NewAge, Inc. - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number: 001-38014

Not Applicable

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

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

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

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

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

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

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

The registrant had 136,788,047 shares of its Common Stock, $0.001 par value per share, outstanding as of August 6, 2021.

NewAge, Inc.

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

NewAge, Inc.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value per share)

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

NewAge, Inc.

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

(In thousands, except loss per share amounts)

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

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2021 and 2020

(In thousands)

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

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2021 and 2020

(In thousands)

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

NewAge, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2021 and 2020

(In thousands)

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

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1 —BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Overview

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

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

Segments

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

Basis of Presentation

The unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly-owned subsidiaries, are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by U.S. GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. These unaudited condensed consolidated financial statements for the three and six months ended June 30, 2021 and 2020 should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2020, included in the Company’s 2020 Annual Report on Form 10-K filed with the SEC on March 18, 2021 (the “2020 Form 10-K”).

The accompanying condensed consolidated balance sheet and related disclosures as of December 31, 2020 have been derived from the Company’s audited financial statements. The Company’s financial condition as of June 30, 2021 and its operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2021.

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Use of Estimates

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

Recent Accounting Pronouncements

The following accounting standard was adopted effective January 1, 2021:

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. Effective January 1, 2021, the Company elected to adopt ASU 2020-06 using the modified retrospective transition method which did not result in any changes to the Company’s financial statements upon adoption.

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

NOTE 2 — LIQUIDITY AND GOING CONCERN

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

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

During the 12-month period ending on June 30, 2022, cash payments will be required to settle certain obligations, including operating lease payments of $9.1 million, deferred consideration related to business combinations of $1.1 million, and up to $25.1 million of principal and interest under the 8.00% Original Issue Discount Senior Secured Notes discussed in Note 6. Management believes the Company’s existing cash and cash equivalents of $80.9 million and the current portion of restricted cash of $5.6 million will be sufficient to fund contractual obligations and working capital requirements at least through August 2022.

NOTE 3 — BUSINESS COMBINATIONS AND DISPOSITIONS

Ariix Merger Agreement

On September 30, 2020, the Company entered into an Amended and Restated Agreement and Plan of Ariix Merger (the “Ariix Merger Agreement”), by and among Ariix, LLC (“Ariix”), Ariel Merger Sub, LLC (“Ariix Merger Sub”), Ariel Merger Sub 2, LLC (“Ariix Merger Sub 2”), certain Members of Ariix (the “Sellers”), and Dr. Frederick W. Cooper, the principal member of Ariix who serves as sellers’ agent (the “Sellers’ Agent”), pursuant to which the Company agreed to acquire 100% of the equity interests of Ariix, subject to customary representations, warranties, covenants and indemnities and closing conditions. The Company entered into the Ariix Merger Agreement to accelerate organic growth with its direct-to-consumer business model and to expand its portfolio of healthy products.

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

On November 16, 2020, the Company entered into a letter agreement (the “Waiver Letter”), with Ariix and the Sellers’ Agent that resulted in closing of the Ariix Merger on November 16, 2020 (the “Ariix Closing Date”) and the Sellers’ Agent was appointed as a member of the Company’s Board of Directors. On the Ariix Closing Date, Ariix merged with Ariix Merger Sub, with Ariix as the surviving entity and a wholly owned subsidiary of the Company. Subsequently, Ariix Merger Sub was merged with and into Ariix Merger Sub 2 and remains a wholly owned subsidiary of the Company. Ariix Merger Sub 2 was subsequently renamed “Ariix, LLC”. The preliminary purchase consideration to acquire Ariix amounted to $155.1 million, consisting of (i) an obligation to issue 19.7 million shares of Common Stock with a fair value of $54.2 million, (ii) an obligation to pay $10.0 million in cash, and (iii) the fair value of the aggregate derivative liability of $90.9 million as discussed below.

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

Pursuant to the Ariix Merger Agreement as modified by the Waiver Letter and the Clarification Letter (the “Amended Ariix Merger Agreement”), the Company was obligated to issue 19.7 million shares of Common Stock on the Ariix Closing Date, and to pay $10.0 million to the Sellers after certain post-closing conditions were satisfied. As of December 31, 2020, the obligation to issue the 19.7 million shares of Common Stock with a fair value of $54.2 million was included within stockholders’ equity and the obligation to pay $10.0 million to the Sellers was reflected as a current liability. During the first quarter of 2021, the 19.7 million shares of Common Stock were issued, and the post-closing conditions were satisfied whereby $10.0 million was paid to the Sellers.

On or before May 16, 2021, under the Amended Ariix Merger Agreement, the Company was required to either pay up to an additional $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 was reduced to the extent that working capital of Ariix was less than $11.0 million as of the Ariix Closing Date. Based on the balance sheet provided by Ariix as of the Ariix Closing Date, working capital of Ariix amounted to a negative $18.0 million, resulting in a $29.0 million shortfall of the targeted working capital per the Amended Ariix Merger Agreement. In addition, Ariix failed to repay $5.0 million of long-term accrued business combination liabilities by the Ariix Closing Date as agreed to by the parties. Accordingly, the requirement to pay the Interim Ariix Merger Consideration of $10.0 million was eliminated.

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

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

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

Aliven Business Combination

On June 1, 2021 (the “Aliven Closing Date”), the Company entered into an Asset Purchase Agreement (“APA”) with Aliven, Inc. (“Aliven”) that was accounted for using the acquisition method of accounting under ASC 805, Business Combinations, and using the fair value concepts set forth in ASC 820, Fair Value Measurement. Aliven is a Japan-based direct selling company. The Company entered into the APA to accelerate growth with its direct-to-consumer business model in Japan and to expand its portfolio of healthy products. Pursuant to the APA, the Company acquired the assets and assumed the liabilities of Aliven on the Aliven Closing Date. The total purchase consideration issued by the Company consisted of approximately 1,072,000 shares of the Company’s Common Stock with a fair value of approximately $2,588,000. The preliminary purchase price allocation is presented below (dollars in thousands):

 SUMMARY OF PURCHASE PRICE ALLOCATION

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Unaudited Pro Forma Disclosures

The following table summarizes the results of operations for the Company after giving effect to the pre-acquisition results of Ariix and Aliven on an unaudited pro forma basis (in thousands, except per share amounts):

 SCHEDULE OF UNAUDITED PRO FORMA DISCLOSURES

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

Business Combination Liabilities

As of June 30, 2021 and December 31, 2020, business combination liabilities were as follows (in thousands):

SCHEDULE OF BUSINESS COMBINATION LIABILITIES 

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Changes in Business Combination Obligations

For the six months ended June 30, 2021, activity related to the Variable Shares and the Fixed Shares derivative liabilities, and other business combination obligations were as follows (in thousands):

SCHEDULE OF CHANGES IN BUSINESS COMBINATION OBLIGATIONS 

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Disposition of BWR and U.S. Retail Brands

In September 2020, the Company sold Brands Within Reach, LLC (“BWR”) and substantially all of the Company’s legacy U.S. retail brands (collectively, the “Divested Business”). Zachert Private Equity GmbH (the “Buyer”) issued to the Company an unsecured promissory note payable by BWR with a principal balance of $2.5 million that was issued in exchange for the Company’s $1.25 million cash payment and the issuance of shares of Common Stock with a fair value of $1.25 million. This promissory note bears interest at 10% per annum, matures in September 2023, and is fully guaranteed by the Buyer until the earlier of such time that (i) the promissory note is repaid in full, (ii) the Buyer makes equity contributions to BWR of at least $2.5 million, or (iii) BWR recognizes net income of at least $2.5 million for any 12-month period following the BWR closing date (the “Guaranty Note”). A portion of the consideration for the Guaranty Note was the issuance of approximately 692,000 shares of the Company’s Common Stock issued to the Buyer with an estimated fair value of $1.25 million. Accordingly, $1.25 million of the Guaranty Note was reflected as a reduction of stockholders’ equity and $1.25 million was included under the caption “Deposits and other” in the accompanying consolidated balance sheets as of December 31, 2020.

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

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

NOTE 4 — OTHER FINANCIAL INFORMATION

Inventories

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

SCHEDULE OF INVENTORIES 

Other Accrued Liabilities

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

SCHEDULE OF OTHER ACCRUED LIABILITIES 

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Depreciation and Amortization

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

 SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE

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

Gain (loss) on change in fair value of derivatives

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

 SCHEDULE OF LOSS FROM CHANGES IN FAIR VALUE OF DERIVATIVES

Severance and Restructuring Activities

On March 3, 2021, the Company and Gregory A. Gould, the former Chief Financial Officer of the Company, entered into a Modification and Transition Addendum to Employment Agreement and Indemnification Agreement (the “Gould Agreement”). The Gould Agreement amended an employment agreement with Mr. Gould, whereby he continued to serve as Chief Financial Officer of the Company until July 2, 2021 (the “Term”). As part of the transition, Mr. Gould was entitled to (i) a payment made in March 2021 for his 2020 performance bonus of $250,000, (ii) a target performance bonus of $650,000 for services through July 2, 2021, (iii) severance compensation of one year of base salary of $500,000 plus target bonus of $250,000 pursuant to his employment agreement, (iv) payment of health insurance premiums for one year, and (v) title to Company-owned automobiles and a laptop computer that have been transferred to Mr. Gould.

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

In April 2020, the Company initiated a restructuring plan designed to achieve selling, general and administrative cost reductions. This restructuring plan was primarily focused on reductions in marketing and other personnel. For the three months ended June 30, 2020, the Company implemented headcount reductions of approximately 100 employees that had estimated annualized compensation and benefit costs of $5.8 million. In connection with the termination of employees, the Company incurred severance costs of $0.9 million which are included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2020.

For the three and six months ended June 30, 2021 and 2020, activity affecting the accrued liability for severance benefits for all employees is summarized as follows (in thousands):

 SUMMARY OF ACTIVITY AFFECTING THE ACCRUED LIABILITY FOR SEVERANCE BENEFITS

Assets Held for Sale

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

Long-lived assets are classified as held for sale when the Company commits to a plan to sell the assets. Accordingly, the Company determined that the MOU qualifies as a commitment whereby accounting for the assets as held for sale is appropriate. Such assets are classified within current assets if there is reasonable certainty that the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated, and a measurement for impairment is performed to determine if there is any excess of carrying value over fair value less costs to sell. As of June 30, 2021, the Company determined that no impairment exists for the manufacturing equipment and the right-of-use asset whereby the aggregate net carrying value of $7.1 million is included as a current asset in the accompanying unaudited condensed consolidated balance sheet. The Company has also classified the entire operating lease liability of $4.7 million related to the leased facility as a current liability in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2021.

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 5 — LEASES

Operating Leases

The Company leases various office and warehouse facilities, vehicles and equipment under non-cancellable operating lease agreements that expire between July 2021 and March 2039. The Company has made accounting policy elections (i) to not apply the recognition requirements for short-term leases and (ii) for facility leases, when there are lease and non-lease components, such as common area maintenance charges, to account for the lease and non-lease components as a single lease component. For the three and six months ended June 30, 2021 and 2020, the Company did not incur any material amounts for variable and short-term lease expense. For the three months ended June 30, 2021 and 2020, the Company incurred operating lease expense of $2.8 million and $2.6 million, respectively. For the six months ended June 30, 2021 and 2020, the Company incurred operating lease expense of $5.8 million and $5.1 million, respectively.

As of June 30, 2021 and December 31, 2020, the weighted average remaining lease term under operating leases was 11.0 years and 11.5 years, respectively. As of June 30, 2021 and December 31, 2020, the weighted average discount rate for operating lease liabilities was 5.6% and 5.5%, respectively.

Impairment of Right-Of-Use Asset

In June 2019, the Company began attempting to sublease a portion of its right-of-use assets previously used for warehouse space that are no longer needed for current operations. As a result, impairment evaluations were completed during 2019 that resulted in the recognition of an impairment charge of $2.3 million. These evaluations were based on the expected time to obtain a suitable subtenant and current market rates for similar commercial properties. Due to longer than expected timing to obtain a subtenant, an updated impairment evaluation was completed in June 2020 that resulted in recognition of an additional impairment charge of $0.4 million for the three and six months ended June 30, 2020. The Company is continuing its efforts to obtain subtenants for this space.

Future Lease Payments

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

SUMMARY OF FUTURE MINIMUM LEASE PAYMENTS

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 6 — DEBT

Summary of Debt

As of June 30, 2021 and December 31, 2020, the Company’s debt consisted of the following (dollars in thousands):

SUMMARY OF DEBT 

Private Placement of Senior Notes

On November 30, 2020, the Company entered into a securities purchase agreement (the “November 2020 SPA”) for a 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 exercisable at $3.75 per share (the “Class A Warrants”), and (iv) Class B Warrants to purchase 750,000 shares of Common Stock exercisable at $5.75 per share (the “Class B Warrants,” and together with the Class A Warrants, the “Warrants”). The Warrants are indexed to the Company’s shares of Common Stock and otherwise meet the criteria for classification within stockholders’ equity. The closing for the private placement occurred on December 1, 2020. Please refer to Note 7 under the captions Private Placement of Units and Redeemable Common Stock for further discussion of the Warrants and the Commitment Shares.

The Senior Notes bear interest at an annual rate of 8.0% applied to the stated principal balance with accrued interest payable monthly in cash. As of the closing date, the aggregate discount related to the Senior Notes was approximately $8.5 million that resulted in a net carrying value of $23.9 million. The discount is being accreted to interest expense using the effective interest method that resulted in an overall effective interest rate of approximately 42.3% as of December 31, 2020.

For the months of February 2021 through April 2021, the holders of the Senior Notes were entitled to request that the Company make principal payments up to $1.0 million per month and these payments were made on a timely basis. Beginning in May 2021 and continuing for each subsequent month, the holders of the Senior Notes are entitled to request that the Company make principal payments up to $2.0 million per month. The holders of the Senior Notes requested principal payments of $1.0 million in May 2021 and $2.0 million in June 2021, and these payments were made on a timely basis. The maturity date of the Senior Notes is on December 1, 2022. However, if the holders of the Senior Notes exercise their rights to demand the maximum principal payments permitted in each future month, the Senior Notes will be repaid in full by August 2022. The Company 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 stated principal balance through December 1, 2021.

As a post-closing deliverable, the Company was required to provide certain historical financial statements of Ariix to the lenders by January 4, 2021. The required financial statements were not available by the deadline, which would have resulted in a default under the November 2020 SPA. The lenders agreed to amend the Senior Notes to extend the deadline in exchange for the issuance of 400,000 shares of Common Stock with a fair value of approximately $1.1 million as of the issuance date. These shares were subject to the same redemption rights as the Commitment Shares discussed in Note 7. The amendment fee was accounted for as a modification that resulted in an additional discount of $1.1 million related to the Senior Notes. This amendment fee and other lender-initiated changes that affect the timing and amount of principal payments are accounted for prospectively as a revision of the effective interest rate. Accordingly, as of June 30, 2021, the overall effective interest rate was approximately 46.8%, including the 8.0% stated rate.

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company was required to maintain restricted cash balances of $18.0 million as of December 31, 2020. 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, which is expected to occur during the second quarter of 2022. As of June 30, 2021, approximately $5.6 million of this restricted cash balance is classified as a current asset since those funds may be utilized to make principal payments that are classified within current maturities of long-term debt.

The obligations of the Company under the Senior Notes are secured by substantially all of the assets of the Company and its subsidiaries, including all personal property and all proceeds and products thereof, goods, contract rights and other general intangibles, accounts receivable, intellectual property, equipment, and deposit accounts and a lien on certain real estate. The Senior Notes contain certain restrictions and covenants, which restrict the Company’s ability to incur additional debt or make guarantees, sell assets, make investments or loans, make distributions or create liens or other encumbrances. The Senior Notes also require that the Company comply with certain financial covenants, including maintaining minimum cash, minimum adjusted EBITDA, minimum revenue, and a maximum ratio of cash in foreign bank accounts to cash in U.S. deposit accounts subject to account control agreements. As of June 30, 2021, the Company was in compliance with all covenants related to the Senior Notes. The Senior Notes contain customary events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults, material adverse effect defaults, change of management defaults, and a change in control. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become immediately due and payable and the contractual interest rate on the obligations increases from 8.0% to 12.0%.

PPP Loans

Pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company obtained a PPP loan (the “NewAge PPP Loan”) in April 2020 for approximately $6.9 million. In May 2020, Ariix obtained a PPP loan (the “Ariix PPP Loan”) for approximately $2.8 million, and the Company assumed this obligation in connection with the business combination discussed in Note 3. The PPP Loans are unsecured and guaranteed by the SBA, bear interest at a fixed rate of 1.0% per annum and provide for maturity dates on the second anniversary of the respective loan agreements. The Company and Ariix applied to their lenders to request forgiveness of their PPP Loans, with the amounts that may be forgiven 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. As discussed in Note 14, the Company was informed in July 2021 that forgiveness of its PPP Loans was approved by the SBA for an aggregate of approximately $9.7 million including accrued interest through June 30, 2021. 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.

The PPP Loans are being accounted for under Accounting Standards Codification (“ASC”) 470, Debt whereby interest expense was accrued at the contractual rate of 1.0% per annum. The Company will recognize forgiveness of the PPP Loans during the third quarter of 2021 when the Company was released of its obligation to repay the PPP Loans.

NOTE 7 — STOCKHOLDERS’ EQUITY

Authorized Shares of Capital Stock

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

NewAge, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Changes in Stockholders’ Equity

Changes in stockholders’ equity for the three months ended June 30, 2021 and 2020 were as follows (in thousands):

SCHEDULE OF CHANGES IN STOCKHOLDERS' EQUITY