NewAge, Inc. - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission File Number 001-38014

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

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

As of June 30, 2020, the last business day of the second fiscal quarter, the aggregate market value of the registrant’s voting stock held by non-affiliates, was approximately $145,157,000, based on the last reported sales price of $1.53 as quoted on the Nasdaq Capital Market on such date.

The registrant had 135,389,876 shares of its $0.001 par value Common Stock outstanding as of March 12, 2021.

Documents incorporated by reference

The preliminary proxy statement for our 2021 Annual Meeting of Stockholders was filed with the SEC on March 10, 2021, and we expect to file the definitive Proxy Statement for our 2021 Annual Meeting of Stockholders (the “2021 Proxy Statement”) by March 31, 2021. The 2021 Proxy Statement is incorporated by reference in Part III of this Form 10-K to the extent stated herein. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (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:

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A. “Risk Factors” of this Report. Moreover, we operate in very competitive and rapidly changing markets. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The forward-looking statements in this Report are made as of the date of the filing, and except as required by law, we disclaim and do not undertake any obligation to update or revise publicly any forward-looking statements in this Report. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission (“SEC”) with the understanding that our actual future results, levels of activity and performance, as well as other events and circumstances, may be materially different from what we expect.

PART I

As used in this Report and unless otherwise indicated, the terms “we”, “us”, “our”, “NewAge”, or the “Company” refers to NewAge, Inc. and our subsidiaries. “Morinda” refers to our wholly owned subsidiary, Morinda Holdings, Inc., and its subsidiaries in the U.S. and around the world. “Ariix” refers to our wholly owned subsidiary, Ariix, LLC and its subsidiaries in the U.S. and around the world. Unless otherwise specified, all dollar amounts are expressed in United States dollars.

Effective July 28, 2020, we amended our Articles of Incorporation to change our name from New Age Beverages Corporation to NewAge, Inc. Accordingly, all references herein have been changed to reflect the new name. NewAge, Inc., the NewAge logo, Morinda, Noni by NewAge, Tahitian Noni, TeMana, Ariix and its portfolio of brands, LIMU, MaVie, and other related companies and trademarks or service marks of NewAge appearing in this Report are the property of NewAge, Inc. or its subsidiaries. Trade names, and other related trademarks and service marks of other companies appearing in this Report are the property of their respective holders.

Item 1. Business

Business Overview

We are an organic and healthy products company intending to become the world’s leading social selling and distribution company. We are a purpose-driven firm dedicated to providing healthy products to customers and inspiring them to “Live Healthy.” We commercialize our portfolio of products across more than 50 countries worldwide and strive to disrupt traditional markets with industry leading social selling tools and technologies. More than 75% of our revenue is ordered and fulfilled online with the products delivered direct to customers’ homes.

We compete in three major category platforms including health and wellness, healthy appearance, and nutritional performance. Within our category platforms, we develop and market a portfolio of science-based, functionally differentiated, and superior performing products and brands. We differentiate our products utilizing our patents, proprietary formulas and production process, and trade secrets and focus our functional differentiation using different combinations of:

Tahitian Noni is our largest brand and has accounted for more than $7.0 billion in sales since its inception, including approximately $360 million cumulatively recognized by us since our acquisition of Morinda in December 2018. There are multiple studies and human trials validating Tahitian Noni’s efficacy and benefits for reducing inflammation and strengthening the body’s protection against viruses. Also, within the health and wellness platform is our LIMU brand, a fucoidan-rich beverage sourced from seaweed. We have two core brands within the healthy appearance platform including TeMana, a unique skin care portfolio that is infused with Tahitian Noni, and Lucim, a line of clean skin care products that was launched in 2020. In our nutritional performance platform, we commercialize a full line of weight management products and other nutritional supplements and nutraceuticals and are expanding our core brands within the platform.

We believe that a major trend in consumer goods is direct delivery, e-commerce ordering, and fulfillment, with purchase intent being driven by social media and friends and family. According to Euromonitor International’s 2019 Lifestyles Survey, the largest driver of purchase intent in every major region of the world was friends and family recommendations and related social media posts. We further believe that these fundamental trends limit the historic advantage of traditional manufacturers geared toward sale of their products, using traditional media, merchandized in traditional retail outlets.

We believe one of our competitive advantages is our network of more than 400,000 brand partners (“Brand Partners”) around the world, and our own direct-store-delivery (“DSD”) delivery system that provides near captive distribution in our respective market areas. We have developed a robust infrastructure and set of execution capabilities across more than 50 countries, with a primary focus on our core markets of Japan, Greater China, Western Europe, and North America. We are selectively invested in emerging market areas whereby the combination of the business opportunity and consumer demographics intersect to form an attractive investment profile for our model. These markets include the Russia and the CIS countries, the Southern Cone of Africa, and selected markets in Latin America and South East Asia.

Corporate History

NewAge, Inc. was incorporated under the laws of the State of Washington in April 2010. In mid-2016, we established our operational headquarters in Denver, Colorado, changed our name to New Age Beverages Corporation and created a vision to commercialize healthy products through a differentiated route-to-market. During 2017, we up-listed to the Nasdaq Capital Market (“Nasdaq”) and acquired an initial portfolio of retail brands in a series of transactions in 2017 and 2018.

In 2018, we completed a business combination with Morinda that provided us with incremental scale, and the resources, team, and global execution capabilities to further our expansion and distribution of healthy products. Morinda is a Utah-based healthy beverage and products company founded in 1996 with infrastructure and operations in more than 50 countries around the world, and manufacturing operations in Tahiti, the U.S., China, Japan, and Germany. Morinda was the first company to commercially globally sell products derived from the noni plant, an antioxidant-rich, natural resource found in French Polynesia. Morinda is primarily a direct-to-consumer and e-commerce business.

In July 2019, we completed a business combination with Brands Within Reach, LLC (“BWR”). BWR owned key licensing and distribution rights in the United States for some of the world’s leading beverage brands including Nestea®, Volvic®, Evian® and Illy® Ready-to-Drink Coffee. In 2020, with the impact of COVID and the change in economics of retail brand beverages, we divested our initial portfolio of retail brands, to focus exclusively on our higher margin, higher potential brands sold direct to customers. All of these divested assets were included in the Direct Store segment from the date of acquisition through the disposal date and are referred to herein as the “Divested Business”. For periods after the disposal of the Divested Business, this segment is primarily comprised of our Direct Store Distribution (“DSD”) network that distributes beverages, snacks, and other products to retail customers in Colorado and surrounding states, and sells the portfolio of brands to wholesale distributors, key account owned warehouses, and international accounts using several distribution channels. 

On November 16, 2020, we completed a business combination with Ariix whereby Ariix became one of our wholly owned subsidiaries. Ariix was formed in Utah in January 2011 and grew from inception to more than $200 million in net revenue in its nine-year history, making it one of the fastest growing companies in the direct selling industry over that time period. Ariix evolved through a combination of organic growth and acquisitions and brought to the combination with us a portfolio of growth brands spanning weight loss management, water and air filtration, personal care and skincare products. Ariix also included the standalone companies of LIMU, Zennoa, MaVie, and others in direct sales and e-commerce, all now included in our Direct / Social Selling segment beginning on the closing date of the Ariix business combination.

We have four direct subsidiaries, all of which are wholly owned. These subsidiaries consist of Morinda, Ariix, NABC, Inc., and NABC Properties, LLC (“NABC Properties”). NABC, Inc. is a Colorado-based operating company that consolidates performance and financial results of the Company’s segments, subsidiaries, and divisions. NABC Properties administers a building owned by NewAge in southern Colorado.

Principal Products

Our core business is developing, marketing, selling, and distributing a portfolio of healthy products sold primarily through a direct to customer business model using a team of more than 400,000 Brand Partners and distributors to help market and sell the portfolio of brands. We compete in three primary category platforms including health and wellness, healthy appearance, and nutritional performance. The product segments and subsegments within these categories represent large addressable growing markets. According to industry sources, the health and wellness industry comprises $4.2 trillion in annual revenue, and the beverage industry comprises $1 trillion in annual revenue. Our brands Tahitian Noni, LIMU, and Zennoa compete in this industry segment. Within the beverage industry, energy drinks constitute $80 billion in annual sales, where our brands LIMU Blue Frog and Hiro Natural Energy Drinks compete. Skincare and cosmetics constitute an industry of $650 billion in annual sales and we have two lead brands in this subsegment, TeMana and Lucim. Weight management is a $204 billion industry segment where our nutritional supplements and Slenderiize products compete. Personal care is a $250 billion industry segment where our brands Reviive and Puritii compete. The diagnostics industry is a $29 billion industry segment, where we compete with our DNA testing and diagnostic kits and products under our MaVie brand.

We also compete in the emerging CBD category and believe we have differentiated technology, especially when CBD is combined with our Tahitian Noni. Our studies have shown an increase in the receptivity in the endocannabinoid system in the body for CBD in combination with Noni by opening additional pathways and reducing inhibitors. We use this technology in our NONI+CBD shots that we commercialize in Japan, where we have gained first mover advantage, and according to one of the largest research companies in Japan, Fuji Keizai, NewAge reached the largest CBD sales in the CBD Supplement category in Japan. As additional markets open and regulations change (including in the United States), we believe we are in a competitively advantaged position both in leveraging our technology and in executing through our network of more than 400,000 Brand Partners to develop this attractive, scale, profitable, and disruptive market. We do not market or sell CBD beverages in the U.S. and do not intend to market or sell CBD ingestible products in the U.S. until we can do so in compliance with applicable laws.

Sales and Marketing

We market our portfolio of healthy products using a range of marketing media, but given the significant shift in how customers are buying and what marketing mediums are influencing their purchase decisions, we have adjusted to evolve with changing consumer patterns to communicate using the most effective ways. As such, we primarily use our team of more than 400,000 Brand Partners worldwide for sales and marketing and are empowering them with the latest social selling tools and technology.

Supporting these 400,000 Brand Partners is a full-scale sales and marketing team of more than 200 people working at the corporate, regional, and local market levels worldwide, and we develop and execute promotions, incentives, new products, marketing, and sales collateral communication materials in more than 15 different languages across more than 50 countries.

We also market our portfolio of affiliate or distributed brands through our DSD distribution system. To support these brands, we have an in-house team of more than 100 sales, marketing, and merchandising associates exclusively focused on the United States.

Distribution

The products in our Direct / Social Selling segment, which is a business-to-consumer model, are currently distributed in over 50 countries through primarily a direct route to market. Approximately 80% of our revenue is ordered and fulfilled online, and more than 80% of our products are delivered direct to customers’ homes. We have dedicated global, regional, and local manufacturing and major logistics and warehousing operations located in strategic locations worldwide to serve our global footprint of more than 400,000 Brand Partners.

Brand Partners

Our team of more than 400,000 Brand Partners worldwide are independent business professionals. Brand Partners are our independent representatives that have signed agreements with us and have the ability to earn commissions, as well as direct customers who have purchased products from our website. The individuals that comprise these groups have purchased products from us within the last twelve months. These professionals sell our products online through their own replicated websites, their social media feeds, and peer-to-peer connections. Purchasers of our products range from one-time customers to monthly subscribers that comprise the greatest share of our revenue. Customers or subscribers that then choose to make a business of selling our products then become affiliates or full Brand Partners whereby they are sponsored by an existing Brand Partner and become a member of the sponsoring Brand Partner’s sales organization. Brand Partners are required to fully comply with the Direct / Social Selling segment policies and procedures, including that Brand Partners will: (i) safeguard and protect our reputation and products; (ii) never communicate any deceptive, false, unethical, or unlawful customer or recruiting practices; (iii) never provide any deceptive, false, unethical, or unlawful claims about our products or compensation plan; and (iv) never promote or sell products that are competitive to our products. We may take disciplinary action (up to and including termination of a Brand Partner’s purchase and sales organization rights) if a Brand Partner violates these policies and procedures. In many markets, Brand Partners purchase an initial nominally priced portfolio of products for sale which also includes sales and educational materials to get a new Brand Partner started with his or her business.

After becoming a Brand Partner, individuals may purchase products directly at wholesale pricing for resale through their own replicated website, through their social feeds, and to their peer-to-peer customers, as well as, for personal use. In addition to their direct-to-customer sales, Brand Partners may build their businesses by sponsoring new Brand Partners. As Brand Partners sponsor others, generational levels are created in the Brand Partners organizational structure. We have no requirements for Brand Partners to sponsor new Brand Partners, and Brand Partners are not compensated for recruiting or sponsoring others. We focus on direct sales to millions of customers worldwide, and market our products directly to them. Customers who may want to build a business in addition to purchasing products may become Brand Partners and enjoy commissions and other benefits based on their sales. Brand Partner compensation is based on customer product sales of that individual and a portion from their respective sales organizations.

Although our global compensation plan is designed generally to permit Brand Partners to establish their sales organizations without country or border limitations, our business and compensation plan for China must be executed in a modified form due to Chinese laws and regulations. Only individuals who are residents of China and are eligible to work there may enroll as Brand Partners or as customers in China. The same general policies and procedures described above, modified for China, apply to Brand Partners in China. According to Chinese regulations, non-China residents are not permitted to sponsor Brand Partners in China, or otherwise participate in the compensation plan for China.

Brand Partner Compensation

Our compensation plan for Brand Partners is performance-based, consistent with our overall philosophy of how internal/direct associates are compensated whereby a significant portion of their total compensation is performance-based and at risk. Our compensation plan for Brand Partners has several attractive features and provides several opportunities for Brand Partners to earn compensation. The commission-based compensation system rewards Brand Partners for their sales and marketing efforts and is comparable to the combined sales and marketing expenses of a traditional consumer goods company. All compensation is conditioned on the Brand Partners’ good standing and compliance with the Company’s policies and procedures and the laws of the country where the Brand Partner does business. The integration of our compensation plan across international markets (except China) allows Brand Partners to earn commissions from global product sales along with local product sales.

Customers

The Direct / Social Selling segment is focused on e-commerce and direct product sales to customers. We offer customers the opportunity to become monthly subscribers, whereby they can enjoy additional benefits and savings on products and shipping, and offer subscribers an opportunity to become affiliates, whereby they can earn bonuses for new customers purchasing or becoming monthly subscribers. We then selectively offer affiliates, subscribers, and customers the opportunity to become Brand Partners whereby they have an opportunity to participate in the business and compensation plan and are eligible to earn commissions.

Business to Business Distribution

Our Direct / Social Selling segment is augmented by our Direct Store segment, which is a business-to-business model, and serves major traditional retail outlets in the United States including grocery retail, natural food retail, specialty outlets, hypermarkets, club stores, pharmacies, convenience stores, and gas stations. The compensation for associates in this model is also highly variable and performance-based, based on their sales and performance against established objectives.

Manufacturing and Supply Chain

Our manufacturing facilities are in American Fork, Utah; Mataiea, Tahiti; Chongqing, China; Tianjin, China; and Alamosa, Colorado, with contract manufacturing in Tokyo, Japan; Bad Liebenwerda, Germany; and more than ten other facilities throughout the U.S. with preferred and qualified manufacturing partners that meet our stringent criteria for quality and safety. Each of our products are produced to exacting specifications and standards, and subject to strict quality control procedures.

Our largest brand, and related sourcing, manufacturing, bottling, and distribution system is Tahitian Noni^® Juice. Our noni fruit is harvested from noni trees on 18 islands of French Polynesia by approximately 2,000 harvesters, who are independent contractors, and who work and coordinate with our representatives on each island. All fruit is checked at the time of harvest for quality, maturity, and purity. To date, we have maintained good relations with our suppliers and have not experienced any significant difficulties in obtaining adequate supplies of the noni fruit.

The noni fruit is then shipped to our 85,000 square foot processing plant in Mataiea, Tahiti, where the fruit is again checked before being processed. This facility, as well as all facilities that produce products for us, adheres to the Good Manufacturing Practices as established by the U.S. Food and Drug Administration (“FDA”). The Tahiti facility is well-maintained, and the buildings and equipment are kept clean and in good repair and technology is up to date. The facility is regularly inspected by the French Polynesian authorities and by the FDA. We are one of the largest industries and exporters in Tahiti together with tourism and black pearl export. As such, we maintain and enjoy a very good relationship with the Tahitian government.

At this processing facility, the seeds are separated from the fruit. The seeds are later processed for oil extraction. The fruit is extensively inspected, pasteurized, and turned into puree, which is the key component of our Tahitian Noni Juice. The pasteurized puree is checked for quality and hermetically sealed in tote bins which are shipped by sea to ports in the United States, Japan, China and Germany for manufacturing our products. Each day the equipment used at this facility is automatically cleaned by a three step clean-in-place system. This system ensures the cleanliness of the equipment, tanks, and pipes used in the processing of the puree.

Reliance on Third-Party Suppliers and Distributors

Except as noted above, we rely on various suppliers for raw and packaging materials, production, sale, and distribution of our products. The material terms of these relationships are typically negotiated annually and include pricing, quality standards, delivery times and conditions, purchase orders, and payment terms. Payment terms are typically net 30, meaning that the total invoiced amount is expected to be paid in full within 30 days from the date the products or services are provided. We believe that we have sufficient options and redundant supply options for each of our raw and packaging material needs, as well as our third-party distribution needs. We have long-term relationships with our suppliers and distributors, resulting in consistency in quality and supply.

The contractual arrangements with third parties, including suppliers, manufacturers, distributors, and retailers are typical of the industry with standard terms. We have no long-term obligations with third party suppliers, manufacturers, distributors, and retailers, nor do any of them have long-term obligations with us. The third-party supplier, manufacturing and distribution agreements were entered into in the normal course of business within the guidelines of industry practices and are not deemed material and definite.

Competition

Our business spans multiple sectors with competitors having similar product portfolios, similar routes-to-market, similar scales and geographic breadth, and/or similar business models. Those comparative sectors include:

Many of our current and potential competitors are well established and have longer operating histories, and as such, have more name recognition than we have. However, we believe that with our purpose-driven identity as a company, our healthy brand portfolio, our global reach and infrastructure, our compensation system, our relative financial strength and flexibility, our strong public company entity, and our team and inclusive culture that we can compete effectively in the industry and increase our market share from existing very large and growing product categories and large legacy competitors.

Research and Development Activities

Our goal is to provide healthy, functionally differentiated, and superior performing products for customers worldwide. Historically, our research and development (“R&D”) efforts are focused on two primary paths. The first is to continually review our existing formulas and production processes and structure to evaluate opportunities for quality, efficacy, or cost of goods sold improvements, without degrading quality or fundamentally changing the customer appeal of our existing products. The second is in the development of fundamentally new and differentiated products, based on customer insights and trends and competitive opportunities.

Our Direct / Social Selling segment has an R&D group that drives our mission to provide healthy functional products across our three core category platforms, health and wellness, healthy appearance, and nutritional performance with real efficacy for consumers. In addition to developing new healthy and scientifically differentiated products and reviewing and improving existing formulas and processes for improvement and cost reductions, our R&D group continues to conduct and publish new, cutting edge benefits research on noni and other new products. R&D is an integral part of our global corporate structure, providing timely technical, regulatory, quality, processing and scientific standards, data, and expertise as needed and requested. Our R&D group, in partnership with other departments, maintains an extensive intellectual property database of patents, publications, formulations, and ideas that help protect and keep the Company in the forefront of healthy product offerings and product development. Our R&D group administers laboratories that provide analytical, chemical, microbiological, nutritional, and biochemical capabilities. We believe that we own the only lab in the world dedicated to the study of the noni plant and pioneering new innovative applications for noni, and as such continue to publish studies and insights into noni’s applications and benefits, as well as insights into all of our products and their benefits for fundamental human needs states.

Patents and Trademarks

We hold numerous issued U.S. patents and trademarks and have rights to additional intellectual property under license agreements with others. We also hold issued patents and trademarks in other countries. In addition, we have pending U.S. and international patent applications that cover numerous inventions. We also maintain trademarks in the U.S. and other countries, as well as, pending trademark applications in the U.S. and other countries and have rights to additional U.S. and international trademarks under license agreements.

We believe our intellectual property portfolio to be a core asset of the firm, and one which we expect to further develop and commercialize in our current and future portfolio offerings. We also rely on trade secrets and unique expertise and know how to protect our proprietary technology and may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know how.

Government and Industry Regulation

We are required to comply, and it is our policy to comply, with all applicable laws in the numerous countries throughout the world in which we do business. In the United States, the safety, production, transportation, distribution, advertising, labeling and sale of our Company’s products and their ingredients are subject to the Federal Food, Drug, and Cosmetic Act; the Federal Trade Commission Act; the Lanham Act; state consumer protection laws; competition laws; federal, state and local workplace health and safety laws; various federal, state and local environmental protection laws; privacy and personal data protection laws; and various other federal, state and local statutes and regulations. Outside the United States, our business is subject to numerous similar statutes and regulations, as well as other legal and regulatory requirements.

Under a California law known as Proposition 65, if the state has determined that a substance causes cancer or harms human reproduction, a warning must be provided for any product sold in the state that exposes consumers to that substance, unless the conditions of an exemption (described below) can be met. The state maintains lists of these substances and periodically adds other substances to these lists. The detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not require a warning if the manufacturer of a product can demonstrate that the use of that product exposes consumers to a daily quantity of a listed substance that is:

One or more substances that are currently on the Proposition 65 lists, or that may be added in the future, can be detected in certain Company products at low levels that are safe. With respect to substances that have not yet been listed under Proposition 65, the Company takes the position that listing is not scientifically justified. With respect to substances that are already listed, the Company takes the position that the presence of each such substance in Company products is subject to an applicable exemption from the warning requirement or that the product is otherwise in compliance with Proposition 65. The state of California and other parties, however, have in the past taken a contrary position and may do so in the future.

We use nonrefillable recyclable containers in the United States and various other markets around the world. We also offer and use refillable containers, which are also recyclable. Legal requirements apply in various jurisdictions in the United States and overseas requiring that deposits or certain ecotaxes or fees be charged in connection with the sale, marketing and use of certain packaging containers. The precise requirements imposed by these measures vary. Other types of statutes and regulations relating to beverage container deposits, recycling, ecotaxes and/or product stewardship also apply in various jurisdictions in the United States and overseas. We anticipate that additional such legal requirements may be proposed or enacted in the future at local, state and federal levels, both in the United States and elsewhere.

Our facilities and other operations in the United States and elsewhere around the world are subject to various environmental protection statutes and regulations, including those relating to the use of water resources and the discharge of wastewater. Our policy is to comply with all such legal requirements. Compliance with these provisions has not had, and we do not expect such compliance to have, any material adverse effect on our Company’s capital expenditures, net income, or competitive position.

We are also subject to various federal, state and international laws and regulations related to privacy and data protection, including the European Union’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, and the California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020. The interpretation and application of data privacy and data protection laws and regulations are often uncertain and are evolving in the United States and internationally. We monitor pending and proposed legislation and regulatory initiatives to ascertain their relevance to and potential impact on our business and develop strategies to address regulatory trends and developments, including any required changes to our privacy and data protection compliance programs and policies.

Seasonality

Sales of our products are somewhat seasonal but with a portfolio of global markets seasonality is significantly diminished. Peak summer months account for a slightly higher level of sales, with the winter months being our lowest level of sales due to holidays in the Americas and Europe in December, holidays in January in Japan, and Chinese New Year in February impacting our business in the Greater China markets.

Environment, Sustainability and Governance

As a global social selling and distributor of health and wellness products operating in more than 50 countries, the values of environment, sustainability, and governance (“ESG”) are important issues that we are in the process of integrating into our business strategy and performance.

We understand the impact that good socially responsible companies can make in their global communities. At NewAge, we take this responsibility very seriously and have efforts underway to implement best in class practices to improve our social and environmental impacts. Our focus is to make sustainable decisions in every area of business, from selecting our raw materials, to our product design, to our manufacturing and shipping practices, to ensure that our planet’s finite resources are used efficiently. Accordingly, reducing our carbon footprint and helping to protect our natural resources is integral to our ESG plan. We will continue to focus on new ways to conserve water, recycle plastic, and save energy at each of our global offices, improving our social responsibility on a world-wide basis.

We also know that people come first. Each and every day we work to provide a safe work environment, to empower people around the world with accessible technology while creating a diverse work environment where we all respect the human rights of everyone’s lives that we touch. We will continue to identify opportunities for sustainable growth and manage our risks alongside our employees, Brand Partners, business partners, and communities around the planet.

Employees

As of December 31, 2020, we had 1,127 employees globally, including 36 that worked for us on a part time basis. We also engage temporary employees and consultants as needed. We have not experienced any work stoppages, and we consider our relations with our employees to be very good.

Information about our Executive Officers.

The following table sets forth the names, ages and positions of our executive officers as of March 11, 2021:

Brent Willis was appointed as Chief Executive Officer, and as a member of our Board of Directors in April 2016. Mr. Willis has also served as a director or officer of a number of private-equity backed companies including ULearning.com, an online education company from April 2015 until March 2016, Vivitris Life Sciences, Inc., a natural life science products company from December 2015 through March 2016, and XFit Brands, Inc., a functional fitness company from November 2009 through present. From January 2013 until April 2015, he served as the Chief Executive Officer and a member of the Board of Directors of Electronic Cigarettes International Group (“ECIG”), a publicly traded company. Twenty-three months after Mr. Willis’ departure, ECIG filed a voluntary petition under the bankruptcy code. From 1987 through 2008, Mr. Willis served in executive or senior management positions for Kraft Heinz (“KHC”), The Coca-Cola Company (“KO”), AB InBev (“BUD”), and The Cott Corporation (“COT”). Mr. Willis obtained a Bachelor of Science in Engineering from the United States Military Academy at West Point in 1982 and obtained a Master’s in Business Administration from the University of Chicago in 1991.

Gregory A. Gould has served as our Chief Financial Officer since October 2018. Prior to joining the Company, Mr. Gould served as Chief Financial Officer of Therapure—Products (Evolve Biologics), a subsidiary of Therapure BioPharma, Inc., from November 2017 until October 2018. Mr. Gould also served as Chief Financial Officer, Treasurer and Secretary of Aytu BioScience, Inc., or Aytu (NASDAQ: AYTU), from April 2015 until November 2017, and he was the Chief Financial Officer, Secretary and Treasurer of Ampio Pharmaceuticals, Inc., or Ampio (NASDAQ: AMPE), from June 2014 until June 2017. He is a highly accomplished financial executive with expertise in the life sciences industry. Mr. Gould is a CPA in the state of Colorado. He holds a Bachelor of Science in Business Administration from the University of Colorado, Boulder. Mr. Gould will terminate his employment with the Company in July 2021.

Item 1A - Risk Factors

Our business, financial condition, results of operations and cash flows are subject to a number of risk factors that may adversely affect our business, financial condition, results of operations or cash flows. If any significant adverse developments resulting from these risk factors should occur, the trading price of our securities could decline, and moreover, investors in our securities could lose all or part of their investment in our securities.

You should refer to the explanation of the qualifications and limitations on forward-looking statements under “Special Note Regarding Forward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.

Risks Related to our Liquidity and Debt

If our shareholders fail to approve the issuance of an aggregate of up to 40.1 million shares of Common Stock at up to three shareholder meetings, we will have to make cash payments of $163.3 million to settle the remaining merger consideration under our business combination with Ariix.

Under our amended and restated merger agreement with Ariix, we issued 19.7 million shares of our Common Stock and paid $10.0 million in cash to the Sellers in February and March 2021. In addition, we must seek approval from our shareholders to issue up to an aggregate of 40.1 million shares of our Common Stock as additional consideration under the amended and restated merger agreement with Ariix and a related non-compete agreement. If our shareholders fail to approve the issuance of an aggregate of up to 40.1 million shares of Common Stock, subject to working capital and post-closing adjustments, at up to three shareholder meetings held after the Ariix Closing Date, we will have to make cash payments of $163.3 million within 90 days after the third shareholder meeting.

If our shareholders fail to approve the settlement of the remaining merger consideration with shares of our Common Stock, we likely will not have sufficient funds to satisfy such cash obligations and, in such circumstances, may not be able to arrange the necessary financing to satisfy such cash obligations on favorable terms or at all. In addition, our ability to satisfy such cash obligations may be limited by applicable law and the terms of the Senior Notes expressly prohibit a cash settlement. Our failure to pay such cash obligations would constitute an event of default under the amended and restated merger agreement.

Our Senior Notes and the related SPA contain financial covenants that require us to maintain certain financial metrics and restrictive covenants that limit our flexibility. A breach of those covenants may cause us to be in default under the Senior Notes and our other indebtedness, and our lenders could foreclose on our assets.

Under our Senior Notes, we were required to maintain restricted cash balances of $18.0 million as of December 31, 2020, which was reduced to $8.0 million in February 2021. Our Senior Notes also require us to achieve earnings before interest, taxes, depreciation and amortization, as defined in the Senior Notes (“EBITDA”), in excess of certain specified thresholds. A failure to increase our revenue levels or an inability to control costs or capital expenditures could negatively impact our ability to meet our financial covenants. If we breach such covenants or the restrictive covenants described below, the lenders could accelerate the repayment of any outstanding borrowings under the Senior Notes. We may not have sufficient assets to repay such indebtedness upon a default. If we cannot repay the indebtedness, the lenders could initiate a bankruptcy proceeding or collection proceedings with respect to our assets.

As of January 4, 2021, we entered in an Amendment Agreement with the lenders to extend the deadline to provide audited annual and unaudited interim financial statements of Ariix LLC from January 4, 2021 until January 31, 2021. As consideration for the concession to enter into the amendment, we were required to issue to the lenders 400,000 shares of our Common Stock with an estimated fair value of approximately $1.1 million. There is no assurance that we will be able to avoid future defaults and financial covenant violations or, if any occur, that the lenders will waive future instances of noncompliance.

The Senior Notes and the related SPA also contain certain restrictive covenants that limit and in some circumstances prohibit, our ability to, among other things, incur additional debt, sell, lease or transfer our assets, pay dividends on our common stock, make capital expenditures and investments, guarantee debt or obligations, create liens, repurchase our common stock, enter into transactions with our affiliates and enter into certain merger, consolidation or other reorganization transactions. These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise, any of which could place us at a competitive disadvantage relative to our competitors.

We have incurred losses to date and will likely continue to incur losses.

We have incurred net losses since we commenced operations. For the years ended December 31, 2020 and 2019, our net losses were $39.3 million and $89.8 million, respectively. We had an accumulated deficit of $151.8 million as of December 31, 2020. Our cumulative net losses have had, and likely will continue to have, a material adverse effect on our working capital, assets, and shareholders’ equity. We will likely continue to incur losses in the future and may never generate revenue sufficient to become profitable or to sustain profitability. Continuing losses may impair our ability to raise the additional capital required to continue and expand our operations. Risks to our operating results include those that may be caused by the spread of coronavirus, including absences affecting manufacturing and sales force personnel leading to reduced customer purchasing activity.

We may not have the cash necessary to satisfy our cash obligations under our Senior Notes.

On November 30, 2020, we entered into a Securities Purchase Agreement (“SPA”) for a private placement (the “Private Placement”) of (i) 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million (the “Senior Notes”), (ii) 800,000 shares of common stock (the “Commitment Shares”), (iii) Class A Warrants to purchase 750,000 shares of Common Stock at an exercise price of $3.75 per share, and (iv) Class B Warrants to purchase 750,000 shares of Common Stock at an exercise price of $5.75 per share. We received gross proceeds of $30.0 million from the purchasers (the “Purchasers”) in the Private Placement that closed on December 1, 2020. The Senior Notes are collateralized under a security agreement (the “Security Agreement”) in favor of the Purchasers. The initial principal balance of the Senior Notes bears interest at 8.0% payable monthly in cash, and the effective interest rate is approximately 42.3%. The Senior Notes are collateralized by a lien on substantially all of our assets.

Beginning in February 2021, the Purchasers may require us to make monthly principal payments in cash up to $1.0 million. Beginning in June 2021, the Purchasers may require us to make monthly principal payments in cash up to $2.0 million. We may not have sufficient funds to satisfy such cash obligations and, in such circumstances, may not be able to arrange the necessary financing to satisfy such cash obligations on favorable terms or at all. In addition, our ability to satisfy such cash obligations may be limited by applicable law or the terms of other instruments governing our indebtedness. Our failure to pay such cash obligations would constitute an event of default under the Note and security agreement, which in turn could constitute an event of default under any of our outstanding indebtedness, resulting in the acceleration of such indebtedness and required prepayment and further restricting our ability to satisfy such cash obligations.

Our ability to make scheduled payments of the principal and interest on the Senior Notes, or to refinance the Senior Notes, depends on our future performance, which is subject to prevailing economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we cannot generate such cash flow, we may have to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in these activities or engage in these activities on desirable terms, which could cause a default on our debt obligations.

Business Environment and Competition Risks

The recent COVID-19 pandemic has negatively affected and will continue to hurt our business, financial condition, and results of operations.

The public health crisis caused by the COVID-19 pandemic and the measures that have been taken or that may be taken by governments, businesses, including us, and the public at large to limit COVID-19’s spread have had, and we expect will continue to materially negatively affect our business, financial condition, and results of operation. The extent of the impact of the COVID-19 pandemic on our business and financial results will depend on numerous evolving factors we cannot accurately predict and which all will vary by market, including the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions taken, or may be taken, in response to the pandemic, and changes in consumer behavior in response to the pandemic, some of which may be more than just temporary.

Our global operations expose us to risks associated with the COVID-19 pandemic, which has resulted in challenging operating environments. COVID-19 has spread across the globe to the countries in which our products are made, manufactured, distributed or sold. Authorities in many of these markets have implemented numerous measures to stall the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter in place orders, and business shutdowns. These measures have impacted and will further impact us, our customers, employees, contract manufacturers, distributors, suppliers, and other third parties with whom we do business. Due to these measures, we have experienced, and expect to continue to experience, a significant decrease in revenues associated with restaurants, hotels, airports, and stadiums. In addition, due to the pandemic, some retailers have opted to reduce or stop carrying our products in favor of products from very large, well-established companies with large market share. In foreign jurisdictions, which account for approximately 68% of our net revenue for the year ended December 31, 2020, our direct-to-consumer selling model typically relies heavily on our Brand Partner sales force in close contact with our customers.

Stay-at-home and social distancing orders have required some of our employees to work from home when possible, and other employees have been prevented from performing their job duties until the orders are relaxed or lifted. The 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 restore the economy to the levels that existed before the pandemic. If an economic recession or depression is sustained, it would likely have a material adverse effect on our business as consumer demand for our products would likely decrease.

In certain jurisdictions, the stay-at-home orders have been relaxed but considerable uncertainty remains about the ultimate impact on our business. Even if the orders are lifted, there is no assurance they will not be reinstated if the spread of COVID-19 resumes. For example, many jurisdictions have recently reinstated orders requiring people to wear masks in public after test results have showed a resurgence of the pandemic. Resurgence of the pandemic in some markets has slowed the reopening process of businesses in those areas, including Europe where additional lockdowns have been recently reinstated. If COVID-19 infection trends continue to reverse and the pandemic intensifies and expands geographically, its negative impacts on our sales could be more prolonged and may become more severe. While we have initially experienced increased sales in the Direct /Direct / Social Selling segment during the crisis, such increased sales levels have not, and we expect will not, fully offset the sales pressures we have experienced, and we expect will continue to experience in the Direct Store segment while social distancing mandates or recommendations are in effect. The long-term financial impact on our business cannot be reasonably estimated.

The COVID-19 pandemic has required alternative selling approaches that are less effective, such as through social media. We may continue to experience reductions in net revenue using these alternative selling approaches that avoid direct contact with our customers.

There is considerable uncertainty regarding how these measures and future measures in response to the pandemic will impact our business, including whether they will result in further changes in demand for our products, further increases in operating costs (whether because of changes to our supply chain or increases in employee costs or otherwise), how they will further impact our supply chain and whether they will result in further reduced availability of air or other commercial transport, port closures or border restrictions, each or all of which can impact our ability to make, manufacture, distribute, and sell our products. In addition, measures that impact our ability to access our offices, plants, warehouses, distribution centers or other facilities, or that impact the ability of our customers, employees, contract manufacturers, distributors, suppliers, and other third parties to do the same, may impact the availability of our and their employees, many of whom cannot perform their job functions remotely. If a significant percentage of our or our business partners’ workforce cannot work, including because of illness, facility closures, quarantine, curfews, shelter in place orders, travel restrictions or other governmental restrictions, our operations will be negatively affected. Any sustained interruption in our or our business partners’ operations, distribution network or supply chain or any significant continuous shortage of raw materials or other supplies as a result of these measures, restrictions or disruptions can impair our ability to make, manufacture, distribute or sell our products. Compliance with governmental measures imposed in response to COVID-19 has caused and may continue to cause us to incur additional costs, and any inability to comply with such measures can subject us to restrictions on our business activities, fines, and other penalties, any of which can hurt our business. In addition, the increase in certain of our employees working remotely has amplified certain risks to our business, including increased demand on our information technology resources and systems, increased phishing and other cybersecurity attacks as cybercriminals try to exploit the uncertainty surrounding the COVID-19 pandemic, and an increase in the number of points of potential attack, such as laptops and mobile devices (both of which are now being used in increased numbers), to be secured, and any failure to effectively manage these risks, including to timely identify and appropriately respond to any cyberattacks, may hurt our business. Further, we experienced, and will continue to experience, costs associated with continuing to pay certain employees who are unable to work due to the travel bans and restrictions, quarantines, curfews, shelter in place orders and, therefore, generate no corresponding revenue.

Public concern regarding the risk of contracting COVID-19 impacts demand from consumers, due to consumers not leaving their homes or otherwise shopping in a different manner than they historically have or because some of our consumers have lower discretionary income due to unemployment or reduced or limited work because of measures taken in response to the pandemic. Because we sell a wide variety of products worldwide, the profile of the products we sell and the revenue attributable to such products varies by jurisdiction and changes in demand as a result of COVID-19 will vary in scope and timing across these markets. Any reduced demand for our products or change in consumer purchasing and consumption patterns, and continued economic uncertainty, can hurt our customers’ and business partners’ financial condition, resulting in an inability to pay for our products, reduced or canceled orders of our products, closing of stores, restaurants, airports, hotels, entertainment or sports complexes or other venues where our products are sold, or our business partners’ inability to supply us with ingredients or other items necessary for us to make, manufacture, distribute or sell our products. Such adverse changes in our customers’ or business partners’ financial condition may also result in our recording additional impairment charges for our inability to recover or collect any accounts receivable, owned or leased assets, including certain equipment, or prepaid expenses. In addition, economic uncertainty associated with the COVID-19 pandemic has resulted in volatility in the global capital and credit markets which can impair our ability to access these markets on terms commercially acceptable to us, or at all.

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

We face strong and varied competition.

Our products and industry are subject to strong and varied competition. Such competitors include: (1) large multinational corporations in the health and wellness, healthy appearance and nutritional performance industries, including but not limited to companies that have established loyal customer bases over several decades; (2) healthy product companies that have an established customer base, and have the same or a similar business plan as we do and may be looking to expand; (3) a variety of other local and national healthy product companies; and (4) multinational corporations in the direct selling business that have large, loyal independent distributor bases.

Many of our current and potential competitors are well established and have longer operating histories, greater financial and operational resources, and greater name and brand recognition than we have. These competitors may have greater credibility with both existing and potential customers. They also may offer more products and more aggressively promote and sell their products. Our competitors may also support more aggressive pricing than we can, which could hurt sales, cause us to decrease our prices to remain competitive, or otherwise reduce the overall gross profit earned on our products. We may not develop or sustain a market position or expand our business. We anticipate that the intensity of competition will increase.

Economic uncertainties or downturns in the general economy could disproportionately affect the demand for our products and services and negatively affect our results of operations.

General worldwide economic conditions have experienced significant fluctuations in recent years, and market volatility and uncertainty remain widespread. During challenging economic times, our distribution customers may face issues with their cash flows and in gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to pay us and hurt our revenue. If such conditions occur, we may have to increase our allowances for doubtful accounts and write-offs of accounts receivable, and our results of operations would be harmed. An economic turndown could also decrease demand for our products due to pricing concerns. The economic conditions in the U.S. and the countries in which we do business also affect foreign exchange rates. We cannot predict the timing, strength, or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy or markets in which we operate worsen, our business could be harmed. In addition, even if the overall economy remains relatively strong, the market for our products and services may not experience growth.

Operational Risks

Failure to achieve and maintain effective internal controls could materially hurt our business.

If we cannot provide reliable financial reports, our operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. As of December 31, 2020, we did not maintain effective controls over business acquisitions. Specifically, due to the size and timing of the acquisition of Ariix, in combination with the lack of adequate personnel at Ariix with requisite expertise to transition from a privately-held to a publicly-held company, we were not able to file this Report by the required due date. Accordingly, we concluded that this control deficiency constitutes a material weakness. We have developed a plan to remediate this material weakness as soon as possible.

A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Failure to maintain our internal controls could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.

A substantial portion of our total assets are classified as long-lived assets and goodwill that are subject to periodic impairment testing. If we determine that impairment exists, it could have a material adverse impact on our results of operations.

Under our accounting policies, we consider whether events and circumstances have occurred that would indicate if it is “more likely than not” that an impairment of our long-lived assets has occurred. We also perform an annual goodwill impairment evaluation during the fourth quarter of each calendar year. Evaluating whether impairment exists involves substantial judgment and estimation. If we project a sustained decline in a reporting unit’s revenues and earnings, it will have a significant negative impact on the fair value of the reporting unit which could result in material impairment charges. Such a decline could be driven by, among other things: (i) changes in strategic priorities; (ii) anticipated decreases in product pricing, sales volumes, and long-term growth rates as a result of competitive pressures or other factors; and (iii) the inability to achieve, or delays in achieving the goals of our strategic initiatives and synergies. Adverse changes to macroeconomic factors, such as increases to long-term interest rates, would also negatively affect the fair value of our reporting units.

During 2019, we determined that our long-lived assets were impaired for an aggregate of $47.2 million. In connection with our acquisition of Ariix in November 2020, we acquired long-lived assets of $135.9 million and we recognized goodwill of $44.7 million. As of December 31, 2020, approximately $291.4 million of our total assets are subject to future impairment evaluations. Future impairment charges could have a material adverse impact on our results of operations.

We have made certain assumptions relating to the Ariix acquisition that may prove to be materially inaccurate.

We have made certain assumptions relating to the Ariix acquisition that may prove to be inaccurate, including as the result of the failure to realize the expected benefits of the Ariix acquisition, failure to realize expected revenue growth rates, higher than expected operating, transaction and integration costs, as well as general economic and business conditions that adversely affect the combined company following the Ariix acquisition. These assumptions relate to numerous matters, including:

The ultimate impact of these matters include, but are not limited to, an increased likelihood that future impairment charges related to the goodwill and long-lived assets of Ariix will be required, and that certain financial covenants in our debt agreements may not be adhered to in future reporting periods.

Any failure to successfully integrate Ariix’s business and operations or fully realize potential synergies from the Ariix acquisition in the expected time frame would hurt our business, operating results, and financial condition.

The success of the Ariix acquisition will depend, in part, on our ability to successfully integrate Ariix’s business and operations and realize the anticipated benefits and potential synergies from combining our existing business with Ariix’s business. To realize these anticipated benefits and potential synergies, we must combine these businesses. If we cannot achieve these objectives following the Ariix acquisition, the anticipated benefits and potential synergies of the Ariix acquisition may not be realized fully or at all, or may take longer to realize than expected. Any failure to timely realize these anticipated benefits would have a material adverse effect on our business, operating results and financial condition. The integration process could cause the loss of key employees, loss of key customers, decreases in revenue and increases in operating costs, and the disruption of each company’s ongoing businesses, any of which could limit our ability to achieve the anticipated benefits and synergies of the Ariix acquisition and have a material adverse effect on our business, operating results and financial condition.

We anticipate that we will incur certain non-recurring charges in connection with this integration; however, we cannot identify the timing, nature and amount of all such charges. These integration costs are charged to expense in the period incurred. The significant integration costs could materially affect our results of operations in the period in which such charges are recorded.

Our China business accounts for a significant part of our revenue and anticipated growth. Any decline in sales in China would harm our business results, as would any adverse regulatory action. Repatriation of profits from China may not be ensured.

Our operations in China are conducted by our Ariix subsidiary in Hong Kong, and our other wholly owned subsidiary, Tahitian Noni Beverages (China) Company Limited (“TNI China”) based in Shanghai. TNI China received a direct selling license from the Chinese Ministry of Commerce in 2015. Our China sales were growing at a double-digit rate prior to 2019, making China our second largest market. If we cannot continue to grow sales through our TNI China business, it will hurt our global results.

China is a large and vibrant market but doing business in China requires navigation of a difficult regulatory environment. China has published regulations governing direct selling—and several administrative methods and proclamations have been issued. These regulations require TNI China to use a business model different from the one we offer in other markets. For TNI China to operate under these regulations, we have created and implemented a model specifically for China. However, it is possible that interpretations of direct selling laws could adversely affect our business in China or lead to fines against us or our Brand Partners.

It can take one to three years to obtain product registrations in China. The lengthy process for obtaining product registrations often prevents us from launching new product initiatives in China on the same timelines as other markets around the world.

Chinese regulations prevent persons who are not Chinese nationals from selling in China. Our Brand Partners that do not have a China presence or Brand Partners or wholesalers in China may have engaged or may engage in activities that violate our policies in this market, or that violate Chinese law or other applicable law, and therefore result in regulatory action and adverse publicity.

Our operations in China are subject to risks and uncertainties related to general economic and political conditions, epidemics such as coronavirus discussed above, and legal developments in China. For example, as a result of negative media coverage about the healthcare-related product claims made by a competitor in the direct selling industry in China, in 2019 the government increased its scrutiny of activities within the healthcare market, including direct selling. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling foreign exchange, and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies, and issuing necessary licenses to conduct business. Any adverse change in the Chinese economy, the Chinese legal system, or Chinese governmental, economic, or other policies could have a material adverse effect on our business in China and our prospects generally.

Over the past several years, the Company has received periodic license fees and annual dividends from TNI China. However, there is no guarantee this will continue, and any change in government policy affecting payment of license fees or repatriation of profits could harm the results and financial performance of the Company and reduce our access to cash resources.

Our business is susceptible to risks associated with global operations.

We have subsidiaries and office locations in more than 25 countries. Our current global operations and future initiatives involve a variety of risks, including:

If we cannot address the risks that may arise in connection with a global business, our financial condition and business result will be hurt.

We have experienced significant growth resulting in changes to our organization and structure, which if not effectively managed, could have a negative impact on our business.

Our headcount and operations have grown substantially in recent years. We increased the number of full-time employees over the past three years from 172 employees on December 31, 2017 to 1,127 employees on December 31, 2020. We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we expand our business and operate as a public company, we may find it difficult to maintain our corporate culture while managing our employee growth. Any failure to manage our anticipated growth and related organizational changes to preserve our culture could negatively affect growth and achievement of our business objectives.

In addition, our organizational structure has become more complex because of our significant growth. We have added employees and may need to continue to scale and adapt our operational, financial, and management controls, and our reporting systems and procedures. The expansion of our systems and infrastructure may require us to commit additional financial, operational, and management resources before our revenue increases and with no assurances that our revenue will increase. If we fail to manage our growth, we likely will be unable to execute our business strategy, which could have a negative impact on our business, financial condition, and results of operations.

If we fail to enhance our brand, our ability to expand our customer base will be impaired and our financial condition may suffer.

We believe that the development of our trade names and various brands are critical to achieving widespread awareness of our products, and is important to attracting new customers and maintaining existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable products at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to promote and maintain our brand, our business could be hurt.

If we cannot attract and retain active Brand Partners and customers in our Direct / Social Selling segment, our business may be harmed.

We distribute our products through a network of over 400,000 Brand Partners and customers, and we depend upon them directly for a substantial amount of our revenue. To increase our revenue, we must increase the number of, and the productivity of, our Brand Partners. Thus, our success in the Direct / Social Selling segment depends in part upon our ability to attract, retain, and motivate a large base of Brand Partners. We cannot accurately predict how the number and productivity of our Brand Partners may fluctuate, because we are relying primarily on our Brand Partner leaders to recruit, train, and motivate new Brand Partners. Several related factors affect retention and motivation, including general business and economic conditions, adverse publicity, investigations or legal proceedings, government regulations or actions, public perceptions about our products, and other competing direct / social selling companies that are larger than us and compete for a few persons who desire to become Brand Partners.

We depend on attracting, retaining, developing, and motivating key personnel, including a small number of key management personnel, and losing them could hurt our business.

Success in our industry, specifically as it relates to our healthy products, does and will continue to require highly talented and experienced employees. Due to the growth in this market segment, such personnel and the talent and experience they possess is in high demand. We may be unable to attract and retain these employees. If we fail to attract, train, motivate, and retain talented personnel, our business, financial condition, and operating results may be materially hurt.

In addition, we rely on a small number of key individuals to manage our business and operations. We do not carry key person insurance covering members of management. Our Chief Financial Officer, Gregory Gould, has announced that he is terminating employment with us on July 2, 2021 and we are currently searching for his replacement. The competition for qualified personnel for our industry is intense. We will need to hire additional personnel as we continue to expand. We may not attract, retain, and develop quality personnel on acceptable terms due to the competition for such personnel, which could have an adverse effect on our business operations, financial condition and operating results.

Uncertainty about the effect of the Ariix acquisition on our and Ariix’s employees may have an adverse effect on us or Ariix and, consequently, the combined business resulting from the Ariix acquisition. This uncertainty may impair our and Ariix’s ability to attract, retain and motivate key personnel until the Ariix acquisition is integrated, or longer for the combined entity. Employee retention may be particularly challenging during the ongoing integration period as our and Ariix’s employees may experience uncertainty about their future roles with the combined business. Additionally, certain of Ariix’s officers and employees own Ariix membership interests and will be entitled to receive a portion of the consideration for the Ariix acquisition, the payment of which could provide sufficient financial incentive for certain officers and employees to no longer pursue employment with the combined business. If key employees depart because of issues relating to the uncertainty and difficulty of integration, financial incentives, or a desire not to become employees of the combined business, we may incur significant costs in identifying, hiring and retaining replacements for departing employees, which could substantially reduce or delay our ability to realize the anticipated benefits of the Ariix acquisition.

In our Direct / Social Selling segment, Tahitian Noni Juice, TruAge® MAX, Nutrifii and Slenderiiz constitute a significant portion of our sales.

Tahitian Noni Juice, TruAge® MAX, Nutrifii and Slenderiiz constitute a significant portion of our Direct / Social Selling segment sales, accounting for approximately 70% and 82% of our net revenue for 2020 and 2019, respectively. We face strong competition from other companies producing noni and other superfruit products. If consumer demand for these products shifts or declines or our competitors are more successful in the markets in which we do business, our financial condition and operating results would be harmed.

We depend on a limited number of suppliers of raw and packaging materials.

We rely upon a limited number of suppliers for raw and packaging materials used to make and package our products. Our success depends in part upon our ability to consistently obtain such materials at a quality that meets our requirements. The price and availability of these materials are subject to market conditions. Increases in the price of our products due to the increase in the cost of raw materials could have a negative effect on our business.

If we cannot obtain sufficient quantities of raw and packaging materials, delays or reductions in product shipments could occur which would have a material adverse effect on our business, financial condition, and results of operations. The supply and price of raw materials used to produce our products can be affected by several factors beyond our control, such as frosts, droughts, other weather conditions, economic factors affecting growing decisions, various plant diseases and pests, transportation interruption, and foreign imposed restrictions. If any of the foregoing were to occur, such condition may have a material adverse effect on our business, financial condition, and results of operations. In addition, our results of operations depend upon our ability to accurately forecast our requirements of raw materials. Any failure by us to accurately forecast our demand for raw materials could result in an inability to meet higher than anticipated demand for products or producing excess inventory, either of which may hurt our results of operations.

The noni we use in our Direct / Social Selling segment is grown and harvested exclusively in French Polynesia. Noni fruit is the most important raw material used in our Tahitian Noni and TeMana products, and it is important to our success. If the government of French Polynesia prohibited the exportation or use of noni, or, if we could not source noni fruit in French Polynesia in sufficient quantities to meet demand for our products due to adverse weather, natural disasters, soil overuse, labor shortages, or any other reason, our financial condition and results would be harmed. Any adverse publicity regarding the quality of noni grown in French Polynesia would also hurt our results of operations and financial condition.

We depend on our noni processing plant in Tahiti.

Our processing plant in Tahiti produces all the noni puree used in our Tahitian Noni Juice, MAX, and many other noni-based products. Noni puree is sent to manufacturing facilities in American Fork, Utah, Japan, Germany, and China. We depend upon the uninterrupted and efficient operation of our processing plant in Tahiti. The Tahiti operation is subject to power failures, breakdown, failure, or substandard performance of equipment, improper installation or operation of equipment, natural or other disasters, labor strikes, and the need to comply with the requirements or directives of government agencies, including the FDA. The occurrence of these or any other operational problems at our facility may have a material adverse effect on our business, financial condition, and results of operations.

We depend on third-party manufacturers for a portion of our business.

A portion of our revenue depends on third-party manufacturers we do not control. The majority of these manufacturers’ business comes from producing or selling either their own products or our competitors’ products. As independent companies, these manufacturers make their own business decisions. They may determine whether, and to what extent, they manufacture our products, our competitors’ products, and their own products. They may devote more resources to other products or take other actions detrimental to our brands. Our third-party manufacturers can usually terminate their manufacturing arrangements with us without cause. We may need to increase support for our brands in their territories and may not be able to pass on price increases to them. Their financial condition could also be hurt by conditions beyond our control, and our business could suffer. Deteriorating economic conditions could negatively affect the financial viability of third-party manufacturers. These factors could negatively affect our business and results of operations.

We face various operating hazards that could result in the reduction of our operations.

Our operations are subject to certain hazards and liability risks, such as defective, contaminated, or damaged products. The occurrence of such a problem could result in a costly product recall, serious damage to our reputation for product quality, and potential lawsuits. Although we maintain insurance against certain risks under various general liability and product liability insurance policies, our insurance may not be adequate to cover any incidents of product contamination or injuries resulting from our operations and our products, or damages to reputation and goodwill. We may not be able to continue to maintain insurance with adequate coverage for liabilities or risks arising from our business operations on acceptable terms. Even if the insurance is adequate, insurance premiums could increase significantly which could result in higher costs to us.

Growth of operations will depend on the acceptance of our products and consumer discretionary spending.

The acceptance of our healthy products by both consumers and by retailers to gain distribution is critically important to our success. Our business could be harmed if there are shifts in retailer priorities and shifts in user preferences away from our products, and if we cannot develop effective healthy products that appeal to both retailers and consumers. Our success depends to a significant extent on discretionary user spending, which is influenced by general economic conditions and the availability of discretionary income. We may experience an inability to generate revenue during economic downturns or during periods of uncertainty, where users may purchase products that are cheaper or forego purchasing any healthy products. Any material decline in discretionary spending could hurt our sales, results of operations, business, and financial condition.

Demand for products we sell depends on many factors, including the number of customers we can attract and retain over time, the competitive environment in the healthy products industry. Lack of demand may force us to reduce prices below our desired pricing level or increase promotional spending, and the inability to anticipate changes in user preferences and to meet consumer needs in a timely cost-effective manner could result in immediate and longer-term declines in the demand for the products we offer, which could hurt our sales, cash flows and overall financial condition.

Our ongoing investment in new product lines and products and technologies is inherently risky and could disrupt our ongoing businesses.

We have invested and expect to continue to invest in new product lines, products, and technologies. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these new ventures are inherently risky, such strategies and offerings may not be successful and will not adversely affect our reputation, financial condition, and operating results.

Substantial disruption to production at our manufacturing and distribution facilities could occur.

A disruption in production at our product manufacturing facilities could have a material adverse effect on our business. In addition, a disruption could occur at any of our other facilities or those of our suppliers, bottlers, or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, water scarcity, manufacturing problems, disease, strikes, transportation or supply interruption, government regulation, cybersecurity attacks or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more, or may take a significant time to start production, each of which could negatively affect our business and financial performance.

We are subject to seasonality related to sales of our products.

Our business is subject to seasonal fluctuations. Historically, a significant portion of our net revenue and net earnings has been realized during the period from May through September. Our operating results may vary significantly from quarter to quarter. Our operating results for any particular quarter are not necessarily indicative of any other results. If our sales were to be substantially below seasonal norms, our annual revenues and earnings could be materially hurt.

Legal, Regulatory and Compliance Risks

We may violate government laws and regulations.

We are subject to a variety of federal, state, and local laws and regulations in the U.S. and foreign countries, some of which are rapidly changing or conflicting. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising, and sale of our products. Violations of these laws or regulations in the manufacture, safety, labeling, transportation and advertising of our products could damage our reputation and/or result in regulatory actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations, could cause increased compliance costs or capital expenditures. For example, changes in recycling and bottle deposit laws or special taxes on our beverages and our ingredients could increase our costs. Regulatory focus on the health, safety and marketing of beverage products is increasing. Certain federal or state regulations or laws affecting labeling our products, such as California’s “Prop 65,” which requires warnings on any product with substances that the state lists as potentially causing cancer or birth defects, are or could become applicable to our products.

In certain jurisdictions, these legal and regulatory requirements may be more stringent than those in the United States. Noncompliance with regulations or requirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions, and may result in our inability to provide certain products and services to customers or prospective customers. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, or if customers make claims against us for compensation, our business, financial condition, and results of operations could be harmed. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees and costs. Enforcement actions and sanctions could further harm our business, financial condition, and results of operations. 

For example, on November 19, 2020, Ariix’s subsidiary in Japan (the “Japanese Subsidiary”) received an order from the Japan Consumer Affairs Agency notifying it of a nine-month suspension for recruiting new distributors in Japan. For the first nine months of 2020 and 2019, Ariix recognized net revenue related to the Japanese Subsidiary of $33.7 million and $31.1 million, respectively. Since the entire suspension period will be reported in our operating results, this suspension of recruiting and the related sanction may result in a material reduction in sales for the Japanese Subsidiary for the nine-month suspension period.

Our Brand Partners could violate marketing or advertising laws or regulations.

In our Direct / Social Selling segment, we sell through Brand Partners. Brand Partners sign an agreement with a business unit within the Direct / Social Selling segment agreeing to comply with all our policies and procedures, including without limitation our Policy Manual. Our policies prohibit false and misleading advertising and making improper health and income claims. We require Brand Partners to clear all promotional materials in advance with our Compliance Department. However, despite our efforts, occasionally Brand Partners violate our policies and publish inappropriate marketing materials describing our products or programs. It is impossible to monitor all social media outlets and all Brand Partner communications. Our Compliance Department takes commercially reasonable means, including a computer program that actively searches for improper advertising, to find improper Brand Partner advertising—and when we find such advertising, we require the Brand Partner to correct it. Some such promotional communications have lingered for years in obscure places on the internet and, by the time we find them, the Brand Partner is no longer affiliated with us and is not cooperative in removing the offending advertising. These violations by Brand Partners could lead to actions against us by regulatory agencies, states’ attorney generals, and private parties and could have an adverse impact on our business, financial condition, and operational results.

We are subject to the Foreign Corrupt Practices Act of 1977 (the “FCPA”) and other similar anti-corruption, anti-bribery and anti-kickback laws and regulations, and any noncompliance with those laws or regulations by us or others acting on our behalf could materially hurt our business, financial condition and results of operations.

The FCPA and other similar anti-corruption and anti-bribery laws and regulations in other jurisdictions generally prohibit companies and their intermediaries from offering or providing improper things of value to foreign officials for the purpose of obtaining or retaining business or securing regulatory benefits. Under these laws, we may become liable for the actions of employees, officers, directors, agents, representatives, consultants, or other intermediaries, or our strategic or local partners, including those over whom we may have little actual control. We are continuously engaged in transacting business, including in new locations, around the world. Because we will maintain and intend to grow our international sales and operations, we have contacts with foreign public officials, and therefore potential exposure to liability under laws such as the FCPA.

If we are found liable for violations of the FCPA or other similar anti-corruption, anti-bribery, or anti-kickback laws or regulations, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could materially hurt our business, financial condition, and results of operations.

Litigation and publicity concerning product quality, health, and other issues could adversely affect our results of operations, business, and financial condition.

Our business could be hurt by litigation and complaints from customers or government authorities resulting from product defects or contamination, operations, workplace inspections, alleged data breaches, or other issues. Adverse publicity about these allegations may negatively affect us, whether or not the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities if a lawsuit or claim results in a decision against us, or litigation costs, regardless of the result. Further, any litigation may distract our key employees or cause them to expend resources and time normally devoted to the operation of our business.

Our CBD product line is subject to varying, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumers perceptions and we may be unable to commercialize our CBD-infused beverages.

We have announced the launch of a new product line consisting of CBD-infused beverages. Our intention is to commercialize the new line of beverages when legally permitted in local markets. In February 2020, we launched a CBD beverage shot in Japan. The CBD and cannabis industry in Japan, the U.S. and elsewhere is evolving and subject to varying, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. For example, the Agriculture Improvement Act of 2018 removes hemp from the Controlled Substances Act and permits the production and marketing of hemp and derivatives of cannabis with less than 0.3 percent concentrations of THC. However, in a 2019 statement from Scott Gottlieb, then FDA Commissioner, the Commissioner reemphasized its agency’s authority and intent to regulate products containing cannabis or cannabis derived compounds under the Federal Food, Drug and Cosmetic Act and Section 351 of the Public Health Service Act. We do not market or sell CBD beverages in the U.S. and do not intend to market or sell CBD ingestible products in the U.S. until we can do so in compliance with applicable laws.

It is difficult and costly to protect and enforce our proprietary rights.

Our commercial success will depend in part on obtaining and maintaining trademark protection, patent protection, and trade secret protection of our products and brands, and successfully defending that intellectual property against third-party challenges. We can only protect our intellectual property if we have obtained rights under valid and enforceable trademarks, patents, or trade secrets that cover our products and brands. Changes in either the trademark and patent laws or in interpretations of trademark and patent laws in the U.S. and other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our issued trademarks or our issued patents. Future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.

We may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in our loss of significant rights and the assessment of treble damages.

From time to time, we may face intellectual property infringement, misappropriation, or invalidity/non-infringement claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect us negatively. For example, if a third party prevailed in an infringement claim against us, we may have to pay substantial damages (including up to treble damages if such infringement was willful). In addition, we could face an injunction, barring us from conducting the allegedly infringing activity. The outcome of the litigation could require us to enter into a license agreement which may not be under acceptable, commercially reasonable, or practical terms or we may be precluded from obtaining a license. It is also possible that an adverse finding of infringement against us may require us to dedicate substantial resources and time in developing non-infringing alternatives, which may or may not be possible. With diagnostic tests, we would also need to include non-infringing technologies which would require us to re-validate our tests. Any such re-validation, besides being costly and time consuming, may be unsuccessful.

Finally, we may initiate claims to assert or defend our own intellectual property against third parties. Any intellectual property litigation, irrespective of whether we are the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert our management’s attention from our business and negatively affect our operating results or financial condition.

Limits on the sales compensation we can pay to our Brand Partners in certain countries could harm our business and cause regulatory risks.

Certain markets, including China, Korea, Indonesia, and Vietnam, impose limits on the sales compensation we can pay our Brand Partners. For example, in Korea, local regulations limit sales compensation to 35% of our total revenue in Korea. These regulations may inhibit persons from becoming Brand Partners or cause interested persons to join competitors not focused on compliance. We have had to modify our compensation plan in certain markets to comply. It is difficult to keep compensation within limits and we may, therefore, be at risk of violating limits even as we are trying to act under the regulations. It is not always clear which revenues and expenses are within the scope of regulations. Any failure to keep sales compensation within legal limits in the above and other markets could result in fines or other sanctions, including suspensions.

General Risk Factors

Future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business, dilute shareholder value, and hurt our financial condition and results of operations.

We may seek to acquire or invest in businesses and product lines we believe could complement or expand our product offerings, or otherwise offer growth opportunities. Pursuing potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not the acquisitions are completed. If we acquire businesses, we may not successfully integrate the acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We may not find and identify desirable acquisition targets or succeed in contracting with any particular target or obtain adequate financing to complete such acquisitions. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could hurt our results of operations. In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may be hurt.

Our shareholders may experience future dilution as a result of future equity offerings and issuances to settle business combination consideration.

To raise additional capital, we may in the future offer additional shares of our Common Stock or other securities convertible into or exchangeable for our Common Stock. For example, we issued an aggregate of approximately 56.8 million shares of our Common Stock in public offerings and 2.1 million shares of our Common Stock in business combinations during the three-year period ended December 31, 2020. In addition, we must seek approval from our shareholders in 2021 to issue up to an aggregate of 40.1 million shares of our Common Stock as additional consideration under the amended and restated merger agreement with Ariix and a related non-compete agreement.

We may be unable to sell shares or other securities in any other offering at a price per share that is equal to or greater than the most recently publicly-traded price or the price per share paid by existing investors, and investors purchasing our shares or other securities in the future could have rights superior to existing shareholders. The price per share at which we sell additional shares of our Common Stock or other securities convertible into or exchangeable for our Common Stock in future transactions may be higher or lower than the price per share at this time.

Our failure to meet the continued listing requirements of the Nasdaq Capital Market could cause a delisting of our Common Stock.

If we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may delist our Common Stock. Such a delisting would likely have a negative effect on the price of our Common Stock and would impair your ability to sell or purchase our Common Stock when you wish to do so. If our Common Stock is delisted, our Common Stock may not become listed again.

Events such as severe weather conditions, natural disasters, regional and global epidemics, government policies and treaties, hostilities, and social unrest, among others, can hurt our results and prospects.

Severe weather conditions, natural disasters, hostilities and social unrest, any shifting climate patterns, terrorist activities, health epidemics or pandemics (or expectations about them), including the COVID-19 outbreak, social unrest, and changes in government policies and treaties can hurt consumer spending and confidence levels and product supply availability and costs, and the local operations in affected markets, all of which can affect our results and prospects. Neither the duration nor scope from the COVID-19 pandemic can be predicted. Therefore, while we expect this outbreak will continue to negatively affect our results, the related future financial impact cannot be reasonably estimated.

The price of our Common Stock may be volatile and hurt by many factors.

The market price of our Common Stock could fluctuate significantly in response to various factors and events, including without limitation:

These market and industry factors may materially reduce the market price of our Common Stock, regardless of our operating performance. Securities markets have from time-to-time experienced significant price and volume fluctuations unrelated to the performance of particular companies.

Reports published by analysts, including projections in those reports that differ from our actual results, could hurt the price and trading volume of our common shares.

Securities research analysts may establish and publish their own periodic projections for us. These projections may vary widely and may not accurately predict the results we actually achieve. Our share price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline. If no analysts commence coverage of us, the market price and volume for our common shares could be hurt.

Our ability to use our net operating loss carryforwards may be limited.

We have incurred net operating losses (“NOLs”) for U.S. income tax purposes during our history. If we continue to generate taxable losses, unused losses will carry forward to offset future taxable income until such unused losses expire. Under Internal Revenue Code (“Code”) Section 382, if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percent change (by value) in its equity ownership by certain shareholders over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, (and other pre-change tax attributes as applicable) to offset its post change income may be limited. We may have experienced ownership changes in the past and may experience ownership changes and/or subsequent shifts in our stock ownership (some of which shifts are outside our control). If we generate net taxable income, our ability to use our pre-change NOLs to offset such taxable income is expected to be subject to limitation under Code Section 382. Similar provisions of state tax law may also apply. Even if we attain profitability, we may be unable to use a material portion of our NOL’s and other tax attributes.

We have not and may never pay dividends to shareholders.

We have not declared or paid any cash dividends or distributions on our capital stock and our Senior Notes prohibit us from paying dividends. We intend to retain our future earnings to support operations and to finance expansion, and therefore we do not anticipate paying any cash dividends on our Common Stock in the foreseeable future.

The declaration, payment, and amount of any future dividends will be made at the discretion of our Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. Dividends may never be paid, and, if dividends are paid, the amount of any such dividend is unknown. If we do not pay dividends, our Common Stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We believe our current physical properties are sufficient and adequate to meet our current and projected requirements. Presented below is a discussion about our key properties by operating segment.

Direct Store Segment

In January 2019, we entered into a lease for our corporate headquarters consisting of approximately 11,200 square feet of office space in the lower downtown area of Denver, Colorado at 2420 17^th Street. Our monthly obligation for base rent averages approximately $33,500 per month over the remaining lease term which expires in December 2029. In December 2019, we agreed to sublease approximately 3,300 square feet of this office space at base rent that averages approximately $8,200 over the term of the sublease that expires in December 2022.

In April 2019, we entered into a lease for a new facility in Aurora, Colorado where we conduct operations, packaging, distributions and administrative activities for our Direct Store segment. This building consists of approximately 156,000 square feet and provides for average monthly rent of approximately $68,000 over the remaining lease term which expires in April 2029.

We are currently attempting to sublease our former corporate headquarters and distribution facility located at 1700 E. 68th Avenue in Denver, Colorado. The monthly rent for this building averages approximately $58,500 over the remaining lease term that expires in March 2027.

Direct/ Social Selling Segment

The Direct/ Social Selling segment’s headquarters is in American Fork, Utah, in a 140,000 square foot office, manufacturing, warehouse, and shipping facility custom built on a 12-acre parcel for our exclusive use. Our monthly obligation for base rent averages approximately $93,640 per month over the remaining lease term which expires in April 2026.

In March 2019, we entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $57.1 million of the land and building in Tokyo that serves as the corporate headquarters of Morinda’s Japanese subsidiary. Concurrently with the sale, we entered into a lease of this property for a term of 27 years with the option to terminate any time after seven years. The monthly lease cost is ¥20.0 million (approximately $194,000 based on the exchange rate as of December 31, 2020) for the initial seven-year period of the lease term. After the seventh year of the lease term, either party may elect to adjust the monthly lease payment to the then current market rate for similar buildings in Tokyo. In order to secure our obligations under the lease, we provided a refundable security deposit of approximately $1.8 million. At any time after the seventh year of the lease term, we may elect to terminate the lease. However, if the lease is terminated before the 20^th anniversary of the lease inception date, then we will be obligated to perform certain restoration obligations, which we considered to be a significant penalty whereby there is reasonable certainty that we will not elect to terminate the lease prior to the 20-year anniversary.

We have a manufacturing, office and warehouse facility in Chongqing, China, consisting of three buildings totaling approximately 64,500 square feet which are located on about three acres of land leased from the government through July 2060. Additional store and office facilities are leased in many cities in China, including Shanghai, Beijing, Taiyuan, Fuzhou, Hangzhou, Guangzhou, Weihai, Nanjing, and Shenyang. We have a warehouse and noni-processing facility in Mataiea, Tahiti, consisting of approximately 82,250 square feet in a building located on about 13.5 acres of land leased from the government through May 2030. We also lease office space in 36 additional locations in Europe, Asia and North and South America.

Item 3. Legal Proceedings.

From time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. We are not aware of any material proceedings in which the Company, or any of our directors, officers, or affiliates, or any registered or beneficial stockholder is a party adverse to us, or has a material interest adverse to us.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Our Common Stock began trading on the Nasdaq Capital Market on February 17, 2017, under the symbol “NBEV.” On March 12, 2021, there were approximately 730 shareholders of record of our Common Stock. We believe the number of beneficial owners of our Common Stock are substantially greater than the number of record holders because a large portion of our outstanding Common Stock is held of record in broker “street names” for the benefit of individual investors.

Dividends

The payment of any dividends is generally at the discretion of our Board of Directors. However, we are currently prohibited from paying dividends under our Senior Notes, and we have not paid any cash dividends on our Common Stock to date. The payment of any future cash dividends will be dependent upon our revenue, earnings and financial condition from time to time. It is presently expected that we will retain all earnings for use in our business operations and, accordingly, it is not expected that our Board of Directors will declare any dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

Reference is made to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” which is incorporated by reference to our definitive 2021 Proxy Statement expected to be filed with the SEC by March 31, 2021.

Recent Sales of Unregistered Securities

Pursuant to the closing of our amended and restated merger agreement with Ariix on November 16, 2020, we agreed to issue 19,703,703 shares of our Common Stock that were issued in February 2021. For additional information, please refer to our Current Report on Form 8-K that we filed with the SEC on November 16, 2020.

On December 1, 2020, we issued 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32,432,000, 800,000 shares of our Common Stock, Class A Warrants to purchase 750,000 shares of Common Stock with an exercise price of $3.75 per share, and Class B Warrants to purchase 750,000 shares of Common Stock with an exercise price of $3.75 per share, in connection with a private placement that resulted in gross proceeds of $30,000,000. For additional information, please refer to our Current Report on Form 8-K that we filed with the SEC on December 1, 2020.

All of these securities were issued in reliance upon an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve public offerings of securities.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On July 6, 2020, we purchased from Brent Willis, our Chief Executive Officer, a total of 780,000 shares of Common Stock based on the closing market price of $1.53 per share. The total purchase price was approximately $1,193,000. The shares were immediately canceled and returned to the Company’s authorized but unissued shares of Common Stock.

Item 6. Selected Financial Data.

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in Item 8 of this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” at the beginning of this Report. Our actual results may differ materially from those described below. You should also read the “Risk Factors” section set forth in Item 1A of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Certain figures, such as interest rates and other percentages included in this section, have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage and dollar amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.

Our Business Model

We are an organic and healthy products company intending to become the world’s leading social selling and distribution company. NewAge, Inc. is a purpose-driven firm dedicated to providing healthy products to consumers and inspiring them to “Live Healthy.” We commercialize our portfolio of products across more than 50 countries worldwide and strive to disrupt with industry leading social selling tools and technologies. More than 75% of the company’s revenue is ordered and fulfilled online, and more than 75% of our products are delivered directly to consumers’ homes.

We compete in three major category platforms including health and wellness, healthy appearance, and nutritional performance. Within its category platforms, we develop and market a portfolio of science-based, functionally differentiated, and superior performing products and brands. The Company differentiates its products utilizing its patents, proprietary formulas and production process and trade secrets and focuses its functional differentiation utilizing different combinations of:

Utilizing these functionally differentiated ingredients, we intend to build ‘hundred-million dollar’ focus brands in each of our respective platforms. For example, Tahitian Noni already meets this standard, is our largest brand, and has sold more than $7.0 billion since its inception, including approximately $360 million cumulatively recognized by us since our acquisition of Morinda in December 2018. We have multiple studies and human trials validating Tahitian Noni’s efficacy and benefits for reducing inflammation and strengthening the body’s protection against viruses. Also, within the health and wellness platform is our LIMU brand, a fucoidan-rich beverage sourced from seaweed. We have two core brands within the healthy appearance platform including TeMana, a unique skin care portfolio that is infused with Tahitian Noni, and Lucim, a line of clean skin care products expanding worldwide that was launched in 2020. In the nutritional performance platform, we commercialize a full line of weight management and other human needs states addressing nutritional supplements and nutraceuticals and are building out our core brands within the platform.

We believe that the major trend in consumer goods is direct delivery, e-commerce ordering and fulfillment, with purchase intent being driven by social media and friends and family. According to Euromonitor International’s 2019 Lifestyles Survey, the largest driver of purchase intent in every major region of the world was friends and family recommendations and related social media posts. The Company further believes that these fundamental trends negate the historic advantage of traditional manufacturers geared toward sale of their products, utilizing traditional media, merchandized in traditional retail outlets.

We believe one of NewAge’s competitive advantages is its network of more than 400,000 Brand Partners around the world, and its own DSD system that provides near captive distribution in our respective market areas. We have developed a robust infrastructure and set of execution capabilities across more than 50 countries, with a primary focus on our core markets of Japan, Greater China, Western Europe, and North America. We are selectively invested in emerging market areas whereby the combination of the business opportunity and consumer demographics intersect to form an attractive investment profile for our model. These markets include Russia and the CIS countries, the Southern Cone of Africa, and selected markets in Latin America and South East Asia.

NewAge has the scale and infrastructure underpinning what we believe to be a differentiated and disruptive business strategy. NewAge believes that what, where, when and how consumers are buying consumable products is transforming. Commercializing its portfolio of healthy brands through primarily a direct-route-to-market, utilizing proprietary and industry-leading social selling technology, and connecting with consumers on their terms with our team of more than 400,000 Brand Partners enables us to take advantage of the fundamental disintermediation happening in consumer product goods.

Operating Segment Overview

Since the consummation of the business combination with Morinda in December 2018, our operating segments have consisted of the Noni by NewAge segment and the NewAge segment. Upon completion of the business combination with Ariix, which comprised a portion of the Noni by NewAge segment, we rebranded this segment as the Direct / Social Selling segment to better reflect the overall characteristics shared by the business units that comprise this segment.

The net revenue and total assets of the Direct / Social Selling segment increased significantly with the closing of our acquisition of Ariix on November 16, 2020. The Direct / Social Selling segment is engaged in the development, manufacturing, and marketing of products in three core category platforms including health and wellness, healthy appearance, and nutritional performance. The Direct /Direct / Social Selling segment has manufacturing operations in Tahiti, Germany, Japan, the United States, and China. The Direct / Social Selling segment’s products are sold and distributed in more than 50 countries using Brand Partners through our direct-to-consumer selling network and e-commerce business model. Over 60% of the net revenue of the Direct /Direct / Social Selling segment is generated in the key Asia Pacific markets of Japan, China, Taiwan, and Indonesia.

On July 10, 2019, we completed a business combination with Brands Within Reach, LLC (“BWR”) whereby BWR became a wholly owned subsidiary. With the changing economics in the retail brand beverage sector exacerbated by COVID-19, on September 24, 2020, we sold BWR and the related rights to the brands with substantially all of our U.S. retail brands to focus on the more profitable, larger scale, higher potential Direct /Direct / Social Selling segment of our business. BWR and the U.S. retail brands are included in the Direct Store segment from the date of acquisition through the disposal date and are referred to herein as the “Divested Business”. For periods after disposal of the Divested Business, the Direct Store segment is primarily comprised of our DSD network that distributes snacks, beverages, and other products direct to stores in Colorado and surrounding states, to wholesale distributors, key account owned warehouses and international accounts using several distribution channels. In addition, the Direct Store segment includes substantially all of our corporate overhead activities.

Recent Developments

On November 16, 2020, we completed our business combination with Ariix for total purchase consideration with an estimated fair value of approximately $155.1 million. Ariix is an international direct selling business that provides products in the health and wellness industry for complete and balanced nutrition, weight loss management, water and air filtration, personal care products, essential oils, and anti-aging skincare. To fund the cash payments required under the amended and restated merger agreement with Ariix, we replaced our debt agreement with East West Bank on December 1, 2020 through the completion of a private placement that included 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million (the “Senior Notes”), issuance of 800,000 shares of our Common Stock and issuance of warrants for an aggregate of 1.5 million shares of Common Stock.

On January 29, 2021, we entered into a letter of clarification (the “Clarification Letter”) to the Ariix merger agreement. The Clarification Letter explained the intent of the parties as of the Ariix Closing date whereby (i) a restricted cash account of Ariix with a Chinese bank that had a balance of $3.1 million as of the Ariix Closing Date remained an asset of the Sellers and, accordingly, was not conveyed to the Company, and (ii) the number of shares of our Common Stock issuable to the sellers on the first anniversary of the closing date was reduced by 0.5 million shares. In addition, the impact of the $3.1 million reduction of restricted cash reduced the number of shares issuable by 0.6 million shares due to the impact of the working capital adjustment.

On February 9, 2021, we notified Roth Capital Partners LLC of our election to terminate the ATM Agreement that was a significant source of liquidity in 2019 and 2020. On February 11, 2021, we entered into a sales agreement with A.G.P./Alliance Global Partners but the maximum number of shares that may be sold pursuant to the sales agreement is currently limited to less than 3.0 million shares based on the number of authorized shares of Common Stock available as of February 28, 2021.

On February 16, 2021, we entered into a securities purchase agreement in connection with a private placement for an aggregate of approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares of our Common Stock. At the closing on February 22, 2021, we received gross proceeds of approximately $58.0 million. After deducting placement agent fees, we received net proceeds of approximately $53.9 million.

On March 3, 2021, we entered into a Modification and Transition Addendum to Employment Agreement and Indemnification Agreement with Gregory A. Gould, our Chief Financial Officer (the “Gould Agreement”). The Gould Agreement amends the employment agreement with Mr. Gould whereby he will continue to serve as our Chief Financial Officer until July 2, 2021. The Agreement also modifies the Indemnification Agreement, dated December 28, 2019, between the Company and Mr. Gould. As part of the transition, Mr. Gould will receive additional cash compensation and a grant of stock options for 125,000 shares of Common Stock that vest on July 2, 2021.

On March 4, 2021, we entered into a letter of intent to acquire Aliven Inc. (“Aliven”), a Japan-based direct selling company. Aliven currently generates approximately $20 million in annualized net revenue with more than 100,000 customers and Brand Partners. Aliven sells a portfolio of differentiated healthy products including skin care products infused with cultured stem cells, nutritional products, and their patented far-infrared technology products designed for reduction of localized pain. Consideration for the acquisition of Aliven is approximately 1.1 million shares of our Common Stock. Completion of the proposed transaction is subject to negotiation and execution of a definitive agreement and the satisfaction of customary conditions to closing.

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

Key Components of Consolidated Statements of Operations

Net revenue. We recognize revenue when we satisfy our performance obligations and we transfer control of the promised products to our customers, which generally occurs over a very short period of time. Performance obligations are typically satisfied by shipping or delivering products to customers, which is also the point when title transfers to customers. Revenue consists of the gross sales price, net of estimated returns and allowances, discounts, and personal rebates that are accounted for as a reduction from the gross sale price. Shipping and handling charges that are billed to customers are included as a component of revenue.

Cost of goods sold. Cost of goods sold primarily consists of direct costs attributable to the purchase from third party suppliers or the internal manufacture of beverage products. It also includes freight costs, shrinkage, e-commerce fulfillment, distribution, and warehousing costs related to products sold.

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for our administrative, human resources, finance and accounting employees, and executives. General and administrative expenses also include contract labor and consulting costs, travel-related expenses, legal, auditing and other professional fees, rent and facilities costs, repairs and maintenance, advertising and marketing costs, and general corporate expenses.

Commissions. Commissions earned by our Brand Partners are charged to expense in the same period that the related sales transactions are recognized.

Depreciation and amortization expense. Depreciation and amortization expense is comprised of depreciation expense related to property and equipment, amortization expense related to leasehold improvements, and amortization expense related to identifiable intangible assets.

Loss on disposal of Divested Business. In September 2020, we sold our BWR reporting unit along with substantially all of our U.S. retail brands. The loss that resulted from the disposal is presented as a separate component of our operating expenses.

Business combination expenses. When we enter into business combinations, the acquisition-related transaction costs are accounted for as expenses in the periods in which such costs are incurred. A portion of the consideration in business combinations may be contingent on future operating performance of the acquired business or upon an event such as the approval of our stockholders. In these circumstances, we determine the fair value of the contingent consideration as a component of the purchase price, and all future changes in the fair value of our obligations are reflected as an adjustment to our operating expenses in the period in which the change is determined. In periods when the fair value of contingent consideration increases, we recognize an expense and when the fair value of contingent consideration decreases, we recognize a gain.

Impairment expense. We periodically consider if events and circumstances have occurred that would indicate if it is “more likely than not” that an impairment of our long-lived assets has occurred. We also perform an annual goodwill impairment evaluation during the fourth quarter of each calendar year. Evaluating whether impairment exists involves substantial judgment and estimation. If we determine that impairment exists, we recognize an impairment charge to reduce the carrying value of the long-lived assets to the expected discounted cash flows associated with the impaired assets.

Interest expense. Interest expense is incurred under our revolving credit facilities, term debt, Senior Notes, and other debt obligations. The components of interest expense include the amount of interest payable in cash at the stated interest rate, accretion and amortization of debt discounts and issuance costs, and “make-whole” premiums incurred and write-offs of debt discounts and issuance costs if we prepay the debt before the scheduled maturity date.

Gain (loss) on change in fair value of derivatives. We periodically enter into certain debt instruments that contain embedded derivatives that are required to be bifurcated and recorded at fair value. Examples of embedded derivatives are provisions that require us to pay the lender default interest upon the existence of an event of default and to pay “make-whole” interest or premiums for certain mandatory and voluntary prepayments of the outstanding principal balance. We also may enter into interest rate swap agreements to effectively convert variable rate debt to fixed rate debt. We perform valuations of all material derivatives on a quarterly basis. Changes in the fair value of derivatives are reflected as net non-operating gains or losses in our consolidated statements of operations.

Interest and other income (expense), net. Interest and other income (expense), net consists of non-operating expenses offset by interest and other non-operating income.

Gain from sale of property and equipment. Gains from the sale of property and equipment are reflected in the period that the sale transaction closes. Gains result when we sell assets for an amount in excess of the net carrying value.

Income tax expense. The provision for income taxes is based on the amount of our taxable income and enacted federal, state and foreign tax rates, as adjusted for allowable credits and deductions. Substantially all of our provision for current income taxes consists of foreign taxes for the periods presented since we had no taxable income for U.S. federal or state purposes.

Results of Operations

Comparison of Years ended December 31, 2020 and 2019

Our consolidated statements of operations for the years ended December 31, 2020 and 2019 are presented below (dollars in thousands):

Presented below is our net revenue, cost of goods sold, gross profit (loss) and gross margin by segment for the years ended December 31, 2020 and 2019 (dollars in thousands):

As discussed above under the caption Operating Segment Overview, on September 24, 2020, we sold BWR and the Brands Division. The Divested Business was a component of our Direct Store segment and is included in our consolidated statements of operations from the date of acquisition through the disposal date. Presented below is a summary of the combined operating loss of the Divested Business for the years ended December 31, 2020 and 2019 (in thousands):

Beginning on September 25, 2020, the Direct Store segment is primarily comprised of our legacy DSD and e-commerce lines of business (the “Retained Business”) and our corporate overhead activities. Please refer to the captions below for further discussion with respect to our net revenue, cost of goods sold, gross profit and gross margin by segment, including the results of operations of the Divested Business and the Retained Business of the Direct Store segment.

Net Revenue. Net revenue increased from $253.7 million for the year ended December 31, 2019 to $279.5 million for the year ended December 31, 2020, an increase of $25.8 million or 10%. For the year ended December 31, 2020, the increase in net revenue was primarily attributable to $32.0 million of net revenue generated by Ariix for the period from the closing date for this acquisition on November 16, 2020 through December 31, 2020.

Net revenue for the Direct / Social Selling segment increased by $21.4 million from $200.7 million for the year ended December 31, 2019 to $222.1 million for the year ended December 31, 2020. This increase was attributable to $32.0 million of net revenue from the Ariix reporting unit, partially offset by a reduction in net revenue of $10.6 million for the legacy portion of the Direct / Social Selling segment. We believe the decrease in net revenue for the legacy portion of the Direct / Social Selling segment was primarily caused by lower quantities of products purchased by consumers during the COVID-19 pandemic and the related mass quarantines and government mandated stay-in-place orders that were in effect beginning in March 2020. Our direct-to-consumer selling model typically relies heavily on the use of our Brand Partner sales force in close contact with our customers. However, the COVID-19 pandemic required alternative selling approaches, such as through social media, which was less effective than in-person selling in certain regions. As a result, the legacy portion of the Direct / Social Selling segment’s net revenue decreased by 5% for the year ended December 31, 2020. The geographic breakdown of this decrease was 18% in China, 2% in Japan, and 11% in all other foreign countries as a group. However, the legacy portion of the Direct / Social Selling segment’s net revenue in the United States increased by 12% for the year ended December 31, 2020. In addition to the impact of COVID-19, we believe our net revenue in China related to the legacy portion of the Direct / Social Selling segment was negatively impacted by the introduction in May 2020 of a new compensation plan for our Brand Partners, which typically results in tentative buying patterns until the mechanics of the new plan are fully understood.

Net revenue for the Direct Store segment increased by $4.3 million from $53.0 million for the year ended December 31, 2019 to $57.3 million for the year ended December 31, 2020. This increase was primarily attributable to an increase in net revenue for the Retained Business of the Direct Store segment of $4.9 million from $41.7 million for the year ended December 31, 2019 to $46.6 million for the year ended December 31, 2020. The increase in net revenue for the Retained Business of the Direct Store segment was primarily attributable to increased net revenue by our DSD business due to new customers and expansion of the product portfolio. For the year ended December 31, 2020, net revenue for the Divested Business of the Direct Store segment decreased by approximately $0.5 million from $11.2 million for the year ended December 31, 2019 to $10.7 million for the year ended December 31, 2020. This decrease in net revenue for the Divested Business of the Direct Store segment was due to a reduction of $2.0 million in net revenue related to our U.S. retail brands, partially offset by an increase of $1.5 million in net revenue related to BWR that was included in our operating results for approximately nine months in 2020 compared to six months in 2019.

Cost of goods sold. Cost of goods sold increased from $101.0 million for the year ended December 31, 2019 to $102.0 million for the year ended December 31, 2020, an increase of $1.0 million. Cost of goods sold for the Direct/ Social Selling segment increased by $8.1 million, partially offset by a decrease in cost of goods sold of $7.1 million for the Direct Store segment.

Cost of goods sold for the Direct / Social Selling segment increased by $8.1 million or 18% for the year ended December 31, 2020. This increase was primarily attributable to the cost of products sold by Ariix of $8.1 million after the closing date on November 16, 2020. Cost of goods sold for the legacy business of the Direct / Social Selling segment was unchanged in comparison to the 5% reduction in net revenue as discussed above. For the year ended December 31, 2020, the legacy business of the Direct / Social Selling segment recognized an increase in excess and obsolete and other inventory variances of $0.9 million compared to the year ended December 31, 2019. For the year ended December 31, 2019, the Direct / Social Selling segment also had a non-recurring charge to cost of goods sold of $2.1 million that related to the sale of inventories acquired as part of the Morinda business combination that closed in December 2018. The fair value of work-in-process and finished goods inventories on the closing date of the Morinda business combination exceeded the historical carrying value, which represented an element of built-in profit on the closing date that was charged to cost of goods sold as the related inventories were sold for the year ended December 31, 2019. In order to partially mitigate the effects of COVID-19 for the year ended December 31, 2020, we offered additional discounts and promotions that are reflected in cost of goods sold. The effects of these higher discounts and promotions compared to the year ended December 31, 2019 contributed to cost of goods sold that were unchanged, whereas net revenue for the legacy business of the Direct / Social Selling segment decreased by 5%.

Cost of goods sold for the Direct Store segment decreased by $7.1 million from $56.0 million for the year ended December 31, 2019 to $48.9 million for the year ended December 31, 2020. Cost of goods sold for the Divested Business decreased by approximately $10.6 million from $22.7 million for the year ended December 31, 2019 to $12.1 million for the year ended December 31, 2020. This decrease was primarily attributable to a reduction in write-offs related to cost of goods sold and excess and obsolete inventories of $6.0 million, plus a reduction in product costs associated with a 5% decrease in net revenue for the Divested Business. Cost of goods sold for the Retained Business increased by $3.5 million or 10%, from $33.3 million for the year ended December 31, 2019 to $36.8 million for the year ended December 31, 2020. The increase in cost of goods sold for the Retained Business was primarily attributable to higher product costs associated with a 12% increase in net revenue.

Gross profit. Gross profit increased from $152.7 million for the year ended December 31, 2019 to $177.5 million for the year ended December 31, 2020, an increase of $24.8 million or 16%. The increase in gross profit consisted of $13.3 million for the Direct/ Social Selling segment and $11.4 million for the Direct Store segment. The improvement in gross profit for the Direct/ Social Selling segment was attributable to $24.0 million of gross profit generated by Ariix after the closing date for this acquisition on November 16, 2020. The legacy business of the Direct/ Social Selling segment experienced a 7% reduction in gross profit due to lower sales due to the COVID-19 pandemic in combination with our increased use of discounts and promotions.

The Direct Store segment accounted for an increase in gross profit of $11.4 million for the year ended December 31, 2020, driven by net revenue that increased by 8% whereas cost of goods sold decreased by 13%. The Divested Business accounted for approximately $1.4 million and $11.4 million of negative gross profit for the years ended December 31, 2020 and 2019, respectively. The Retained Business accounted for gross profit of approximately $8.4 million and gross margin of 20% for the year ended December 31, 2019, compared to gross profit of $9.8 million and gross margin of 21% for the year ended December 31, 2020.

Consolidated gross margin improved from 60% for the year ended December 30, 2019 to 64% for the year ended December 31, 2020. Gross margin for the Direct/ Social Selling segment decreased from 78% to 76%, whereas gross margin for the Direct Store segment increased from negative 6% for the year ended December 31, 2019 to positive 15% for the year ended December 31, 2020.

Selling, general and administrative expenses. SG&A expenses decreased from $115.0 million for the year ended December 31, 2019 to $113.2 million for the year ended December 31, 2020, a decrease of $1.8 million. This decrease was comprised of reductions in marketing costs of $7.1 million, stock-based compensation expense of $1.7 million, occupancy costs of $1.0 million, and travel costs of $0.8 million. These decreases in SG&A expense totaled $10.6 million and were partially offset by increases in (i) severance costs of $2.6 million, (ii) professional fees of $2.5 million that was driven by higher auditing, consulting costs and legal fees, (iii) cash-based compensation of $1.8 million, (iv) general business expenses of $0.9 million that was partially driven by higher director and officer insurance costs in 2020, and (v) communications expense of $0.8 million.

We incurred severance costs of $2.6 million in connection with restructuring plans initiated in April and August 2020 that resulted in the termination of approximately 150 employees. The annualized compensation cost for these terminated employees amounted to approximately $9.6 million. In addition, the Divested Business accounted for approximately $5.7 million and $5.8 million of our SG&A for the years ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2020, cash-based compensation and benefits increased due to the addition of Ariix employees which accounted for $3.9 million of compensation costs, and approximately $0.7 million related to BWR. These increases totaling $4.6 million were partially offset by approximately $2.8 million that was primarily related to savings from the restructuring plans initiated in April and August 2020, resulting in a net increase in cash-based compensation and benefits of $1.8 million for the year ended December 31, 2020.

Commissions. Commissions were $85.9 million for the year ended December 31, 2020 compared to $76.0 million for the year ended December 31, 2019, an increase of $9.9 million. For the year ended December 31, 2020, commissions for the Direct / Social Selling segment consisted of $13.7 million related to our November 2020 acquisition of Ariix and $70.1 million for the legacy business of the Direct / Social Selling segment. Commissions for the legacy business decreased by $4.3 million or 6%, which was in line with the 5% decrease in net revenue discussed above. Commissions related to the Direct Store segment increased by $0.5 million primarily due to increased net revenue for the Retained Business of that segment.

Depreciation and amortization expense. Depreciation and amortization expense included in operating expenses increased from $8.4 million for the year ended December 31, 2019 to $8.5 million for the year ended December 31, 2020, an increase of $0.1 million. This increase was attributable to amortization expense of $1.4 million related to identifiable intangible assets of $131.8 million acquired in our business combination with Ariix in November 2020. The increase in amortization expense related to the Ariix acquisition was offset by lower amortization expense related to the Direct Store segment due to impairment charges in December 2019 that eliminated the net carrying value of substantially all of the intangible assets of the Direct Store segment.

Loss on disposal of Divested Business. On September 24, 2020, we sold our BWR subsidiary and substantially all U.S. retail brands and recognized a loss of $3.4 million. These businesses incurred combined operating losses of $7.4 million and $61.4 million for the years ended December 31, 2020 and 2019, respectively.

Business combination expense (gain). We incurred acquisition related expenses of $0.9 million for the year ended December 31, 2020 whereas no acquisition related expenses were incurred for the year ended December 31, 2019. Substantially all of the acquisition related expenses incurred for the year ended December 31, 2020 consisted of professional fees for due diligence activities and legal fees related to the Ariix business combination that was completed in November 2020.

In connection with the Morinda business combination, we were obligated to make an earnout payment referred to as a Milestone Dividend up to an aggregate of $15.0 million if the Adjusted EBITDA of Morinda was at least $20.0 million for the year ended December 31, 2019. The estimated fair value of the Milestone Dividend decreased by approximately $12.9 million from $13.1 million as of December 31, 2018 to approximately $0.2 million as of December 31, 2019. This reduction in the fair value of the Milestone Dividend resulted in a gain of approximately $12.9 million for the year ended December 31, 2019. For the year ended December 31, 2020, we did not have any gain or loss on the change in fair value of earnout obligations.

Impairment expense. During the fourth quarter of 2020, we performed our annual goodwill impairment testing and determined that no impairment of goodwill existed as of December 31, 2020. Impairment expense related to right-of-use (“ROU”) assets decreased from $2.3 million for the year ended December 31, 2019 to $0.4 million for the year ended December 31, 2020, a decrease of $1.9 million. In June 2019, we began attempting to sublease a portion of our ROU assets previously used for warehouse space that were no longer needed for current operations. As a result, an impairment evaluation was completed that resulted in an impairment charge of $2.3 million for the year ended December 31, 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, 2020, we are continuing our efforts to obtain a subtenant for this space. Due to longer than expected timing to obtain a subtenant that we believe was at least partially attributable to the economic shut down related to COVID-19, we completed an updated impairment evaluation that resulted in an additional impairment charge of $0.4 million for the year ended December 31, 2020. It is possible that further impairment charges will be incurred if we are not able to locate a subtenant in the next several months, or if the sublease terms are less favorable than our current expectations.

During the fourth quarter of 2019, we performed our annual goodwill impairment testing. Our qualitative assessment indicated that impairment may exist for each reporting unit within the Direct Store segment. Therefore, as of December 31, 2019 we also performed a quantitative assessment of the fair value of each of our reporting units within the Direct / Social Selling and Direct Store segments. The primary basis for our quantitative assessment was based in part on a valuation report for all of our reporting units that was performed by an independent specialist. The result of this valuation resulted in an aggregate impairment charge of $44.9 million to eliminate the net carrying value of all goodwill and substantially all identifiable intangible assets related to all of the reporting units of the Direct Store segment.

Interest expense. Interest expense increased from $3.7 million for the year ended December 31, 2019 to $4.0 million for the year ended December 31, 2020, an increase of $0.3 million. For the year ended December 31, 2020, interest expense of $4.0 million was attributable to (i) interest expense based on the contractual rates under the EWB Credit Facility (as defined below) of $0.7 million based on a weighted average interest rate of 5.3% and weighted average borrowings outstanding of $13.1 million for the year ended December 31, 2020, (ii) accretion of discount for a total of $1.1 million related to the Morinda business combination liabilities and the EWB Credit Facility, (iii) imputed interest expense of $0.5 million related to our deferred lease financing obligation, (iv) write-off of debt issuance costs and discount related to the EWB Credit Facility of $0.7 million, and (v) interest expense of $0.9 million at the effective interest rate of 42.3% related to the Senior Notes. Based on the 1.0% contractual rate, interest expense related to our PPP Loans amounted to less than $0.1 million for the year ended December 31, 2020.

For the year ended December 31, 2019, interest expense of $3.7 million was primarily attributable to (i) termination of the revolving credit facility with Siena Lending Group LLC (the “Siena Revolver”) which resulted in a make-whole prepayment penalty of $0.5 million, (ii) accretion of discount and write-off of debt issuance costs of $0.5 million related to the Siena Revolver, (iii) accretion of discount of $1.2 million related to the Morinda business combination liabilities and the EWB Credit Facility, (iv) imputed interest expense of $0.5 million related to our deferred lease financing obligation, and (v) interest expense based on the contractual rates and swap settlements under the EWB Credit Facility of $0.7 million based on a weighted average interest rate of 5.6% and weighted average borrowings outstanding of $15.5 million for the year ended December 31, 2019.

Gain (loss) from change in fair value of derivatives, net. For the year ended December 31, 2020, we recognized a loss from the change in fair value of derivatives of $0.2 million whereas we recognized a gain of $0.4 million for the year ended December 31, 2019. In July 2019, we entered into an interest rate swap agreement with EWB (as defined below). This swap agreement provided for a total notional amount of $10.0 million at a fixed interest rate of approximately 5.4% through May 1, 2023, in exchange for a floating rate indexed to the prime rate plus 0.5%. For the year ended December 31, 2020, we recognized a loss of $0.2 million from this interest rate swap agreement due to a decline in interest rates. In December 2020, we terminated the swap agreement in connection with the termination of the EWB Credit Facility.

For the year ended December 31, 2019, we recognized a gain of $0.5 million from the change in fair value of embedded derivatives related to the Siena Revolver that was terminated in March 2019, partially offset by a loss related to our interest rate swap agreement of approximately $0.1 million.

Interest and other income (expense), net. Interest and other income (expense), net amounted to income of $1.7 million for the year ended December 31, 2020 and a net expense of $0.2 million for the year ended December 31, 2019. For the year ended December 31, 2020, other income was primarily comprised of foreign exchange gains of $1.4 million and interest income of $0.3 million. For the year ended December 31, 2019, we incurred other debt financing expenses related to the Siena Revolver of $0.2 million.

Gain from sale of property and equipment. On March 22, 2019, we entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $57.0 million of the land and building in Tokyo that serves as the corporate headquarters of our Japanese subsidiary. Concurrently with the sale, we entered into a lease of this property for an expected term of 20 years with an extension option for an additional seven years. The sale of this property resulted in a gain of $24.1 million. We determined that $17.6 million of the gain was the result of above-market rent inherent in the leaseback arrangement. This portion of the gain is being accounted for as a lease financing obligation whereby the gain will result in a reduction of rent expense of approximately $0.9 million per year over the 20-year lease term. The remainder of the gain of $6.4 million was attributable to the highly competitive process among the entities that bid to purchase the property and, accordingly, was recognized as a gain in our consolidated statement of operations for the year ended December 31, 2019. For the year ended December 31, 2020, we did not have any gains from the sale of property and equipment.

Income tax expense. For the year ended December 31, 2020, we recognized income tax expense of $1.9 million, which primarily consisted of foreign income taxes associated with profitable foreign markets. Due to the establishment of a valuation allowance applied against our domestic net deferred tax assets, we recognized a domestic income tax benefit of $1.0 million for the year ended December 31, 2020.

For the year ended December 31, 2019, we recognized income tax expense of $12.7 million, which consisted of foreign income taxes of $17.6 million, partially offset by a net deferred income tax benefit of $4.9 million. Foreign income taxes consisted of approximately $11.9 million that was incurred in March 2019 due to our sale leaseback of the building that serves as Morinda’s Japanese headquarters, and the remaining $5.7 million was primarily attributable to profitable operations in foreign jurisdictions.

Inflation and changing prices. For the years ended December 31, 2020 and 2019, the impact of inflation and changing prices have not had a significant impact on our net revenue, cost of goods sold and operating expenses.

Liquidity and Capital Resources

Overview

For the year ended December 31, 2020, we incurred a net loss of $39.3 million and cash used in our operating activities amounted to $34.3 million. As of December 31, 2020, our working capital amounted to $4.6 million, and we had an accumulated deficit of $151.8 million. As of December 31, 2020, we had cash and cash equivalents of $43.7 million and the current portion of restricted cash balances of $10.0 million, for a total of $53.7 million.

On November 16, 2020, we completed our business combination with Ariix for total purchase consideration with an estimated fair value of approximately $155.1 million. As a result of the closing, we were obligated to issue 19.7 million shares of our Common Stock and to pay $10.0 million to the Sellers. These shares were issued and substantially all of the cash was paid in February 2021. Pursuant to the amended merger agreement and exclusive of the impact of the working capital adjustment discussed below, we were required to seek approval from our stockholders to issue up to 40.1 million shares of our Common Stock to settle the remainder of the merger consideration. If our stockholders fail to approve the issuance of the aggregate of up to 40.1 million shares of Common Stock at up to three stockholder meetings held after the closing date, we will be required to make cash payments of $163.3 million within 90 days after the third stockholder meeting.

On May 16, 2021, we are required to either pay up to $10.0 million in cash to the Sellers or issue a variable number of shares of its Common Stock with a value up to $10.0 million (the “Interim Ariix Merger Consideration”). The Interim Ariix Merger Consideration is reduced to the extent that working capital of Ariix is less than $11.0 million as of the closing date. Based on the preliminary balance sheet provided by Ariix as of the closing date, working capital amounted to a negative $18.0 million, resulting in a $29.0 million shortfall of the targeted working capital per the amended merger agreement. Ariix also had $5.0 million of long-term accrued business combination liabilities as of the closing date of the transaction which were required to be repaid pursuant to the amended merger agreement. Based on Ariix’s failure to meet the working capital requirements of the amended merger agreement, we expect to eliminate the requirement to pay the Interim Ariix Merger Consideration of $10.0 million. We also believe there will be a reduction in the number of shares issuable on the first anniversary of the closing date by approximately 4.3 million shares based on the agreed settlement price of $5.53 for the working capital deficiency.

On January 29, 2021, entered into a letter of clarification that explained the intent of the parties whereby (i) a restricted cash account of Ariix with a Chinese bank that had a balance of $3.1 million remained an asset of the Sellers, and (ii) the number of shares of our Common Stock issuable to the Sellers on the first anniversary of the closing date was reduced by 0.5 million shares. In addition, the impact of the $3.1 million reduction of restricted cash reduced the number of shares issuable by 0.6 million shares due to the impact of the working capital adjustment.

On November 30, 2020, we entered into a securities purchase agreement for a private placement of our (i) 8.00% Original Issue Discount Senior Secured Notes with an initial principal balance of $32.4 million (the “Senior Notes”), (ii) 800,000 shares of Common Stock (the “Commitment Shares”), (iii) Class A Warrants to purchase 750,000 shares of Common Stock exercisable at $3.75 per share (the “Class A Warrants”), and (iv) Class B Warrants to purchase 750,000 shares of Common Stock exercisable at $5.75 per share (the “Class B Warrants,” and together with the Class A Warrants, the “Warrants”). The Warrants are exercisable until December 1, 2025. At the closing, we received net proceeds of $28.7 million from the private placement. Approximately $14.1 million of the proceeds was used to repay all outstanding principal to terminate our Credit Facility with East West Bank, including the termination of an interest rate swap agreement for $0.4 million and a prepayment fee of $0.1 million.

On February 16, 2021, we entered into a securities purchase agreement in connection with a private placement of an aggregate of approximately 14.6 million shares of our Common Stock and warrants to purchase an aggregate of 7.3 million shares of our Common Stock. At the closing, we received net proceeds of approximately $53.9 million.

On March 3, 2021, we entered into the Gould Agreement with Gregory A. Gould, our Chief Financial Officer that amends the employment agreement with Mr. Gould whereby he will continue to serve as our Chief Financial Officer until July 2, 2021. The Agreement also modifies the Indemnification Agreement, dated December 28, 2019, between the Company and Mr. Gould. As part of the transition, Mr. Gould will receive additional cash compensation in excess of $1.4 million and a grant of stock options for 125,000 shares of Common Stock that vest on July 2, 2021. Pursuant to the Senior Notes, we are required to replace Mr. Gould with a suitable candidate to serve as our Chief Financial Officer within 120 days of Mr. Gould’s termination date. The failure to replace Mr. Gould with an individual reasonably acceptable to the lenders would result in an event of default under the Senior Notes. We expect to hire a suitable replacement for Mr. Gould by the prescribed deadline.

On March 4, 2021, we entered into a letter of intent to acquire Aliven, a Japan-based direct selling company that currently generates approximately $20 million in annualized net revenue with more than 100,000 customers and Brand Partners. Consideration for the acquisition of Aliven is approximately 1.1 million shares of our Common Stock with no material cash payments expected. Completion of the proposed transaction is subject to negotiation and execution of a definitive agreement and the satisfaction of customary conditions to closing.

As shown below under the caption Contractual Obligations, cash payments will be required to settle obligations of approximately $42.2 million during the year ending December 31, 2021, including (i) cash payable to the former owners of Ariix of $10.0 million due in February 2021, (ii) up to $20.0 million of principal and interest under our Senior Notes, and (iii) operating lease payments of $9.3 million.

We believe the current portion of our cash and restricted cash resources of $53.7 million, combined with the net proceeds of $53.9 million from the private placement completed in February 2021, will be sufficient to fund our contractual obligations and working capital requirements for the next 12 months.

Please refer to the sections below for further discussion about our recent financing activities.

February 2021 Private Placement

On February 16, 2021, we entered into a securities purchase agreement in connection with a private placement for the issuance of an aggregate of approximately 14.6 million shares of Common Stock and warrants to purchase an aggregate of 7.3 million shares (the “Warrant Shares”) of Common Stock. At the closing on February 19, 2021, we received gross proceeds of approximately $58.0 million. Roth Capital Partners, LLC acted as the exclusive placement agent in exchange for a fee equal to 7% of the gross proceeds. After deducting the placement agent fees, the net proceeds were approximately $53.9 million.

The warrants have an initial exercise price of $5.00 per share, subject to adjustment in certain circumstances. The warrants are exercisable until the third anniversary of the effectiveness of a registration statement required to be filed within 30 days after the closing pursuant to a separate registration rights agreement. Exercise of the warrants is subject to a beneficial ownership limitation of 4.99% (or 9.99% at the option of the Purchasers).

Pursuant to the registration rights agreement, we agreed to file an initial registration statement on Form S-3 covering the resale of the shares of Common Stock and the Warrant Shares with the SEC by March 18, 2021. We also agreed that the registration statement must be declared effective by the SEC and effectiveness must be maintained within prescribed deadlines set forth in the registration rights agreement. If we fail to comply with these requirements, the investors are entitled to liquidated damages equal to 2.0% of the aggregate subscription amount on each 30-day anniversary of such failure.

Senior Notes

The Senior Notes bear interest at an annual rate of 8.0% applied to the contractual principal balance with such accrued interest payable in cash commencing on December 31, 2020 and continuing monthly thereafter. The aggregate discount related to the Senior Notes was approximately $8.5 million based on the contractual principal balance of $32.4 million and the net carrying value of $23.9 million on the closing date. The discount is being accreted to interest expense using the effective interest method that results in an overall effective interest rate of approximately 42.3%, including the 8.0% stated rate.

For the months of February 2021 through May 2021, the holders of the Senior Notes are entitled to request that we make principal payments up to $1.0 million per month. Beginning in June 2021 and continuing for each subsequent month, the holders of the Senior Notes are entitled to request that we make principal payments of up to $2.0 million per month. All principal payments are required to be paid within five business days of the date that notice is provided by the holders of the Senior Notes. The maturity date of the Senior Notes is on December 1, 2022. However, if the holders of the Senior Notes continue to exercise their rights to demand the maximum principal payments permitted in each month, the Senior Notes would be repaid in full by August 2022. We may prepay all or a portion of the outstanding principal amount of the Senior Notes at any time, subject to a prepayment fee of 3.0% of the outstanding principal balance through December 1, 2021.

Our obligations under the Senior Notes are secured by substantially all of our assets, including all personal property and all proceeds and products thereof, goods, contract rights and other general intangibles, accounts receivable, intellectual property, equipment, and deposit accounts and a lien on certain real estate. We were required to maintain restricted cash balances of $18.0 million until February 2021. Beginning in February 2021, the requirement to maintain restricted cash balances was reduced to $8.0 million until such time that the outstanding principal balance of the Senior Notes is reduced below $8.0 million without regard to the unaccreted discount. The Senior Notes contain certain restrictions and covenants, which restrict the Company’s ability to incur additional debt or make guarantees, sell assets, make investments or loans, make distributions or create liens or other encumbrances. The Senior Notes also require that we comply with certain financial covenants, including maintaining minimum cash, minimum adjusted EBITDA, minimum revenue, and a maximum ratio of cash in foreign bank accounts to cash in U.S. deposit accounts subject to account control agreements.

The Senior Notes contain customary events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults, material adverse effect defaults, change of management defaults, and a change in control. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become immediately due and payable and interest on the obligations increases to an annual rate of 12.0%.

As a post-closing deliverable, we were required to provide certain historical financial statements of Ariix to the lenders by January 4, 2021. The required financial statements were not available by the deadline, which would have resulted in a default under the securities purchase agreement. The lenders agreed to amend the Senior Notes to extend the deadline in exchange for the issuance of 400,000 shares of Common Stock with a fair value of approximately $1.1 million as of the issuance date. The amendment fee of $1.1 million will be accounted for as an additional discount related to the Senior Notes in the first quarter of 2021.

PPP Loans

Pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we obtained a PPP Loan in April 2020 for approximately $6.9 million. Ariix also obtained a PPP loan for approximately $2.8 million that we assumed in connection with our business combination that closed on November 16, 2020. The PPP Loans are unsecured and guaranteed by the U.S. Small Business Administration (“SBA”), bear interest at a fixed rate of 1.0% per annum and provide for a maturity date in two years. Ariix applied for forgiveness of its PPP loan in 2020 and we intend to apply for forgiveness of our other PPP Loan in 2021. The amount that is subject to forgiveness is equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred during the permitted period as calculated in accordance with the terms of the CARES Act. The eligibility for the PPP Loans, expenditures that qualify toward forgiveness, and the final balance of the PPP Loans that may be forgiven are subject to audit and final approval by the SBA. To the extent that all or part of the PPP Loan is not forgiven, all accrued interest and principal will be payable on the maturity dates in the second quarter of 2022. The terms of the PPP Loans provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loans may be accelerated upon the occurrence of an event of default, including if the SBA subsequently reaches an audit determination that the eligibility criteria were not met.

ATM Offering

Pursuant to an At the Market Offering Agreement (the “ATM Offering Agreement”) with Roth Capital Partners, LLC (“Roth”), we sold an aggregate of 16.1 million shares of Common Stock for gross proceeds of approximately $25.8 million for the year ended December 31, 2020. Total commissions and other offering costs deducted from the gross proceeds were $0.8 million, resulting in net proceeds of $25.0 million. On February 9, 2021, we notified Roth of our election to terminate the ATM Agreement. On February 11, 2021, we entered into a sales agreement with A.G.P./Alliance Global Partners (“AGP”), under which we may offer and sell from time-to-time up to an aggregate of approximately $53.5 million in shares of our Common Stock through AGP. However, the maximum number of shares that may be sold is currently limited to less than 3.0 million shares based on the number of authorized shares of Common Stock available as of February 28, 2021. Accordingly, we do not expect ATM Offerings will be a significant source of liquidity for us until such time that our stockholders approve an increase in the authorized number of shares of Common Stock.

East West Bank Credit Facility

On March 29, 2019, we entered into a credit facility with East West Bank (the “EWB Credit Facility”). The EWB Credit Facility was scheduled to mature on March 29, 2023. However, on December 1, 2020 we terminated the EWB Credit Facility and repaid all outstanding principal, interest and fees from the proceeds received from the private placement consisting of the Senior Notes, Commitment Shares and the Warrants. The EWB Credit Facility provided for (i) a term loan in the original principal amount of $15.0 million (the “EWB Term Loan”) and (ii) a $10.0 million revolving loan agreement (the “EWB Revolver”). As of December 31, 2019, the outstanding principal balances were $14.8 million under the EWB Term Loan and $9.7 million under the EWB Revolver.

Borrowings outstanding under the EWB Credit Facility initially provided for interest at the Prime Rate (4.25% as of December 31, 2019) plus 0.5%. Borrowing requests under the EWB Revolver were subject to various customary conditions precedent, including satisfaction of a borrowing base test. The EWB Revolver also provided for an unused line fee equal to 0.5% per annum of the undrawn portion. The EWB Revolver included a subjective acceleration clause and a lockbox arrangement where we were required to direct our customers to remit payments to a restricted bank account, whereby all available funds were used to pay down the outstanding principal balance under the EWB Revolver. Payments under the EWB Term Loan were interest-only through September 2019. Beginning in October 2019, monthly principal payments of $125,000 plus interest were payable through the maturity date of the EWB Term Loan. We were permitted to prepay the EWB Term Loan before the Maturity Date subject to a prepayment fee of 2% for the first year of the EWB Term Loan and 1% for the second year of the EWB Term Loan.

Our obligations under the EWB Credit Facility were secured by substantially all of our assets. The EWB Credit Facility required compliance with certain financial and restrictive covenants and included customary events of default. Key financial covenants included maintenance of minimum Adjusted EBITDA and a maximum Total Leverage Ratio. As of December 31, 2019, we were not in compliance with the minimum Adjusted EBITDA covenant.

On March 13, 2020, we entered into the Third Amendment to the EWB Credit Facility whereby EWB waived our failure to comply with the minimum Adjusted EBITDA covenant for the 12-month period ended December 31, 2020. In addition, the Third Amendment modified the EWB Credit Facility as follows:

Business Combination Liabilities

The table below summarizes the net carrying value and the range of cash settlements for the Ariix business combination liabilities as of December 31, 2020 (in thousands):

Cash Flows Summary

Presented below is a summary of our operating, investing and financing cash flows for the years ended December 31, 2020 and 2019 (in thousands):

Cash Flows Used in Operating Activities

For the years ended December 31, 2020 and 2019, we recognized net losses of $39.3 million and $89.8 million, respectively. The following adjustments are taken into account to reconcile our net loss to net cash used in operating activities for the years ended December 31, 2020 and 2019 (in thousands):

For the years ended December 31, 2020 and 2019, we incurred total non-cash expenses of $25.3 million and $71.8 million, respectively. Significant non-cash expenses include long-lived asset impairment expense, depreciation and amortization expense, non-cash lease expense, and stock-based compensation expense. For the year ended December 31, 2019, we recognized non-cash gains of $25.5 million that consisted of gains from changes in the fair value of earnout obligations of $13.8 million, a gain on sale of property and equipment of $6.4 million, and a deferred income tax benefit of $4.9 million. We did not have any non-cash gains for the year ended December 31, 2020.

Net changes in our operating assets and liabilities can have a significant impact on operating cash flow. For the year ended December 31, 2019, changes in operating assets and liabilities provided $11.7 million of operating cash flow which was primarily due to an increase in foreign income taxes due to our sale of real estate in Japan in March 2019. For the year ended December 31, 2020, changes in operating assets and liabilities used $20.2 million of operating cash flows which was primarily due to the payment of foreign income taxes in the first quarter of 2020 related to the March 2019 sale of real estate.

Cash Flows from Investing Activities

For the year ended December 31, 2020, cash provided by investing activities was $4.5 million. This amount consisted of cash acquired in our acquisition of Ariix of $7.4 million, net cash received from the buyer of the Divested Business of $0.4 million, and proceeds from the sale of equipment for $0.4 million for a total of $8.2 million. Investing cash outflows for the year ended December 31, 2020 consisted of capital expenditures for property and equipment of $2.5 million and a cash payment of $1.3 million in exchange for an unsecured promissory note received in connection with our sale of the Divested Business. Our capital expenditures included property and equipment for our Direct / Social Selling segment of $2.2 million, and capital expenditures for our Direct Store segment of $0.3 million. Capital expenditures for the Direct / Social Selling segment included manufacturing line improvements of $0.8 million in our China facility, and leasehold improvement of $1.1 million for a leased facility in Japan.

For the year ended December 31, 2019, cash provided by investing activities of $29.4 million was primarily driven by the sale leaseback of our land and building in Tokyo. The gross selling price was $57.1 million. After deducting commissions and other selling expenses of $1.9 million, the net proceeds amounted to $55.2 million. The net proceeds attributable to investing activities included $36.2 million related to the sale of the property, and $1.3 million that was designated to fund future repair obligations for a total of $37.5 million. The remainder of the net proceeds of $17.6 million was a financial inducement to enter into a 20-year operating lease as discussed under Cash Flows from Financing Activities.

Investing cash outflows for the year ended December 31, 2019 included (i) capital expenditures for property and equipment of $5.4 million, (ii) a security deposit of $1.8 million withheld by the purchaser in the sale leaseback, and (iii) cash paid for our business combination with BWR for $1.0 million. Our capital expenditures included property and equipment for our Direct/ Social Selling segment of $4.2 million, and capital expenditures for our Direct Store segment of $1.2 million. Capital expenditures for the Direct/ Social Selling segment included leasehold improvements of $2.0 million to the Tokyo, Japan headquarters facility, manufacturing line improvements of $0.4 million in our China facility, and leasehold improvement for a new leased facility in Shanghai, China. Capital expenditures for the Direct Store segment included leasehold improvements related to our new distribution facility in Aurora, Colorado of $0.3 million, transportation equipment of $0.2 million, and furniture and office equipment primarily related to our new leased facilities in Aurora and Denver, Colorado for a total of $0.4 million.

Cash Flows from Financing Activities

Our financing activities generated net cash proceeds of $28.5 million for the year ended December 31, 2020. The principal sources of cash from our financing activities during 2020 consisted of (i) $30.0 million of gross proceeds received in December 2020 from a private placement of Senior Notes, Common Stock and Warrants, (ii) net proceeds of $25.1 million from the issuance of approximately 16.1 million shares of Common Stock pursuant to the ATM Offering Agreement, (iii) proceeds of $6.9 million from a PPP Loan received in April 2020 under the CARES Act, and (iv) proceeds from the exercise of stock options of $0.7 million. These financing cash proceeds totaled $62.7 million and were partially offset by (i) principal payments under the EWB Credit Facility of $24.5 million, (ii) payment of Morinda business combination liabilities of $5.8 million, (iii) payments for debt issuance costs of $1.7 million primarily related to the Senior Notes, (iv) the purchase and retirement of 780,000 shares of Common Stock for $1.2 million, (v) cash payments to reduce a deferred lease financing obligation of $0.6 million as discussed below, (vi) cash payments of $0.2 million for offering costs related to the ATM Offering Agreement, and (vii) payment of make-whole premium of $0.1 million as a result of the termination of the EWB Credit Facility.

Our financing activities generated net cash proceeds of $19.4 million for the year ended December 31, 2019. The principal sources of cash from our financing activities during 2019 consisted of (i) $61.3 million of borrowings, including $51.7 million under the EWB Credit Facility and $9.6 million under the Siena Revolver that was terminated in March 2019, (ii) net proceeds of $20.1 million from the issuance of approximately 6.0 million shares of Common Stock pursuant to the ATM Offering Agreement, (iii) proceeds of $17.6 million for the deferred lease financing obligation related to the sale leaseback of our land and building in Tokyo, and (iv) proceeds from the exercise of stock options of $0.6 million. These financing cash proceeds totaled $99.6 million and were partially offset by (i) principal payments under debt agreements of $43.9 million, including $29.2 million under the EWB Credit Facility, $9.7 million under the Siena Revolver, $2.6 million to repay the mortgage on the sale of our land and building in Tokyo, and $2.4 million to terminate the line of credit assumed in the business combination with BWR, (ii) payment of Morinda business combination liabilities of $34.0 million, (iii) payments for debt issuance costs of $1.0 million to obtain the EWB Credit Facility, (iv) payment of make-whole premium of $0.5 million as a result of the termination of the Siena Revolver, (v) cash payments of $0.5 million for offering costs related to the ATM Offering Agreement, and (vi) cash payments to reduce a deferred lease financing obligation of $0.5 million as discussed below. The Siena Revolver was terminated on March 29, 2019 and was replaced by the EWB Credit Facility.

As discussed above, the net proceeds received from the buyer of our land and building in Tokyo included $17.6 million that represented an inducement to enter into the related leaseback financing arrangement. Since we agreed to pay above market lease payments for the 20-year lease term in exchange for an up-front cash payment included in the selling price, we have recognized a deferred lease financing obligation for this amount. For financial reporting purposes, a portion of the monthly operating lease payments is not being recognized as rent expense, but rather is allocated to reduce this financial liability and recognize imputed interest expense. For the year ended December 31, 2019, $0.5 million of our lease payments was allocated to reduce the financial liability.

Contractual Obligations

The following table summarizes our contractual obligations on an undiscounted basis as of December 31, 2020, and the period in which each contractual obligation is due:

Off-Balance Sheet Arrangements

During the years ended December 31, 2020 and 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.

Foreign Currency Risks

We have foreign currency risks related to our net revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euro, Chinese Yuan and Japanese Yen. We generated approximately 68% of our net revenue from our international business for the year ended December 31, 2020. Increases in the relative value of the U.S. Dollar to other currencies may negatively affect our net revenue, partially offset by a positive impact to operating expenses in other currencies as expressed in U.S. Dollars. We have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains or losses related to revaluing certain current asset and current liability balances, including intercompany receivables and payables, which are denominated in currencies other than the functional currency of the entities in which they are recorded. While we have not engaged in the hedging of our foreign currency transactions to date, we are evaluating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. Dollar.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported net revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

We believe that, of our significant accounting policies that are described in Note 2 to our consolidated financial statements included in Item 8 of this Report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Acquisition Method of Accounting for Business Combinations

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. We engage independent third-party valuation specialists to assist us in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Different valuations approaches are used to value different types of intangible assets. The income approach is a valuation technique that capitalizes anticipated income associated with the asset being valued. This approach is predicated on developing net income and cash flow projections which are discounted for risk and the time value of money. This approach is generally the principal approach to the valuation of most intangible assets. The market approach involves the compilation and analysis of recent acquisitions of similar assets in the open market. A fair value can be estimated after adjustments are made to reflect comparability differences between the assets sold and those being valued. This method of valuation applies primarily to the valuation of owned land and certain intangible assets. The cost approach estimates the amount that would be required to replace the service capacity of an asset (often referred to as current replacement cost). We typically apply all three approaches to estimate the fair value of our tangible and intangible tangible assets depending on the type of asset acquired.

Significant estimates in valuing certain intangible assets include but are not limited to the projected financial information related to each individual asset, particularly forecasted net revenue, cash flows, market-based royalty rates and estimated discount rates. Developed technology and trademarks are valued using the relief-from-royalty method, and customer relationships are valued using the multi-period excess earnings model. The relief-from-royalty method is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. The multi-period excess earnings method supposes that the owner of the intangible asset is able to achieve a return in excess of that received without the intangible asset through enhanced revenues or cost savings. Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account our operating plans and strategies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our intangible assets, which would adversely affect our operating results in the period of impairment.

Accounting for Complex Financings

In order to account for complex financing transactions, we are required to make judgments, assumptions, and estimates to determine the appropriate amounts reported in our consolidated financial statements. These financing transactions typically involve entering into several distinct legal agreements, whereby we are required to identify and account for each freestanding financial instrument separately. The freestanding financial instruments may be classified as debt, temporary equity or permanent equity instruments depending on the results of our evaluation. In addition, we evaluate if any of the financial instruments contain features that are required to be accounted for as embedded derivatives at fair value. Each freestanding financial instrument is required to be recognized at fair value on the closing date of the financing. The fair value of warrants is determined using the Black-Scholes-Merton valuation model and the fair value of Common Stock is based on the trading price of our shares on the closing date. In order to determine the fair value of debt instruments, we review peer companies with similar credit rating by considering the interest rates and other market terms in their debt instruments.

If the fair value of all of the financial instruments in the financing transaction exceeds the net proceeds received and if none of the freestanding financial instruments will subsequently be measured at fair value, then we record each financial instrument based on its relative fair value. This results in each of the financial instruments being recognized at its proportional fair value in relation to the aggregate net proceeds received in the financing transaction. If we are contingently liable to redeem shares of our Common Stock, we classify those shares and the related allocated fair value as temporary equity until such time that the contingency is eliminated.

For financial instruments classified as debt, a discount is recognized if the stated principal balance exceeds the initial allocation of fair value as of the closing date. This discount is accreted to interest expense using the interest method that results in recognition of interest expense at a fixed rate through the expected maturity date.

Impairment of Goodwill and Long-lived Assets

Goodwill is not amortized but tested for impairment annually, or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered more likely than not that the fair value of the reporting unit is greater than the carrying amount, further testing of goodwill for impairment is not required. In the course of preparing our annual goodwill impairment testing, if we project a sustained decline in a reporting unit’s revenues and earnings, it will have a significant negative impact on the fair value of the reporting unit which could result in material future impairment charges for our goodwill and long-lived assets. Such a decline could be driven by, among other things: (i) changes in strategic priorities; (ii) anticipated decreases in product pricing, sales volumes, and long-term growth rates as a result of competitive pressures or other factors; and (iii) the inability to achieve, or delays in achieving the goals of our strategic initiatives and synergies. Adverse changes to macroeconomic factors, such as increases to long-term interest rates, would also negatively impact the fair value of our reporting units. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Long-lived assets include identifiable intangible assets, property and equipment, and right-of-use assets. Under our accounting policies, at least quarterly we consider whether events and circumstances have occurred that would indicate if it is “more likely than not” that an impairment of our long-lived assets has occurred. Evaluating whether impairment exists involves substantial judgment and estimation. Impairment exists for identifiable intangible assets, property and equipment and right-of-use assets if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. If impairment is determined to exist, then an impairment charge is recognized for the amount by which the carrying amount of the asset, or asset group, exceeds its fair value. Fair value of our long-lived assets is determined using the fair value concepts set forth in Accounting Standards Codification 820, Fair Value Measurement.

Revenue Recognition

We recognize product sales when we satisfy our performance obligations and transfer control of the promised products to our customers, which generally occurs over a very short period of time. Performance obligations are typically satisfied by shipping or delivering products to customers, which is also the point when title transfers to customers. Revenue is measured as the amount of consideration expected to be received in exchange for transferring the related products.

Net revenue consists of the gross sales price, less estimated returns and allowances for which provisions are made at the time of sale, and less certain other discounts, allowances, and personal rebates that are accounted for as a reduction from gross revenue. Shipping and handling charges that are billed to our customers are included as a component of revenue. Costs incurred by us for shipping and handling charges are included in cost of goods sold.

Payments received for undelivered or back-ordered products are recorded as deferred revenue. Our policy is to defer revenue related to Brand Partner convention fees, payments received on products ordered in the current period but not delivered until the subsequent period, initial Brand Partner fees, Brand Partner renewal fees and internet subscription fees until the products or services have been provided.

Customers are permitted to return products in unused condition during a period of six to twelve months after the original sale date, depending on the business unit that originated the sale. The amount refunded is generally offset by a reduction in commissions and incentives related to the original sale. Brand Partners may be terminated if they return more than $250 of products within a rolling six-month period unless otherwise agreed to by the Company. If a Brand Partner elects to terminate their account, they may return all unused products purchased within the past 12 months. Sales returns have historically been less than 1.0% of annual sales.

Inventories

Inventories are adjusted to the lower of cost and net realizable value, using the first-in, first-out method. The components of inventory cost include raw materials, labor and overhead. The determination of net realizable value involves various assumptions related to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning, and market conditions. If future demand and market conditions are less favorable than our assumptions, additional inventory adjustments could be required in future periods.

Income Taxes

We account for income taxes under the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred income tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred income tax asset will not be realized based on the weight of available evidence, including expected future earnings.

We recognize an uncertain tax position in our financial statements when we conclude that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. Interest and penalties related to income taxes are recognized in the provision for income taxes.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed in Note 2 to our consolidated financial statements included in Item 8 of this Report, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. For additional information on recently issued accounting standards and our plans for adoption of those standards, please refer to the section titled Recent Accounting Pronouncements under Note 2 to our consolidated financial statements included in Item 8 of this Report.

Non-GAAP Financial Measures

The primary purpose of using non-GAAP financial measures is to provide supplemental information that we believe may be useful to investors and to enable investors to evaluate our results in the same way we do. We also present the non-GAAP financial measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis, as well as comparing our results against the results of other companies, by excluding items that we do not believe are indicative of our core operating performance. Specifically, we use these non-GAAP measures as measures of operating performance; to prepare our annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our business strategies; to provide consistency and comparability with past financial performance; to facilitate a comparison of our results with those of other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and in communications with our Board of Directors concerning our financial performance. Investors should be aware however, that not all companies define these non-GAAP measures consistently. We provide in the tables below a reconciliation from the most directly comparable GAAP financial measure to each non-GAAP financial measure presented. Due to a valuation allowance for our deferred tax assets, there were no income tax effects associated with any of our non-GAAP adjustments.

EBITDA and Adjusted EBITDA. The calculation of our EBITDA and Adjusted EBITDA is presented below for the years ended December 31, 2020 and 2019 (in thousands):

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

Stock-Based Compensation Expense: Our compensation strategy includes the use of stock-based compensation to attract and retain employees, directors and consultants. This strategy is principally aimed at aligning the employee interests with those of our stockholders and to achieve long-term employee retention, rather than to motivate or reward operational performance for any particular period. As a result, stock-based compensation expense varies for reasons that are generally unrelated to operational decisions and performance in any particular period.

Impairment of goodwill and identifiable intangible assets: We have excluded impairment write-downs related to goodwill and identifiable intangible assets because these non-cash charges are not indicative of our core operating performance.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

Item 8. Financial Statements and Supplementary Data.

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm

To the shareholders and the Board of Directors of NewAge, Inc. (formerly New Age Beverages Corporation)

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of NewAge, Inc. (formerly New Age Beverages Corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 8 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2021, expressed an adverse opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Business Combinations — Refer to Note 4 to the financial statements

Critical Audit Matter Description

The Company completed the acquisition of Ariix, LLC (Ariix) for $155.1 million on November 16, 2020. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including the sales and distribution network intangible of $79.6 million, trade names intangible of $20.0 million, and internal-use software intangible of $13.2 million. Management estimated the fair value of these intangible assets using variations of the “income approach,” which is based on the present value of the future after-tax cash flows attributable to each identifiable intangible asset. The fair value determination of these intangible assets required management to make key assumptions consisting of estimates of future net revenue and an appropriate discount rate.

We identified the valuation of the sales and distribution network, the trade names, and the internal-use software intangibles as a critical audit matter because of the estimates and assumptions management makes to determine the fair value these assets. The valuation of these intangible assets required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of future net revenue and estimated discount rate including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the future net revenue and estimated discount rate for the acquired intangible assets included the following, among others:

NewAge, Inc.

Consolidated Balance Sheets

December 31, 2020 and 2019

(In thousands, except per share amounts)

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

NewAge, Inc.

Consolidated Statements of Operations and Comprehensive Loss

Years Ended December 31, 2020 and 2019

(In thousands, except per share amounts)

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

NewAge, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2020 and 2019

(In thousands)