Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature
of Operations and Segments
New
Age Beverages Corporation (the “Company”) was formed under the laws of the State of Washington on April 26, 2010.
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 Morinda business combination,
please refer to Note 3.
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. As a result of the
business combination with Morinda, the Company changed its operating segments to consist of the Morinda segment and the New Age
segment beginning in December 2018. 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. 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. Accordingly, the Company’s previous segment disclosures have been restated for the three and six months
ended June 30, 2018.
The
Morinda segment is engaged in the development, manufacturing, and marketing of Tahitian Noni® Juice, MAX and other noni beverages
as well as other nutritional, cosmetic and personal care products. The majority of Morinda’s products have a component of
the Noni plant, Morinda Citrifolia (“Noni”) as a common element. The Morinda products are sold and distributed in
more than 60 countries throughout the world using independent product consultants (“IPC) through a direct to consumer selling
network. The New Age segment 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 New Age brands are sold in all channels of distribution including Hypermarkets, Supermarkets,
Pharmacies, Convenience, Gas and other outlets.
Legal
Structure 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 ownership issues for the Company’s facilities
(except for those leased by Morinda), and New Age Health Sciences owns the Company’s intellectual property and manages operating
performance in the medical and hospital channels.
Basis
of Presentation
The
unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries,
are prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”).
All significant intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required
by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the
opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation
of the unaudited condensed consolidated financial statements have been included. These unaudited condensed consolidated financial
statements for the three and six months ended June 30, 2019 should be read in conjunction with the Company’s audited consolidated
financial statements for the fiscal year ended December 31, 2018, included in the Company’s 2018 Annual Report on Form 10-K
as filed with the SEC on April 1, 2019 (the “2018 Form 10-K”).
The
accompanying condensed consolidated balance sheet and related disclosures as of December 31, 2018 have been derived from the Company’s
audited financial statements. The Company’s financial condition as of June 30, 2019, and operating results for the three
and six months ended June 30, 2019 are not necessarily indicative of the financial condition and results of operations that may
be expected for any future interim period or for the year ending December 31, 2019.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Emerging
Growth Company
The
accompanying unaudited condensed consolidated financial statements and related footnotes have been prepared in accordance with
applicable rules and regulations of the 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. The Company previously elected to opt out of the
extended transition period to adopt new or revised accounting standards. Therefore, the Company is required to adopt such standards
at the same time as other public companies that are not emerging growth companies. The Company currently expects its status as
an emerging growth company will terminate after the year ending December 31, 2019.
Reclassifications
Certain
amounts in the previously issued unaudited condensed consolidated financial statements for the three and six months ended June
30, 2018 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 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 creating products and brands which consumers like and want to buy, development of sales and distribution channels,
and its ability to generate significant net revenue and cash flows from the use of this expertise.
Recent
Accounting Pronouncements
Recently
Adopted Standards.
The following recently issued accounting standard was adopted during fiscal year 2019:
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2018-07, “
Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting
,” which expands the scope of ASC 718 to include share-based payment transactions for
acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards
except for specific guidance on inputs to an option pricing model and the attribution of cost. This new guidance was adopted
effective on January 1, 2019. For the six months ended June 30, 2019, the Company granted stock options to non-employees
for an aggregate of 25,000 shares of Common Stock with a grant date fair value of $0.1 million. These options vest over three
years and resulted in expense recognition of $5,000 for the six months ended June 30, 2019.
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 Unaudited Condensed 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
BWR
Merger Agreement
On
May 30, 2019, the Company entered into an Agreement and Plan of Merger with Brands Within Reach, LLC, a New York limited
liability corporation (“BWR”), the sole owner of BWR, and BWR Acquisition Corp., a newly organized New York corporation
that was wholly owned by the Company (“Merger Sub”). As discussed in Note 16, the total consideration was approximately
$5.9 million. At the closing on July 10, 2019, the transactions contemplated by the Merger Agreement were completed resulting
in the merger of Merger Sub with and into BWR and BWR became a wholly owned subsidiary of the Company. This transaction will be
accounted for in the third quarter of 2019 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
.
In
connection with the BWR merger, the Company made a loan to BWR in the amount of $1.0 million. The terms of this loan provided
that it would be settled upon the earlier of the closing of the Merger Agreement or upon demand by the Company beginning on December
31, 2019. Since this loan is effectively a deposit for the business combination, it is included in
restricted cash and other
in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2019.
Morinda
Merger Agreement
On
December 2, 2018, the Company entered into a Plan of Merger (the “Morinda 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 Morinda 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 Morinda Merger Agreement, Morinda’s equity holders received (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 $15.0 million contingent
upon Morinda achieving certain post-closing milestones, as discussed below.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Pursuant
to the Certificate of Designations of the 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 $20.0 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. As of June 30, 2019 and December 31, 2018, the estimated fair value of the Milestone Dividend earnout was approximately
$6.5 million and $13.1 million, respectively. For the six months ended June 30, 2019, the reduction in the fair value of the Milestone
Dividend earnout resulted in an unrealized gain of approximately $6.7 million, which is reflected as a reduction of operating
expenses in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss.
The
Series D Preferred Stock provides for 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. These quarterly dividends will be reflected as an adjustment to the fair value of the Milestone Dividend
earnout liability as the quarterly dividends are settled in future periods. Through June 30, 2019, no quarterly dividends have
been paid.
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
was subject to completion of the Sale Leaseback transaction discussed in Note 6, 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 exceeded $25.0 million. The Closing Date balance
sheet of Morinda indicated that EWC was approximately $14.6 million as of the Closing Date.
Business
Combination Liabilities
Presented
below is a summary of the earnout obligations related to the Morinda and Marley business combinations and payables to the former
Morinda stockholders as of June 30, 2019 and December 31, 2018 (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Marley
earnout obligation
|
|
$
|
900
|
(1)
|
|
$
|
900
|
(1)
|
Payables
to former Morinda stockholders, net of imputed interest discount:
|
|
|
|
|
|
|
|
|
EWC
payable in April 2019
|
|
|
–
|
(2)(5)
|
|
|
986
|
(2)(5)
|
EWC
payable in July 2019
|
|
|
7,962
|
(2)(5)
|
|
|
7,732
|
(2)(5)
|
EWC
payable in July 2020
|
|
|
5,130
|
(2)(5)
|
|
|
4,976
|
(2)(5)
|
Earnout
under Series D preferred stock
|
|
|
6,469
|
(3)
|
|
|
13,134
|
(3)
|
Contingent
on financing event
|
|
|
–
|
(4)(5)
|
|
|
24,402
|
(4)(5)
|
Total
|
|
|
20,461
|
|
|
|
52,130
|
|
Less
current portion
|
|
|
14,431
|
|
|
|
8,718
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion
|
|
$
|
6,030
|
|
|
$
|
43,412
|
|
|
(1)
|
The
Company is obligated to make a one-time earnout payment of $1.25 million over a period of two years beginning 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. The Marley business combination closed on June 13, 2017, and revenue for the Marley brand
is not expected to exceed the $15.0 million earnout threshold during the next 12 months. 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 whereby the fair value increased from $0.8 million to $0.9 million during the first
quarter of 2018. The increase in the fair value of the earnout of $0.1 million was recognized as an expense in the accompanying
unaudited condensed consolidated statement of operations and comprehensive loss for the six months ended June 30, 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.
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
|
(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
for the year ending December 31, 2019. The fair value of the earnout was $13.1 million as of December 31, 2018 and $6.5 million
as of June 30, 2019. As of June 30, 2019, fair value of the earnout was determined using an option pricing model and will
continue to be adjusted as additional information becomes available about the progress toward achievement of the Milestone
Dividend earnout. The earnout is classified within Level 3 of the fair value hierarchy. Valuation of the earnout was performed
by an independent valuation specialist at the original issuance date and as of June 30, 2019. The valuation methodology was
performed through an option pricing model based on forecast annual EBITDA, expected volatility of forecast annual EBITDA of
10.0%, the risk-free interest rate of 2.3%, a discount rate applicable to forecast annual EBITDA of 21.5%, a risk premium
of 19.2%, and an estimated credit spread of 6.0%. Key Level 3 assumptions inherent in the valuation methodology as of December
31, 2018 included an option pricing model based on forecast annual EBITDA, expected volatility of forecast annual EBITDA of
10.0%, the risk-free interest rate of 2.6%, a discount rate applicable to forecast annual EBITDA of 21.5%, a risk premium
of 18.9%, and an estimated credit spread of 5.7%.
|
|
(4)
|
Pursuant
to a separate agreement between the parties prior to the consummation of the Merger, 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
6, the closing for this transaction occurred on March 22, 2019. Since this payment was to be made from the proceeds of a long-term
financing, the net carrying value was classified in long-term liabilities in the accompanying unaudited condensed consolidated
balance sheet as of December 31, 2018. This obligation was paid during the three months ended June 30, 2019.
|
|
(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. Accretion of discount related to these obligations amounted
to an aggregate of $0.4 million and $1.0 million for the three and six months ended June 30, 2019, respectively, which is
included in interest expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive
loss.
|
Pro
Forma Disclosures
The
following unaudited pro forma financial results for the three and six months ended June 30, 2018 reflects (i) the historical operating
results of the Company, and (ii) the unaudited pro forma results of Morinda prior to its acquisition date of December 21, 2018,
as if the Morinda business combination had occurred as of January 1, 2018. 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 three and six months ended June 30, 2018 (in thousands, except per share amounts):
|
|
Three
|
|
|
Six
|
|
|
|
Months
|
|
|
Months
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
71,647
|
|
|
$
|
138,428
|
|
Net
loss
|
|
$
|
(2,013
|
)
|
|
$
|
(3,657
|
)
|
Net
loss per share- basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
Weighted
average number of shares of common stock outstanding- basic and diluted
|
|
|
41,141
|
|
|
|
39,743
|
|
The
calculations of pro forma net revenue and pro forma net loss give effect to the pre-acquisition operating results of Morinda based
on (i) the historical net revenue and net income (loss) of Morinda, (ii) incremental depreciation and amortization 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 Morinda business combination.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
4 — OTHER INFORMATION
Inventories
Inventories
consist of the following as of June 30, 2019 and December 31, 2018 (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
12,183
|
|
|
$
|
12,538
|
|
Work-in-process
|
|
|
11,222
|
|
|
|
907
|
|
Finished
goods, net
|
|
|
13,538
|
|
|
|
23,703
|
|
Total
inventories
|
|
$
|
36,943
|
|
|
$
|
37,148
|
|
In
connection with the Morinda business combination discussed in Note 3, 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 represented an element of
built-in profit on the Closing Date that is being charged to cost of goods sold as the related inventories are sold. For the three
and six months ended June 30, 2019, a portion of the Closing Date inventories were sold which resulted in a charge to cost of
goods sold of approximately $0.9 million and $1.7 million, respectively. The remaining Closing Date built-in profit of $0.4 million
is expected to be charged to cost of goods sold by the third quarter of 2019.
Prepaid
Expenses and Other Current Assets
As
of June 30, 2019 and December 31, 2018, prepaid expenses and other current assets consist of the following (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Prepaid
expenses and deposits
|
|
$
|
9,219
|
|
|
$
|
4,982
|
|
Prepaid
stock-based compensation
|
|
|
380
|
|
|
|
347
|
|
Supplier
and other receivables
|
|
|
620
|
|
|
|
1,144
|
|
Total
|
|
$
|
10,219
|
|
|
$
|
6,473
|
|
Property
and Equipment
As
of June 30, 2019 and December 31, 2018, property and equipment consisted of the following (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
37
|
|
|
$
|
25,726
|
|
Buildings
and improvements
|
|
|
16,888
|
|
|
|
19,822
|
|
Leasehold
improvements
|
|
|
3,528
|
|
|
|
4,398
|
|
Machinery
and equipment
|
|
|
5,618
|
|
|
|
5,208
|
|
Office
furniture and equipment
|
|
|
2,414
|
|
|
|
2,087
|
|
Transportation
equipment
|
|
|
1,837
|
|
|
|
1,727
|
|
Total
property and equipment
|
|
|
30,322
|
|
|
|
58,968
|
|
Less
accumulated depreciation
|
|
|
(2,846
|
)
|
|
|
(1,687
|
)
|
Property
and equipment, net
|
|
$
|
27,476
|
|
|
$
|
57,281
|
|
Depreciation
and amortization expense included in operating expenses amounted to $0.8 million and $0.1 million for the three months
ended June 30, 2019 and 2018, respectively. Depreciation and amortization expense included in operating expenses amounted
to $1.8 million and $0.3 million for the six months ended June 30, 2019 and 2018, respectively. Depreciation and amortization
expense included in cost of goods sold amounted to $0.1 million and $0.2 million for the three and six months ended June 30, 2019.
Repairs and maintenance costs amounted to $0.4 million and $0.2 million for the three months ended June 30, 2019 and 2018,
respectively. Repairs and maintenance costs amounted to $1.0 million and $0.4 million for the six months ended June 30, 2019 and
2018, respectively.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Restricted
Cash and Other
As
of June 30, 2019 and December 31, 2018, restricted cash and other long-term assets consist of the following (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
$
|
3,776
|
(1)
|
|
$
|
3,339
|
(1)
|
Debt
issuance costs, net
|
|
|
348
|
|
|
|
548
|
|
Prepaid
stock-based compensation
|
|
|
-
|
|
|
|
210
|
|
Loan
receivable from BWR
|
|
|
1,000
|
|
|
|
-
|
|
Deposits
and other
|
|
|
4,268
|
|
|
|
2,838
|
|
Total
|
|
$
|
9,392
|
|
|
$
|
6,935
|
|
|
(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.
|
Accrued
Liabilities
As
of June 30, 2019 and December 31, 2018, accrued liabilities consist of the following (in thousands):
|
|
2019
|
|
|
2018
|
|
|
Accrued
commissions
|
|
$
|
8,532
|
|
|
$
|
9,731
|
|
Accrued
compensation and benefits
|
|
|
5,744
|
|
|
|
4,715
|
|
Accrued
marketing events
|
|
|
5,008
|
(1)
|
|
|
3,757
|
(1)
|
Deferred
revenue
|
|
|
5,266
|
|
|
|
2,701
|
|
Income
taxes payable
|
|
|
15,842
|
(2)
|
|
|
1,670
|
|
Current
portion of right of use liabilities:
|
|
|
|
|
|
|
|
|
Lease
liability
|
|
|
5,117
|
|
|
|
4,798
|
|
Deferred
lease incentive obligation
|
|
|
882
|
|
|
|
-
|
|
Restricted
stock obligations
|
|
|
1,012
|
(3)
|
|
|
-
|
|
Embedded
derivative liability
|
|
|
-
|
|
|
|
470
|
|
Other
accrued liabilities
|
|
|
6,201
|
|
|
|
6,177
|
|
Total
accrued liabilities
|
|
$
|
53,604
|
|
|
$
|
34,019
|
|
|
(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.
|
|
(2)
|
Includes
approximately $12.1 million of income taxes payable in Japan primarily related to the gain on sale of the land and building
in Tokyo as discussed further in Note 6.
|
|
(3)
|
Represents
the fair value of restricted stock awards required to be settled in cash as discussed in Note 9.
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
5 — GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill
Goodwill
consists of the following by reporting unit as of June 30, 2019 and December 31, 2018 (in thousands):
Reporting
Unit
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
10,284
|
|
Marley
|
|
|
9,418
|
|
Maverick
|
|
|
5,149
|
|
Xing
|
|
|
4,506
|
|
PMC
|
|
|
1,768
|
|
B&R
|
|
|
389
|
|
Total
Goodwill
|
|
$
|
31,514
|
|
Identifiable
Intangible Assets
Identifiable
intangible assets consist of the following as of June 30, 2019 and December 31, 2018 (in thousands):
|
|
June
30, 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
|
|
|
$
|
721
|
|
|
$
|
19,699
|
|
|
$
|
20,420
|
|
|
$
|
40
|
|
|
$
|
20,380
|
|
Other
|
|
|
6,827
|
|
|
|
560
|
|
|
|
6,267
|
|
|
|
5,989
|
|
|
|
318
|
|
|
|
5,671
|
|
Manufacturing
processes and recipes
|
|
|
11,610
|
|
|
|
770
|
|
|
|
10,840
|
|
|
|
11,610
|
|
|
|
380
|
|
|
|
11,230
|
|
Trade
names
|
|
|
12,301
|
|
|
|
1,012
|
|
|
|
11,289
|
|
|
|
12,301
|
|
|
|
584
|
|
|
|
11,717
|
|
IPC
distributor sales force
|
|
|
9,760
|
|
|
|
517
|
|
|
|
9,243
|
|
|
|
9,760
|
|
|
|
29
|
|
|
|
9,731
|
|
Customer
relationships
|
|
|
6,444
|
|
|
|
1,404
|
|
|
|
5,040
|
|
|
|
6,444
|
|
|
|
1,194
|
|
|
|
5,250
|
|
Patents
|
|
|
4,100
|
|
|
|
569
|
|
|
|
3,531
|
|
|
|
4,100
|
|
|
|
433
|
|
|
|
3,667
|
|
Former
Morinda shareholder non-compete agreements
|
|
|
186
|
|
|
|
33
|
|
|
|
153
|
|
|
|
186
|
|
|
|
2
|
|
|
|
184
|
|
Total
identifiable intangible assets
|
|
$
|
71,648
|
|
|
$
|
5,586
|
|
|
$
|
66,062
|
|
|
$
|
70,810
|
|
|
$
|
2,980
|
|
|
$
|
67,830
|
|
Docklight
Agreement and Marley License Extension
On
January 14, 2019, the Company entered into an agreement with Docklight LLC (“Docklight”) 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 Docklight
license 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. Through June 30, 2019, the Company has not commenced sales
of the licensed products and, accordingly, no fees have been incurred.
On
March 28, 2019, the Company extended its license agreement with Marley Merchandising LLC through March 31, 2030. As consideration
for the extension, the Company issued a warrant that was immediately exercisable for 200,000 shares of Common Stock at an exercise
price of $5.14 per share. This warrant is exercisable for ten years and had a grant date fair value of $0.8 million, which is
included in the table above for other license agreements. This intangible asset is being amortized over the remaining term of
the Marley license. Fair value of the warrant was determined using the Black-Scholes-Merton (“BSM”) option-pricing
model. Key assumptions included an expected term of five years, volatility of 115%, and a risk-free interest rate of 2.2%.
Amortization
of Identifiable Intangible Assets
Amortization
expense related to identifiable intangible assets was $1.3 million and $0.4 million for the three months ended June 30, 2019 and
2018, respectively. Amortization expense related to identifiable intangible assets was $2.6 million and $0.7 million for the six
months ended June 30, 2019 and 2018, respectively. 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. For the three months ended June 30, 2019 and 2018, total amortization expense related to this
license agreement was approximately $0.1 million and $36,000, respectively. For the six months ended June 30, 2019 and 2018, total
amortization expense related to this license agreement was approximately $0.2 million and $72,000, respectively.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Estimated
future amortization expense for the Company’s identifiable intangible assets is set forth below (in thousands):
12-Months
ending June 30,
|
|
|
|
|
|
|
|
2020
|
|
$
|
4,953
|
|
2021
|
|
|
4,953
|
|
2022
|
|
|
4,920
|
|
2023
|
|
|
4,891
|
|
2024
|
|
|
4,812
|
|
Thereafter
|
|
|
41,533
|
|
Total
|
|
$
|
66,062
|
|
NOTE
6 — LEASES
The
Company leases various office and warehouse facilities, vehicles and equipment under non-cancellable operating lease agreements
that expire between July 2019 and March 2039. For the three months ended June 30, 2019 and 2018, the Company had
operating lease expense of $2.9 million and $0.3 million respectively. For the six months ended June 30, 2019 and 2018, the Company
had operating lease expense of $5.2 million and $0.6 million respectively.
On
January 21, 2019, the Company entered into a lease for approximately 11,200 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. The Company determined the right-of-use (“ROU”) lease liability of $2.8 million
based upon a discount rate of 6.1% and assuming that the Company will not exercise its options to terminate the lease after 90
months or extend the lease for an additional five years.
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 was recorded as ROU lease assets and ROU lease liabilities during
the six months ended June 30, 2019. The Company determined the ROU lease liabilities based upon a discount rate of 6.1%.
On
April 3, 2019, the Company entered into a lease for approximately 156,000 square feet of warehouse space in Aurora Colorado. The
monthly obligation for base rent averages approximately $66,000 per month over the lease term which expires in July 2029. The
Company has an option to extend the lease for an additional period of five years. The Company determined the right-of-use (“ROU”)
lease liability of approximately $6.0 million based upon a discount rate of 6.1% and assuming that the Company will not exercise
its option to extend the lease for an additional five years.
Sale
Leaseback
On
March 22, 2019, the Company entered into an agreement with a major Japanese real estate company resulting in the sale for approximately
$57.1 million of the land and building in Tokyo that serves as the corporate headquarters of Morinda’s Japanese subsidiary.
Concurrently with the sale, the Company entered into a lease of this property for a term of 27 years. The monthly lease cost is
¥20.0 million (approximately $181,000 as of June 30, 2019) for the initial seven-year term, and thereafter either party may
elect to adjust the monthly lease payment to the then current market rate for similar buildings in Tokyo. In order to secure its
obligations under the lease, the Company provided a refundable security deposit of approximately $1.8 million. At any time after
the initial seven-year term, the Company may elect to terminate the lease. However, if the lease is terminated before the 20
th
anniversary of the date the lease was entered into, then the Company will be obligated to perform certain restoration obligations
that are currently estimated to cost between $1.6 million and $2.2 million. The Company determined that the restoration obligation
is a significant penalty whereby there is reasonable certainty that the Company will not elect to terminate the lease prior to
the 20-year anniversary. Therefore, the lease term was determined to be 20 years.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
In
connection with this transaction, the Company repaid the $2.6 million mortgage on the building and cancelled the related interest
rate swap agreement discussed in Note 7, paid the refundable security deposit of $1.8 million, and the Company became obligated
to pay $25.0 million to the former stockholders of Morinda to settle the full amount of the contingent financing liability discussed
in Note 3. Other cash payments that have been or will be made include transaction costs of $1.9 million, post-closing repair obligations
of $1.7 million, and Japanese income taxes of $11.9 million.
Presented
below is a summary of the selling price and resulting gain on sale calculation (in thousands):
Gross
selling price
|
|
$
|
57,129
|
|
Less
commissions and other expenses
|
|
|
(1,941
|
)
|
Less
repair obligations
|
|
|
(1,675
|
)
|
Net
selling price
|
|
|
53,513
|
|
Cost
of land and building sold
|
|
|
(29,431
|
)
|
Total
gain on sale
|
|
|
24,082
|
|
Portion
of gain related to above-market rent concession
|
|
|
(17,640
|
)
|
Recognized
gain on sale
|
|
$
|
6,442
|
|
As
shown above, the sale of this property resulted in a gain of $24.1 million and the Company determined that $17.6 million of the
gain was the result of above-market rent inherent in the leaseback arrangement. The remainder of the gain of $6.4 million was
attributable to the highly competitive process among the entities that bid to purchase the property. 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 present value of the lease payments amounted
to $25.0 million. After deducting the $17.6 million lease incentive concession, the Company recognized an initial ROU lease asset
and ROU lease liability of approximately $7.4 million.
Impairment
In
June 2019, the Company began attempting to sublease a portion of its ROU lease assets previously used for warehouse space
that are no longer needed for current operations. As a result, an impairment evaluation was completed that resulted in recognition
of an impairment charge of $1.5 million for the three and six months ended June 30, 2019. This evaluation was based on the expected
time to obtain a suitable subtenant and current market rates for similar commercial properties.
Balance
Sheet Presentation
As
of June 30, 2019 and December 31, 2018, the carrying value of ROU lease assets, ROU lease obligations, and the deferred lease
incentive obligation are as follows (in thousands):
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Right-of-Use
Assets:
|
|
|
|
|
|
|
|
|
Cost
basis, net of impairment
|
|
$
|
37,563
|
|
|
$
|
19,221
|
|
Accumulated
amortization
|
|
|
(3,719
|
)
|
|
|
(732
|
)
|
Net
|
|
$
|
33,844
|
|
|
$
|
18,489
|
|
|
|
|
|
|
|
|
|
|
Right-of-Use
Liabilities:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
5,117
|
|
|
$
|
4,798
|
|
Long-term
|
|
|
30,557
|
|
|
|
13,686
|
|
Total
|
|
$
|
35,674
|
|
|
$
|
18,484
|
|
|
|
|
|
|
|
|
|
|
Deferred
Lease Incentive Obligation:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
882
|
|
|
$
|
-
|
|
Long-term
|
|
|
16,538
|
|
|
|
-
|
|
Total
|
|
$
|
17,420
|
|
|
$
|
-
|
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
As
of June 30, 2019 and December 31, 2018, the weighted average remaining lease term under ROU leases was 8.3 and 5.9 years, respectively.
As of June 30, 2019 and December 31, 2018, the weighted average discount rate for ROU lease liabilities was approximately 6.6%.
Lease
Commitments
Future
minimum lease payments and amortization of the related lease incentive obligation related to non-cancellable ROU operating lease
agreements are as follows (in thousands):
12-Months
Ending June 30,
|
|
|
|
|
|
|
|
2020
|
|
$
|
9,051
|
|
2021
|
|
|
7,248
|
|
2022
|
|
|
6,367
|
|
2023
|
|
|
6,120
|
|
2024
|
|
|
5,730
|
|
Thereafter
|
|
|
44,421
|
|
Total
minimum lease payments
|
|
|
78,937
|
|
Less
imputed interest
|
|
|
(43,263
|
)
|
|
|
|
|
|
Present
value of minimum lease payments
|
|
$
|
35,674
|
|
NOTE
7 — DEBT
Credit
Facility
On
March 29, 2019, the Company 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 million subject to the
satisfaction of certain conditions (the “Term Loan”) and (ii) a $10.0 million revolving loan facility (the “EWB
Revolver”). At the closing, EWB funded $25.0 million to the Company consisting of the $15.0 million Term Loan and $10.0
million as an advance under the EWB Revolver. The Company utilized a portion of the proceeds from the Credit Facility to repay
all outstanding amounts and terminate the Siena Revolver discussed below.
The
obligations of the Company under the Credit Facility are secured by substantially all assets of the Company and guaranteed by
certain subsidiaries of the Company. 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 period 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%.
The Company 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, 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 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 EWB Revolver includes a subjective acceleration clause and 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 EWB Revolver. Accordingly, the entire outstanding principal balance of the EWB Revolver is classified as a current
liability as of June 30, 2019. On July 1, 2019, the Company elected to make a voluntary prepayment of $9.7 million of principal
to repay all outstanding borrowings under the EWB Revolver. 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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Payments
under the Term Loan are interest-only for the first six months and are followed by monthly principal payments of $125,000 amortized
over the remaining term of the Term Loan plus interest. The Company 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, 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 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. Mandatory principal payments
based on Excess Cash Flow generated in subsequent quarters are excluded from current liabilities since they are contingent payments
based on the generation of working capital in the future.
Siena
Revolver
On
August 10, 2018 (the “Siena Closing Date”), the Company 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. 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%. 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, 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.
In
connection with the Siena Revolver the Company incurred debt issuance costs of $0.6 million. This amount was accounted for as
debt issuance costs that was amortized using the straight-line method over the three-year term of the Siena Revolver. The Siena
Revolver was paid off and terminated on March 29, 2019 and the unamortized debt issuance costs of $0.5 million were written off
as additional interest expense for the six months ended June 30, 2019. Additionally, the Company incurred a make-whole premium
payment of $0.5 million that was also charged to interest expense for the six months ended June 30, 2019.
Summary
of Debt
As
of June 30, 2019 and December 31, 2018, debt consists of the following (in thousands):
|
|
2019
|
|
|
2018
|
|
|
EWB
Credit Facility:
|
|
|
|
|
|
|
|
|
Term
loan, net of discount of $516
|
|
$
|
14,484
|
|
|
$
|
-
|
|
Revolver
|
|
|
9,700
|
|
|
|
-
|
|
Installment
notes payable
|
|
|
32
|
(1)
|
|
|
66
|
(1)
|
Siena
Revolver
|
|
|
-
|
|
|
|
2,000
|
|
Mortgage
payable to a foreign bank
|
|
|
-
|
|
|
|
2,628
|
(2)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,216
|
|
|
|
4,694
|
|
Less
current maturities
|
|
|
(10,852
|
)
|
|
|
(3,369
|
)
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
$
|
13,364
|
|
|
$
|
1,325
|
|
|
(1)
|
Consists
of various installment notes payable that are collateralized by equipment and that bear
interest at 12.4% to 22.1%.
|
|
(2)
|
This
mortgage note payable was collateralized by land and a building in Tokyo, Japan. Quarterly
principal payments of $0.3 million plus interest were payable in Japanese Yen at TIBOR
plus 0.7% (0.76% as of December 31, 2018) through the maturity date in December 2020.
This debt was repaid, and the interest rate swap agreement discussed below was terminated
upon sale of the property on March 22, 2019 as discussed in Note 6.
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Future
Debt Maturities
As
of June 30, 2019, the scheduled future maturities of long-term debt, exclusive of unaccreted discount of $0.5 million related
to the EWB Term Loan, are as follows (in thousands):
12-Months
Ending June 30,
|
|
|
|
|
|
|
|
2020
|
|
$
|
10,852
|
|
2021
|
|
|
1,504
|
|
2022
|
|
|
1,501
|
|
2023
|
|
|
10,875
|
|
|
|
|
|
|
Total
|
|
$
|
24,732
|
|
Embedded
Derivatives
The
Siena Revolver included features that were determined to be embedded derivatives requiring bifurcation and accounting as separate
financial instruments. The Company 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. The early termination premium was 4.0% of the $12.0 million commitment if termination occurred during
the first year after the Siena Closing Date. As of December 31, 2018, the embedded derivatives for the Siena Revolver had an aggregate
fair value of approximately $0.5 million, which was included in accrued liabilities as of December 31, 2018. As a result of the
termination of the Siena Revolver as discussed above, a make-whole premium of $0.5 million was incurred on March 29, 2019, and
the Company recognized a gain on change in fair value of embedded derivatives of $0.5 million which is included in non-operating
income (expenses) for the six months ended June 30, 2019.
Interest
Rate Swap Agreement
At
December 31, 2018, the Company had one contract for an interest rate swap with a total notional amount of approximately $2.6 million.
At December 31, 2018, the Company had an unrealized loss from this interest rate swap agreement of approximately $36,000 that
is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet. As discussed in
Note 6, this swap agreement was terminated upon sale of the property in Tokyo and repayment of the related mortgage.
NOTE
8 — STOCKHOLDERS’ EQUITY
Amendment
to Articles of Incorporation
On
May 30, 2019, the Company’s stockholders voted to approve 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.
At
the Market Offering Agreement
On
April 30, 2019, the Company entered into an At the Market Offering Agreement (the “ATM 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 ATM Offering Agreement. The ATM 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 ATM 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. Through June 30, 2019, an aggregate of approximately
2.2 million shares of Common Stock were sold for net proceeds of approximately $11.4 million. Total commissions and fees deducted
from the net proceeds were $0.4 million and other offering costs of $0.2 million were incurred for the three and six months ended
June 30, 2019.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Series
D Preferred
In
December 2018, the Board of Directors designated 44,000 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 June 30, 2019 and December 31, 2018, the Series D Preferred Stock 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.
Changes
in Stockholders’ Equity
Changes
in stockholders’ equity for the three months ended June 30, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
March 31, 2019
|
|
|
75,393
|
|
|
$
|
75
|
|
|
$
|
179,592
|
|
|
$
|
1,053
|
|
|
$
|
(24,252
|
)
|
|
$
|
156,468
|
|
Issuance
of Common Stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATM
public offering, net of offering costs
|
|
|
2,225
|
|
|
|
2
|
|
|
|
11,139
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,141
|
|
Employee
services
|
|
|
6
|
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
434
|
|
|
|
-
|
|
|
|
-
|
|
|
|
434
|
|
Fair
value of warrant issued for license agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
838
|
|
|
|
-
|
|
|
|
-
|
|
|
|
838
|
|
Net
change in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
569
|
|
|
|
-
|
|
|
|
569
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,681
|
)
|
|
|
(11,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
June 30, 2019
|
|
|
77,624
|
|
|
$
|
77
|
|
|
$
|
192,034
|
|
|
$
|
1,622
|
|
|
$
|
(35,933
|
)
|
|
$
|
157,800
|
|
Changes
in stockholders’ equity for the three months ended June 30, 2018 are as follows (in thousands):
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
March 31, 2018
|
|
|
36,649
|
|
|
$
|
36
|
|
|
$
|
63,620
|
|
|
$
|
(13,152
|
)
|
|
$
|
50,504
|
|
Issuance
of Common Stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series B promissory note, including accrued interest of approximately $61
|
|
|
461
|
|
|
|
1
|
|
|
|
871
|
|
|
|
-
|
|
|
|
872
|
|
Grant
of restricted stock awards
|
|
|
31
|
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
|
|
65
|
|
Public
offering, net of offering costs
|
|
|
2,560
|
|
|
|
3
|
|
|
|
3,290
|
|
|
|
-
|
|
|
|
3,293
|
|
Debt
discount
|
|
|
225
|
|
|
|
-
|
|
|
|
470
|
|
|
|
-
|
|
|
|
470
|
|
Stock-based
compensation related to stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
160
|
|
|
|
-
|
|
|
|
160
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,367
|
)
|
|
|
(3,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
June 30, 2018
|
|
|
39,926
|
|
|
$
|
40
|
|
|
$
|
68,476
|
|
|
$
|
(16,519
|
)
|
|
$
|
51,997
|
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
9 — STOCK-BASED COMPENSATION
2019
Equity Incentive Plan
On
May 30, 2019, the Company’s stockholders voted to approve the New Age Beverages Corporation 2019 Equity Incentive Plan (the
“2019 Plan”). The 2019 Plan will terminate in April 2029. 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.
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
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. As
of June 30, 2019, all of the 10.0 million shares authorized under the 2019 Plan are available for future grants of stock options,
restricted stock and similar instruments.
LTI
Stock Option Plan
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. 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, a maximum of approximately 7.5 million shares of Common Stock
were available for grants under the LTI Plan. As of June 30, 2019, after deducting stock options and restricted stock grants to
date, there were approximately 2.3 million shares available for future grants of stock options, restricted stock and similar
instruments under the LTI Plan.
Stock
Option Activity
The
following table sets forth the summary of stock option activity under the LTI Plan for the six months ended June 30, 2019 (shares
in thousands):
|
|
Shares
|
|
|
Price
(1)
|
|
|
Term
(2)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
2,786
|
|
|
$
|
2.84
|
|
|
|
9.0
|
|
Grants
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
|
36
|
|
|
$
|
5.57
|
|
|
|
|
|
Non-employees
|
|
|
25
|
|
|
$
|
5.30
|
|
|
|
|
|
Forfeited
|
|
|
(87
|
)
|
|
$
|
3.70
|
|
|
|
|
|
Exercised
|
|
|
(200
|
)
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
2,560
|
(3)
|
|
$
|
2.90
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested,
end of period
|
|
|
740
|
(4)
|
|
$
|
1.90
|
|
|
|
7.8
|
|
|
(1)
|
Represents
the weighted average exercise price.
|
|
(2)
|
Represents
the weighted average remaining contractual term until the stock options expire.
|
|
(3)
|
As
of June 30, 2019 and December 31, 2018, the aggregate intrinsic value of stock options
outstanding was $4.5 million and $6.6 million, respectively.
|
|
(4)
|
As
of June 30, 2019 and December 31, 2018, the aggregate intrinsic value of vested stock
options was $2.0 million and $3.1 million, respectively.
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
As
of June 30, 2019, unrecognized compensation expense related to unvested stock options amounts to $3.9 million. This amount is
expected to be recognized on a straight-line basis over the weighted-average vesting period of 2.3 years.
The
fair value of stock options 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 six months ended June 30, 2019:
Grant
date fair value of common stock (exercise price)
|
|
$
|
5.41
|
|
Expected
life (in years)
|
|
|
6.5
|
|
Volatility
|
|
|
113
|
%
|
Dividend
yield
|
|
|
0
|
%
|
Risk-free
interest rate
|
|
|
2.4
|
%
|
Based
on the assumptions set forth above, the weighted-average grant date fair value of stock options granted during the six
months ended June 30, 2019 was $4.65 per share. 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.
Restricted
Stock Activity
In
connection with the business combination with Morinda in December 2018, the Company made restricted stock award grants for an
aggregate of 1.2 million shares of the Company’s Common Stock. None of these shares will be issued until a vesting event
occurs. Upon vesting of the Morinda awards, settlement will occur in (i) cash where foreign regulatory requirements 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 following table sets forth a summary of restricted stock award activity for the six months ended June 30, 2019 (in
thousands):
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
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
|
|
|
(2
|
)
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fair
value adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(284
|
)
(4)
|
|
|
-
|
|
|
|
-
|
|
Vested
shares and expense
|
|
|
(359
|
)
|
|
|
(2,273
|
)
|
|
|
-
|
|
|
|
(1,012
|
)
|
|
|
(629
|
)
(5)
|
|
|
(64
|
)
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
916
|
(2)
|
|
$
|
2,281
|
(2)
|
|
|
473
|
(3)
|
|
$
|
1,194
|
(3)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value, end of period
|
|
$
|
4,265
|
(6)
|
|
|
|
|
|
$
|
2,206
|
(6)
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
Weighted
average remaining term for recognition of unvested expense
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
-
|
|
|
(1)
|
The
weighted average fair value was $5.50 per share based on the closing price of the Company’s
Common Stock on the grant date.
|
|
(2)
|
As
of June 30, 2019, unvested shares of restricted stock consist of approximately 0.7 million
shares that will be issued upon vesting and 0.2 million shares that have been issued
subject to vesting conditions. For unvested shares that have been issued, approximately
$0.4 million of unvested compensation is included in prepaid expenses as of June 30,
2019. Outstanding unvested shares include awards for 216,000 shares that vest if Morinda
achieves EBITDA of $20.0 million for the year ending December 31, 2019. The Company assesses
the probability of achievement of such performance conditions in the recognition of compensation
expense related to these awards.
|
|
(3)
|
Due
to Morinda’s foreign operations, these awards will be settled in cash upon vesting
since regulatory requirements prohibit settlement in shares. These awards vest between
one and three years after the grant date and are classified as liabilities in the Company’s
consolidated balance sheets based on the fair value of the Company’s Common Stock
at the end of each reporting period. The liability is being recorded with a corresponding
charge to stock-based compensation expense over the vesting period. As of June 30, 2019,
approximately $1.2 million is included in current liabilities.
|
|
(4)
|
Change
in unvested compensation resulted from a decrease in the closing price of the Company’s
Common Stock for the six months ended June 30, 2019.
|
|
(5)
|
Consists
of restricted stock issued to the Company’s Chief Executive Officer in 2016 that
vested over three years. The remaining shares became fully vested in March and April
2019 and the remaining compensation charge was recorded.
|
|
(6)
|
The
intrinsic value was based on the closing price of the Company’s common stock of
$4.66 per share on the last trading day for June 2019.
|
Stock-based
Compensation Expense
Stock-based
compensation expense is included in selling, 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 six months ended June 30, 2019 and 2018 (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Stock
options awards:
|
|
|
|
|
|
|
|
|
Employees
|
|
$
|
933
|
|
|
$
|
398
|
|
Non-employees
|
|
|
5
|
|
|
|
-
|
|
Restricted
stock awards:
|
|
|
|
|
|
|
|
|
Equity
classified
|
|
|
2,337
|
|
|
|
500
|
|
Liability
classified
|
|
|
1,012
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,287
|
|
|
$
|
898
|
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
10 — INCOME TAXES
The
Company’s provision for income taxes for the three and six months ended June 30, 2019 resulted in income tax expense of
$7.8 million and $6.1 million, respectively. The effective tax rate as a percentage of pre-tax earnings for the three and six
months ended June 30, 2019 was negative 108.5% and negative 84.8%, respectively. The negative effective tax rate for the three
months ended June 30, 2019 was due to the establishment of a valuation allowance applied to the Company’s domestic
net deferred tax assets of $3.3 million and the reversal of the benefit recognized for the three months ended March 31, 2019.
The negative effective tax rate for the six months ended June 30, 2019 was due to establishment of the valuation allowance. The
Company continues to maintain a taxable income position in its foreign jurisdictions.
A
valuation allowance is established when necessary to reduce the deferred tax assets to amounts expected to be realized. As of
June 30, 2019, we evaluated our domestic net deferred tax assets and liabilities and determined that a valuation allowance was
necessary. The determination was made primarily due to the existence of negative evidence of historical domestic net operating
losses, possible limitations on the usability of certain net operating losses, and uncertainty regarding future domestic taxability
due to the Company’s operations, and the reversal of taxable temporary differences. The establishment of this valuation
allowance resulted in an adjustment of $7.4 million and $3.3 million for the three and six months ended June
30, 2019, respectively.
The
Company’s U.S. federal income tax returns for 2015 through 2017 are open to examination for federal tax purposes. In major
foreign jurisdictions, the Company is generally no longer subject to income tax examinations for years before 2012. However, statutes
in certain countries may be as long as ten years.
The
total outstanding balance for liabilities related to unrecognized tax benefits as of June 30, 2019 was $0.4 million, which would
favorably impact the effective tax rate if recognized. There were no unrecognized tax benefits as of June 30, 2018. The increase
in 2019 relates to tax audits in foreign jurisdictions, transfer pricing adjustments, and state tax expense. The Company does
not anticipate that unrecognized tax benefits will significantly increase or decrease within the next twelve months.
Significant
judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred
income tax assets and evaluating the Company’s uncertain tax positions. In evaluating the ability to recover its deferred
income tax assets, in full or in part, the Company considers all available positive and negative evidence, including past operating
results, forecast of future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies.
Interim
income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for
discrete tax items in the period in which they occur. Although the Company believes its tax estimates are reasonable, the Company
can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its
historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax
provision and operating results in the period in which the Company makes such determination.
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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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 unaudited condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018. After
the executives retire, the deferred compensation obligation is payable over a period up to 20 years.
401(k)
Plan
The
Company 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 who are entitled to participate at the beginning of the first
full quarter following commencement of employment. The Company matches contributions up to 3% of the participating employee’s
compensation, and these 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 to the 401(k) Plan amounted to
$0.1 million and $0.2 million for the three and six months ended June 30, 2019, respectively. The Company did not have a 401(k)
Plan for the three and six months ended June 30, 2018.
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
$3.3 and $3.0 million as of June 30, 2019 and December 31, 2018, respectively. Of this amount, approximately $3.2 and $2.9 million
is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets as of June 30,
2019 and December 31, 2018, respectively.
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 June 30, 2019 and December 31, 2018, the Company has recorded a current liability under Accounting
Standards Codification (ASC) 450,
Contingencies
, of approximately $0.8 million.
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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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 June 30, 2019 and December 31, 2018, guarantee deposits of approximately $0.8 million are included in other
long-term assets in the accompanying unaudited condensed consolidated balance sheets.
NOTE
12 — RELATED PARTY TRANSACTIONS
For
the six months ended June 30, 2019 and 2018, the Company granted restricted stock awards to five non-employee members of the Board
of Directors for an aggregate of 90,910 and 153,000 shares of Common Stock. The fair value of these shares was based on the closing
price of the Company’s Common Stock on the grant date and amounted to an aggregate of $0.5 million and $0.3 million for
the six months ended June 30, 2019 and 2018, respectively. Compensation expense is recognized over the 12-month vesting period
after the respective grant dates for these restricted stock awards. Please refer to Note 9 for additional information about restricted
stock awards.
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 three and six months ended June 30, 2019 and 2018, basic and diluted net loss per share
were the same since all Common Stock equivalents were anti-dilutive. As of June 30, 2019 and 2018, 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):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
2,560
|
|
|
|
1,257
|
|
Restricted
stock awards under LTI Plan:
|
|
|
|
|
|
|
|
|
Unvested
shares of Common Stock issued
|
|
|
163
|
|
|
|
1,027
|
|
Unissued
and unvested awards to Morinda employees
|
|
|
1,226
|
|
|
|
-
|
|
Non-plan
restricted stock awards
|
|
|
-
|
|
|
|
982
|
|
Warrant
issued for license agreement
|
|
|
200
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,149
|
|
|
|
3,266
|
|
NOTE
14 — FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATIONS
Fair
Value Measurements
Fair
value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction
between market participants on the measurement date. When determining fair value, the Company considers the principal or most
advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset
or liability. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value
into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant
to the fair measurement:
Level
1—Quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement
date
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 June 30, 2019
and December 31, 2018. The contingent consideration obligations incurred in the business combinations with Marley and Morinda
are recorded at estimated fair value as of June 30, 2019 and December 31, 2018. 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 June 30, 2019 and December 31, 2018.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
The
Company’s interest rate swap, earnout obligations under business combinations, 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 was recorded
at fair market value and was classified within Level 2 of the fair value hierarchy. The Company’s earnout obligations under
business combinations are recorded at fair market value and have been classified within Level 3 of the fair value hierarchy. The
Company’s embedded derivative liability was recorded at fair market value and was classified within Level 3 of the fair
value hierarchy. Details of the business combination earnout obligations, including valuation methodology and key assumptions
and estimates used, are disclosed in Note 3. 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 six months ended June 30, 2019 and 2018, the Company had no transfers of its assets or liabilities
between levels of the fair value hierarchy.
Significant
Concentrations
For
the three and six months ended June 30, 2019, no single customer comprised more than 10% of the Company’s consolidated net
revenue. For each of the three and six months ended June 30, 2018, one customer comprised approximately 11% of the Company’s
consolidated net revenue. A substantial portion of the Morinda segment 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
for the six months ended June 30, 2019. 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 June 30, 2019, the Company had cash and cash equivalents with four financial institution
in the United States with balances of $22.9 million, $8.4 million, $1.8 million and $1.0 million; three financial institutions
in China with balances of $10.7 million, $4.5 million and $1.0 million; and two financial institutions in Japan with balances
of $22.0 million and $6.2 million. 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 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 June 30, 2019, the Company did not have any customers with an accounts
receivable balance in excess of 10% of consolidated accounts receivable. As of June 30, 2018, the Company had two customers that
comprised 11% and 10% of accounts receivable, net.
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 three and six months
ended June 30, 2018.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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 three and six months ended June 30, 2019 and 2018, is as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
52,060
|
|
|
$
|
-
|
|
|
$
|
100,282
|
|
|
$
|
-
|
|
New
Age
|
|
|
14,288
|
|
|
|
13,363
|
|
|
|
24,373
|
|
|
|
24,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
66,348
|
|
|
$
|
13,363
|
|
|
$
|
124,655
|
|
|
$
|
24,921
|
|
Gross
profit by reporting segment for the three and six months ended June 30, 2019 and 2018, is as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
40,469
|
|
|
$
|
-
|
|
|
$
|
78,174
|
|
|
$
|
-
|
|
New
Age
|
|
|
1,180
|
|
|
|
1,760
|
|
|
|
2,051
|
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross profit
|
|
$
|
41,649
|
|
|
$
|
1,760
|
|
|
$
|
80,225
|
|
|
$
|
4,376
|
|
Assets
by reporting segment as of June 30, 2019 and December 31, 2018, are as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
216,464
|
|
|
$
|
206,222
|
|
New
Age
|
|
|
115,237
|
|
|
|
80,710
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
331,701
|
|
|
$
|
286,932
|
|
Capital
expenditures for property and equipment and identifiable intangible assets incurred by reporting segment for the three and six
months ended June 30, 2019 and 2018, are as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
461
|
|
|
$
|
-
|
|
|
$
|
577
|
|
|
$
|
-
|
|
New
Age
|
|
|
576
|
|
|
|
-
|
|
|
|
1,709
|
(1)
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$
|
1,037
|
|
|
$
|
-
|
|
|
$
|
2,286
|
|
|
$
|
64
|
|
|
(1)
|
Consists
of additions to property and equipment of $0.9 million and the fair value of $0.8
million for a license agreement obtained through the issuance of a warrant
as discussed in Note 5.
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Geographic
Concentrations
The
following table presents net revenue by geographic region for the three and six months ended June 30, 2019 and 2018 (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States of America
|
|
$
|
16,945
|
|
|
$
|
13,363
|
|
|
$
|
33,400
|
|
|
$
|
24,921
|
|
International
|
|
|
49,403
|
|
|
|
-
|
|
|
|
91,255
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
66,348
|
|
|
$
|
13,363
|
|
|
$
|
124,655
|
|
|
$
|
24,921
|
|
As
of June 30, 2019, the net carrying value of the Company’s property and equipment located outside of the United States amounted
to approximately $22.0 million. 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.
NOTE
16 — SUBSEQUENT EVENTS
BWR
Merger Agreement
As
discussed in Note 3, on May 30, 2019, the Company entered into the BWR Merger Agreement. On July 10, 2019, the closing
occurred resulting in completion of the transactions contemplated by the BWR Merger Agreement. Pursuant to the BWR Merger Agreement,
the total consideration amounted to approximately $5.9 million consisting of (i) cash of $0.5 million to the Seller; (ii) repayment
of $2.5 million of the outstanding indebtedness of BWR, and (iii) issuance of up to 700,000 shares of the Company’s Common
Stock with an estimated fair value on the closing date of approximately $2.9 million. The BWR Merger Agreement provided that if
BWR’s working capital set forth on the closing date balance sheet is negative, then the 700,000 shares issuable to the Seller
will be reduced to account for the deficiency. The shares of Common Stock, as adjusted for any working capital deficiency, are
expected to be issued in the first half of August 2019. The BWR Merger Agreement will be accounted for in the third quarter of
2019 and the Company will begin consolidating the financial results of BWR commencing on the closing date.
Interest
Rate Agreement
The
Company entered into an ISDA 2002 Master Agreement (the “Interest Rate Agreement”) dated July 31, 2019, including
all Schedules and Annexes thereto, with EWB. The confirmation under the Interest Rate Agreement, provides for a total notional
amount of $10.0 million at a fixed interest rate of approximately 5.4% through May 1, 2023, in exchange for a floating rate indexed
to the prime rate plus 0.5%. The Interest Rate Agreement was entered into pursuant to the terms of the Credit Facility with EWB
discussed in Note 7, which required the entry into interest rate swap agreements with an aggregate face amount equal to 50% of
the Term Loan principal amount.
In
connection with the Interest Rate Agreement, certain of the Company’s direct and indirect subsidiaries (the “Subsidiaries”)
entered into an Unlimited Continuing Guaranty (Swap Transactions), as of July 31, 2019 (the “Guaranty”)
for the benefit of EWB pursuant to which each of the Subsidiaries agreed to guaranty all Swap Obligations, as defined in the Guaranty,
including all debt obligations and liabilities arising under the Interest Rate Agreement.
First
Amendment, Waiver and Consent to Credit Facility
On
August 5, 2019, the Company entered into a First Amendment, Waiver and Consent to the Credit Facility, effective as of July 11,
2019 (the “Amendment”), pursuant to which EWB waived any non-compliance by the Company with certain covenants in the
Credit Facility that may have occurred or would otherwise arise as a result of the BWR Merger Agreement. Pursuant to the Amendment,
BWR entered into a Supplement to Guarantee and Pledge and an Intellectual Property Security Agreement. The Amendment also includes
certain post-closing obligations to be completed by the Company.
Payment
of Current Liabilities
In
July 2019, the Company paid $8.0 million of the business combination liabilities discussed in Note 3, and $9.7 million of
borrowings outstanding under the EWB Revolver discussed in Note 7.
Offering
Agreement
In
connection with the ATM Offering Agreement discussed in Note 8, for the period from July 1, 2019 through August 8, 2019,
the Company sold an aggregate of approximately 542,000 shares of Common Stock for net proceeds of approximately $2.1 million.