NewAge, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number: 001-38014

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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

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

The registrant had 78,393,965 shares of its common stock, $0.001 par value per share, outstanding as of November 11, 2019.

NEW AGE BEVERAGES CORPORATION

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value per share)

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

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except loss per share amounts)

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

NEW AGE BEVERAGES CORPORATION

 Unaudited Condensed Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2019 and 2018

(In thousands)

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

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2019 and 2018

(In thousands)

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

NEW AGE BEVERAGES CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows, Continued

Nine Months Ended September 30, 2019 and 2018

(In thousands)

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

NEW AGE BEVERAGES CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations and Segments

New Age Beverages Corporation (the “Company”) was formed under the laws of the State of Washington on April 26, 2010. On December 21, 2018, the Company completed a business combination with Morinda Holdings, Inc., a Utah corporation (“Morinda”), whereby Morinda became a wholly-owned subsidiary of the Company. For further information about the Morinda business combination, please refer to Note 3.

The Company’s chief operating decision maker (the “CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reporting segment for purposes of making operating decisions and assessing financial performance. As a result of the business combination with Morinda, the Company changed its operating segments to consist of the Morinda segment and the New Age segment beginning in December 2018. After the Morinda business combination, the Company’s CODM began assessing performance and allocating resources based on the financial information of these two reporting segments. The New Age segment was previously comprised of the Brands segment and the 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):

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):

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):

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):

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):

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):

Property and Equipment

As of September 30, 2019 and December 31, 2018, property and equipment consisted of the following (in thousands):

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):

Accrued Liabilities

As of September 30, 2019 and December 31, 2018, accrued liabilities consisted of the following (in thousands):

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):

Identifiable Intangible Assets

Identifiable intangible assets consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):

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 20^th 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):

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):

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):

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):

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):

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):