Orders”) to halt the spread of the virus. While 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. The Orders required some of the Company’s employees to work from home when possible, and other employees were entirely prevented from performing their job duties at times. These 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. The world-wide response to the pandemic has resulted in a significant downturn in economic activity and there is no assurance that government stimulus programs will successfully restore the economy to the levels that existed before the pandemic. If an economic recession or depression is sustained, it could have a material adverse effect on the Company’s business as consumer demand for its products could decrease.

 

Foreign jurisdictions accounted for approximately 64% of the Company’s net revenue for the three months ended June 30, 2020. The impact of COVID-19 was a significant contributing factor for the three months ended June 30, 2020 that resulted in decreases in net revenue by 17% in China, 10% in Japan, and 18% in all other foreign countries as a group. While the Company’s direct-to-consumer selling model typically relies heavily on the use of its IPC sales force in close contact with customers, the pandemic has required alternative selling approaches such as through social media. Until a vaccine or other successful mitigation of COVID-19 is developed, no assurance can be provided that the Company will be able to avoid future reductions in net revenue using alternative selling approaches that avoid direct contact with customers.

 

In most jurisdictions, the Orders have been relaxed or lifted but considerable uncertainty remains about whether the Orders will need to be reinstated as the spread of COVID-19 continues. While the current disruption to the Company’s business is expected to be temporary, the long-term financial impact on the Company’s business cannot be reasonably estimated at this time.

 

  19  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Employment Agreements

 

 On May 8, 2020, the Company entered into employment agreements with three executive officers, Brent Willis, Gregory Gould, and David Vanderveen. The employment agreements provide for aggregate annual base compensation of $650,000, $500,000, and $550,000 plus target annual performance bonuses of 100%, 50%, and 50% of annual base compensation for Mr. Willis, Mr. Gould, and Mr. Vanderveen, respectively. The agreements expire on January 1, 2023 and provide for annual renewal periods thereafter. If the employment agreements are terminated by the Company for Cause (as defined in the employment agreements) or officer resigns without Good Reason (as defined in the employment agreements), becomes disabled, or dies before the expiration date, the Company is required to pay base salary through the termination date plus reimbursement of business expenses and unused vacation. If the Company terminates the employment agreements with Messrs. Willis or Gould without Cause or they resign for Good Reason, the Company will be required to make severance payments of 18 months and 12 months of base compensation and health insurance benefits, for Mr. Willis and Mr. Gould, respectively, plus the target performance bonus that would have been otherwise payable for the year in which termination occurs. If the Company terminates the employment agreement with Mr. Vanderveen without Cause, the Company will be required to pay the remaining amounts due under the employment agreement, including severance payments of nine months of base compensation with one additional month for every full year of service up to 12 months total, plus the target performance bonus that would have been otherwise payable for the year in which the termination occurs. If Mr. Vanderveen resigns for Good Reason, the Company will be required to make severance payments of nine months of base compensation with one additional month for every full year of service up to 12 months total, plus the target performance bonus that would have been otherwise payable for the year in which the termination occurs. If termination of any of the three executive officers occurs in connection with a change of control, the Company is required to make (i) severance payments of between 150% and 200% of annual base compensation plus the target bonus applicable in the year in which termination occurs, and (ii) payments for up to 18 months of health insurance benefits.

 

NOTE 11 —NET LOSS PER SHARE

 

Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. The calculation of diluted net loss per share includes dilutive stock options, unvested restricted stock awards, and other Common Stock equivalents computed using the treasury stock method, in order to compute the weighted average number of shares outstanding. For the three and six months ended June 30, 2020 and 2019, basic and diluted net loss per share were the same since all Common Stock equivalents were anti-dilutive. As of June 30, 2020 and 2019, the following potential Common Stock equivalents were excluded from the computation of diluted net loss per share since the impact of inclusion was anti-dilutive (in thousands):

 

SCHEDULE OF LOSS PER SHARE

    2020     2019  
             
Equity incentive plan awards:                
Stock options     3,686       2,560  
Restricted stock awards     2,484       1,226  
Common stock purchase warrants     311       303  
                 
Total     6,481       4,089  

 

 

NOTE 12 — FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATIONS

 

Fair Value Measurements

 

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair measurement:

 

Level 1—Quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date

 

  20  

 

 

NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Level 2—Other than quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly through market collaboration, for substantially the full term of the asset or liability

 

Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date

 

As of June 30, 2020 and December 31, 2019, the fair value of the Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximated their carrying values due to the short-term nature of these instruments. Cash equivalents consist of short-term certificates of deposit that are classified as Level 2. The recorded amounts for the business combination obligations in Note 3 and the debt obligations in Note 6 also approximated fair value due to the short-term maturities of the business combination liabilities, and the variable nature of the interest rates under the EWB Credit Facility. Due to the U.S. government guarantee and the otherwise unique terms of the PPP Loan discussed in Note 6, it was not possible to determine fair value of this debt instrument.

 

Recurring Fair Value Measurements

 

Recurring measurements of the fair value of assets and liabilities as of June 30, 2020 and December 31, 2019 were as follows:

 

 

    As of
June 30, 2020
    As of
December 31, 2019
 
    Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
                                                 
Earnout under Series D preferred stock   $ -     $ -     $     -     $ -     $           -     $           -     $ 225     $           225  
Marley earnout obligation     -       -       -       -       -       -       -       -  
Interest rate swap liability     -       406       -       406       -       99       -       99  
                                                                 
Total   $ -     $ 406     $ -     $ 406     $ -     $ 99     $ 225     $ 324  

 

Valuation assumptions for the earnout under the Series D preferred stock are set forth in Note 3. The interest rate 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 0.50%, and is classified within Level 2 of the fair value hierarchy. The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the six months ended June 30, 2020 and 2019, the Company had no transfers of its assets or liabilities between levels of the fair value hierarchy.

 

Significant Concentrations

 

A significant portion of the Noni by NewAge business is conducted in foreign markets, exposing the Company to the risks of trade or foreign exchange restrictions, increased tariffs, foreign currency fluctuations and similar risks associated with foreign operations. As set forth in Note 13, for the three and six months ended June 30, 2020 and 2019, a significant portion of the Company’s consolidated net revenue was generated outside the United States, primarily in the Asia Pacific market. Most of the Noni by NewAge’s products have a component of the Noni plant, Morinda Citrifolia (“Noni”) as a common element. Tahitian Noni® Juice, MAX and other noni-based beverage products comprise over 80% of net revenue of the Noni by NewAge segment. However, if consumer demand for these products decreases significantly or if the Company ceases to offer these products without a suitable replacement, the Company’s consolidated financial condition and operating results would be adversely affected. The Company purchases fruit and other Noni-based raw materials from French Polynesia, but these purchases of materials are from a wide variety of individual suppliers with no single supplier accounting for more than 10% of its raw material purchases during the three and six months ended June 30, 2020. However, as the majority of the raw materials are consolidated and processed at the Company’s plant in Tahiti, the Company could be negatively affected by certain governmental actions or natural disasters if they occurred in that region of the world. For the three and six months ended June 30, 2020 and 2019, no single customer accounted for 10% or more of the Company’s consolidated net revenue.

 

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. The Company maintains its cash, cash equivalents and restricted cash at high-quality financial institutions. Cash deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. As of June 30, 2020, the Company had cash and cash equivalents with three financial institutions in the United States with balances of $13.9 million, $11.9 million and $3.5 million, and two financial institutions in China with balances of $8.7 million and $7.5 million. As of December 31, 2019, the Company had cash and cash equivalents with two financial institutions in the United States with balances of $22.2 million and $1.4 million, and two financial institutions in China with balances of $6.6 million and $3.6 million. The Company has never experienced any losses related to its investments in cash, cash equivalents and restricted cash.

 

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NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Generally, credit risk with respect to accounts receivable is diversified due to the number of entities comprising the Company’s customer base and their dispersion across different geographies and industries. The Company performs ongoing credit evaluations on certain customers and generally does not require collateral on accounts receivable. The Company maintains reserves for potential bad debts.

 

NOTE 13 — SEGMENTS AND GEOGRAPHIC CONCENTRATIONS

 

Reportable Segments

 

The Company follows segment reporting in accordance with ASC Topic 280, Segment Reporting. The Company’s operating segments consist of the Noni by NewAge segment and the NewAge segment.

 

The Noni by NewAge segment is engaged in the development, manufacturing, and marketing of Tahitian Noni® Juice, MAX and other noni beverages as well as 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 Noni by NewAge segment’s products are sold and distributed in more than 60 countries using IPCs through its direct to consumer selling network and ecommerce business model. Approximately 80% of the net revenue of the Noni by NewAge segment is generated in the key Asia Pacific markets of Japan, China, Korea, Taiwan, and Indonesia.

 

The NewAge segment markets and sells a portfolio of healthy beverage brands including XingTea, Búcha® Live Kombucha, Coco-Libre, Evian, Nestea, Illy Coffee and Volvic. These products are distributed through the Company’s Direct Store Distribution (“DSD”) network and a hybrid of other routes to market throughout the United States and in a few countries around the world. The NewAge segment brands are sold in all channels of distribution including hypermarkets, supermarkets, pharmacies, convenience, gas and other outlets. The NewAge segment distributes beverages to retail customers and sells beverages to wholesale distributors, key account owned warehouses and international accounts using several distribution channels.

 

Net revenue by reporting segment for the three and six months ended June 30, 2020 and 2019, was as follows (in thousands):

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,  
 
Segment   2020     2019     2020     2019  
                         
Noni by NewAge   $ 46,861     $ 52,060     $ 96,971     $ 100,282  
NewAge     15,776       14,288       29,359       24,373  
                                 
Net revenue   $ 62,637     $ 66,348     $ 126,330     $ 124,655  

 

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

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
Segment   2020     2019     2020     2019  
                         
Noni by NewAge   $ 35,903     $ 40,469     $ 75,509     $ 78,174  
NewAge     2,175       1,180       4,093       2,051  
                                 
Gross profit   $ 38,078     $ 41,649     $ 79,602     $ 80,225  

 

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NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

Segment   2020     2019  
             
Noni by NewAge   $ 186,304     $ 201,600  
NewAge     55,708       49,530  
                 
Total assets   $ 242,012     $ 251,130  

 

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

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
Segment   2020     2019     2020     2019  
                         
Noni by NewAge   $ 1,725     $ 1,671     $ 3,444     $ 3,366  
NewAge     148       534       308       1,075  
                                 
Total depreciation and amortization   $ 1,873     $ 2,205     $ 3,752     $ 4,441  

 

Capital expenditures for property and equipment and identifiable intangible assets by reporting segment for the three and six months ended June 30, 2020 and 2019, were as follows (in thousands):

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
Segment   2020     2019     2020     2019  
                         
Noni by NewAge   $ 286     $ 461     $ 1,753     $ 577  
NewAge     103       576       227       1,709  
                                 
Total capital expenditures   $ 389     $ 1,037     $ 1,980     $ 2,286  

 

Geographic Concentrations

 

The Company attributes net revenue to geographic regions based on the location of its customers’ contracting entity. The following table presents net revenue by geographic region for the 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  
                         
United States of America   $ 22,531     $ 19,965     $ 41,916     $ 36,420  
Japan     20,940       23,238       41,807       43,938  
China     11,181       13,407       26,156       26,562  
Other countries     7,985       9,738       16,451       17,735  
                                 
Net revenue   $ 62,637     $ 66,348     $ 126,330     $ 124,655  

 

As of June 30, 2020 and December 31, 2019, the net carrying value of property and equipment located outside of the United States amounted to approximately $22.6 million and $22.1 million, respectively.

 

NOTE 14 — SUBSEQUENT EVENTS

 

Fourth Amendment to Credit Facility

 

On July 6, 2020, the Company entered into the Fourth Amendment to the EWB Credit Facility discussed in Note 6. The Fourth Amendment reduced the amount of restricted cash in China with a corresponding increase in restricted cash in the United States. The Fourth Amendment also permitted the Company to repurchase up to $1.2 million of shares of its Common Stock with a corresponding increase in the requirement of cash equity infusions from $30.0 million to approximately $31.2 million for the year ending December 31, 2020.

 

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NewAge, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Stock Purchase

 

On July 6, 2020, the Company purchased from the Company’s Chief Executive Officer a total of 780,000 shares of Common Stock based on the closing market price of $1.53 per share. The total purchase price of approximately $1.2 million will be accounted for as a reduction of stockholders’ equity for the three months ending September 30, 2020. The shares were immediately canceled and returned to the Company’s authorized but unissued shares of Common Stock.

 

Merger Agreement

 

On July 20, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, 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 the Company agreed to acquire Ariix, which owns five brands in the e-commerce and direct selling channels (the “Acquisition”). 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 the Company 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 a wholly-owned subsidiary of the Company.

 

On the Closing Date, the Company 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 $141.3 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 the Company’s stockholders, the Company 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 the Company’s stockholders and solely at the election of the Company, 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 the Common Stock reaches $6.00 per share.

 

  24  

 

 

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:

 

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.
     
Our belief that we 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 2020 and 2021.
     
Ability to successfully integrate acquisitions.

 

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A. “Risk Factors” of 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.

 

  25  

 

 

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.

 

  26  

 

 

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.

 

  27  

 

 

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):

 

    2020     2019     Change     Percent  
                         
Net revenue   $ 62,637     $ 66,348     $ (3,711)     -6%
Cost of goods sold     24,559       24,699       (140)     -1%
                                 
Gross profit     38,078       41,649       (3,571)     -9%
Gross margin     61%     63%                
                                 
Operating expenses:                                
Commissions     18,405       19,607       (1,202)     -6%
Selling, general and administrative     26,277       28,175       (1,898)     -7%
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     1,761       2,017