NBEV NewAge Inc

	New Age Beverages Corporation
	(Exact Name of Small Business Issuer as Specified in its Charter)

 

Washington		27-2432263
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1700 E. 68th Avenue Denver, CO		80229
(Address of principal executive offices)		(Zip Code)
Registrant's telephone number, including area code:		(303) 289-8655

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

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

 

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

						Accumulated
					Additional	Other
	Preferred Stock		Common Stock		Paid-in	Comprehensive	Accumulated
	Shares	Amount	Shares	Amount	Capital	Income	Deficit	Total
Three Months Ended March 31, 2019
Balances, December 31, 2018	-	$ -	75,067	$ 75	$ 176,471	$ 626	$ (22,636 )	$ 154,536
Issuance of Common Stock for:
Exercise of stock options	-	-	200	-	418	-	-	418
Grant of restricted stock awards	-	-	126	-	576	-	-	576
Stock-based compensation expense	-	-	-	-	2,127	-	-	2,127
Net change in other comprehensive income	-	-	-	-	-	427	-	427
Net loss	-	-	-	-	-	-	(1,616 )	(1,616 )
Balances, March 31, 2019	-	$ -	75,393	$ 75	$ 179,592	$ 1,053	$ (24,252 )	$ 156,468
Three Months Ended March 31, 2018
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 )	-	-	-
Grant of restricted stock awards	-	-	123	-	260	-	-	260
Stock-based compensation related to stock options	-	-	-	-	157	-	-	157
Net loss	-	-	-	-	-	-	(2,651 )	(2,651 )
Balances, March 31, 2018	-	$ -	36,649	$ 36	$ 63,620	$ -	$ (13,152 )	$ 50,504

Net revenue	$ 66,781
Net loss	$ (1,645 )
Net loss per share- basic and diluted	$ (0.04 )
Weighted average number of shares of common stock outstanding- basic and diluted	38,427

Reporting Unit
Morinda	$ 10,284
Maverick	5,149
PMC	1,768
Marley	9,418
Xing	4,506
B&R	389
Total Goodwill	$ 31,514

	March 31, 2019			December 31, 2018
		Accumulated	Net Book		Accumulated	Net Book
Identifiable Intangible Asset	Cost	Amortization	Value	Cost	Amortization	Value
License agreements
China direct selling license	$ 20,420	$ 380	$ 20,040	$ 20,420	$ 40	$ 20,380
Other	5,989	417	5,572	5,989	318	5,671
Manufacturing processes and recipes	11,610	577	11,033	11,610	380	11,230
Trade names	12,301	796	11,505	12,301	584	11,717
IPC distributor sales force	9,760	273	9,487	9,760	29	9,731
Customer relationships	6,444	1,296	5,148	6,444	1,194	5,250
Patents	4,100	501	3,599	4,100	433	3,667
Former Morinda shareholder non-compete agreements	186	17	169	186	2	184
Total identifiable intangible assets	$ 70,810	$ 4,257	$ 66,553	$ 70,810	$ 2,980	$ 67,830

	Gross	Lease
12 months ending March 31:	Payments	Incentive	Net
2020	$ 8,435	$ (1,470 )	$ 6,965
2021	6,749	(1,470 )	5,279
2022	5,608	(1,470 )	4,138
2023	5,379	(1,470 )	3,909
2024	4,931	(1,470 )	3,461
Thereafter	40,425	(10,290 )	30,135
Total minimum lease payments	71,527	(17,640 )	53,887
Less imputed interest	(24,099 )	-	(24,099 )
Present value of minimum lease payments	$ 47,428	$ (17,640 )	$ 29,788

Summary of Debt

 

As of March 31, 2019 and December 31, 2018, debt consists of the following (in thousands):

   

	2019	2018
EWB Credit Facility:
Term loan, net of discount of $542	$ 14,458	$ -
Revolver	10,000	-
Installment notes payable	48 (1)	66 (1)
Siena Revolver	-	2,000
Mortgage payable to a foreign bank	-	2,628 (2)
Total	24,506	4,694
Less current maturities	(10,790 )	(3,369 )
Long-term debt, less current maturities	$ 13,716	$ 1,325

_________________

	Shares	Price (1)	Term (2)
Outstanding, beginning of period	2,786	$ 2.84	9.0
Granted	214	$ 5.17
Forfeited	(41 )	$ 3.87
Exercised	(200 )	$ 2.09
Outstanding, end of period (3)	2,759	$ 3.06	8.8
Vested, end of period (4)	935	$ 2.59	8.4

 ______________

Grant date fair value of common stock (exercise price)	$ 5.17
Expected life (in years)	5.1
Volatility	116 %
Dividend yield	0 %
Risk-free interest rate	2.2 %

	LTI Plan Equity Awards		LTI Plan Liability Awards		Non-Plan Awards
	Number of	Unvested	Number of	Unvested	Number of	Unvested
	Shares	Compensation	Shares	Compensation	Shares	Compensation
Outstanding, beginning of period	1,151	$ 3,988	474	$ 2,490	629	$ 64
Restricted shares issued	91 (1)	500 (1)	-	-	-	-
Other	35	76	-	-	-	-
Forfeited	(1 )	(4 )	(1 )	-	-	-
Vested shares and expense	(383 )	(1,347 )	-	(570 )	(262 )	(54 )
Outstanding, end of period	893 (2)	$ 3,213 (2)	473 (3)	$ 1,920 (3)	367 (4)	$ 10 (4)
Intrinsic value, end of period	$ 4,699 (5)		$ 2,490 (5)		$ 1,929 (5)
Weighted average remaining term
for recognition of unvested expense		1.0		1.0		0.1

_________________

NOTE 16 — SUBSEQUENT EVENTS

 

Prepayment of EWB Revolver

 

On April 4, 2019, the Company elected to make a voluntary prepayment of $10.0 million of principal to repay all outstanding borrowings under the EWB Revolver discussed in Note 7. Subject to the terms of the Credit Facility, the Company may reborrow up to $10.0 million under the EWB Revolver through the Maturity Date.

 

2019 Equity Incentive Plan

 

On April 5, 2019, the Company’s Board of Directors approved the New Age Beverages Corporation 2019 Equity Incentive Plan (the “2019 Plan”), subject to shareholder approval. The 2019 Plan will terminate on the tenth anniversary of the date of approval by the Board. A total of up to 10.0 million shares of Common Stock may be issued under the 2019 Plan. Participation in the 2019 Plan is limited to employees, non-employee directors, and consultants.

 

 

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NEW AGE BEVERAGES CORPORATION

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

The 2019 Plan provides for grants of both incentive stock options, or “ISOs”, which are subject to special income tax treatment, and non-statutory options, or “NSOs.” Eligibility for ISOs is limited to employees of the Company and its subsidiaries. The exercise price of an ISO cannot be less than the fair market value of the common stock at the time of grant. In addition, the expiration date of an ISO cannot be more than ten years after the date of the original grant. In the case of NSOs, the exercise price and the expiration date are determined in the discretion of the administrator. The administrator also determines all other terms and conditions related to the exercise of an option, including the consideration to be paid, if any, for the grant of the option, the time at which options may be exercised and conditions related to the exercise of options.

 

The 2019 Plan also provides for awards of shares of restricted common stock. Awards of restricted stock may be made in exchange for past services or other lawful consideration. Generally, awards of restricted stock are subject to the requirement that the shares be forfeited or resold to the Company unless specified conditions are met. Subject to these restrictions, conditions and forfeiture provisions, any recipient of an award of restricted stock will have all the rights of a stockholder of the Company, including the right to vote the shares and to receive dividends. The 2019 Plan also provides for deferred grants (“deferred stock”) entitling the recipient to receive shares of common stock in the future on such conditions as the administrator may specify.

 

At the Market Offering Agreement

 

On April 30, 2019, the Company entered into an At the Market Offering Agreement (the “Offering Agreement”) with Roth Capital Partners, LLC (the “Agent”), pursuant to which the Company may offer and sell from time to time up to an aggregate of $100 million in shares of the Company’s Common Stock (the “Placement Shares”), through the Agent. The Agent will act as sales agent and will use commercially reasonable efforts to sell on the Company’s behalf all of the Placement Shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the Agent and the Company. 

 

The Company has no obligation to sell any of the Placement Shares under the Offering Agreement. The Offering Agreement terminates on April 30, 2020 and may be earlier terminated by the Company upon five business days’ notice to the Agent and at any time by the Agent or by the mutual agreement of the parties. The Company intends to use the net proceeds from this offering for general corporate purposes, including working capital. Under the terms of the Offering Agreement, the Company will pay the Agent a commission equal to 3% of the gross proceeds from the gross sales price of the Placement Shares up to $30 million, and 2.5% of the gross proceeds from the gross sales price of the Placement Shares in excess of $30 million. In addition, the Company has agreed to pay certain expenses incurred by the Agent in connection with the offering.

 

Amendment to Articles of Incorporation

 

In April 2019, the Company’s Board of Directors approved, subject to stockholder approval, an amendment to the Company’s Articles of Incorporation increasing the authorized shares of Common Stock from 100,000,000 shares to 200,000,000 shares. This amendment will be filed with the Secretary of State of Washington if approved by the stockholders at the Company’s annual meeting of stockholders to be held on May 30, 2019.

 

 

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I TEM 2. 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 Part I, Item 1 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 and Utah-based healthy beverages and lifestyles company engaged in the development and commercialization of a portfolio of organic, natural and other better-for-you healthy beverages, liquid dietary supplements, and other healthy lifestyle products. We compete in the growth segments of the beverage industry as a leading one-stop shop supplier for major retailers and distributors. We also are one of few competitors that commercializes its business across multiple channels including traditional retail, e-commerce, direct to consumer, and the medical channel. 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 functional performance characteristics and ingredients and offer products that are 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. 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. We believe 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

 

Reference is made to Notes 6, 7 and 16 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a discussion of the Recent Developments during the first quarter of 2019, including (i) a new Credit Facility for $25.0 million of funding with East West Bank entered into on March 29, 2019, (ii) repayment and termination of the Siena Revolver on March 29, 2019, (iii) a   sale leaseback of real estate in Tokyo, Japan entered into on March 22, 2019 that resulted a net selling price of $53.5 million, and (iv) an At the Market Offering agreement entered into on April 30, 2019. These Recent Developments are also discussed below under the caption Liquidity and Capital Resources .

 

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 and outdoor.

 

               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.

 

 

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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 consist 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 and amortization of debt discounts and issuance costs, and the write-off of debt discounts and issuance costs if we prepay the debt before the maturity date.

 

Other debt financing expenses. Other debt financing expenses are incurred pursuant to our former Siena Revolver and our new EWB Credit Facility. The components of other debt financing expenses include collateral monitoring fees, unused line fees required to ensure our availability to funding, and other fees charged by the lenders.

 

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.

 

Gains from sale of property and equipment. Gains from the sale of property and equipment are reflected in the period that the sale transaction closes.

 

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.

 

 

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Results of Operations

 

Our consolidated statements of operations for the three months ended March 31, 2019 and 2018, are presented below (in thousands):

 

			Change
	2019	2018	Amount	Percent
Net revenue	$ 58,307	$ 11,558	$ 46,749	404 %
Cost of goods sold	19,731	8,942	10,789	121 %
Gross profit	38,576	2,616	35,960	1375 %
Gross margin	66 %	23 %
Operating expenses:
Commissions	18,038	327	17,711	5416 %
General and administrative	26,842	4,256	22,586	531 %
Change in fair value of Marley earnout obligation	-	100	(100 )	(1 )
Depreciation and amortization expense	2,236	521	1,715	329 %
Total operating expenses	47,116	5,204	41,912	805 %
Operating loss	(8,540 )	(2,588 )	(5,952 )	230 %
Non-operating income (expenses):
Gain from sale of land and building	6,442	-	6,442	(1 )
Interest expense	(1,646 )	(56 )	(1,590 )	2839 %
Other debt financing expenses	(224 )	-	(224 )	(1 )
Gain from change in fair value of embedded derivatives	470	-	470	(1 )
Other income (expense), net	182	(7 )	189	-2700 %
Loss before income taxes	(3,316 )	(2,651 )	(665 )	-25 %
Income tax expense	1,700	-	1,700	(1 )
Net loss	$ (1,616 )	$ (2,651 )	$ 1,035	39 %

______________

 

(1)  

Percentage is not applicable since no amounts were incurred for the three months ended March 31, 2018.

 

Revenue. Gross revenue increased from $12.8 million for the three months ended March 31, 2018 to $60.5 million for the three months ended March 31, 2019, an increase of $47.7 million. Net revenue increased from $11.6 million for the three months ended March 31, 2018 to $58.3 million for the three months ended March 31, 2019, an increase of $46.7 million. For the three months ended March 31, 2019, the Morinda segment generated net revenue of $48.2 million. Since the Morinda acquisition closed on December 21, 2018, no revenue was generated by this segment for the three months ended March 31, 2018. The increase in net revenue from the Morinda segment was partially offset by a reduction in net revenue for the New Age segment of $1.5 million. Net revenue for the New Age segment decreased by 13% from $11.6 million for the three months ended March 31, 2018 to $10.1 million for the three months ended March 31, 2019. The decrease in net revenue for the New Age segment was primarily attributable to an increase in discounts and allowances of $0.9 million which was driven by the increase in billbacks and discounts from two 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 one of the products in the Coco-Libre brand and one of the products in the Marley brand which we are discontinuing to focus on products with higher future sales potential.

 

Cost of goods sold. Cost of goods sold increased from $8.9 million for the three months ended March 31, 2018 to $19.7 million for the three months ended March 31, 2019, an increase of $10.8 million. Cost of goods sold for the New Age segment increased from $8.9 million for the three months ended March 31, 2018 to $9.2 million for the three months ended March 31, 2019, an increase of $0.3 million or 3%. This increase in cost of goods sold for the New Age segment was due to higher product costs incurred in the second half of 2018 due to smaller production runs and buying raw materials in smaller amounts on the spot market, so we were not getting economies of scale with our purchasing which was related to our working capital constraints in 2018. For the three months ended March 31, 2019, we continued to cycle through these higher cost inventories which increased our cost of goods sold.

 

For the three months ended March 31, 2019, cost of goods sold for the Morinda segment was $10.5 million. Since the Morinda acquisition closed on December 21, 2018, no cost of goods sold was incurred by this segment for the three months ended March 31, 2018.

 

 

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Gross Profit. Gross profit increased from $2.6 million for the three months ended March 31, 2018 to $38.5 million for the three months ended March 31, 2019, an increase of $35.9 million. Gross margin increased from 23% for the three months ended March 31, 2018 to 66% for the three months ended March 31, 2019. As discussed below the increase in gross margin was primarily due the Morinda segment which accounted for $37.6 million of gross profit for the three months ended March 31, 2019. This increase in gross profit was due to the business combination with Morinda on December 21, 2018, and was partially offset by a reduction in gross profit for the New Age segment of $1.7 million for the three months ended March 31, 2019, due to higher product costs on lower net revenues for the New Age segment as discussed above.

 

Commissions. Commissions increased from $0.3 million for the three months ended March 31, 2018 to $18.0 million for the three months ended March 31, 2019, an increase of $17.7 million. This increase was due to the Morinda business combination which resulted in commissions of $17.8 million, or approximately 37% of the net revenue generated by the Morinda segment. 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 $4.3 million for the three months ended March 31, 2018 to $26.8 million for the three months ended March 31, 2019, an increase of $22.5 million. This increase was primarily attributable to (i) $20.3 million related to the Morinda segment, (ii) an increase in compensation and benefits for the New Age segment of $1.8 million, and (iii) an increase in rent and occupancy costs for the New Age segment of $0.3 million. The increase in compensation and benefits for the New Age segment consisted of stock-based compensation expense of $1.4 million and other compensation and benefits of $0.4 million.

 

The key components of selling, general and administrative expenses for the Morinda segment consist of (i) compensation and benefit costs of $12.4 million, including stock-based compensation expense of $1.6 million, (ii) business meetings, awards, promotions and travel of $4.0 million, (iii) rent, repairs and other occupancy costs of $2.4 million, and (iv) professional fees of $0.8 million.

 

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. We did not incur any acquisition-related transaction costs for the three months ended March 31, 2019. Acquisition-related transaction costs amounted to $0.1 million for the three months ended March 31, 2018, which consisted of the increase in the fair value of the Marley earnout obligation discussed below.

 

Depreciation and amortization expense. Depreciation and amortization expense increased from $0.5 million for the three months ended March 31, 2018 to $2.2 million for the three months ended March 31, 2019, an increase of $1.7 million. This increase was due to approximately $0.8 million of depreciation and $0.9 million of amortization related to the Morinda acquisition that closed on December 21, 2018. As of March 31, 2019, we have approximately $45.9 million of identifiable intangible assets and approximately $26.4 million of depreciable property and equipment to the Morinda business combination. Accordingly, we expect to continue to recognize a significant increase in depreciation and amortization expense for the remainder of the year ending December 31, 2019.

 

Gain from sale of building. On March 22, 2019, we entered into an agreement with a major Japanese real estate company resulting in the sale for approximately $57.0 million of the land and building in Tokyo that serves as the corporate headquarters of Morinda’s Japanese subsidiary. Concurrently with the sale, we entered into a lease of this property for a term of 27 years.

 

The sale of this property resulted in a gain of $24.1 million and we determined that $17.6 million of the gain was the result of above-market rent inherent in the leaseback arrangement. The $17.6 million portion of the gain related to above market rent is being accounted for as a lease concession whereby the gain will result in a reduction of rent expense of approximately $0.9 million per year over the 20-year lease term. The remainder of the gain of $6.4 million was attributable to the highly competitive process among the entities that bid to purchase the property and, accordingly, is recognized as a gain in our unaudited condensed consolidated statement of operations for the three months ended March 31, 2019. For the three months ended March 31, 2018, no gain or loss was recognized since we did not sell any of our property and equipment.

 

Interest expense. Interest expense increased from $56,000 for the three months ended March 31, 2018 to $1.6 million for the three months ended March 31, 2019, an increase of $1.6 million. The increase in interest expense was primarily attributable to (i) termination of the Siena Revolver which resulted a make-whole prepayment penalty of $0.5 million, (ii) accretion of discount and write-off of debt issuance costs of $0.5 million related to the Siena Revolver, and (iii) accretion of discount of $0.6 million related to the Morinda business combination liabilities. For the three months ended March 31, 2018, we incurred interest expense of $0.1 million which was primarily attributable to a revolving credit agreement with U.S. Bank that was terminated in 2018.

 

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Other debt financing expenses. For the three months ended March 31, 2019, we incurred other debt financing expenses of $0.2 million as compared to the three months ended March 31, 2018 when no other debt financing expenses were incurred. Other debt financing expenses include collateral monitoring fees, unused line fees, and other fees charged under the Siena Revolver.

 

Loss on change in fair value of embedded derivatives. In August 2018, we entered into the Siena Revolver that provided for borrowings up to $12.0 million. The Siena Revolver included features that were determined to be embedded derivatives requiring bifurcation and accounting as separate financial instruments. We determined that embedded derivatives included the requirement to pay (i) an early termination premium if the Siena Revolver was terminated before the maturity date in August 2021, and (ii) default interest at a 5.0% premium if events of default existed. An early termination premium equal to 4.0% of the $12.0 million commitment was required to be paid if the Siena Revolver was terminated during the first year after the August 2018 closing date.

 

As of December 31, 2018, the fair value of these embedded derivatives was $0.5 million which resulted in the recognition of a liability of $0.5 million. 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. We recognized a gain of $0.5 million for the three months ended March 31, 2019 since we incurred a contractual liability to pay the 4.0% prepayment fee on March 29, 2019 when we terminated the Siena Revolver with the proceeds of the East West Bank financing discussed below under Liquidity and Capital Resources .

 

Other income (expense), net. For the three months ended March 31, 2018, we had net other income of $0.2 million as compared to the three months ended March 31, 2018, when we had net other expense of $7,000. Other income for the three months ended March 31, 2019 consisted of interest income of $0.1 million and other non-operating income of $0.1 million.

 

Income tax expense. Due to a valuation allowance for our deferred income tax assets, we did not recognize an income tax benefit for the three months ended March 31, 2018. For the three months ended March 31, 2019, we recognized a net income tax benefit of $1.7 million. This income tax benefit consisted of current income tax expense of $12.2 million that was primarily attributable to a taxable gain on the sale of our land and building in Tokyo, Japan, offset by a deferred income tax benefit of $13.9 million that was primarily related to Japan and other foreign jurisdictions.

 

Liquidity and Capital Resources

 

Overview

 

As of March 31, 2019, we had cash and cash equivalents of $110.0 million and working capital of $63.9 million. For the three months ended March 31, 2019, we incurred a net loss of $1.6 million and cash provided by operating activities was $11.4 million.

 

We have contractual obligations of approximately $53.2 million that are due during the 12 months ending March 31, 2020. This amount includes (i) payables to the former stockholders of Morinda for $34.0 million, (ii) operating lease payments of $8.4 million, and (iii) estimated payments due under the EWB Credit Facility of $10.8 million. Of the $53.2 million of contractual obligations, we are obligated to pay the former Morinda stockholders $26.0 million in the second quarter of 2019, and $8.0 million in the third quarter of 2019. In April 2019, we repaid $10.0 million under the EWB Revolver but we may reborrow up to that amount subject to the terms of the financing agreement as discussed below.

 

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 12-months ending March 31, 2020, combined with our existing cash resources of $110.0 million, will be sufficient to fund our working capital requirements and the remainder of our net contractual obligations.

  

 

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East West Bank Credit Facility

 

On March 29, 2019, we entered into a Loan and Security Agreement (the “Credit Facility”) with East West Bank (“EWB”).  The Credit Facility matures on March 29, 2023 (the “ Maturity Date”) 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 agreement (the “EWB Revolver”). 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 EWB Revolver. Our obligations under the Credit Facility are secured by substantially all of our assets and guaranteed by certain of our subsidiaries . The Credit Facility requires compliance with certain financial and restrictive covenants and includes customary events of default. Key financial covenants include maintenance of minimum Adjusted EBITDA and a maximum Total Leverage Ratio (all as defined and set forth in the Credit Facility). During any periods when an event of default occurs, the Credit Facility provides for interest at a rate that is 3.0% above the rate otherwise applicable to such obligations.

 

Borrowings outstanding under the Credit Facility bear interest at the Prime Rate plus 0.25%. However, if the Total Leverage Ratio (as defined in the Credit Facility) 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 EWB Revolver on ten business days’ prior notice to EWB without prepayment charges. In the event the EWB Revolver is terminated prior to the Maturity Date, we would be required to pay an early termination fee in the amount of 0.50% of the revolving line. Additional borrowing requests under the EWB Revolver are subject to various customary conditions precedent, including satisfaction of a borrowing base test as more fully described in the Credit Facility. The EWB Revolver also provides for an unused line fee equal to 0.5% per annum of the undrawn portion. The Credit Facility 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 EWB Revolver.

 

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 the Maturity Date 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 Credit Facility), 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 .   

 

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 in August 2021. 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. 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.

 

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. 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. From January 1, 2019 through the termination date of March 29, 2019, we were in compliance with the financial covenants. 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.

 

 

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Cash Flows Summary

 

Presented below is a summary of our operating, investing and financing cash flows for the three months ended March 31, 2019 and 2018 (in thousands):

 

	2019	2018	Change
Net cash provided by (used in):
Operating activities	$ 11,439	$ (127 )	$ 11,566
Investing activities	32,837	(64 )	32,901
Financing activities	22,670	-	22,670

 

Cash Flows from Operating Activities

 

The key components in the calculation of our cash flows from operating activities for the three months ended March 31, 2019 and 2018, are as follows (in thousands):

 

	2019	2018	Change
Net loss	$ (1,616 )	$ (2,651 )	$ 1,035
Deferred income tax benefit	(13,916 )	-	(13,916 )
Gain from sale of land and building	(6,442 )	-	(6,442 )
Non-cash and non-operating expenses, net	6,646	998	5,648
Changes in operating assets and liabilities, net	26,767	1,526	25,241
Total	$ 11,439	$ (127 )	$ 11,566

 

For the three months ended March 31, 2019, our net loss was $1.6 million compared to a net loss of $2.7 million for the three months ended March 31, 2018. Please refer to the section above discussing our Results of Operations for the factors that resulted in our net losses. For the three months ended March 31, 2019, we recognized a non-cash deferred income tax benefit of $13.9 million that was primarily attributable to a gain from sale of our land and building in Tokyo. This gain will be taxable on our Japanese income tax return for 2019 so we recorded a current income tax payable of $11.9 million for the three months ended March 31, 2019. For financial reporting purposes, $17.6 million of the gain is being accounted for as a lease incentive that will be recognized as a reduction of rent expense over the lease term of 20 years. Similarly, the gain on sale was generated by the receipt of investing cash flows rather than our operating cash flows. Accordingly, the deferred income tax benefit and the gain on sale favorably impacted our net loss but did not generate any cash for the three months ended March 31, 2019.

 

Net non-cash and non-operating expenses partially mitigated the impact of our net loss by $6.6 million. For the three months ended March 31, 2019, net non-cash and non-operating expenses consisted of (i) depreciation and amortization expense of $2.2 million, (ii) stock-based compensation expense of $3.3 million, (iii) accretion and amortization of debt discount and issuance costs of $1.1 million, and (iv) make-whole premium of $0.5 million. These non-cash expenses total $7.1 million and were partially offset by a gain from the change in fair value of embedded derivatives of $0.5 million.

 

For the three months ended March 31, 2019, changes in operating assets and liabilities provided $26.8 million of operating cash flows, including (i) an increase due to a deferred lease incentive obligation of $17.6 million, (ii) an increase in accounts payable and accrued liabilities of $11.1 million that was driven by the increase in Japanese income taxes payable as discussed above, and (iii) a reduction in accounts receivable that resulted in an increase in cash collections of $0.4 million. The $17.6 million deferred lease incentive obligation represents the portion of the proceeds from the sale leaseback of Morinda’s corporate offices in Tokyo that is attributable to above-market rent that we are obligated to pay over the first 20 years of the lease term. The $11.1 million Japanese income tax obligation is expected to be paid during 2019 and will result in negative operating cash flows in the period in which we are required to make the payment. The deferred lease incentive obligation is expected to result in negative operating cash flows of approximately $73,000 per month as the above-market portion of the lease payments are made over the first 20 years of the lease term. The aggregate operating cash flow impact of the deferred lease incentive, the unpaid Japanese income taxes, and the cash collections from the reduction in accounts receivable amounted to $28.7 million and was partially offset by operating cash outflows of $3.4 million due to an increase in inventories.

 

For the three months ended March 31, 2018, cash flows used in operating activities amounted to $0.1 million. While we recognized a net loss of $2.7 million for the three months ended March 31, 2018, net non-cash expenses of $1.0 million mitigated the cash impact of our net loss. For the three months ended March 31, 2018, non-cash expenses consisted of depreciation and amortization expense of $0.5 million, stock-based compensation expense of $0.4 million, and $0.1 million for the change in fair value of our obligations under the Marley earnout.

 

For the three months ended March 31, 2018, changes in operating assets and liabilities provided $1.5 million of operating cash flows including an increase in accounts receivable of $0.7 million, and a net increase in accounts payable and accrued liabilities of $1.4 million. These increases amount to a total of $2.1 million, and were partially offset by cash outflows to fund an increase in inventories of $0.3 million, and an increase in prepaid expenses and other assets of $0.3 million.

 

 

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Cash Flows from Investing Activities

 

For the three months ended March 31, 2019, cash provided by investing activities of $32.8 million was primarily driven by the sale leaseback of our land and building in Tokyo whereby $31.4 million of the proceeds were attributable to the sale of the property and an additional $1.7 million of proceeds was provided subject to our obligation to perform post-closing repairs and refurbishments to the property. For the three months ended March 31, 2019, these investing cash inflows totaled $33.1 million and were partially offset by capital expenditures primarily for equipment of $0.3 million.

 

For the three months ended March 31, 2018, our sole use of cash in investing activities resulted from cash payments of $0.1 million for equipment in our New Age segment.  

 

Cash Flows from Financing Activities

 

Our financing activities provided net cash proceeds of $32.8 million for the three months ended March 31, 2019 whereas we did not have any transactions that affected financing cash flows for the three months ended March 31, 2018. For the three months ended March 31, 2019, the principal sources of cash from our financing activities consisted of (i) $32.0 million of borrowings that consisted of $22.4 million under our EWB Credit Facility and $9.6 million under the Siena Revolver, and (ii) proceeds from the exercise of stock option of $0.4 million. These financing cash proceeds totaled $32.4 million and were partially offset by cash payments for principal under the Siena Revolver of $9.7 million. As discussed above the Siena Revolver was terminated on March 29, 2019 and replaced with the EWB Credit Facility.

 

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.

 

Foreign Currency Risks

 

We have foreign currency risks related to our net revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euro, Chinese Yaun and Japanese Yen. We generated approximately 72% of our net revenue from our international business for the three months ended March 31, 2019. Increases in the relative value of the U.S. Dollar to other currencies may negatively affect our net revenue, partially offset by a positive impact to operating expenses in other currencies as expressed in U.S. Dollars. We have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains or losses related to revaluing certain current asset and current liability balances, including intercompany receivables and payables, which are denominated in currencies other than the functional currency of the entities in which they are recorded. While we have not engaged in the hedging of our foreign currency transactions to date, we are evaluating the costs and benefits of initiating such a program and we may in the future hedge selected significant transactions denominated in currencies other than the U.S. Dollar.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

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

 

We believe that of our significant accounting policies that are described in Note 2 to our consolidated financial statements included in Part I, Item 1 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. 

  

 

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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.

 

 

 

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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 Part I, Item 1 of this Report.

 

Non-GAAP Financial Measures

 

The primary purpose of using non-GAAP financial measures is to provide supplemental information that we believe may 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 disclose the following non-GAAP financial measures:

 

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  is net loss adjusted to exclude interest expense, income tax expense, and depreciation and amortization expense.

  

Adjusted EBITDA. For the calculation of Adjusted EBITDA, we also exclude the following items for the periods presented:

 

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

 

 

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Gain from the Sale of Long-lived Assets: Gain from the sale of land, buildings and other long-lived assets are excluded since they do not relate to our core business activities.

 

Other Debt Financing Expenses : Other debt financing expenses include collateral monitoring, unused line fees and other expenses related to our credit agreements. Since these amounts related to our debt financing structure, we have excluded them since they do not relate to our core business activities.

 

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.

 

We provide in the tables below a reconciliation from the most directly comparable GAAP financial measure to each non-GAAP financial measure presented. The calculation of our Non-GAAP gross revenue is presented below for the three months ended March 31, 2019 and 2018 (in thousands):

 

	2019	2018
Net revenue	$ 58,307	$ 11,558
Non-GAAP adjustment for discounts and allowances	2,158	1,210
Non-GAAP gross revenue	$ 60,465	$ 12,768

 

 The calculation of our non-GAAP EBITDA and Adjusted EBITDA is presented below for the three months ended March 31, 2019 and 2018 (in thousands):

 

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	2019	2018
Net loss	$ (1,616 )	$ (2,651 )
EBITDA Non-GAAP adjustments:
Interest expense	1,646	56
Income tax benefit	(1,700 )	-
Depreciation and amortization expense	2,236	521
EBITDA	566	(2,074 )
Adjusted EBITDA Non-GAAP adjustments:
Stock-based compensation expense	3,287	377
Other debt financing expenses	224	-
Gain from sale of land and building	(6,442 )	-
Gain from change in fair value of embedded derivatives	(470 )	-
Adjusted EBITDA	$ (2,835 )	$ (1,697 )

 

 

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I TEM 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

I TEM 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that we file or submit under the Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and to reasonably ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, or person performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) (“Disclosure Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls will be modified as systems change and conditions warrant.

 

In connection with the preparation of this Quarterly Report on Form 10-Q as of March 31, 2019, an evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, we concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during our first fiscal quarter of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II - OTHER INFORMATION

 

I TEM 1. Legal Proceedings.

 

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

 

I TEM 1A. Risk Factors.

 

Factors that could cause our actual results to differ materially from those in this report are any of the risks described in Item 1.A. Risk Factors of our 2018 Form 10-K. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in our 2018 Form 10-K, except we may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

 

I TEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In February 2019, two former employees exercised stock options for an aggregate of 200,000 shares of the Company’s Common Stock. On March 12, 2019, the Board of Directors approved the issuance of an aggregate of 90,910 shares of the Company’s Common Stock to the five non-employee members of the Board of Directors for a portion of the compensation for serving in such capacity. These shares issued to members of the Board of Directors are subject to restrictions prohibiting the sale prior to March 12, 2020. All of these shares were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act. There were no other unregistered sales of the Company's equity securities during the three months ended March 31, 2019.

 

I TEM 3. Defaults Upon Senior Securities.

 

None.

 

I TEM 4. Mine Safety Disclosures.

 

Not applicable.

 

I TEM 5. Other Information.

 

None.

 

I TEM 6. Exhibits.

 

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

 

ExhibitNumber		Description
10.1		Fixed Term Building Lease Agreement between Hulic Co., Ltd. and Morinda Japan GK
10.2		Lease of Space Agreement entered into as of April 3, 2019 between 40th Street Partners, LLC and New Age Beverages Corporation
31.1		Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2		Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1		Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.2		Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

 

 

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S IGNATURES

 

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	NEW AGE BEVERAGES CORPORATION
Date: May 9, 2019	/s/ Brent Willis
	Name: Brent Willis
	Title: Chief Executive Officer
	(Principal Executive Officer)

 

Date: May 9, 2019	/s/ Gregory A. Gould
	Name: Gregory A. Gould
	Title: Chief Financial Officer
	(Principal Financial and Accounting Officer)

  

   

 

 

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