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 Direct Store Distribution (“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 nine months ended September 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
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 five wholly-owned subsidiaries, NABC, Inc., NABC Properties, LLC (“NABC Properties”), New Age Health Sciences
Holdings, Inc., Morinda and BWR. 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 Holdings, Inc. owns the Company’s intellectual property
and manages operating performance in the medical and hospital channels. BWR owns key licensing and distribution rights in the
United States for some of the world’s leading beverage brands.
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 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 nine months ended September 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 September 30, 2019 and operating results for the three
and nine months ended September 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 of 1933, as amended (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’s status as an emerging growth company will terminate on December 31, 2019.
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, valuation assumptions for earnout obligations, 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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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, integrate recent business combinations,
its ability to attract new customers and expand sales to existing customers, the risks of attracting and retaining qualified management
personnel, the risks related to litigation and operating in a highly regulated business environment, 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 ability to generate significant net revenue and cash flows from the use of this expertise.
Recent
Accounting Pronouncements
Recently
Adopted Accounting 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 Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation
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. The Company adopted this new guidance using the modified retrospective method effective on January 1, 2019. On the date
of adoption, there were no outstanding awards granted to non-employees for which the measurement date had not yet occurred. Therefore,
the adoption of this standard did not have any impact on the Company’s financial statements. For the nine months ended September
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.
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.
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
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. ASU 2016-13 and ASU 2018-19 are effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The Company has not yet determined the effect that ASU 2016-13 and
ASU 2018-19 will have on its results of 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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements.
ASU 2018-13 is effective for the Company in the first quarter of fiscal 2020. The Company is currently evaluating the impact ASU
2018-13 will have on its consolidated financial statements and related disclosures.
NOTE
3 — BUSINESS COMBINATIONS
BWR
Merger Agreement
Overview.
On May 30, 2019, the Company and BWR Acquisition Corp., a newly organized New York corporation that was wholly owned by
the Company (“BWR Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
Brands Within Reach, LLC, a New York limited liability company (“BWR”), and Olivier Sonnois, the sole owner of BWR
(“Mr. Sonnois”). At the closing on July 10, 2019 (the “BWR Closing Date”), the transactions contemplated
by the Merger Agreement were completed resulting in the merger of BWR Merger Sub with and into BWR, and BWR became a wholly-owned
subsidiary of the Company (the “BWR Merger”). This closing of the transaction was accounted for using the acquisition
method of accounting based on ASC 805, Business Combinations, and using the fair value concepts set forth in ASC 820, Fair
Value Measurement. The Company entered into the Merger Agreement primarily to acquire certain key licensing and distribution
rights in the United States for some of the world’s leading beverage brands.
In
connection with the Merger Agreement, the Company made a loan to BWR in the amount of $1.0 million in June 2019. The Merger Agreement
provided that if BWR’s working capital set forth on its opening balance sheet was negative, then the number of shares of
Common Stock issuable by the Company would be reduced from 700,000 shares to account for the deficiency. The opening balance sheet
resulted in negative working capital of approximately $2.5 million, which resulted in a reduction of the number of shares issued
at closing to 107,602 shares. Accordingly, the estimated fair value of the shares was approximately $453,000 based on the fair
value of the Company’s Common Stock of $4.21 per share on the BWR Closing Date. The Merger Agreement also provided for a
cash payment of $0.5 million to the former owner of BWR. The total purchase consideration for the transaction consisted of the
following (in thousands, except share number):
|
Pre-closing cash advance to BWR
|
|
$
|
1,000
|
|
|
Cash
paid to former owner of BWR at closing
|
|
|
500
|
|
|
Fair
value of 107,602 shares of Common stock issued
|
|
|
453
|
|
|
|
|
|
|
|
|
Total
purchase consideration
|
|
$
|
1,953
|
|
As
provided for in the Merger Agreement, the Company paid approximately $2.5 million after the BWR Closing Date to repay the outstanding
principal and interest owed by BWR under its existing line of credit and certain other liabilities.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Purchase
Price Allocation. Presented below is a summary of the purchase price allocation for the BWR business combination (in thousands):
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
537
|
|
|
Accounts receivable
|
|
|
1,293
|
|
|
Inventories
|
|
|
2,398
|
(1)
|
|
Prepaid expenses and other
|
|
|
452
|
|
|
Total current assets acquired
|
|
|
4,680
|
|
|
Identifiable intangible assets
|
|
|
1,530
|
(2)
|
|
Right-of-use lease assets
|
|
|
708
|
(3)
|
|
Property, equipment and other
|
|
|
136
|
|
|
Total identifiable assets acquired
|
|
|
7,054
|
|
|
Current liabilities assumed:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(3,756
|
)(3)
|
|
Note payable under line of credit
|
|
|
(2,353
|
)
|
|
Deferred income taxes
|
|
|
(401
|
)(4)
|
|
Long-term operating lease liabilities assumed
|
|
|
(622
|
)(3)
|
|
Net identifiable assets acquired
|
|
|
(78
|
)
|
|
Goodwill
|
|
|
2,031
|
(5)
|
|
Total purchase price allocation
|
|
$
|
1,953
|
|
|
|
(1)
|
Based
on the report of an independent valuation specialist, the fair value of work-in-process and finished goods inventories on
the BWR Closing Date exceeded the historical carrying value by approximately $150,000. This amount represents an element of
built-in profit on the BWR Closing Date and will be charged to cost of goods sold as the related inventories are sold. The
fair value of inventories was determined using both the “cost approach” and the “market approach.”
|
|
|
(2)
|
The
fair value of identifiable intangible assets was $1.5 million and was determined based on the report of an independent valuation
specialist, primarily using variations of the “income approach,” which is based on the present value of the future
after-tax cash flows attributable to each identifiable intangible asset.
|
|
|
(3)
|
In
order to conform with the Company’s accounting policies, BWR adopted ASU No. 2016-02, Leases, which requires
that assets and liabilities be recognized on the balance sheet for the rights and obligations created by those leases. Accordingly,
right-of-use assets of approximately $0.7 million were recognized, along with the current and long-term portions of operating
lease liabilities of $0.1 million and $0.6 million, respectively.
|
|
|
(4)
|
BWR’s
operations were previously taxed on the individual income tax return of the sole owner, whereby no deferred income tax assets
or liabilities had been recognized for U.S. federal and state income tax purposes. Upon consummation of the BWR Merger, BWR’s
operations are included in the consolidated income tax returns of the Company. Accordingly, an adjustment of approximately
$0.4 million has been reflected for net deferred income tax liabilities that resulted from differences between the financial
reporting basis and the income tax basis of such assets and liabilities.
|
|
|
(5)
|
Goodwill
related to BWR is recognized for the difference between the total consideration transferred to consummate the BWR Merger of
$0.9 million and the fair value of net identifiable assets acquired of negative $1.1 million. Goodwill and intangible assets
in connection with the BWR business combination are not expected to be deductible for income tax purposes.
|
Consulting
Agreement. Concurrent with the BWR Merger, the Company entered into an independent contractor agreement (“ICA”)
that provides for Mr. Sonnois, the former sole owner of BWR, to serve as President of the Company’s North American Brands
Division (“NABD”). The ICA provides for an initial term that expires in June 2022 with an option by either party to
renew on an annual basis thereafter. Under the ICA, the Company is required to (i) grant 100,000 shares of restricted Common Stock
to Mr. Sonnois, which vest over the initial three-year term of the ICA, (ii) pay base compensation of $350,000 per year, (iii)
pay annual short term performance bonuses between 25% and 100% of base salary depending on achievement of criteria established
by the Company, (iv) annually issue stock options, restricted stock or other annual long-term equity awards, up to 25% of base
compensation with vesting over three years, and (v) pay special performance incentives based on the future gross profit of NABD.
As discussed in Note 16, the restricted stock and stock option grants were made to Mr. Sonnois in October 2019.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Commencing
on the effective date of the ICA, the Company is required to provide special performance incentives to Mr. Sonnois consisting
of issuing unregistered shares of Common Stock with a fair value of $1.5 million if NABD’s gross profit is $10.0 million
or more for the first 12 consecutive months of the agreement, an additional $1.5 million of shares if NABD’s gross profit
is $20.0 million or more for the first 24 consecutive months, and an additional $2.0 million of shares if NABD’s gross profit
is $35.0 million or more for the first 36 consecutive months of the agreement. All shares issued for the special performance incentives
will vest immediately upon achievement of the performance targets. If the Company elects not to terminate or not renew the ICA,
a payment to Mr. Sonnois equal to six months of base compensation is required. Future bonuses and incentive compensation based
on future gross profit of NABD will be charged to expense in the period earned.
Morinda
Merger Agreement
On
December 2, 2018, the Company and New Age Health Sciences Holdings, Inc., a newly formed Utah corporation and wholly-owned subsidiary
of the Company (“Merger Sub”), entered into a Plan of Merger (the “Morinda Merger Agreement”) with Morinda.
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, and (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.
Pursuant
to the Certificate of Designations of the Series D Preferred Stock (the “CoD”), the holders of the Preferred Stock
are entitled to receive (i) dividends 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, and (ii) dividends
at a rate of 1.5% per annum (the “Annual Dividend”) based on the maximum Milestone Dividend amount. 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 September 30, 2019 and December 31, 2018, the estimated fair value of the Series D Preferred
Stock was approximately $0.2 million and $13.1 million, respectively. For the three and nine months ended September 30, 2019,
the reduction in the fair value of the Series D Preferred Stock resulted in an unrealized gain of approximately $6.2 million and
$12.9 million, respectively. This unrealized gain 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 also provides that 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 must be registered
under the Securities Act. The Series D Preferred Stock terminates on April 15, 2020. The obligation to pay the Annual Dividend
for $0.2 million is included in the fair value of the Milestone Dividend earnout liability as of September 30, 2019.
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 Morinda 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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Business
Combination Liabilities
Presented
below is a summary of earnout obligations related to business combinations with Marley Beverage Company, LLC (“Marley”)
and Morinda, and payables to the former Morinda stockholders as of September 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
|
|
|
-
|
(2)(5)
|
|
|
7,732
|
(2)(5)
|
|
EWC payable in July 2020
|
|
|
5,207
|
(2)(5)
|
|
|
4,976
|
(2)(5)
|
|
Earnout under Series D preferred stock
|
|
|
225
|
(3)
|
|
|
13,134
|
(3)
|
|
Contingent on financing event
|
|
|
-
|
(4)(5)
|
|
|
24,402
|
(4)(5)
|
|
Total
|
|
|
6,332
|
|
|
|
52,130
|
|
|
Less current portion
|
|
|
5,432
|
|
|
|
8,718
|
|
|
Long-term
portion
|
|
$
|
900
|
|
|
$
|
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 September 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 nine months ended September 30, 2018.
|
|
|
|
|
|
|
(2)
|
Pursuant
to a separate agreement between the parties, EWC is payable to Morinda’s stockholders as follows: $1.0 million in April
2019, $8.0 million in July 2019, and the remainder of $5.5 million in July 2020.
|
|
|
|
|
|
|
(3)
|
The
fair value of earnout consideration under the Series D Preferred Stock is based on the probability of achieving the Milestone
Dividend. As of September 30, 2019, the reduction in fair value was due to an assessment that the Adjusted EBITDA target will
not be achieved, and that the only value associated with the Milestone Dividend is for the Annual Dividend. As of September
30, 2019, fair value 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. This earnout obligation 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 September 30, 2019. The valuation methodology was performed through an option pricing
model based on forecast annual EBITDA, expected volatility of forecast annual EBITDA of 20.0%, the risk-free interest rate
of 1.8%, a discount rate applicable to forecast annual EBITDA of 21.5%, a risk premium of 19.7%, and an estimated credit spread
of 6.5%.
|
|
|
|
|
|
|
(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 $0.1 million and $1.1 million for the three and nine months ended September 30, 2019, respectively, which
is included in interest expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive
loss.
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Net
Revenue and Earnings Related to Business Combinations
For
the nine months ended September 30, 2019, the accompanying unaudited condensed consolidated statement of operations includes net
revenue of $155.1 million and a net loss of $4.1 million for the post-acquisition results of operations of Morinda. For the period
from July 10, 2019 through September 30, 2019, the accompanying unaudited condensed consolidated statements of operations and
comprehensive loss include net revenue of $2.4 million and a net loss of $0.9 million for the post-acquisition results of operations
of BWR.
Unaudited
Pro Forma Disclosures
The
following unaudited pro forma financial results for the three and nine months ended September 30, 2019 reflect (i) the historical
operating results of the Company, and (ii) the unaudited pro forma results of BWR prior to its acquisition date of July 10, 2019,
as if the BWR business combination had occurred as of January 1, 2018. The following unaudited pro forma financial results for
the three and nine months ended September 30, 2018 reflect (i) the historical operating results of the Company, (ii) the unaudited
pro forma results of Morinda prior to its acquisition date of December 21, 2018, and (iii) the unaudited pro forma results of
BWR prior to its acquisition date of July 10, 2019, as if the Morinda and BWR business combinations 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. As applicable
for the periods presented, the calculations of pro forma net revenue and pro forma net loss give effect to the pre-acquisition
operating results of Morinda and BWR based on (i) the historical net revenue and net income (loss) of Morinda and BWR, (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. Based on these assumptions, the following table summarizes on an unaudited pro
forma basis the Company’s results of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands,
except per share amounts):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
70,189
|
|
|
$
|
76,144
|
|
|
$
|
203,007
|
|
|
$
|
223,759
|
|
|
Net loss
|
|
$
|
(10,823
|
)
|
|
$
|
(1,799
|
)
|
|
$
|
(25,425
|
)
|
|
$
|
(5,636
|
)
|
|
Net loss per share- basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.13
|
)
|
|
Weighted average number of shares of common stock outstanding- basic and diluted
|
|
|
78,184
|
|
|
|
45,684
|
|
|
|
76,658
|
|
|
|
41,830
|
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
4 — SUPPLEMENTAL INFORMATION
Inventories
Inventories
consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
12,230
|
|
|
$
|
12,538
|
|
|
Work-in-process
|
|
|
2,006
|
|
|
|
907
|
|
|
Finished goods, net
|
|
|
24,006
|
|
|
|
23,703
|
|
|
Total inventories
|
|
$
|
38,242
|
|
|
$
|
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 was charged to cost of goods sold as the related inventories were sold. For the three
and nine months ended September 30, 2019, the Closing Date inventories were sold which resulted in a charge to cost of goods sold
of approximately $0.4 million and $2.1 million, respectively. Please refer to Note 3 for discussion of the built-in profit related
to the inventories acquired from BWR in July 2019.
Prepaid
Expenses and Other Current Assets
As
of September 30, 2019 and December 31, 2018, prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and deposits
|
|
$
|
8,750
|
|
|
$
|
4,982
|
|
|
Prepaid stock-based compensation
|
|
|
240
|
|
|
|
347
|
|
|
Supplier and other receivables
|
|
|
462
|
|
|
|
1,144
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,452
|
|
|
$
|
6,473
|
|
Property
and Equipment
As
of September 30, 2019 and December 31, 2018, property and equipment consisted of the following (in thousands):
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
37
|
|
|
$
|
25,726
|
|
|
Buildings and improvements
|
|
|
16,419
|
|
|
|
19,822
|
|
|
Leasehold improvements
|
|
|
3,728
|
|
|
|
4,398
|
|
|
Machinery and equipment
|
|
|
5,358
|
|
|
|
5,208
|
|
|
Office furniture and equipment
|
|
|
2,324
|
|
|
|
2,087
|
|
|
Transportation equipment
|
|
|
1,704
|
|
|
|
1,727
|
|
|
Total property and equipment
|
|
|
29,570
|
|
|
|
58,968
|
|
|
Less accumulated depreciation
|
|
|
(2,931
|
)
|
|
|
(1,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
26,639
|
|
|
$
|
57,281
|
|
Depreciation
related to property and equipment is included in both operating expenses and in cost of goods sold in the accompanying unaudited
condensed consolidated statements of operations and comprehensive loss. Total depreciation expense amounted to $0.9 million
and $0.1 million for the three months ended September 30, 2019 and 2018, respectively. Depreciation expense amounted to $2.5 million
and $0.4 million for the nine months ended September 30, 2019 and 2018, respectively.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Repairs
and maintenance costs amounted to $0.4 million and $0.1 million for the three months ended September 30, 2019 and 2018,
respectively. Repairs and maintenance costs amounted to $1.5 million and $0.6 million for the nine months ended September 30,
2019 and 2018, respectively.
Restricted
Cash and Other
As
of September 30, 2019 and December 31, 2018, restricted cash and other long-term assets consisted of the following (in thousands):
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
3,657
|
(1)
|
|
$
|
3,339
|
(1)
|
|
Debt issuance costs, net
|
|
|
318
|
|
|
|
548
|
|
|
Prepaid stock-based compensation
|
|
|
-
|
|
|
|
210
|
|
|
Deposits and other
|
|
|
4,453
|
|
|
|
2,838
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,428
|
|
|
$
|
6,935
|
|
|
|
(1)
|
Restricted
cash primarily represents long-term cash deposits held in a bank for a foreign governmental agency. This restricted cash is
required to maintain the Company’s direct selling license to do business in China.
|
Accrued
Liabilities
As
of September 30, 2019 and December 31, 2018, accrued liabilities consisted of the following (in thousands):
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Accrued commissions
|
|
$
|
9,885
|
|
|
$
|
9,731
|
|
|
Accrued compensation and benefits
|
|
|
5,929
|
|
|
|
4,715
|
|
|
Accrued marketing events
|
|
|
2,836
|
(1)
|
|
|
3,757
|
(1)
|
|
Deferred revenue
|
|
|
1,271
|
|
|
|
2,701
|
|
|
Income taxes payable
|
|
|
18,467
|
(2)
|
|
|
1,670
|
|
|
Current portion of operating lease liabilities:
|
|
|
|
|
|
|
|
|
|
Lease liability
|
|
|
5,464
|
|
|
|
4,798
|
|
|
Deferred lease financing obligation
|
|
|
631
|
|
|
|
-
|
|
|
Restricted stock obligations
|
|
|
304
|
(3)
|
|
|
-
|
|
|
Derivative liability
|
|
|
166
|
|
|
|
470
|
|
|
Other accrued liabilities
|
|
|
6,330
|
|
|
|
6,177
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
51,283
|
|
|
$
|
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 $12.4 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
cumulative vesting related to the fair value as of September 30, 2019 for 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
by reporting unit consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
|
Reporting Unit
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
10,284
|
|
|
$
|
10,284
|
|
|
Marley
|
|
|
9,418
|
|
|
|
9,418
|
|
|
Maverick
|
|
|
5,149
|
|
|
|
5,149
|
|
|
Xing
|
|
|
4,506
|
|
|
|
4,506
|
|
|
PMC
|
|
|
1,768
|
|
|
|
1,768
|
|
|
BWR
|
|
|
2,031
|
|
|
|
-
|
|
|
B&R
|
|
|
389
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill
|
|
$
|
33,545
|
|
|
$
|
31,514
|
|
Identifiable
Intangible Assets
Identifiable
intangible assets consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
September 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
|
|
|
$
|
(1,061
|
)
|
|
$
|
19,359
|
|
|
$
|
20,420
|
|
|
$
|
(40
|
)
|
|
$
|
20,380
|
|
|
Other
|
|
|
6,828
|
|
|
|
(700
|
)
|
|
|
6,128
|
|
|
|
5,989
|
|
|
|
(318
|
)
|
|
|
5,671
|
|
|
Manufacturing processes and recipes
|
|
|
11,610
|
|
|
|
(972
|
)
|
|
|
10,638
|
|
|
|
11,610
|
|
|
|
(380
|
)
|
|
|
11,230
|
|
|
Trade names
|
|
|
12,587
|
|
|
|
(1,229
|
)
|
|
|
11,358
|
|
|
|
12,301
|
|
|
|
(584
|
)
|
|
|
11,717
|
|
|
IPC distributor sales force
|
|
|
9,760
|
|
|
|
(761
|
)
|
|
|
8,999
|
|
|
|
9,760
|
|
|
|
(29
|
)
|
|
|
9,731
|
|
|
Customer relationships
|
|
|
6,860
|
|
|
|
(1,514
|
)
|
|
|
5,346
|
|
|
|
6,444
|
|
|
|
(1,194
|
)
|
|
|
5,250
|
|
|
Patents
|
|
|
4,263
|
|
|
|
(638
|
)
|
|
|
3,625
|
|
|
|
4,100
|
|
|
|
(433
|
)
|
|
|
3,667
|
|
|
Distribution rights and other
|
|
|
795
|
|
|
|
(11
|
)
|
|
|
784
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Non-compete agreements
|
|
|
306
|
|
|
|
(54
|
)
|
|
|
252
|
|
|
|
186
|
|
|
|
(2
|
)
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$
|
73,429
|
|
|
$
|
(6,940
|
)
|
|
$
|
66,489
|
|
|
$
|
70,810
|
|
|
$
|
(2,980
|
)
|
|
$
|
67,830
|
|
Impairment
Risk
Over
the past several years, the Company has continued to invest in business combinations to accelerate its core business strategy
of developing, marketing, selling, and distributing healthy liquid dietary supplements and ready-to-drink beverages. The carrying
value of the New Age segment includes several reporting units with goodwill and identifiable intangible assets with an aggregate
net carrying value of $46.7 million as of September 30, 2019. These intangible assets of the New Age segment primarily arose from
a series of business combinations between April 2015 and June 2017. The acquisition of Maverick Brands, LLC (“Maverick”)
in March 2017 resulted in total goodwill and identifiable intangible assets of $11.8 million, and the acquisition of Marley Beverage
Company LLC (“Marley”) in June 2017 resulted in total goodwill and identifiable intangible assets of $18.7 million.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
As
of the date of the Company’s 2018 annual impairment test, the estimated fair value of each of the New Age segment’s
reporting units exceeded the carrying value of the related goodwill and identifiable intangible assets. The Company considered
events and circumstances impacting the Maverick and Marley businesses during the third quarter of 2019 and concluded that it is
not considered “more likely than not” that an impairment of the goodwill balances of these reporting units exists.
However, the Company’s standard practice is to perform an annual goodwill impairment test during the fourth quarter of each
calendar year. During the fourth quarter of each year, the Company also completes its annual budget process to reassess strategic
priorities and forecast future operating performance and capital spending. Accordingly, the Company will perform an updated quantitative
assessment of the fair value of each of its reporting units for the New Age and Morinda segments during the fourth quarter of
2019.
This
annual quantitative assessment involves substantial judgment and estimation. If sustained decline in a reporting unit’s
revenues and earnings is projected, it would have a significant negative impact on the fair value of the reporting unit which
could result in material impairment charges in the future. Such a decline could be driven by, among other things: (i) changes
in strategic priorities; (ii) anticipated decreases in product pricing, sales volumes, and long-term growth rates as a result
of competitive pressures or other factors; and (iii) the inability to achieve, or delays in achieving the goals of the Company’s
strategic initiatives and synergies. Adverse changes to macroeconomic factors, such as increases to long-term interest rates,
would also negatively impact the fair value of the reporting units. The Maverick and Marley reporting units have experienced increasing
market pressures throughout 2019 that have resulted in lower than expected revenues, gross margins and earnings. The upcoming
quantitative assessment may result in impairment charges if there is any further deterioration in business conditions or negative
changes in market factors, or if the recent trend of declining results for the Maverick and Marley reporting units is not remediated.
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, and 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, less certain marketing and distribution
costs, on future sales of approved licensed products, which fee shall be reviewed annually by the parties. Through September 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 other license agreements in the identifiable intangible assets table above. This intangible asset is being amortized
over the remaining term of the Marley license. The 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%.
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. The Company has made an accounting policy election to not apply the recognition
requirements for short-term leases, which have historically been insignificant. For the three months ended September
30, 2019 and 2018, the Company had operating lease expense of $2.8 million and $0.4 million, respectively. For the nine months
ended September 30, 2019 and 2018, the Company had operating lease expense of $8.1 million and $1.0 million, respectively.
On
January 21, 2019, the Company entered into a lease for approximately 11,200 square feet of office space in downtown 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 operating 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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
During
the first quarter of 2019, the Company entered into operating lease obligations for transportation equipment. These leases provide
for fixed 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 right-of-use (“ROU”) assets and operating lease
liabilities during the nine months ended September 30, 2019. The Company determined the operating 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 operating 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.
In
connection with the BWR Merger discussed in Note 3, the Company assumed a lease that provides for aggregate cash payments of $0.9
million through the expiration date in September 2025. The Company has an option to extend the lease for an additional period
of five years that would result in additional cash payments of $0.8 million. The Company determined the operating lease liability
of approximately $0.7 million assuming that the Company will not exercise its option to extend the lease for an additional five
years and based upon a discount rate of 6.1%.
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 with the option to terminate
any time after seven years. The monthly lease cost is ¥20.0 million (approximately $185,000 based on the exchange rate as
of September 30, 2019) for the initial seven-year period of the lease term. After the seventh year of the lease term, 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 seventh year of the lease term, the Company may elect to terminate the lease. However, if the lease is terminated before
the 20th anniversary of the lease inception date, then the Company will be obligated to perform certain restoration
obligations. 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.
In
connection with this transaction, the $2.6 million mortgage on the building was repaid at closing and the related interest rate
swap agreement discussed in Note 7 was cancelled, the refundable security deposit of $1.8 million was paid at closing, 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
|
|
|
Deferred lease financing obligation
|
|
|
(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 deferred lease financing obligation. Accordingly, the operating
lease payments are allocated to (i) reduce the operating lease liability, (ii) reduce the principal portion of the deferred lease
financing obligation, and (iii) to recognize imputed interest expense at an incremental borrowing rate of 3.5% on the deferred
lease financing obligation over the 20-year lease term. The present value of the future lease payments amounted to a gross operating
lease liability of $25.0 million. After deducting the $17.6 million deferred lease financing obligations, the Company recognized
an initial ROU asset and operating lease liability of approximately $13.1 million.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Impairment
In
June 2019, the Company began attempting to sublease a portion of its ROU 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 in June 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 September 30, 2019 and December 31, 2018, the carrying value of ROU assets, operating lease obligations, and the deferred lease
financing obligation were as follows (in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Right-of-Use Assets
|
|
$
|
38,954
|
|
|
$
|
18,489
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Liabilities:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
5,464
|
|
|
$
|
4,798
|
|
|
Long-term
|
|
|
35,475
|
|
|
|
13,686
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,939
|
|
|
$
|
18,484
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Lease Financing Obligation:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
631
|
|
|
$
|
-
|
|
|
Long-term
|
|
|
16,702
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,333
|
|
|
$
|
-
|
|
As
of September 30, 2019 and December 31, 2018, the weighted average remaining lease term under operating leases was 13.2
and 5.9 years, respectively. As of September 30, 2019 and December 31, 2018, the weighted average discount rate for operating
lease liabilities was approximately 5.6% and 6.6%, respectively.
Lease
Commitments
Future
lease payments and amortization of the related lease incentive obligation related to non-cancellable operating lease agreements
are as follows (in thousands):
|
12-Months Ending September 30,
|
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
8,848
|
|
|
2021
|
|
|
6,996
|
|
|
2022
|
|
|
6,433
|
|
|
2023
|
|
|
6,125
|
|
|
2024
|
|
|
5,834
|
|
|
Thereafter
|
|
|
43,092
|
|
|
Total lease payments
|
|
|
77,328
|
|
|
Less imputed interest
|
|
|
(36,389
|
)
|
|
|
|
|
|
|
|
Present value of operating lease liabilities
|
|
$
|
40,939
|
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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%.
As of September 30, 2019, the prime rate was 5.0% and the contractual rate applicable to outstanding borrowings under the Credit
Facility was 5.5%. As discussed below, the Company has also entered into a swap agreement that provides for a total notional amount
of $10.0 million at a fixed interest rate of approximately 5.4% through May 1, 2023.
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 September 30, 2019. On October 1, 2019, the Company elected to make a voluntary prepayment of $9.7 million 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.
Payments
under the Term Loan are interest-only through September 30, 2019, followed by monthly principal payments of $125,000 plus interest
through the Maturity Date of the Term Loan. 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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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 nine months ended September 30, 2019. Additionally, the Company incurred a make-whole premium
payment of $0.5 million that was also charged to interest expense for the nine months ended September 30, 2019.
Summary
of Debt
As
of September 30, 2019 and December 31, 2018, debt consisted of the following (in thousands):
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
EWB Credit Facility:
|
|
|
|
|
|
|
|
|
|
Term loan, net of discount of $476
|
|
$
|
14,524
|
|
|
$
|
-
|
|
|
Revolver
|
|
|
9,700
|
|
|
|
-
|
|
|
Installment notes payable
|
|
|
15
|
|
|
|
66
|
|
|
Siena Revolver
|
|
|
-
|
|
|
|
2,000
|
|
|
Mortgage payable to a foreign bank
|
|
|
-
|
|
|
|
2,628
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,239
|
|
|
|
4,694
|
|
|
Less current maturities
|
|
|
(11,090
|
)
|
|
|
(3,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
$
|
13,149
|
|
|
$
|
1,325
|
|
|
|
(1)
|
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.
|
Future
Debt Maturities
As
of September 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 September 30,
|
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
11,090
|
|
|
2021
|
|
|
1,500
|
|
|
2022
|
|
|
1,500
|
|
|
2023
|
|
|
10,625
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,715
|
|
Interest
Rate Swap Agreements
As
of 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.
The
Company entered into an interest rate swap agreement with EWB dated July 31, 2019. This swap 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%. As of September 30, 2019, the Company had an unrealized loss from this interest rate swap agreement
of approximately $0.2 million that is included in accrued liabilities in the accompanying unaudited condensed consolidated balance
sheet.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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. Please refer to Note 16
regarding a Second Amendment and Waiver to the Credit Facility.
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 nine months ended September 30, 2019.
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 the offering for general
corporate purposes, including working capital. Under the terms of the ATM Offering Agreement, the Company agreed to 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 September 30, 2019, an aggregate
of approximately 2.8 million shares of Common Stock were sold for net proceeds of approximately $13.2 million. Total commissions
and fees deducted from the net proceeds were $0.4 million and other offering costs of $0.3 million were incurred for the nine
months ended September 30, 2019.
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 Stock provides for the potential payment of up to $15.0 million contingent upon Morinda achieving certain post-closing
milestones. As of September 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 Stock.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Changes
in Stockholders’ Equity
Changes
in stockholders’ equity for the three months ended September 30, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2019
|
|
|
77,624
|
|
|
$
|
77
|
|
|
$
|
192,034
|
|
|
$
|
1,622
|
|
|
$
|
(35,933
|
)
|
|
$
|
157,800
|
|
|
Issuance of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATM public offering, net of offering costs
|
|
|
542
|
|
|
|
1
|
|
|
|
2,093
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,094
|
|
|
Business combination with BWR
|
|
|
108
|
|
|
|
-
|
|
|
|
453
|
|
|
|
-
|
|
|
|
-
|
|
|
|
453
|
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,525
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,525
|
|
|
Net change in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,138
|
)
|
|
|
-
|
|
|
|
(1,138
|
)
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,687
|
)
|
|
|
(10,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2019
|
|
|
78,274
|
|
|
$
|
78
|
|
|
$
|
196,105
|
|
|
$
|
484
|
|
|
$
|
(46,620
|
)
|
|
$
|
150,047
|
|
Changes
in stockholders’ equity for the three months ended September 30, 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
39,926
|
|
|
$
|
40
|
|
|
$
|
68,476
|
|
|
$
|
(16,519
|
)
|
|
$
|
51,997
|
|
|
Issuance of Common Stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public offering, net of offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
16,100
|
|
|
|
16
|
|
|
|
40,290
|
|
|
|
-
|
|
|
|
40,306
|
|
|
Conversion of Series B promissory notes
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
|
|
616
|
|
|
|
-
|
|
|
|
616
|
|
|
Cashless exercise of options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Common Stock exchanged for Series C Preferred Stock
|
|
|
7
|
|
|
|
-
|
|
|
|
(6,900
|
)
|
|
|
(7
|
)
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
159
|
|
|
|
-
|
|
|
|
159
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,504
|
)
|
|
|
(3,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2018
|
|
|
7
|
|
|
$
|
-
|
|
|
|
49,514
|
|
|
$
|
49
|
|
|
$
|
109,548
|
|
|
$
|
(20,023
|
)
|
|
$
|
89,574
|
|
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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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 September 30, 2019, all of the 10.0 million shares authorized under the 2019 Plan were 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. The LTI Plan has been superseded by the 2019 Plan and, accordingly, no further grants
will be made under the LTI Plan.
Stock
Option Activity
The
following table sets forth the summary of stock option activity under the LTI Plan for the nine months ended September 30, 2019
(shares in thousands):
|
|
|
Shares
|
|
|
Price
(1)
|
|
|
Term
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
2,786
|
|
|
$
|
2.84
|
|
|
|
9.0
|
|
|
Grants to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
|
363
|
|
|
$
|
3.63
|
|
|
|
|
|
|
Non-employees
|
|
|
25
|
|
|
$
|
5.30
|
|
|
|
|
|
|
Forfeited
|
|
|
(328
|
)
|
|
$
|
3.58
|
|
|
|
|
|
|
Exercised
|
|
|
(200
|
)
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
2,646
|
(3)
|
|
$
|
2.94
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, end of period
|
|
|
852
|
(4)
|
|
$
|
1.93
|
|
|
|
7.5
|
|
|
|
(1)
|
Represents
the weighted average exercise price.
|
|
|
(2)
|
Represents
the weighted average remaining contractual term until the stock options expire.
|
|
|
(3)
|
As
of September 30, 2019 and December 31, 2018, the aggregate intrinsic value of stock options outstanding was $1.3 million and
$6.6 million, respectively.
|
|
|
(4)
|
As
of September 30, 2019 and December 31, 2018, the aggregate intrinsic value of vested stock options was $0.7 million and $3.1
million, respectively.
|
As
of September 30, 2019, unrecognized compensation expense related to unvested stock options was $3.7 million. This amount is expected
to be recognized on a straight-line basis over the weighted-average vesting period of 2.2 years.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
In
July 2019, the Company entered into a modification agreement for approximately 0.3 million shares of outstanding stock options.
The modification resulted in an extension of the exercise period from July 2019 until July 2020, which increased the fair value
of the stock options by approximately $0.8 million. The modified options became vested in August 2019, and the Company recognized
a charge of $0.8 million for the three months ended September 30, 2019. For the nine months ended September 30, 2019, the valuation
assumptions for the modified options and other stock options granted for an aggregate of 388,000 shares granted under the LTI
Plan were estimated on the date of grant or modification using the BSM option-pricing model, with the following weighted-average
assumptions:
|
|
|
Stock Options
|
|
|
Valuation Inputs
|
|
Granted
|
|
|
Modified
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of common stock (exercise price)
|
|
$
|
3.83
|
|
|
$
|
4.75
|
|
|
Expected life (in years)
|
|
|
6.5
|
|
|
|
1.0
|
|
|
Volatility
|
|
|
110
|
%
|
|
|
138
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Risk-free interest rate
|
|
|
1.7
|
%
|
|
|
1.9
|
%
|
Based
on the assumptions set forth above, during the nine months ended September 30, 2019, the weighted-average fair value of stock
options granted and modified was $3.26 per share and $3.40 per share, respectively. The BSM model requires various 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 unless 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 nine months ended September 30, 2019
(in thousands):
|
|
|
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
|
|
|
$
|
3,236
|
|
|
|
474
|
|
|
$
|
2,490
|
|
|
|
629
|
|
|
$
|
64
|
|
|
Restricted shares granted
|
|
|
461
|
(1)
|
|
|
2,258
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
|
35
|
|
|
|
79
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited and not expected to vest
|
|
|
(219
|
)(2)
|
|
|
(260
|
)(2)
|
|
|
(318
|
)(5)
|
|
|
(1,673
|
)(5)
|
|
|
-
|
|
|
|
-
|
|
|
Modification of award
|
|
|
-
|
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Fair value adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(388
|
)(7)
|
|
|
-
|
|
|
|
-
|
|
|
Vested shares and expense
|
|
|
(423
|
)
|
|
|
(2,870
|
)
|
|
|
-
|
|
|
|
(304
|
)
|
|
|
(629
|
)(8)
|
|
|
(64
|
)(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
1,005
|
(3)
|
|
$
|
2,348
|
(3)
|
|
|
156
|
|
|
$
|
125
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Intrinsic value, end of period
|
|
$
|
2,774
|
(4)
|
|
|
|
|
|
$
|
430
|
(4)(6)
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
Weighted average remaining term for recognition of unvested expense
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
-
|
|
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
(1)
|
The
weighted average fair value was $4.90 per share based on the closing price of the Company’s Common Stock on the grant
date.
|
|
|
(2)
|
Forfeitures
of LTI Plan Equity Awards include 162,000 shares that vest only if Morinda achieves EBITDA of $20.0 million for the year ending
December 31, 2019. Based on the Company’s current assessment, these shares are not expected to vest. Therefore, all
previously recognized compensation expense related to these shares was reversed for the three months ended September 30, 2019.
|
|
|
(3)
|
As
of September 30, 2019, unvested shares of restricted stock consist of approximately 1.0 million shares that will be issued
upon vesting, and 0.1 million shares that are included in issued and outstanding shares but are subject to restrictive vesting
conditions. For unvested shares that have been issued, $240,000 of unvested compensation is included in prepaid expenses and
other current assets as of September 30, 2019.
|
|
|
(4)
|
The
intrinsic value was based on the closing price of the Company’s common stock of $2.76 per share on September 30, 2019.
|
|
|
(5)
|
Forfeitures
of LTI Plan Liability Awards include approximately 317,000 shares that vest only if Morinda achieves EBITDA of $20.0 million
for the year ending December 31, 2019. Based on the Company’s current assessment, these shares are not expected to vest.
Therefore, all previously recognized compensation expense related to these shares was reversed for the three months ended
September 30, 2019.
|
|
|
(6)
|
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 September 30, 2019, approximately $0.3 million is included in current liabilities.
|
|
|
(7)
|
The
change in unvested compensation resulted from a decrease in the closing price of the Company’s Common Stock for the
nine months ended September 30, 2019.
|
|
|
(8)
|
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.
|
Stock-based
Compensation Expense
Substantially
all stock-based compensation expense is included in selling, general and administrative expenses in the accompanying unaudited
condensed consolidated statements of operations and comprehensive loss. The table below summarizes stock-based compensation expense
related to stock options and restricted stock awards for the nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Stock options awards:
|
|
|
|
|
|
|
|
|
|
Employees
|
|
$
|
2,026
|
|
|
$
|
557
|
|
|
Non-employees
|
|
|
14
|
|
|
|
-
|
|
|
Restricted stock awards:
|
|
|
|
|
|
|
|
|
|
Equity classified
|
|
|
2,934
|
|
|
|
830
|
|
|
Liability classified
|
|
|
304
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,278
|
|
|
$
|
1,387
|
|
NOTE
10 — INCOME TAXES
The
Company’s provision for income taxes for the three and nine months ended September 30, 2019 resulted in income tax expense
of $6.7 million and $12.8 million, respectively. The effective tax rate as a percentage of pre-tax earnings for
the three and nine months ended September 30, 2019 was negative 168% and negative 110%, respectively. The negative
effective tax rate for the three months ended September 30, 2019 was due to foreign tax expense and a domestic valuation allowance.
The valuation allowance was partially reduced by the acquisition of BWR. The negative effective tax rates for the nine months
ended September 30, 2019 was primarily due to establishment of valuation allowances and income tax expense in foreign jurisdictions.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
A
valuation allowance is established when necessary to reduce the deferred tax assets to amounts expected to be realized. As of
September 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 income tax expense of $8.2 million for the nine months ended September 30, 2019.
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 allow income tax examinations for up to ten prior years.
The
total outstanding balance for liabilities related to unrecognized tax benefits as of September 30, 2019 was $0.4 million. There
were no unrecognized tax benefits as of September 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 had federal net operating loss (“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. The Company’s ability to
utilize net operating losses may be limited due to changes in its ownership as defined by Section 382 of the Internal Revenue
Code (the Code). Under the provisions of Section 382 and 383 of the Code, a change in control, as defined by the Code, may impose
an annual limitation on the amount of the Company’s net operating loss and tax credit carryforwards, and other tax attributes
that can be used to reduce future tax liabilities.
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
was included in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018.
After the executives retire, the deferred compensation obligation is payable over a period of 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
$0.2 million and $0.5 million for the three and nine months ended September 30, 2019, respectively. The Company did not have a
401(k) Plan for the three and nine months ended September 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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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
$3.4 million and $3.0 million as of September 30, 2019 and December 31, 2018, respectively. Of this amount, approximately $3.2
million and $2.9 million is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance
sheets as of September 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 in which 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 September 30, 2019 and December 31, 2018, the Company has recorded a current liability under
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.
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 September 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 nine months ended September 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 shares and 153,000 shares of Common Stock, respectively. 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 nine months ended September 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.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
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 nine months ended September 30, 2019 and 2018, basic and diluted net loss per
share were the same since all Common Stock equivalents were anti-dilutive. As of September 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
|
|
|
2,646
|
|
|
|
1,486
|
|
|
Unissued
restricted stock awards under LTI Plan
|
|
|
1,161
|
|
|
|
-
|
|
|
Warrant
issued for license agreement
|
|
|
200
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,007
|
|
|
|
1,486
|
|
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 value 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 September 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 September 30, 2019 and December 31, 2018. In addition, the net assets acquired in the
business combinations discussed in Note 3 were 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 September 30, 2019 and December 31, 2018.
The
Company’s interest rate swaps, earnout obligations under business combinations, and embedded derivative liabilities 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 liabilities were recorded at fair market value and were 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 nine months ended September 30, 2019 and 2018, the Company had no transfers of its assets
or liabilities between levels of the fair value hierarchy.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Significant
Concentrations
For
the three and nine months ended September 30, 2019, no single customer comprised more than 10% of the Company’s consolidated
net revenue. For each of the three and nine months ended September 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 73% of the Company’s consolidated net revenue and 91% of Morinda’s net revenue
for the nine months ended September 30, 2019 has been generated outside the United States, primarily in the Asia Pacific market.
Morinda’s Tahitian Noni® Juice, MAX and other noni-based beverage products comprise over 82% of Morinda’s net
revenue for the nine months ended September 30, 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 nine months ended September 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 are subject 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 September 30, 2019, the Company had cash and cash equivalents with three financial institutions in the
United States with balances of $21.3 million, $3.0 million, and $0.7 million; two financial institutions in China with balances
of $7.5 million and $3.8 million; and two financial institutions in Japan with balances of $20.7 million and $6.0 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 September 30, 2019, the Company did not have any customers with an
accounts receivable balance in excess of 10% of consolidated accounts receivable. As of September 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 nine months
ended September 30, 2018.
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 80% of its business generated in the key Asia Pacific markets of Japan, China, Korea, Taiwan, and Indonesia.
NEW
AGE BEVERAGES CORPORATION
Notes
to Unaudited Condensed Consolidated Financial Statements
Net
revenue by reporting segment for the three and nine months ended September 30, 2019 and 2018, was as follows (in thousands):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
54,843
|
|
|
$
|
-
|
|
|
$
|
155,125
|
|
|
$
|
-
|
|
|
New Age
|
|
|
14,985
|
|
|
|
13,243
|
|
|
|
39,358
|
|
|
|
38,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
69,828
|
|
|
$
|
13,243
|
|
|
$
|
194,483
|
|
|
$
|
38,164
|
|
Gross
profit (loss) by reporting segment for the three and nine months ended September 30, 2019 and 2018, was as follows (in thousands):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
43,288
|
|
|
$
|
-
|
|
|
$
|
121,462
|
|
|
$
|
-
|
|
|
New Age
|
|
|
(2,992
|
)
|
|
|
1,699
|
|
|
|
(941
|
)
|
|
|
6,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
40,296
|
|
|
$
|
1,699
|
|
|
$
|
120,521
|
|
|
$
|
6,075
|
|
Assets
by reporting segment as of September 30, 2019 and December 31, 2018, were as follows (in thousands):
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
202,241
|
|
|
$
|
206,222
|
|
|
New Age
|
|
|
111,435
|
|
|
|
80,710
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
313,676
|
|
|
$
|
286,932
|
|
Capital
expenditures for property and equipment and identifiable intangible assets incurred by reporting segment for the three and nine
months ended September 30, 2019 and 2018, were as follows (in thousands):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morinda
|
|
$
|
205
|
|
|
$
|
-
|
|
|
$
|
746
|
|
|
$
|
-
|
|
|
New Age
|
|
|
1,996
|
|
|
|
8
|
|
|
|
3,705
|
(1)
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
2,201
|
|
|
$
|
8
|
|
|
$
|
4,451
|
|
|
$
|
72
|
|
|
|
(1)
|
Consists
of additions to property and equipment of $0.9 million, the fair value of identifiable
intangible assets acquired for $1.1 million, and property, equipment and intangible assets
of $1.7 million acquired in the acquisition of BWR as discussed in Note 3.
|
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 nine months ended September 30, 2019 and 2018 (in
thousands):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
19,610
|
|
|
$
|
13,243
|
|
|
$
|
53,010
|
|
|
$
|
38,164
|
|
|
International
|
|
|
50,218
|
|
|
|
-
|
|
|
|
141,473
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
69,828
|
|
|
$
|
13,243
|
|
|
$
|
194,483
|
|
|
$
|
38,164
|
|
As
of September 30, 2019, the net carrying value of the Company’s property and equipment located outside of the United States
amounted to approximately $11.0 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 $38.5 million, including approximately $27.8 million
located in Japan. See Note 6 for a discussion of the sale leaseback of the Company’s property in Japan.
NOTE
16 — SUBSEQUENT EVENTS
Second
Amendment to Credit Facility
On
October 9, 2019, the Company entered into a Second Amendment and Waiver (the “Second Amendment”) to the Credit Facility
discussed in Note 7. Under the Second Amendment, EWB waived (i) any default for failure to maintain at least $5.0 million of net
cash with EWB in the United States or in China during the period from July 25, 2019 to October 9, 2019 and (ii) any default for
failing to maintain primary operating accounts with EWB, and ensure that the Company’s deposit and investment accounts with
third party financial institutions located in China contain no more than 40% of the Company’s total cash, cash equivalents
and investment balances maintained in China. The Second Amendment also amended the Credit Facility to (i) extend the time period
to establish compliance with the operating account provisions until November 30, 2019, (ii) to make the covenants no longer applicable
to the Company’s subsidiaries in China, and (iii) to decrease the amount of net cash from $5.0 million to $2.0 million that
the Company is required to maintain with EWB on and after December 31, 2019.
Equity
Awards
On
October 14, 2019, the Company made restricted stock grants for an aggregate of approximately 159,000 shares to certain key employees
of BWR. The fair value of the restricted stock on the date of grant was approximately $0.4 million. In addition, stock options
for an aggregate of approximately 75,000 shares were granted to certain BWR employees at an exercise price of $2.71 per share.
These restricted stock awards and stock options vest annually for approximately one-third of the shares in each of July 2020,
July 2021 and July 2022.