Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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.” Our actual results may differ materially from
those described below. You should read the “Risk
Factors” section 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 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.
Overview
We are a Colorado-based
healthy beverage company engaged in the development and
commercialization of a portfolio of organic, natural and other
better-for-you healthy beverages. We market a full portfolio of
Ready-to-Drink (“RTD”) better-for-you beverages
including competitive offerings in the kombucha, tea, coffee,
functional waters, relaxation drinks, energy drinks, rehydrating
beverages, and functional medical beverage segments. We also offer
liquid dietary supplement products, including Tahitian Noni®
Juice, through a direct-to-consumer model using independent
distributors called independent product consultants
(“IPCs”). We differentiate our brands through superior
functional performance characteristics and ingredients and offer
products that are 100% organic and natural, with no high-fructose
corn syrup (“HFCS”), no genetically modified organisms
(“GMOs”), no preservatives, and only natural flavors,
fruits, and ingredients. We rank as one of largest healthy beverage
companies in the world as well as one of the fastest growing
beverage companies according to Beverage Industry Magazine annual
rankings and Markets and Markets. Our goal is to become the
world’s leading healthy beverage company, with leading brands
for consumers, leading growth for retailers and distributors, and
leading return on investment for shareholders. Our target market is
health conscious consumers, who are becoming more interested and
better educated on what is included in their diets, causing them to
shift away from less healthy options such as carbonated soft drinks
or other high caloric beverages and towards alternative beverage
choices. Consumer awareness of the benefits of healthier lifestyles
and the availability of heathier beverages is rapidly accelerating
worldwide, and we are capitalizing on that shift.
Recent Developments
East West Bank Loan Agreement
On March 29, 2019, we entered
into a Loan and Security Agreement (the “Loan
Agreement”) with East West Bank (“EWB”).
The Loan Agreement matures on March 29, 2023 and provides for (i) a
term loan in the aggregate principal amount of $15.0 million, which
may be increased to $25.0 subject to the satisfaction of certain
conditions (the “Term Loan”) and (ii) a $10.0 million
revolving loan facility (the “Revolving Loan
Facility”). At the closing, EWB funded $25.0 million to us
consisting of the $15.0 million Term Loan and $10.0 as an advance
under the Revolving Loan Facility.
Our obligations under
the Loan Agreement are secured by substantially all of our assets
and guaranteed by certain of our subsidiaries
.
The Loan Agreement requires compliance
with certain financial and restrictive covenants and
includes customary events of default. Key
financial covenants include maintenance of minimum Adjusted EBITDA
and a maximum Total Leverage Ratio (all as defined and set forth in
the Loan Agreement). During any periods when an event of default
occurs, the Loan Agreement provides for interest at a rate that is
3.0% above the rate otherwise applicable to such
obligations.
Borrowings outstanding under
the Loan Agreement will bear interest at the Prime Rate plus 0.25%.
However, if the Total Leverage Ratio (as defined in the Loan
Agreement) is equal to or greater than 1.50 to 1.00, borrowings
will bear interest at the Prime Rate plus 0.50%. We may voluntarily
prepay amounts outstanding under the Revolving Loan Facility on ten
business days’ prior notice to EWB without prepayment
charges. In the event the Revolving Loan Facility is terminated
prior to its maturity, we would be required to pay an early
termination fee in the amount of 0.50% of the revolving line.
Additional borrowing requests under the Revolving Loan Facility are
subject to various customary conditions precedent, including
satisfaction of a borrowing base test as more fully described in
the Loan Agreement.
The
Revolving Loan Facility also provides for an unused line fee equal
to 0.5% per annum of the undrawn portion. The Loan Agreement
includes a lockbox arrangement that requires that we direct our
customers to remit payments to a restricted bank account, whereby
all available funds are used to pay down the outstanding principal
balance under the Revolving Loan Facility.
Payments under the Term Loan are interest-only for
the first six months and are followed by principal and interest
payments amortized over the remaining term of the Term Loan. We may
elect to prepay the Term Loan before its maturity on 10 business
days’ notice to EWB subject to a prepayment fee of 2% for the
first year of the Term Loan and 1% for the second year of the Term
Loan.
No later than 120 days after the end of each
fiscal year, commencing with the fiscal year ending December 31,
2019, we are required to make a payment towards the outstanding
principal amount of the Term Loan in an amount equal to 35% of the
Excess Cash Flow (as defined in the Loan Agreement),
if the Total Leverage Ratio is less than 1.50 to
1.00 or (i) 50%
of the Excess Cash Flow
if the Total Leverage Ratio is greater than or
equal to 1.50 to 1.00
.
Reference is made to Note 3 to our
consolidated financial statements included in Item 8 of this Report
for a discussion of the Merger with Morinda entered into in
December 2018, and Note 8 for a discussion about the public
offering completed in November 2018. Additionally, reference is
made to Note 16 to our consolidated financial statements included
in Item 8 of this Report for a discussion of (i) a new Loan
Agreement for $25.0 million of funding with East West Bank entered
into on March 29, 2019, (ii) a
sale leaseback entered into on March
22, 2019 that is expected to result in net proceeds between $9.0
million and $12.0 million.
Siena Revolver
On
March 29, 2019, simultaneously with our entry into the new loan
facility with East West Bank discussed below, we repaid all
outstanding amounts under the Siena Revolver, including a
prepayment fee of $0.5 million.
Sale Leaseback
On March 22, 2019, we entered into an agreement
with a major Japanese real estate company resulting in the sale for
approximately $55 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 an initial noncancelable term of seven years,
with an option at our discretion to extend the lease term for 20
additional years. The monthly lease cost is ¥20 million
(approximately $181,000 as of March 22, 2019) for the initial
seven-year term.
In connection with this transaction, we
repaid the $2.9 million mortgage on the building, cancelled the
related interest rate swap agreement, and we are obligated to pay
$25.0 million to the former stockholders of Morinda to eliminate
the contingent financing liability incurred under the business
combination. After these payments, income taxes, post-closing
repair obligations, and transaction costs, the net proceeds from
the sale leaseback are expected to be between $9.0 million and
$12.0 million.
Our Business Model
We
market our RTD beverage products using a range of marketing
mediums, including in-store merchandising and promotions,
experiential marketing, events, and sponsorships, digital marketing
and social media, direct marketing, and traditional media including
print, radio, outdoor, and TV.
Our core business is to develop, market, sell, and
distribute healthy liquid dietary supplements and ready-to-drink
beverages. The beverage industry comprises $870 billion in annual
revenue according to Euromonitor and Booz & Company
and is highly competitive with three
to four major multibillion-dollar multinationals that dominate the
sector. We compete by differentiating our brands as healthier and
better-for-you alternatives that are natural, organic, and/or have
no artificial ingredients or sweeteners. Our brands include
Tahitian Noni Juice, TruAge, Xing Tea, Aspen Pure®, Marley,
Búcha® Live Kombucha, PediaAde, Coco Libre, BioShield,
and ‘NHANCED Recovery, all competing in the existing growth
and newly emerging dynamic growth segments of the beverage
industry. Morinda also has several additional consumer product
offerings, including a TeMana line of skin care and lip products, a
Noni + Collagen ingestible skin care product, wellness supplements,
and a line of essential oils.
Key Components of Consolidated Statements of
Operations
Net Revenue.
We recognize revenue when products are delivered and when title and
the risk of ownership passes to our 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 product costs and freight.
Since we use third-party suppliers to manufacture our products, we
don’t capitalize overhead as part of our
inventories.
Commissions.
Commissions earned by our sales and marketing personnel are charged
to expense in the same period that the related sales transactions
are recognized.
Selling, general and
administrative expenses.
Selling, general and administrative
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.
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. When we enter
business combinations, a portion of the consideration may be
contingent on future operating performance of the acquired
business. 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 is
reflected as an adjustment to our operating expenses in the period
that the change is determined.
Depreciation and
amortization expense.
Depreciation and amortization expense
consists of depreciation expense related to property, plant and
equipment, amortization expense related to leasehold improvements,
and amortization expense related to identifiable intangible
assets.
Interest expense.
Interest expense is incurred under our revolving credit facilities
and other debt obligations. The components of interest expense
include the amount of interest payable in cash at the stated
interest rate, make-whole applicable premium, accretion of debt
discounts and issuance costs using the effective interest method,
and the write-off of debt discounts and issuance costs if we prepay
the debt before the maturity date.
Loss on change in fair
value of embedded derivatives.
The Siena Revolver contains
features referred to as embedded derivatives that are required to
be bifurcated and recorded at fair value. Embedded derivatives
include requirements to pay default interest upon the existence of
an event of default and to pay “make-whole” interest
for certain mandatory and voluntary prepayments of the outstanding
principal balance under the Siena Revolver. We perform valuations
of the embedded derivatives on a quarterly basis. Changes in the
fair value of embedded derivatives are reflected as a
non
-
operating gain or loss
in our consolidated statements of operations.
Other income (expense),
net.
Other income (expense), net consists primarily of
interest income and non-operating expenses.
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.
Impairment losses related long-lived assets are generally reflected
as operating expenses in the period that an asset is determined to
be impaired.
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. Our provision for
income taxes consists only of foreign taxes for the periods
presented as we had no taxable income for U.S. federal or state
purposes. In addition, because of our lack of domestic earnings
history, the domestic net deferred tax assets have been fully
offset by a valuation allowance and no tax benefit has been
recognized.
Results of Operations
Our
consolidated statements of operations for the years ended December
31, 2018 and 2017, are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$
52,160
|
$
52,188
|
$
(28
)
|
0
%
|
Cost
of goods sold
|
42,865
|
39,788
|
3,077
|
8
%
|
|
|
|
|
|
Gross
profit
|
9,295
|
12,400
|
(3,105
)
|
-25
%
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Commissions
|
2,781
|
1,456
|
1,325
|
91
%
|
General
and administrative
|
20,288
|
15,387
|
4,901
|
32
%
|
Business
combination expenses:
|
|
|
|
|
Financial
advisor and other transaction costs
|
3,189
|
232
|
2,957
|
(1
)
|
Change
in fair value of earnout obligations
|
100
|
-
|
100
|
(1
)
|
Depreciation
and amortization expense
|
2,310
|
1,606
|
704
|
44
%
|
|
|
|
|
|
Total
operating expenses
|
28,668
|
18,681
|
9,987
|
53
%
|
|
|
|
|
|
Operating
loss
|
(19,373
)
|
(6,281
)
|
(13,092
)
|
208
%
|
|
|
|
|
|
Non-operating
income (expenses):
|
|
|
|
|
Interest
expense
|
(1,068
)
|
(228
)
|
(840
)
|
368
%
|
Loss
from change in fair value of embedded derivatives
|
(470
)
|
-
|
(470
)
|
(1
)
|
Other
income (expense), net
|
(151
)
|
(300
)
|
149
|
-50
%
|
Gain
from sale of building
|
-
|
3,273
|
(3,273
)
|
-100
%
|
|
|
|
|
|
Loss
before income taxes
|
(21,062
)
|
(3,536
)
|
(17,526
)
|
496
%
|
Income
tax expense
|
8,927
|
-
|
8,927
|
(1
)
|
|
|
|
|
|
|
$
(12,135
)
|
$
(3,536
)
|
$
(8,599
)
|
243
%
|
(1)
Percentage is not
applicable since no amounts were incurred for the year ended
December 31, 2017.
Comparison of Years ended December 31, 2018 and 2017
Net revenue.
Net
revenue was unchanged at $52.2 million for the years ended December
31, 2018 and 2017. Net revenue for the New Age segment decreased
from $52.2 million for the year ended December 31, 2017 to $48.3
million for the year ended December 31, 2018, a decrease of $3.8
million or 7%. The decrease in net revenue for the New Age segment
was primarily attributable to an increase in discounts and
allowances of $2.5 million which was driven by the negative impact
related to working capital constraints during 2018, which severely
constricted inventory levels and the Company’s ability to
meet the demands of major distributors and retailers. The other
major impact between gross and net revenue level was an increase in
billbacks and discounts from one of our major distributors where we
were impacted by significant charges on shipments we shorted
because of our inventory challenges, and we faced a high level of
changeover charges related to the Coco-Libre brand. For the year
ended December 31, 2018, the Morinda acquisition contributed net
revenue of $3.8 million for the post acquisition period from
December 21, 2018 through December 31, 2018.
Cost of goods sold.
Cost of goods sold increased from $39.8 million for the year ended
December 31, 2017 to $42.9 million for the year ended December 31,
2018, an increase of $3.1 million or 8%. Cost of goods sold for the
New Age segment increased from $39.8 million for the year ended
December 31, 2017 to $42.0 million for the year ended December 31,
2018, an increase of $2.2 million or 5%. This increase in cost of
goods sold was due to higher product costs since we were making
smaller production runs and buying raw materials in smaller amounts
on the spot market, so we were not getting economies of scale with
our product which was related to our working capital constraints
during 2018.
For the
year ended December 31, 2018, cost of goods sold for the Morinda
acquisition was $0.9 million for the post acquisition period from
December 21, 2018 through December 31, 2018.
Gross Profit.
Gross
profit decreased from $12.4 million for the year ended December 31,
2017 to $9.3 million for the year ended December 31, 2018, a
decrease of $3.1 million or 25%. Gross margin decreased from 24%
for the year ended December 31, 2017 to 18% for the year ended
December 31, 2018. As discussed below the decrease in gross margin
was primarily due to higher product costs on lower net revenues for
the New Age segment.
Gross
profit for the New Age segment decreased by $6.0 million for the
year ended December 31, 2018, primarily due to a decrease in net
revenue of $3.8 million and an increase in cost of goods sold of
$2.2 million as discussed above. As a result, gross margin for the
New Age segment decreased from 24% for the year ended December 31,
2017 to 13% for the year ended December 31, 2018. The lower gross
margins for the New Age segment in 2018 are not indicative of our
expectations for the year ending December 31, 2019, due to the
working capital constraints that negatively impacted our net
revenue and our production costs in 2018. As discussed under
Liquidity and Capital
Resources
below, the conditions that constrained the
availability of funding for working capital requirements have been
resolved by our debt and equity financing activities over the past
five months. Therefore, we expect improved margins for the New Age
segment beginning in the second quarter of 2019.
For the
period from December 21, 2018 through December 31, 2018, gross
profit for the Morinda acquisition was $0.9 million and gross
margin was 76%. For pre-acquisition periods in 2018 and 2017,
Morinda’s gross margin was approximately 80%. We don’t
believe the lower gross margin for the post-acquisition period is
indicative of a trend, but rather is a factor of the short period
of time and holidays during which Morinda’s results are
consolidated with ours.
Commissions.
Commissions increased from $1.5 million for the year ended December
31, 2017 to $2.8 million for the year ended December 31, 2018, an
increase of $1.3 million. This increase was due to the Morinda
acquisition which resulted in commissions of $1.5 million for the
post acquisition period from December 21, 2018 through December 31,
2018. Under Morinda’s business model, commissions typically
range between 38% and 40% of net revenue whereas commissions for
the New Age segment are typically about 3% of net
revenue.
Selling, general and
administrative expenses.
Selling, general and administrative
expenses increased from $15.4 million for the year ended December
31, 2017 to $20.3 million for the year ended December 31, 2018, an
increase of $4.9 million or 32%. This increase was primarily
attributable to (i) $1.5 million related to Morinda for the post
acquisition period from December 21, 2018 through December 31,
2018, (ii) an increase in other compensation and benefits of $1.4
million, (iii) an increase in stock-based compensation of $0.8
million, (iv) an increase in rent and occupancy costs of $0.5
million, and an increase in professional fees of $0.4
million.
Our
compensation and benefit costs and professional fees have increased
in 2018 due to the significant growth that resulted from three
acquisitions in 2017 and one acquisition in 2018. Due to the growth
of our business and our status as a public company, we expect these
costs will continue to increase as we address the accounting and
financial reporting requirements of a significantly more complex
business structure.
Business combination
expenses.
Acquisition-related transaction costs for
financial advisory services and professional fees associated with
the business combination are not included as a component of the
consideration transferred but are accounted for as expenses in the
periods in which such costs are incurred. Acquisition-related
transaction costs related to business combinations increased from
$0.2 million for the year ended December 31, 2017 to $3.2 million
for the year ended December 31, 2018, an increase of $3.0 million.
In connection with the acquisition of Morinda, we incurred
transaction costs of $3.2 million, including (i) payment of cash of
$1.1 million and issuance of 214,250 shares of Common Stock with a
fair value of $1.2 million to a financial advisor that assisted
with the consummation of the Merger, and (ii) professional fees and
other incremental and direct costs associated with the Merger of
$0.9 million. For the year ended December 31, 2017, we incurred
transaction costs of $0.2 million in connection with the Maverick
business combination.
In
addition, as part of the Marley transaction in 2017, we agreed to
make a one-time earnout payment of $1.25 million if revenue for the
Marley reporting unit is equal to or greater than $15.0 million
during any trailing twelve calendar month period after the closing.
The fair value of the earnout was valued using the weighted average
return on assets and amounted to $0.8 million on the closing date.
During 2018, we determined that the fair value of this earnout
obligation had increase to $0.9 million. Accordingly, we recognized
an expense of $0.1 million for the year ended December 31,
2018.
Depreciation and
amortization expense.
Depreciation and amortization expense
increased from $1.6 million for the year ended December 31, 2017 to
$2.3 million for the year ended December 31, 2018, an increase of
$0.7 million. This increase was due to (i) an increase of $0.5
million due to full year of amortization expense in 2018 related to
approximately $20.0 million of identifiable intangible assets
associated with the Maverick, PMC and Marley acquisitions that
closed in the first half of 2017, and (ii) approximately $0.2
million of depreciation and amortization related to the Morinda
acquisition for the post acquisition period from December 21, 2018
through December 31, 2018. Due to the Morinda acquisition, we
expect a significant increase in depreciation and amortization
expense for the year ending December 31, 2019.
Interest expense.
Interest expense increased from $0.2 million for the year ended
December 31, 2017 to $1.1 million for the year ended December 31,
2018, an increase of $0.9 million. The entire increase in interest
expense was attributable to a Senior Secured Convertible Promissory
Note with a principal balance of $4.75 million that was borrowed in
June 2018 and provided for a maturity date in June 2019. Due to the
early extinguishment of in August 2018, we recognized accretion for
all of the debt discount and issuance costs of $0.6 million for the
year ended December 31, 2018. In addition, we incurred interest
expense of $0.1 million and a make-whole prepayment fee of $0.2
million for the year ended December 31, 2018.
Loss on change in fair
value of embedded derivatives.
In August 2018, we entered
into the Siena Revolver that provides for borrowings up to $12.0
million.
The Siena Revolver includes
features that were determined to be embedded derivatives requiring
bifurcation and accounting as separate financial instruments. We
determined that embedded derivatives include the requirement to pay
(i) an early termination premium if the Siena Revolver is
terminated before the Maturity Date, and (ii) default interest at a
5.0% premium if events of default exist. An early termination
premium is required to be paid if Siena’s commitment to make
revolving loans is terminated prior to the Maturity Date in August
2021. The fee is equal to 4.00%, 2.25% and 1.25% of the $12.0
million commitment if termination occurs during the first, second
and third years after August 2018 closing date,
respectively.
As of
December 31, 2018, the fair value of these embedded derivatives was
$0.5 million which resulted in the recognition of a loss of $0.5
million for the year ended December 31, 2018. Increases in the fair
value of embedded derivatives result in losses that are recognized
when the likelihood increases that a future cash payment will be
required to settle an embedded derivative, whereas gains are
recognized when the fair value decreases. Decreases in fair value
occur when we become contractually obligated to pay an embedded
derivative (whereby the embedded derivative liability is
transferred to a contractual liability), or as the likelihood of a
future cash settlement decreases. The loss of $0.5 million for the
year ended December 31, 2018 was due to our assessment that the
probability of a prepayment event was likely before the first
anniversary of the Siena Revolver. On March 29, 2019, we terminated
the Siena Revolver with the proceeds of the East West Bank
financing discussed below under
Liquidity and Capital Resources
. As a
result, we incurred a prepayment fee of $480,000 that will be
recognized as an expense for the first quarter of 2019 and this
expense will be offset by a gain of $470,000 due to elimination of
the derivative.
Other income (expense),
net.
For the year ended December 31, 2017, we had net other
expense of $0.3 million as compared to the year ended December 31,
2018, when we had net other expense of $0.2 million.
Gain from sale of
building.
On January 10, 2017, we entered into an agreement
with an unaffiliated third party resulting in the sale for $8.9
million of the land and building that serves as our corporate
headquarters in Denver, Colorado. Concurrently with the sale, we
entered into a lease of this property for an initial term of ten
years, with two options to extend for successive five-year periods.
This transaction qualified as a sale under ASU 2016-02
(“
Leases
”),
whereby a gain of approximately $3.3 million was recognized for the
year ended December 31, 2017. For the year ended December 31, 2018,
we did not sell any of our property and equipment.
Income tax expense.
Due to a valuation allowance for our deferred income tax assets, we
did not recognize an income tax benefit for the year ended December
31, 2017. For the year ended December 31, 2018, we recognized an
income tax benefit of $8.9 million as a result of deferred income
tax liabilities of $9.9 million recorded in connection with the
Morinda business combination. We determined that our net operating
loss carryforwards will offset any income tax expense related the
deferred income tax liabilities for Morinda. Accordingly, we
recognized an $8.9 million deferred income tax benefit for the year
ended December 31, 2018.
Liquidity and Capital Resources
Overview
As of
December 31, 2018, we had cash and cash equivalents of $42.5
million and working capital of $40.9 million. For the year ended
December 31, 2018, we incurred a net loss of $12.1 million and cash
used in operating activities was $22.0 million.
We have
contractual obligations of approximately $50.8 million that are due
during the 12 months ending December 31, 2019. This amount includes
(i) payables to the former stockholders of Morinda for $34.0
million, (ii) operating lease payments of $6.3 million, (iii) open
purchase orders of $4.8 million, (iv) estimated payments due under
the Siena Revolver of $2.7 million, and (v) principal due under a
foreign mortgage for $1.3 million. Of the $50.8 million of
contractual obligations, $25.0 million is payable to the extent
that proceeds up to this amount are received in a sale leaseback
financing that closed on March 22, 2019, and that will be paid in
the second quarter of 2019. Accordingly, we will only be required
to satisfy $25.8 million of these contractual obligations from our
existing capital resources as the $25.0 million payable is netted
from the sales proceeds from the sale leaseback of our Japanese
building that is discussed in Note 16 to our consolidated financial
statements included in Item 8 of this Report. We expect the net
proceeds from the sale leaseback will range between $9.0 million
and $12.0 million.
Based
on our expectations for future growth in net revenue for the
Morinda and New Age segments, we believe our cash flow from
operating activities for the year ending December 31, 2019,
combined with (i) our existing cash resources of $42.5 million,
(ii) up to $12.0 million of net proceeds from the Japanese sale
leaseback, and (iii) net proceeds of approximately $22.4 million
from the East West Bank loan (net of payoff of the Siena Revolver)
as discussed below, will be sufficient to fund our working capital
requirements and the remainder of our net contractual obligations
of $19.1 million.
Siena Revolver
In August 2018, we entered into a loan and security agreement with
Siena Lending Group LLC (“Siena”) that provided for a
$12.0 million revolving credit facility (the “Siena
Revolver”) with a scheduled maturity date of August 10, 2021
(the “Maturity Date”). Outstanding borrowings provided
for interest at the greater of (i) 7.5% or (ii) the prime rate plus
2.75%. As of December 31, 2018, the effective interest rate was
8.25%. Beginning in November 2018, we were required to pay interest
on a minimum of $2.0 million of borrowings, regardless of whether
such funds had been borrowed. The Siena Revolver also provided for
an unused line fee equal to 0.5% per annum of the undrawn portion
of the $12.0 million commitment. The Siena Revolver was subject to
availability based on eligible accounts receivables and eligible
inventory of the Company.
As of December 31,
2018, the borrowing base calculation permitted total borrowings of
approximately $2.5 million. After deducting the outstanding
principal balance of $2.0 million, we had excess borrowing
availability of $0.5 million as of December 31, 2018.
Pursuant to the Siena Revolver, we
granted a security interest in substantially all assets and
intellectual property of the Company and its subsidiaries, except
for such assets owned by Morinda.
The Siena Revolver contained standard and customary events of
default including, but not limited to, maintaining compliance with
the financial and
non-financial
covenants set forth in the Siena
Revolver.
The financial covenants
required maintenance of a fixed charge coverage ratio of less than
1.1 if excess borrowing availability was less than $1.0 million,
and to maintain minimum liquidity of $2.0 million. The fixed charge
coverage ratio compares EBITDA, net of unfinanced capital
expenditures, to fixed charges for the latest quarterly reporting
period. As of December 31, 2018, we were in compliance with the
financial covenants. The
Siena
Revolver
also limited or
prohibited us from paying dividends, incurring additional debt,
selling significant assets, or merging with other entities without
the consent of the lenders.
The
Siena Revolver included a lockbox arrangement that required that we
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 Siena
Revolver.
On March 29, 2019, simultaneously with our entry into the new loan
facility with East West Bank discussed below, we repaid all
outstanding amounts under the Siena Revolver, including a
prepayment fee of $0.5 million.
East West Bank Loan Agreement
On March 29, 2019, we entered into a Loan and Security Agreement
(the “Loan Agreement”) with East West Bank
(“EWB”). The Loan Agreement matures on March 29,
2023 and provides for (i) a term loan in the aggregate principal
amount of $15.0 million, which may be increase to $25.0 subject to
the satisfaction of certain conditions (the “Term
Loan”) and (ii) a $10.0 million revolving loan facility (the
“Revolving Loan Facility”). At the closing, EWB funded
$25.0 million to us consisting of the $15.0 million Term Loan and
$10.0 as an advance under the Revolving Loan Facility.
Our
obligations under the Loan Agreement are secured by substantially
all of our assets and guaranteed by certain of our
subsidiaries
.
The Loan
Agreement requires compliance with certain financial and
restrictive covenants and
includes
customary events of default. Key financial covenants include
maintenance of minimum Adjusted EBITDA and a maximum Total Leverage
Ratio (all as defined and set forth in the Loan Agreement). During
any periods when an event of default occurs, the Loan Agreement
provides for interest at a rate that is 3.0% above the rate
otherwise applicable to such obligations.
Borrowings outstanding under the Loan Agreement will bear interest
at the Prime Rate plus 0.25%. However, if the Total Leverage Ratio
(as defined in the Loan Agreement) is equal to or greater than 1.50
to 1.00, borrowings will bear interest at the Prime Rate plus
0.50%. We may voluntarily prepay amounts outstanding under the
Revolving Loan Facility on ten business days’ prior notice to
EWB without prepayment charges. In the event the Revolving Loan
Facility is terminated prior to its maturity, we would be required
to pay an early termination fee in the amount of 0.50% of the
revolving line. Additional borrowing requests under the Revolving
Loan Facility are subject to various customary conditions
precedent, including satisfaction of a borrowing base test as more
fully described in the Loan Agreement.
The Revolving Loan Facility also provides for an
unused line fee equal to 0.5% per annum of the undrawn portion. The
Loan Agreement includes a lockbox arrangement that requires that we
direct our customers to remit payments to a restricted bank
account, whereby all available funds are used to pay down the
outstanding principal balance under the Revolving Loan
Facility.
Payments under the Term Loan are interest-only for the first six
months and are followed by principal and interest payments
amortized over the remaining term of the Term Loan. We may elect to
prepay the Term Loan before its maturity on 10 business days’
notice to EWB subject to a prepayment fee of 2% for the first year
of the Term Loan and 1% for the second year of the Term
Loan.
No later than 120 days after the end of each
fiscal year, commencing with the fiscal year ending December 31,
2019, we are required to make a payment towards the outstanding
principal amount of the Term Loan in an amount equal to 35% of the
Excess Cash Flow (as defined in the Loan Agreement),
if the Total Leverage Ratio is less than 1.50 to
1.00 or (i) 50%
of the Excess Cash Flow
if the Total Leverage Ratio is greater than or
equal to 1.50 to 1.00
.
Cash Flows Summary
Presented below is
a summary of our operating, investing and financing cash flows (in
thousands):
|
|
|
|
Net cash provided
by (used in):
|
|
|
|
Operating
activities
|
$
(21,831
)
|
$
(8,411
)
|
$
(13,420
)
|
Investing
activities
|
(29,438
)
|
6,227
|
(35,665
)
|
Financing
activities
|
96,401
|
1,940
|
94,461
|
Cash Flows Provided by Operating Activities
For the
years ended December 31, 2018 and 2017, net cash flows used in
operating activities amounted to $21.8 million and $8.4 million,
respectively. The key components in the calculation of our cash
used in operating activities for the years
ended December 31, 2018 and 2017, are as
follows (in thousands):
|
|
|
|
|
|
|
|
Net
loss
|
$
(12,135
)
|
$
(3,536
)
|
$
(8,599
)
|
Deferred
income tax benefit
|
(8,927
)
|
-
|
(8,927
)
|
Non-cash
and non-operating expenses, net
|
7,596
|
163
|
7,433
|
Changes
in operating assets and liabilities, net
|
(8,365
)
|
(5,038
)
|
(3,327
)
|
Total
|
$
(21,831
)
|
$
(8,411
)
|
$
(13,420
)
|
For the
year ended December 31, 2018, our net loss of $12.1 million and a
non-cash deferred income tax benefit of $8.9 million resulted in
combined negative operating cash flow of $21.1 million. However,
non-cash expenses partially mitigated this impact by $7.6 million.
For the year ended December 31, 2018, non-cash expenses of $7.6
million included depreciation and amortization expense of $2.3
million, stock-based compensation expense of $2.5 million,
acquisition costs settled in shares of Common Stock for $1.2
million, accretion and amortization of debt discount and issuance
costs of $0.8 million, and a loss from change in fair value of
embedded derivatives of $0.5 million. Additionally, a cash expense
for make-whole applicable premium of $0.2 million was classified as
a financing cash outflow since it related to the prepayment of
debt.
For the
year ended December 31, 2018, changes in operating assets and
liabilities used $8.4 million of operating cash flows including (i)
an increase in inventories of $3.4 million, (ii) an increase in
prepaid expenses and other assets of $1.8 million, and (iii) an
increase in accounts payable and accrued liabilities of $4.4
million. These uses of cash total $9.6 million and were partially
offset by cash collections that resulted in a decrease in accounts
receivable of $1.3 million.
For the
year ended December 31, 2017, cash flows used in operating
activities amounted to $8.4 million. While we recognized a net loss
of $3.5 million for the year ended December 31, 2017, net non-cash
expenses of $0.2 million mitigated the cash impact of our net loss.
For the year ended December 31, 2017, non-cash expenses amounted to
$3.4 million including depreciation and amortization expense of
$1.6 million, stock-based compensation expense of $1.7 million, and
accretion and amortization of debt discount and issuance costs of
$0.1 million. These non-cash expenses of approximately $3.4 million
were partially offset by a $3.3 million gain from sale of our
building in Denver, Colorado.
For the
year ended December 31, 2017, changes in operating assets and
liabilities used $5.0 million of operating cash flows including (i)
an increase in accounts receivable of $2.3 million, (ii) an
increase in inventories of $0.3 million, (iii) an increase in
prepaid expenses and other assets of $0.5 million, and (iii) an
increase in accounts payable and accrued liabilities of $2.0
million.
Cash Flows Used in Investing Activities
Cash
used in investing activities was primarily driven by three business
combinations in our New Age segment that were completed in 2017 and
the Morinda segment business combination in 2018. For the year
ended December 31, 2018, our principal use of cash in investing
activities resulted from a cash payment of $75.0 million to
purchase the Morinda segment in December 2018. This cash payment
was offset by the cash, cash equivalents and restricted cash that
we acquired from Morinda for a total of $46.3 million. The net
amount of cash paid to acquire the Morinda segment of $28.7 million
is reflected as an investing cash outflow for the year ended
December 31, 2018. For the year ended December 31, 2018, we also
made capital expenditures primarily for machinery and equipment for
$0.7 million. Of the $0.7 million of capital expenditures,
approximately $0.6 million related to our Morinda
segment.
For the
year ended December 31, 2017, our principal use of cash in
investing activities resulted from a cash payment of $2.0 million
to acquire the Maverick reporting unit in March 2017. For the year
ended December 31, 2017, we also made capital expenditures
primarily for machinery and equipment in our New Age segment for
$0.7 million.
Cash Flows from Financing Activities
Our
financing activities provided net cash proceeds of $1.9 million for
the year ended December 31, 2017 as compared to $96.4 million for
the year ended December 31, 2018. For the year ended December 31,
2018, the principal sources of cash from our financing activities
consisted of (i) $99.9 million from four public offerings that
resulted in the issuance of an aggregate of 34.7 million shares of
our Common Stock, (ii) $5.0 million for borrowings under the Siena
Revolver, and (iii) $4.6 million from a convertible debt financing
in June 2018. These financing cash proceeds totaled $109.5 million
and were partially offset by cash payments for (i) principal paid
under the Siena Revolver of $3.0 million, (ii) principal and
make-whole premium in August 2018 to repay the convertible debt
financing for $4.9 million, (iii) payment to terminate our previous
revolver with U.S. Bank for $2.0 million in June 2018, (iv) payment
of $2.2 million for incremental and direct offering costs
associated with the public offerings, and (v) payment of debt
issuance costs associated with the Siena Revolver for $0.6
million.
For the
year ended December 31, 2017, net cash provided by financing
activities was primarily attributable to a public offering in
February 2017 that resulted net proceeds of $15.4 million for the
issuance of an aggregate of 4.9 million shares of our Common Stock.
The other sources of cash from our financing activities in 2017
resulted in cash proceeds of $2.0 million from the U.S. Bank
Revolver that was entered into in July 2017, and proceeds from the
exercise of warrants for $0.1 million. These sources of cash from
financing activities total $17.5 million and were partially offset
by (i) principal payments to repay a previous revolving line
of credit for $5.7 million, (ii) principal payments of $4.8
million under a mortgage that was repaid upon the sale of our
building in Denver, Colorado, (iii) principal payments of $4.5
million under a note payable to the former owners of Xing Beverage
LLC that was acquired in 2016, and (iv) principal payments on other
installment notes payable of $0.6 million.
Contractual Obligations
The
following table summarizes our contractual obligations on an
undiscounted basis as of December 31, 2018, and the period in
which each contractual obligation is due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
$
6,328
|
$
4,480
|
$
3,040
|
$
2,672
|
$
2,261
|
$
5,611
|
$
24,392
|
Earn-outs
in business combinations:
|
|
|
|
|
|
|
|
Morinda
(1)
|
-
|
13,134
|
-
|
-
|
-
|
-
|
13,134
|
Marley (2)
|
-
|
-
|
625
|
313
|
312
|
-
|
1,250
|
Payables
to former Morinda stockholders:
|
|
|
|
|
|
|
|
Excess working capital (EWC)
(3)
|
9,000
|
5,463
|
-
|
-
|
-
|
-
|
14,463
|
Contingent on financing event
(4)
|
25,000
|
-
|
-
|
-
|
-
|
-
|
25,000
|
Siena Revolver
(5)
:
|
|
|
|
|
|
|
|
Principal
balance
|
2,000
|
-
|
-
|
-
|
-
|
-
|
2,000
|
Interest
expense
|
41
|
-
|
-
|
-
|
-
|
-
|
41
|
Collateral
monitoring fees
|
93
|
-
|
-
|
-
|
-
|
-
|
93
|
Early
termination penalty
|
480
|
-
|
-
|
-
|
-
|
-
|
480
|
Mortgage
payable to foreign bank
|
1,275
|
1,353
|
-
|
-
|
-
|
-
|
2,628
|
Installment
notes payable
|
54
|
12
|
-
|
-
|
-
|
-
|
66
|
Employment agreements
(6)
|
1,650
|
-
|
-
|
-
|
-
|
-
|
1,650
|
Open
purchase orders
|
4,796
|
-
|
-
|
-
|
-
|
-
|
4,796
|
|
|
|
|
|
|
|
|
Total
|
$
50,717
|
$
24,442
|
$
3,665
|
$
2,985
|
$
2,573
|
$
5,611
|
$
89,993
|
__________________
(1)
Represents
the fair value of earnout consideration under the Series D
Preferred Stock as discussed further in Note 3 to the consolidated
financial statements included in Item 8 of this Report. The cash
payment is due in the second quarter of 2020.
(2)
Represents
the fair value of earnout consideration related to the Marley
acquisition as discussed further in Note 3 to the consolidated
financial statements included in Item 8 of this Report. The
one-time cash payment of $1.25 million is required at such time as
revenue for the Marley reporting unit is equal to or greater than
$15.0 million during any trailing twelve calendar month period
after the closing. Payment for 50% of the $1.25 million is due
within 15 days after the month in which the earnout payment is
triggered, 25% is payable one year after the first payment, and the
remaining 25% is payable two years after the first payment. The
timing of payment is based on our current expectations that the net
revenue threshold will be triggered during the year ending December
31, 2021.
(3)
Represents
Excess Working Capital payments to Morinda’s stockholders as
discussed further in Note 3 to the consolidated financial
statements included in Item 8 of this Report. The cash payment is
due for $1.0 million in April 2019, $8.0 million in July 2019, and
the remainder of $5.5 million is payable in July 2020.
(4)
As
discussed further in Note 3 to the consolidated financial
statements included in Item 8 of this Report, Morinda agreed to pay
its former stockholders up to $25.0 million from the net proceeds
of a sale leaseback financing event to be completed after the
Closing Date. The closing for this financing occurred on March 22,
2019, whereby the entire $25.0 million will be payable to
Morinda’s former stockholders during the second quarter of
2019.
(5)
While the Siena
Revolver was not scheduled to mature until August 2021, we
terminated the facility on March 29, 2019. Accordingly, all amounts
due are shown in 2019 and for purposes of the calculation of
interest expense and the early termination penalty, the payments
shown give effect to the termination on March 29, 2019. As
discussed in Note 16 to our consolidated financial statements
included in Item 8 of this Report the Siena Revolver was replaced
with a new Loan Agreement for $25.0 million with East West Bank
which is excluded from this table since it was entered into on
March 29, 2019.
(6)
Consists of base
salary payable to five individuals under employment agreements that
renew annually for successive one-year terms, unless terminated by
either party.
Off-Balance Sheet Arrangements
During
the periods presented, 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.
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.
Goodwill and Intangible Assets
Goodwill
represents the excess of the purchase price of acquired businesses
over the estimated fair value of the identifiable net assets
acquired. Goodwill and other intangibles with indefinite useful
lives are not amortized but tested for impairment annually or more
frequently when events or circumstances indicates 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. 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.
Identifiable
intangible assets acquired in business combinations are recorded at
the estimated acquisition date fair value. Finite lived intangible
assets are amortized over the shorter of the contractual life or
their estimated useful life using the straight-line method, which
is determined by identifying the period over which the cash flows
from the asset are expected to be generated.
Impairment of Long-lived Assets
Long-lived assets
are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. Impairment exists for property and equipment and
identifiable intangible assets if the carrying amounts of such
assets exceed the estimates of future net undiscounted cash flows
expected to be generated by such assets. An impairment charge is
recognized for the amount by which the carrying amount of the
asset, or asset group, exceeds its fair value.
Revenue Recognition
We
recognize revenue when our performance obligations are satisfied.
Our primary performance obligation (the distribution and sale of
beverage products) is satisfied upon the shipment or delivery of
products to our customers, which is also when control is
transferred. Merchandising activities that are performed after a
customer obtains control of the product, are accounted for as
fulfillment of our performance obligation to ship or deliver
product to our customers and are recorded in selling, general and
administrative expenses. Merchandising activities are immaterial in
the context of our contracts.
The
transfer of control of products to our customers is typically based
on written sales terms that do not allow for a right of return.
However, our policy for DSD and certain chilled products is to
remove and replace damaged and out-of-date products from store
shelves to ensure that consumers receive the product quality and
freshness they expect. Similarly, our policy for certain
warehouse-distributed products is to replace damaged and
out-of-date products. As a result, we record reserves, based on
estimates, for anticipated damaged and out-of-date
products.
Payments
received for undelivered or back-ordered products are recorded as
deferred revenue. Our policy is to defer revenue related to
distributor convention fees, payments received on products ordered
in the current period but not delivered until the subsequent
period, initial independent product consultants
(“IPCs”) fees, IPC renewal fees and internet
subscription fees until the products or services have been
provided.
Stock-Based Compensation
We
measure the cost of employee and director services received in
exchange for all equity awards granted, including stock options,
based on the fair market value of the award as of the grant date.
We compute the fair value of options using the Black-Scholes-Merton
(“BSM”) option pricing model. We recognize the cost of
the equity awards over the period that services are provided to
earn the award, usually the vesting period. For awards granted
which contain a graded vesting schedule, and the only condition for
vesting is a service condition, compensation cost is recognized as
an expense on a straight-line basis over the requisite service
period as if the award was, in substance, a single award. We
recognize the impact of forfeitures in the period that the
forfeiture occurs, rather than estimating the number of awards that
are not expected to vest in accounting for stock-based
compensation.
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 (“FASB”) or other
standard setting bodies that are adopted by us as of the specified
effective date. Unless otherwise discussed, 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
To
provide investors and others with additional information regarding
our results, we have disclosed certain non-GAAP financial measures
as follows:
Gross Revenue
is net
revenue plus deductions for discounts and allowances (net of
recoveries). Gross revenue is a key operational metric for our
business because this is how we believe investors and competitors
measure us and other beverage companies as with additional scale
distributors and retails will have less ability to force discounts
and allowances on smaller companies in the market which will help
identify our full value to an investor, competitor or potential
acquire.
EBITDA
is
net loss adjusted to exclude interest expense, income tax expense,
and depreciation and amortization expense.
Adjusted
EBITDA
is EBITDA
adjusted to exclude business combination expenses, stock-based
compensation expense, losses on changes in the fair value of
embedded derivatives, other non-operating income and expenses, and
gains and losses from the sale of long-lived assets.
The
primary purpose of using non-GAAP financial measures is to provide
supplemental information that we believe may prove 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. The calculation of our Non-GAAP Financial
Measures is presented below for the years ended December 31, 2018
and 2017:
|
|
|
|
|
|
Gross Revenue:
|
|
|
Net
revenue
|
$
52,160
|
$
52,188
|
Non-GAAP
adjustment:
|
|
|
Discounts
and allowances, net of recoveries
|
6,959
|
4,448
|
|
|
|
|
$
59,119
|
$
56,636
|
|
|
|
|
|
|
Non-GAAP EBITDA and Adjusted EBITDA reconciliation:
|
|
|
Net
loss
|
$
(12,135
)
|
$
(3,536
)
|
Non-GAAP
adjustments:
|
|
|
Interest
expense
|
1,068
|
228
|
Income
tax benefit
|
(8,927
)
|
-
|
Depreciation
and amortization expense
|
2,310
|
1,606
|
|
|
|
EBITDA
|
(17,684
)
|
(1,702
)
|
Non-GAAP
adjustments:
|
|
|
Business
combination financial advisor and other transaction
costs
|
3,189
|
232
|
Stock-based
compensation expense
|
2,533
|
1,731
|
Loss
from change in fair value of embedded derivatives
|
470
|
-
|
Other
expense, net
|
151
|
300
|
Gain
from sale of building
|
-
|
(3,273
)
|
|
|
|
|
$
(11,341
)
|
$
(2,712
)
|
Non-GAAP Gross Revenue.
For the calculation of Non-GAAP
gross revenue, we exclude selling discounts and allowances when
evaluating the gross amount of our revenue. Our gross revenue is an
important metric because this is how we believe investors and
competitors measure us and other beverage companies since with
additional scale distributors and retailers will have less ability
to force discounts and allowances on smaller companies in the
market, which will help identify our full value to an investor,
competitor or potential acquirer.
EBITDA and Adjusted EBITDA.
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:
Business Combination Expenses:
Financial advisory fees, due diligence costs and other professional
fees incurred in connection with business combinations are
excluded, them since they do not relate to our core business
activities.
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.
Loss on Change in Fair Value of Embedded
Derivatives:
Our Siena Revolver credit facility includes
features that were determined to be embedded derivatives requiring
bifurcation and accounting as separate financial instruments. We
have excluded this loss related to the changes in fair value of
embedded derivatives given the nature of the fair value
requirements. We are not able to manage these amounts as part of
our business operations nor are the losses part of our core
business activities, so we have excluded them.
Other Non-operating Income and Expense:
Other non-operating income and expenses are excluded since they
typically do not relate to our core business
activities.
Gain from the Sale of Long-lived
Assets:
Gain from the sale of buildings and other long-lived
assets are excluded since they do not relate to our core business
activities.
Item 8. Financial
Statements and Supplementary Data.
TABLE OF CONTENTS
|
Page
|
Report of
Independent Registered Public Accounting
Firm
|
45
|
Financial
Statements
:
|
|
Consolidated
balance sheets as of December 31, 2018 and 2017
|
46
|
Consolidated statements of
operations and comprehensive loss
for
the years ended December 31, 2018 and 2017
|
47
|
Consolidated statements of
stockholders’ equity for the years ended
December
31, 2018 and 2017
|
48
|
Consolidated statements of
cash flows for the years ended December 31, 2018 and
2017
|
49
|
Notes to consolidated
financial statements
|
51
|
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders
New Age
Beverages Corporation
Opinion on the Consolidated Financial Statements
We have
audited the accompanying consolidated balance sheets of New Age
Beverages Corporation (the Company) as of December 31, 2018 and
2017, and the related consolidated statements of operations and
comprehensive loss, stockholders’ equity, and cash flows for
each of the years in the two-year period ended December 31, 2018,
and the related notes (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, 2018 and 2017, and the results of its
operations and its cash flows for each of the years in the two-year
period ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of
America.
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 Public Company
Accounting Oversight Board (United States) (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 audits to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
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.
/s/
Accell Audit & Compliance, P.A.
We have
served as the Company’s auditor since 2016.
Tampa,
Florida
April
1, 2019
NEW AGE BEVERAGES CORPORATION
Consolidated Balance Sheets
December 31, 2018 and 2017
(In thousands, except par value per share amounts)
ASSETS
|
|
|
Current assets:
|
|
|
Cash
and cash equivalents
|
$
42,517
|
$
285
|
Accounts
receivable, net of allowance of $134 and $52,
respectively
|
9,837
|
7,462
|
Inventories
|
37,148
|
7,042
|
Prepaid
expenses and other
|
6,473
|
1,435
|
Total
current assets
|
95,975
|
16,224
|
|
|
|
Long-term assets:
|
|
|
Identifiable
intangible assets, net
|
67,830
|
23,556
|
Property
and equipment, net
|
57,281
|
1,895
|
Goodwill
|
31,514
|
21,230
|
Right-of-use lease
assets
|
18,489
|
4,065
|
Deferred income
taxes
|
8,908
|
-
|
Restricted cash and
other
|
6,935
|
702
|
Total
assets
|
$
286,932
|
$
67,672
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
Current liabilities:
|
|
|
Accounts payable
|
$
8,960
|
$
4,370
|
Accrued liabilities
|
34,019
|
2,394
|
Current portion of business combination
liabilities
|
8,718
|
-
|
Current maturities of long-term debt
|
3,369
|
3,549
|
Total
current liabilities
|
55,066
|
10,313
|
|
|
|
Long-term liabilities:
|
|
|
Business
combination liabilities, net of current portion
|
43,412
|
800
|
Long-term
debt, net of current maturities
|
1,325
|
-
|
Right-of-use
lease liability, net of current portion
|
13,686
|
3,821
|
Deferred
income taxes
|
9,747
|
-
|
Other
|
9,160
|
-
|
Total
liabilities
|
132,396
|
14,934
|
|
|
|
Commitments and
contingencies
(Note
11)
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
Series
B Preferred stock, $0.001 par value per share. Authorized 300
shares;
|
|
|
169
shares issued and outstanding in 2017 (none in 2018)
|
-
|
-
|
Common
Stock; $0.001 par value. Authorized 100,000 shares; issued and
outstanding
|
|
|
75,067 and
35,
172 shares as of December 31, 2018
and 2017, respectively
|
75
|
35
|
Additional
paid-in capital
|
176,471
|
63,204
|
Accumulated
other comprehensive income
|
626
|
-
|
Accumulated
deficit
|
(22,636
)
|
(10,501
)
|
Total
stockholders’ equity
|
154,536
|
52,738
|
Total
liabilities and stockholders’ equity
|
$
286,932
|
$
67,672
|
The
accompanying notes are an integral part of these consolidated
financial statements.
NEW AGE BEVERAGES CORPORATION
Consolidated Statements of Operations and Comprehensive
Loss
Years Ended
December 31,
2018 and 2017
(In thousands, except loss per share amounts)
|
|
|
Net
revenue
|
$
52,160
|
$
52,188
|
Cost
of goods sold
|
42,865
|
39,788
|
Gross
profit
|
9,295
|
12,400
|
|
|
|
Operating
expenses:
|
|
|
Commissions
|
2,781
|
1,456
|
Selling,
general and administrative
|
20,288
|
15,387
|
Business
combination expenses:
|
|
|
Financial
advisor and other transaction costs
|
3,189
|
232
|
Change
in fair value of earnout obligations
|
100
|
-
|
Depreciation
and amortization expense
|
2,310
|
1,606
|
Total
operating expenses
|
28,668
|
18,681
|
Operating
loss
|
(19,373
)
|
(6,281
)
|
|
|
|
Non-operating
income (expenses):
|
|
|
Interest
expense
|
(1,068
)
|
(228
)
|
Loss
from change in fair value of embedded derivatives
|
(470
)
|
-
|
Other
expense, net
|
(151
)
|
(300
)
|
Gain
from sale of building
|
-
|
3,273
|
Loss
before income taxes
|
(21,062
)
|
(3,536
)
|
Income tax
benefit
|
8,927
|
-
|
Net loss
|
(12,135
)
|
(3,536
)
|
Other comprehensive
income:
|
|
|
Foreign
currency translation adjustments, net of tax
|
626
|
-
|
Comprehensive
loss
|
$
(11,509
)
|
$
(3,536
)
|
|
|
|
Net
loss per share attributable to common stockholders (basic and
diluted)
|
$
(0.26
)
|
$
(0.12
)
|
Weighted
average number of shares of Common Stock outstanding (basic and
diluted)
|
46,448
|
30,617
|
The accompanying
notes are an integral part of these consolidated financial
statements.
NEW AGE BEVERAGES CORPORATION
Consolidated Statements of Stockholders’ Equity
Years Ended
December 31,
2018 and 2017
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2016
|
535
|
$
1
|
21,900
|
$
22
|
$
11,821
|
$
-
|
$
(6,965
)
|
$
4,879
|
Issuance of Common Stock in:
|
|
|
|
|
|
|
|
|
Public offering
|
-
|
-
|
4,929
|
5
|
15,394
|
-
|
-
|
15,399
|
Business combinations:
|
|
|
|
|
|
|
|
|
Maverick Brands,
LLC
|
-
|
-
|
2,200
|
2
|
9,084
|
-
|
-
|
9,086
|
Marley Beverage Company,
LLC
|
-
|
-
|
3,000
|
3
|
18,597
|
-
|
-
|
18,600
|
PMC Holdings,
Inc.
|
-
|
-
|
1,200
|
1
|
5,495
|
-
|
-
|
5,496
|
Restricted stock awards and other services
|
-
|
-
|
645
|
1
|
2,501
|
-
|
-
|
2,502
|
Stock-based compensation
|
-
|
-
|
-
|
-
|
162
|
-
|
-
|
162
|
Issuance of shares upon exercise of warrants
|
-
|
-
|
373
|
-
|
150
|
-
|
-
|
150
|
Conversion of Series B Preferred Stock
|
(116
)
|
(1
)
|
925
|
1
|
-
|
-
|
-
|
-
|
Recission of
Series A Preferred Stock
|
(250
)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,536
)
|
(3,536
)
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2017
|
169
|
-
|
35,172
|
35
|
63,204
|
-
|
(10,501
)
|
52,738
|
Issuance of Common Stock for:
|
|
|
|
|
|
|
|
|
Conversion of Series B Preferred
Stock
|
(169
)
|
-
|
1,354
|
1
|
(1
)
|
-
|
-
|
-
|
Conversion of Series B promissory
notes
|
-
|
-
|
794
|
1
|
1,487
|
-
|
-
|
1,488
|
Public offerings, net of offering
costs
|
-
|
-
|
34,684
|
35
|
97,606
|
-
|
-
|
97,641
|
Debt issuance costs
|
-
|
-
|
226
|
-
|
470
|
-
|
-
|
470
|
Transaction costs in business
combination
|
-
|
-
|
214
|
-
|
1,166
|
-
|
-
|
1,166
|
Cashless exercise of stock options and
warrants
|
-
|
-
|
449
|
1
|
(1
)
|
-
|
-
|
-
|
Grant of restricted stock awards, net of
forfeitures
|
-
|
-
|
158
|
-
|
353
|
-
|
-
|
353
|
Common Stock
exchanged for Series C Preferred Stock
|
7
|
-
|
(6,900
)
|
(7
)
|
-
|
-
|
-
|
(7
)
|
Series C
Preferred Stock converted to Common Stock
|
(7
)
|
-
|
6,900
|
7
|
-
|
-
|
-
|
7
|
Common Stock
issued in business combination with Morinda
|
-
|
-
|
2,016
|
2
|
10,968
|
-
|
-
|
10,970
|
Stock-based
compensation expense related to stock options
|
-
|
-
|
-
|
-
|
1,219
|
-
|
-
|
1,219
|
Net change in other comprehensive
income
|
-
|
-
|
-
|
-
|
-
|
626
|
-
|
626
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(12,135
)
|
(12,135
)
|
Balances,
December 31, 2018
|
-
|
$
-
|
75,067
|
$
75
|
$
176,471
|
$
626
|
$
(22,636
)
|
$
154,536
|
The accompanying notes are an
integral part of these consolidated financial
statements.
NEW AGE BEVERAGES CORPORATION
Consolidated Statements of Cash Flows
Years Ended
December 31,
2018 and 2017
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$
(12,135
)
|
$
(3,536
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation
and amortization
|
2,310
|
1,606
|
Accretion
and amortization of debt discount and issuance costs
|
780
|
99
|
Change
in fair value of contingent consideration payable in business
combination
|
100
|
-
|
Loss
from change in fair value of embedded derivatives
|
470
|
-
|
Stock-based
compensation expense
|
2,533
|
1,731
|
Deferred
income taxes
|
(8,927
)
|
-
|
Issuance
of Common Stock for:
|
|
|
Acquisition
costs related to business combination
|
1,166
|
-
|
Accrued
interest
|
61
|
-
|
Make-whole
premium on early payment of Convertible Note
|
176
|
-
|
Gain
from sale of building
|
-
|
(3,273
)
|
Changes
in operating assets and liabilities, net of effects of business
combinations:
|
|
|
Accounts
receivable
|
1,286
|
(2,301
)
|
Inventories
|
(3,374
)
|
(299
)
|
Prepaid
expenses, deposits and other
|
(1,838
)
|
(470
)
|
Accounts
payable
|
(3,583
)
|
(1,779
)
|
Other
accrued liabilities
|
(856
)
|
(189
)
|
Net
cash used in operating activities
|
(21,831
)
|
(8,411
)
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Payments
for acquisition of businesses, net of cash, cash equivalents
and
|
|
|
restricted
cash acquired
|
(28,694
)
|
(2,000
)
|
Capital
expenditures for property and equipment
|
(744
)
|
(563
)
|
Proceeds
from sale of building
|
-
|
8,790
|
Net
cash provided by (used in) investing activities
|
(29,438
)
|
6,227
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net
proceeds from issuance of Common Stock
|
99,857
|
15,399
|
Payments
for deferred offering costs
|
(2,217
)
|
-
|
Proceeds
from borrowings
|
9,526
|
2,000
|
Principal
payments on borrowings
|
(9,955
)
|
(15,610
)
|
Proceeds
from exercise of Common Stock purchase warrant
|
-
|
151
|
Debt
issuance costs paid
|
(634
)
|
-
|
Make-whole
premium on early payment of Convertible Note
|
(176
)
|
-
|
Net
cash provided by financing activities
|
96,401
|
1,940
|
Effect
of foreign currency translation changes
|
439
|
-
|
Net
change in cash, cash equivalents and restricted cash
|
45,571
|
(244
)
|
Cash,
cash equivalents and restricted cash at beginning of
year
|
285
|
529
|
Cash,
cash equivalents and restricted cash at end of year
|
$
45,856
|
$
285
|
The accompanying notes are an
integral part of these consolidated financial
statements.
NEW AGE BEVERAGES CORPORATION
Consolidated Statements of Cash Flows, Continued
Years Ended
December 31,
2018 and 2017
(Dollars in thousands)
|
|
|
SUMMARY OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
|
|
|
Cash
and cash equivalents at end of year
|
$
42,517
|
$
285
|
Restricted
cash at end of year
|
3,339
|
-
|
Total
|
$
45,856
|
$
285
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
Cash
paid for interest
|
$
386
|
$
228
|
Cash
paid for income taxes
|
$
-
|
$
-
|
Cash
paid under right-of-use lease obligations
|
$
2,080
|
$
644
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
|
|
|
FINANCING ACTIVITIES:
|
|
|
Reconciliation of non-cash and cash consideration in business
combinations:
|
|
|
Fair
value of assets acquired:
|
|
|
Identifiable
assets, excluding cash, cash equivalents and restricted
cash
|
$
151,902
|
$
23,353
|
Goodwill
|
10,284
|
16,335
|
Less
liabilities assumed
|
(109,388
)
|
(3,706
)
|
Net
assets acquired
|
52,798
|
35,982
|
Issuance
of common stock in business combinations
|
(10,970
)
|
(33,182
)
|
Liability
for contingent consideration
|
(13,134
)
|
(800
)
|
Cash
paid, net of cash, cash equivalents and restricted cash
acquired
|
$
28,694
|
$
2,000
|
|
|
|
Other non-cash investing and financing activities:
|
|
|
Exchange
of 6,900,000 shares of Common Stock for 6,900 shares
|
|
|
of
Series C Preferred Stock
|
$
-
|
$
-
|
Issuance
of Common Stock for conversion of:
|
|
|
Principal
under Series B notes payable
|
$
1,427
|
$
-
|
169,234
shares of Series B Preferred Stock
|
$
-
|
$
-
|
6,900
shares of Series C Preferred Stock
|
$
-
|
$
-
|
Restriced
stock granted for prepaid compensation, net of
forfeitures
|
$
353
|
$
-
|
Debt
issuance costs paid from proceeds of borrowings
|
$
170
|
$
-
|
Issuance
of Common Stock for debt discount
|
$
470
|
$
-
|
Right-of-use
lease assets obtained in exchange for right-of-use lease
obligations
|
$
1,569
|
$
4,274
|
Fair
value of warrants issued with convertible debt
|
$
-
|
$
18
|
The accompanying notes are an integral part of
these consolidated financial
statements.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF
PRESENTATION
Legal Structure and Nature of Operations
New Age
Beverages Corporation (the “Company”) was formed under
the laws of the State of Washington on April 26, 2010 under the
name American Brewing Company, Inc. In April 2015, the Company
acquired the assets of B&R Liquid Adventure ("B&R"), which
included the brand Búcha® Live Kombucha. In June 2016,
the Company acquired the combined assets of Xing Beverage, LLC,
Aspen Pure®, LLC, New Age Beverages, LLC, and New Age
Properties, LLC and changed the Company’s name to New Age
Beverages Corporation.
In
March 2017, the Company entered into a business combination with
Maverick Brands, LLC (“Maverick”), including
acquisition of the Coco-Libre brand. In May 2017, the Company
entered into a business combination with PMC Holdings, Inc.
(“PMC”), and in June 2017, the Company completed a
business combination with Marley Beverage Company, LLC
(“Marley”) including the worldwide brand licensing
rights to all Marley brand non-alcoholic ready-to-drink
(“RTD”) beverages. On December 21, 2018, the Company
completed a business combination with Morinda Holdings, Inc., a
Utah corporation (“Morinda”), whereby
Morinda became a wholly-owned
subsidiary of the Company. For further information about the
Company’s acquisitions in 2017 and 2018, please refer to Note
3.
The
Company manufactures, markets and sells a portfolio of healthy
beverage brands including XingTea, Marley, Aspen Pure®,
Búcha® Live Kombucha, and Coco-Libre. The portfolio is
distributed through the Company’s own Direct Store
Distribution (“DSD”) network and a hybrid of other
routes to market throughout the United States and in 15 countries
around the world. The brands are sold in all channels of
distribution including Hypermarkets, Supermarkets, Pharmacies,
Convenience, Gas and other outlets.
Morinda
is primarily engaged in the development, manufacturing, and
marketing of Tahitian Noni
®
Juice, MAX and
other noni beverages (Morinda’s primary products) as well as
other nutritional, cosmetic and personal care products. The
majority of Morinda’s products have a component of the Noni
plant, Morinda Citrifolia (“Noni”) as a common element.
Morinda primarily sells and distributes its products to independent
product distributors through a direct to consumer selling network.
Morinda is based in the United States and markets and sells its
products in more than 60 countries throughout the
world.
The
Company and its subsidiaries are subject to regulation from a
number of governmental agencies, including the U.S. Food and
Drug Administration; Federal Trade Commission; Consumer Product
Safety Commission; federal, state, and local taxing agencies; and
others. In addition, the Company and its subsidiaries are subject
to regulations from a number of foreign government
agencies.
Basis of Presentation and Consolidation
The
Company has four wholly-owned subsidiaries, NABC, Inc., NABC
Properties, LLC (“NABC Properties”), New Age Health
Sciences Holdings, Inc., and Morinda. NABC, Inc. is a
Colorado-based operating company that consolidates performance and
financial results of the Company’s subsidiaries and
divisions. NABC Properties manages leasing and ownership issues for
the Company’s buildings and warehouses (except for those
owned or leased by Morinda), and New Age Health Sciences owns the
Company’s intellectual property, and manages operating
performance in the medical and hospital channels. Due to the recent
acquisition of Morinda, there have been no material changes to the
operations of that subsidiary.
The
consolidated financial statements, which include the accounts of
the Company and its four wholly-owned subsidiaries, are prepared in
conformity with generally accepted accounting principles in the
United States of America (“U.S. GAAP”). All significant
intercompany balances and transactions have been
eliminated.
Emerging Growth Company
The
accompanying audited consolidated financial statements and related
footnotes have been prepared in accordance with applicable rules
and regulations of the Securities and Exchange Commission
(“SEC”).
The Company is an “emerging
growth company,” as defined in Section 2(a) of the Securities
Act, as modified by the Jumpstart Our Business Startups Act of 2012
(the “JOBS Act”), and it may take advantage of certain
exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies
including, but not limited to, not being required to comply with
the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”),
reduced disclosure obligations regarding executive compensation,
and exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and shareholder approval of
any golden parachute payments not previously approved.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies
from being required to comply with new or revised financial
accounting standards until private companies (that is, those that
have not had a Securities Act registration statement declared
effective or do not have a class of securities registered under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) are required to comply with the new or revised
financial accounting standards. The JOBS Act provides that a
company can elect to opt out of the extended transition period and
comply with the requirements that apply to non-emerging growth
companies but any such election to opt out is irrevocable. The
Company previously elected to opt out of such extended transition
period which means that the Company must adopt new or revised
accounting standards at the same time public companies are required
to adopt the new or revised standard. The Company currently expects
to retain its status as an emerging growth company until the year
ending December 31, 2021, but this status could end sooner under
certain circumstances.
Reclassifications
Certain
amounts in the 2017 financial statements have been reclassified to
conform to the current period financial statement presentation.
These reclassifications had no effect on the previously reported
net loss, working capital, cash flows and stockholders’
equity.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The
preparation of financial statements and related disclosures in
conformity with U.S. GAAP requires the Company to make judgments,
assumptions, and estimates that affect the amounts reported in its
consolidated financial statements and accompanying notes. The
Company bases its estimates and assumptions on current facts,
historical experience, and various other factors that it believes
are reasonable under the circumstances, to determine the carrying
values of assets and liabilities that are not readily apparent from
other sources. The Company’s significant accounting estimates
include, but are not necessarily limited to, estimated useful lives
for identifiable intangible assets and property and equipment,
impairment of goodwill and long-lived
assets,
valuation assumptions for stock options, warrants
and equity instruments issued for
goods or services
, the
allowance for doubtful accounts receivable,
inventory obsolescence, the allowance for sales returns and
chargebacks,
deferred income taxes and the related valuation
allowances, and the evaluation and measurement of contingencies. 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.
Risks and Uncertainties
Inherent
in the Company’s business are various risks and
uncertainties, including its limited operating history in a rapidly
changing industry. These risks include the Company’s ability
to manage its rapid growth and its ability to attract new customers
and expand sales to existing customers, risks related to
litigation, as well as other risks and uncertainties. In the event
that the Company does not successfully execute its business plan,
certain assets may not be recoverable, certain liabilities may not
be paid and investments in its capital stock may not be
recoverable. The Company’s success depends upon the
acceptance of its expertise in providing services, development of
sales and distribution channels, and its ability to generate
significant net revenue and cash flows from the use of this
expertise.
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 reporting segment for purposes of
making operating decisions and assessing financial performance.
Accordingly, the Company operates in two reportable segments as
presented in Note 15.
Cash and Cash Equivalents
All
highly liquid investments purchased with an original maturity of
three months or less that are freely available for the
Company’s immediate and general business use are classified
as cash and cash equivalents. Cash and cash equivalents consist
primarily of demand deposits with financial
institutions.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Doubtful Accounts
The
Company records a provision for doubtful accounts based on
historical experience and a detailed assessment of the
collectability of its accounts receivable. In estimating the
allowance for doubtful accounts, the Company considers, among other
factors, the aging of the accounts receivable, its historical
write-offs, the credit worthiness of customers, and general
economic conditions. Account balances are charged against the
allowance when the Company believes that it is probable that the
receivable will not be recovered. Actual write-offs may either be
in excess or less than the estimated allowance. Recoveries of any
accounts receivable previously written off are recorded as a
reduction of expense when received.
Inventories
Inventories
consist of the costs associated with the purchase of raw materials
and the manufacturing and transportation of products. Inventories
are stated at the lower of cost or net realizable value using the
first-in, first-out method. Provisions for excess inventory are
included in cost of goods sold and have historically been
immaterial.
Property and Equipment
Property
and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets,
as follows:
|
Years
|
Buildings and improvements
|
28-40
|
Machinery and equipment
|
3-7
|
Office furniture and equipment
|
3-10
|
Delivery vehicles
|
3-5
|
Leasehold
improvements are amortized over the remaining lease term or the
estimated useful life of the asset, whichever is shorter. As of
December 31, 2018, leasehold improvements are being amortized over
lives ranging from 1 to 10 years. Maintenance and repairs are
expensed as incurred. Depreciation commences when assets are
initially placed into service for their intended use.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of acquired
businesses over the estimated fair value of the identifiable net
assets acquired. Goodwill and other intangibles with indefinite
useful lives are not amortized but tested for impairment annually
or more frequently when events or circumstances indicates 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. 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. The Company performed a qualitative assessment and determined
there was no impairment of goodwill for the years ended December
31, 2018 and 2017.
Intangible assets acquired in business combinations are recorded at
the estimated acquisition date fair value. Finite lived intangible
assets are amortized over the shorter of the contractual life or
their estimated useful life using the straight-line method, which
is determined by identifying the period over which the cash flows
from the asset are expected to be generated.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Company’s business combinations,
identifiable intangible assets were acquired that were recorded at
estimated fair value on the date of acquisition. These assets are
being amortized using the straight-line method over the
amortization periods shown below:
|
|
|
|
|
|
|
|
License
agreements
|
|
|
China
direct selling license
|
15
|
15.0
|
Other
|
15
(1)
|
15.0
|
Trade
names
|
15
|
15.0
|
Manufacturing
processes and recipes
|
15
|
15.0
|
Independent
product consultants distribution network
|
10
|
10.0
|
Customer
relationships
|
3-15
|
14.5
|
Patents
|
15
|
15.0
|
Non-compete
agreements
|
3
|
3.0
|
_________________
(1)
In order to more closely reflect the estimated
economic life of the license agreement acquired in the June 2017
acquisition of Marley, the Company revised the estimated useful
life from 42 years to 15 years during the fourth quarter of 2018.
The carrying value of this license was approximately $5.7 million,
and the impact of the change in estimate resulted in an additional
$64,000 of amortization expense for the fourth quarter of
2018
whereby
the change to earnings per share was immaterial. For the year
ending December 31, 2019, total amortization expense related to
this license agreement is expected to be approximately $0.4 million
as compared to approximately $0.2 million that was recognized for
the year ended December 31, 2018.
Impairment of Long-lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. Impairment exists for property and equipment and other
long-lived assets if the carrying amounts of such assets exceed the
estimates of future net undiscounted cash flows expected to be
generated by such assets. An impairment charge is recognized for
the amount by which the carrying amount of the asset, or asset
group, exceeds its fair value. No impairment of long-lived assets
occurred in the years presented.
Leases
The
Company determines if contractual arrangements are considered a
lease at inception. Operating leases are included in operating
lease right-of-use (“ROU”) assets, whereas assets
related to finance leases are included in property and equipment.
The corresponding liabilities related to ROU assets and assets
under financing leases are included in accrued liabilities and
other long-term liabilities in the Company’s consolidated
balance sheets, based on the related contractual maturities. ROU
assets represent the Company’s right to use an underlying
asset for the lease term and lease liabilities represent the
related obligations to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized at the
lease commencement date based on the present value of lease
payments over the lease term. None of the Company’s leases
provide an implicit interest rate, which requires use of the
Company’s estimated incremental borrowing rate to determine
the present value of lease payments. The operating lease ROU asset
also includes any lease payments made and excludes lease
incentives.
When
lease terms include options to extend or terminate the lease that
are reasonably certain to be exercised, the ROU calculations give
effect to such options. Lease expense for lease payments is
recognized on a straight-line basis over the lease term. Some of
the Company’s lease agreements contain lease and non-lease
components, which are generally accounted for separately. However,
for certain leases, the Company elects to account for the lease and
non-lease components as a single lease component. Additionally, for
certain equipment leases, the Company applies a portfolio approach
to effectively account for the operating lease ROU assets and
liabilities.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Issuance Costs and Discounts
Debt
issuance costs incurred to obtain new debt financing or modify
existing debt financing consist of incremental direct costs
incurred for professional fees and due diligence services,
including reimbursement of similar costs incurred by the lenders.
Amounts paid to the lenders when a financing is consummated are a
reduction of the proceeds and are treated as a debt discount.
Except for revolving lines of credit, debt issuance costs and
discounts are presented in the accompanying consolidated balance
sheets as a reduction in the carrying value of the debt and are
accreted to interest expense using the effective interest method.
Debt issuance costs related to revolving lines of credit are
presented in the accompanying consolidated balance sheets as a
long-term asset and are amortized using the straight-line method
over the contractual term of the debt agreement. Unamortized
deferred debt issuance costs are not charged to expense when the
related debt becomes a demand obligation due to the violation of
terms so long as it is probable that the lenders will either waive
the violation or will agree to amend or restructure the terms of
the indebtedness. If either circumstance is probable, the deferred
debt issuance costs continue to be amortized over the remaining
term of the initial amortization period. If it is not probable, the
costs will be charged to expense.
Deferred Offering Costs
Commissions,
legal fees and other costs that are directly associated with equity
offerings are capitalized as deferred offering costs, pending a
determination of the success of the offering. Deferred offering
costs related to successful offerings are charged to additional
paid-in capital in the period it is determined that the offering
was successful. Deferred offering costs related to unsuccessful
equity offerings are recorded as expense in the period when it is
determined that an offering is unsuccessful.
Revenue Recognition
We
recognize revenue when our performance obligations are satisfied.
Our primary performance obligation (the distribution and sale of
beverage products) is satisfied upon the shipment or delivery of
products to our customers, which is also when control is
transferred. Merchandising activities that are performed after a
customer obtains control of the product, are accounted for as
fulfillment of our performance obligation to ship or deliver
product to our customers and are recorded in selling, general and
administrative expenses. Merchandising activities are immaterial in
the context of our contracts.
The
transfer of control of products to our customers is typically based
on written sales terms that do not allow for a right of return.
However, our policy for DSD and certain chilled products is to
remove and replace damaged and out-of-date products from store
shelves to ensure that consumers receive the product quality and
freshness they expect. Similarly, our policy for certain
warehouse-distributed products is to replace damaged and
out-of-date products. As a result, we record reserves, based on
estimates, for anticipated damaged and out-of-date
products.
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 customers are included as a
component of revenue. Costs incurred by the Company 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. The Company’s policy is to
defer revenue related to distributor convention fees, payments
received on products ordered in the current period but not
delivered until the subsequent period, initial independent product
consultants (“IPCs”) fees, IPC renewal fees and
internet subscription fees until the products or services have been
provided. Deferred revenue is included in accrued liabilities in
the accompanying consolidated balance sheets.
Customer Programs and Incentives
The Company incurs customer program costs to promote sales of
products and to maintain competitive pricing. Amounts paid in
connection with customer programs and incentives are recorded as
reductions to revenue or as advertising, promotional and selling
expenses,
based on the nature
of the expenditure. The Company accounts for volume rebates made to
its independent product consultants (“IPCs”) and
similar discounts and incentives as a reduction of revenue in the
accompanying consolidated statements of
operations.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales and Marketing Expenses
Advertising, promotional and selling expenses consisted of sales
salaries, tap handles, media advertising costs, sales and marketing
expenses, and promotional activity expenses and are recognized in
the period incurred.
The Company accrues expenses for incentive trips
associated with Morinda’s direct sales marketing program,
which rewards certain IPCs with paid attendance at its conventions,
meetings, and retreats. Expenses associated with incentive trips
are accrued over qualification periods as they are earned. The
Company specifically analyzes incentive trip accruals based on
historical and current sales trends as well as contractual
obligations when evaluating the adequacy of the incentive trip
accrual. Actual results could result in liabilities being more or
less than the amounts recorded.
Research and Development
Research and development costs are primarily related to development
of new product formulas. All research and development costs are
expensed as incurred. Research and development costs were not
material for the years ended December 31, 2018 and
2017.
Stock-Based Compensation
The
Company measures the cost of employee and director services
received in exchange for all equity awards granted, including stock
options, based on the fair market value of the award as of the
grant date. The Company computes the fair value of options using
the Black-Scholes-Merton (“BSM”) option pricing model.
The Company recognizes the cost of the equity awards over the
period that services are provided to earn the award, usually the
vesting period. For awards granted which contain a graded vesting
schedule, and the only condition for vesting is a service
condition, compensation cost is recognized as an expense on a
straight-line basis over the requisite service period as if the
award was, in substance, a single award. The Company recognizes the
impact of forfeitures in the period that the forfeiture occurs,
rather than estimating the number of awards that are not expected
to vest in accounting for stock-based compensation.
Derivatives
The
Company holds a derivative financial instrument in the form of an
interest rate swap. The Company uses interest rate swaps to
economically convert variable interest rate debt on a foreign
mortgage to a fixed rate. The Company has not designated these
derivatives as hedging instruments. The interest rate swaps are
recorded in the accompanying consolidated financial statements at
their fair value with the unrealized gains and losses recorded in
interest expense.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When
the Company enters into a financial instrument such as a debt or
equity agreement (the “host contract”), the Company
assesses whether the economic characteristics of any embedded
features are clearly and closely related to the primary economic
characteristics of the remainder of the host contract. When it is
determined that (i) an embedded feature possesses economic
characteristics that are not clearly and closely related to the
primary economic characteristics of the host contract, and (ii) a
separate, stand-alone instrument with the same terms would meet the
definition of a financial derivative instrument, then the embedded
feature is bifurcated from the host contract and accounted for as a
derivative instrument. The estimated fair value of the derivative
feature is recorded separately from the carrying value of the host
contract, with subsequent changes in the estimated fair value
recorded as a non-operating gain or loss in the Company’s
consolidated statements of operations.
Income Taxes
The
Company accounts 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.
The
Company recognizes an uncertain tax position in its financial
statements when it concludes 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.
Foreign Currency Translation
The
Company’s reporting currency is the U.S. Dollar, while
the functional currencies of its foreign subsidiaries are their
respective local currencies. A majority of Morinda’s business
operations occur outside the United States. The local currency of
each of the Morinda’s international subsidiaries and branches
is used as its functional currency. All assets and liabilities are
translated into U.S. dollars at exchange rates existing at the
consolidated balance sheet date, and net revenue and expenses are
translated at monthly average exchange rates. The resulting net
foreign currency translation adjustments are recorded in
accumulated other comprehensive income as a separate component of
stockholders’ equity in the consolidated balance sheets.
Gains and losses from foreign currency transactions and
remeasurement gains (losses) on short-term intercompany borrowings,
are recorded in other income and expense in the consolidated
statements of operations and comprehensive loss. The tax effect has
not been material to date.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Common Share
Basic
net loss per common share is computed by dividing the net loss
applicable to common stockholders by the weighted average number of
common shares outstanding for each period presented. Diluted net
loss per common share is computed by giving effect to all potential
shares of Common Stock, including unvested restricted stock awards,
stock options, convertible debt, Preferred Stock and warrants, to
the extent dilutive.
Recent Accounting Pronouncements
Recently Adopted Standards.
The following recently issued
accounting standards were adopted during fiscal year
2018:
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
,
which supersedes nearly all existing revenue recognition standards
under U.S. GAAP. The new standard provides a five-step process for
recognizing revenue that depicts the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services.
The Company adopted
this ASU using the full retrospective method effective January 1,
2018. The impact of adoption of this ASU was immaterial and,
accordingly, there were no changes to the previously issued
financial statements for the year ended December 31,
2017.
In August 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2016-15,
Statement of Cash Flows,
Classification of Certain Cash Receipts and Cash
Payments.
The new standard
is intended to reduce diversity in practice in how certain cash
receipts and cash payments are classified in the statements of cash
flows and must
be adopted retrospectively for each prior
reporting period presented upon initial adoption. ASU 2016-15 was
adopted effective January 1, 2018 and did not have a material
impact on the Company’s consolidated financial statements for
the years ended December 31, 2018 and 2017.
Accordingly, there were no transactions that
required retrospective adjustments in the consolidated statements
of cash flows for the year ended December 31,
2017.
In November 2016, the FASB issued ASU No.
2016-18,
Statement of Cash Flows
– Restricted Cash
, which
requires entities that have restricted cash or restricted cash
equivalents to reconcile the change during the period in the total
cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents in its statement of
cash flows. As a result, amounts generally described as cash and
restricted cash equivalents should be included with cash and cash
equivalents shown on the statement of cash flows. The Company
adopted this standard during 2018 using the retrospective
transition method. The adoption did not result in any changes to
the Company’s previously reported consolidated statements of
cash flows for the year ended December 31,
2017.
In May 2017, the
FASB issued ASU No. 2017-09,
Compensation—Stock Compensation: Scope
of Modification Accounting
, which provides clarification on
when modification accounting should be used for changes to the
terms or conditions of a share-based payment award. This standard
does not change the accounting for modifications of share-based
payment awards but clarifies that modification accounting guidance
should only be applied if there is a change to the value, vesting
conditions, or award classification and would not be required if
the changes are considered non-substantive. This standard was
adopted by the Company in the first quarter of fiscal 2018 and did
not have a material impact on its consolidated financial
statements.
Standards Required to be Adopted in Future Years.
The
following accounting standards are not yet effective; management
has not completed its evaluation to determine the impact that
adoption of these standards will have on the Company’s
consolidated financial statements.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June
2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial
Instruments.
ASU 2016-13 amends the guidance on the
impairment of financial instruments. This update adds an
impairment model (known as the current expected credit losses
model) that is based on expected losses rather than incurred
losses. Under the new guidance, an entity recognizes, as an
allowance, its estimate of expected credit losses. In
November 2018, ASU 2016-13 was amended by ASU 2018-19,
Codification Improvements to Topic 326,
Financial Instruments – Credit Losses.
ASU 2018-19
changes the effective date of the credit loss standards (ASU
2016-13) to fiscal years beginning after December 15, 2021,
including interim periods within those fiscal years. Further, the
ASU clarifies that operating lease receivables are not within the
scope of ASC 326-20 and should instead be accounted for under the
new leasing standard, ASC 842. The Company has not yet
determined the effect that ASU 2018-19 will have on its results
operations, balance sheets or financial statement
disclosures.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles
- Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment.
The amendments in this ASU
simplify the subsequent measurement of goodwill by eliminating Step
2 from the goodwill impairment test and eliminating the requirement
for a reporting unit with a zero or negative carrying amount to
perform a qualitative assessment. Instead, under this ASU, an
entity would perform its annual, or interim, goodwill impairment
test by comparing the fair value of a reporting unit with its
carrying amount and would recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized is not to
exceed the total amount of goodwill allocated to that reporting
unit. In addition, income tax effects will be considered, if
applicable. This ASU is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2019. Early adoption is permitted. The Company is currently
evaluating the impact of this ASU on its consolidated financial
statements and related disclosures.
NOTE 3 — BUSINESS COMBINATIONS
The
Company completed business combinations with Morinda in December
2018, and Maverick, PMC and Marley during 2017. Each of these
business combinations was accounted for using the acquisition
method of accounting based on ASC 805,
Business Combinations
, and using the
fair value concepts set forth in ASC 820,
Fair Value Measurement
. The key terms
of each of these business combinations are discussed
below.
Morinda Holdings, Inc.
On
December 2, 2018, the Company entered into a Plan of Merger (the
“Merger Agreement”) with Morinda and New Age Health
Sciences Holdings, Inc., a newly formed Utah corporation and
wholly-owned subsidiary of the Company (“Merger Sub”).
On December 21, 2018 (the “Closing Date”), the
transactions contemplated by the Merger Agreement were completed.
Merger Sub was merged with and into Morinda and Morinda became a
wholly-owned subsidiary of the Company. This transaction is
referred to herein as the “Merger.”
Pursuant
to the Merger Agreement, the Company paid to Morinda’s equity
holders (i) $75.0 million in cash; (ii) 2,016,480 shares of the
Company’s Common Stock with an estimated fair value on the
closing Date of approximately $11.0 million, (iii) 43,804 shares of
Series D Preferred Stock (the “Preferred Stock”)
providing for the potential payment of up to $15 million contingent
upon Morinda achieving certain post-closing milestones, as
discussed below.
Pursuant
to the Certificate of Designations of Series D Preferred Stock (the
“CoD”), the holders of the Preferred Stock are entitled
to receive a dividend of up to an aggregate of $15.0 million (the
“Milestone Dividend”) if the Adjusted EBITDA (as
defined in the CoD) of Morinda is at least $20.0 million for the
year ending December 31, 2019. The Milestone Dividend is payable on
April 15, 2020. If the Adjusted EBITDA of Morinda is less than
$20.0 million, the Milestone Dividend shall be reduced by applying
a five-times multiple to the difference between the Adjusted EBITDA
target of $20 million and actual Adjusted EBITDA for the year
ending December 31, 2019. Accordingly, no Milestone Dividend is
payable if actual Adjusted EBITDA is $17.0 million or lower.
Additionally, the Company is required to pay quarterly dividends to
the holders of the Preferred Stock at a rate of 1.5% per annum of
the Milestone Dividend amount, payable
on a pro rata basis. The Company may pay the Milestone Dividend and
/or the annual dividend in cash or in kind, provided that if the
Company chooses to pay in kind, the shares of
Common Stock
issued as payment therefore must be
registered under the Securities Act of 1933, as amended (the
“Securities Act”). The Preferred Stock shall terminate
on April 15, 2020.
Prior to the Merger, Morinda was an S corporation for U.S. federal
and state income tax purposes. Accordingly, Morinda’s taxable
earnings were reported on the individual income tax returns of the
stockholders who were responsible for payment of the related income
tax liabilities. In December 2018, Morinda agreed to
distribute to its stockholders approximately $39.6 million of its
previously-taxed S corporation earnings whereby distributions are
payable (i) up to $25.0 million for which the timing and
amount are subject to a future financing event, and
(ii) approximately $14.6 million based on the calculation
of excess working capital (“EWC”) as of the
Closing Date. EWC is the amount by which Morinda’s actual
working capital (as defined in the Merger Agreement) on the Closing
Date exceeds $25.0 million. The Closing Date balance sheet of
Morinda indicated that EWC was approximately $14.6 million as of
the Closing Date
.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under
ASC 805, acquisition-related transaction costs (e.g., advisory,
legal and other professional fees) are not included as a component
of consideration transferred but are accounted for as expenses in
the periods in which such costs are incurred. In connection
with the Merger, the Company incurred transaction costs of $3.2
million, including (i) payment of cash of $1.1 million and issuance
of 214,250 shares of Common Stock with a fair value of $1.2 million
to a financial advisor that assisted with the consummation of the
Merger, and (ii) professional fees and other incremental and direct
costs associated with the Merger of $0.9 million.
Maverick Brands, LLC
On
March 31, 2017, the Company acquired all of the assets of Maverick.
Maverick was engaged in the manufacturing and sale of coconut water
and other beverages, and the acquisition helped the Company expand
its capabilities and product offerings. The operating results of
Maverick have been consolidated with those of the Company beginning
April 1, 2017. Total purchase consideration consisted of (i) $2.0
million of cash and (ii) 2.2 million shares of Common Stock valued
at the closing price on the date of the acquisition of $4.13 per
share for a total of $9.1 million. All of the goodwill and
intangible assets from the Maverick acquisition are deductible for
income tax purposes and are included in the Company’s New Age
segment. The fair value of the identifiable assets included (i)
customer relationships using the income approach with a fair value
of $1.0 million, and (ii) the trade name with a fair value of $4.9
million and recipes with a fair value of $0.8 million, both
determined using the market approach.
I
n connection with the acquisition of
Maverick, the Company incurred transactional expenses totaling $0.2
million.
Goodwill related
to Maverick was recognized for the difference between the total
consideration transferred to consummate the acquisition of $11.1
million and the fair value of net identifiable assets acquired of
$5.9 million.
PMC Holdings, Inc.
On May 23, 2017, closing occurred pursuant to an Asset Purchase
Agreement whereby the Company acquired substantially all of the
operating assets of PMC, which was a company engaged in the
business of developing, manufacturing, selling and marketing
micronutrient products and formulations.
The Company received substantially all of the operating assets of
PMC, consisting of patents and equipment in exchange for
consideration of 1.2 million shares of
Common Stock
with a fair value of $5.5 million
based on a closing price of $4.58 per share.
All of the
goodwill and intangible assets from the PMC acquisition are
deductible for income tax purposes and are included in the
Company’s New Age segment. Fair value of the
patents was determined using the market approach
by an independent third-party valuation specialist.
Goodwill related to PMC was recognized
for the difference between the total consideration transferred to
consummate the acquisition of $5.5 million and the fair value of
net identifiable assets acquired of $3.7
million.
Marley Beverage Company, LLC
On March 23, 2017, the Company entered into an asset purchase
agreement whereby the Company acquired substantially all of the
operating assets of Marley, which was a company engaged in the
development, manufacturing, selling and marketing of nonalcoholic
relaxation teas and sparkling waters, and ready-to-drink coffee
drinks. Closing for the acquisition occurred on June 13, 2017. At
closing, the Company received substantially all of the operating
assets of Marley, consisting of inventory, accounts receivable,
property and equipment, intellectual property, and worldwide
licensing rights in perpetuity to all non-alcoholic Marley RTD
beverages in exchange for consideration consisting of 3.0 million
shares of
Common Stock with a fair value of $18.6 million
based on a closing price of $6.20 per share
.
In addition, the Company is obligated to make a single earnout
payment of $1.25 million at such time that revenue for the Marley
reporting unit is equal to or greater than $15.0 million during any
trailing twelve calendar month period after the closing. Payment
for 50% of the $1.25 million is due within 15 days after the month
in which the earnout payment is triggered, 25% is payable one year
after the first payment, and the remaining 25% is payable two years
after the first payment. The fair value of the earnout was valued
using the weighted average return on assets and amounted to $0.8
million on the closing date. As of December 31, 2018, the fair
value of this earnout has increased to $0.9 million.
All of the goodwill and intangible assets from the Marley
acquisition are deductible for income tax purposes and are included
in the Company’s New Age segment. The fair value of the
identifiable assets included (i) customer relationships using the
cost approach with a fair value of $0.6 million, and (ii) the
license agreement with a fair value of $5.8 million and recipes
with a fair value of $2.7 million, both determined using the market
approach. Goodwill related to Marley was recognized for the
difference between the total consideration transferred to
consummate the acquisition of $19.4 million and the fair value of
net identifiable assets acquired of $10.0 million.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Purchase Consideration
Presented
below is a summary of the total purchase consideration for these
business combinations (in thousands):
|
|
|
|
|
|
|
|
|
Purchase
consideration:
|
|
|
|
|
|
Cash
paid
|
$
75,000
|
$
2,000
|
$
-
|
$
-
|
$
2,000
|
Fair
value of:
|
|
|
|
|
|
Common
stock issued
|
10,970
(1)
|
9,086
|
5,496
|
18,600
|
33,182
|
Contingent
consideration payable
|
13,134
(2)
|
-
|
-
|
800
|
800
|
Total
purchase consideration
|
$
99,104
|
$
11,086
|
$
5,496
|
$
19,400
|
$
35,982
|
_________________
(1)
Fair value was
determined based on the closing price of the Company’s Common
Stock on the Closing Date.
(2)
Earnout
consideration represents the fair value of the Series D Preferred
Stock based on the probability of achieving the Milestone Dividend,
whereby the maximum Milestone Dividend is $15.0 million if the
Adjusted EBITDA of Morinda is $20.0 million or more. The earnout
consideration is expected to be finalized by the first quarter of
2020 and is required to be paid on April 30, 2020. The fair value
of the earn-out was determined using an option pricing
model.
Purchase Price Allocations
Presented
below is a summary of the purchase price allocations for these
business combinations (in thousands):
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
$
42,647
|
$
-
|
$
-
|
$
-
|
$
-
|
Accounts
receivable
|
4,250
|
246
|
-
|
187
|
433
|
Inventories
|
26,733
(1)
|
1,523
|
-
|
798
|
2,321
|
Prepaid
expenses and other
|
3,985
|
211
|
2
|
199
|
412
|
Total
current assets acquired
|
77,615
|
1,980
|
2
|
1,184
|
3,166
|
Property
and equipment
|
55,389
(2)
|
68
|
55
|
22
|
145
|
Identifiable
intangible assets
|
45,886
(3)
|
6,661
|
4,100
|
9,281
|
20,042
|
Right-of-use
lease asset and other
|
19,318
(4)
|
-
|
-
|
-
|
-
|
Total
identifiable assets acquired
|
198,208
|
8,709
|
4,157
|
10,487
|
23,353
|
Current
liabilities assumed:
|
|
|
|
|
|
Current
maturities of notes payable
|
(1,291
)
|
-
|
(401
)
|
-
|
(401
)
|
Stockholder
payables
|
(8,701
)
(5)
|
-
|
-
|
-
|
-
|
Accounts
payable, accrued liabilities and other
|
(40,364
)
|
(1,345
)
|
(28
)
|
(505
)
|
(1,878
)
|
Long-term
liabilities assumed:
|
|
|
|
|
|
Notes
payable, less current maturities
|
(1,578
)
|
(1,427
)
|
-
|
-
|
(1,427
)
|
|
(43,356
)
(5)
|
-
|
-
|
-
|
-
|
Other
long-term liabilities
|
(14,098
)
|
-
|
-
|
-
|
-
|
Net
identifiable assets acquired
|
88,820
|
5,937
|
3,728
|
9,982
|
19,647
|
Goodwill
|
10,284
(6)
|
5,149
|
1,768
|
9,418
|
16,335
|
Total
purchase price allocation
|
$
99,104
|
$
11,086
|
$
5,496
|
$
19,400
|
$
35,982
|
_________________
(1)
Based on the report
of an independent valuation specialist, the fair value of
work-in-process and finished goods inventories on the Closing Date
exceeded the historical carrying value by approximately $2.2
million. This amount represents an element of built-in profit on
the Closing Date and will be charged to cost of goods sold as the
related inventories are sold, which is expected to occur within
approximately six months after the Closing Date. The fair value of
inventories was determined using both the “cost
approach” and the “market approach”.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2)
Fair value of
Morinda’s real estate properties amounted to $44.4 million
and was based upon real estate appraisals prepared by an
independent firm, primarily using the “income
approach”. Fair value of other property and equipment
amounted to $10.9 million and was based primarily on the report of
an independent valuation specialist with fair value determined
using both the “cost approach” and the “market
approach”.
(3)
The fair value of
identifiable intangible assets was $45.9 million and was determined
based on the report of an independent valuation specialist,
primarily 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.
(4)
In order to conform
with the Company’s accounting policies, Morinda adopted ASU
No. 2016-02,
Leases
,
which requires that assets and liabilities be recognized on the
balance sheet for the rights and obligations created by those
leases. Accordingly, operating lease right of use assets of
$13.4 million were recognized.
(5)
Morinda’s
U.S. operations were previously taxed as a subchapter S Corporation
whereby no deferred income tax assets or liabilities had been
recognized for U.S. federal and state income tax purposes. Upon
consummation of the Merger, Morinda’s U.S. operations are
included in the consolidated income tax returns of the Company.
Accordingly, an adjustment of approximately $9.9 million has been
reflected for net deferred income tax liabilities that resulted
from differences between the financial reporting basis and the
income tax basis of such U.S. assets and liabilities.
(6)
Goodwill related to
Morinda is recognized for the difference between the total
consideration transferred to consummate the Merger of $99.1 million
and the fair value of net identifiable assets acquired of $88.8
million. Goodwill and intangible assets in connection with the
Morinda business cominbation are not expected to be deductible for
income tax purposes.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Combination Liabilities
Presented below is a summary of earnout obligations related to the
Marley and Morinda business combinations and payables to the former
stockholders of Morinda (in thousands):
|
|
|
|
|
|
|
|
|
Marley
earnout obligation
|
$
900
(1)
|
$
-
|
$
-
|
$
900
|
$
800
|
Payables
to former Morinda stockholders:
|
|
|
|
|
|
EWC
payable in April 2019
|
1,000
(2)
|
(16)
(5)
|
2
|
986
|
-
|
EWC
payable in July 2019
|
8,000
(2)
|
(283)
(5)
|
15
|
7,732
|
-
|
EWC
payable in July 2020
|
5,463
(2)
|
(497)
(5)
|
10
|
4,984
|
-
|
Earnout
under Series D preferred stock
|
13,134
(3)
|
-
|
-
|
13,134
|
-
|
Contingent
on financing event
|
25,000
(4)
|
(644)
(5)
|
46
|
24,394
|
-
|
Total
|
53,497
|
(1,440)
|
73
|
52,130
|
800
|
Less
current portion
|
9,000
|
(299)
|
17
|
8,718
|
-
|
Long-term portion
|
$
44,497
|
$
(1,141)
|
$
56
|
$
43,412
|
$
800
|
_________________
(1)
Revenue for the Marley reporting unit is not
expected to exceed the $15.0 million earnout threshold during
2019.
The fair value of the
earnout was valued using the weighted average return on assets
whereby the fair value increased from $0.8 million to $0.9 million
during 2018. The increase in the fair value of the earnout of $0.1
million is recognized as an expense for the year ended December 31,
2018.
(2)
Pursuant to a
separate agreement between the parties, EWC is payable to
Morinda’s stockholders for $1.0 million in April 2019, $8.0
million in July 2019, and the remainder of $5.5 million is payable
in July 2020.
(3)
The
fair value of earnout consideration under the Series D Preferred
Stock is based on the probability of achieving the Milestone
Dividend, whereby the maximum Milestone Dividend is $15.0
million if the Adjusted EBITDA of Morinda is $20.0 million or
more. The fair value of the earnout of $13.1 million was determined
using an option pricing model and will continue to be adjusted to
fair value each quarter during 2019 as additional information
becomes available.
(4)
Pursuant
to a separate agreement between the parties, Morinda agreed to pay
its former stockholders up to $25.0 million from the net proceeds
of a sale leaseback to be completed after the Closing Date. As
discussed in Note 16, the closing for this transaction occured on
March 22, 2019. Accordingly, since this payment was made from the
proceeds of a long-term financing, the net carrying value is
classified as a long-term liability in the accompanying
consolidated balance sheet as of December 31, 2018.
(5)
Interest
was imputed on these obligations based on a credit and tax adjusted
interest rate of 6.1% for the period from the Closing Date until
the respective contractual or estimated payment dates. This
discount is being accreted using the effective interest
method.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Disclosures
The following unaudited pro forma financial results reflects the
historical operating results of the Company, including the
unaudited pro forma results of Morinda, Maverick, PMC and Marley
for the years ended December 31, 2018 and 2017, respectively, as if
each of these four business combinations had occurred as of January
1, 2017. The pro forma financial information set forth below
reflects adjustments to the historical data of the Company to give
effect to each of these acquisitions and the related equity
issuances as if each had occurred on January 1, 2017. The pro
forma information presented below 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. The following table
summarizes on an unaudited pro forma basis the Company’s
results of operations for the years ended December 31, 2018 and
2017 (in thousands, except per share amounts):
|
|
|
Net
revenue
|
$
287,119
|
$
285,297
|
Net
loss
|
$
(10,210
)
|
$
(1,774
)
|
Net
loss per share- basic and diluted
|
$
(0.21
)
|
$
(0.05
)
|
Weighted
average number of shares of common
|
|
|
stock
outstanding- basic and diluted
|
48,617
|
35,222
|
The
calculations of pro forma net revenue and pro forma net loss give
effect to the business combinations for the period from January 1,
2017 until the respective closing dates for (i) the historical net
revenue and net income (loss), as applicable, of the acquired
businesses, (ii) incremental depreciation and amortization for each
business combination based on the fair value of property, equipment
and identifiable intangible assets acquired and the related
estimated useful lives, and (iii) recognition of accretion of
discounts on obligations with extended payment terms that were
assumed in the business combinations.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4
—
OTHER INFORMATION
Inventories
Inventories
consist of the following as of December 31, 2018 and 2017 (in
thousands):
|
|
|
Raw
materials
|
$
12,538
|
$
6,302
|
Work-in-process
|
907
|
-
|
Finished
goods
|
23,703
|
740
|
Total
inventories
|
$
37,148
|
$
7,042
|
Prepaid Expenses and Other Current Assets
As of
December 31, 2018 and 2017, prepaid expenses and other current
assets consist of the following (in thousands):
|
|
|
Prepaid
expenses and deposits
|
$
4,982
|
$
309
|
Prepaid
stock-based compensation
|
347
|
963
|
Supplier
and other receivables
|
1,144
|
163
|
Total
|
$
6,473
|
$
1,435
|
Property and Equipment
As of
December 31, 2018 and 2017, property and equipment consisted of the
following (in thousands):
|
|
|
Land
|
$
25,726
|
$
37
|
Buildings
and improvements
|
19,822
|
481
|
Leasehold
improvements
|
4,398
|
858
|
Machinery
and equipment
|
5,208
|
439
|
Office
furniture and equipment
|
2,087
|
55
|
Transportation
equipment
|
1,727
|
787
|
Total
property and equipment
|
58,968
|
2,657
|
Less
accumulated depreciation
|
(1,687
)
|
(762
)
|
Property
and equipment, net
|
$
57,281
|
$
1,895
|
Depreciation
and amortization expense related to property and equipment amounted
to $0.7 million and $0.6 million for the years ended
December 31, 2018 and 2017, respectively. Repairs and
maintenance costs amounted to $0.8 million and $0.7 million for the
years ended December 31, 2018 and 2017,
respectively.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash and Other
As of
December 31, 2018 and 2017, restricted cash and other long-term
assets consist of the following (in thousands):
|
|
|
Restricted
cash
(1)
|
$
3,339
|
$
-
|
Debt
issuance costs, net
|
548
|
-
|
Prepaid
stock-based compensation
|
210
|
555
|
Deposits
and other
|
2,838
|
147
|
Total
|
$
6,935
|
$
702
|
(1)
Restricted cash
primarily represents long-term cash deposits held in a bank for a
foreign governmental agency. This deposit is required to maintain
the Company’s direct selling license to do business in
China.
Other Accrued Liabilities
As of
December 31, 2018 and 2017, other accrued liabilities consist of
the following (in thousands):
|
|
|
Accrued
commissions
|
$
9,731
|
$
86
|
Current portion of right-of-use lease liability
|
4,798
|
239
|
Accrued
compensation and benefits
|
4,715
|
1,059
|
Accrued
marketing events
|
3,757
(1)
|
-
|
Deferred
revenue
|
2,701
|
-
|
Income
taxes payable
|
1,670
|
-
|
Embedded
derivative liability
|
470
|
-
|
Other
accrued liabilities
|
6,177
|
1,010
|
Total
other accrued liabilities
|
$
34,019
|
$
2,394
|
_________________
(1)
Represents accruals
for incentive trips associated with Morinda’s direct sales
marketing program, which rewards certain IPCs with paid attendance
at future conventions, meetings, and retreats. Expenses associated
with incentive trips are accrued over qualification periods as they
are earned. Incentive trip accruals are based on historical
experience in relation to current sales trends in order to
determine the related contractual obligations.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 —
GOODWILL AND
IDENTIFIABLE INTANGIBLE ASSETS
Goodwill
Goodwill consists of the following by reporting unit as of December
31, 2018 and 2017 (in thousands):
Reporting Unit
|
|
|
Morinda
|
$
10,284
|
$
-
|
Marley
|
9,418
|
9,418
|
Maverick
|
5,149
|
5,149
|
Xing
|
4,506
|
4,506
|
PMC
|
1,768
|
1,768
|
B&R
|
389
|
389
|
Total
Goodwill
|
$
31,514
|
$
21,230
|
Identifiable Intangible Assets
As of
December 31, 2018 and 2017, identifiable intangible assets consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Identifiable Intangible Asset
|
|
|
|
|
|
|
License
agreements
|
|
|
|
|
|
|
China
direct selling license
|
$
20,420
|
$
40
|
$
20,380
|
$
-
|
$
-
|
$
-
|
Other
|
6,089
|
418
|
5,671
|
5,990
|
74
|
5,916
|
Manufacturing
processes and recipes
|
11,610
|
380
|
11,230
|
3,530
|
132
|
3,398
|
Trade
names
|
12,301
|
584
|
11,717
|
4,861
|
243
|
4,618
|
IPC
distributor sales force
|
9,760
|
29
|
9,731
|
-
|
-
|
-
|
Customer
relationships
|
6,444
|
1,194
|
5,250
|
6,444
|
760
|
5,684
|
Patents
|
4,100
|
433
|
3,667
|
4,100
|
160
|
3,940
|
Former
Morinda shareholder non-compete agreements
|
186
|
2
|
184
|
-
|
-
|
-
|
Total
identifiable intangible assets
|
$
70,910
|
$
3,080
|
$
67,830
|
$
24,925
|
$
1,369
|
$
23,556
|
Amortization expense related to identifiable intangible assets was
$1.7 million and $1.0 million for the years ended December 31, 2018
and 2017, respectively. Assuming no future impairments or
disposals, amortization expense for the above intangibles for the
next five years is set forth below (in thousands):
Year ending December
31:
|
|
2019
|
$
4,785
|
2020
|
4,785
|
2021
|
4,783
|
2022
|
4,723
|
2023
|
4,723
|
Thereafter
|
44,031
|
Total
|
$
67,830
|
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 —
LEASES
The
Company leases various office and warehouse facilities, vehicles
and equipment under non-cancellable operating lease agreements that
expire between January 2019 and May 2030. For the years ended
December 31, 2018 and 2017, the Company had operating lease expense
of $1.6 million and $0.7 million respectively.
Balance Sheet Presentation
As of
December 31, 2018 and 2017, the carrying value of right-of-use
("ROU") lease assets and the related obligations were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-Use Lease Assets:
|
|
|
|
|
|
Cost
basis
|
$
4,274
|
$
13,369
|
$
1,578
|
$
19,221
|
$
4,274
|
Accumulated
amortization
|
(449
)
|
(101
)
|
(182
)
|
(732
)
|
(209
)
|
Net
|
$
3,825
|
$
13,268
|
$
1,396
|
$
18,489
|
$
4,065
|
|
|
|
|
|
|
Right-of-Use Lease Liabilities:
|
|
|
|
|
|
Current
|
$
277
|
$
4,167
|
$
354
|
$
4,798
|
$
239
|
Long-term
|
3,543
|
9,101
|
1,042
|
13,686
|
3,821
|
Total
|
$
3,820
|
$
13,268
|
$
1,396
|
$
18,484
|
$
4,060
|
_________________
(1)
Solely consists of
the ROU lease asset entered into in connection with the sale
leaseback transaction discussed below.
(2)
Represents ROU
lease
asset
and corresponding ROU lease liabilities assumed in the Merger with
Morinda as discussed in Note 3. The present value of the ROU lease
liabilities assumed in the Merger was based on the Company’s
implicit borrowing rate of 6.1% on the Closing Date.
As of
December 31, 2018 and 2017, the weighted average remaining lease
term under ROU leases was 5.9 and 9.2 years, respectively. As of
December 31, 2018 and 2017, the weighted average discount rate for
ROU lease liabilities was approximately 7% and 10%,
respectively.
Sale Leaseback
On
January 10, 2017, the Company entered into an agreement with an
unaffiliated third party resulting in the sale for $8.9 million of
the land and building that serves as the Company’s corporate
headquarters in Denver, Colorado. Concurrently with the sale, the
Company entered into a lease of this property for an initial term
of ten years, with two options to extend for successive five-year
periods. The monthly lease cost is $52,000 for the initial year,
with 2% annual increases for each year thereafter. The Company
determined that this transaction qualified as a sale under ASU
2016-02 (“
Leases
”), which the Company
adopted effective January 1, 2017. Therefore, a gain of
approximately $3.3 million was recognized for the year ended
December 31, 2017. In connection with the leaseback, the Company
recognized an ROU lease asset and a corresponding ROU lease
liability for approximately $4.3 million. The present value of the
ROU lease liability was based on the Company’s implicit
borrowing rate of 10.0% on the closing date.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease Commitments
Future
minimum lease payments under non-cancellable ROU operating lease
agreements are as follows (in thousands):
Year ending December
31:
|
|
2019
|
$
6,328
|
2020
|
4,480
|
2021
|
3,040
|
2022
|
2,672
|
2023
|
2,261
|
Thereafter
|
5,611
|
Total
minimum lease payments
|
24,392
|
Less
imputed interest
|
(5,908
)
|
Present
value of minimum lease payments
|
$
18,484
|
NOTE 7 —
DEBT
Siena Revolver
On August 10, 2018 (the “Closing Date”), the Company
entered into a loan and security agreement with Siena Lending Group
LLC (“Siena”) that provides for a $12.0 million
revolving credit facility (the “Siena Revolver”) with a
scheduled maturity date of August 10, 2021 (the “Maturity
Date”). Outstanding borrowings bear interest at the greater
of (i) 7.5% or (ii) the prime rate plus 2.75%. As of December 31,
2018, the effective interest rate was 8.25%. Beginning on November
7, 2018, the Company was required to pay interest on a minimum of
$2.0 million of borrowings, regardless of whether such funds had
been borrowed. The Siena Revolver also provides for an unused line
fee equal to 0.5% per annum of the undrawn portion of the $12.0
million commitment. The Siena Revolver is subject to availability
based on eligible accounts receivables and eligible inventory of
the Company.
As of December 31,
2018, the borrowing base calculation permitted total borrowings of
approximately $2.5 million. After deducting the outstanding
principal balance of $2.0 million, the Company had excess borrowing
availability of $0.5 million.
Pursuant to the Siena Revolver, the Company
granted a security interest in substantially all assets and
intellectual property of the Company and its subsidiaries, except
for such assets owned by Morinda. Siena’s obligation to fund
loans was subject to the satisfaction of certain closing
conditions, including the requirement to raise debt or equity which
was satisfied during the fourth quarter of
2018.
The Siena Revolver contains standard and customary events of
default including, but not limited to, maintaining compliance with
the financial and
non-financial
covenants set forth in the Siena
Revolver.
The financial covenants
require maintenance of a fixed charge coverage ratio of no less
than 1.1 if excess borrowing availability is less than $1.0
million, and to maintain minimum liquidity of $2.0 million. The
fixed charge coverage ratio compares EBITDA, net of unfinanced
capital expenditures, to fixed charges for the latest quarterly
reporting period. As of December 31, 2018, the Company was in
compliance with the financial covenants. The
Siena Revolver
also limits or
prohibits the Company from paying dividends, incurring additional
debt, selling significant assets, or merging with other entities
without the consent of the lenders.
The Siena Revolver also includes an event of
default if Brent Willis ceases to be employed as chief executive
officer or if Greg Gould ceases to be employed as the chief
financial officer, unless a successor is appointed within 60 days
and such successor is reasonably satisfactory to the
Lender.
In connection with the financing, the Company incurred a financial
advisor fee, a closing fee and professional fees for a total of
$0.4 million. This amount is being accounted for as debt issuance
costs that is being amortized using the straight-line method over
the three-year term of the Siena Revolver.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Siena Revolver includes a lockbox arrangement that requires the
Company to direct its customers to remit payments to a restricted
bank account, whereby all available funds are used to pay down the
outstanding principal balance under the Siena Revolver.
Accordingly, the entire outstanding principal balance of the Siena
Revolver is classified as a current liability as of December 31,
2018.
As discussed in
Note 16, the Siena Revolver was paid off and terminated on March
29, 2019.
Embedded Derivatives
The Siena Revolver includes features that were determined to be
embedded derivatives requiring bifurcation and accounting as
separate financial instruments. The Company determined that
embedded derivatives include the requirement to pay (i) an early
termination premium if the Siena Revolver is terminated before the
Maturity Date, and (ii) default interest at a 5.0% premium if
events of default exist. An early termination premium is required
to be paid if Siena’s commitment to make revolving loans is
terminated prior to the Maturity Date. The fee is equal to 4.00%,
2.25% and 1.25% of the $12.0 million commitment if termination
occurs during the first, second and third years after the Closing
Date, respectively. These embedded derivatives are classified
within Level 3 of the fair value hierarchy. Fair value was
estimated using the “with” and “without”
method. Accordingly, the Siena Revolver was first valued with the
embedded derivatives (the “with” scenario) and
subsequently valued without the embedded derivatives (the
“without” scenario). The fair value of the embedded
derivatives was estimated as the difference between these two
scenarios. The fair values were determined using the income
approach, specifically the yield method. As of December 31, 2018,
key Level 3 assumptions and estimates used in the valuation of the
embedded derivatives included an assessment of the probability of
early termination of the Siena Revolver, the remaining term to
maturity of approximately 2.6 years, probability of default of
approximately 10%, and a discount rate of 6.1%.
As of December 31, 2018, the embedded derivatives for the Siena
Revolver have an aggregate fair value of approximately $0.5
million, which is included in accrued liabilities as of December
31, 2018. The Company recognized a loss on change in fair value of
embedded derivatives of $0.5 million which is included in
non-operating expenses for the year ended December 31,
2018.
Summary of Debt
As of
December 31, 2018 and 2017, debt consists of the following (in
thousands):
|
|
|
Siena
Revolver
|
$
2,000
|
$
-
|
Mortgage
payable to a foreign bank
|
2,628
(1)
|
-
|
Installment
notes payable
|
66
(2)
|
122
|
U.S.
Bank Revolver
|
-
|
2,000
(3)
|
Series
B notes assumed in Maverick business combination
|
-
|
1,427
(4)
|
Total
|
4,694
|
3,549
|
Less
current maturities
|
(3,369
)
|
(3,549
)
|
Long-term
debt, less current maturities
|
$
1,325
|
$
-
|
_________________
(1)
This mortgage note
payable is collateralized by land and a building in Japan.
Quarterly principal payments of $0.3 million plus interest is
payable in Japanese Yen at TIBOR plus 0.7% (0.76% as of December
31, 2018). The maturity date is in December 2020. This debt is
subject to the interest rate swap agreement discussed below, which
essentially fixes the interest rate on this loan at approximately
2.0%.
(2)
Consists of various
installment notes payable that are collateralized by equipment and
that bear interest at 12.4% to 22.1%.
(3)
On July 6, 2017,
the Company entered into a revolving credit agreement with U.S.
Bank National Association (the “U.S. Bank Revolver”).
Maximum borrowings were $2,000,000, subject to borrowing base
requirements under the agreement. The credit agreement provided for
interest at 2.5% plus the Daily Reset LIBOR Rate (4.6% as of
December 31, 2017). The maturity date was in July 2018 and the
entire balance plus accrued interest was repaid in June
2018.
(4)
In connection with
the acquisition of Maverick, the Company assumed Maverick’s
Series B notes payable that provided for interest at approximately
10.0% per annum. Monthly payments of interest only were due until
the maturity date in December 2018. The principal balance plus
accrued interest of $0.1 million was converted to an aggregate of
0.8 million shares of Common Stock in 2018.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swap Agreement
The
amount of unrealized loss from interest rate swaps at December 31,
2018, was approximately $36,000, and is included in other long-term
liabilities in the accompanying consolidated balance sheet. At
December 31, 2018, the Company had one contract for an interest
rate swap with a total notional amount of approximately $2.6
million.
Future Debt Maturities
As of December 31, 2018, the scheduled future maturities of
long-term debt are as follows (in thousands):
Year Ending December
31,
|
|
2019
|
$
3,369
|
2020
|
1,322
|
2021
|
3
|
Total
|
$
4,694
|
Convertible Note
On June 20, 2018, the Company issued a Senior Secured Convertible
Promissory Note (the “Convertible Note”) with a
principal balance of $4.75 million and a maturity date of June 20,
2019. The Convertible Note provided for monthly payments of
interest only at 8.0% per annum, and was collateralized by certain
equipment, general intangibles, inventory, and a security interest
in all of the Company’s trademarks, copyrights and patents.
The Convertible Note was convertible into shares of Common Stock at
a conversion price of $1.89 per share.
After payment of the lender’s expenses of $0.2 million, the
Company received net proceeds of $4.6 million. The Company also
issued to the lender an aggregate of 226,190 shares of Common Stock
with a fair value of approximately $0.4 million. These amounts
were accounted for as an aggregate discount of $0.6 million that
was accreted to interest expense using the effective interest
method. On August 24, 2018, the Company repaid the entire
convertible note by paying an aggregate of approximately $5.0
million, which consisted of the principal balance of $4.75 million
plus a make-whole penalty for early prepayment of $0.2 million. Due
to the early extinguishment of the Convertible Note, the Company
recognized accretion for all of the debt discount and issuance
costs of $0.6 million for the year ended December 31, 2018. The
Company has no further obligations related to this convertible
note.
NOTE 8 — STOCKHOLDERS’ EQUITY
Common Stock
On October 23, 2018, the Company amended its Articles of
Incorporation to increase the authorized shares of its
Common Stock, with a par value of $0.001 per share
, from 50,000,000 to 100,000,000.
Holders
of the Company’s Common Stock are entitled to one vote for
each share.
Preferred Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock
in one or more series, each having a par value of
$0.001
per
share. The Board of Directors is authorized to establish the voting
rights, if any, designations, powers, preferences, special rights,
and any qualifications, limitations and restrictions thereof,
applicable to the shares of each series. Through December 31, 2018,
the Board of Directors had designated four series of Preferred
Stock as discussed below.
Series A Preferred
The
Board of Directors previously designated 250,000 shares as Series A
Preferred stock (“Series A Preferred”). Each share of
Series A Preferred was entitled to 500 votes in matters voted on by
the common stockholders of the Company. In February 2017, 250,000
shares of Series A Preferred stock were voluntarily rescinded by a
director of the Company for no consideration. Accordingly, no
Series A Preferred shares are designated for issuance as of
December 31, 2018 and 2017.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series B Preferred
The
Board of Directors previously designated 300,000 shares as Series B
Preferred Stock (“Series B Preferred”). The Series B
Preferred was non-voting, not eligible for dividends and ranked
equal to Common Stock and below Series A Preferred in liquidation.
Each share of Series B Preferred was convertible into eight shares
of Common Stock. The Company issued 300,000 shares of Series B
Preferred in 2016 and the holder converted 15,193, 115,573 and
169,234 shares of Series B Preferred into shares of Common Stock
for the years ended December 31, 2018, 2017 and 2016, respectively.
Accordingly, no shares of Series B Preferred are outstanding or
designated for future issuance as of December 31,
2018.
Series C Preferred
In
September 2018, the Board of Directors designated 7,000 shares as
Series C Preferred Stock (“Series C Preferred”). Each
share of Series C Preferred converts automatically into 1,000
shares of the Company’s Common Stock when the Company files
an amendment to its Articles of Incorporation to increase the
authorized number of shares of Common Stock to 100,000,000. Holders
of the Series C Preferred were entitled to receive dividends
declared to holders of Common Stock on an as converted basis. In
addition, each holder of outstanding Series C Preferred was
entitled to vote and had liquidation rights on an as converted
basis with the Company’s Common Stock. In September 2018, the
Company entered into an agreement with two members of the Board of
Directors whereby the directors exchanged an aggregate of 6,900,000
shares of Common Stock owned by them for an aggregate of 6,900
shares of the Company’s Series C Preferred. In October 2018,
the Company amended its Articles of Incorporation to increase the
authorized number of shares of Common Stock to 100,000,000 and,
accordingly, all outstanding shares of Series C Preferred converted
to 6,900,000 shares of Common Stock. As of December 31, 2018, no
shares of Series C Preferred are outstanding. Accordingly, no
shares of Series C Preferred are outstanding and none are
designated for future issuance as of December 31,
2018.
Series D Preferred
In November 2018, the Board of Directors designated 44 shares as
Series D Preferred Stock. As discussed in Note 3, the Series D
Preferred provides for the potential payment of up to $15.0 million
contingent upon Morinda achieving certain post-closing
milestones.
As of December 31, 2018, the Series D Preferred
is classified as a liability since it provides for the issuance of
a variable number of shares of Common Stock if the Company elects
to settle in shares rather than pay the cash redemption value.
Please refer to Note 3 for additional information on the
consideration issued in the Morinda business combination and the
valuation and carrying value of the Series D
Preferred.
Summary of Preferred Stock Activity
The
Company’s Series A, Series B and Series C Preferred Stock
were classified within stockholders’ equity in the
Company’s consolidated balance sheets. Presented below is a
summary of activity for each equity classified series of Preferred
Stock for the years ended December 31, 2018 and 2017:
|
Equity Classified Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2016
|
250,000
|
284,807
|
2,278,456
|
-
|
-
|
534,807
|
2,278,456
|
|
|
|
|
|
|
|
|
Recission
of Series A shares
|
|
|
|
|
|
|
|
for
no consideration
|
(250,000
)
|
-
|
-
|
-
|
-
|
(250,000
)
|
-
|
Conversion
of Series B Preferred
|
|
|
|
|
|
|
|
Stock
to Common Stock
|
-
|
(115,573
)
|
(924,584
)
|
-
|
-
|
(115,573
)
|
(924,584
)
|
Balances,
December 31, 2017
|
-
|
169,234
|
1,353,872
|
-
|
-
|
169,234
|
1,353,872
|
Conversion
of Series B Preferred
|
|
|
|
|
|
|
|
Stock
to Common Stock
|
-
|
(169,234
)
|
(1,353,872
)
|
-
|
-
|
(169,234
)
|
(1,353,872
)
|
Issuance
of Series C Preferred Stock
|
-
|
-
|
-
|
6,900
|
6,900,000
|
6,900
|
6,900,000
|
Conversion
of Series C Preferred
|
|
|
|
|
|
|
|
Stock
to Common Stock
|
-
|
-
|
-
|
(6,900
)
|
(6,900,000
)
|
(6,900
)
|
(6,900,000
)
|
Balances,
December 31, 2018
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
_________________
(1)
Represents the
number of shares of Common Stock issuable based on the conversion
ratio of 8 shares of Common Stock for each outstanding share of
Series B Preferred Stock.
(2)
Represents the
number of shares of Common Stock issuable based on the conversion
ratio of 1,000 shares of Common Stock for each outstanding share of
Series C Preferred Stock.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Public Offerings of Common Stock
In
February 2017, the Company issued approximately 4.9 million shares
of Common Stock in an underwritten public offering at $3.50 per
share for net proceeds of approximately $15.4 million. In April
2018, the Company completed an underwritten public offering and
issued approximately 2.6 million shares of Common Stock for net
proceeds of approximately $3.8 million. In August 2018, the Company
completed an underwritten public offering of 9.2 million shares of
Common Stock at $1.28 per share for net proceeds of approximately
$9.7 million. In September 2018, pursuant to an At the Market
(“ATM”) Offering Agreement with Roth Capital Partners,
LLC, the Company commenced an offering that resulted in the
issuance of an aggregate of 8.1 million shares of Common Stock for
net proceeds of approximately $35.8 million. In November 2018, the
Company issued approximately 14.8 million shares of Common Stock in
an underwritten public offering at $3.50 per share for net proceeds
of approximately $47.8 million. Presented below is a summary of the
shares of Common Stock issued and the net proceeds received for
public offerings completed in 2018 (in thousands):
|
|
|
|
|
Description
|
|
|
|
|
|
April
2018 Offering
|
2,560
|
$
4,480
|
$
(269
)
|
$
(448
)
|
$
3,763
|
August
2018 Offering
|
9,200
|
11,776
|
(824
)
|
(647
)
|
10,305
|
ATM
Offering
|
8,089
|
37,533
|
(1,126
)
|
(603
)
|
35,804
|
November
2018 Offering
|
14,835
|
51,922
|
(3,635
)
|
(518
)
|
47,769
|
Total
|
34,684
|
$
105,711
|
$
(5,854
)
|
$
(2,216
)
|
$
97,641
|
NOTE
9 — STOCK OPTIONS AND WARRANTS
Stock Options
On
August 3, 2016, the Company’s approved and implemented the
New Age Beverages Corporation 2016-2017 Long Term Incentive Plan
(the “LTI Plan”). The LTI Plan provides for stock
options to be granted to employees, directors and consultants at an
exercise price not less than 100% of the fair value of the
Company’s Common Stock on the grant date. The options granted
generally have a maximum term of 10 years from the grant date and
are exercisable upon vesting. Option grants generally vest over a
period between one and three years after the grant date of such
award. As of December 31, 2018, approximately 0.2 million shares
were available for future grants of stock options, restricted stock
and similar instruments under the LTI Plan. The number of shares
reserved for grants is adjusted annually on the first day of
January whereby a maximum of 10% of the Company’s outstanding
shares of Common Stock are available for grant under the LTI Plan.
Accordingly, as of January 1, 2019, an additional 4.0 million
shares of Common Stock became available for future grants under the
LTI Plan.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table sets forth the summary of stock option activity
under the Company’s Stock Plans for the years ended December
31, 2018 and 2017 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of year
|
2,491
|
$
1.93
|
9.4
|
1,019
|
$
1.79
|
9.6
|
Granted
|
926
|
$
4.63
|
|
1,472
|
$
2.02
|
|
Forfeited
|
(213
)
|
$
2.00
|
|
-
|
$
-
|
|
Exercised
|
(418
)
|
$
1.79
|
|
-
|
$
-
|
|
Outstanding, end of
year
(3)
|
2,786
|
$
2.84
|
9.0
|
2,491
|
$
1.93
|
9.4
|
Vested, end of year
(4)
|
943
|
$
1.94
|
8.4
|
343
|
$
1.79
|
8.6
|
_________________
(1)
Represents the
weighted average exercise price.
(2)
Represents the
weighted average remaining contractual term until the stock options
expire.
(3)
As of December 31,
2018 and 2017, the aggregate intrinsic value of stock options
outstanding was $6.6 million and $0.6 million,
respectively.
(4)
As of December 31,
2018 and 2017, the aggregate intrinsic value of vested stock
options was $3.1 million and $0.1 million,
respectively.
The
fair value of each stock option granted under the LTI Plan was
estimated on the date of grant using the BSM option-pricing model,
with the following weighted-average assumptions for the years ended
December 31, 2018 and 2017:
|
|
|
|
|
Grant
date fair value of common stock (exercise price)
|
$
4.63
|
$
1.79
|
Expected
life (in years)
|
6.0
|
3.0
|
Volatility
|
121
%
|
100
%
|
Dividend
yield
|
0
%
|
0
%
|
Risk-free
interest rate
|
2.8
%
|
0.9
%
|
Based on the assumptions set forth above, the weighted-average
grant date fair value per share of employee options during the
years ended December 31, 2018 and 2017 was $4.05 and $1.11,
respectively. The BSM model requires various highly subjective
assumptions that represent management’s best estimates of the
fair value of the Company’s Common Stock, volatility,
risk-free interest rates, expected term, and dividend yield. The
expected term represents the weighted-average period that options
granted are expected to be outstanding giving consideration to
vesting schedules. Since the Company does not have an extended
history of actual exercises, the Company has estimated the expected
term using a simplified method which calculates the expected term
as the average of the time-to-vesting and the contractual life of
the awards. The Company has never declared or paid cash dividends
and does not plan to pay cash dividends in the foreseeable future;
therefore, the Company used an expected dividend yield of zero. The
risk-free interest rate is based on U.S. Treasury rates in effect
during the expected term of the grant. The expected volatility is
based on the historical volatility of the Company’s Common
Stock for the period beginning in August 2016 when its shares were
first publicly traded through the grant date of the respective
stock options.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
The
following table sets forth a summary of restricted stock award
activity under the Company’s LTI Plan for the years ended
December 31, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of year
|
1,823
|
$
1,518
|
1,876
|
$
534
|
Restricted shares issued
|
193
(1)
|
429
|
588
(2)
|
1,339
|
Forfeited
|
(35
)
|
(76
)
|
-
|
-
|
Vested
|
(963
)
|
(1,314
)
|
(641
)
|
(355
)
|
Outstanding, end of
year
(2)
|
1,018
|
$
557
(3)
|
1,823
|
$
1,518
(4)
|
Intrinsic value,
end of year
|
$
5,294
(4)
|
|
$
3,956
(4)
|
|
Balance
sheet classification of
|
|
|
|
|
unvested compensation cost:
|
|
|
|
|
Prepaid expenses- current
|
|
$
347
|
|
$
963
|
Prepaid expenses- long-term
|
|
210
|
|
555
|
Total
|
|
$
557
|
|
$
1,518
|
_________________
(1)
The weighted
average fair value was $2.22 per share based on the closing price
of the Company’s
Common
Stock
on the grant date.
(2)
The weighted
average fair value was $2.28 per share based on the closing price
of the Company’s
Common
Stock
on the grant date.
(3)
Unvested
compensation as of December 31, 2018 will be recognized over a
weighted average remaining term of 1.6 years.
(4)
The intrinsic value
at the end of the year was based on the closing price of the
Company’s common stock of $5.20 per share on December 31,
2018 and $2.17 per share on December 31, 2017.
In
connection with the business combination with Morinda, the Company
made restricted stock award grants for an aggregate of 1.2 million
shares of the Company’s common stock. No shares will be
issued until a vesting event occurs. Due to Morinda’s foreign
operations, upon vesting the awards will be settled in (i) cash
where regulatory requirement prohibit settlement in shares, (ii)
shares of Common Stock, or (iii) a combination of shares and cash
at the Company’s election for certain awards. The awards that
must be settled in cash will be presented as a liability in the
Company’s consolidated balance sheet as discussed below. Due
to the grants that were effective at the end of December 2018, no
compensation was recognized for these awards. The following table
sets forth a summary of restricted stock award activity under
related to the Morinda grants as of December 31, 2018 (in
thousands):
|
|
Unvested Compensation
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance grants
(1)
|
-
|
216
|
-
|
216
|
$
-
|
$
1,123
|
$
-
|
$
1,123
|
Service-based
grants:
|
|
|
|
|
-
|
|
|
|
|
-
|
319
|
555
|
874
|
-
|
1,659
|
2,886
|
4,545
|
Three-year vesting
(3)
|
43
|
96
|
-
|
139
|
224
|
499
|
-
|
723
|
Total
|
43
|
631
|
555
|
1,229
|
$
224
|
$
3,281
|
$
2,886
|
$
6,391
|
_________________
(1)
Restricted stock
grants vest if Morinda achieves EBITDA of $20.0 million for the
year ending December 31, 2019.
(2)
Restricted stock
grants were provided to certain key employees of Morinda and
provide for vesting of 100% of the shares if the employee continues
to be employed through December 31, 2019.
(3)
Restricted stock
grants vest ratably for one-third of the shares on each anniversary
of the grant date.
(4)
Awards that may
only be settled in cash will be classified as liabilities in the
Company’s consolidated balance sheets. Accordingly, at the
end of each future reporting period this liability will be adjusted
based on changes in the fair value of the Company’s Common
Stock with a corresponding charge to stock-based compensation
expense over the vesting period.
(5)
Awards that may be
settled in cash or shares of the Company’s Common Stock will
be classified as equity in the Company’s consolidated balance
sheets. Accordingly, a charge to stock-based compensation expense
will be recognized over the vesting period.
(6)
Unvested
compensation represents the product of the number of shares granted
times the closing price of the Company’s Common Stock of
$5.20 per shares as of December 31, 2018. Unvested compensation
will be recognized as described above. The impact of any
forfeitures will be recognized as a reduction of stock-based
compensation expense in the period in which employees
terminate.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2018, the remaining unrecognized costs are expected to
be recognized on a straight-line basis over a weighted-average
period of approximately 2.6 years for stock options and 1.6 years
for restricted stock awards.
Stock-based Compensation Expense
Stock-based
compensation expense is included in general and administrative
expenses in the accompanying consolidated statements of operations.
The table below summarizes stock-based compensation expense related
to stock options and restricted stock awards for the years ended
December 31, 2018 and 2017, and the unrecognized compensation
expense as of December 31, 2018 and 2017 (in
thousands):
|
Expense
Recognized
Year
Ended December 31:
|
Unrecognized
Expense
as of
December 31:
|
|
|
|
|
|
Stock
options
|
$
1,219
|
$
162
|
$
6,811
|
$
3,035
|
Restricted
stock awards
|
1,314
|
1,569
|
557
|
1,442
|
Total
|
$
2,533
|
$
1,731
|
$
7,368
|
$
4,477
|
Warrants
As of
December 31, 2016, the Company had warrants outstanding for 372,974
shares of Common Stock with an exercise price of $0.40 per share.
For the year ended December 31, 2017, these warrants were exercised
for proceeds of approximately $150,000. No warrants were granted
for the years ended December 31, 2018 and 2017, and no warrants are
outstanding as of December 31, 2018 and 2017.
NOTE 10 — INCOME TAXES
The Tax Act
In
December 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax
Act”) was enacted into law which significantly revises the
Internal Revenue Code of 1986, as amended. The newly enacted
federal income tax law, among other things, contains significant
changes to corporate taxation, including a flat corporate tax rate
of 21%, limitation of the tax deduction for interest expense to 30%
of adjusted taxable income, limitation of the deduction for newly
generated net operating losses to 80% of current year taxable
income and elimination of net operating loss (“NOL”)
carrybacks, future taxation of certain classes of offshore earnings
regardless of whether they are repatriated, immediate deductions
for certain new investments instead of deductions for depreciation
expense over time, and modifying or repealing many business
deductions and credits beginning in 2018.
As of
December 31, 2018, the Company has continued its position to
return all foreign earnings to the U.S. parent company and has
recorded deferred tax liabilities of $850,000 for foreign
withholding taxes associated with foreign retained earnings and
cross-border payments.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a
result of the Tax Act, the corporate tax rate decreased from a top
marginal rate of 35% that was effective through December 31, 2017
to a flat rate of 21% effective January 1, 2018. Accordingly, a
decrease of $1.4 million in the Company’s domestic deferred
income tax assets was recognized as of December 31, 2017, and this
amount was fully offset by a corresponding decrease in the
valuation allowance.
Morinda Business Combination
Before
the Company acquired Morinda on December 21, 2018, Morinda’s
net earnings taxed for the U.S. and various state jurisdictions
were payable personally by the shareholders pursuant to an election
under Subchapter S of the Internal Revenue Code. The
Subchapter S election terminated upon closing of the business
combination with the Company. Accordingly, the Company recognized
net deferred income tax liabilities of approximately $9.9 million
for differences between the income tax basis of the assets and
liabilities and the related balances for financial reporting
purposes.
The
Company is required to pay taxes to the appropriate governmental
entities on profits derived from Morinda’s international
operations, including foreign withholding taxes imposed on the
remittance of earnings of Morinda’s foreign subsidiaries and
withholding taxes imposed on royalty payments. The Company has
recorded income tax liabilities for foreign withholding on
distributed earnings. As of December 31, 2018, the Company has no
undistributed earnings from foreign subsidiaries that are
indefinitely reinvested. The Company is also responsible for state
income taxes and other taxes assessed at the Company level. The
Company’s provision for income taxes includes such
taxes.
Income Tax Expense
For the
years ended December 31, 2018 and 2017, loss before income taxes is
as follows (in thousands):
|
|
|
Domestic
|
$
(20,529
)
|
$
(3,536
)
|
International
|
(533
)
|
-
|
Loss
before income taxes
|
$
(21,062
)
|
$
(3,536
)
|
For the
years ended December 31, 2018 and 2017, the reconciliation between
the income tax benefit computed by applying the statutory U.S.
federal income tax rate to the pre-tax loss before income taxes,
and total income tax expense recognized in the financial statements
is as follows (in thousands):
|
|
|
Income
tax benefit at statutory U.S. federal rate
|
$
4,423
|
$
1,202
|
Income
tax benefit attributable to U.S. states
|
1,063
|
108
|
Stock-based
compensation
|
1,367
|
-
|
Non-deductible
expenses
|
(351
)
|
(1
)
|
Change
in prior year deferred taxes and other
|
300
|
|
Foreign
rate differential
|
(27
)
|
-
|
Change
in valuation allowance
|
2,152
|
(1,309
)
|
Total
income tax benefit
|
$
8,927
|
$
-
|
For
the years ended December 31, 2018 and 2017, the Company did not
recognize any current income tax expense. Deferred income tax
expense consisted of the following (in
thousands):
|
|
|
U.S.
Federal
|
$
7,891
|
$
-
|
U.S.
States
|
1,063
|
-
|
Foreign
|
(27
)
|
-
|
Total deferred income tax
benefit
|
$
8,927
|
$
-
|
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Income Tax Assets and Liabilities
As of
December 31, 2018 and 2017, the income tax effects of temporary
differences that give rise to significant deferred income tax
assets and liabilities are as follows (in thousands):
|
|
|
Deferred
income tax assets:
|
|
|
Identifiable
intangible assets
|
$
-
|
$
128
|
Accrued
liabilities
|
5,224
|
53
|
Embedded
derivative liabilities
|
112
|
-
|
Other
|
26
|
-
|
Stock-based
compensation
|
435
|
-
|
Net
operating loss carryforwards
|
9,295
|
2,689
|
Gross
deferred income tax assets
|
15,092
|
2,870
|
Valuation
allowance for deferred income tax assets
|
-
|
(2,870
)
|
Net
deferred income tax assets
|
15,092
|
-
|
Deferred
income tax liabilities:
|
|
|
Goodwill
and identifiable intangible assets
|
(12,405
)
|
-
|
Property
and equipment, net
|
(3,200
)
|
-
|
Notes
payable
|
(326
)
|
-
|
Gross
deferred income tax liabilties
|
(15,931
)
|
-
|
Net
deferred income tax liability
|
$
(839
)
|
$
-
|
Deferred
income tax assets and liabilities as of December 31, 2018 and 2017
are presented in the accompanying consolidated balance sheets as
follows (in thousands):
|
|
|
Deferred income tax
assets
|
$
8,908
|
$
-
|
Deferred income tax
liabilities
|
(9,747
)
|
-
|
Net deferred income tax
liability
|
$
(839
)
|
$
-
|
For the
year ended December 31, 2017 the valuation allowance increased
by $0.7 million, primarily as a result of the increase in net
operating losses. For the year ended December 31, 2018, the
net decrease in the valuation allowance amounted to $2.9 million
since net operating loss carryforwards were considered to be
realizable due to net deferred tax liabilities related to purchase
accounting. In assessing the realizability of deferred income tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred income tax assets will not
be realized.
NOL Carryforwards and Other Matters
At
December 31, 2018, the Company has federal NOL carryforwards of
approximately $36.3 million, of which $24.9 million does not expire
and $11.4 million will begin to expire in 2023. Additionally, the
Company has varying amounts of NOL carryforwards in the U.S. states
in which it does business that start to expire in 2023. Federal and
state laws impose substantial restrictions on the utilization of
NOL and tax credit carryforwards in the event of an ownership
change for income tax purposes, as defined in Section 382 of
the Internal Revenue Code.
Pursuant
to Internal Revenue Code (“IRC”) Section 382, annual
use of the Company’s net operating loss carryforwards may be
limited in the event a cumulative change in ownership of more than
50% occurs within a three-year period. The Company has not
completed an IRC Section 382 analysis regarding the limitation of
net operating loss carryforwards. The Company’s ability to
use its remaining net operating loss carryforwards may be further
limited if the Company experiences a Section 382 ownership change
in connection with future changes in the Company’s stock
ownership.
As
discussed above, the imposition of the one-time Transition Tax may
reduce or eliminate U.S. federal deferred income taxes on the
unremitted earnings of the Company’s foreign subsidiaries.
However, the Company may still be liable for withholding taxes or
other income taxes that might be incurred upon the repatriation of
foreign earnings. The Company has made a provision for additional
income taxes on undistributed earnings of its foreign subsidiaries
because the Company does not intend to permanently reinvest these
earnings outside the United States.
The
Company files income tax returns in the U.S. federal, and various
states as well as the following foreign jurisdictions: Australia,
Austria, Canada, Chile, China, Colombia, Germany, Hong Kong,
Hungary, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, New
Zealand, Norway, Peru, Poland, Russia, Singapore, Sweden,
Switzerland, Thailand, Tahiti, Taiwan, the UK and Vietnam. The
Company’s federal and state tax years for 2015 and forward
are subject to examination by taxing authorities, due to unutilized
NOL’s. All foreign jurisdictions tax years are also subject
to examination based on the relative statute of
limitations.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
total outstanding balance for liabilities related to unrecognized
tax benefits at December 31, 2018 was $0.4
million, which would favorably impact the effective tax rate if
recognized. There were no unrecognized tax benefits as of December
31, 2017. The increase in 2018 relates to tax audits in foreign
jurisdictions, transfer pricing adjustments, and state tax expense.
We account for interest expense and penalties for unrecognized tax
benefits as part of our income tax provision. The Company does not
anticipate that unrecognized tax benefits will significantly
increase or decrease within the next twelve
months.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Executive Deferred Compensation Plan
Morinda’s
Board of Directors
implemented
an unfunded executive deferred compensation plan in 2009 for
certain executives of Morinda. All financial performance targets
under the plan were achieved as of December 31, 2018, and a
long-term liability of $4.1 million is included in the accompanying
consolidated balance sheets. After the executives retire, the
deferred compensation obligation is payable over a period up to 20
years.
401(k) Plan
Morinda
has a defined contribution employee benefit plan under section
401(k) of the Internal Revenue Code (the “401(k)
Plan”). The 401(k) Plan covers all eligible U.S. employees of
Morinda who are entitled to participate at the beginning of the
first full quarter following commencement of employment. Morinda
matches contributions up to 3% of the participating
employee’s compensation. Morinda’s matching
contributions vest over four years with 0% vested through the end
of the first year of service and 33% vesting upon completion of
each of the next three years of service. Total contributions by
Morinda to the 401(k) Plan were insignificant for the period from
December 21, 2018 through December 31, 2018. Effective January 1,
2019, the Company extended the right to participate in the 401(k)
Plan to all of the Company’s eligible employees.
Foreign Benefit Plans
Morinda
has an unfunded retirement benefit plan for the Company’s
Japanese branch that entitles substantially all employees in Japan,
other than directors, to retirement payments. Morinda also has an
unfunded retirement benefit plan in Indonesia that entitles all
permanent employees to retirement payments.
Upon
termination of employment, the Morinda employees of the Japanese
branch are generally entitled to retirement benefits determined by
reference to basic rates of pay at the time of termination, years
of service, and conditions under which the termination occurs. If
the termination is involuntary or caused by retirement at the
mandatory retirement age of 65, the employee is entitled to a
greater payment than in the case of voluntary termination. Morinda
employees in Indonesia whose service is terminated are generally
entitled to retirement benefits determined by reference to basic
rates of pay at the time of termination, years of service and
conditions under which the termination occurs. The unfunded benefit
obligation for these defined benefit pension plans was
approximately $3.0 million as of December 31, 2018. Of this
amount, approximately $2.9 million is included in other long-term
liabilities in the accompanying consolidated balance sheet as of
December 31, 2018.
Morinda
also makes contributions to employee benefit plans in various other
countries in which it operates. Total contributions by Morinda to
foreign employee benefit plans were insignificant for the period
from December 21, 2018 through December 31, 2018.
Contingencies
The
Company’s operations are subject to numerous governmental
rules and regulations in each of the countries it does business.
These rules and regulations include a complex array of tax and
customs regulations as well as restrictions on product ingredients
and claims, the commissions paid to the Company’s IPCs,
labeling and packaging of products, conducting business as a
direct-selling business, and other facets of manufacturing and
selling products. In some instances, the rules and regulations may
not be fully defined under the law or are otherwise unclear in
their application. Additionally, laws and regulations can change
from time to time, as can their interpretation by the courts,
administrative bodies, and the tax and customs authorities in each
country. The Company actively seeks to be in compliance, in all
material respects, with the laws of each of the countries in which
it does business and expects its IPCs to do the same. The
Company’s operations are often subject to review by local
country tax and customs authorities and inquiries from other
governmental agencies. No assurance can be given that the
Company’s compliance with governmental rules and regulations
will not be challenged by the authorities or that such challenges
will not result in assessments or required changes in the
Company’s business that could have a material impact on its
business, consolidated financial statements and cash
flow.
The
Company has various non-income tax contingencies in several
countries. Such exposure could be material depending upon the
ultimate resolution of each situation. As of December 31,
2018, the Company has recorded a current liability under Accounting
Standards Codification (ASC) 450,
Contingencies
, of approximately $0.8
million.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From
time to time, the Company may be a party to litigation and subject
to claims incident to the ordinary course of business. Although the
results of litigation and claims cannot be predicted with
certainty, the Company currently believes that the final outcome of
these ordinary course matters will not have a material adverse
effect on its business. Regardless of the outcome, litigation can
have an adverse impact on the Company because of defense and
settlement costs, diversion of management resources, and other
factors.
Guarantee Deposits
Morinda
has deposits in Korea for collateral on IPC returns dictated by
law, and collateral to credit card companies for guarantee of IPC
payments. As of December 31, 2018, approximately $0.8 million
of guarantee deposits are included in other long-term assets in the
accompanying consolidated balance sheet.
NOTE 12 — RELATED PARTY TRANSACTIONS
In March 2015, the Company borrowed $60,000 from a member of
management. The note provided for interest at 10% per annum and
matured on March 31, 2020. Payments of interest were required
quarterly. This note was repaid in full in February 2017.
As
discussed in Note 8, 250,000 shares of Series A Preferred stock
were voluntarily rescinded by a director of the Company for no
consideration in February 2017.
As discussed in Note 8,
the Company entered into an
agreement with two members of the Board of Directors
i
n September 2018 whereby the directors
exchanged an aggregate of 6,900,000 shares of Common Stock owned by
them for an aggregate of 6,900 shares of the Company’s Series
C Preferred. In October 2018, the shares of Series C Preferred
Stock automatically converted into 6,900,000 shares of Common Stock
upon receipt of shareholder approval to increase the authorized
number of shares of Common Stock to 100,000,000
shares.
NOTE 13 —NET LOSS PER SHARE
Net
loss per share is computed by dividing loss attributable to common
stockholders by the weighted average number of common shares
outstanding during the year. The calculation of diluted net loss
per share includes dilutive stock options, unvested restricted
stock awards, and other Common Stock equivalents computed using the
treasury stock method, in order to compute the weighted average
number of shares outstanding. For the years ended December 31, 2018
and 2017, basic and diluted net loss per share were the same since
all Common Stock equivalents were anti-dilutive. As of December 31,
2018 and 2017, the following potential Common Stock equivalents
were excluded from the computation of diluted net loss per share
since the impact of inclusion was anti-dilutive (in
thousands):
|
|
|
Series B Preferred
Stock
|
-
|
1,354
|
Stock
options
|
2,786
|
2,491
|
Restricted stock awards
under LTI Plan:
|
|
|
Unvested shares of Common Stock issued
|
1,018
|
1,823
|
Unissued and unvested awards to Morinda
employees
|
1,229
|
-
|
Total
|
5,033
|
5,668
|
NOTE 14 — FINANCIAL INSTRUMENTS AND SIGNFICANT
CONCENTRATIONS
Fair Value Measurements
Fair
value is defined as the price that would be received upon sale of
an asset or paid to transfer a liability in an orderly transaction
between market participants on the measurement date. When
determining fair value, the Company considers the principal or most
advantageous market in which it transacts and considers assumptions
that market participants would use when pricing the asset or
liability. The Company applies the following fair value hierarchy,
which prioritizes the inputs used to measure fair value into three
levels and bases the categorization within the hierarchy upon the
lowest level of input that is available and significant to the fair
measurement:
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level
1—Quoted prices in active markets for identical assets or
liabilities accessible to the reporting entity at the measurement
date
Level
2—Other than quoted prices included in Level 1 that are
observable for the asset and liability, either directly or
indirectly through market collaboration, for substantially the full
term of the asset or liability
Level
3—Unobservable inputs for the asset or liability used to
measure fair value to the extent that observable inputs are not
available, thereby allowing for situations in which there is
little, if any market activity for the asset or liability at
measurement date
The
fair value of the Company’s cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and accrued
liabilities, payables to former Morinda shareholders, and notes
payable approximate their carrying values as of December 31,
2018 and 2017.
The contingent
consideration obligations incurred in the business combinations
with Marley and Morinda are recorded at estimated fair value as of
December 31, 2018 and 2017. In addition, the
net assets
acquired in the business combinations discussed in Note 3 were
generally recorded at fair market value on the date of closing. The
Company did not have any other nonrecurring assets and liabilities
measured at fair value as of December 31, 2018 and
2017.
The
Company’s interest rate swap and embedded derivative
liability are the only liabilities that have been carried at fair
value on a recurring basis. The Company’s interest rate swap
is recorded at fair market value and has been classified within
Level 2 of the fair value hierarchy. The Company’s embedded
derivative liability is recorded at fair market value and has been
classified within Level 3 of the fair value hierarchy. Details of
the interest rate swap and the embedded derivative liabilities,
including valuation methodology and key assumptions and estimates
used, are disclosed in Note 7. The Company’s policy is to
recognize asset or liability transfers among Level 1, Level 2 and
Level 3 as of the actual date of the events or change in
circumstances that caused the transfer. During the years ended
December 31, 2018 and 2017, the Company had no transfers of
its assets or liabilities between levels of the fair value
hierarchy.
Significant Concentrations
For the years ended December 31, 2018 and 2017, one customer
comprised approximately 11% and 10%, respectively, of the
Company’s consolidated net revenue.
A substantial
portion of the business acquired from Morinda is conducted in
foreign markets, exposing the Company to the risks of trade or
foreign exchange restrictions, increased tariffs, foreign currency
fluctuations and similar risks associated with foreign operations.
Approximately 70% of the Company’s consolidated net revenue
and 90% of Morinda’s net revenue for 2019 is expected to be
generated outside the United States, primarily in the Asia Pacific
market. Morinda’s Tahitian Noni
®
Juice, MAX and
other noni-based beverage products are expected to comprise over
85% of Morinda’s net revenue for 2019. However, if consumer
demand for these products decreases significantly or if the Company
ceases to offer these products without a suitable replacement, the
Company’s consolidated financial condition and operating
results would be adversely affected. The Company purchases fruit
and other Noni-based raw materials from French Polynesia, but these
purchases of materials are from a wide variety of individual
suppliers with no single supplier accounting for more than 10% of
its raw material purchases during 2018. However, as the majority of
the raw materials are consolidated and processed at the
Company’s plant in Tahiti, the Company could be negatively
affected by certain governmental actions or natural disasters if
they occurred in that region of the world.
Financial
instruments that subject the Company to concentrations of credit
risk consist primarily of cash, cash equivalents, restricted cash,
and accounts receivable. The Company maintains its cash, cash
equivalents and restricted cash at high-quality financial
institutions. Cash deposits, including those held in foreign
branches of global banks often exceed the amount of insurance, if
any, provided on such deposits. As of December 31, 2018, the
Company had cash and cash equivalents with a single financial
institution in the United States with a balance of $6.5 million,
and two financial institutions in China with balances of $14.5
million and $8.0 million. The Company also had $3.2 million of
restricted cash in China as of December 31, 2018. The Company has
never experienced any losses related to its investments in cash,
cash equivalents and restricted cash.
Generally,
credit risk with respect to accounts receivable is diversified due
to the number of entities comprising the Company’s customer
base and their dispersion across different geographies and
industries. The Company performs ongoing credit evaluations on
certain customers and generally does not require collateral on
accounts receivable. The Company maintains reserves for potential
bad debts and historically such losses have been insignificant.
As of December 31, 2017, one customer
comprised approximately 11% of accounts receivable,
net.
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 — SEGMENTS AND GEOGRAPHIC CONCENTRATIONS
Reportable Segments
The
Company follows segment reporting in accordance with ASC Topic 280,
Segment Reporting
. As a
result of the business combination with Morinda in December 2018 as
discussed in Note 3, the Company has changed its operating segments
to consist of the Morinda segment and the New Age segment. The New
Age segment was previously comprised of the Brands segment and the
DSD segment which are now combined as a single segment as they are
operating with a single management team. After the Morinda business
combination, the Company’s CODM began assessing performance
and allocating resources based on the financial information of
these two reporting segments. Accordingly, the Company’s
previous segment disclosures have been restated for the year ended
December 31, 2017.
The New
Age segment distributes beverages to retail customers throughout
Colorado and surrounding states, and sells beverages to wholesale
distributors, broad-liners, key account owned warehouses and
international accounts using several distribution channels. Morinda
is a healthy lifestyles and beverage company with operations in
more than 60 countries around the world, and manufacturing
operations in Tahiti, Germany, Japan, the United States, and China.
Morinda is primarily a direct-to-consumer and e-commerce business
with over 70% of its business generated in the key Asia Pacific
markets of Japan, China, Korea, Taiwan, and Indonesia.
Net
revenue by reporting segment for the years ended December 31, 2018
and 2017, is as follows (in thousands):
|
|
|
New Age
|
$
48,335
|
$
52,188
|
Morinda
|
3,825
|
-
|
Total Revenue
|
$
52,160
|
$
52,188
|
Gross
profit by reporting segment for the years ended December 31, 2018
and 2017, is as follows (in thousands):
|
|
|
New
Age
|
$
6,380
|
$
12,400
|
Morinda
|
2,915
|
-
|
Total
gross profit
|
$
9,295
|
$
12,400
|
Assets
by reporting segment as of December 31, 2018 and 2017, are as
follows (in thousands):
|
|
|
New
Age
|
$
61,265
|
$
61,646
|
Morinda
|
206,222
|
-
|
Other
|
19,445
|
6,026
|
Total
assets
|
$
286,932
|
$
67,672
|
NEW AGE BEVERAGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital
expenditures by reporting segment for the years ended December 31,
2018 and 2017, are as follows (in thousands):
|
|
|
New
Age
|
$
81
|
$
666
|
Morinda
|
56,133
(1)
|
-
|
General
corporate
|
12
|
-
|
Total
capital expenditures
|
$
56,226
|
$
666
|
_________________
(1)
Consists of
property and equipment of $55.4 million acquired in the business
combination with Morinda and post-closing additions of $0.7
million.
Geographic Concentrations
The
following table presents net revenue by geographic region for the
years ended December 31, 2018 and 2017 (in thousands):
|
|
|
|
|
United
States of America
|
$
48,460
|
$
52,188
|
International
|
3,700
|
-
|
Total
revenue
|
$
52,160
|
$
52,188
|
As of
December 31, 2018, the net carrying value of the Company’s
property and equipment located outside of the United States
amounted to approximately $50.6 million, including approximately
$30.7 million located in Japan. As of December 31, 2017,
substantially all of the Company’s assets and operations were
located in the United States.
NOTE 16 — SUBSEQUENT EVENTS
Loan Agreement
On March 29, 2019, the Company entered into a Loan and Security
Agreement (the “Loan Agreement”) with East West Bank
(“EWB”). The Loan Agreement matures on March 29,
2023 and provides for (i) a term loan in the aggregate principal
amount of $15.0 million, which may be increase to $25.0 subject to
the satisfaction of certain conditions (the “Term
Loan”) and (ii) a $10.0 million revolving loan facility (the
“Revolving Loan Facility”). At the closing, EWB funded
$25.0 million to the Company consisting of the $15.0 million Term
Loan and $10.0 as an advance under the Revolving Loan
Facility.
The obligations of the
Company under the Loan Agreement are secured by substantially all
assets of the Company and guaranteed by certain subsidiaries of the
Company
.
The Loan
Agreement requires compliance with certain financial and
restrictive covenants and
includes
customary events of default. Key financial covenants include
maintenance of minimum Adjusted EBITDA and a maximum Total Leverage
Ratio (all as defined and set forth in the Loan Agreement). During
any periods when an event of default occurs, the Loan Agreement
provides for interest at a rate that is 3.0% above the rate
otherwise applicable to such obligations.
Borrowings outstanding under the Loan Agreement bear interest at
the Prime Rate plus 0.25%. However, if the Total Leverage Ratio (as
defined in the Loan Agreement) is equal to or greater than 1.50 to
1.00, borrowings will bear interest at the Prime Rate plus 0.50%.
The Company may voluntarily prepay amounts outstanding under the
Revolving Loan Facility on ten business days’ prior notice to
EWB without prepayment charges. In the event the Revolving Loan
Facility is terminated prior to its maturity, the Company would be
required to pay an early termination fee in the amount of 0.50% of
the revolving line. Additional borrowing requests under the
Revolving Loan Facility are subject to various customary conditions
precedent, including satisfaction of a borrowing base test as more
fully described in the Loan Agreement.
The Revolving Loan Facility also provides for an
unused line fee equal to 0.5% per annum of the undrawn portion. The
Loan Agreement includes a lockbox arrangement where the Company is
required to direct its customers to remit payments to a restricted
bank account, whereby all available funds are used to pay down the
outstanding principal balance under the Revolving Loan
Facility.
Payments under the Term Loan are interest-only for the first six
months and are followed by principal and interest payments
amortized over the remaining term of the Term Loan. The Company may
elect to prepay the Term Loan before its maturity on 10 business
days’ notice to EWB subject to a prepayment fee of 2% for the
first year of the Term Loan and 1% for the second year of the Term
Loan.
No later than 120 days after the end of each
fiscal year, commencing with the fiscal year ending December 31,
2019, the Company is required to make a payment towards the
outstanding principal amount of the Term Loan in an amount equal to
35% of the Excess Cash Flow (as defined in the Loan Agreement),
if the Total Leverage Ratio is less
than 1.50 to 1.00 or (i) 50%
of the Excess Cash Flow
if the Total Leverage Ratio is greater
than or equal to 1.50 to 1.00
.
Also on March 29, 2019, the Company repaid all outstanding amounts
and terminated the Siena Revolver discussed in Note 7, whereby a
prepayment fee of $0.5 million was incurred.
Sale Leaseback
On March 22, 2019, the Company entered into an agreement with a
major Japanese real estate company resulting in the sale for
approximately $55 million of the land and building in Tokyo that
serves as the corporate headquarters of Morinda’s Japanese
subsidiary. Concurrently with the sale, the Company entered into a
lease of this property for an initial noncancelable term of seven
years, with an option at the Company’s discretion to extend
the lease term for 20 additional years. The monthly lease cost is
¥20 million (approximately $181,000 as of March 22, 2019) for
the initial seven-year term.
In connection with this transaction, the Company repaid the $2.9
million mortgage on the building discussed in Note 7, cancelled the
related interest rate swap agreement discussed in Note 7, and is
obligated to pay $25.0 million to the former stockholders of
Morinda to eliminate the contingent financing liability discussed
in Note 3. After these payments, income taxes, post-closing repair
obligations, and transaction costs, the net proceeds from the sale
leaseback are expected to be between $9.0 million and $12.0
million.
The net carrying value of this property was approximately $29.0
million, resulting in a gain of approximately $26.0 million. The
Company is evaluating whether this transaction qualifies as a sale
under ASU 2016-02 (“
Leases”
).
Depending on the final results of this evaluation, the gain on sale
will either be (i) amortized as a reduction of future lease expense
over the initial noncancelable term, or (ii) recognized in the
Company’s consolidated statement of operations for the
quarter ended March 31, 2019. The Company has not yet determined
the amount of ROU lease asset and the corresponding ROU lease
liability that will be recognized during the first quarter of
2019.
Other Transactions
On
January 14, 2019, the Company entered into an agreement with
Docklight LLC for the exclusive licensing rights in the United
States for the manufacturing, sale, distribution, marketing and
advertising of certain products which include shelf-stable, ready
to drink, non-alcoholic, consumer beverages infused with
Cannabidiol derived from hemp-based or synthetic sources. The
licensed property includes the name, image, likeness, caricature,
signature and biography of Bob Marley, the trademarks MARLEY and
BOB MARLEY for use in connection with the Company’s existing
licensed marks. The initial term of the Agreement expires in
January 2024, unless extended or earlier terminated as provided in
the agreement. As consideration for the license, the Company agreed
to pay a fee equal to fifty percent of the gross margin, as defined
in the Agreement, on future sales of approved licensed products,
which fee shall be reviewed annually by the
parties.
On
January 21, 2019, the Company entered into a lease for
approximately 79,600 square feet of office space in the downtown
area of Denver, Colorado. The monthly obligation for base rent will
average approximately $33,000 per month over the lease term which
expires in December 2029. The Company has options to terminate the
lease after 90 months as well as the option to extend the lease for
an additional period of five years.
On
March 12, 2019, the Company granted restricted stock awards to
members of the Board of Directors for an aggregate of 90,910 shares
of Common Stock.
The fair
value of these shares was $0.5 million based on the closing price
of the Company’s Common Stock on the grant date. Compensation
expense will be recognized until the restricted stock awards vest
on March 12, 2020.
During
the first quarter of 2019, the Company entered into operating lease
obligations for transportation equipment. These leases provide for
fixed minimum payments of approximately $17,000 per month over the
eight-year lease term for an aggregate commitment of $1.7 million.
The present value of these obligations of $1.3 million will be
recorded as an ROU lease asset and ROU lease liability for the
first quarter of 2019.