UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[X] QUARTERLY report pursuant to section 13 or 15( d ) of the Securities Exchange Act of 1934
 

 

For the Quarterly Period Ended June 30, 2019

   
[  ] Transition report pursuant to section 13 or 15( d ) of the Securities Exchange Act of 1934
 

 

For the Transition Period from _____________to _____________

 

Commission File Number: 001-38014

 

New Age Beverages Corporation

 

(Exact Name of Small Business Issuer as Specified in its Charter)

 

Washington   27-2432263
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     

2420 17th Street, Suite 220

Denver, CO

  80202
(Address of principal executive offices)   (Zip Code)
     
Registrant’s telephone number, including area code:   (303) 566-3030

 

1700 E. 68 th Avenue, Denver, CO 80229

(Former name or former address, if changed since last report)

 

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

 

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

 

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

 

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

 

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

 

  Large accelerated filer [  ] Accelerated filer [  ]
  Non-accelerated filer [X] Smaller reporting company [X]
    Emerging growth company [X]

 

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

 

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

 

The registrant had 78,166,042 shares of its common stock, $0.001 par value per share, outstanding as of August 5, 2019.

 

 

   

 
 

 

NEW AGE BEVERAGES CORPORATION

TABLE OF CONTENTS

 

      Page
       
PART I. FINANCIAL INFORMATION  
       
  ITEM 1. Financial Statements  
       
    Unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 2
       
    Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018 3
       
    Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2019 and 2018 4
       
    Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 5
       
    Notes to Unaudited Condensed Consolidated Financial Statements 7
       
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
       
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 46
       
  ITEM 4. Controls and Procedures 46
       
PART II. OTHER INFORMATION  
   
  ITEM 1. Legal Proceedings 47
       
  ITEM 1A. Risk Factors 47
       
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
       
  ITEM 3. Defaults Upon Senior Securities 47
       
  ITEM 4. Mine Safety Disclosures 47
       
  ITEM 5. Other Information 47
       
  ITEM 6. Exhibits 47
       
SIGNATURES 48

 

1
 

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value per share amounts)

 

    June 30, 2019     December 31, 2018  
ASSETS            
Current assets:                
Cash and cash equivalents   $ 83,580     $ 42,517  
Accounts receivable, net of allowance of $80 and $134, respectively     15,177       9,837  
Inventories     36,943       37,148  
Prepaid expenses and other     10,219       6,473  
Total current assets     145,919       95,975  
                 
Long-term assets:                
Identifiable intangible assets, net     66,062       67,830  
Property and equipment, net     27,476       57,281  
Goodwill     31,514       31,514  
Right-of-use lease assets     33,844       18,489  
Deferred income taxes     17,494       8,908  
Restricted cash and other     9,392       6,935  
Total assets   $ 331,701     $ 286,932  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 9,282     $ 8,960  
Accrued liabilities     53,604       34,019  
Current portion of business combination liabilities     14,431       8,718  
Current maturities of long-term debt     10,852       3,369  
Total current liabilities     88,169       55,066  
                 
Long-term liabilities:                
Business combination liabilities, net of current portion     6,030       43,412  
Long-term debt, net of current maturities     13,364       1,325  
Right-of-use liabilities, net of current portion:                
Lease liability     30,557       13,686  
Deferred lease incentive obligation     16,538       -  
Deferred income taxes     9,790       9,747  
Other     9,453       9,160  
Total liabilities     173,901       132,396  
                 
Commitments and contingencies (Note 11)                
                 
Stockholders’ equity:                
Common Stock; $0.001 par value. Authorized 200,000 shares; issued and outstanding 77,624 and 75,067 shares as of June 30, 2019 and December 31, 2018, respectively     77       75  
Additional paid-in capital     192,034       176,471  
Accumulated other comprehensive income     1,622       626  
Accumulated deficit     (35,933 )     (22,636 )
Total stockholders’ equity     157,800       154,536  
Total liabilities and stockholders’ equity   $ 331,701     $ 286,932  

 

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

 

2
 

 

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except loss per share amounts)

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2019     2018     2019     2018  
                               
Net revenue   $ 66,348     $ 13,363     $ 124,655     $ 24,921  
Cost of goods sold     24,699       11,603       44,430       20,545  
                                 
Gross profit     41,649       1,760       80,225       4,376  
                                 
Operating expenses:                                
Commissions     19,607       346       37,645       673  
Selling, general and administrative     28,175       4,142       55,017       8,398  
Change in fair value of earnout obligations     (6,665 )     -       (6,665 )     100  
Impairment of right-of-use lease assets     1,500       -       1,500       -  
Depreciation and amortization expense     2,017       517       4,253       1,038  
Total operating expenses     44,634       5,005       91,750       10,209  
                                 
Operating loss     (2,985 )     (3,245 )     (11,525 )     (5,833 )
                                 
Non-operating income (expenses):                                
Gain from sale of land and building     -       -       6,442       -  
Interest expense     (756 )     (125 )     (2,402 )     (181 )
Other debt financing expenses     -       -       (224 )     -  
Gain from change in fair value of embedded derivatives     -       -       470       -  
Interest and other income (expense), net     (143 )     3       39       (4 )
Loss before income taxes     (3,884 )     (3,367 )     (7,200 )     (6,018 )
Income tax expense     (7,797 )     -       (6,097 )     -  
                                 
Net loss     (11,681 )     (3,367 )     (13,297 )     (6,018 )
Other comprehensive income:                                
Foreign currency translation adjustments, net of tax     569       -       996       -  
                                 
Comprehensive loss   $ (11,112 )   $ (3,367 )   $ (12,301 )   $ (6,018 )
Net loss per share attributable to common stockholders (basic and diluted)   $ (0.15 )   $ (0.09 )   $ (0.18 )   $ (0.16 )
Weighted average number of shares of Common Stock outstanding (basic and diluted)     76,331       38,911       75,780       37,513  

 

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

 

3
 

 

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2019 and 2018

(In thousands)

 

                            Accumulated              
                Additional     Other              
    Preferred Stock     Common Stock     Paid-in     Comprehensive     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Income     Deficit     Total  
                                                 

Six Months Ended June 30, 2019

                                               
Balances, December 31, 2018     -     $ -       75,067     $ 75     $ 176,471     $ 626     $ (22,636 )   $ 154,536  
Issuance of Common Stock for:                                                                
Exercise of stock options     -       -       200       -       418       -       -       418  
Grant of restricted stock awards     -       -       126       -       576       -       -       576  
ATM public offering, net of offering costs     -       -       2,225       2       11,139       -       -       11,141  
Employee services     -       -       6       -       31       -       -       31  
Stock-based compensation expense     -       -       -       -       2,561       -       -       2,561  
Fair value of warrant issued for license agreement     -       -       -       -       838       -       -       838  
Net change in other comprehensive income     -       -       -       -       -       996       -       996  
Net loss     -       -       -       -       -       -       (13,297 )     (13,297 )
Balances, June 30, 2019     -     $ -       77,624     $ 77     $ 192,034     $ 1,622     $ (35,933 )   $ 157,800  
                                                                 
                                                                 
                                                                 
                                                                 
                                                                 

Six Months Ended June 30, 2018

                                                               
Balances, December 31, 2017     169     $ -       35,172     $ 35     $ 63,204     $ -     $ (10,501 )   $ 52,738  
Issuance of Common Stock for:                                                                
Conversion of Series B Preferred Stock     (169 )     -       1,354       1       (1 )     -       -       -  
Grant of restricted stock awards     -       -       154       -       325       -       -       325  
Public offering, net of offering costs     -       -       2,560       3       3,290       -       -       3,293  
Debt discount     -       -       225       -       470       -       -       470  
Conversion of Series B promissory notes                     461       1       871       -       -       872  
Stock-based compensation related to stock options     -       -       -       -       317       -       -       317  
Net loss     -       -       -       -       -       -       (6,018 )     (6,018 )
Balances, June 30, 2018     -     $ -       39,926     $ 40     $ 68,476     $ -     $ (16,519 )   $ 51,997  

 

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

 

4
 

 

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2019 and 2018

(In thousands)

 

    2019     2018  
             
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (13,297 )   $ (6,018 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
Stock-based compensation expense     4,287       898  
Depreciation and amortization     4,441       1,038  
Accretion and amortization of debt discount and issuance costs     1,609       15  
Impairment of right-of-use lease assets     1,500       -  
Make-whole premium on early payment of Siena Revolver     480       -  
Deferred income taxes     (8,543 )     -  
Issuance of Common Stock for employee services     31       -  
Issuance of common stock for accrued interest     -       61  
Gain from sale of land and building     (6,442 )     -  
Gain from change in fair value of embedded derivatives     (470 )     -  
Change in fair value of earnout obligations     (6,665 )     100  
Changes in operating assets and liabilities:                
Accounts receivable     (5,340 )     130  
Inventories     205       (2,479 )
Prepaid expenses, deposits and other     (3,703 )     (712 )
Accounts payable     308       1,420  
Other accrued liabilities     16,696       (877 )
Deferred lease incentive obligation     17,420       -  
Net cash provided by (used in) operating activities     2,517       (6,424 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Net proceeds from sale of land and building:                
Related to sale of property     31,445       -  
Repair obligations     1,675       -  
Loan receivable from BWR     (1,000 )     -  
Capital expenditures for property and equipment     (1,241 )     (64 )
Net cash provided by (used in) investing activities     30,879       (64 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from borrowings     41,678       4,565  
Principal payments on borrowings     (19,701 )     (2,000 )
Principal payments on business combination obligations     (26,000 )     -  
Proceeds from issuance of common stock     11,380       3,851  
Payments for deferred offering costs     (140 )     -  
Proceeds from exercise of stock options     418       -  
Debt issuance costs paid     (719 )     -  
Net cash provided by financing activities     6,916       6,416  
                 
Effect of foreign currency translation changes     1,188       -  
Net change in cash, cash equivalents and restricted cash     41,500       (72 )
Cash, cash equivalents and restricted cash at beginning of period     45,856       285  
                 
Cash, cash equivalents and restricted cash at end of period   $ 87,356     $ 213  

 

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

 

5
 

 

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30, 2019 and 2018

(In thousands)

 

    2019     2018  
             
SUMMARY OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:                
Cash and cash equivalents at end of period   $ 83,580     $ 213  
Restricted cash at end of period     3,776       -  
Total at end of period   $ 87,356     $ 213  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid for interest   $ 217     $ 169  
Cash paid for income taxes   $ 1,936     $ -  
Cash paid under right-of-use operating lease obligations   $ 4,205     $ 193  
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Siena Revolver payments from borrowings under EWB Credit Facility:                
Principal payment   $ 1,944     $ -  
Make-whole premium     480       -  
Total   $ 2,424     $ -  
                 
Repayment of mortgage from proceeds from sale of land and building   $ 2,628     $ -  
Restricted stock granted for prepaid compensation   $ 576     $ 353  
Debt issuance costs paid from proceeds of borrowings   $ 210     $ 170  
Increase in payables for capital expenditures   $ 14     $ -  
Increase in payables for deferred offering costs   $ 99     $ -  
Fair value of warrant issued for license agreement   $ 838     $ -  
Right-of-use lease assets acquired in exchange for operating lease obligations   $ 19,841     $ 214  
Common stock issued for settlement of principal balance under note payable   $ -     $ 811  

 

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

 

6
 

 

NEW AGE BEVERAGES CORPORATION

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.

 

7
 

 

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.

 

8
 

 

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.

 

9
 

 

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.

 

10
 

 

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.

 

11
 

 

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.

 

12
 

 

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.

 

13
 

 

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.

 

14
 

 

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.

 

15
 

 

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     $ -  

 

16
 

 

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.

 

17
 

 

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.

 

18
 

 

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.

 

19
 

 

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  

 

20
 

 

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)